GOVERNANCE Corporate governance
Corporate governance Lessons from the financial crisis
Mats Isaksson and Grant Kirkpatrick, OECD Directorate for Financial and Enterprise Affairs
I
f there is one major lesson to draw from the financial crisis, it is that corporate governance matters. Directors, regulators and shareholders, but also policymakers and the general public, need to pay more attention to corporate governance. This tells us how firms operate, their motives and principles, their reporting lines, who they are accountable to, and how they manage profit, remuneration and, in the case of many financial firms, other people’s money. When times were good, too many people took their eye off the ball and now we see the consequences.
Failures in corporate governance contributed to the collapse in financial markets. What can be done?
The public outcry has been loud and understandable, not least in relation to executive pay. And even some top executives have now admitted the lack of relationship between pay and performance and called for a salaries shake-up. We now realise that constantly rising share prices is
not necessarily a sign of good corporate governance. In fact, as recent history shows, it could actually be the opposite. The question is, what can be done to improve how financial firms operate? We have been examining the crisis closely and in particular seeing how the OECD Principles of Corporate Governance might help or, indeed, be improved in light of recent experiences. We see four key areas for urgent action: corporate risk management, pay and bonuses, the performance of board directors, and the need for shareholders to be more proactive in their role as owners. Let’s start with remuneration. Recent surveys have shown that four out of five market participants believe that compensation practices played a role in OECD Observer
No 273 June 2009
11
©Jason Reed/Reuters (UNITED STATES)
Positive signs: Richard Syron (left), Daniel Mudd, and Leland Brendsel, former chief executives of Freddie Mac, Fannie Mae and Freddie Mac respectively, are sworn in before testifying at a House oversight and government reform committee hearing on Capitol Hill in Washington DC, December, 2008.
