Issues around misaligned incentives and an over-emphasis on short term performance which encouraged reckless risk-taking, in addition to the lack of transparency, and the pervasive conflict of interests have long been the focus of public attention especially in relation to companies with dispersed shareholding structures. These same issues however, are far more serious when they involve the financial institutions given the significant externalities inflicted on society following the failure of such financial institutions. Banks in particular are especially vulnerable to the consequences of governance failures given the critical importance of public confidence to their very survival. Since the crisis, substantial work on several fronts have been devoted to strengthening the resilience of financial institutions. New capital and liquidity standards have been a key focus of the global regulatory reforms and the work to transpose these global standards into national regulations are now well underway in many countries, including in Malaysia. While this will deliver significantly improved frameworks for risk-taking by financial institutions, they remain, at best, poor substitutes for good governance. Evidence of this can be drawn from the contrast between institutions that operated under the same regulatory framework, but that experienced very different outcomes during and after the crisis. The comparisons are revealing. Of significance has been the observation – including in the most recent cases of massive bank losses – that behaviour and culture had a more significant part in the recent governance failures.

Despite having independent directors and elaborate control structures in place, firms have failed because of decisions by their management and when boards have not effectively performed their oversight role. This has been principally attributed to the lack of sufficient collective knowledge of the board and inadequate competence of individual directors which in turn have led to poor judgements that hampered the ability of the board to rein in excesses at an early stage. Competency gaps generally allow for individuals on boards or from senior management to exert a dominant and undue influence over the decision making process, without being subject to sufficient scrutiny and effective challenge. This occurs when Boards are not able to grasp the risks associated with inordinately complex activities that their institutions are engaged in. This is generally further compounded by the failure to provide an effective countervailing influence to an overzealous risk-taking culture among front-liners who are principally driven by the pressure to deliver short term returns. BIS central bankers’ speeches  1  Of course, sound processes and structures will continue to have a central role in any good governance framework. This provides the parameters within which decisions can be made. However, the growing significance of behavioural, cultural and ethical issues suggests that governance frameworks must give greater attention to the “softer” aspects of governance. A clear reason for this is that the more challenging and fluid operating environment demands greater exercise of judgement by management.