Corporate governance in financial institutions is a set of standards and principles that establish the way in which financial institutions are directed and controlled. It has become increasingly important since the mid-1990s due to globalization, deregulation, and financial crises. International standards promote transparency and accountability in business operations to manage risk and preserve shareholder value.
Corporate governance in financial institutions is the set of standards and principles used to create a system of checks and balances on the management of banks and financial intermediaries. It establishes the way in which financial institutions are directed and controlled, usually through established standards for the conduct of the board of directors and senior management. Countries have different political and regulatory environments, business patterns and customs. In addition, independent legal systems that vary from country to country cause significant differences in corporate governance practices. There is, however, an international movement towards universal standards for all multinational financial institutions that has been gaining momentum since the late 1990s.
The topic of corporate governance of financial institutions and its role in stabilizing the sector has reached new levels of importance since the mid-1990s, as a result of the globalization of financial markets, deregulation and technological change. These positive factors, together with the mismanagement, corruption and fraud that resulted in multiple financial crises in major industrial countries over a number of years, have brought the role of corporate governance in financial institutions to the forefront in many countries and in the international economic community. Governments around the world recognized that opaque governance and low disclosure requirements for banks and financial intermediaries were a significant factor in destabilizing financial markets and disrupting economies around the world.
Consequently, the concept of corporate governance for financial institutions has taken on a more defined role in the regulatory environment in many countries and has driven the adoption of specific international standards promoted by the Organization for Economic Cooperation and Development (OECD) and the Basel Committee on Banking Supervision. (BCBS). Corporate governance is now seen as a prominent way to manage risk, prevent crises and preserve shareholder value. It requires the two-pronged structure, which provides guidance and management at the top of any country’s financial institutions, to commit to transparency and accountability in business operations.
International standards define the role of corporate governance in financial institutions as a mechanism for establishing corporate values and implementing clear lines of responsibility. Adequate governance ensures that board members are qualified to provide meaningful oversight and are competent in their roles. It also provides internal and external audit procedures and ensures a consistent and rational compensation structure for senior management. More importantly, the role of corporate governance in financial institutions under the international paradigm is to ensure a level of transparency that can alert regulators and the public to problems before they turn into crises.
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