This has the intended effect of encouraging firms to shift from a compliance focus to developing a deeper understanding of the risk drivers in their business. In turn, conversations between management and the board, and between insurers and supervisors, have moved to focus on how key risks are being controlled rather than on whether particular rules have been breached. This reflects our expectation that boards, supported by the audit and risk committees, must monitor changes to their risk profiles and actively review risk strategies and internal controls in the light of those changes. An area in which Bank Negara Malaysia is currently seeking to better understand industry practice is with respect to the interactions between the audit and risk committees of the board. Audit committees have a clear interest in risk management within their organisations. Most internal audits adopt a risk-based approach to auditing which requires an understanding of material risks within the organisation. Audit committees also obtain independent assurance from internal audit on the effectiveness of risk management processes within the organisation and this requires a reasonably deep knowledge of risk management. Conversely, risk committees must consider the quality of internal controls, including financial reporting practices, which are an important part of any risk management framework. The Walker Review of corporate governance in the financial industry acknowledged an important link between these two functions. In Malaysia, we have moved ahead of many countries in requiring an organisational separation of the audit and risk committees in order to encourage an enhanced focus on audit and risk.

Bank Negara Malaysia is also particularly focused on corporate governance in the light of regulatory changes that are being pursued for the insurance industry. I am referring to the transition from a rules-based system which regulates a number of aspects of insurance operations, to a more principles-based system. This process has already started with the newer guidelines that we have introduced lately, but there continue to be a number of rules applied to the insurance sector which may have outlived their purpose. We are reviewing these. A precondition for this transition is a significant emphasis on a strong system of corporate governance, and one that is actually working effectively within financial institutions. Ultimately, corporate governance reforms are about improving accountability and control, especially where interests and incentives of stakeholders are not fully aligned. We believe that in Malaysia, we have laid strong foundations for sound governance practices within financial institutions. For the insurance industry, the prudential framework on corporate governance for insurance companies and various other guidelines that have been issued by the Bank establish standards that we expect insurers to operate against to ensure the sound and prudent management of insurers. Our supervisory approach has contributed to promoting better governance in practice. And in the last four years, we have focused on providing important support to directors in performing their roles through education initiatives. Forums such as this contribute to that effort. Our continuing work on corporate governance builds on and strengthens this foundation.