The Financial Stability Board ("FSB") has launched a peer review on the implementation of the G20/Organisation for Economic Co-Operation and Development ("OECD") principles of corporate governance which were updated in September 2015.
The objective of the planned peer review is to take stock of how FSB member jurisdictions have applied the corporate governance principles to publicly listed, regulated financial institutions, identifying effective practices and areas where good progress has been made while noting gaps and areas of weakness.
The results will also inform work that is underway to revise the OECD's assessment methodology that is used by the World Bank as the basis for country assessments undertaken as part of its Corporate Governance Report of Standards and Codes initiative and will contribute to governance-related aspects of the FSB's broader work on conduct for financial institutions.
The FSB invites feedback from financial institutions, industry and consumer associations as well as other stakeholders on the areas covered by the peer review. This could include comments on:
- the design of corporate governance frameworks, including legal and regulatory powers, to promote transparent and fair markets, and the efficient allocation of resources;
- how the corporate governance framework should protect and facilitate the exercise of shareholders' rights and ensure the equitable treatment of all shareholders, including minority and foreign shareholders;
- ways in which the corporate governance framework can recognise the rights of stakeholders and encourage active co-operation between the financial institution and stakeholders in creating wealth, jobs, and the sustainability of financially firms;
- how the corporate governance framework can ensure that timely and accurate disclosure is made on all material matters regarding the financial institution, including its financial situation, performance, ownership, and governance; and
- how the corporate governance framework can ensure the strategic guidance of the financial institution, the effective monitoring of management by the board, and the board's accountability, including to the shareholders.
Compliance Tips and Next Steps
The G20/OECD principles are the supranational base-plate for many of the sector-specific approaches to corporate governance including the Basel Committee on Banking Supervision Corporate governance principles for banks updated in July 2015, the OECD Guidelines for Pension Fund Governance published in 2009 and International Association of Insurance Supervisors Principles on Corporate Governance of Insurers.
The original OECD principles of corporate governance date back to 1999 and have been through several iterations after both corporate scandals and the financial crisis. The most recent update maintains many of the principles from earlier versions as the vital components of an effective corporate governance framework while introducing some new issues and bringing greater emphasis or additional clarity to others.
The principles are based on six areas:
- ensuring the basis for an effective corporate governance framework
- the rights and equitable treatment of shareholders and key ownership functions
- institutional investors, stock markets and other intermediaries
- the role of stakeholders in corporate governance
- disclosure and transparency, and
- the responsibilities of the board.
The FSB has consistently promulgated that effective corporate governance is critical to the proper functioning of the financial sector and financial stability more generally. In particular, it is seen as playing a key role in the resiliency of financial institutions and mitigating systemic risks.
There are two main elements for firms to consider with the launch of the corporate governance peer review. The first regards lobbying. The practical implementation and ramifications of the G20/OECD corporate governance principles set the high level scene for the supervisory approach to and regulatory expectations of corporate governance frameworks. Firms have the ideal opportunity to consider whether or not they would like to influence the shape of both the future principles and how the principles are interpreted in practice.
Lobbying is not a quick-win scenario but rather should be considered a medium- to long-term investment. For any strategy to be successful firms need to have both the resources and a deep understanding of the evolving stance and approach taken by regulators around the world.
That specifically involves considering not only the rules and regulations being made at the jurisdiction level but also the policymaking by the supranational bodies (such as FSB, OECD as well as Basel and the IMF) which set, and comment on, the international regulatory framework.
The other element for firms to consider is that the FSB intends to use the results of the peer review to contribute to governance-related aspects of its broader work on conduct. As part of the work for any response to the FSB firms may wish to review the details of a FSB roundtable hosted in May 2016 (and published in July 2016) on compensation practices to share experiences and lessons on the use of compensation tools to address misconduct in banks.
There was a wide-ranging discussion but much of it pertinent to the approach to corporate governance in a firm. On the specific linkage between compensation and misconduct, banks are at different stages in this process, but practice seems broadly to be converging and focusing on certain key approaches.
While firms recognise that compensation and conduct are linked directly, and are increasingly looking to actively manage conduct via compensation tools both ex ante (explicit performance targets and encouragement of positive behavior) and ex post (ensuring appropriate consequences for poor behavior), they also noted that compensation tools should not be overemphasised.
More generally, banks are focused on turning values into actions and ensuring that lines of business 'own' conduct risk. At many banks codes of conduct set the framework for expected behavior, and explicit expectations surrounding roles and responsibilities are emphasised.
There has been steady progress linking performance objectives to the values or ethics reflected in codes, and increased weight is being given to related assessments of risk management and conduct in year-end performance assessments. Importantly, there is also recognition that other values may pull away from these goals; for example, conduct and profitability drivers may clash.
Other points included the importance of 'tone from the top' in signaling where to place the balance between performance and customer and counterparty interests and the need to allow time to embed already issued regulations and guidance.
A number of banks noted that they would welcome more guidance from regulators on 'what good looks like' and that they welcome initiatives such as roundtables to share examples of better practice. Supervisors have an important role to play in identifying better practices, conveying them to the industry as well as promoting consistency across markets. To that end, the FSB has summarised the detail of the topics discussed at the roundtable and has asked for any feedback or comments by 21 August 2016.
Firms may wish to reference the consistency across markets point in particular as part of any response to the peer review of the G20/OECD corporate governance principles. The FSB has asked for feedback to be submitted by 9 September 2016. The FSB said responses will be analysed and discussed later in 2016 with the aim of publishing the peer review report in early 2017.