Corporate Governance Mechanisms and their Influence on Financial Stability

There is an intermediate relationship between financial stability and corporate governance. Businesses are not under any mandate to consider financial stability unless required to do so by law or the relevant regulation. That applies in many areas: fears about financial stability are what drive the regulation of auditors or credit rating agencies. Governance failures in large financial institutions and other groups have suggested that it leads to systemic risks. In addition to the rules that apply directly to the firms that triggered the crisis, three areas in which corporate governance rules need to be made stronger to avoid experiencing again a systemic crisis are on the political agenda: management compensation and the role of the CEO as well as the makeup of the boards, and accounting and valuation issues. The paper does not specify whether the current soft regulation systems would be adequate or if these provisions would need to be implemented through hard law