Skip to main content

Final Governance Principles Out from Basel but Changes are Limited

Vincent Tophoff  | 

The Basel Committee on Banking Supervision recently published a revised version of its Corporate Governance Principles for Banks. These guidelines provide a framework within which banks and supervisors should operate to achieve robust and transparent risk management and decision making and, in doing so, promote public confidence and uphold the safety and soundness of the banking system.

IFAC responded to the consultation version of this guideline earlier this year. In our response, we welcomed the enhancements to the Basel Principles as they specifically aim to strengthen risk governance, clarify the role of the board of directors, emphasize board competence, provide guidance for bank supervisors, and point out the influence of compensation systems. However, we also pointed out that the guidelines were very detailed and prescriptive, which might promote a compliance culture rather than a values based, behavioral route to better governance. For that reason we suggested that consideration be given to presenting the guidelines at a higher level, describing principles more focused on desired outcomes and less on detailed implementation guidance to achieve those outcomes.

Apart from a few minor changes, some based on our recommendations, the final document is practically identical to the consultation draft. As such, it continues to provide a long list of input requirements, including a large set of detailed instructions on the establishment of a risk management “function.” Unfortunately, however, these guidelines are not very well aligned with current thinking about risk management, nor with already existing authoritative international frameworks, standards, and guidelines in this area. This will likely create confusion for institutions that have already established formal risk management arrangements and might lead to compliance rather than effective risk management (see “Basel Principles on Enhancing Corporate Governance—Will Revisions Be Enough to Invoke True Change?” for additional information on the revision).

What now?

Even though these principles are branded as “guidelines,” most banks around the world will most likely have to comply with them one way or another. Compliance with these detailed guidelines, however, should not prevent banks from also implementing good governance in spirit, including arrangements for the effective management of risk in everything they do and not only as an internal control measure.

As professional accountants, we can actively support our organizations in evaluating and improving their governance, risk management, and internal control arrangements. IFAC and its member organizations provide support, for example, with good practice guidance and thought leadership, many of which are available in the governance and risk management and internal control sections of the Gateway.

Some of the most relevant IFAC publications are:

  • From Bolt-on to Built-in: Managing Risk as an Integral Part of Managing an Organization positions risk management and internal control as it was originally intended—as a highly relevant and useful process for decision and execution support, and as a process that boards and management naturally use to ensure their organization makes the best decisions and achieves its objectives.
  • Integrating Governance for Sustainable Success analyses how professional accountants in business can support their organizations and increase performance by integrating governance into the key drivers of sustainable organizational success.
  • Evaluating and Improving Internal Control in Organizations highlights areas where the practical application of existing internal control standards and frameworks often fails in many organizations. The guidance assists professional accountants in business as they work with their organizations to continuously evaluate and improve internal control, and ensure that it is an integrated part of the organization’s systems of governance and risk management.
  • Evaluating and Improving Governance in Organizations provides a framework—consisting of a series of fundamental principles, supporting guidance, and references—for how professional accountants can contribute to evaluating and improving governance in organizations.

By leveraging the good practice recommendations from these publications alongside implementation of the revised Basel Committee Principles, you will be able to balance the performance and conformance dimensions of your organization’s governance arrangements.

Vincent Tophoff

Former Senior Technical Manager

Vincent Tophoff was a senior technical manager at IFAC, working with the Professional Accountants in Business Committee. Previously, he was a partner at INTE-Q Integration Management, a management accountancy consulting firm in The Netherlands and senior lecturer at the postgraduate accountancy program of the Vrije University in Amsterdam.