BCBS releases final document on principles for enhancing corporate governance

04 October 2010

Given the great relevance of corporate governance to the stability of individual banks and the international financial system as a whole, the Basel Committee on Banking Supervision has issued principles based on certain key areas to help ensure sound corporate governance practices in banks .

The Basel Committee on Banking Supervision today issued a set of principles for enhancing sound corporate governance practices at banking organisations.

  The "Principles for enhancing corporate governance" addresses fundamental deficiencies in bank corporate governance that became apparent during the financial crisis. The principles were first issued for consultation in March 2010 and comments received were highly supportive of the Committee's proposed corporate governance guidance.

The principles cover multiple areas of corporate governance, including:

• 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 a risk management function (including a chief risk officer or equivalent for large banks and internationally active banks), a compliance function and an internal audit function, each 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 the 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.

Supervisors also have a critical role in ensuring that banks practice good corporate governance. In line with the Committee's principles, supervisors should establish guidance or rules requiring banks to have robust corporate governance strategies, policies and procedures. Commensurate with a bank's size, complexity, structure and risk profile, supervisors should regularly evaluate the bank's corporate governance policies and practices as well as its implementation of the Committee's principles.

The need for sound corporate governance improvements has also been observed in other financial sectors. That is why, in developing the principles issued today, the Basel Committee coordinated its work with the International Association of Insurance Supervisors (IAIS), which is currently reviewing its Insurance Core Principles to address corporate governance for the insurance sector. The Basel Committee and the IAIS seek to collaborate on monitoring the sound implementation of their respective principles.

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