The financial crisis that hit the globe starting from the year 2008 led to major problems for countries across the world, especially in the financial sector. Major financial institutions collapsed, economic growth came to a stand still and the stock markets were thrown in turmoil. The tourism and housing sectors were not spared either. This was described as the worst economic crisis to have hit the world since the great depression in the 1930s.
To deal with the situation governments around the world came up with economic recovery packages which were meant to stimulate economic growth in their countries economies and the United States was no exception. In order to support and strengthen the ailing financial system and in particular the banking system, the United States government came up with bailout plans for financial institutions to save them from having to liquidate or going bankrupt. Some of the bailout plans included injecting money directly into the banks through grants and loans and also buying shares held by the some of the banks by the treasury. The financial aid received by banks was mainly meant to increase their capital base. According to members of the Associated Press, these banks were expected to buy back these shares from the treasury once they had recovered from the effects of the crisis (2008, para. 1-5).
Since some of the recovery strategies put in place at the time seem to have paid off as evidenced by the economic recovery, the United States government is seeking to pull out from further bailouts as far as financial institutions and the financial market is concerned, subject to certain conditions such as a rise in governance of specific issues. Thus, the federal government has come up with exit strategies to enable this happen.
United States Government Exit Strategies
Corporate Governance refers to the combination of policies, processes, procedures, laws and customs that determine the way in which institutions are controlled or managed. Corporate governance defines the relationships that subsist between different stakeholders involved as well as the goals of the organization(s) in question and ensures that there is a certain level of accountability between these stakeholders. In the case of governments, corporate governance principles are meant to assist and provide guidance for institutions and other stakeholders such as corporations, financial institutions, investors and stock exchange operators among others to enable their countries remain competitive in relation to other countries (Organization for Economic Corporation and Development (OECD), 2004, pp. 13).
As the government seeks implements its exit strategies there is need for it to tighten some of its governance provisions in order to ensure the successful implementation of the said strategies (Benanke, 2010, pp. 2). This will ensure that the country’s financial systems and institutions are strong enough to cope with the exit strategies. Some of the policies the government has used involve the use of monetary policy to control operations of the financial market and the financial institutions.
Major Findings of the June 2009 “Corporate Governance and the Financial Crisis” Report by the OECD
This report carries out an analysis of the corporate governance weaknesses in the United States based on the institution’s principles and makes recommendations as to how these weaknesses can be dealt with. The main findings based on the study carried out by OECD include the following:
General Findings: An analysis carried out by the steering committee found that there was no need to revise the guiding corporate governance principles that are already in place in the United States regarding risk management, shareholders rights and their exercise as well as those governing the corporate governance board practices as they still form a fine basis upon which the main concerns that have been raised regarding the causes of the financial crisis can be addressed. The committee also said that it would instead come up with ways of improving the effect of the already existing principles so that they would be more effective in preventing any similar challenges that may occur in the future with regards to the financial crisis.
Governance of the Remuneration Process
With regards to how the remuneration process is governed, the committee came up with the following findings:
Remuneration Decision Making Process: The committee acknowledged that the failure of the authority of the remuneration systems fails because decisions are not made collectively between board members and managers because the managers and other stakeholders hold far more influence over issues like the level of performance based remuneration as well as the conditions gauging such performance. This means that board members do not have the discretion of making independent judgments over such remuneration matters.
Performance-Remuneration Link: the committee found that the link between the level of remuneration and performance of different stakeholders was difficult to establish. They noted for example that using company stock price as a measure of companies’ performance against that of the industry was ineffective as it did not give clear results (OECD, 2009, pp. 7). This makes it difficult to determine the conditions and consequences of existing remuneration schemes.
Transparency and Goals: The committee also found that most of the country’s corporations did not have transparent policies as to how they relate their performance with their remuneration programs and how these can be altered in relation to the prevailing industry conditions. The goals of corporations were also not put forth in a way that encouraged accountability on the part of executives and should be therefore made in such a way that the executives would be remunerated in terms of their influence on the long term achievements of the corporations.
Structure of Remuneration Systems: The committee found that remuneration structure as they are, are characterized by inflexibility in that it becomes difficult for them to adjust to changes in surrounding circumstances. They recommended the limited used of legal limitations as well as the careful consideration of fixed and variable elements of remuneration so as to allow for flexibility. To deal with all the above mentioned issues the committee recommended conforming to the principles laid down by OECD and FSF (Financial Stability Forum).
Risk Management Implementation Processes
The steering committee came up with the following findings regarding the implementation of risk management processes.
It was found that the management of risk by the different stakeholders was a total failure as different enterprises did not have the necessary processes in place either at the enterprise or the corporate level. The exclusion of risk managers from the overall management of enterprises meant that they were not able to make their contribution towards the implementation of risk management strategies in companies. As such the board members of such companies remained unaware of the risks the companies were facing. Strategic, market and operational risks associated with company operations need to be kept in check at all times to prevent companies from being caught unawares as the case was during the financial crisis. For financial institutions such risks pose a greater magnitude of risk and therefore more effort should be put in avoiding and controlling such risks (OECD, 2009, pp. 9). Risk managers should put more emphasis on understanding and managing risks as opposed to completely ignoring ventures that pose a certain level of risk to companies. Risk management should be handled by companies at an organizational level and not at a single business unit level and the organizations board should be involved in all decision making processes. Procedures to be followed in managing risks should also be made clear to every one but not in such a way that will reveal the trade secrets of organizations.
Organization Board Practices
Based on its findings, the committee came to the conclusion that there were no clear rules and regulations to monitor and improve the performance of boards in organizations and as such encouraged the private sector to draw up and implement their own standards to ensure that these boards are regulated and evaluated in terms of their performance. This would lead to the existence of boards that have the ability to perform and come up with clear, objective judgments regarding industry and other matters and at the same time balance their independence and competence. Organizations were also advised to come up with policies that will enable the efficient and effective monitoring and evaluation of the performance of their boards and also put up necessary structures that would improve and strengthen the role of shareholders in appointing the companies’ board members. Such appointments should be dependent on the competence, professionalism and skills of individual members.
In any organization, there exist different types of shareholders whose interests are normally aligned with those of the management. This has been proved to only work in the short term and is of no relevant benefit to the shareholders in the long run. In most cases such shareholders rights are taken to be secondary as compared to those of the management thereby disallowing them from exercising their rights effectively. This means that in most cases, it is the board of directors who carry the day as far as decision making is concerned even though the shareholders have the numbers to exert a greater influence on the decisions that are made in the company. Therefore companies should do support the rights of their shareholders, such as voting rights, by coming up with policies that look out for such rights in line with their equity contributions to the organization (OECD, 2009, pp. 11).
Conformity to Findings by the OECD Steering Committee
The United States president Obama, outline two provisions that his government intends to implement as an addition to provisions that had been put in place before as a way of dealing with effects of economic crisis and also preventing extreme impacts on the country’s financial institutions. These proposals are meant to minimize the potential risk on the country’s financial system as a whole. One of the proposals seeks to limit the extent of banks activities as well as those of financial institutions, bank holding companies among others. Some of the proposals in which to make this happen include preventing commercial banks from investing in, having ownership of or giving guidance to and advising holders of private equity funds as well as limiting the number of times they can carry out proprietary trade on their own accounts even though they are not related to their clients businesses. This will ensure conformity to the OECD corporate governance principles in that powers of such financial systems will be limited and in effect the powers of their managers and board members. This will ensure that the board members come up with policies that will ensure their companies are shielded against risks associated with related problems. This also ensures that administration of such financial institutions conforms to the outlined standards (US Law Watch, 2010, para. 6-8). The second proposal is aimed at limiting the size of individual financial institutions in relation to the size of the whole industry. This would ensure that no single institution has an extremely large control over the financial sector in the country.
Financial Reforms Conformity to OECD Principles
The Financial Regulatory Reforms that were proposed by the US Treasury Department also showed conformity to the OECD principles. This is because they seek to minimize the powers of large individual firms so as to ensure that in future, their problems will not prove detrimental to the country’s economy. It will do this by imposing strong liquidity and capital requirements to such institutions thereby limiting their liabilities and thereby their effects on the country’s financial system. This means that such institutions will have less leverage thereby limiting the level of financial risk they can derive (Geithner, 2010, para. 9-10).
Geithner (2010, para. 13), also said that transparency will be required of such large financial institutions so as to ensure their running costs remain known to their clients so that they may also be able to manage their risks. This will enable risk managers and other managers to engage in policy decisions that will be free of fraud, abuse and manipulation by any single level of power within these companies, may it be the managers or the board of directors.
The proposals also require financial institutions to come up with clear, unambiguous rules that do not have unclear limitations that encourage risk. This is in line with the OECD principles which advocated for clear, flexible rules with limited legal restrictions. These proposals, according to Geithner, will ensure that all the institutions in the financial sector operate on level ground. Their operations would then be regulated by an independent institution created for that specific job (201, para. 16-17).
It is possible for the government to completely withdraw their support from financial institutions but this should be done in such a way that the withdrawal should not lead to complications in the recovery efforts of such institutions. This means that the withdrawal should be well planned out and implemented. The government should also tighten other measures so as to ensure that institutions conform to the OECD principles in order to shield financial institutions from undergoing problems like they did at the time of the financial and economic crisis. Monetary and Fiscal policies should be made with possible risks in mind so as to make them more effective in times of changing economic environments.
Based on the information above, it is fair to say that institutions still have a long way to go as far as conforming to the OECD principles is concerned. Companies should take the necessary steps and come up with viable policies that will ensure the principles are adhered to in order to prevent or at least mitigate the effects of crippling crisis’ like the 2008 global economic crisis.
Associated Press., 2008. Despite ‘Regret’, U.S. to Pour Money into Banks. MSNBC. [Online]. Web.
Bernanke, B. S. 2010. “Federal Reserve’s Exit Strategy”. Bank of International Settlements. Web.
Geithner, T., 2010. “Geithner OP-ED: Financial Reform with Teeth”. US Treasury Department Press Room, Web.
Organization for Economic Corporation and Development., 2004. Corporate Governance: A Survey of OECD Countries. Massachusetts: OECD Publications
Organization for Economic Corporation and Development., 2009. Corporate Governance and the Financial Crisis: Key Findings and Main Messages. OECD. [Online]. Web.
US Law Watch., 2010. “Obama Outlines Two Proposals for Restricting Bank Size, Influence”. International BNA. Web.