Change Remuneration Packages to Drive Culture Reform, says HKMA Head

Banks' remuneration packages should be restructured to act as a driver for good corporate culture and values, Hong Kong's top banking regulator said. Norman Chan, the chief executive of the Hong Kong Monetary Authority ("HKMA") said banks should establish an incentive system which is well-aligned with corporate culture, so that remuneration and corporate values are closely linked. 

In a recently released transcript from a closed-door regulatory event in New York last month, Chan said that while most banks have put in place a board-level remuneration committee already, it is often tasked with monitoring the remuneration packages of senior management or determining annual bonuses only. 

"In order to put through the culture and values to the middle management and frontline staff effectively, the incentive system must be structured in such a way that it can mobilise all staff to observe the corporate culture and values," he said. 

Chan said that to ensure the credibility and independence of such an incentive system, the remuneration committee should be chaired by an independent non-executive director. 

He said the HKMA has been supportive of moves to develop and empower independent non-executive directors in Hong Kong, including organising training programmes and exchange sessions. 

The incentive system should also be reformed, he added, noting that a customer-centric culture will only be empty talk if profit maximisation continues to be the goal, rewarding only those who meet or exceed sales targets. 

"Our aim is that banks will promote governance and risk management standards with self-discipline and self-initiation, and play an active role in promoting the reform of bank culture," he said. 

Many financial institutions have put the cart before the horse in the pursuit of profits, he said, caring only whether their behaviour will breach any rules and regulations, or whether they will be caught. 

Profit-Driven

"They think that as long as they have not violated any rule and regulation technically, they are free to do whatever they want, with no moral limits. This not only violates the basic 'customer-centric' principle, but also fails the expectation on the social responsibility of banks as compared with other industries, since their business model is to make profits based on the public’s savings and trust," he said. 

Chan said a reform of shareholders' short-term investing mindset would also be necessary. 

"In recent years, some asset managers and hedge funds focusing on short-termism have been pressuring bank boards and management to take a very short term view to maximise profits, which will jeopardise banks' development and reputation in the long run," he said.

Chan said the HKMA would keep working on reforms to improve culture and maintain close dialogue with the industry and other regulators, including overseas regulators, in considering the next steps. 

"We all have a common vision when it comes to issues concerning the ethics and corporate culture of banks: there is a pressing need to enhance banks' ethical standards but it cannot be done by simply implementing more stringent rules and regulations," he said. "We need to start from the fundamentals, i.e. bank culture."

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North Asia editor for Thomson Reuters Regulatory Intelligence. He is based in Hong Kong.