- The banking crisis has raised questions about boards’ risk oversight. Evaluating directors’ risk-management and industry expertise may help investors gauge how well banks are positioned to navigate current market volatility.
- We found that 39% of the 74 banking constituents of the MSCI World Index lacked independent directors with risk-management expertise, while 18% had no independent directors with banking-industry expertise, as of March 2023.
- The level of independent risk-management expertise on bank boards varied widely across the Americas, APAC and EMEA, suggesting important regional differences in risk-oversight capabilities.
Investors with exposure to the banking industry may seek to assess the risk-management oversight practices of these companies within their portfolios. This could help them determine which banks may be well-placed to cope with current market conditions and which may be less prepared.
Research about the 2007-2009 global financial crisis highlighted the importance of risk management for banks.1 According to best corporate governance practices for banks, directors should oversee the risk-governance framework, including the responsibilities for risk management and control functions.2 This involves regular review of key policies and controls with senior management and with the heads of the risk management, compliance and internal audit functions.
Not only skills — but the right skills
One key question is whether the board has the right level of skills to effectively fulfil this oversight role. First, investors may look at the level of general risk-management expertise on the board. To determine whether a director has this expertise, MSCI ESG Research seeks evidence of previous executive-level experience at one or more companies where a director’s biography includes a specific reference to risk management. Second, investors may wish to assess the level of relevant industry expertise. To determine whether a director has this expertise, MSCI ESG Research seeks evidence on whether a director has served as an executive at a company in the same industry as the board on which they serve.
Due to the specific nature of risk management at banks,3 a board with a high number of risk-management as well as industry experts may be better positioned to fulfil its oversight function compared to other bank boards.
Skills and independence play vital role in risk oversight
Investors may be interested in whether independent directors have the right skills to help oversee a bank’s risk management, as these directors can play a vital role in providing oversight and constructively challenge senior executives, including on the management of risks.4
As the exhibit below shows, approximately 39% of banks in the MSCI World Index did not have any independent directors5 with risk-management expertise, as of March 2023. At the same time, approximately 18% of banks in this index did not have independent directors with industry expertise.
Independent directors at banking constituents of the MSCI World Index
Note: The MSCI World Index captures large and mid-cap representation across 23 developed markets. Our analysis includes directors at all 74 bank constituents of the MSCI World Index who were classified as independent of management under our methodology. In the case of dual board structures, only members of the supervisory board were included. Classification of companies as part of the banking industry is based on the Global Industry Classification Standard (GICS®), the global industry classification standard jointly developed by MSCI and S&P Global Market Intelligence. Data as of March 2023. Source: MSCI ESG Research
Number of independent risk-management experts varied drastically by region
Our analysis also found important regional differences in the number of independent risk-management experts on bank boards. A high level (56%) of banks incorporated in APAC did not have any independent risk-management experts on the board, compared to banks in the Americas (30%) and EMEA (36%). APAC-incorporated banks also had the lowest level (6%) of boards with three or more independent risk-management experts, compared to the Americas (13%) and EMEA (12%). These trends suggest limited independent risk-oversight capabilities at APAC-incorporated banks, compared to other regions.
Independent directors with risk-management expertise by region
Note: Our analysis includes directors at all 74 bank constituents of the MSCI World Index who were classified as independent of management under our methodology. In the case of dual board structures, only members of the supervisory board were included. Regional classification was based on where banks were incorporated. Americas N=23, APAC N=18, EMEA N=33. Percentages do not add up to 100% due to rounding. Data as of March 2023. Source: MSCI ESG Research
Correction: The second exhibit and accompanying text were updated in May 2023 to correct a data manipulation error that occurred in the original version of this blog from April 2023.
Based on our analysis, 39% of banks in the MSCI World Index lacked independent directors with general risk-management expertise and 18% lacked independent directors with industry expertise. These findings suggest potential weaknesses in board-oversight capabilities, which may warrant further analysis by investors, especially in current market conditions.
1See, for example, “Corporate Governance and the Financial Crisis: Key Findings and Main Messages.” OECD, June 2009.
2“Basel Committee on Banking Supervision, Guidelines — Corporate Governance Principles for Banks.” Bank for International Settlements, July 2015.
3See, for example, “Corporate Governance and the Financial Crisis: Key Findings and Main Messages.” OECD, June, 2009.
4“Basel Committee on Banking Supervision, Guidelines — Corporate Governance Principles for Banks.” Bank for International Settlements, July 2015. For a detailed discussion of the relationship between director independence and director skills at banks please refer to “The Corporate Governance Lessons from the Financial Crisis.” OECD, February 2009.
5Throughout our analysis, we refer to directors who are independent of management under our ESG Ratings methodology.