On 2 June 2010 the European Commission published a Green Paper on corporate governance in financial institutions and remuneration policies. The Green Paper was published in response to the financial crisis and is part of the European Commission’s commitment to improve corporate governance in financial institutions and to ensure that the interests of consumers and other stakeholders are better taken into account, businesses are managed in a more sustainable way and bankruptcy risks are reduced in the longer term. It states that there is a need to address the fundamental question of whether the existing corporate governance regime is deficient as far as financial institutions are concerned or whether it has been poorly implemented. The paper deals with and raises questions on the following issues:
- How to improve the functioning and composition of boards of financial institutions in order to enhance their supervision of senior management;
- How to establish a risk culture at all levels of a financial institution in order to ensure that long-term interests of the business are taken into account;
- How to enhance the involvement of shareholders, financial supervisors and external auditors in corporate governance matters; and
- How to change remuneration policies in companies in order to discourage excessive risk taking.
In terms of remuneration, the Green Paper notes that recommendations already adopted on the remuneration of directors of listed companies have not been applied by Member States in a uniform or satisfactory manner. As a result, the Green Paper raises questions on the following:
- What additional measures at EU level on remuneration for directors of listed companies could be adopted?
- Should the granting of directors’ stock options be regulated at EU level or should the granting of stock options be prohibited?
- Does the favourable tax treatment of stock options and similar remuneration in certain Member States encourage excessive risk-taking?
- Should shareholders, employees and their representatives play a greater role in establishing remuneration policy?
- Should severance packages (golden parachutes) be regulated or prohibited? Should they only be used to remunerate effective performance of directors?
In the Green Paper the European Commission also announces that it will shortly launch a broader review on corporate governance within listed companies in general and, in particular, on the place and role of shareholders, the distribution of duties between shareholders and boards with regard to supervising senior management teams, the composition of boards and corporate social responsibility.
The European Commission has also published Frequently Asked Questions on the Green Paper and has further complemented it with a staff working document which describes and analyses weaknesses in corporate governance revealed by the financial turmoil.
The consultation closes on 1 September 2010.