The impact of the crises began to diminish. Still, all key players, including top executives, regulators, and investors, have much to learn from global financial failures. The steering group of the Organization for Economic Co-operation and Development (OECD) has published a report entitled Corporate Governance Lessons from the Financial Crisis. This Report concludes that among the main contributors to the financial crisis are flaws and weaknesses in corporate governance arrangements. When put to the test, corporate governance routines failed their purpose of safeguarding against excessive risk-taking at several financial services institutions.

Other key contributors to global financial crises include failures in transparency, failures in lending standards; failures in prudential standards; failures in risk management.

When it comes to compensation for top executives, the real problem was not the amount they receive; it’s how companies pay them. Bad bonus culture encourages short-term thinking: make as many offers as you can this year and get a bigger bonus! That approach pushed executives to focus on achieving short-term goals at the expense of sustainable growth goals.

Most financial institutions link compensation to quarterly performance, encouraging short-term bets. When the bets win, the executives get the rewards, but when the bets fail, as happened in the last financial crisis, the executives who took the risks don’t have to pay back their fat bonuses. Executives, in most cases, were no longer gambling with their own net worth. It was the shareholders who took the hit. Thus, executive greed acted as fuel thrown on the fire and contributed to the fiery global financial crisis. The correct approach if we are going to prevent the financial system from being battered again by top executive greed is to maintain a partnership between top executives and tie their net worth to the well-being of organizations. As a result, they would be cautious about taking big risks and discourage the bad practice of running after short-term gains. Additionally, we need to replace bonuses with better, longer-term compensation, such as deferred cash pay and restricted stock.

The directors of the troubled institutions appear to have provided only cursory oversight to check the greed of top executives. The boards of the collapsed companies bear all the responsibility. Every month they see the numbers. They are also responsible for compliance with regulations. And they set compensation packages for top executives. However, the troubled companies simply checked the boxes for good corporate governance in their annual reports. In other words, these organizations presented an obvious example of cosmetic corporate governance to mislead different stakeholders, including investors, rating agencies and regulators.

The current global financial crisis has shed light on how poor risk management could lead to catastrophic outcomes. Risk management systems have failed in many cases due to corporate governance procedures rather than inadequate computer models alone.

With the advent of new products, such as sophisticated derivatives and certificates of deposit, they posed unknown risks. Risk management may not have been up to the task, as many of the standard quantitative models and the users of these models used to misjudge the systematic nature of risks. To some extent, this was due to product complexity and over-reliance on quantitative analysis. Unfortunately, many risk assessments were wrong, including those provided by rating agencies.

Directors of failed financial institutions should have a better understanding of the risk involved when making decisions related to sophisticated products such as derivatives. The reality is that many board members had inadequate knowledge about fancy new products and were probably embarrassed to show that they lacked adequate knowledge! This is where director education and guidance fails as best corporate governance practice. Continuing education is important to ensure that directors are familiar with all aspects of the company’s affairs, with a particular focus on risks. Each director must receive personalized orientation programs in the areas in which he or she lacks adequate knowledge in order to effectively perform the fiduciary oversight role.

Finally, the concept that in bad times companies would be more interested in supporting their profitability and therefore would not have time for corporate governance is irrational. Integrity cannot be compromised because corporate governance is not seasonal, it is for all time and must be embedded in senior executives and corporate directors. Companies should not neglect corporate governance in bad times. It’s like a muscle, you have to exercise it or it atrophies