OECD report - Finance, Competition and Governance

The OECD has published Finance, Competition and Governance: Priorities for Reform and Strategies to Phase-Out Emergency Measures. The report outlines guiding principles and proposals for reforming incentives in financial markets. The report contains proposals intended to strengthen financial firms' corporate governance (see pp. 52-54) and begins:

Many firms that have received public funds or are owned by governments are already subject to special conditions on governance and remuneration. During such periods, they should be run as close as possible to the OECD Guidelines to ensure appropriate governance. Before phasing out emergency measures, it is incumbent upon governments and authorities to improve rules and guidance for the governance of financial firms in general, both to enhance risk control and to redress other weaknesses that contributed to the present crisis. Since the OECD Principles of Corporate Governance have not been properly implemented by a number of financial firms in the past, there is also a need for improved monitoring and peer review processes. The OECD Steering Group on Corporate Governance examined the implementation issues at its meeting in April 2009, and some of its basic recommendations follow".

These recommendations include (to quote directly from the report):

[1] Independent and competent directors: strengthening the fit and proper person test to competence and knowledge of governance; term limit on board membership for independent directors without a direct stake in the company; formal separation of the role of the CEO and the Chair in banks, except in special circumstances.

[2] Risk officer role: all financial firms should require a ‘Chief Risk Officer’, responsible for risk management, with direct access to the board (not necessarily a Risk Committee but probably not the Audit Committee).

[3] Fiduciary responsibility of directors: the complexity of some corporate groups (large and complex businesses) has been identified as both governance and risk control issues during the crisis. To the extent that this issue cannot be adequately addressed by policies to separate and simplify the activities of affiliates in complex groups (see above), in some jurisdictions there may be a need to clarify the fiduciary duty of directors.

[4] Remuneration: reformed and strengthened boards would improve governance, especially if it was clear that the duties of directors were extended to overseeing sources of risk and the compatibility with the institutions financial strategy. This would make the link between risk management and compensation policies clear and transparent. Where possible, tax incentives could also help to encourage a greater use of compensation linked to longer-run performance.