Principles for enhancing corporate governance

Given the important financial intermediation role of banks in an economy, the public and the market have a high degree of sensitivity to any difficulties potentially arising from any corporate governance shortcomings in banks. Corporate governance is thus of great relevance both to individual banking organisations and to the international financial system as a whole, and merits targeted supervisory guidance. The Basel Committee on Banking Supervision published initial guidance on corporate guidance in 1999, with revised principles in 2006. The Committee's guidance assists banking supervisors and provides a reference point for promoting the adoption of sound corporate governance practices by banking organisations in their countries. The principles also serve as a reference point for the banks' own corporate governance efforts.

Subsequent to the publication of the Committee's 2006 guidance, there have been a number of corporate governance failures and lapses, many of which came to light during the financial crisis that began in mid-2007. Drawing on the lessons learned during the crisis, the Committee's document, Principles for enhancing corporate governance, sets out best practices for banking organisations. The key areas where the principles have been strengthened include: (1) the role of the board; (2) the qualifications and composition of the board; (3) the importance of an independent risk management function, including a chief risk officer or equivalent; (4) the importance of monitoring risks on an ongoing firm-wide and individual entity basis, (5) the board's oversight of the compensation systems; and (6) the board and senior management's understanding of the bank's operational structure and risks. The principles also emphasise the importance of supervisors regularly evaluating the bank's corporate governance policies and practices as well as its implementation of the Committee's principles.

The final version of this paper was released in October 2010.