Walking the Talk
The financial crisis has caused unprecedented attention to the incentive compensation practices of financial institutions. In addition to media coverage and public scrutiny of compensation arrangements, this attention has given rise to new federal oversight of financial institutions’ compensation arrangements. In fact, enforcement action may possibly be taken by a financial institution’s federal supervisor if its incentive compensation arrangements are thought to have created a risk to the safety and financial soundness of the organization. In addition, the Dodd- Frank Act requires disclosures of incentive compensation arrangements that may increase a company’s risk exposure.
Talking the Walk
The Basel Committee on Banking Supervision (the “Basel Committee”) issued revised final Principles and Guidance (the “Guidance”) concerning sound corporate governance of banks. See http://www.mofo.com/resources/regulatory-reform/#basel. The Guidance updates 2006 Basel Committee guidance on bank corporate governance and reflects modifications that the Basel Committee believes are appropriate in view of the bank and insurance company corporate governance failures that came to light during the recent financial crisis. The Basel Committee stated that the Guidance is not intended to add a new regulatory layer on top of existing national statutes, but instead is meant to assist banks in enhancing their corporate governance framework and to assist bank supervisors in assessing the quality of their corporate governance framework, should be implemented in a manner that reflects the size, complexity, structure, economic significance to, and risk profile of the bank, and applied in a manner consistent with applicable national law.
The Guidance articulates fourteen corporate governance principles, including: the Board’s overall responsibility for the bank and oversight over senior management; Board members’ qualifications, training, and understanding of their role in the bank’s corporate governance; Board’s definition of appropriate governance practices for its work; parent holding company’s Board’s responsibility for ensuring there is corporate governance throughout the corporate organization; senior management ensuring that the bank operates in a manner consistent with the bank’s business strategy, risk tolerance/appetite, and Board policies; effective internal controls system and risk management function (including a chief risk officer) with sufficient authority, stature, independence, resources, and access to the Board; and monitoring of risks on an ongoing firm-wide and individual entity basis, and updates thereof as a bank engages in new or expanded activities and as the external risk landscape changes.
The Guidance updates 2006 Basel Committee guidance on bank corporate governance and reflects modifications that the Basel Comm ittee believes are appropriate in view of the bank and ins uranc e company corporate govern anc e failures.