Why Have Regulatory Reforms to Date Failed to Prevent Governance Failures?

The financial crisis of 2008 exposed deep-seated flaws in the financial system and highlighted the importance of governance and ethics in finance. In the wake of the crisis, a series of scandals in financial institutions ranging from mis-selling to market manipulation undermined trust in the financial system. In response, policy makers sought to promote higher standards of corporate governance, industry culture, ethics, and trust in financial institutions.

Despite those reform efforts, incidences of misconduct and mismanagement of risk continue to plague the industry. The banking-sector failures in the first half of 2023 are dramatic examples of the consequences of lax governance and poor risk cultures. Banks’ boards and senior management failed to assess and manage risks adequately, and banks did not have effective internal controls and risk management systems in place.1 Additionally, compensation and incentive structures appear to have encouraged excessive risk-taking and a focus on short-term earnings and equity returns. Work on corporate governance was one element of a multipronged effort undertaken by the Financial Stability Board (FSB) and standard-setting bodies to strengthen the overall safety and soundness of financial institutions in the wake of the Global Financial Crisis. This effort led to the introduction of a range of new measures aimed at strengthening governance frameworks and practices at financial institutions. It covered board effectiveness and risk management, senior management accountabilities and responsibilities, risk culture, and financial and non-financial incentives: