OSFI steps up board oversight

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Canada's financial regulator is stepping up its oversight of the boards of banks and insurers, and signalling that directors need to be more skeptical of the executives who run those firms.

The Office of the Superintendent of Financial Institutions plans to spend more time with directors and place higher expectations on them, Julie Dickson, the head of the regulator, said in an interview. It is also looking at updating its corporate governance guidelines.

A key goal will be bolstering the degree of independence that boards have from management, in a bid to ensure that directors aren't shy about second-guessing chief executive officers.

OSFI intends to be at the forefront of a global push to increase focus on the boards of such institutions in the wake of the financial crisis, and it has already been pressing banks and insurers to recruit more directors who have experience in their industry.

In Canada, the financial crisis revealed large risky exposures at Manulife Financial Corp. and Canadian Imperial Bank of Commerce, causing shareholders to question how diligent boards had been at assessing risk. Now there is a growing awareness among regulators internationally that having strong and somewhat cynical boards of financial institutions is a key line of defence in the prevention of another crisis. As the volume of demands placed on regulators themselves continues to increase, that first line of defence becomes even more important.

"OSFI is increasingly realizing how important [corporate governance]is," Ms. Dickson said. "Independence is becoming a big issue for us."

OSFI created an internal group early last year to assess corporate governance of Canadian institutions, and the group will soon be kicking into high gear, she added. As it does, the regulator will be spending more time with directors.

OSFI has already begun meeting with the entire board of each of the large financial institutions at least once a year to discuss the regulator's findings and concerns, and it is keeping an eye on the information that goes to the board and the decisions the board makes throughout the year.

An early focus in this effort was boosting the level of industry expertise on boards, and there has been some progress in that area, Ms. Dickson said.

However, some of Canada's large banks don't appear to have extensive banking experience on their boards.

Royal Bank of Canada, the country's largest financial institution, shows only a few people on its board have banking experience, according to its director biographies. The bank says, however, that about two-thirds of its 12-member board has financial industry or investment management experience, though some of that was acquired at consulting firms or financial software companies.

OSFI's main aim, it says, is to ensure that directors aren't scared to put management on the hot seat, and that they know the right questions to ask.

Stephen Jarislowsky, chief executive officer of Jarislowsky Fraser Ltd., said that he's glad OSFI is forging ahead. "I find that there are many directors who are extremely nice people and competent people, but very few bank directors who really know banking," he said in an interview.

Since the board is relying on information that comes from the CEO and top management, good directors should be regularly asking for additional material that they feel they need, he said. "But unless you are extremely well versed on how banks work and where the risks of banks are, and what the potential problems are, it's very difficult."

The Institute of International Finance, a global banking association, recently urged boards to do more to ensure that banks and insurers don't take on excessive risks. "Senior management should be expected to account for their behaviours, and board members may find it helpful to find opportunities to interact directly with staff at all levels in an attempt to gauge the extent to which they are aware of and responsive to a positive risk culture, and to assess, for example, the extent to which 'bad news travels upwards,'" the IIF said in a report.

It also called on boards to review, at least once a year, the degree to which they have made a difference in the risk management of the institution.