Manama: Regulators are most concerned with financial stability as their perception of risk taking by financial institutions rises, so will their demands for greater controls, an expert told the participants of a workshop.
Dr. Nabil El-Hage, a corporate governance expert and former professor at Harvard Business School, was speaking during the 6th Corporate Governance (CG) workshop organized by the Waqf Fund which was attended by 23 CEOs and board members of Waqf Fund member institutions.
Dr. El-Hage presented three cases of compliance failure, corporate fraud and tightening regulations due to Basel III. These included a global systemically important bank, an emerging market bank and a US-based family owned company.
He highlighted the growing importance of regulatory compliance in the banking industry and the need for board members to be extra vigilant in this regard.
The expert says that the bank boards have multiple constituents, and multiple lenses through which to view the world…shareholders, customers, staff and the public, to name the most obvious ones. In times of crisis, regulators will focus on protecting the public, and financial stability will be paramount.
“Banks and their boards must consider three aspects of every decision they make – economic, legal and ethical. Regulators will hold them to the highest standards of each; there are always gaps between what goes on in the boardroom and the reality in the field. When the gap becomes a full-fledged “disconnect”, boards can and will get in trouble; boards have a responsibility to gauge the extent to which their directives are being ignored, or worse, disregarded, in the field. This is more difficult in large organizations; boards need to be on the constant look out for “Red Flags”. When board members see such red flags, or when they “smell a rat”, “niceties” need to take a back seat. Board members need to be relentless in seeking and getting answers to their questions.
“According to Warren Buffet the boards are 50% “Business Entities” and 50% “Social Clubs”. When you see violations of senior management’s duties of candor, care or loyalty, the “Social Club” aspect of the board needs to take a back seat; best corporate governance practices might be a necessary condition to make boards great, but it is certainly not sufficient. The key is not structural, it is social. Board members have to be comfortable with each other socially and develop a chemistry among themselves in order to function as a board effectively and while banks are by no means expected to run the clients’ business, they really cannot afford to look the other way if they become aware of fraudulent activities.”
In an efforts to create an effective board, he said, should create a climate of trust and candor – board members should be comfortable sharing difficult information with each other; foster a culture of open dissent – board members should have the capacity and willingness to challenge one another’s assumptions and beliefs without losing respect for each other; utilize a fluid portfolio of roles – no one should be pigeon-holed to their respective role only; people should be allowed the freedom to question about areas outside of their domain; ensure individual accountability; evaluate the board’s performance; lessons from the ex-CFO of Enron ‘It is easy to justify unethical, materially misleading behavior by saying, ‘I’m following the rules.’ “If I could sum it up in one word, I would use the word ‘loophole’. My title should not have been ‘Chief Financial Officer’; it should have been ‘Chief Loophole Officer’. Very often, executives and directors don’t see the problem with their decisions – they rationalize. Finally, I thought, ‘[The deals have] been approved. I don’t have to think about it.’ When I was at Enron, it never even dawned upon me that I might be committing fraud.”
The Waqf Fund, which hosted the workshop, has been serving the Islamic finance industry in Bahrain since 2006. It offers several programs targeted to Islamic finance practitioners, Shari’ah resources and other stakeholders. The Waqf Fund has 22 member institutions including the Central Bank of Bahrain