Corporate Governance: a perspective from thinking about central bank governance

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Corporate Governance a perspective from thinking
about central bank governance

• Presentation at SUERF seminar on corporate
  governance in financial institutions
• 29-30 March 2007
• David Archer
• Head, Central Banking Studies
• Bank for International Settlements

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Key elements of governance

• Common features of governance arrangements in the
  public and private domain
• Specify the objective and align incentives for
  managers with preferences of principals
• Transparency stakeholders must be able to
  observe actions of managers and their context
• Accountability managers need to demonstrate
  that they have done their utmost to achieve the
  objective of the organisation

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Governance of central banks many approaches
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Legal grounding considerable changeChanges in
central bank laws ( of jurisdictions)
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Differences between corporate and central bank
governance

• Corporate governance
• Principals may be directly involved in writing
  contract with management

• Central bank governance
• Principals interests intermediated through
  agents with potentially-conflicting interest

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Differences between corporate and central bank
governance

• Corporate governance
• Principals may be directly involved in writing
  contract with management
• Shareholders able to dismiss management

• Central bank governance
• Principals interests intermediated through
  agents with potentially-conflicting interest
• Shareholders not able to dismiss management

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Differences between corporate and central bank
governance

• Corporate governance
• Principals may be directly involved in writing
  contract with management
• Shareholders able to dismiss management
• Capital market substitutes for weaknesses in
  governance

• Central bank governance
• Principals interests intermediated through
  agents with potentially-conflicting interest
• Shareholders not able to dismiss management
• No capital market to substitute for weaknesses in
  governance

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Differences between corporate and central bank
governance

• Corporate governance
• Principals may be directly involved in writing
  contract with management
• Shareholders able to dismiss management
• Capital market substitutes for weaknesses in
  governance
• Profit bottom line relatively direct feedback on
  performance

• Central bank governance
• Principals interests intermediated through
  agents with potentially-conflicting interest
• Shareholders not able to dismiss management
• No capital market to substitute for weaknesses in
  governance
• Policy bottom line slow and indirect feedback on
  performance

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Differences between corporate and central bank
governance, cont.

• Corporate governance
• Senior management drive strategy strategic
  mobility

• Central bank governance
• Strategy may be locked down in law strategic
  immobility

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Differences between corporate and central bank
governance, cont.

• Corporate governance
• Senior management drive strategy strategic
  mobility
• Efficiency in use of resources a key issue

• Central bank governance
• Strategy may be locked down in law strategic
  immobility
• Effectiveness of delivery on objectives dominates
  efficiency

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Elements of governance framework not present in
central banking context

• Individual financial incentives
• Threat of takeover
• Threat of dismissal for weak performance
• Strong separation of Chairman/Chief Executive
  roles

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Elements of governance framework present in
central banking context

• Objectives set at the political level, and often
  embedded in law operational autonomy
• Financial independence
• Clarity about objectives, targets
• Heavy reliance on transparency
• Supplemented by independent investigations,
  reviews, enquiries

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Security of tenure for Governorconstraints on
dismissal
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Majority of internal/external members
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Legal objectives of the central bank
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Appointment procedures for Governor
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Security of tenure for Governor appointment