The European Commission published a Green Paper on corporate governance in financial institutions and an accompanying Staff Working Document in June 2010. The Green Paper raises questions about corporate governance in financial institutions specifically but also includes provisions about remuneration in listed companies generally. This note highlights the key themes raised in the Green Paper and Linklaters’ response to it.
Corporate governance in financial institutions
The Green Paper covers a broad range of corporate governance topics, such as the composition and functioning of boards, the role of shareholders, auditors, risk-related functions and conflicts of interest. Some of the questions posed seem to challenge fundamentally some current conceptions of the relationship between shareholders, directors and their companies. Specific questions raised include the following:
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Should the civil and criminal liability of directors be reinforced?
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Should a specific duty be established for the board of directors to take into account the interests of depositors and other stakeholders (“duty of care”)?
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Could the functioning and efficiency of boards be improved by increasing the number of women and individuals with different backgrounds?
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Should the number of boards on which a director may sit be limited?
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Should external evaluations be made compulsory with the results being published to shareholders?
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Should it be compulsory to set up a risk committee?
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Is shareholder control of financial institutions still realistic and what would improve shareholder engagement in practice?
Although the Green Paper does not make specific proposals for reforms, its general approach and tone together with that of the Staff Working Document suggest that the Commission believes legislative measures are needed to tighten up corporate governance in the EU. This would run counter to the approach of allowing corporate governance to be based on codes and “comply or explain” principles, which currently exists in many member states.
Remuneration
In the Green Paper, the European Commission notes that implementation by Member States of its 2009 Recommendations (on the remuneration of executives of listed companies and on remuneration in the financial services sector) has been “neither uniform nor satisfactory”.
The European Commission indicates that it is considering the need for legislative measures to regulate the remuneration of the directors of listed companies in general and seeks views on whether additional measures are needed and, if so, what form they should take. Specific questions include:
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Whether stock options and similar types of remuneration encourage excessive risk-taking and need to be regulated or prohibited?
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Whether the role of employees in establishing remuneration policy should be strengthened?
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Should severance packages (“golden parachutes”) be prohibited?
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Should the variable elements of remuneration in financial institutions that have received public funding be reduced or suspended?
Linklaters’ response
In summary, Linklaters takes the view that given the wide variety of financial institutions, it will not be effective to determine one set of new detailed rules applicable to all those institutions.
The effective implementation of corporate governance principles, which exist in a broad variety in many member states, is better achieved through regulatory supervision based on broad principles. These include, where necessary, the coordination of regulatory activities across member states.
The above view is based on our assumption that in most member states the supervisory authorities already have sufficient powers to exercise the required supervision on financial institutions. In particular the assessment and pre-approval of individuals carrying out governance functions within financial institutions should be an effective instrument to achieve a proper functioning of decision-making bodies in financial institutions.
Furthermore, some of the conclusions and observations in the Green Paper appear not to be exclusive to financial institutions such as the questions of conflicts of interest, the powers of boards of directors to exercise effective control over senior management and the discussion on the role of shareholders. Consequently, they should not form the subject of a singular legislative proposal directed at financial institutions only.
Corporate governance in listed companies generally
The Commission has also stated that it will soon launch a broader review on corporate governance within listed companies. It is likely that the views expressed by the Commission and its staff in the Green Paper and the Staff Working Document will be a basis for this broader review. Linklaters will follow these developments and keep you informed.
Contacts
For further information please contact Peter Goes (Tel: +312 0799 6270, peter.goes@linklaters.com), Lucy Fergusson (Tel: +44 207 456 3386, lucy.fergusson@linklaters.com), or your usual contact at Linklaters.
Related materials
To read Linklaters' full Submission, please click here
European Commission Green Paper - Corporate governance in financial institutions
Green Paper Commission Staff Working document
