Promoting Good Governance in Central Banks: The Role of Non-Executive Directors
Examine the role of non-executive directors in promoting good governance and curbing corruption in Central Banks.
Central banks are uniquely complex institutions: they have, at the same time, a sovereign, complex public policy making mandate (the central) and an equally complex balance sheet (the bank). This makes central banks challenging organizations to manage. Oversight Boards of centrals banks play a critical role in ensuring sound governance of central banks, in particular by establishing independent internal oversight over the central bank’s financial and other operations. As the highest decision-making body of their central bank, Oversight Boards are responsible for overseeing executive management and adopting robust policies in respect of internal controls, risk management, audit and financial reporting.
To ensure that the Oversight Boards are sufficiently independent from executive management, it is imperative that (i) non-executive directors have a clear majority in the Board (quantitative aspect), and (ii) that the non-executive directors are individually and collectively sufficiently “fit” (and, of course, “proper”) to oversee executive management (qualitative aspect). Many countries however struggle with selecting the best people for non-executive director positions for their central banks. Strong eligibility criteria enshrined in the central bank law are critical in defining the selection threshold for non-executive directors. However, to date, 84% of all central bank laws of the IMF membership have weak-to-nonexistent eligibility criteria. A few central banks have experimented with innovative selection processes to fill their non-executive directors’ positions. In many countries, however, the selection of those directors is also influenced by broader political and other contextual factors, which may hamper the meritocratic nature of the selection process.
Areas for proposal submission:
- What can central banks do to get the most out of their non-executive directors?
- How can central banks select the best possible non-executive directors for their Oversight Boards?
- What would be the best possible eligibility criteria for the central bank law? How do we balance competence and diversity?
- In addition to legal requirements, which selection approaches and procedures are conducive to selecting the best possible candidates?
- How can we make good practices for non-executive directors widespread?
Risk Identification: The typical misuse and corruption risks in central banks are (i) theft of official foreign reserves, (ii) theft of banknotes in local currency, (iii) favoritism in lending operations and other financial transactions, (iv) abuse of influence in regulatory decisions, and (v) abuse in procurement processes. A major factor that can contribute to these risks is an “imperial” executive management style leading to overrides in internal controls.
Risk Assessment/Impact: Past examples have demonstrated that corruption in central banks can cost percentages of national GDP.
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