In a recent speech before the Transatlantic Corporate Governance Dialogue Conference on Corporate Governance Standards and Financial Stability in Brussels, SEC Commissioner Kathleen Casey emphasized strong corporate governance and effective risk management as key characteristics of firms effectively weathering the current market turmoil.
We have learned once again that a strong corporate governance culture can play a key role in achieving necessary and beneficial risk taking while also minimizing potential detrimental effects to financial stability.
. . .
Specifically, four factors distinguished those firms that fared better than the rest:
- effective firm-wide risk identification and analysis;
- consistent application of independent and rigorous valuation practices across the firm;
- efficient management of capital, liquidity, and the balance sheet; and
- informative and responsive risk measurement and reporting.
Referencing a recent report by the Senior Supervisors Group, Commissioner Casey remarked that well governed firms managed risk better by instilling a culture of healthy skepticism throughout the organization, and are more nimble at reacting to unexpected or changing risks.
Well-governed firms generally did a better job of sharing quantitative and qualitative information effectively across the organization, from the senior management team down through the control functions.
Perhaps as a consequence of creating an active cross-disciplinary oversight of risk factors, these firms were skeptical of rating agencies’ evaluations of complex structured financial products and relied instead on in-house expertise to execute rigorous internal valuation processes.
And unlike some competitors that were caught unprepared, they also were able to prevent the morphing of risk from forms that were readily measured and controlled into less easily governed forms, such as credit exposure to monoline insurers and liquidity risk from off-balance sheet vehicles.
Commissioner Casey also stressed the importance of strong independent leadership to effective and robust risk management and sound decision making.
Equally important was an effective risk-control function that requires an independent and strong voice within the firm in both the reporting as well as the decision-making context.
The full text of Commissioner Casey's remarks is available at: http://www.sec.gov/news/speech/2008/spch090908klc.htm#P104_10703
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