In such circumstances, we expect the board to provide leadership, guidance and oversight in ensuring that the needs and rights of all parties are adequately and appropriately managed. Thirdly, the implementation of global regulatory reforms will pose further challenges for the industry. While the reforms are well-intended, the complexity and impact of the reforms to business should not be underestimated. Increasingly, there seems to be a trend on the “extraterritorial” application of laws and regulatory requirements, which have implications on other jurisdictions. The extraterritorial effect of such laws may require changes to existing practices and may involve substantial costs in terms of system change and improving monitoring capabilities. At the board and senior management levels, an adequate understanding of the potential impact of these trends and regulatory changes is critical to help the organisation in setting business priorities while ensuring full compliance with emerging regulatory requirements. With much at stake, board members must take seriously their responsibility to drive the corporate governance agenda forward. One important lesson we ought to learn is that weak governance causes the failure of financial institutions. The costs of salvaging a failed institution far outweigh the costs incurred to prevent such a failure. Over the long term, the failure of institutions would also cause businesses and households that depend on financial institutions for funding to be in a difficult position, erode public trust that would take many years to restore and consequently result in more intrusive and prescriptive regulation of the industry.
This complexity stems from the highly dynamic and constantly evolving nature of the financial system. Financial institutions occupy a unique position in any economy. This uniqueness requires financial institutions to balance between growth, profitability and innovation, and the long-run stability of institutions. It is also this unique position that may create a moral hazard where financial institutions are incentivised to take excessive risks on the expectation that the cost of failure would be borne by a third party, for example through government bail outs or through the concept of “bail-in”. This state of affairs, if not managed appropriately, would burden the taxpayers and increase the dissatisfaction of the general public with the industry. The risks and trade-offs that I have mentioned would pose a number of specific issues and challenges for corporate governance. Firstly, the complexity of the operations of financial institutions and financial groups is expected to continue to increase. Financial institutions are becoming larger and more complex as they grow in size and expand abroad. Earlier this year, the six domestic banking groups had overseas operations in 22 countries worldwide, including in all ASEAN member countries. The total overseas assets of the domestic banking groups had also increased by 15.4% from the previous year to RM362.1 billion. The oversight of financial groups with cross border operations is more complex and demanding, as groups have a highly diverse range of businesses, products and services, and diversified clientele bases. Managing people with different cultures will be an additional challenge.