The Basel Committee on Banking Supervision—the primary global standard-setter for the prudential regulation of banks made up of bank regulators from 28 nations—has issued revised guidance on principles of corporate governance for banks. The revised corporate governance principles released on October 10 build on the Basel Committee’s 2010 principles for enhancing corporate governance. Specifically, the revised principles strengthen guidance on risk management, including the roles played by business units, risk management teams and internal audit and control functions and the importance of a sound risk culture to drive risk management within a bank. The revised principles also expand the guidance on the role of the board of directors in overseeing the implementation of effective risk management systems and emphasize the importance of the board’s collective competence as well as the obligations on individual directors to dedicate sufficient time to their duties and to remain current on developments in banking. The revised principles recognize that compensation systems are a key component of corporate culture through which the board and senior management of a bank convey acceptable norms for risk-taking. The principles on corporate governance also provide guidance for bank regulators in evaluating the processes used by banks to select board members and senior management. The revised principles recommend that bank regulators strengthen their ability to assess the effectiveness of a bank’s risk governance and its risk culture.

Nutter Notes: The Basel Committee’s revised principles on corporate governance for banks reflect a trend among bank regulators in emphasizing the importance of corporate culture in risk management, particularly the role of a banking organization’s board of directors in establishing a bank’s risk management culture. The first principle of the Basel Committee’s revised corporate governance guidance is that “[t]he board has overall responsibility for the bank, including approving and overseeing the implementation of the bank’s strategic objectives, governance framework and corporate culture.” The revised principles recommend that a bank’s board take a number of measures to establish the “tone at the top,” such as setting and adhering to corporate values for the board, senior management and other employees that create expectations that business should be conducted in a legal and ethical manner. The revised principles also recommend that a bank’s board promote risk awareness and convey the expectation that the board does not support excessive risk-taking. According to the revised principles, a bank’s board is responsible for ensuring that steps are taken to communicate throughout the bank the corporate values, professional standards or codes of conduct the board sets, together with supporting policies, and reinforcing those standards with appropriate disciplinary actions for unacceptable behavior.