In some other areas, we have found that practices of institutions have fallen substantially short of our expectations as enumerated in existing corporate governance principles that institutions must observe. An example relates to the effectiveness of nomination committees and attention to remuneration practices. In such areas, we find merit in providing more specific guidance to institutions in order to achieve greater progress towards the desired state. I alluded earlier to the particular importance of effective governance as we move towards the adoption of more principle-based regulations for the insurance industry. A common misperception that we find in the industry has been the notion that principles-based  2  BIS central bankers’ speeches  regulation equals deregulation or less regulation. It is in fact neither. The move is mainly motivated by two key considerations: first, a recognition that in an environment of fast-paced innovations, attempts to regulate prudent behaviour through detailed and prescriptive rules is just not sustainable as they risk becoming outdated almost as soon as they are written. Second, common rules often do not adequately capture the risks of larger and more complex institutions, or when they do, they are disproportionately onerous for smaller institutions and this can choke off innovation. The adoption of more principles-based regulation is therefore about re-regulating the industry in a manner that better reflects the risks which an insurer faces. There is a third consideration. With greater focus on principles of sound practice, it is left to insurers to design appropriate internal rules that will govern their activities.

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.