Learning Objectives:

  • Understand corporate governance structures specific to banks.

  • Analyse the role and composition of the board of directors.

  • Assess internal and external corporate control mechanisms.

5.1 Corporate Governance in Banking

The University of Leeds module includes “bank governance” as a core topic. The SOAS Banking Strategy module requires an analysis of “the composition and role of boards of directors, and the relation between boards and management”. The Aydın Adnan Menderes University course covers “banks are required to carry corporate governance principles, board of directors-audit committee, general manager and general manager assistance”.

Why Bank Governance is Different:

  • Systemic Importance: Bank failures can have cascading effects on the entire economy.

  • Deposit Insurance: Moral hazard can encourage excessive risk-taking.

  • Regulatory Oversight: Banks are subject to extensive regulation that shapes governance.

  • Complexity: Banks are large, complex organisations with diverse activities.

  • Information Asymmetry: Management may have more information than the board or shareholders.

5.2 The Board of Directors and Audit Committee

The Aydın Adnan Menderes University course covers “banks are required to carry corporate governance principles, board of directors-audit committee, general manager and general manager assistance”. The University of Milano-Bicocca course covers “The design of the control system” and “The different level of the internal control. Risk Management, Compliance and Internal Audit”.

Key Governance Structures:

  • Board of Directors: Responsible for setting strategy, overseeing management, and ensuring accountability. The board is the ultimate decision-making body for the bank’s strategic direction.

  • Audit Committee: Responsible for overseeing financial reporting, internal controls, and the external audit.

  • Remuneration Committee: Responsible for setting executive compensation.

  • Risk Committee: Responsible for overseeing risk management. The University of Milano-Bicocca course covers “Risk Management, Compliance and Internal Audit” as distinct control functions.

  • Nomination Committee: Responsible for board composition and succession planning.

5.3 Internal vs. External Corporate Control Mechanisms

The SOAS module examines “internal and external corporate control mechanisms”.

Internal Controls:

  • Board Oversight: Active monitoring of management by the board.

  • Internal Audit: Independent assessment of internal controls and risk management. The University of Milano-Bicocca course identifies “Internal Audit” as a distinct control function.

  • Risk Management: Identification, measurement, and mitigation of risks. The course covers “The Risk management function in the bank’s organization: processes, responsibilities and the control of risks”.

  • Compliance: Ensuring adherence to laws and regulations. The course covers “Compliance” as a distinct function.

  • Segregation of Duties: Separating front, middle, and back office functions.

External Controls:

  • Regulatory Supervision: Oversight by banking regulators.

  • Market Discipline: Pressure from shareholders, debtholders, and rating agencies.

  • External Audit: Independent audit of financial statements.

  • Shareholder Activism: Active engagement by shareholders in governance.

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