OSFI Looking at Board Involvement

The Office of the Superintendent of Financial Institutions has released the text of a speech by Ted Price, Assistant Superintendent, Supervision Sector, to the 2009 Canada-UK Colloquium on Global Finance.

After the familiar puffery about Canadian banks (and the usual failure to address third party analysis of Canadian banks’ resilience), it gets more interesting:

As the financial services business becomes more and more complex, it is likely that we will see more frequent shocks to the system. In this environment, it is not enough for a board to give tacit approval to management in setting the risk profile; boards need to engage management, ask questions, demand answers, and not sign off until they are satisfied.

In the past, some boards have felt that it was inappropriate for directors to engage management regarding risk management. That it would require too much education and discussion. This implies that risk management is too complex for the board, and that it cannot be explained simply, or understood. If this is the case, then why be in that business? In any other industry it would not be ok for directors to say, “We don’t understand the risks, but let’s get into that business anyway”.

At OSFI, we believe that defining risk appetite is as important in an institution’s strategic planning as other production inputs, like budgets. It has been long accepted that major expenditures and budgets should be reviewed by the board, but when it comes to setting risk appetite, some boards have, incorrectly, abdicated that responsibility to management. We believe that boards have an essential oversight role in setting and limiting risk appetite in financial institutions.

Well, any board that made the statement that “it was inappropriate for directors to engage management regarding risk management” would get a roasting here on PrefBlog, if nowhere else! According to me, the board is elected by shareholders to supervise management – and supervision implies (or should imply) some degree of knowledge and the ability to over-rule.

Unfortunately, there is widespread feeling that the purpose of a board is to provide equal employment opportunities to minorities and traditionally disadvantaged sectors of the populace, as well as supporting diversity, the environment and fluffy little bunnies … yet another internal contradiction of the system that will, from time to time, blow up.

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