Many corporate governance rules present themselves as sheep. They are wolves. So be careful! Some countries have the questionable reputation of being champions in making rules. Everything has been arranged. Milk powder, nuclear power stations, the color of the grass, the children’s teeth, corporate governance, you name it. This regulating has the apparent appeal of order and control. However, if you are not careful, the opposite is what you’ll experience. This is also a risk when corporate governance is regulated. If you want to arrange everything, you know how it ends: the surgery was successful, but the patient has died.
Increased monitoring of compliance
The same applies to supervision. The world has been confronted painfully with the consequences of the financial crisis for over five years now. One or our responses is more monitoring of financial institutions such as banks and insurance companies. These institutions have to comply with all kinds of provisions and rules. We call this ’compliance’. Financial institutions have to comply with hundreds if not thousands of different requirements. Consequently, they all employ one or more compliance officers. Under the responsibility of the management board and the supervisory board, they monitor whether the rules imposed from the top are followed properly. In the background, this is, in turn, audited by the accountants, and higher up by institutions such as the Central Banks, the IMF, the Netherlands Authority for the Financial Markets etc.
Conservative estimates show that in some cases the top management of banks and other financial institutions spends almost half its time organizing the consequences of this supervision and regulating the impact hereof in the institution concerned. Does everything work better because of supervision? It often doesn’t. Paper is printed and pushed, all kinds of audits are conducted, many boxes are ticked, but you can question whether this all leads to better and more stable banks and insurance companies. Illusions are easy but often cost a lot of money.
Costs and benefits
What to do then? I do not advocate abandoning all kinds of supervision and regulation. Transparency and supervision are more important than ever these days. But we have to dare to regularly assess the net profit of all this testing and regulating. We also have to dare to adjust certain forms of supervision or to reduce or even stop them if they appear not to be effective. Otherwise, the supervisory bodies quickly become a goal in isolation. And who guards the guards?