“Delivering effective corporate governance: the financial regulator’s role”

Delivering effective corporate governance: the financial regulator’s role – speech by Hector Sants (FSA) – Hector Sants, Chief Executive, FSA, has given a speech at Merchant Taylor’s Hall entitled “Delivering effective corporate governance: the financial regulator’s role”.

Mr Sants’ speech reviewed the progress of regulatory reforms since the financial crisis and, in particular, how more action is required to deliver effective corporate governance.

Points Mr Sants highlighted include:

• Causes of shortcomings in governance and risk management.
- The shortcomings in the governance and risk management of firms and the culture and ethics that underpin them are mainly caused by a failure in behaviour, attitude and in some cases, competence.
• Significant Influence Function (SIF) interview process.
- The FSA’s SIF interview process is aimed at tackling the lack of technical skills by individuals at senior positions so that they are capable of managing risks at their organisations.
- The FSA’s SIF interview process assesses suitability of a candidate to undertake a role and ensures that an appropriately robust and rigorous but proportionate appointment process is in place within the firm.
This assessment must take into consideration the overall composition of the board, as well as the individual’s knowledge and competence. In this interview process, the FSA is mainly interested in the following positions:
- (i) chair,
- (ii) senior independent director,
- (iii) chair of the risk and audit committee and
- (iv) principle executive functions (chief executive officer, finance director and chief risk officer).
Outside of these functions, the need for an interview will be assessed on a firm specific basis.
- Generally the FSA will not interview non-executives, unless they intend to occupy senior non-executive roles.
• Role of incentives.
- Reward structures continue to encourage short-term gain and excessive risk-taking.
• Role of a firm’s culture.
- A firm’s culture is key to achieving good governance.
- Therefore, a firm needs to have a culture that concentrates on delivering the right long-term obligations to society.
- Mr Sants emphasised that the right cultures are rooted in strong ethical frameworks and the importance of individuals making decisions in relation to principles, instead of short-term commercial considerations.
• Role of enforcement.
- Mr Sants pointed out that historically, the self-motivation of individuals alone has not been enough to make them comply with the right principles.
- As a result, credible enforcement is required to make individuals comply with such principles, rather than with commercial expediency.
- Mr Sants said that: “Commercial success should not place an individual above the law.”