Corporate Governance and Access to Finance - ESBG

The first two elements (the ownership structure and the role of stakeholders)determine the formal decision making process in financial institutions.Particularly relevant is the connection between the decision-takingprocess and risk assumption resulting from these decisions. The globalfinancial crisis has highlighted the need for consistency between ensuringan integral view by the Board of the risks facing the institution while, atthe same time, granting a certain independence of the Chief Risk Officer(CRO). The latter should have at its disposal adequate means to developthis important function and should report directly to the Board, where theultimate responsibility on the integral view of the institution lies (seeWalker Review, 2009).This raises two questions: (i) the agency costs in the organization, whichgenerally depend on the options available to the owners in reacting tomanagement decisions contrary to their interests (voice and exit from theentity); (ii) the design of the incentives, including the remuneration ofdirectors in the board and management. A considerable debate has takenplace recently on incentives and remuneration in banking institutions(see BCBS, 2010a), as a result of which principles for avoiding excessiveshort-term focus in incentives have been adopted. These principles seekto promote appropriate compensation practices to create the rightincentives for effective risk management and avoiding excessive risktaking. These practices must be approved by shareholders and be subjectto oversight by supervisors.In turn, the organizational structure must be analyzed consideringelements such as efficiency, the residual risk (which owners generallybear), control and accountability. Without these elements soundgovernance of the financial institution would not be well founded.The organisational structure of WSBI members can be grouped aroundthe following models: government-owned banks, savings banks as publicinstitutions, postal savings institutions, mutual or cooperative banks,private banks (listed or not listed) and foundations. This diversity oforganizational forms raises the issue of whether good CorporateGovernance features are common for all these types or vary among them.In general, Corporate Governance depends on ownership structures,but some general good practices are applicable to all these types ofinstitutions, especially when considering that (i) most codes andstandards originate in common banking regulation and supervision and(ii) they share similar access to finance objectives.49