Effective board governance critical to financial soundness – Hawkesby

Weak governance can put the stability of "the financial system as a whole" at risk, deputy governor says

Effective board governance critical to financial soundness – Hawkesby

The Reserve Bank of New Zealand (RBNZ) – Te Pūtea Matua recently published the speech by Christian Hawkesby, the deputy governor and general manager financial stability, to the central bank’s Institute of Directors.

Hawkesby’s speech included an explanation regarding how learning the governance lessons that were taught by history had been important in shaping the guidelines towards good practices for both domestic and international endeavours.

He also assessed the discipline that the boards followed when it came to governing activities. This included documented frameworks, policies, and processes which were posed to embed continuous improvement. Hawkesby said that if those foundations were put into place, there would be more time available to be allocated on strategy, conduct, culture, and behaviours.

Hawkesby said that such would reduce the likelihood of occurrence of worst-case outcomes that had been previously seen throughout history such as financial failures, bailouts, systemic crises, misconduct as well as mis-selling.

Hawkesby also mentioned the pillars that the bank’s approaches relied on. These were self-discipline, market discipline, and regulatory discipline.

“No matter how strong the regulatory discipline and market discipline are, if there are governance failings, or even weak governance, the stability of the organisation and the financial system as a whole, are at risk,” Hawkesby said.

While mentioning the good practices that was observed in the report, a portion of the speech mentioned key areas that could be improved upon:

  • Processes for selecting and appointing the board chair and committee members were not robust
  • Succession planning for the board was not as formal and rigorous as expected
  • Whilst the review identified that most entities were performing some form of internal evaluation of the board, the evaluations lacked formal, clearly defined, and comprehensive criteria
  • Although the capacity of directors was assessed prior to appointment and on an ongoing basis, these assessments were mostly informal in nature and not comprehensive
  • In the absence of a formal framework, organisations generally took varying and ad-hoc approaches to identifying the ongoing training needs of the board
  • While organisations had diversity policies for staff, these diversity policies did not apply to the board.

“We observed a variety of governance practices across entities, which is why the report shares examples of good practice that others can learn from,” Hawkesby said.

“We hope that this work is of wider value, providing a unique opportunity to learn from others – both for other financial institutions and those outside the financial industry.”

The speech followed the release of a cross-sector thematic review of regulated entities’ governance practices by the RBNZ and the Financial Markets Authority (FMA) – Te Mana Tātai Hokohoko.