23 Pages Posted: 10 Mar 2010
The Great Financial Crisis (GFC) highlighted faults within the style of corporate governance and regulatory regimes of both financial and non financial institutions globally.
Although the GFC could be summed up as the mismatch between risk and valuation, it also mirrors corporate governance issues.
It is unlikely that the GFC would have occurred had it not been a systematic break down of appropriate corporate governance processes necessary to check and balance risk taking, the reward and remunerate of managers.
In short, the system of accountability transparency became distorted and dominated by a culture and process of remuneration, driven on managerial not corporate stakeholder objectives.
The very reason why corporate governance is a fundamental component of the law is to regulate managers since they are rarely the owners of the body corporate.
Since the 1980s the rise of the cult of the manager has emerged to such an extent that in will be argued, government bailout of financial institutions was drive by and for the benefit of the managers whilst the owners carried the loss.
One possible exception is the relative health of Australian Authorised Deposit Taking Institutions (ADI).
The regulation of Australian ADIs is well beyond capital and liquidity requirements; it is increasingly viewed as a model to drive a better corporate governance culture more attune to value adding and risk management. The Australian model tempered the rise and dominance of management culture with as couture of risk mitigation and accountability.
The London G20 Conference 2009 examined the role played by Australian Prudential Regulation Authority (APRA) and foreshadowed a range of corporate and securities law reform in line with the existing ADI regulation developed by APRA.
The current reform agenda is not new; it is a culmination of the work carried out by APRA since the demise of HIH Limited and flows from the recommendations made by Basel Committee on Banking Supervision (Basel II). Together a unique codified legal regime evolved to regulate virtually every aspect of the banking business. The idea that legal principles govern behaviour has now been overshadowed by a prescriptive legal model which was to determine who was to manage and how they were to manage (govern) the ADI.
The result is that Australian ADIs were discouraged from the temptations of their overseas counterparts to engage in high return high risk management driven business model. It was either good design or good fortune which brought about the changes in law and regulation. Perhaps such changes may also have some relevance for the regulation of carbon emission.
The theme of the paper is that perhaps the lessons learnt from HIH and the Basel II recommendation has set the stage for the design, accident or good fortune to navigate Australian ADIs out of the global GFC turmoil and to create what is now regarded as a model of corporate governance internationally. A model that may have some relevance in the way the body corporate through the application of a governance model can regulate carbon emissions much like the way it regulates risk.
The paper examines how APRA through its delegated legislation and post HIH period had created a regulatory governance regime to address issues such as risk management, transparency, accountability setting policies to strengthen corporate governance culture, codify board duties and succession planning.
The paper outlines how this trend now has gained further momentum as it being considered as a model to regulate carbon risk, value and trading. In such a scenario the common law is less equipped to deal with these emerging forces, the time of general principles will be argued, may be destined to legal history as codification and the rise of civil law doctrines emerge as corporate governance beacons championed by the likes of regulators such as APRA.
Finally, imposing a corporate governance regime is now standard within the banking sector as the preferred model to manage risk, rather than leaving risk to credit rating agencies and the price mechanism. The same may apply to mitigating carbon emissions by avoiding a purely price mechanism model which in the final analysis may had contributed to the global financial crisis when it came to incorrectly pricing risk and obligations.
Keywords: banking law, regulation, global financial crisis
JEL Classification: G21, G28, G38, K22, K23
Suggested Citation: Suggested Citation
Peters, Michael K., Corporate Governance of Australian Banking: A Lesson in Law Reform or Good Fortune?. UNSW Australian School of Business Research Paper. Available at SSRN: https://ssrn.com/abstract=1567726 or http://dx.doi.org/10.2139/ssrn.1567726