Corporate governance in financial institutions establishes standards for directing and controlling banks and financial intermediaries. The globalization of financial markets and financial crises have brought the role of corporate governance to the forefront, leading to the adoption of international standards for transparency and accountability. Good governance ensures qualified board members, audit procedures, and a rational compensation structure for senior management. Its role is to manage risk, prevent crises, 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 how 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, trade standards and customs. Furthermore, independent legal systems which 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 which has been gaining momentum since the late 1990s.
The issue 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 changes. These positive factors, coupled with mismanagement, corruption and fraud that have resulted in multiple financial crises in major industrialized countries over several years have brought the role of corporate governance in financial institutions to the forefront in many countries and in the international business community. Governments around the world have recognized that management opacity and low disclosure requirements for banks and financial intermediaries have been a significant factor in destabilizing financial markets and disrupting economies around the world.
As a result, the concept of corporate governance of financial institutions has taken on a more defined role in the regulatory environment of many countries and has driven the adoption of specific international standards promoted by the Organization for Economic Co-operation and Development (OECD) and the Committee Basel Committee for Banking Supervision (Basel Committee). Corporate governance is now seen as an important way to manage risk, prevent crises and preserve shareholder value. It requires the two-pronged structure that provides direction and management to the top of any country’s financial institutions to engage in transparency and accountability in corporate operations.
International standards define the role of corporate governance in financial institutions as a mechanism for establishing corporate values and implementing clear lines of accountability. Good governance ensures that board members are qualified to provide meaningful oversight and are competent in their duties. It also has internal and external audit procedures in place 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 become crises.
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