Directors need to question growth rates in businesses and assess whether controls are keeping up with risks and if the business is resilient to shocks. This requires board members with expertise in banking, insurance and risk management. Boards also play an important role in ensuring that compensation systems are part of an integrated risk-management strategy.
Tying bonuses to short-term profits without adequate consideration of long-term risk is a recipe for excessive risk taking. The Financial Stability Board has developed principles for compensation practices that align compensation with prudent risk taking. Implementation must be system-wide so that professionals and firms have a level playing field.