Editorial | Listen to Richard Byles

Richard Byles, the governor of Jamaica’s central bank, may have addressed the broad principle, without specific entities in mind. But his call last week for strong boards at financial companies was a sobering reminder of the potential for the amplification of systemic risks in the absence of good and engaged governance.

Indeed, this proposition is a fundamental truism, applicable not only to the financial sector but the entirety of the corporate ecosystem. The financial sector, though, faces special vulnerabilities, with greater risks for widespread economic contagion as Jamaica discovered in the mid-1990s when a toxic mix of loose fiscal policies, weak regulatory oversight, and unrestrained corporate behaviour led to the collapse of a swathe of banks, near-banks, and insurance companies.

The Government’s bailout of the sector, during the so-called Finsac years, cost taxpayers over 40 per cent of GDP, causing a near doubling of the public debt from just over 70 per cent of GDP, from which it took Jamaica three decades to recover.

Since then, as Mr Byles noted at a conference of Caribbean chief financial officers (CFOs), Jamaica has significantly improved – and is still refining – its regulatory mechanisms, while the Government has enhanced its macroeconomic management. Indeed, the island’s financial architecture is significantly more resilient than in the 1990s.

However, while there appears to have also been improvements, it is not clear if, or how much, the quality of boards has matched the gains on the regulatory front. In that regard, and against the backdrop of Mr Byles’ observations, it might be useful if the Bank of Jamaica supported serious academic/technical research by one of the island’s academies into the make-up and the competencies of the boards of domestic financial companies to determine their capacity to provide the level and quality of governance and oversight in an increasing complex and challenging global environment.

While the now-collapsed brokerage house Stocks and Securities Limited (SSL) may not have been big enough to cause systemic problems in the financial sector, the public disclosures about the company suggest that it suffered as much from weak governance oversight as from regulatory failures. Further, two years ago, significant losses on overseas investments by one financial company had sufficient ripple effects in two other related entities to affect their quarterly profit and loss accounts. It is not known what analysis underpinned those ultimately risky investments and whether the process by which they were made were subjected to robust review and the people who sanctioned them, including board committees, were held to account.

RISKS

In his remarks to the CFO conference, Mr Byles rightly highlighted the increasing range of risks that confront nowadays, from those that, in the past, would be considered normal course of business to the increasingly frequent shocks from geopolitics and climate change.

For instance, in the last five years, Mr Byles pointed out, Jamaica has been hit by the COVID-19 pandemic, the Russia-Ukraine war, Hurricane Beryl in 2024, the Category 5 storm Hurricane Melissa last year, and now, the war in the Gulf after the United States and Israel attacked Iran.

How countries and their financial institutions are impacted by such shocks will depend on the quality and outcomes of their macroeconomic policies, and the firm level, the prudence of their boards. But it is not only in periods of global shocks that the firms need a high calibre of governance. When boards fail at, or are lax in, their fiduciary obligations and operating executives are unchecked, it is often an opening to crises.

Or, as the Bank of Jamaica (BOJ) governor put in his speech to the CFOs: “The board is ultimately responsible for approving strategy, defining and overseeing risk appetite, ensuring prudent risk management, and holding senior management accountable. One of the most important — and sometimes uncomfortable — elements of strong governance is constructive tension. Healthy institutions benefit from boards that challenge management, ask difficult questions, and enforce accountability. Unchecked consensus weakens institutions. Constructive challenge strengthens them. This dynamic protects depositors, shareholders, and the broader financial system.

“Globally, we have seen the consequences of weak corporate governance: erosion of public trust, higher funding costs, capital strain, and, in some cases, regulatory intervention.”

SYSTEMIC ITERATION

The scenario painted by Mr Byles had, in part, its systemic iteration in Jamaica in the 1990s, leading to Finsac’s (Financial Sector Adjustment Company) intervention and more than two decades of economic derailment. Internationally, it was on display in the financial meltdown and global recession of the 2008 and 2009, which was triggered by the failures in the executive offices and boardrooms of banks and financial companies that gave rise to the subprime crisis.

Executives, starting in America, gave easy and risky mortgages, fuelling a housing bubble, then packaged those loans into increasingly esoteric mortgage-backed securities (MBS) and collateralised debt obligations (CDO), which fell apart when the mortgaged bubble burst. Hundreds and thousands of people lost their homes and major banks and investment houses, collapsed or were bailed or were gobbled up in the raft of rescue mergers.

Several studies in the United States in the aftermath of the collapse revealed that financial institutions at the centre of the subprime crisis suffered monumental failures of governance, with boards falling short in their oversight of risk management– a matter highlighted by Mr Byles in his speech as critical for CFOs and boards.

Often, boards didn’t understand the complexities of the securities executives were selling and buying, so CEOs and CFOs went unchallenged. In many instances, board members were too busy or otherwise too occupied to pay attention. They were on too many boards. They also approved pay structures and incentivised short-term performance, and, therefore, elevated risk-taking, over long-term stability.

Years after the fallout, studies showed that financial US institutions were slow in making adjustments to boards to fix the pre-crisis failures. Jamaica should test its situation.