The Basel Committee on Banking Supervision (Basel Committee) has published a final version of its Principles for Enhancing Corporate Governance, which provides guidance to banks in light of the corporate governance failures that occurred during the financial crisis beginning in mid-2007. This guidance released this month revised guidelines adopted by the Basel Committee in 2006. The Basel Committee created 14 corporate governance principles that cover the responsibilities and qualifications of the board, the board’s responsibility for defining appropriate governance practices, internal controls for risk identification and management, board oversight and risk-analysis of compensation, and transparency of governance. The guidance also explains the function of bank supervisory agencies in relation to bank corporate governance. The guidance recommends that a supervisor’s functions include conducting comprehensive evaluations of the existence and implementation of corporate governance policies and practices, monitoring internal and external reports, and requiring remedial action to address problems in corporate governance policies and practices. The Basel Committee emphasized that its guidance should be implemented in a manner that is consistent with applicable national laws and is not intended to create a new regulatory framework that overlays existing national statutes.

Nutter Notes: The guidance recommends that banks customize the principles to fit “the size, complexity, structure . . . and risk profile of the bank.” In addition to these principles, the Basel Committee also said that fostering a corporate culture that supports and provides appropriate standards and incentives for professional and responsible behavior creates a key building block to good corporate governance. According to the Basel Committee, the guidance is intended to help banks improve their corporate governance framework and prevent the types of failures that contributed to the most recent financial crisis. The failures cited by the Basel Committee include poor board oversight of senior management, insufficient risk management and improper, ineffective or cumbersome operational structures. Risk management is one of the more significant themes that runs throughout the corporate governance principles. The guidance suggests that every bank reconsider how it identifies and manages risk in light of board risk management practices and internal controls, the risk tolerance of the bank, communication practices and employee compensation.