Improving risk governance - a proposal on Board decision-making

Official inquiries around the world into the events that precipitated the Global Financial Crisis (GFC) have identified, among other causes, failures in Corporate and Risk Governance as being critical. One of the critical issues identified by inquiries is how effectively Boards of directors of Systemically Important Banks (SIBs) provide oversight of management. Having found deficiencies of oversight across the industry, politicians, banking regulators and the industry have proposed radical changes to the banking industry and its regulation. Some of the problems of corporate governance revealed the role of 'cognitive illusions' or biases that resulted in 'irrational decision-making', by Boards of some of the most important banks in the world. To address such issues, regulators have called for Boards to be more transparent about their decision-making processes and have also called for formal, regular evaluation of Board performance. Critical to improving transparency and evaluating the performance of directors is the creation of more detailed Board Minutes, in particular, recording the level of challenge to managements' proposals. At present, Board Minutes are secretive documents that official inquiries have found to be insufficient to evaluate critical decisions. As an aid to improving Board performance, this paper proposes the development of what are called here 'Rich Board Minutes'. In essence, such minutes would be electronic transcripts of Board, and other important, meetings, which would be subject to expert analysis to evaluate the process of decision making, in particular looking for good governance and risk management practices and the absence of destructive biases, such as Groupthink. The paper shows that the technology to implement such Rich Board Minutes already exists and is not expensive. It is a matter of collecting and organizing the information so that experts can analyze it. What is needed is first for Boards to take evaluation of their decision making capabilities seriously and secondly the training of experts in diverse topics such as organizational behaviour, behavioural finance and risk management to analyze Board deliberations and create analyzable Rich Board Minutes. The paper concludes by developing proposals for implementation of the proposed concepts in Systemically Important Banks.