By Stephanie Tan Yen Li and Katie Lee Sheah Tsan, Bank Negara Malaysia

Introduction
Effective corporate governance by financial institutions is critical to strengthen public trust and confidence in the financial system. Recent instances of conduct failures present a major threat to this continuing trust, as they can be seen as a reflection of underlying weaknesses of governance in financial institutions. Recognising that addressing misconduct calls for a multifaceted approach, a number of regulators have begun to focus on reinforcing ethical and professional behaviour in the financial sector. This article reviews developments in the Bank’s approach towards influencing behavioural outcomes in the domestic financial industry, focusing on both contextual and individual factors that can affect behaviour.

The Evolution of Financial Reforms
Approaches to corporate governance have traditionally been characterised by a focus on the strength of systems and processes within financial institutions. Requirements relating to board composition, disclosures and control functions endeavour to ensure that governance structures form sound foundations for effective management of risks within organisations. However, the global financial crisis revealed that failures were also driven by behavioural deficiencies.

This has led to a series of corporate governance reforms that form part of the global regulatory reform agenda. In addition to raising the bar with respect to corporate governance arrangements, these reforms also introduce a focus on the behavioural aspect of governance. Of significance are efforts in aligning incentive systems with prudent risk-taking behaviour in financial institutions. While this continues to gain traction, widely publicised cases of retail banking fraud and rigging of key benchmark rates in major financial systems underscore the need for sharper efforts to tackle misconduct risk.