Corporate governance: Lessons from the financial crisis

©Jason Reed/Reuters

If there is one major lesson to draw from the financial crisis, it is that corporate governance matters.

Directors, regulators and shareholders, but also policymakers and the general public, need to pay more attention to corporate governance. This tells us how firms operate, their motives and principles, their reporting lines, who they are accountable to, and how they manage profit, remuneration and, in the case of many financial firms, other people's money. When times were good, too many people took their eye off the ball and now we see the consequences.

The public outcry has been loud and understandable, not least in relation to executive pay. And even some top executives have now admitted the lack of relationship between pay and performance and called for a salaries shake-up. We now realise that constantly rising share prices is not necessarily a sign of good corporate governance. In fact, as recent history shows, it could actually be the opposite.

The question is, what can be done to improve how financial firms operate? We have been examining the crisis closely and in particular seeing how the OECD Principles of Corporate Governance might help or, indeed, be improved in light of recent experiences.

We see four key areas for urgent action: corporate risk management, pay and bonuses, the performance of board directors, and the need for shareholders to be more proactive in their role as owners.

Let's start with remuneration. Recent surveys have shown that four out of five market participants believe that compensation practices played a role in promoting the accumulation of risk that led to the crisis. If they are right, the way that remuneration schemes are designed and supervised can have systemic impact on the financial system.

But to get it right we need to look at pay structures across whole companies, not just at their high-profile executives. It is equally important to come to grips with how bonuses are designed and paid among traders and portfolio managers throughout the company. We have seen too many examples of employees being given short-term incentives that are not in line with the long-term sustainability of the firm. This is what contributed to the build-up of unmanageable risks that eventually brought some companies down. By applying the corporate governance principles, companies can establish a proper structure for deciding on issues such as remuneration. And the board will clearly play an important role, since to leave it to executives themselves is inviting disaster. When looking at various models for compensation, boards should explicitly ask themselves if the company's compensation model is aligned with prudent risk-taking and the long-term objectives and strategy of the company. Perhaps some firms asked this question and got the wrong answer, but it is also likely that too many firms ignored it. The crisis has also thrown up some massive failures in risk management. Even where companies had mandatory internal controls on reporting for the financial accounts, their executives did not fully grasp or clearly communicate the financial risks of many of the instruments they were betting on. Many of these were in fact off the balance sheet prior to the crisis. To fill this gap, risk management must be seen in a corporate-wide perspective where the risk management system is continuously adjusted in line with a corporate strategy and the appetite for risk. The oversight of risk management by board members must also be improved and they must also be given all the information they need to make informed decisions.

One way OECD believes this can be done is to encourage corporations to appoint a special risk officer. Moreover, to keep information clear, that person would report directly to the board of directors and not only via the CEO. Surveys of audit committee members have shown that they are not too satisfied with the current state of reporting. Only four out of ten said that the risk reporting they received was very good. Some boards have not only failed in the oversight of risk management systems but also in the remuneration practices of their firms, so the financial market collapse was their failure, too.

It is indeed true that boards have not always received high-quality information. But we must also ask if they had actually demanded the right information and in a suitable form. For example, knowing exposure to residential mortgages is not the same thing as also knowing what proportion is exposed to sub-prime. Being a board member in a large complex organisation is extremely demanding. And no board member can be expected to master all aspects of the business in detail.

But in financial firms, a good understanding of risk management is vital. This is why the OECD has suggested that the "fit and proper person" test-which assesses if somebody is trustworthy to be a bank director-could be expanded to include technical and professional competence in areas like risk management. It might also be worth looking at strengthening the legal duties of board members-and the enforcement of those duties.

If boards have failed in many cases, then where were the shareholders? Some did raise their voices, or sold their investments, but others were just as interested in shortterm gain as traders and management were.

The age-old debate about whether higher standards of corporate governance can be enforced by laws and rules or encouraged via guidelines and market behaviour has heated up considerably since the crisis. But the debate may be missing the point.

Consider the OECD Principles of Corporate Governance. In many cases the principles have been implemented through regulation and legislation. This creates a level playing field and is sometimes the preferred route for companies that may find it hard to "take the first step" among competitors. But even where there are rules and laws on the books, they simply cannot ensure good behaviour. We also need to do better in monitoring their implementation and their effectiveness. That is why the OECD will put in place a process of peer reviews based on the OECD principles. These peer reviews will obviously scrutinise implementation, though they will also encourage transparency, consistency and mutual learning.

Not that all companies are sitting on their laurels. Since the crisis, the private sector has been taking a greater interest in improving their corporate governance. Board composition is changing and shareholders are rediscovering their voices too.

Many firms now realise that they need to re-gain credibility. Private sector initiatives to improve corporate governance are vital for progress and OECD has established a forum for companies and broader stakeholders to exchange views and best practices. In 2009 we also launched a global consultation on the Internet to garner input and suggestions from the public on how to improve corporate governance. As the financial crisis has underlined, good corporate governance is everyone's business.

©OECD Observer No 273 June 2009


References OECD (2009), "The Corporate Governance Lessons from the Financial Crisis", Working Paper by Grant Kirkpatrick, Paris, available at


See the OECD Principles of Corporate Governance at


Economic data


Stay up-to-date with the latest news from the OECD by signing up for our e-newsletter :

Twitter feed

Suscribe now

<b>Subscribe now!</b>

To receive your exclusive print editions delivered to you directly

Online edition
Previous editions

Don't miss

  • Africa's cities at the forefront of progress: Africa is urbanising at a historically rapid pace coupled with an unprecedented demographic boom. By 2050, about 56% of Africans are expected to live in cities. This poses major policy challenges, but make no mistake: Africa’s cities and towns are engines of progress that, if harnessed correctly, can fuel the entire continent’s sustainable development.
  • “Nizip” refugee camp visit
    July 2016: OECD Secretary-General Angel Gurría visits the “Nizip” refugee camp, situated between Gaziantep and the Turkish-Syrian border, accompanied by Turkey’s Deputy Prime Minister Mehmet Şimşek. The camp accommodates a small number of the 2.75 million Syrians currently registered in Turkey, mostly outside the camps. In his tour of the camp, Mr Gurría visits a school, speaks with refugees and gives a short interview.
  • OECD Observer i-Sheet Series: OECD Observer i-Sheets are smart contents pages on major issues and events. Use them to find current or recent articles, video, books and working papers. To browse on paper and read on line, or simply download.
  • Queen Maxima of the Netherlands gives a speech next to Mexico's President Enrique Pena Nieto (not pictured) during the International Forum of Financial Inclusion at the National Palace in Mexico City, Mexico June 21, 2016.
  • How sustainable is the ocean as a source of economic development? The Ocean Economy in 2030 examines the risks and uncertainties surrounding the future development of ocean industries, the innovations required in science and technology to support their progress, their potential contribution to green growth and some of the implications for ocean management.
  • OECD Environment Director Simon Upton presented a talk at Imperial College London on 21 April 2016. With the world awash in surplus oil and prices languishing around US$40 per barrel, how can governments step up efforts to transform the world’s energy systems in line with the Paris Agreement?
  • Happy 10th birthday to Twitter. This 2008 OECD Observer interview with Henry Copeland said you’d do well.
  • The OECD Gender Initiative examines existing barriers to gender equality in education, employment, and entrepreneurship. The gender portal monitors the progress made by governments to promote gender equality in both OECD and non-OECD countries and provides good practices based on analytical tools and reliable data.
  • Once migrants reach Europe, countries face integration challenge: OECD's Thomas Liebig speaks to NPR's Audie Cornish.

  • Message from the International Space Station to COP21

  • The carbon clock is ticking: OECD’s Gurría on CNBC

  • If we want to reach zero net emissions by the end of the century, we must align our policies for a low-carbon economy, put a price on carbon everywhere, spend less subsidising fossil fuels and invest more in clean energy. OECD at #COP21 – OECD statement for #COP21
  • They are green and local --It’s a new generation of entrepreneurs in Kenya with big dreams of sustainable energy and the drive to see their innovative technologies throughout Africa.
  • Pole to Paris Project
  • In order to face global warming, Asia needs at least $40 billion per year, derived from both the public and private sector. Read how to bridge the climate financing gap on the Asian Bank of Development's website.
  • How can cities fight climate change?
    Discover projects in Denmark, Canada, Australia, Japan and Mexico.
  • Climate: What's changed, what hasn't, what we can do about it.
    Lecture by OECD Secretary-General Angel Gurría, hosted by the London School of Economics and Aviva Investors in association with ClimateWise, London, UK, 3 July 2015.
  • Is technological progress slowing down? Is it speeding up? At the OECD, we believe the research from our Future of ‪Productivity‬ project helps to resolve this paradox.
  • Is inequality bad for growth? That redistribution boosts economies is not established by the evidence says FT economics editor Chris Giles. Read more on
  • Interested in a career in Paris at the OECD? The OECD is a major international organisation, with a mission to build better policies for better lives. With our hub based in one of the world's global cities and offices across continents, find out more at .

Most Popular Articles


What issue are you most concerned about in 2016?

Euro crisis
International conflict
Global warming

OECD Insights Blog

NOTE: All signed articles in the OECD Observer express the opinions of the authors
and do not necessarily represent the official views of OECD member countries.

All rights reserved. OECD 2016