Corporate Governance and the Banking and Financial Sector: Statement by Commonwealth Central Bank Governors, London, 6 June 2001
6 June 2001
1. Central Bank Governors and their representatives from 27 Commonwealth countries met in London on 6 June 2001. The Conference was organised by the Commonwealth Secretariat and was the first such meeting of Central Bank Governors from Commonwealth countries, and their views will be relayed to the Commonwealth Finance Ministers Meeting in September and the Commonwealth Heads of Government Meeting in October 2001.2. The focus of this meeting was on corporate governance in the banking sector, which had been highlighted in the Commonwealth Finance Ministers Meeting in Malta in September 2000. The Governors recognised corporate governance as an essential policy instrument for Commonwealth countries, and noted that it can help to achieve multiple objectives in an emerging market, in particular to strengthen:
· probity, efficiency and effectiveness of the financial markets, which in turn increases investor confidence to commit long term funds to the country;
· leadership for operational and strategic competitiveness of companies in the global market; and
· self-regulation of companies, especially in the context of privatisation and the attack on the supply side of corruption.
3. The Governors noted the increasing evidence that good corporate governance practices are a prerequisite for domestic and international investment, in particular the recent McKinsey Investor Opinion Survey, which identified that institutional investors would pay a premium of 10 per cent in Europe and up to 28 per cent in South American and East Asian markets for companies which could demonstrate good corporate governance. However, it was noted that corporate governance is only one of several prerequisites for encouraging investment. Others are political stability, sound macroeconomic policies, and effective microeconomic development strategies.
4. The Governors endorsed a broad approach to corporate governance, noting that it will be especially effective when it is:
· emphatic on the fundamentals of corporate governance for accountability, transparency and probity of company management to their shareholders;
· founded on market principles, and seen to support increased performance of companies rather than simply being a regulatory instrument;
· comprehensive in scope, covering the banking sector, private companies, state enterprises and co-operatives, in addition to listed public companies; and
· focused on development, dealing with ways that corporate governance can actively promote the economic performance of companies and their contribution to their stakeholders, as well as conformance to international standards of accountability to shareholders.
5. The Governors recognised that a critical factor for the promotion of good corporate governance is a broad set of policies, legal and administrative reforms, including market incentives as well as supervisory methods. The mix of policy instruments will need to be set according to the particular conditions of individual countries.
6. The banking sector has a critical role to play in this combined strategy, as the central bank, or other regulatory authorities, has the duty to encourage co-operation and promote standards for corporate governance practices for all licensed commercial banks and other financial institutions in accordance with the standards set by the Basle Committee, while the commercial banks can in turn recommend good corporate governance practices for their corporate customers (including private and family-owned companies which are the majority in most countries), all of which will help to reduce systemic risk. The banking sector is crucial, because it is like the bloodstream of the economy - if it is healthy the rest of the economy can be strong; if it is poisoned by poor corporate governance the whole economy will be infected.
7. Other critical factors to promote corporate governance are:
· the setting of guidelines to encourage standards of director behaviour;
· the development of a pool of competent directors, through training and public education on the significance of corporate governance; and
· effective accounting and auditing systems.
8. The Governors noted the importance of corporate governance for the central banks themselves and that the central banks should lead the way in demonstrating transparency, accountability and efficiency.
9. National initiatives to promote corporate governance, combined with training and institutional building for directors, such as had been initiated in several Commonwealth countries, would send a powerful signal to the markets to encourage domestic and international investor confidence.
10. The results of programmes to promote corporate governance should be:
· improvements in the quality and efficiency of all boards of directors, under the policy supervision and monitoring of the national regulatory commissions, backed by the weight of the government and parliament;
· increased performance and profitability of private companies, leading to increased exports, higher rates of GDP growth, and thus to increased share prices in listed companies; and
· increased inflow of investment which will in turn lead to higher growth, employment and poverty reduction.
11. The Governors reaffirmed that high priority should be accorded to protect the integrity and stability of their banking and financial systems and recognised the potential to use the chain of prudential and risk management controls in the banking system to promote other essential development priorities on a case by case basis.
12. Governors recommended that the conclusions of this conference should be submitted to the Commonwealth Finance Ministers Meeting 2001 together with the two documents circulated at this conference, namely:
· 'Corporate Government in the Financial Sector', issued by the Commonwealth Working Group on Corporate Governance in the Financial Sector, chaired by the Governor of the Central Bank of Kenya.
· 'Checklist of Issues for Promoting Effective Corporate Governance', produced by the Commonwealth Secretariat.
01/39 6 June 2001
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