Towards good
governance in the
financial system of
Aotearoa
A speech delivered online to the Institute of Directors
on 7 September 2023
by Christian Hawkesby, Deputy Governor and General
Manager Financial Stability
Written with Esther Bonaparte
Introduction
E nga mana, e nga reo. E nga karanga maha o te wa.
Tihei mauri ora!
(To all authorities, all voices, to the many chiefs gathered here. Behold the breath of life!)
E nga rangatira
Karanga mai
Mihi mai
Whakatau mai
Tena koutou katoa
(Thank you to the leadership of the Institute of Directors who have called us here; who have
welcomed us here; who have looked after us here. Thank you very much)
I am delighted to be with you this morning, both as Deputy Governor of the Reserve Bank of New
Zealand and as a fellow member of the Institute of Directors.
In recent years, I have presented to the Institute of Directors a number of times, at the annual
conference and at branch functions around the country. Some of the topics I've covered have
been the Māori Economy 1, Financial Inclusion2 and the Future of Money. All of these issues are at
the heart of central banking in New Zealand. They are also topics that I've found directors and
trustees are very keen to understand for their roles.
Today I am here to discuss a topic at the very heart of the governance and the territory of the
Institute of Directors - the path towards good governance in the financial sector of Aotearoa.
• First, I want to explain the role of governance in Reserve Bank's approach to prudential
supervision and regulation;
•
Second, I want to look back through history to reflect on past governance lessons learned,
and discuss how these have shaped governance guidance; and
•
Finally, I will share the outcomes of our recent Thematic Review on Governance and take
any questions.
I should first acknowledge that at the Reserve Bank, Te Pūtea Matua we have been undergoing
our own very significant changes in governance.
Under our 1989 Act, the powers and responsibilities of the Reserve Bank were held by the
Governor, with the Board playing an oversight and advisory role. Now under our new 2021 Act, the
Monetary Policy Committee is responsible for formulating monetary policy and the Reserve Bank
Board is responsible for all other governance functions.
Under this new approach, our Board of Directors looks much more like a standard corporate
board like our regulated entities. The past couple of years has been an intense period setting up
the foundations for our new Board to succeed in its role.
However, today I am here to talk about our role as the prudential regulator of deposit takers and
insurers, and the crucial role that good governance has on the stability of those institutions and
the financial system, as well as the ability of the financial services industry to meet the needs of
New Zealanders.
More specifically, I'd like to share the findings of our Governance Thematic Review3 which we
jointly undertook with the Financial Markets Authority (FMA), New Zealand's financial conduct
regulator. This work follows on from the joint Conduct and Culture Review we published in 2018.
That work highlighted the critical role of culture and conduct from the Board and Senior
Management of financial institutions to ensure trust in their services4.
The scope of this latest Governance Thematic Review was around the thoroughness and discipline
boards follow in governing their activities. Systems, processes, documenting lessons, and
transparency were a key focus of our work. What sat behind this was a view that if appropriate
fixed investment and care are taken at the outset, governance will be more efficient and effective.
With these foundations in place, more time is available to focus on strategy, conduct, culture and
behaviours, reducing the likelihood of the worst-case outcomes we have seen through history -
financial failures, bailouts, systemic crises, misconduct and mis-selling.
A common theme we identified was the need for boards to set themselves up for success now and
into the future. This is the essence of a being a good kaitiaki. It's about being a temporary
guardian or caretaker, with responsibility to hand things over to the next generation in a better
position and ready for the future.
The results of the Thematic Review will inform our institutional supervision priorities and input into
our supervisory standards and guidelines as we embed the new Deposit Takers Act 2023 (DTA)
and review of the Insurance Prudential Supervision Act 2010 (IPSA).
We also hope that this work is of wider value, providing a unique opportunity to learn from others,
both for other financial institutions and those outside the financial industry.
Our approach to prudential regulation and supervision
Effective governance is critical to the financial soundness, success, and long-term sustainability of
New Zealand's financial institutions and to ensuring their customers are treated fairly.
As Dr John Laker says in the introduction to the Review, there is no 'one size fits all' governance
framework for financial institutions and no single best practice for governance, but there are
essential foundational elements in governance policies, processes and practices that underpin
good decision-making at board level.
Before getting into the Review, it is important to step back and briefly remind ourselves why there
is a role for a public policy institution like Te Pūtea Matua to have responsibility for financial
stability.
A sound and well-functioning financial system - financial markets, financial institutions, payments
systems - provides a public good shared by society in much the same way that physical
infrastructures do. Transport, energy, water and communications infrastructure provides benefits
that are felt much more widely than by individual users. As a public good, the costs of financial
instability can also be felt far beyond the management, shareholders, or customers of individual
financial institutions.
Sound financial institutions and financial systems are core responsibilities for us at the Reserve
Bank and the organisations we regulate. We want to ensure that we have a resilient financial
system that can withstand shocks and provide the financial services that all New Zealanders rely
on. It is a privilege to be a deposit taker or insurer in our society; it comes with the safeguard of
being prudentially regulated and supervised.
Our approach to prudential supervision relies on three interdependent pillars - self discipline,
market discipline and regulatory discipline5 6.
• Self discipline: relates to the role of directors and senior managers7. Boards of financial
institutions are responsible for setting the strategic direction; the tone and culture of the
entity; the risk appetite of the organisation; ensuring there are strong systems, policies,
processes and procedures; making critical decisions; and holding management to account.
In many ways the governance Board is the financial institution.
•
Market discipline: relates to the role of financial market participants in monitoring the risk
profile, and the financial performance and position, of financial institutions, and in
influencing their behaviour. An aim of the market discipline pillar is to reduce the
information asymmetry between firms and market participants so that they can effectively
monitor and influence financial institutions8.
•
Regulatory discipline: relates to the role of regulation, such as minimum capital and
liquidity requirements, to enhance the effectiveness of market and self discipline, and to
minimise the costs of financial instability if they do occur9.
It's hard to overstate the importance of good governance in all this.
No matter how strong the regulatory discipline and market discipline are, if there are governance
failings, or even weak governance, the stability of the organisation and the financial system as a
whole, are at risk.
Figure 1 - Three pillars of prudential regulation and supervision
History and importance of good governance
Over the past 20 years we have learnt a lot about governance failings and weak governance.
Internationally, the Global Financial Crisis (GFC) highlighted governance failures of financial
institutions that experienced the most trouble managing their financial risks10 11. Some common
themes of governance failures on the board during the GFC included:
• A lack of financial industry experience amongst directors;
•
An inability of board members to accurately identify and understand financial risks; and
• Boards failing to receive timely, relevant, and digestible information.
Unfortunately, in New Zealand we are not immune to governance failures and lessons.
Around the same time as the GFC, the failure of finance companies was further precipitated by
governance weaknesses. South Canterbury Finance is a prime example of the importance of
having effective board dynamics and procedures amongst directors. Governance failings included:
• The board had few formal meetings between all directors;
• Independence was hindered as the chairman doubled as the controlling shareholder,
creating a challenge for the board to make collective decisions; and
• The board did not sufficiently review the content of papers or financial statements12.
More recently, CBL Insurance serves as a reminder of public concerns being raised in relation to
financial institutions' governance. For CBL Insurance these included:
• Ceasing to follow up on recommendations from the Appointed Actuary;
• Failing to sufficiently oversee the risks facing the insurer;
• Breaching regulatory directions13; and
•
Failing to disclose material information to the market14.
Scandals in Australia over conduct and culture in 2018 also highlighted governance failings in
managing non-financial risks. The Royal Commission noted several prominent governance issues
including:
• Not receiving the right information, and not doing enough to seek further information;
•
Not doing enough with the information they had to oversee and challenge management;
• Putting the pursuit of profit above all else, in particular above the interests of customers
and compliance with the law; and
•
Unclear lines of accountability which resulted in a lack of consequences when outstanding
issues were left unresolved15.
The Royal Commission's review prompted the FMA and the Reserve Bank to jointly review
Conduct and Culture here in New Zealand16.
For the Reserve Bank a key takeaway was that an entity's culture is the key driver of its conduct
and risk management. Creating the right culture requires an ongoing conscious effort, led from
the top. Boards need to take ownership for ensuring the appropriate culture is embedded within
an organisation17.
A scan of governance in New Zealand's financial sector would not be complete without
mentioning the section 95 reviews that we requested on governance from ANZ in 202018 and
Westpac in 202119. Both resulted in a significant uplift and strengthening of governance that should
be acknowledged and recognised.
Finally, yet again this year we were reminded of the importance of governance through the
highprofile collapse of Silicon Valley Bank (SVB) in the United States. SVB saw failings in governance
including:
• The board not receiving adequate information about the risks faced;
•
Directors failing to 'lean in' and hold management liable for the mismanagement of the
organisation's risks; and
• The board as a whole possessing limited banking experience20.
____________
13
See Trowbridge, S. Scholtens, M (2019). An Independent Review for the RBNZ for the Supervision of CBL Insurance Ltd. Final Report available at CBL RBNZ Final Report.
14
See FMA. (2023). FMA reaches agreement with CBL Corporation and four independent directors on continuous disclosure breaches, available at FMA reaches agreement with CBL
Corporation and four independent directors on continuous disclosure breaches | Financial Markets Authority
15
See Haynes K, M. (2019). Final Report - Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry (Volume 1). Final report available at Final
Report - Volume 1 (treasury.gov.au)
16
In 2018 the Reserve Bank and Financial Markets authority undertook a joint review into the conduct and culture issues present in life insurers and banks in New Zealand, and
looked to understand how banks and life insurers identify and remediate issues. Available here for life insurers life-insurer-conduct-and-culture.pdf (rbnz.govt.nz) and here for banks
banks-conduct-and-culture-review.pdf (rbnz.govt.nz).
17
See Orr, A. (2019). Conduct, Culture and Financial Inclusion A speech delivered at The Westpac Massey Fin-Ed Centre - Building Financially Capable Communities: Our Pathways To
Success Conference, available at: Conduct, Culture and Financial Inclusion (rbnz.govt.nz).
18
See Deloitte (2019). Section 95 - Review of ANZ Bank New Zealand Limited - Effectiveness of the directors' attestation and assurance framework, available at
anz-nz-section-95director-attestation-and-assurance-review-december-2019.pdf (rbnz.govt.nz)
19
See Oliver Wyman. (2021).Risk Governance Review - Section 95 Review of Westpac New Zealand Limited for additional information on material shortcomings in the Board's
Oversight, available here Section 95 Risk Governance Review of Westpac New Zealand Limited (rbnz.govt.nz)
20
See Barr, M S. (2023) Review of the Federal Reserve's Supervision and Regulation of Silicon Valley Bank, available at: Review of the Federal Reserve's Supervision and Regulation of
Silicon Valley Bank
Individually, these factors may not have had a material impact on the failure of SVB, but when
considered collectively, the inadequate governance processes and behaviours resulted in the
board having inappropriate oversight of the risks facing SVB.
Principles, policies and guidelines
Historically, the OECD has been the leading international organisation on principles of good
governance across all sectors - financial and non-financial21. They have periodically released
corporate governance principles to support boards and policy makers in improving economic
efficiency, sustainable growth and financial stability.
While ineffective governance was not the sole contributor to the GFC, it highlighted the risks faced
when boards fail to grasp the magnitude of their financial risks and acted as a catalyst for
improving corporate governance across the world. Organisations and regulators looked to
increase the expectations and accountability on directors.
In 2010, the Bank for International Settlements (BIS)22 published the first edition of its corporate
governance principles for banks. Given the central importance of governance to banks, it seems
remarkable that these were not published until 2010 when you consider the foundations of
modern banking regulation have been in place since the first Basel Accord of the 1980s.
Around the same time, the Group of Thirty - a private sector organisation, which we at the
Reserve Bank are proud to be a part of, along with other global central banks, international
financiers and academics - published its comprehensive document which took a global perspective
on good governance practices23. Its guidance provided key insights and recommendations for
enhancing governance effectiveness of financial institutions.
Here at the Reserve Bank, our governance guidelines for insurers were published in 201124 and our
corporate governance policy for banks (BS14) was published in 201425. The FMA also has its own
corporate governance guidance as a financial conduct regulator26.
To further promote good governance and recognise the critical role that boards play in both
protecting the interests of shareholders and providing long term value, the NZX released the latest
version of their Corporate Governance Code this year27. The code strikes a balance between
promoting strong governance practices and providing flexibility to boards to tailor their
governance practices to the unique needs of their business.
The Institute of Directors published its Four Pillars of Governance to provide guidance on good
practice governance, global trends and the contemporary operating environment in New Zealand.
Now in its fourth edition28, it is the go-to reference guide for governance, within arm's reach of
directors, trustees and governors across all sectors of the economy: from financial, to
nonfinancial; private sector, public sector.
Our joint Governance Thematic Review with FMA
With all this context and background in mind, in late 2021 we teamed up with the FMA to
undertake a joint review of governance. Our shared objective was to examine the policies,
processes, and operational practices of boards of financial institutions we regulate. We wanted to
focus on key areas of governance to:
• Determine the extent to which these aligned to our regulatory requirements and guidance;
• Understand how these allow boards to provide oversight and govern effectively; and
•
Promote effective board practices by outlining areas of good practice that all boards
should consider, as well as highlight areas for improvement.
Figure 2 - Areas of focus for effective governance
We reviewed a sample of 29 entities regulated by the Reserve Bank and/or FMA, across the
banking, insurance, non-bank deposit taking and investment management sectors.
For each entity, we reviewed a range of documents related to board and governance policies,
procedures and record keeping. This was followed up with in-depth onsite reviews where we
interviewed board members and executive management, focusing on eight key areas of
governance:
• Roles and responsibilities;
• Board and committee composition and structure;
•
Challenge;
•
Board and committee performance;
•
Board training;
•
Board meetings;
• Board capacity; and
• Conflicts of interest.
We assessed the entities against our expectations for governance, as set out in relevant legislation
and the Reserve Bank and FMA guidance. Where we did not have guidance on a specific area we
looked beyond our internal guidance and considered international good practices to gain an
understanding of what other jurisdictions and regulators consider when assessing governance.
When forming a view on international good practice we looked to governance guidance from a
range of regulators from Bank of England, Federal Reserve, Australian Prudential Regulation
Authority and OECD.
Good practices and areas for improvement
We observed a variety of governance practices across the industry; there were a number of good
practices, as well as practices that were below our expectations. There is still room for
improvement for most entities to ensure robust policies and processes are in place.
Some areas where we generally saw good practices included:
• Formal and clear processes for planning and formulating strategy.
•
Strong processes for selecting and appointing new directors and the CEO.
• Boards being composed of a majority of independent directors.
• Clearly documented succession planning for CEOs and senior management.
• Formal standalone conflicts of interest policies.
• Formal annual planning processes and work plans for board and committees.
•
Regular education sessions for the board, including in-depth sessions on specific risk
topics.
While we observed good practices across the sample, many of these practices were not
embedded into policies and processes, and those that were documented often lacked sufficient
detail and clarity.
Through our review we have seen boards make positive changes to their governance structures,
with their practices evolving over time. However, we observed changes which were not often
reflected in the organisation's governance frameworks. Formalising practices into these
foundational documents:
• Fosters transparency and accountability;
•
Sets the tone from the top, supporting good practice being embedded into the values and
culture of the organisation; and
•
Sets boards up for success not only now, but into the future.
In addition to formalising processes, some of the key areas for improvement across the sample
included:
•
Processes for selecting and appointing the board chair and committee members were not
robust. Several entities did not have clear or comprehensive processes in place for the
chair and board committee members.
•
Succession planning for the board was not as formal and rigorous as we expected. While
discussions were taking place and processes existed, almost none of the locally
incorporated entities had documented plans for the board, committees, or the board chair.
•
Whilst the review identified that most entities were performing some form of internal
evaluation of the board, the evaluations lacked formal, clearly defined, and comprehensive
criteria. Performance of the board was not independently reviewed for most entities.
• Although capacity of directors was assessed prior to appointment and on an ongoing
basis, these assessments were mostly informal in nature and not comprehensive. This was
due to the absence of a formal framework to ensure consistent and robust assessment of
capacity.
• In the absence of a formal framework, organisations generally took varying and ad-hoc
approaches to identifying the ongoing training needs of the board.
• While organisations had diversity policies for staff, these diversity policies did not apply to
the board.
Being future focused and embedding good practice
A common theme running through these findings of the Governance Thematic Review is the ability
of boards to change and evolve, setting themselves up for success not only now but into the
future.
The environment facing governance boards is forever changing:
•
Changing economic developments.
•
Changing global geopolitical trends.
•
Changing structural factors, such as climate change.
• Changing threats, such as cyber scams and attacks.
• Changing opportunities, from new markets and technologies.
• Changing expectations to embrace diversity to better arm boards to navigate these
varying developments, trends, threats and opportunities.
• Changing expectations to embed a Te Ao Māori perspective and the strengths and
benefits this provides, as a unique comparative advantage of Aotearoa, New Zealand29.
•
Changing expectations to earn and retain the social licence to operate by being
transparent, accessible and accountable to all of society.
As this evolution occurs, we need boards to ensure that they have the appropriate processes,
capabilities and culture in place which allows them to ask the right questions and provide
appropriate direction, challenge and oversight.
One of the key roles of the board is to use the learned experience of previous boards to guide the
organisation. With this in mind, one of the most valuable assets that directors leave an
organisation with is their lessons learned so future generations can learn from their experience.
In order to be future focused and embed a continuous improvement mindset, some of our key
recommendations that all boards should consider include:
•
Undertaking robust suitability assessments which outline the skills, diversity and capabilities
required on the board. This will assist the board in maintaining the collective skills and
experience to guide and oversee the organisation's long-term strategy;
•
Ensuring that succession planning is thorough and well thought out to mitigate future
composition risks, maintain an appropriate balance of skills, experience and diversity, and
ensure continuity;
• Actively considering the diversity needs of the board to support them in their role;
• Assessing director capacity against a formal framework to ensure directors have sufficient
time to be effective in their role;
• Conducting regular and robust evaluations to drive effective board performance. This
includes having a clearly defined, and comprehensive criteria and ensuring improvements
are identified and implemented; and
• Providing effective and appropriate challenge to one another and management.
This continuous improvement mindset is the essence of a being a good kaitiaki. It is about being a
temporary guardian or caretaker, with responsibility to hand things over to the next generation in
a better position and ready for the future.
Next steps and conclusion
Thank you for this opportunity to join you this morning, as Deputy Governor and as a fellow
member of the Institute of Directors.
If you were directly involved in the Governance Thematic Review, thank you for your willingness to
participate. The examples of good practice we observed in your entities are shared in our report
so others can learn from them. I also hope you will embed any good practices that you don't
currently have in place.
If you weren't involved in the Governance Thematic Review, we hope that this work is of wider
value, providing a unique opportunity to learn from others - both for other financial institutions
and those outside the financial industry.
At the Reserve Bank, the insights will inform our supervisory priorities and input into standards and
guidelines as we embed the new Deposit Takers Act 2023 (DTA) and review of the Insurance
Prudential Supervision Act 2010 (IPSA).
Finally, I wanted to finish with a whakataukī (proverb) first said in 1858 by Pōtatau Te Wherowhero
in 1858, a Waikato chief and the first Māori King.
"Kotahi te kōhao o te ngira e kuhuna ai te miro mā, te miro pango, te miro whero"
The literal translation is "through the eye of the needle pass the white thread, the black thread and
the red thread".
Pōtatau was highlighting the importance of connection, collaboration and a common vision, and
the strength this can create. Three strands woven strongly together are much stronger than
one. At the same time, much like threading three strands through the eye of one needle, achieving
this is not easy, and requires much deliberate focus and effort.
In the world of financial stability, the strands of self-discipline, market-discipline and
regulatorydiscipline together make for a strong financial system that meets the needs of New Zealanders.
In the world of governance of financial institutions, the connected strands of past, present and
future directors enable the learned experience of previous boards to guide the organisation into
the future.
Kia kaha, kia maia, kia manawanui, kia ora koutou katoa.
Be strong, be bold, be patient, be well and good luck.