Last month, JP Morgan Chase took a giant leap in corporate governance when it released its internal report on the $6 billion loss scandal.  A task force report, along with a board committee report outlined forward-thinking reforms and structural requirements to enhance compliance.

As I have written on numerous occasions (with Donna Boehme), companies need to empower their chief compliance officers by clarifying his or her authority and independence, and defining a clear reporting line directly to the board of directors.  The JP Morgan reports include several important recommendation to ensure the independence of the chief compliance officer, freeing the chief compliance officer from any reporting obligation to the company’s general counsel, and increasing the stature, compensation and relative role of the chief compliance officer in relation to other C-suite officers.

The JP Morgan report reflects concerns that cut across all industries and are not limited to financial institutions.  The corporate governance recommendations are at the very core of basic corporate governance principles – How does a board ensure timely reporting of relevant information?  How should a board structure its committees?  What role should a chief compliance officer play in the overall compliance structure?

Aside from the structure of the compliance function, the task force identified a number of operational failings, including the failure to keep the board apprised of basic risk information in a timely manner.  The board committee was not presented with any risk review of the portfolio risks, and was not informed of growing trading losses until shortly before the public learned of the $6 billion loss.

The JP Morgan reports underscore the importance of sharing timely information with the board.  The reporting breakdown led directly to a collapse of proper risk management.  Had the committee been provided with proposed trading information, the committee could have exercised appropriate oversight.

In the case of financial institutions, there are often overlapping roles and responsibilities.  Risk, audit and compliance committees often stumble over each other while trying to sort through their role in reviewing financial trading strategies and investment practices.  The internal auditor has a difficult job when reporting lines are clear, but in JP Morgan’s case, the internal auditor faced unique challenges.

Audit and risk committees face significant challenges in today’s corporate governance world.  Given the importance of the audit and risk committee functions, companies need to nominate well-qualified members for these committees who have experience in supervising complex financial transactions.  In addition, board members have to stay current on current regulatory requirements and should maintain close formal and informal contacts with regulators.

On the broader point, JP Morgan’s response to the trading loss scandal is an example of proper and focused response to a substantial governance collapse.  Some cynical observers may brush aside the task force work as a well-calculated public relations campaign.  On the other hand, JP Morgan already has implemented a number of the reforms, and appears to be committed to real change.

Whether these changes are enough to satisfy critics or address the governance problems, time will tell.