Global focus on corporate governance

April 2024 | SPOTLIGHT | BOARDROOM INTELLIGENCE

Financier Worldwide Magazine

April 2024 Issue

Corporate governance refers to the structures and processes for the direction and control of companies – from those that make up the FTSE100 to the local credit union and even a small family business. Corporate governance concerns the relationships among the management, board of directors, shareholders and other stakeholders.

Good corporate governance contributes to sustainable economic development by enhancing the performance of companies, increasing access to external capital and improving confidence in the market, which leads to stability. Poor corporate governance contributes to failing economic health, loss of confidence and, ultimately, financial losses for stakeholders.

In recent years, the world is taking note of the importance of corporate governance. There is increasing dialogue around corporate governance policy and a heightened focus on the development of national corporate governance codes, regulations and guidance. National governments, global organisations, stock exchanges, regulators and the private sector recognise the importance of sound corporate governance in improving the performance of companies and developing public and private capital markets.

Corporate governance is an essential component of all successful organisations. This is especially true in the regulated financial services sector where regulatory risk poses significant challenges for firms. Previously, corporate governance has predominantly been associated with publicly listed companies; nonetheless, the importance of industry standard codes to the non-listed sector should not be understated.

Corporate governance codes for the non-listed sector exist in many countries and can be industry specific. These codes are intended to be a guide or, at the very least, an aid, to those governing organisations to carry out their roles effectively. Although codes are commonplace today, they are a relatively recent phenomenon and in the past these have often not been sufficiently prioritised by firms. Over the last decade or so, organisations are learning to be proactive, rather than reactive, when it comes to corporate governance.

Regulatory priorities

While corporate governance codes – both for listed and non-listed entities – operate on a comply or explain basis, the last decade has seen the establishment of a number of senior manager regimes by regulators covering both the executive and non-executive branches of regulated financial services firms. These regimes which operate on a statutory footing and by virtue of the obligations imposed on individuals, will increase the importance of corporate governance in regulated firms.

The Senior Managers and Certification Regime (SMCR) in the UK is a well-known example. Ireland followed suit in 2023 with the Individual Accountability Framework (IAF), which encompasses the Senior Executive Accountability Regime (SEAR). These regimes require regulated financial services firms to document and assign responsibility for a number of areas deemed systemically important by regulators.

While the extended powers provided to regulators by these regimes pose a risk to firms, they are also an opportunity for firms to conduct reviews of their governance frameworks and document clearly the roles and responsibilities within an organisation. Training on new obligations is also an opportunity to embed a culture of compliance within firms at all levels.

Focus on compliance

Regulators are increasingly looking to C-suite and senior-level personnel as the crucial element of an effective governance and control framework in regulated firms. Any failure by senior-level personnel to effectively supervise their compliance and risk functions is likely to have significant legal, regulatory and reputational impacts on their firms.

Financial services firms’ risk and compliance frameworks should be complete, effective and designed to withstand the most stringent regulatory reviews without disrupting the business. Non-executive directors should seek to understand the frequency with which compliance risk assessments are reviewed and updated, assess the requirement for periodic assurance reviews of first and second-line functions, and regularly seek confirmation the firm has adequate resources in place to discharge its regulatory obligations.

Advent of ESG

The relatively recent focus on the environmental, social and governance (ESG) agenda means that corporate governance has created a new platform for all stakeholders to understand how companies operate. ESG is a vast, fast-moving, changing set of topics that means something different for different companies. Senior management and boards have had to upskill to keep pace.

Lessons learned

Numerous corporate scandals such as Wirecard, Silicon Valley Bank, the collapse of cryptocurrency exchange FTX and the Facebook/Cambridge Analytica data scandal were all enabled by weak corporate governance practices. The question is whether lessons have been learned and governance measures have now improved to the extent that these events are less likely to reoccur.

Good governance depends on having robust governance frameworks in place. It requires having the appropriate people around the boardroom table who know how to question decisions. Board members must understand the importance of promoting transparency within the business. Perhaps most importantly of all, there must be a mixed skillset; an organisation needs to identify what skills are required in order to run the business in an appropriate manner.

Ensuring a board has the right composition, structure and processes to oversee the business is essential. Christine LaGarde, the French politician and lawyer, famously said: “If Lehman brothers had been Lehman sisters the 2008 crisis may never have happened.” However, it is not simply about gender diversity; it is about each persons’ miscellany of background, abilities and what experience and skillsets a director is bringing to the table. Those in senior management and at board level must have frequent strategy sessions to determine what skillsets are needed, what gaps need to be addressed and to create a succession plan to future proof.

For example, in an investment fund, a director with asset management experience should be present, every board should have a finance and audit person, and ESG responsibilities should be allocated. Moreover, regulators are increasingly focused on ownership of responsibilities. Boards need to be thoughtful in adding to their ranks the specific mix of skills and experience that will enable their firm to weather crises and reset for resilience, whatever the future may hold. Furthermore, the composition of a board should change over time. What is required at a startup phase will be different later in a firm’s lifecycle.

Boards should also prioritise the adoption of voluntary corporate governance codes for their sector and seek to abide by them proactively. Regular reviews of board effectiveness should be conducted along with periodic governance reviews. The board should also maintain an evidence-trail of board decisions through comprehensive board and committee minutes and receive regular updates from senior risk and compliance personnel on upstream regulatory risks.

As to whether improvements have been made, it can certainly be said that companies and associated stakeholders are now much more educated as to how imperative robust governance is compared to how they were a decade ago. Regulators have made enhancements to corporate governance codes to ensure companies know what needs to be focused on in the context of corporate governance. Strides forward have been made, but there is still work to be done.

Regulated financial services firms should not underestimate corporate governance risk and should devote adequate resources to the development and implementation of effective governance frameworks to mitigate against this risk. To reiterate, corporate governance should be proactive, not reactive.

Grainne O’Farrelly is managing director and Eoin Devlin is senior vice president of regulatory consulting at Kroll Advisory (Ireland) Limited. Ms O’Farrelly can be contacted on +353 (0)472 0768 or by email: grainne.ofarrelly@kroll.com. Mr Devlin can be contacted on +353 (01) 472 0749 or by email: eoin.devlin@kroll.com.

Grainne O’Farrelly and Eoin Devlin

Kroll Advisory (Ireland) Limited