Corporate Governance and 2008 Global Crisis

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The Global Financial Crisis and Corporate Governance

The recent global financial crisis came with the fall of the United States housing market. The housing prices were on their record low and rise in default rate in 2007 (Toolkit 2: developing corporate governance codes of best practice (Vol. 3): Process, 2021). By the following year, the impact of the economic disaster has spread worldwide to other institutions exposed to the inherent risks in the investment products that incorporated the U.S. mortgages.¹ There were reports of high profile bank collapse in 2008, including the nationalization of the United Kingdom of Northern Rock and the hurried acquisition of American-based Bear Stearns by JP Morgan. Notwithstanding, the severity of the financial crisis became evident in the September of 2008 when the U.S. government took control of major corporations, with Lehman Brothers filing for insolvency protection. These events were followed by multiple bailouts and government-sponsored acquisitions of multinational financial institutions. During these difficult times, it became clear that some of the most renowned financial institutions in Europe, such as Dexia, Bradford & Bingley, HBOS, and Hypo Real Estate, were either nationalized or bailed out as entire Iceland’s banking system collapsing.² Scrutiny of the high-profile industry cases, inappropriate pay and inadequate risk management practices were implicated as the cause of the financial crisis.

Risk management and pay-setting occur in the context of cooperate governance structures and practices. To a greater extent, the crisis was caused by weaknesses and failure in corporate governance arrangements, and the realization led to key proposals aimed to reform the sector. These proposals are the mirror in both multilateral and national regulatory reform efforts. The said proposals incorporate perspectives from corporate governance experts and touch on the remedies and causes of the global crisis (Toolkit 2: developing corporate governance codes of best practice (Vol. 3): Process, 2021). Further, they seek to inform reforms efforts and provide insights into the works of stakeholders in the relevant fields. As such, the causes and remedies of the crisis should be viewed through the lens of the system of monetary regulation. Fortunately, policy intervention since the commencement of the situation has been nothing but multilateral, sweeping, and swift, focusing on developing an early warning system and financial stabilization. An early warning system is designed to predict and examine risk sources in the future. These reorganizations have significant repercussions for corporate disclosure and governance.

Global efforts to address the crisis started with convening a meeting of G20 in the United States in 2008 November. An Action Plan that outlined high priority actions for implementation was the product of the convention. Liaising with an existing institution and other economics and drawing upon the guidance from independent experts, the Finance minister was advised to formulate policy approaches to minimize the effect of the crisis on economies. These approaches to the situation focused on the identification of the wellsprings of systematic risk in the sector, developing crisis response capacity, incorporating financial supervision of markets, and revising compensation practices concerning innovation and incentives for risk-taking (Toolkit 2: developing corporate governance codes of best practice (Vol. 3): Process, 2021).

Item 25 of the action plan dealt with compensation schemes and incentive structures at financial institutions.³ It references the soundness of the principles of compensation practices for organizations as published by the Financial Stability Forum to prevent excessive risk-taking that is attributable to compensation schemes. These efforts were followed by a commitment to foster international coordination on benchmark-setting, particularly in reimbursement practices as far as international institutions are concerned. The London Summit unilaterally decided to enlarge the FSF scope and change it to the Financial Stability Board (FSB), strengthening its decree to safeguard financial stability at the global level. The focus on achieving financial stability based on regulatory reforms after the crisis cemented the role of the G20 as a platform for international economic collaboration, assuming the responsibility from G8. The expanded role guaranteed that developing economies, such as India, Brazil and China, were involved in the deliberations on issues that affect economic stability at the global level. These concerns included oil price speculations, tax havens, IMF’s role, and regulatory reforms.

These efforts saw FSB formalize its mandate to diagnose supervisory, regulatory and financial policy reforms necessary to safeguard financial stability (King Report on Corporate Governance for South Africa 2009, 2009). The body has the participation of central banks, supervisory establishments, and finance departments from twenty-four dominions and heads of critical bodies of standard-setting. Among the notable attributes of the design of regulatory reforms of financial services in leading markets, including North America and Europe, is the strengthening of cooperation between the already operational supervisory bodies.

Inappropriate pay and insufficient risk management practices within the financial industry are positioned at the crisis centre (King Report on Corporate Governance for South Africa 2009, 2009). Risk management and pay-setting are at the core of corporate governance. Therefore, the financial crisis is undoubtedly due to the weaknesses and failure in the structures and practices of corporate governance. The FSB initiated a reform process that sources to reinforce the financial system and foster good governance.

The article offered an overview of governance issues that needed reform to respond to the global financial crisis and return markets and organization to sustainable performance. The focus was also to prepare organizations for environmental, social and economic problems in future. A transition from a compliance-based approach toward governance to a sustainable performance approach is necessary. It should aim to better integrate sustainability and management in the strategy, stakeholder communications, and operations. Notably, the accountancy profession must be prepared to support and guide the organization as they transition to the new level of governance. They should work with other stakeholders to ensure the proposed reforms are in place. An organization should appreciate the importance of corporate governance and go the extra mile to implement the proposed changes, focusing on developing an early warning system and financial stabilization. Corporate culture should incorporate these reforms, and senior management ensures they establish early warning systems.

References

World Bank. 2021. Toolkit 2: developing corporate governance codes of best practice (Vol. 3):

Process. [online] Available at: https://documents.worldbank.org/en/publication/documents-reports/documentdetail/480211468328174255/process [Accessed 4 May 2021].

Institute of Directors Southern Africa. 2009. King Report on Corporate Governance for South

Africa 2009. 1 September. Available at http://african.ipapercms.dk/IOD/KINGIII/kingiiireport/ [Accessed 4 May 2021]