FINANCE

Can 2018 herald a new era of good governance in financial services?

By Alister Esam, CEO, eShare (www.eshare.net)

Alister Esam, CEO, eShare (www.eshare.net)

Alister Esam, CEO, eShare (www.eshare.net)

 Governance is more in the spotlight than ever in 2018. Until a decade or so ago, it was an area of business that was mostly low-profile and didn’t attract much attention. Occasionally there might be an issue with an organisation that had been guilty of particularly bad governance. They would be suitably reprimanded and then things would return to normal.

Then the financial crisis of 2008 occurred, and there emerged a new focus on businesses – particularly those in financial services (FS) – and how they are governed. Since then there has been increasing regulation to do business in the right way and increasingly severe penalties for failing to adhere to those regulations.

There has also been a shift in responsibility. The pension mis-selling scandal that occurred in the late 1980s and early 1990s and saw millions of people given incorrect advice about opting out of occupational schemes, was blamed on commission-hungry salesmen. More recent and post-crisis scandals of a similar nature, such as PPI mis-selling, have seen much more blame attached to the board of the company in question.

The media has grown much more interested in exposing FS companies found to be guilty of bad governance, and when you also factor in shareholder pressure to do everything by the book, the size of the task facing FS firms to be well governed is clear. So how can boards demonstrate that the organisations they work for are well-run and professional, and can 2018 herald a new era of strong governance in FS?

What does good governance look like?

Governance is by no means a new concept, and has existed virtually since the dawn of time. It essentially relates to decision-making – how decisions are reached and the process by which decisions are implemented.

When it comes to corporate governance in FS, such decisions are made by that company’s board. The focus will often fall on those individuals to set the tone for good governance and ensure that structures are in place to arrive at and implement decisions.

But exact interpretations of what constitutes good governance can vary. The Council of Europe is an organisation that aims to uphold human rights, democracy and rule of law in Europe and is also focused on promoting good governance.

It identifies ‘12 Principles of Good Governance’, and covers issues such as ethical conduct, rule of law, efficiency and effectiveness, transparency, sound financial management and accountability. This is all eminently sensible but in my experience working with FS firms across Europe and beyond, the two most important elements of good governance -acting honestly and taking responsibility for those actions – demonstrating how decisions were made, who was involved, and delivering effective punishment to those that do not match up to the required standards.

How to get there

If an organisation has realised the importance of good governance and identified that transparency and accountability are key to achieving that, how can they then address this? The foundation of good governance entails knowing what you are and why you exist, being well-run from top to bottom and having internal values and behaviours that are perpetuated externally across the world.

So when the board, or leadership team makes a decision about the future of a company, knowing how that decision was reached and the thinking behind it can reassure internal and external stakeholders that the board has best interests at heart. Transparency is imperative here, and this means a change in approach to how board meetings are run and managed.

Board meetings are the main forum for the people who hold an organisation accountable, which is why their operation is so important. Yet the format of board meetings has barely changed in decades and is ripe for a more digital approach. Board portals can be the vehicle that deliver better governance.

Paper forms and paper records are not accessible and mean that it is hard to see where decisions came from and how they were formed. The use of online board portals to replace paper or PDF based board packs for board meetings will make it much easier to demonstrate clearly who said what in the meeting and provide insight into how certain decisions were reached. If an FS firm ever needs to demonstrate this to a regulator, such transparency makes the processes much simpler.

A framework of accountability

One also needs the right systems in place to ensure that people want to conduct business in the right way, a framework of accountability.This entails responsibility assigned to an individual or team so their organisation stays on top of any FS-specific regulations and can adhere to more general rules of business.

If these rules are not followed, then effective punishment needs to be administered by a higher authority. If the government held businesses and individuals accountable, then the incentive to behave better would be greater. Often the penalties for poor corporate governance are just empty threats, and companies do not take them seriously.In the US this is enshrined in law, and while there are still some corporate governance scandals there, the punishments are usually severe enough to deter most offenders.

Governments and FS regulators have realised that if you allow people to hide and operate in the shadows, then corrupt practices can emerge. If good behaviour is encouraged, and bad behaviour punished appropriately, then organisations will become better governed. That’s why the increased focus on governance is to be welcomed and will contribute to a new era of FS governance in 2018 and beyond.

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