Comment: Central Bank champions corporate governance

By Michael S. Olympios

 

Few policy issues have moved from the wings to center stage as quickly and decisively as corporate governance. Virtually every country particularly in the western world but also in Asia have learned the bitter lessons of financial distress from one another and tried to shore up the affairs and governance of banking institutions. Oddly enough, despite the general focus on the topic, only in recent years efforts have intensified to harmonize standards on corporate governance in the banking industry.

This effort was led primarily from the Basel Committee on Banking Supervision initially in 1999 and more recently in February 2006 with a directive which in many respects looks more like a Swiss cheese… full of holes. It’s principle-based approach leaves a lot of room for improvement for the local regulatory authorities to fill in and despite its gaps, as compared for example with the latest version of the UK Combined Code, it serves the banking industry well in providing a solid base for banks and regulatory authorities to improve on.

Despite different views on governance and approaches across the world everyone agrees on its significance and its positive effects for the industry. The importance of corporate governance in financial institutions was the topic of a two day conference organized by SUERF – the European money and finance forum and the Central Bank of Cyprus, which took place in Nicosia.

SUERF is a network association of bankers, central bankers, other practitioners in the financial sector and academics. The focus of the Association is on the analysis, discussion and understanding of financial markets and institutions, the monetary economy, the conduct of regulation and monetary policy, and related issues. Its events provide a unique European network for the analysis and discussion of these and related issues. SUERF has evolved as a forum for the exchange of information, research results and ideas.

With more than 25 speakers and moderators including many Cypriots such as former Cyprus Securities and Exchange Chairman Marios Clerides and Professor Andreas Charitou – University of Cyprus, the event brought together more than 130 delegates from across Europe including Cyprus.

In his opening speech, Spyros Stavrinakis, senior manager at the Central Bank, noted that the “implementation of corporate governance principles has become mandatory on 1st January 2007 for all banks incorporated in Cyprus and their overseas branches as well as for those Cyprus branches of foreign banks incorporated outside the European Economic Area”.

Mr. Stavrinakis emphasized the role of the board of directors in establishing and approving ethical standards and corporate values for itself and the bank’s senior executive management. He argued that these standards should, in particular, address corruption and other unethical or illegal behavior in the bank’s internal and external activities. Bridget Gandy, head of accounting and corporate governance research credit policy group with Fitch Credit Ratings Ltd of London, presented the topic of corporate governance in emerging markets.

Ms. Gandy explained that oversight of risk management by a bank regulator is highly infuential in a bank’s governance structure and to that end she argued that three important elements must be in place; a functioning legal system, an independent regulator and meaningful fines or sanctions and/or market forces that challenge and punish banks that do not play by the rules. She admitted that stronger regulation is improving the governance of banks but not so at the companies they lend in emerging markets.

According to Ms. Gandy “management should be appointed and monitored and should operate independently from the owners yet still be accountable to them.” The aim, she continued, should focus on aligning management interests with efficiency and performance, limit insider abuse of power and corporate resources and to provide a cost effective protection of investors’ and society’s interests vis-à-vis corporate insiders.

 

Michael Olympios is Chief Consultant at Allied Consultants.

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