Commission seeks to rein in risky bankers
Michel Barnier wants directors and major shareholders to carry more responsibility and limit the number of boards a director can sit on
A major shake-up of corporate governance in the EU’s financial services sector is under preparation by the European Commission. In a proposal due to be published next Thursday (3 June), the Commission wants directors and large shareholders to carry more responsibility in ensuring that financial firms do not take unjustified risks.
The Commission puts part of the blame for the 2008 banking crisis on inadequacies in the current rules. Its proposal will go further than international reforms shortly to be announced by the Basel Committee on Banking Supervision, a club of rich-country bank supervisors.
Michel Barnier, the European commissioner for internal market, has already indicated his dissatisfaction with current arrangements. Governance “must be strengthened”, he said in a speech earlier this month. “Effective checks and balances within financial institutions would have mitigated the worst excesses,” he argued.
A Commission official told European Voice that Barnier is “firmly convinced of the need for deep reform”. Barnier’s ideas include a limit on the number of company boards a director can sit on (in order to ensure that they devote enough time to their responsibilities) and intensified vetting of board members to make sure that they are not exposed to a conflict of interest.
He envisages large shareholders in a financial institution signing up to a code of good practice that would commit them to play an active and responsible role in the firm’s governance.
The plans, which would apply to banks, insurance companies and other regulated financial firms, will be published in the form of a consultation paper, with legislative proposals following later this year.
Tougher rules on directors’ pay across all sectors of the economy will also form part of the package, since the Commission’s recommendation of April 2009 has not been sufficiently acted upon by member states. Barnier will suggest restrictions on stock options – such as banning directors of listed companies from receiving them, or removing any favourable tax treatment.
In 2011, Barnier will go still further, with a plan to extend some of his financial-services reforms to other sectors.
The European business community is very negative about the plans, which are seen as riding roughshod over national corporate traditions, and limiting firms’ adaptability, posing direct risks to their ability to compete. “For corporate governance, we believe in general that legislation is not the most appropriate or efficient route,” said Jérôme Chauvin of BusinessEurope, the employers’ federation. National codes of conduct were preferable, as they could be implemented faster, adapted to the individual circumstances of each member state, and be amended more easily, Chauvin said. “We would have difficulty supporting a legislative approach across the board.”
The banking sector has repeatedly warned the EU not to leap ahead of other G20 countries in restricting remuneration. The European Banking Federation is urging the Commission to adopt a “principles-based, balanced and flexible” approach in its corporate-governance reforms. It said that this was necessary because banks “strongly differ in size, structure and environment”, and “there is not one structure that would best fit all banks”.
The British Bankers’ Association said that UK banks are already subject to rigorous corporate governance rules. “Shareholders already play a vital role in overseeing the operation of banks and have a say on pay,” it said, pointing out that the UK’s Financial Services Authority “also vets people appointed to the boards of UK banks and can – and does – remove those found to be unsuitable.”