Corporate Governance – An Often Overlooked Weakness

Over the years, I have had numerous conversations with colleagues and industry insiders about why some organizations fail, and others do not. I have also attended and spoken at many conferences involving trust and ethics. In my view, here are a few key reasons why some organizations fail, and others do not.

• Effective leadership – provides a clear vision and direction. Weak leadership creates confusion and lacks a clearly defined purpose. Think – Steve Jobs, who focused on innovation and excellence.
• Ability to adapt to change and changing customer preferences – Think – Blockbuster, which ignored streaming trends while Netflix embraced them.
• Clear strategy – success depends on clear priorities and focusing on core strengths, while others lack a clear mission and chase too many opportunities – Think Dell Computers vs. Compaq Computers.
• Financial Management – poor financial decisions kill more organizations than bad ideas – Think Exxon vs. Enron.
• Execution – poor execution kills, not ideas.
  • Think sports – New England Patriots – Bill Belichek and Tom Brady were so successful – was it because they were able to execute their game plan?
• Governance and Ethics – fraud, corruption, and ethical lapses – once trust is broken, it is almost impossible to regain – Think Goldman Sachs vs. Lehman Brothers.

My experience during my career has taught me that failing organizations struggle in multiple areas simultaneously, not just one.

These remaining comments are based on my observations of financial markets in both developed and developing countries. These will primarily concern financial institutions, as this is where I have spent most of my time. These comments and suggestions were discussed and reviewed with a colleague, David Hawkins, with whom I have known for almost 4 decades. Our views and observations are closely correlated.

When financial institutions fail or become distressed, governance weaknesses are almost always visible long before financial deterioration begins. Good governance can help reduce risk.

Our experience across the various countries we have worked in reveals the following:

• Legal frameworks that appear sound but prove difficult to implement or enforce.
• Regulatory agencies are constrained by limited independence, authority, or resources.
• Board composition is based on political influence or financial resources rather than technical competence.
• Enforcement options are insufficient to change behavior.
• Ownership structures that obscure controlling parties.
• Audit, reporting, and oversight processes exist only on paper in an organizational chart.

At the center of these recurring challenges, in my mind, is an effective culture of good corporate governance.

When Frameworks Exist but Outcomes Fall Short

To foster corporate governance in financial institutions, most jurisdictions today have some form of fit-and-proper standards, fiduciary duty concepts, and supervisory powers embedded in law, yet implementation often falls short of intent.

For example, regulators may face practical constraints — limited resources, uncertain or ambiguous statutory authority, political pressure, or even questions of true bank ownership. Even when information provided to the regulator to assess a board candidate raises concerns about rejecting the candidate, such rejection can carry institutional or political consequences. Over time, this can lead to boards that lack collective expertise, independence, or robust discussions about important matters before them.

Similarly, enforcement actions against directors are frequently more difficult to assess than actions against institutions. Challenges to actions may be lengthy, reducing regulators’ authority to address problems quickly. Compounding the problem, where legal frameworks do not clearly articulate director accountability, regulators may default to monetary penalties against the bank. These measures rarely address root causes and provide no consequences for the bad actors.

The Boardroom Gap

In practice, governance challenges are often both cultural and technical. In some cultures, board membership at a financial institution is still viewed as an honor or reward for community achievements or political standing rather than based on experience or merit. Many proposed directors are not fully aware of the business risks or the liability involved in overseeing a financial institution.

In addition, risk oversight may be procedural rather than substantive:

• Risks are not always identified and articulated, much less understood by all board members.
• Risk limits may exist, but are not always enforced. This can be especially true in lending to related parties or influential members of the community.
• Committees are established but lack the authority to take necessary actions to protect the bank’s financial standing.
• Board meetings occur, but meeting documentation is incomplete, making it difficult to understand why decisions were made and which members approved them.
• In certain cases — particularly where ownership is concentrated, or government influence is significant — independence can be difficult to maintain. Political priorities, family influence, or dominant personalities may narrow the range of viewpoints in the boardroom.

The Predictability of Governance Failures

What is most striking is not that governance failures occur, but that they are often predictable. Warning signs with bank boards typically accumulate gradually:

• Increasing reliance on a small group of decision makers to establish bank policy.
• The will to challenge bad decisions.
• Inadequate transparency at the board level.
• Reluctance by regulators to identify and then to act on supervisory concerns.

By the time financial distress appeared, governance weaknesses were already present. They may go unnoticed or, in some cases, be ignored, thus remaining uncorrected. This raises an uncomfortable but necessary question: are governance failures primarily due to insufficient legal design, the board’s failure to implement good governance, or inconsistent enforcement and accountability? Both David and I have seen all of these throughout our careers.

As we examine weaknesses and failures more broadly, it is worth considering whether strengthening governance requires more laws or greater resolve in applying the ones already in place. We should not forget, however, that, in the end, boards are responsible for ensuring the safety and soundness of their financial institutions. Therefore, better governance starts with them.

Prepared by Terry L. Stroud – February 2026