Learning Objectives:

  • Analyse the causes and consequences of governance failures.

  • Identify the factors that can reduce the effectiveness of corporate governance.

  • Understand the implications of governance failures for systemic risk.

6.1 Distorted Incentives and Governance Failures

The SOAS module explores “how management incentives in banks can become distorted, and how corporate governance of banks can fail” . The Macquarie University course examines “how subtle flaws in bank regulation can result in a failure of the financial system as a whole” . Key factors include:

  • Misaligned Incentives: Incentives that encourage excessive risk-taking.

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

  • Regulatory Capture: Regulators becoming too close to the institutions they regulate.

  • Groupthink: Lack of dissent and critical thinking in decision-making.

6.2 Governance Failures and Systemic Risk

The SOAS module discusses “the factors that can reduce the effectiveness of corporate governance, and explain how this can lead to an excessive level of risk in the financial system” . Governance failures in individual banks can have systemic consequences, as demonstrated by the 2008 financial crisis.

6.3 The Role of the Board in Preventing Failures

The SOAS module uses the UBS case study to illustrate “the relationship between bank strategy, internal governance mechanisms, and oversight” . The case study demonstrates the importance of:

  • Independent Non-Executive Directors: Providing independent oversight and challenge to management.

  • Board Composition: Ensuring the board has the right skills and experience.

  • Risk Oversight: Ensuring the board properly oversees risk management.

 

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