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Governance attitudes need radical overhaul, says Sants

The attitudes and competence of the individuals who conduct governance within financial companies need radical overhaul, according to the FSA.

In a speech to the Securities and Investment Institute today, chief executive Hector Sants said financial companies need to create board-level governance structures that allow for challenges over companies’ risk controls, without creating conflict.

Sants outlined the changes being made in the regulator’s approach to judging the competence of firms’ senior management.

Sants said the credit crisis has demonstrated that: “There are some management decisions that have revealed a degree of incompetence, and at times a rather cavalier approach regarding risk management.

“The necessary challenge was missing from governance structures, in particular boards, and there may well be questions that can reasonably be asked about the openness and thus, arguably, the integrity of firms dealings with regulators, shareholders and their customers.”

He added that the structure of governance in financial companies does not need radical overhaul, but that the attitudes and competence of the individuals who conduct that governance does.

He said: “In particular we need to create governance that fosters challenge without creating conflict. The effectiveness of governance is the key issue and addressing this challenge is the responsibility of all of us, not just regulators and boards.

“This by no means weakens our fundamental view that firms’ senior management carry primary responsibility for their actions and their resulting consequences.”

The FSA says it is not seeking to establish non-executive directors as a competing governance mechanism against the executive, but to make both more effective.

Sants said it must be recognised that the unitary board model runs the risk of “encouraging the herd instinct both in the sense of encouraging follow-the-leader behaviour and in the sense of the reluctance to break away from the pack and express an independent view”.

As part of the Significant Influence Function review, the FSA is now interviewing candidates for a number of the key functions in an authorised firm.

It says it has conducted 51 SIF interviews and a number of applications have already been refused.


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