THE EUROPEAN Commission has raised the prospect of bank board members being restricted to holding three directorships at any one time as part of a far-reaching plan to strengthen the governance of financial institutions.
As the EU executive moved to bring credit rating agencies within the ambit of the nascent European Securities and Markets Authority (ESMA), internal markets commissioner Michel Barnier said agencies should be empowered to issue unsolicited ratings.
Mr Barnier published a Green Paper discussion document yesterday in which he calls for fundamental governance reforms in the financial sector. His paper suggests the chief risk officer in banks should have the same status as the chief financial officer and says co-operation between external auditors and supervisory authorities should also be strengthened.
“I am convinced that true crisis prevention starts from within companies. If we are to prevent future crises, financial institutions themselves need to change,” Mr Barnier said.
The Commission has initiated a public consultation on the Green Paper, which is open until September 1st, and it plans to publish legislative proposals next year. The paper says weak governance in banks played “a role” in the financial crisis.
“Board supervision and control of management was insufficient; risk management was weak; inadequate remuneration structures for both directors and traders led to excessive risk-taking and short-termism and shareholders did not exercise control over risk-taking in the financial institutions they owned,” it says.
“These weaknesses played a role in the crisis, and timely and effective checks and balances in governance systems would help prevent any future crisis.”
Given the increasing complexity of financial institutions’ structure and activities, the paper says ways to improve the efficiency of directors’ work should be examined.
“Limiting the number of boards on which a director may sit should be considered to enable them to devote sufficient time to performance of their duties.”
Asking whether the number of boards on which a director may sit should be limited to “no more than three”, the paper also asked whether an external evaluator should assess the functions of bank boards. “Should the result of this evaluation be made available to supervisory authorities and shareholders?” it asks.
The paper says it might be possible to create “a duty for supervisory authorities to check the correct functioning and effectiveness of the board of directors”. It goes on to say that it “seems necessary” for the supervisory authorities to extend the “fit and proper test” for future directors to cover technical and professional skills, including risk, as well as individual qualities.
With credit rating agencies blamed by certain EU leaders for fanning the Greek debt crisis, Mr Barnier said rules to strengthen supervision would cover Fitch, Moody’s and Standard Poor’s.
