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Basel Committee: Principles for Enhancing Corporate Governance

In March, the Basel Committee on Banking Supervision issued a consultation draft of its paper, Guidance for Enhancing Corporate Governance.  Aimed at providing best practice guidance both to individual banking and finance organizations, and to the global financial system, this document is intended to "assists banking supervisors and provides a reference point for promoting the adoption of sound corporate governance practices by banking organisations in their countries."  The Basel Committee's principles focus on fundamental deficiencies in bank corporate governance indicated during the recent financial crisis. The principles cover:

  • the role of the board, which includes approving and overseeing the implementation of the bank's risk strategy taking account of the bank's long-term financial interests and safety;
  • the board's qualifications. For example, the board should have adequate knowledge and experience relevant to each of the material financial activities the bank intends to pursue to enable effective governance and oversight of the bank;
  • the importance of an independent risk management function, including a chief risk officer or equivalent with sufficient authority, stature, independence, resources and access to the board
  • the need to identify, monitor and manage risks on an ongoing firm-wide and individual entity basis. This should be based on risk management systems and internal control infrastructures that are appropriate for the external risk landscape and the bank's risk profile; and
  • the board's active oversight of the compensation system's design and operation, including careful alignment of employee compensation with prudent risk-taking, consistent with the Financial Stability Board's principles.
  • The principles also stress the importance of board and senior management having a clear knowledge and understanding of the bank's operational structure and risks. This includes risks arising from special purpose entities or related structures.
 

Though this guidance is drafted with banks and banking supervisors in mind, its governance principles and recommendations can be useful to a wider variety of financial institutions.   This report reinforces many of the principles and guidelines in the Forum's own recently issued guidance for fund directors on oversight of risk management, Risk Principles for Fund Directors, and can provide fund directors with additional perspectives and reference points with which to assess and improve their fund's risk governance. 

The full text of the Basel Committee's consultation draft is available at: http://www.bis.org/publ/bcbs168.pdf

Comments on the consultation draft are due by June 15, 2010.