Corporate governance of financial institutions: board responsibility

The Financial System Inquiry Interim Report specifically discussed the corporate governance of financial institutions and the role of APRA in emphasising board responsibility.

It observed that “To contribute to the effectiveness of the financial system, sound corporate governance requires clarity of the responsibilities and authority of boards and management. There are differences in the duties and requirements of governing bodies for different types of financial institutions and, within institutions, substantial regulator focus on boards has confused the delineation between the role of the board and that of management.”

It said that “although there is a public policy case for specific corporate governance requirements on financial institutions, there is no case for regulation to alter the delineation of responsibilities between boards and management.”

The report discusses concerns about APRA’s expectations of the boards of companies it supervises: that APRA’s requirements have become too prescriptive and do not respect the appropriate division between the responsibilities of the board and those of management.

The Report states:

“According to APRA, its standards do not require boards to micro-manage the organisation. Instead, they aim to ensure boards implement appropriate policies and frameworks, particularly relating to risk, and are satisfied that these policies are effective. In addition, correspondence is often addressed to boards with the intention of ensuring that they are aware of APRA’s concerns and ensure that management addresses them, not for the board’s direct action. If this is the case, APRA should clarify its expectation of boards to dispel misconceptions. The Inquiry notes that actions are already underway in this regard. This should assist with concerns in this area.”

The Report referred to a letter from APRA dated 8 May 2014 to all CEOs of ADIs, general insurers and life companies.

APRA indicated it would adopt the following definition of “ensure” in relation to the obligation of Boards to clarify that it did not mean that “as requiring that a particular outcome be guaranteed”: “Ensure: when used in relation to a responsibility of the board, means to take all reasonable steps and make all appropriate enquiries so that the board can determine, to the best of its knowledge, that the stated matter has been properly addressed.”

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