De-regulation, not regulation, and less of a focus on independence within boards could be the answer to governance concerns that have arisen from the financial crisis, a Professor of finance from The University of Queensland argues in a new book published by SimCorp Strategy Lab. Renee Adams, Professor of finance at UQ Business School in Queensland and a co-author of the book “Understanding the financial crisis: investment, risk and governance”, says while regulation has focused on improving independence within boards, independent directors don’t necessarily have the expertise or professional knowledge that’s required.
“De-regulation might be the answer,” she says. “There’s been an overemphasis on independence, now we also need more expertise [on boards]. How can you regulate that? Taking a step back, financial firms obviously don’t want to be in the situation they’re in now. Maybe we need to give them more freedom in the way they run their boards.” Adams says little governance research is done on financial institutions, and much of the literature is “totally inconclusive”. “Why you would base regulation on inconclusive research is beyond me,” she says.
“If there is no solid evidence that independence improves governance, then why mandate firms have more independent boards?” The book, which is the first in a series of three books being produced by SimCorp’s research arm, demonstrates how boards of banks receiving bailout money were more, rather than less independent than banks that did not receive TARP funding. TARP banks generally have larger boards, more outside directorships and higher equity-based pay, which can be considered both aspects of good governance as well as poor governance, Adams says. The book recommends that if the cash flows from a product cannot be calculated in a relatively straightforward way, the product should not be traded, and that within enterprise architectures and IT solutions, investment managers should seek to have a “core data master”.
It also suggests the mathematical models used in risk management should be used to create scenarios that allow better understanding, and that the set of reforms proposed by national and international groups to reduce the risk of global banking crises constitutes an incomplete reform agenda. When it comes to governance, Adams says a knee-jerk reaction to the crisis would be a big mistake, and more research is needed before any policy steps are taken. Her analysis of a large sample of data on non-financial and financial firms shows that the governance of financial firms is, on average, not obviously worse than in non-financial firms. She also found that although CEOs of financial firms earn on average more than CEOs of non-financial firms, firm-size adjusted CEO pay is lower in banks. Bank directors earn significantly less compensation than their counterparts in non-financial firms. Adams believes it should be mandatory for both public and private companies to collect data about management boards, compensation levels, and the committees that directors sit on.