A New Outlook for Good Finance
There is no prêt-à-porter model for corporate governance: structure and processes need to be tailored according to the features of individual firms, their changing strategies, and events, which in turn design business scenarios.
The fact remains, as the OECD has argued since the 1990s, that good governance fosters growth and efficiency, as well as increases investors' confidence. But while it's relatively easy to identify cases of bad governance (corporate scandals are usually pretty evident, since misbehavior is ultimately ascribable to weak governance), it's harder to outline the features of quality governance.
Not long ago the Financial Times hosted a heated debate around the statements made by Sergio Ermotti, CEO of UBS, who argued that banks must maintain a positive stance on risk without fear of making mistakes, as long as they act in good faith. According to the head of the Swiss bank, we must avoid spreading a culture of fear of error, since this could compromise the attainment of a bank's objectives.
In the world of finance, a correct attitude towards risk, determined by adequate forms of governance, is fundamental, and regulators seem to have understood this. They have strongly oriented the composition and activities of banks' administration boards in order to avoid another crisis. What had been lacking so far? Form and substance, to put it shortly. On the first front, there is a redefinition of the criteria at the basis of the composition of boards and processes of governance (the governance project) which takes into account a bank's size and complexity, as well as its business model and risk strategy. From this, a clear division of roles and responsibilities must descend, so that decision-making can be traced back in all its steps ex post. In particular, forms of selection and appointment of administrators, and standards for the self-evaluation of corporate roles and the effectiveness in fulfillment of their mandates need to be put forward. On the substance front, there is a drive toward not only the diversification of profiles and refinement of competencies of various board members, but especially a higher willingness to engage them in fruitful debate in board meetings, in order to challenge management on strategic choices, and express leadership that can orient strategy and control its execution, within the framework of a healthy and widespread culture of business risk.
All this would lead to less plethoric and culturally homogenous boards, which presently blindly ratify the decisions taken by executive management, and to more active boards capable of making good decisions through informed, lively, and constructive debate that can orient the banking company toward a balanced and sustainable growth path in the long term. With the coming into force of EU Directive CRD IV, banking supervisors have all the tools at their disposal to impose such change, as well as the respect of the principles of good governance: from high monetary sanctions to the power of suspending or removing individual administrators, and penalizing less virtuous banks with higher capital requirements.
The fact remains that in order to "do good banking", as the slogan of an Italian bank urges, a credit institution must first of all respect the principles of correctness, transparency and accountability toward all stakeholders, not only toward shareholders/investors. Good finance can only arise through the good governance of finance, which implies strong awareness and sense of responsibility on the part of all actors that take part in the system of financial governance.