Volume 7 - Number 3 | November 2023
Governance in financial institutions: key elements and preventing the failures
Ashish Srivastava
Abstract:
Purpose
The need for robust governance standards in financial institutions requires no overemphasis. However, instances of governance failures have been a recurring global phenomenon. This paper examines the key elements of governance in financial institutions, evaluates reasons for failures and suggests ways to strengthen governance and prevent such failures.
Design/methodology/approach
The author follows a descriptive design and a behavioural approach to understand the governance issues in financial institutions.
Findings
The author identifies key elements of governance, and the potential reasons for failures and highlights that the structure of boards, thrust on the adoption of best practices and regulatory guidelines are necessary but not sufficient to ensure failsafe governance standards. The author emphasises the need for recognition of behavioural factors and a focus on continuous monitoring and red flagging of the conduct of key stakeholders by the third and fourth lines of defence. An effective whistle-blower policy, a clear focus on organisational culture and the subjugation of individuals to the systems can improve the robustness of the governance standards in financial institutions.
Originality/value
To the best of the author's knowledge and belief, the observations and suggestions made in the paper are original. The paper contributes by offering a nuanced perspective for strengthening governance in financial institutions.
References:
- Core, J.E., Guay, W.R. and Rusticus, T. (2006), “Does weak governance cause weak stock returns? An examination of firm operating performance and investors’ expectations”, Journal of Finance, Vol. 61 No. 2, pp. 655-687, doi: 10.1111/j.1540-6261.2006.00851.x.
- Douglas, C., Johan, S. and Peter, R. (2018), “Developments in financial institutions, governance, agency costs, and misconduct”, Journal of International Financial Markets, Institutions and Money, Vol. 54, pp. 1-14, ISSN: 1042-4431, doi: 10.1016/j.intfin.2017.06.004.
- Kaawaase, T.K., Nairuba, C., Akankunda, B. and Bananuka, J. (2021), “Corporate governance, internal audit quality and financial reporting quality of financial institutions”, Asian Journal of Accounting Research, Vol. 6 No. 3, pp. 348-366, doi: 10.1108/AJAR-11-2020-0117.
- Larcker, D.F. and Tayan, B. (2016), “Governance aches and pains: is bad governance chronic?”, Rock Center for Corporate Governance at Stanford University Closer Look Series: Topics, Issues and Controversies in Corporate Governance No. CGRP-54, Stanford University Graduate School of Business Research Paper No. 16-19, available at SSRN: https://ssrn.com/abstract=2765003
- Tayan, B. (2019), “The wells Fargo cross-selling scandal”, Rock Center for Corporate Governance at Stanford University Closer Look Series: Topics, Issues and Controversies in Corporate Governance No. CGRP-62 Version 2, Stanford University Graduate School of Business Research Paper No. 17-1, available at SSRN: https://ssrn.com/abstract=2879102
Further reading
- Larcker, D. and Tayan, B. (2011a), Corporate Governance Matters: A Closer Look at Organizational Choices and Their Consequences, FT Press, New York, NY.
- Larcker, D. and Tayan, B. (2011b), “Seven myths of corporate governance, stanford closer look series”, available at: http:/www.gsb.stanford.edu/cgri-research.
- Larcker, D., Eric, C. and Wang, C. (2013), “Boardroom centrality and firm performance”, Journal of Accounting and Economics, Vol. 55 No. 2-3, pp. 225-250, doi: 10.1016/j.jacceco.2013.01.006.