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.

Behavioural, cultural and ethical norms, are likely as a consequence, to assume more importance in defining the boundaries within which management will make such judgements. As institutions become larger and more complex, boards themselves must also have the ability and confidence to assess the nature of the risks to the financial institution’s strategic plan and business direction. This will entail behavioural and cultural changes within the boardroom that will involve changes to the board dynamics and the ability to effectively harness the collective knowledge and expertise of the board. It will involve the courage to break away from the status quos that promotes “group think” over diversity. Developments in supervisory approaches will also reinforce this trend. The bar on corporate governance continues to be raised through more intensive supervision that focuses on board effectiveness. Supervisors are increasingly looking for evidence of a mix of technical and strategic competencies on the board that will support meaningful engagements both within the board, and between the board and management. Assessments are also made on whether boards function in a manner that promotes independence of judgement, and the extent to which boards are able to define the acceptable risk appetite for the institution and to oversee its translation into appropriate policies and behavioural norms. Following the Asian financial crisis, strengthening the governance of financial institutions was a key priority which culminated in a number of regulatory reforms that established the framework of governance practices that exist today.