Friday, April 20, 2012

G-30 Report Says Understanding Risk Is the Essence of Corporate Governance

The essence of sound governance at financial services firms is understanding risk. posited a new G-30 report.  If a risk is too complicated to understand, said the G-30, it is too complicated to accept. Effectively balancing risk, return, and resilience takes judgment.  The report also concluded that values and culture are the ultimate “software” that determines the behaviors of people throughout the financial firm and the effectiveness of its governance arrangements. The report stresses that values influence the behavior of those with governance responsibilities and the key to reform is to promote changes in the ways in which these individuals think about their responsibilities.

Roger W. Ferguson Jr., Chairman of the G30 Steering Committee on Corporate Governance, and former Vice Chairman, Board of Governors of the Federal Reserve System, said that effective governance greatly depends on the tone set at the top. The corporate culture dictates the values and the behaviors of the people in the firm and how they interact, he emphasized, and firms can tailor and optimize governance processes and procedures. But if they have the wrong people, or if those people do not behave with integrity and transparency, said the former Fed official, the arrangements will not save them. Leadership makes a huge difference, he concluded.

G-30 Chairman Jean-Claude Trichet, former President of the European Central Bank, noted that ineffective governance of systemically important financial institutions contributed to the massive failure of financial-sector decision making that led to the financial crisis. The paramount aim of the new report is to promote changes in governance behavior, he said, which demands changing the ways in which people think so that they can successfully induce the specific, tailored reforms that will enhance governance in their institutions.