Corporate Governance after the Financial Crisis and the Emerging Best Practices
In previous articles, we have discussed how the global financial crisis forced a rethink of corporate governance practices. To start with, the global financial crisis brought into focus the unfettered greed and uncontrolled risk taking that characterized the global financial crisis. These were symptoms of the crisis that happened because of poor corporate governance. Added to that was the inability of regulators to provide oversight over the actions of the banks and corporates and the humungous amounts spent by banks to lobby for less oversight and control over their actions. Hence, it can be said that the underlying reasons for the crisis were poor banking practices and lack of transparency and accountability by the corporates.
In the wake of the crisis, several proposals aimed at introducing greater transparency and accountability from the corporates have been set in motion. These include the Dodd-Frank Act or the legislation that has been passed in the US to monitor the accounting and business practices of the banks and corporates.
Further, the Consumer Protection Agency under Elizabeth Warren has taken a series of steps to restore consumer confidence and to bring back the trust that suffered as a result of the crisis. The bottom line requirement for good corporate governance is that the shareholders and the consumers must have implicit and explicit trust in the actions and reporting of corporates. Hence, any move towards increasing transparency and accountability has to be done in a manner that makes the stakeholders trust the actions. The point here is that credibility and integrity is the key to successful corporate governance.
The emerging best practices include stricter regulatory requirements, reporting done in a transparent and ethical manner and fair business practices aimed at servicing the small consumer as well as the large institutional shareholders. The legislation mentioned above along with the slew of measures that have been collectively called Wall Street Reform are aimed at reining in the rapacious and reckless behavior of the banks and financial institutions. Further, since the crisis was thought of as an assault on capitalism itself, it became necessary for the reformers to focus on the aspect of investigating the ideas and theories underpinning capitalism.
Finally, there has been some movement towards instituting best practices though the pace has been slow because banks have been resisting these reforms. It needs to be mentioned that human ingenuity knows no limits and hence, unless there is voluntary compliance, we would always find ways and means to circumvent the rules and regulations. Hence, more than anything else, a mindset change is needed from the corporates to set in process patterns of corporate behavior that are sustainable and socially and environmentally conscious. Only when there is a desire to change from within can the best practices work.
In conclusion, the global financial crisis shook the very foundations of capitalism and laid bare the tenets and the wrong assumptions under which the market based system was working. Hence, after the crisis, the attempt at reform though slow has still been noteworthy because the size of the task at hand is ambitious and fraught with dangers. It is hoped that the crisis would serve as a valuable learning experience for the corporates to mend their ways and to avoid a repeat of such occurrences.
- Significance of Corporate Behavior
- Factors Directing Corporate Behavior
- Corporate Governance and Finance
- Corporate Governance and CSR
- Role of Institutional Investors in CG
Authorship/Referencing - About the Author(s)
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