Book review: The Law on Corporate Governance in Banks

I have recently published this review at the inaugural issue of Fin-Future magazine (see fin-future.com). I believe this book should be on the reading list of all UK and EU FinTech and banking executives.

Book review: The Law on Corporate Governance in Banks

An anthology of academic and critical viewpoints on highly topical issues in the governance of banks and financial institutions.

The Law on Corporate Governance in Banks, by Iris Hse-Yu Chiu (Editor), Edward Elgar Publishing Ltd, 352 pp. Hardcover, 2015

Reviewed by Nahum Goldmann, president, ARRAY Development, Ottawa, Canada and general partner, BelPay.be. Goldmann is a corporate board member of several U.S. and Canadian companies and was previously a director of a financial institution and the publisher of the Journal of Internet Banking and Commerce. His expertise is in improving profitability, as well as in building, marketing and securing ebanking, ecommerce, supply chain finance and epayment solutions. His latest book is 'Effective Decision Making: A Primer in Information Retrieval'.

This volume is a compendium of nine articles put together for Elgar Financial Law and Practice Series by UK leading academic legal experts. The covered legislation and various regulatory frameworks mainly include International conventions, EU, OECD, UK, occasional US, as well as of other countries. The book also cites numerous prominent UK legal precedents, as well as some EU and international court judgments. It would be interesting to see how this complex regulatory Web could be untangled with the Brexit coming in effect in a couple of years.

In the introductory Chapter 1 'A Primer on Corporate Governance in Banks and Financial Institutions: Are Banks Special?', Andreas Kokkinis from University of Warwick explains that governing regulated financial entities is conceptually different from that of the conventional companies, mainly due to the regulators' requirements (which author in effect fully equates with the 'public interest'). Indeed, what is fine for an industrial corporation might be deadly for a financial institution. Many a VC could have saved their lost investments if they were making this chapter a required reading for their FinTech startup executives, who might take relatively minor risks without fully understanding the immeasurably costly consequences. Neglecting this critical issue is a primary reason for both the lack of substantive innovation in the established financial industry and the dismal survival rates of the so-called 'digital banking challengers'.

In Chapter 2 'Corporate Governance and Banks – The Role and Composition of the Board', Edward Walker-Arnott from the University College London argues that responsibilities of bank boards are not well defined in the existing regulatory frameworks and that the forthcoming UK legislative reforms are moving in the wrong direction. Moreover, older and accomplished ex-executives, typically approvable for banking boards, are often ill-equipped for the required intensive learning and daily re-evaluation of their legacy believe system. It is challenging to discharge their board duties in the today's environment of ever-shifting socio-economic and banking priorities, full of objective surprises and innumerable FinTech fads.

Chapter 3 'Directors Duties and Liabilities: Disqualifying 'Unfit' Directors at Banks? Political Rhetoric and the Directors' Disqualification Regime' has been written by John Lowry from Hong Kong University and Rod Edmunds from Queen Mary University of London. It mainly explores the issue of disqualification of the incompetent directors of the failed UK banks (RBS, HBOS), whose conduct caused colossal and widespread economic damage, from holding banking directorship in the future. Not surprisingly for the industry insiders, to date such a radical legal measure has never been applied. The verdict is still open whether it would actually raise standards of directorial responsibility or would be a marginally effective populist step.

In Chapter 4 'The Role of Institutional Shareholders: Stewardship and the Long/Short term Debate', Arad Reisberg from Brunel University London explores the negative impact of short-term outlook and shareholder disengagement on corporate growth and development.

Chapter 5 'Design and Control of Remuneration in UK Banks' by Marc T. Moore from University of Cambridge discusses how pertinent UK regulations (such as 2010 Remuneration Code or post-2013 framework for remuneration) help or impede the effective alignment of executive pay with bank's performance and risk tolerance.

Chapter 6 'Corporate Governance and Risk Management in Banks and Financial Institutions' by Iris H-Y Chiu from University College London illustrates how reforming bank's top governance framework addresses its risk management practices. By following published empirical evidence, the author sees poor risk management as a key factor in the failure of financial institutions during the 2008-9 crisis. She also notes that judging the ultimate effectiveness of the banks risk management frameworks is quite difficult.

In Chapter 7 'Corporate Reporting and the Accountability of Banks and Financial Institutions', Iris H-Y Chiu discusses the objectives of corporate reporting in improving banks governance and accountability to shareholders, regulators and other stakeholders. The author sees capital adequacy of the banks, such as expressed in the Basel accords, as the main objective of microprudential regulation of financial institutions. The reality is somewhat more complex; with the recent trend of the toughened regulatory interventions, other risks (such as compliance), and hugely expensive regulatory overhead, might also sink a bank, even systemically important – but more likely of the mid and smaller size, and especially of the digital challenger variety.

Chapter 8 'Systems and Controls in Anti-Bribery and Corruption' by Anna P. Donovan from University College London covers the impact of the tenuous and demanding risk-assessment requirements of the Bribery Act 2010, as well as OECD conventions and legal precedents on the control systems and ethical culture within the UK banks.

In Chapter 9 'The Market for Corporate Control in the Banking Industry Index', Georgina Tsagas from University of Bristol examines effectiveness of monitoring banks performance. Based on some M&A case studies, it examines the causes of collapse of several high-profile financial institutions. The author argues for further enhancing and complicating the regulatory framework so that the supervisory authorities provide final approval of banks acquisitions at the expense of the shareholders.

Previously, I have reviewed a comprehensive guide by Samuel Rosenthal (Director and Officer Liability in Financial Institutions: A Deskbook) that provides a uniquely US perspective. Together these two books are complementary 'must have' references for global banking executives.