Banks are regularly under scrutiny for their professional and ethical behaviour. This column assesses the role of boards in monitoring and advising conduct, and offers new insights for how to structure bank boards to prevent misconduct. Conventional board measures such as board independence and financial expertise have no measurable impact on misconduct being committed or detected. Instead, governance metrics revolving around CEO connections warrant more attention from regulators, investors, and governance activists.
The reputation of banks in terms of professional and ethical conduct continues to be in sharp decline. In recent years, regulators have targeted banks with record numbers of enforcement actions, requiring them to take corrective measures against financial misconduct. Among the banks engulfed in misconduct cases are various high-profile institutions. Wells Fargo is currently in the news regarding a large case of misconduct, with many commentators viewing poor board governance as the main reason behind the Wells Fargo debacle (Financial Times 2016). Likewise, JP Morgan has faced several enforcement actions related to credit card fraud, money laundering and internal accounting controls over the past few years.
On one level, it is surprising to see the recent surge in cases of bank misconduct. One explanation holds that when a CEO has too much authority within the firm, misconduct is but one potential outcome (Khanna et al. 2015). However, by most accounts, oversight of CEO decision-making has improved markedly in recent years. Data from Riskmetrics show that eight out of ten US bank board members are classified as independent in 2012, up from around half in 2000 (see Figure 1). With increasing levels of independence, one would expect bank boards to be more effective in preventing misconduct. However, far from a declining trend, the number of enforcement actions has increased from 5 to 28 over the same time period.
http://voxeu.org/article/when-bank-boards-get-too-cosy-expect-misconduct
The reputation of banks in terms of professional and ethical conduct continues to be in sharp decline. In recent years, regulators have targeted banks with record numbers of enforcement actions, requiring them to take corrective measures against financial misconduct. Among the banks engulfed in misconduct cases are various high-profile institutions. Wells Fargo is currently in the news regarding a large case of misconduct, with many commentators viewing poor board governance as the main reason behind the Wells Fargo debacle (Financial Times 2016). Likewise, JP Morgan has faced several enforcement actions related to credit card fraud, money laundering and internal accounting controls over the past few years.
On one level, it is surprising to see the recent surge in cases of bank misconduct. One explanation holds that when a CEO has too much authority within the firm, misconduct is but one potential outcome (Khanna et al. 2015). However, by most accounts, oversight of CEO decision-making has improved markedly in recent years. Data from Riskmetrics show that eight out of ten US bank board members are classified as independent in 2012, up from around half in 2000 (see Figure 1). With increasing levels of independence, one would expect bank boards to be more effective in preventing misconduct. However, far from a declining trend, the number of enforcement actions has increased from 5 to 28 over the same time period.
http://voxeu.org/article/when-bank-boards-get-too-cosy-expect-misconduct
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