Banking regulators are looking for firms to tighten up their governance practices in the wake of the financial crisis.

In a speech Friday to Financial Services Invitational Forum in Cambridge, Ont., Julie Dickson, Superintendent of Financial Institutions, addressed the subject of governance failures and the obligations of boards as a result of the financial crisis.

“While board performance in the years leading up to the turmoil is the subject of some debate globally, board performance is critical now as financial institutions respond to financial market turmoil and the global recession,” she said.

Given the governance failures revealed by the crisis, Dickson noted that there are competing explanations for this, “Either directors are not doing what is expected of them, or the expectations of directors are far too high… I think that both scenarios play a possible role — some expectations are set too high, and some boards are sometimes not doing what they should be doing.”

In terms of improving what boards do, Dickson said that recent events “suggest that many boards need to increase their involvement in setting risk appetite, overseeing management and compensation.” She also said that boards should consider adding directors with expertise in the relevant disciplines of banking, insurance and risk management “so as to deepen board discussions”.

Additionally, she allowed that the Office of the Superintendent of Financial Instiutions also needs to do more to assess boards’ effectiveness, especially in the areas of compensation and risk management, and she noted that it has already begun this effort. “OSFI is in the early stages of developing new standards for our assessment of board effectiveness. We will begin by focusing on the larger institutions, and boards’ role in risk management, in particular,” she said.

She added that OSFI is undertaking a comparative review of compensation practices at the largest banks and insurers, which will ask institutions to self assess against Financial Stability Board principles. It will then report back to the institutions and make recommendations.

Similarly, Hector Sants, chief executive of the UK’s Financial Services Authority, also delivered a speech calling for more effective governance and better risk management at financial firms. Sants stressed that financial companies “need to create board-level governance structures that allow for challenge without creating conflict”, he said in remarks to the Securities and Investment Institute yesterday.

He noted that, “the structure of governance in financial companies does not need radical overhaul. The attitudes and competence of the individuals who conduct that governance does. In particular we need to create governance that fosters challenge without creating conflict. The effectiveness of governance is the key issue and addressing this challenge is the responsibility of all of us, not just regulators and boards.”

Sants also stressed that the FSA is not seeking to establish non-executive directors as a competing governance mechanism against the executive, and that it continues to support the ‘unitary board’ model. But, as he said, “it must be recognised that such a structure runs the risk of encouraging the herd instinct both in the sense of encouraging ‘follow the leader’ behaviour and in the sense of the reluctance to ‘break away from the pack’ and express an independent view.”

IE