Flaws in Banking Governance

Abstract:     
The subprime crisis showed that governance mechanisms are still far from perfect in most organisations, and also highlighted the many flaws in bank governance systems. Indeed, the majority of organisations do not appear to consider governance as a key issue. Instead, they work from the standpoint of formal respect for the regulatory or professional provisions in place rather than one of real adherence to governance principles. In this context, our paper sets out to explore the underlying sources of their inefficiency. In particular, we identify four main areas of governance weaknesses in the banking sector: risk control, the independence and competence of board members, the compensation system for executives and traders, and the way the strategy is defined. We believe that, in addition to cultural, organisational and environmental issues, the main explanation is that executives consider governance mechanisms to be more to do with the non-destruction of value rather than with real value creation.

Number of Pages in PDF File: 20

Keywords: governance, executives, best practices, performance, value creation, bank

JEL Classification: G34, G21

Accepted Paper Series