What is governance?
The concept of governance refers to the system by which an institution is managed: organisational structures, division of duties and powers, the strategy, the policy and processes and internal control functions. Governance includes amongst other things the standards and principles related to:
- determination of the institution's objects, strategies and risk tolerance;
- the manner in which the institution is organised;
- the division of responsibilities and powers;
- the conditions by which the key players are bound;
- the reporting lines within the organisation and the information passed along these lines;
- the organisation of the internal controls (including the organisation and operation of the control function); and
- the policy on remuneration and outsourcing.
Implementation of these principles does not merely involve the design of the governance system. Sound operational management is also dependent on the operation of this system.
The implementation can take account of the nature, size and complexity of the institution. This means that although all institutions have to fulfil the requirements some may need to take less far-reaching measures than others.
It is important for institutions to have an understanding of the risks and how they are controlled within the organisation.
This means that an institution must identify the risks and then take adequate risk management measures. Risk management is the process designed to obtain reasonable certainty that the objectives of the organisation are achieved. Examples of risk management measures include segregation of duties, frameworks and guidelines, processes and procedures, etc.
Governance is important to DNB because it provides the basis for controlled operational management.
If the top of an undertaking is not properly organised, it is certain that management of the risks in the operational processes will not be either. Good governance thus also helps to protect the interests and rights of shareholders, creditors, policyholders and other interested parties. The protection of stakeholders’ interests depends crucially on the adequacy of the undertaking’s governance.
The operational management of financial institutions must be not only sound but also ethical in order to control integrity risks and thus to safeguard the integrity of the financial sector as a whole.
The various elements of a governance system are addressed on separate pages. On each page you will find more information and links to relevant documents.