Accordingly, as supervisors we should test principles, theories and procedures against the reality of events in financial systems. Both within and outside Spain, last year provided us with representative cases of weaknesses that leave no room for complacency and which require fresh thought and responses. The rest of my speech will deal with these aspects. Let me begin by noting that no new initiative it is sought to take in this field may be considered in isolation. It must be part of a two-dimensional framework. First is the matter of international coordination, since in markets as interrelated as is currently the case, the stability and behaviour of the system has an international facet. And second is the multi-disciplinary dimension, since, as revealed by the welter of problems I discussed in connection with the ENRON case, it is becoming increasingly evident that no banking supervision model may be expected to be efficient if the rest of the institutional apparatus underpinning the rationale of the market economy does not function properly. Among these institutional underpinnings, there are two which, although they affect all companies, I consider to be of particular importance for the workings of credit institutions and for their proper supervision. The first is the need to reinforce market discipline. On the basis of adequate, reliable and updated information compiled by companies, duly verified by independent auditors and impartially evaluated by analysts and rating agencies, such discipline should simultaneously act as a deterrent to and penalise imprudent, inappropriate or simply mistaken behaviour.

The second concerns strengthening corporate governance. Banking supervision cannot and should not replace company directors and senior managers in the performance of their functions or the discharging of their responsibilities. Naturally, then, the contribution of bank directors and senior managers is essential if sounder, more stable and more efficient systems are to be attained. Achieving appropriate corporate governance standards contributes to corporate health, increases market confidence and promotes efficiency in the economy in general. Legislators, supervisors and, above all, entities themselves should promote the sound functioning of companies through the following key aspects: management transparency; the reliability and integrity of accounting information; the protection of shareholders; and the appropriate treatment of conflicts of interest. Also vital are the accountability of boards of directors and the suitability of their composition and procedural rules; guarantees that key decisions are adopted by the appropriate collegiate bodies and then duly recorded and conveyed to the market with sufficient transparency; and the setting up of audit, remuneration or appointment committees with clear objectives so as to ensure their effectiveness. To be effective, the adoption of any code in this area should be supported by appropriate structures and procedures. It will also require substantial participation and commitment by the company's directors and managers. Specifically, I should like to stress the importance for good corporate  8  BIS Review 38/2002  governance of an audit committee that is suitably composed and committed and on which nonexecutive directors form the majority.