In July, the European Parliament (EP) adopted certain corporate governance related amendments to the European Commission proposal for a Directive concerning the encouragement of long-term shareholder engagement and certain elements of the corporate governance statement.
The proposed Directive amends (a) Directive 2007/36/EC on the exercise of certain rights of shareholders in listed companies (Shareholder Rights Directive) and (b) Directive 2013/34/EC on the annual financial statements, consolidated financial statements and related reports of certain types of undertakings.
The amendments were as follows:
New country-by-country tax reporting requirement
The EP inserted a requirement for large undertakings to publish information country by country, on profits or losses before tax, taxes on profits or losses and public subsidies received. The EP also indicated that public interest entities, including listed companies and insurance firms, as well as companies designated by Member States as public-interest entities because of their significant public relevance, should also be required to publish this information.
Shareholder say on director’s pay
The EP also included an amendment to enable shareholders to vote at least every three years on a listed company’s remuneration policy for directors. Member States will be permitted to decide whether the vote on remuneration policy by the general meeting of shareholders is binding or advisory.
The EP indicated that the company's policy on directors' pay should explain how it contributes to the long-term interest of the company and set clear criteria for awarding fixed and variable remuneration, including all bonuses and benefits. The value of shares should not play a dominant role in the financial performance criteria and the share-based remuneration should not represent the most significant part of directors’ variable remuneration.
The EP and the European Council must adopt the same final text. To this end, the EP, the Council and Commission are expected to try to informally reach an agreement on the text of the proposal, paving the way for the amended Shareholder Rights Directive to be formally adopted at first reading by the EP and Council.
The Basel Committee issues corporate governance principles for banks
The Basel Committee has issued revised corporate governance principles aimed at providing a framework within which banks and supervisors should operate to achieve robust and transparent risk management and decision-making and, in doing so, promote public confidence and uphold the safety and soundness of the banking system.
The Committee's revised set of principles supersedes guidance published by the Committee in 2010. The revised guidance emphasises the critical importance of effective corporate governance for the safe and sound functioning of banks. It stresses the importance of risk governance as part of a bank's overall corporate governance framework and promotes the value of strong boards and board committees together with effective control functions.
More specifically, the revised principles:
- expand the guidance on the role of the board of directors in overseeing the implementation of effective risk management systems;
- emphasise the importance of the board's collective competence as well as the obligation of individual board members to dedicate sufficient time to their mandates and to keep abreast of developments in banking;
- strengthen the guidance on risk governance, including the risk management roles played by business units, risk management teams, and internal audit and control functions (the three lines of defence), as well as underline the importance of a sound risk culture to drive risk management within a bank;
- provide guidance for bank supervisors in evaluating the processes used by banks to select board members and senior management; and
- recognise that compensation systems form a key component of the governance and incentive structure through which the board and senior management of a bank convey acceptable risk-taking behaviour and reinforce the bank's operating and risk culture.