The failure of a systematically important financial institution may also result in serious ramifications and costs to the economy, given their roles and inter-linkages within a country’s economy. For this reason, especially in the conduct its business operations, financial institutions are subjected to a higher standard of integrity and professionalism. In recognition of this, statutory responsibility is entrusted to the board and senior management to steer the institution and to safeguard its safety, integrity and reputation at all times. As public interest entities, actions by financial institutions have far reaching implications for a wide range of stakeholders. Modernising corporate governance for the banking sector and the insurance industry has been a major focus for Bank Negara Malaysia following the Asian financial crisis in 1997. In the years since then, various regulatory reforms have been implemented to strengthen board practices, roles and responsibilities. These reforms include requiring the establishment of board committees, enhancing the independence of the board, expanding transparency and raising disclosure requirements. We also commissioned a study on board remuneration with the aim to improve board remuneration packages and as a way to retain and attract fresh board talent. At the international level, more expanded efforts were undertaken to strengthen corporate governance in the financial sector in 2008 following the global financial crisis. It became evident that ineffective boards and weak senior management oversight had been key contributing factors to the failure of some of the largest global financial institutions.

In some instances, the board and management will also have to deal with increased and sometimes conflicting regulatory and 2  BIS central bankers’ speeches  legal requirements across the different jurisdictions. For such financial groups, the lines of accountability and reporting must be clearly established to avoid the business becoming “toobig-to-manage”. A more diverse board reflecting the financial group’s cross border presence might also be necessary. As the operating environment becomes more complex, it is not an impossibility that sometime in the near future there would be a demand for “professional directors”. Secondly, financial innovation, including in the area of Islamic finance, will continue to expand as institutions seek their own competitive edge. While we should encourage such innovations within the bounds of prudence, the implication of financial innovations on governance arrangements and practices must be properly understood. For example, the introduction of new financing structures based on different Islamic contracts such as equitybased or risk-sharing concepts will likely demand different and more robust governance arrangements. In this context, the Bank is introducing Shariah and operational standards to promote greater legal and operational certainty and quality in Islamic finance transactions. These standards will set out, among others, clear duties and responsibilities of the various parties involved in Islamic contracts with the aim to ensure end-to-end Shariah compliance. At the same time, there will be enhanced disclosure requirements on risks associated with potential misconduct and negligence.