Corporate Governance and the City

Corporate Governance and the City
Bill Witherell
July 6, 2012



The still unfolding story of Libor and Barclays’ “reprehensible behavior” (to quote Bob Diamond, ex-chief executive of Barclays) presents a sorry picture of the quality of corporate governance in the City of London. US-based financial firms may well also have been involved. This story makes particularly disturbing reading for anyone interested in promoting high governance standards, including this writer. In my previous position as Director for Financial and Enterprise Affairs at the Organization for Economic Co-operation and Development (OECD) from 1989 to 2005, I directed the program that developed the “OECD Principles of Corporate Governance,” which became recognized as the global standard in this field. These Principles are one of the 12 key standards for international financial stability of the Financial Stability Board and are the basis for the “Corporate Governance” component of the World Bank Group’s Reports on the Observance of Standards & Codes. A copy of the OECD Principles can be downloaded from the OECD website at . An explanatory policy brief can be found at

The corporate governance initiative at the OECD was spearheaded by the United States and the United Kingdom, two countries from which most of the pioneers of corporate governance have come. Indeed, one of the early issues that had to be overcome in promoting the Principles around the globe was their Anglo-Saxon roots. Some European countries even found it difficult to translate “corporate governance” into their national languages. The OECD and the World Bank have carried out extensive efforts to take the Principles to Asia, Latin America, the Middle East, and Africa; and a goodly number of countries in these regions have made impressive progress in strengthening their governance standards and practices. It is both ironic and sad that it is some major financial firms in the UK and the US, the birthplaces of corporate governance, that need to be reminded of these basic principles.

All firms, and particularly those in the financial sector, where trust plays such a central role, should recognize that the integrity of business and markets is central to the vitality and stability of our economies. Therefore, to quote the above-noted policy brief, “Good corporate governance – the rules and practices that govern the relationship between managers and shareholders of corporations, as well as stake-holders like employees and creditors – contributes to growth and financial stability by underpinning market confidence, financial market integrity and economic efficiency.” One does not need to probe deeply into the Barclays Libor revelations to judge that “market confidence” has been undermined and “financial market integrity” put at risk by the reported actions and the corporate culture they reflect. Good corporate governance should provide proper incentives for the board of directors and management to pursue objectives that are in the interests of the company and its shareholders, and should facilitate effective monitoring. The cost to shareholders of Barclays (and any other firms to be identified) that result from the reported actions may well be far greater than just the fines levied by regulators, as the reputational losses and the costs of lawsuits could be huge.

These revelations of corporate governance weaknesses in the financial sector do not come as a complete surprise. Following the financial crisis in 2008, the OECD published in June 2009 the report “Corporate Governance and the Financial Crisis” ( The OECD found “financial sector remuneration that seemed little related to company performance; risk management systems that did not consider the firm as a whole and the risk inherent in compensation schemes, and; boards that were in a number of cases unaware of the peril faced by their company.” Similar deficiencies appear to have been present in the current case. A subsequent paper giving conclusions and recommendations of the OECD Corporate Governance Steering Group included a number of recommendations for improving the governance of risk management and of remuneration and incentives which, if they had been adopted, would likely have prevented or led to the early correction of the practices reported in the current case ( ).

We now must witness the further development of this case and hope that the effects on the financial system and its stability are not severe. Looking forward, while any deficiencies in financial regulations and their enforcement need to be corrected, it is at least equally important to support efforts to strengthen corporate governance in our financial institutions. At Cumberland Advisors we believe that good corporate governance arrangements provide the proper incentives for a positive values-creation process within private enterprises. An analysis of the quality of corporate governance thus enters into our investment strategies.


This commentary was written by Bill Witherell, Cumberland’s Chief Global Economist. He joined Cumberland after years of experience at the OECD in Paris. His bio is found on Cumberland’s home page, He can be reached at

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