To what extent is the financial crisis a governance crisis? From diagnosis to possible remedies

The post-Enron period is characterised by increased efforts in strengthening corporate governance. In the wake of the financial crisis, however, the effectiveness of these (governance) reforms is put into question. Although the financial crisis seems to be caused by macro-instabilities and micro regulatory failures, it can be argued that governance failures aggravated the financial meltdown. This paper discusses the systemic governance failures that can (partly) explain the financial crisis and provides insights into the lessons to be learned. The analysis highlights four main deficiencies: (i) inadequate monitoring by the market in combination with an ‘open’ shareholder model; (ii) the perverse side-effects of (variable) performance-related incentive schemes that were supposed to be the disciplinary mechanism per excellence for (top) managers; (iii) insufficient risk modelling and risk management which leads to poor external and internal supervision with regard to risk exposure and (iv) governance investments were too much focused on structures and procedures instead of on stimulating the right corporate behaviour and attitude. Furthermore, possible remedies to restore trust in the business world are being discussed. This includes -amongst others- a reflection on mechanisms that foster company-wide long-term value creation; proper risk assessment encompassing a true audit of strategic risks; a reconsideration of board roles and board composition, thereby paying more attention to leadership and personality issues; etc. Finally, the paper argues that the balance between regulation and self-regulation is at stake.