Corporate Governance and International Standards - Paper by Kern Alexander and Rahul Dhumale
April 21, 2008 – 3:26 pmIn 2001, Kern Alexander and Rahul Dhumale published a paper on the relevance of International Standards for the Corporate Governance of Financial Institutions.
Both the BCBS and the OECD have released Corporate Governance Principles (the OEDC in 2004, the BCBS in 2006) building on previous work.
As the authors point out, corporate governance can be ensured through
- appropriate levels of accountability, managerial competence, clear lines of responsibility, oversight by senior management, appropriate compensation mechanism and transparency within the bank
- laws and regulation by governments
- disclosure and listing requirements by securities regulators and stock exchanges
- accounting standards enforced by auditors
- voluntary industry principles by the financial industry
The authors use the principal-agent-problem to illustrate the problem of enforcing regulation of corporate governance in financial institutions such as banks. Bank managers can increase their payoffs by hiding overtly risky behavior. Governments have developed mechanisms like depositor insurance to protect depositors from these information assymetries, however these mechanisms induce the problem of moral hazard where bank managers rely on the deposit insurance to undertake even riskier business operations.
Source: K. Alexander, Dhumale, Rahul (2001). Enhancing Corporate Governance for Financial Institutions: The Role of International Standards. ESRC Centre for Business Research, Working Paper No. 196, Cambridge 2001
Topics of this post: accounting standards, bcbs, corporate governance, financial standards, Kern Alexander, moral hazard, oecd, Papers, Rahul Dhumale, regulators, securities