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Corporate Governance and the Credit Crunch

There are many causes of the current financial turmoil. ACCA believes, however, that a failure in corporate governance is a major contributor to the credit crunch. Regulatory boxes may have been ticked but fundamental principles of good governance were breached. The charitable explanation for this failure is that those responsible did not understand the risks that were being taken. That would suggest a failure of diligence and professionalism. The less charitable explanation is that those responsible knew about the risks but chose to turn a blind eye.

This raises the issue of moral and ethical failure. ACCA believes that this signals a need for a much greater emphasis on professionalism and ethics in business.

We argue that boards need to provide more effective oversight and to be able to challenge management. We urge shareholders to make greater efforts in holding boards to account. Performance-based remuneration needs to support good long-term and sustainable business performance and should take account of the risk involved. Profits involving high risk should attract a lower bonus payments to staff and management than profits that are less risky.

Risk management will have to improve and be more integrated within the business. The risk management function needs to have equivalent status to the front office and boards should take the same interest in risk as they do in business expansion.

We should have learned more from previous financial crises; it is vital that we learn the lessons now.

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