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Anam Raj Sharma

Roll No: 16

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IntroductionCorporate Governance

Corporate governance is the set of processes, customs,

policies, laws, and institutions affecting the way acorporation (or company) is directed, administered or

controlled.

In recent years, corporate governance has received

increased attention because of high-profile scandalsinvolving abuse of corporate power and, in some cases,

alleged criminal activity by corporate officers.

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Statement of ProblemThis report analyses the weaknesses in corporategovernance on the financial crisis, including riskmanagement systems and executive salaries.

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Literature ReviewMonetary policy in major countries was expansive after

2000. Asset price booms followed in many countries,particularly in the housing sector where lendingexpanded rapidly.

At the end of 2006 and at the beginning of 2007,warnings were issued by a number of institutions

including the IMF, BIS, OECD, Bank of England.

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Risk Management

The main principle of board is monitoring theeffectiveness of the companysmanagement practicesand making changes as needed.

The internal management aspect of the principlesmight not have received the attention it deserves incodes and in practice.

Nearly all 11 major banks reviewed by the Senior

Supervisors Group (2008) failed to anticipate fully theseverity and nature of recent market stress.

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Failed to take appropriate steps to control or mitigatethose risks.

In a number of cases boards were not aware of suchstrategic decisions and had not put controlmechanisms in place to oversee their risk appetite.

Some firms had limited understanding and control

over their potential balance sheet growth and liquidityneeds

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Remuneration and incentive

systemsInfluencing not only the sensitivity of financial

institutions to the macroeconomic shock occasionedby the downturn of the real estate market, but also in

causing the development of unsustainable balancesheet positions in the first place.

Short term management actions and to rewards forfailure.

One study for European banks indicated that in 2006,the fixed salary accounted for 24 per cent of CEOremuneration, annual cash bonuses for 36 per cent andlong term incentive awards for 40 per cent.

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It is interesting to note that at UBS, a company with majorlosses, long-term incentives accounted for some 70 per cent

of CEO compensation and that the CEO is required toaccumulate and hold shares worth five times the amount ofthe last three years average cash component of totalcompensation.

one study (Nestor Advisors, 2009) reports that financial

institutions that collapsed had a CEO with high stockholdings so that they should normally have been riskaverse, whereas the ones that survived had strongincentives to take risks.

Incentive systems at sub-executive level are also a concernfor nonfinancial companies. For example, transactions-based compensation and promotion might lead to corruptpractices contrary to company policies and interests.

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ConclusionThe ability of the board to effectively oversee executive

remuneration appears to be a key challenge in practiceand remains one of the central elements of thecorporate governance debate in a number ofjurisdictions.

In many cases the link between performance andremuneration is very weak or difficult to establish. Theuse of company stock price as a single measure forexample, does not allow to benchmark firm specificperformance against an industry or market average.

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In many cases risk was not managed on an enterprisebasis and not adjusted to corporate strategy. Riskmanagers were often kept separate from managementand not regarded as an essential part of implementingthe companys strategy. Most important of all, boardswere in a number of cases ignorant of the risk facingthe company.

It should be considered good practice to involve theBoard in both establishing and overseeing the riskmanagement structure.

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Since the crisis, the private sector has been taking agreater interest in improving their corporategovernance. Board composition is changing andshareholders are rediscovering their voices too.