There are various elements of corporate governance that interact with each other and influence the organization’s performance. Our research1 indicates that the most effective elements of ‘good’ governance are independence and diversity of the Board of Directors, remuneration of senior executives, characteristics of the CEO, and the organization’s oversight and ownership structure. Here are six relevant drivers of corporate governance that should be essential to any Financial Services Firm.
The 6 drivers of good corporate governance
- Board of directors independence: A larger number of independent members improves the Board’s objectivity and its ability to represent multiple points of view. But when the size of the Board is increased, this might slow down the decision-making process.
- Board of directors diversity: Demographic diversity has a positive impact on performance. However, when diversity is enforced by regulation (i.e. statutory diversity), there is no such effect.
- Remuneration: Remuneration arrangements can contribute to performance by aligning the interests of shareholders and senior management. However, although stock options for management may work well in good times, they have no effect when the organization’s performance is stagnating.
- CEO characteristics: Having a powerful CEO has a positive effect on performance, but also leads to more risky decision-making
- Oversight: An active oversight role for Boards and owners has a positive effect on performance, especially in international joint ventures. A disadvantage however is that both Boards and owners tend to be less attentive during times of prosperity.
- Ownership structure: Institutional ownership enhances the quality of strategic decisions made by the Board of Directors, through active engagement with the Board and adding an external perspective.
..but no “one size fits all”
Each of these governance variables can enhance corporate performance, but there is no one-size-fits-all approach to applying them in practice. The best approach will depend on the organization’s particular circumstances.
The new revised FINMA-Circ.17/1 on corporate governance addresses important aspects of the organisational structure and processes by defining minimum principles, such as the independence requirements, responsibilities and the diversification needs in terms of their banking knowledge and expertises of the governing bodies. Executive committees and CRO have also increased responsibilities, with the design and implementation of the institutions’ risk management framework.
As governance elements strengthen and weaken each other, ‘good’ governance exists when structures and mechanisms are suitably balanced, and supportive of effective decision-making.
At moments when crucial decisions need to be taken, directors are often faced with a tough choice. The right governance set-up will help recognise and understand the issues onvolved, and help the Board of Directors reach a well-judged decision.