Boardroom crisis performance under scrutiny.

Byline: [e-mail] (Staff Writer)

The report examines the various factors - organisational, methodological and heuristic - that made it difficult for bank boards to address the rapidly evolving and expanding franchise risks to which their institutions were exposed in the years preceding the current crisis. While the report focused on European banks, its findings are of relevance to the global financial sector.

Many countries in the Middle East and North Africa (MENA) region managed to avoid financial sector havoc through conservative regulation and relatively underdeveloped bank balance sheets. However, as the region's banking sector grows, bank boards will need to play a much more important role in directing and controlling banks than they do today.

As a first step, MENA banks will also need to significantly improve transparency in order to boost investor and depositor confidence in a changed global environment.

While the report from Nestor Advisors does not identify any corporate governance "silver bullets" to explain the failings of bank boards, it does make several observations and recommendations on how better corporate governance practices could improve bank performance by avoiding excessive risk taking so as to better safeguard a bank's overall franchise.

Three key failings of franchise risk oversight at board level were identified: a failure to check excessive leverage; underestimating liquidity risks; and a focus on risk measurement, rather than risk identification.

Bank boards must develop their collective capacity to look through (and look beyond) the statistics presented by their risk managers and take a more active role in defining the parameters and objectives of stress testing.

Boards led by financial industry experts are likely to outperform boards that are led by chairs who are independent at appointment, but have no financial industry experience. It also seems that bank boards require, at any given moment, experience and expertise which could be difficult to source if the length of non-executive director tenure is too low or the board is too young.

In order to achieve improved levels of open and critical thinking when it comes to risk governance, bank non-executive directors will need to become increasingly "professional". More financial industry expertise should be enlisted; non-executive directors should be required to work significantly more and their other commitments should be more limited.

In order to address the shrinking pool of potential bank board candidates, special governance rules (in the form of comply-or-explain provisions) should be developed for bank boards that are different from rules applying to non-financial companies on issues such as independence requirements for non-executive directors and chairs. <p>2009 CPI Financial. All rights reserved.

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