Group of 30 looks to behaviour more than regulation in governance of finance

The governance of banks and other financial institutions pretty clearly contributed to the economic distress we continue to endure, four years after the main events. Much reflection and some action has followed it. While knowing the something needs to be done is easy, knowing what to do is harder.

That sentiment is in evidence in a reflection published by a loose group of financiers, academics and financial regulators. They call themselves the Group of 30, and they've been around, in a shifting constellation of actors, for more than 30 years. Policy takes the forefront, with Jacob Frenkel, a retired governor of the Israeli central bank, acting as chairman of its board of trustees of the non-profit group. Jean-Claude Trichet, the retired governor of the European Central Bank and the Banque de France, is chairman of the G30 itself. The group commissioned research into the corporate governance of banks and concluded that, well, good governance is more easily said than done. Let's listen into its thinking:

Nature of governance: Good corporate governance requires checks and balances on the power and rights accorded to shareholders, stakeholders, and society overall. Without checks, we see the behaviors that lead to disaster. But governance is not a fixed set of guidelines and procedures; rather, it is an ongoing process by which the choices and decisions of FIs [financial institutions] are scrutinized, management and oversight are strengthened and streamlined, appropriate cultures are established and reinforced, and FI leaders are supported and assessed.

Bank boards: Boards control the three key factors that ultimately determine the success of an FI: the choice of business model (strategy), the risk profile, and the choice of CEO – and by extension the quality of the top-management team. Boards that permit their time and attention to be diverted disproportionately into compliance and advisory activities at the expense of strategy, risk, and talent issues are making a critical mistake.

To those convinced that more regulation is required, this report will disappoint in its lack of a clear game-plan of action. To those willing to be persuaded, the report urges thoughtfulness on the part of the governing and governed. To those who don't consider it at all, the prominence of the backers suggests the report may still end up as part of the discourse in which they operate.

Source document: The Group of 30 report, "Toward effective governance of financial institutions," is a 96-page pdf file.