Why Regulation of Financial Institutions Cannot Be Assured with a Unitary Board
Presented to 14th Australasian Finance and Banking Conference, The ANA Hotel, Sydney, 18 December, 2001
26 Pages Posted: 17 May 2002
Date Written: December 18, 2001
This paper indicates why the integrity of financial institutions cannot be assured with a unitary board with its manifold conflicts of self-interest that can jeopardise the financial integrity of the institution. While block holders can mediate conflicts of director self interest they may introduce their own from related party dealings. Unitary boards exacerbate information overload and bounded rationality while paradoxically not providing sufficient information, independent of management, to monitor and control management. Examples of watchdog boards mandated in Europe are presented. The laws of information and control science are introduced to indicate the impossibility of regulation being assured without supplementary boards representing the interest of shareholders, creditors and other stakeholders. Conditions for self-regulation are identified and recommendations made that the licence condition for the operation of financial institutions require the introduction of governance and operating watchdog boards to supplement the role of regulators and provide competitive advantages to the institution.
JEL Classification: G28, G38
Suggested Citation: Suggested Citation