This has resulted in more independent directors being appointed to the boards in most of the financial institutions. The environment confronting financial institutions will continue to be immensely challenging, particularly in the coming years as global financial conditions remain highly volatile and uncertain, and as regulatory reforms start to take effect. In this environment, a number of areas will become more important to reinforce the effectiveness of boards and sound governance. 2  BIS central bankers’ speeches  First, board-level engagements on risk issues will need to be strengthened further. This can only be achieved if boards have a sound understanding of the institution’s business model, and a strong grasp of the changing complexion of risks in which the institution is exposed. Committed resources should therefore be available to the board to support their understanding of material developments affecting the institution, and to hone their judgement on matters concerning risk strategy. This should include relevant and meaningful management of information flows and risk analysis to the board, the ability to retain talent including external expertise where required, the ability to attract individuals with relevant competencies and experience to serve on boards, and the budget for board development and education. Second, with the growing expansion of financial institutions in scale and complexity, there is a need to inject greater diversity into boards to enable the board collectively to deal with the broader range of issues across the institution’s activities. This needs to be embedded within the framework for board renewal and succession.

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.