Strategies in Response to the Global Financial Recession Essay

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Governance Following the Financial Crisis

Principles of Good Governance Following the Global Financial Crisis

Many high profile companies suffered a downfall following the 2008 global financial crisis. The meltdown spanned across various nations including the top world economies. Accusations on the cause of the downfall pointed to the failure by institutional investors inadequate monitoring of investments. In 2007, the collapse of the subprime mortgage market in the U.S. marked the beginning of the financial crisis. The escalating default rates and the decline in housing prices contributed to the economic meltdown. Companies such as AIG, Freddie Mac, Lehman Brothers, and Freddie Mae filed for bankruptcy protection (United Nations Conference on Trade and Development [UNCTAD] 2010). A series of government bailouts followed various financial institutions including HBOS, Citigroup, and Washington Mutual, amongst others. Key policy makers fault weaknesses in corporate governance that explain the financial crisis.

Following the adverse economic implications, top world economies commonly referred to as the G20 convened a situation meeting in Washington D.C. The meeting endeavored to create an 'Action Plan' for the completion of high priority actions in addressing the crisis. Recommendations from the meetings delved in the appointment of independent experts to look into the case with consultations with various economies and existing bodies (Watson, Vasudev 2012). Focus of the recommendations pointed to various activities such as the identification of the sources of systematic risks engraved in financial systems. Other activities included capacity development to address the crisis and a review of compensation practices about innovation and risk-taking incentives.

World major economies, including the United Kingdom, committed to utilizing the recommendations and principles to foster reliable corporate governance to avoid any future occurrence (UNCTAD 2010). Several consultations and discussions with relevant stakeholders reached various recommendations. For the UK case, board size including the qualification and composition of members reiterated the need for an efficient board.

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The role of institutional stakeholders heightened the need for the engagement and communication to foster transparency and efficiency within organizations.

Risk management occurred as a significant principle following the financial crisis. The concentration of this aspect entails corporate governance. Most risk models utilized by financial institutions failed due to various technical problems. The behavioral side of risk management engages the use of the information within the organization. Further, it engages transmission of information to the board for oversight. Recently, attention on this principle focuses on internal controls that relate to financial reporting. It supports the need for external checks reporting.

Remuneration and incentive systems play a crucial role that influences the sensitivity of financial institutions. Recommendations in this aspect endeavored to monitor the company performance with the remuneration for top executives and the board closely. Good governance encourages matching compensation plans with the performance of the company.

Low-level incentive systems have encouraged outsized bets and risk taking. The action plan in this aspect entails a culture of mutual respect and shared responsibility. The principle encourages increased awareness of the status of risk management among staff members that explained the economic meltdown. In the end, strong support for an incentive compensation model should closely relate to the profitability of the firm and the interests of shareholders.

Setting the risk policy as a clear role of the board eliminates the blame game over assigned functions and responsibilities. Poor board oversight encourages distorted incentive plans and the deficiencies in risk management. Having the board to lay out clear strategies over this issue lessens the burdens of failed companies. Risks associated with interest and exchange rates affects boards of both financial and non-financial bodies. Other associated risks include investment and outsourcing risks. The lack of board performance explained the impact on companies including Siemens, Boeing, Airbus, and….....

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