Tag Archives: Corporate governance

Remuneration policies in the financial services sector

Remuneration policies in the financial services sector

Outline of the Community (European Union) legislation about Remuneration policies in the financial services sector

Topics

These categories group together and put in context the legislative and non-legislative initiatives which deal with the same topic.

Internal market > Financial services: general framework

Remuneration policies in the financial services sector

Document or Iniciative

Commission Recommendation 2009/384/EC of 30 April 2009 on remuneration policies in the financial services sector.

Summary

This Recommendation sets out general principles applicable to remuneration practices in the financial services sector which aim at avoiding any excessive risk-taking in this sector, particularly by banks and investment firms.

The Recommendation applies to:

  • financial undertakings having their registered office or their head office in the territory of a Member State;
  • remuneration of those categories of staff whose professional activities have a material impact on the risk profile of the financial undertaking.

The Recommendation does not apply to fees and commissions received by intermediaries and external service providers in case of outsourced activities.

Remuneration policy

Remuneration policy should be in line with the business strategy, objectives, values and long-term interests of the financial undertaking, such as sustainable growth prospects or the protection of clients and investors in the course of services provided.

The remuneration policy should be the result of a balance between fixed and variable components. The fixed component should represent a sufficiently high proportion of the total remuneration allowing the undertaking to operate a fully flexible bonus policy.

The structure of the remuneration policy should be updated regularly so that it corresponds to the development of the company.

In the event that remuneration is performance-related, it should be evaluated according to current or future risks without omitting to take into account the cost of the capital employed and the liquidity required.

The procedures followed should be clear and documented and internally transparent.

The (supervisory) board should establish the general principles of the remuneration policy of the financial undertaking and be responsible for its implementation.

Control functions, human resources departments and external experts should also be involved in the design of the remuneration policy.

Remuneration policy should, at least on an annual basis, be subject to central and independent internal review by control functions for compliance with policies and procedures defined by the (supervisory) board.

Disclosure

Information on the remuneration policy should be disclosed by the undertaking in the form of an independent statement or a periodic disclosure and should list:

  • information on the decision-making process which defines the remuneration policy chosen;
  • information on linkage between pay and performance;
  • performance measurement criteria;
  • the performance criteria on which the entitlement to shares, options or variable components of remuneration is based;
  • the main parameters and rationale for any annual bonus scheme and any other non-cash benefits.

Supervision

The competent authorities should carry out supervisory activities and take into account when doing so parameters such as:

  • the size of the financial undertaking;
  • the nature of its activities;
  • the complexity of its activities.

Financial undertakings should, in addition, send the competent authorities a statement indicating the level of compliance with the principles given above concerning remuneration policy.

Context

Remuneration practices in the financial undertakings sector, particularly in banks and investment firms, have led to excessive risk-taking. These practices contributed, to a certain extent, to significant losses suffered by large financial undertakings and were, partly, at the origin of the October 2008 financial crisis. The Communication “Driving the European recovery”, published in spring 2009, presents a plan which aims at restoring and maintaining a stable and reliable financial system. This Recommendation on remuneration policies is part of the strategy proposed by the plan.

Related Act

Report from the Commission to the European Parliament, the Council, the European Economic and Social Committee and the Committee of the Regions Report on the application by Member States of the EU of the Commission 2009/384/EC Recommendation on remuneration policies in the financial services sector [COM(2010) 286 final – Not published in the Official Journal].

This Report concerns the application of Recommendation 2009/384/EC in the different Member States.
It notes disparities in the application of the principles laid down in the Recommendation. At present, only 16 Member States have fully or partly applied the Recommendation and 7 Member States apply the measures advocated in the Recommendation across the financial services sector.
Moreover, the Report also notes the reluctance of financial institutions to modify their remuneration practices. These institutions are continuing to filter most of the information relating to their individual remuneration practices.

In view of these still considerable obstacles, the Commission intends to pursue the action undertaken and to contribute to the introduction of global rules on remuneration policy in the financial services sector within the context of the G20 and the FSB.

Regime for the remuneration of directors of listed companies

Regime for the remuneration of directors of listed companies

Outline of the Community (European Union) legislation about Regime for the remuneration of directors of listed companies

Topics

These categories group together and put in context the legislative and non-legislative initiatives which deal with the same topic.

Internal market > Financial services: general framework

Regime for the remuneration of directors of listed companies

Document or Iniciative

Commission Recommendation 2009/385/EC of 30 April 2009 completing Recommendations 2004/913/EC and 2005/162/EC as regards the regime for the remuneration of directors of listed companies (Text with EEA relevance).

Summary

The existing Community framework is based on the principle of performance-based remuneration of directors of listed companies (hereinafter referred to as “directors”). This Recommendation aims at giving additional guidelines on the way in which best practices can be defined to prepare an appropriate remuneration policy. To this end, it deals with some aspects of the structure of the remuneration of directors and governance thereof.

Remuneration policy

Structure of the policy on directors’ remuneration

In order to ensure that remuneration is performance-related, the new Recommendation requires a balance to be established between fixed and variable remuneration and makes the allocation of the variable component conditional upon predetermined and measurable performance criteria.

In order to promote the long-term sustainability of companies, the new Recommendation also provides for:

  • a balance between long-term and short-term performance criteria;
  • deferment of payment of the variable component;
  • a minimum period for the vesting of share options and shares;
  • the retention of a minimum number of shares until the end of the mandate.

Termination payments (“golden parachutes”) are also subject to quantified limitations and should not be paid in the event of failure. It is suggested that payments do not exceed the equivalent of two years of the non-variable component of the remuneration.

The new Recommendation also introduces the principle of proportionality of remuneration within the company, namely a rating which compares the remuneration of directors to that of other executive directors on the board and employees or executives of the company.

As a last resort, companies should reclaim variable components of remuneration that are paid on the basis of data which later proves to be manifestly misstated.

Governance of the policy on directors’ remuneration

Disclosure of the policy on directors’ remuneration

This Recommendation is based on Recommendation 2004/913/EC which stipulates that each listed company must publish a statement on its remuneration policy. This Recommendation goes further by stating that this statement must be clear and easily understandable.

The statement on remunerations should also provide information on:

  • the choice of performance criteria;
  • the methods applied to determine whether performance criteria have been fulfilled;
  • the payment of variable components of the remuneration;
  • the payment of termination payments;
  • the vesting of share-based rights to remuneration;
  • the policy on the retention of shares;
  • the composition of peer groups of companies the remuneration policy of which has been examined in relation to the establishment of the remuneration policy of the company concerned.

Shareholders’ vote

In order to improve transparency, shareholders should participate in board meetings and use their voting rights with regard to directors’ remuneration.

Remuneration committees

Remuneration committees play a key role in establishing a responsible remuneration policy. In order to strengthen the functioning and responsibility of the remuneration committee, the Recommendation suggests that at least one of its members should have sufficient expertise in remuneration matters. Furthermore, the Recommendation contains an obligation for members of the remuneration committee to attend the board meeting at which the statement on remuneration is on the agenda in order to be able to provide explanations to shareholders. Finally, in order to avoid conflicts of interests for remuneration consultants, the Recommendation provides that consultants who advise the remuneration committee must not also advise other departments of the company.

Remuneration of non-executive directors or members of the supervisory board

In order to avoid conflicts of interests, the Recommendation provides that the remuneration of non-executive board members or members of the supervisory board should not include share options.

Context

The financial crisis of October 2008 revealed more and more complex remuneration structures. They are often based on short-term performance, which can lead to excessive remuneration of directors, not justified by performance. This Recommendation complements and strengthens Recommendations 2004/913/EC and 2005/162/EC which constitute the Community framework for the remuneration of directors of listed companies.

Related Act

Report from the Commission to the European Parliament, the Council, the European Economic and Social Committee and the Committee of the Regions Report on the application by Member States of the EU of the Commission 2009/385/EC Recommendation (2009 Recommendation on directors´ remuneration) complementing Recommendations 2004/913/EC and 2005/162/EC as regards the regime for the remuneration of directors of listed companies [COM(2010) 285 final – Not published in the Official Journal].

This Report concerns the application of Recommendation 2009/385/EC in the different Member States. It emphasises that 10 Member States have already applied at least half of the recommendations. Moreover, some Member States are working on the implementation of several recommendations in their law or Corporate Governance Code. According to the Report, the Member States’ poor understanding of certain aspects of the Recommendation such as the concept of deferment or share based remuneration is the reason for this unsatisfactory implementation. The Commission therefore intends to improve the coherence and effectiveness of EU action in the area of the remuneration of directors of listed companies.

Rights of shareholders in listed companies

Rights of shareholders in listed companies

Outline of the Community (European Union) legislation about Rights of shareholders in listed companies

Topics

These categories group together and put in context the legislative and non-legislative initiatives which deal with the same topic.

Internal market > Financial services: transactions in securities

Rights of shareholders in listed companies

Document or Iniciative

Directive 2007/36/EC of the European Parliament and of the Council of 11 July 2007 on the exercise of certain rights of shareholders in listed companies.

Summary

This Directive establishes the minimum requirements to facilitate the exercise of shareholders’ rights at general meetings of listed companies, particularly on a cross-border basis. It also aims to take account of the possibilities presented by modern technologies.

The Directive applies to all companies with their registered office in a Member State of the European Union and shares admitted to trading on a regulated market*. Nevertheless, Member States may exempt from this Directive undertakings for collective investment in transferable securities (UCITS), undertakings whose sole purpose is the collective investment of capital provided by the public and cooperative societies.

As regards information to be communicated prior to the general meeting, companies must:

  • Issue the convocation no later than the twenty-first day before the day of the general meeting;
  • Include essential information in the convocation (date, location of general meeting, proposed agenda, description of voting and participation procedures, etc.);
  • Publish on the company’s internet site the convocation , the full text of draft resolutions and essential practical information (total number of shares and voting rights, documents intended to be submitted, or a comment against each agenda item, voting forms, if applicable).

Shareholders, either individually or collectively, must be able to put items on the agenda, which will result in a revised agenda, and to submit draft resolutions. This right may nevertheless be limited to shareholders having a minimum holding of 5% of the company’s capital. The Member State also needs to set a single deadline by which these rights should be exercised.

Shareholders may ask questions related to items on the agenda and the company is obliged to answer the questions. However, these rights are still subject to the necessary measures being taken to identify the shareholder or to ensure the good order of the general meeting.

As a result of this Directive, shareholders’ participation and voting at the general meeting may not be subject to any particular limitation other than the record date. People who are shareholders on the record date are entitled to vote at the meeting. Each Member State stipulates a single record date applying to all the listed companies registered on its territory, although they may exempt companies who issue registered shares and who are therefore able to identify all their shareholders on the date of the meeting. The record date may not be earlier than 30 days prior to the date of the general meeting and must be at least 8 days after the date for the convocation of the meeting.

Voting methods

Member States must abolish any restrictions on shareholder participation at general meetings by electronic means.

Each shareholder may vote by proxy, by issuing a proxy to any natural or legal person to participate at the general meeting and to exercise the shareholder’s rights in their own name. Member States shall abolish any restriction regarding the eligibility of persons to be appointed as proxy holders, except for requirements pertaining to legal capacity. However, Member States may impose certain restrictions or obligations in the event of potential conflicts of interest between the shareholder and the proxy holder. The number of proxy holders and the period of their appointment may also be restricted.

Member States must authorise shareholders to appoint (and revoke) their proxy holder by electronic means. Member States may not submit the validity of a proxy to any requirement other than the fact that it should be made in writing.

When national law requires prior disclosure of certain information when exercising the right to vote, that information may not, in the case of shareholders acting in a professional capacity for a client, exceed what is strictly necessary to identify the client and the number of various shares with voting rights held by the client.

Member States must authorise companies to offer their shareholders the option of voting by correspondence prior to the general meeting.

Companies must account for the exact number of votes for each resolution. However, if no shareholders request an account, Member States may allow companies only to account for the number of votes required to obtain the majority in order to pass a resolution. Companies must publish the results of voting at general meetings on their internet site no later than 15 days after the meeting is held.

Background

In its 2003 Communication entitled “Modernising Company Law and Enhancing Corporate Governance in the European Union -A Plan to Move Forward” [COM (2003) 284 final], the Commission proposed initiatives to improve the rights of shareholders in listed companies and to resolve the issue of cross-border voting. Directive 2004/109/EC provided responses regarding information that issuers need to disclose to the market. This Directive aims to improve investor protection by making it easier for them to access information and to exercise their rights, especially on a cross-border basis.

Key terms in the act

  • Regulated market: a multilateral system, operated and/or managed by a market operator, which brings together or facilitates the bringing together of multiple third-party buying and selling interests in financial instruments.

References

Act

Entry into force

Timescale for transposition into Member States

Official Journal

Directive 2007/36/EC [adoption: codecision COD/2005/0265]

3.8.2007

3.8.2009
(Art.10(3): 3.8.2012)

OJ L 184, 14.7.2007

Promoting corporate social responsibility

Promoting corporate social responsibility

Outline of the Community (European Union) legislation about Promoting corporate social responsibility

Topics

These categories group together and put in context the legislative and non-legislative initiatives which deal with the same topic.

Research and innovation > Research in support of other policies

Promoting corporate social responsibility

Document or Iniciative

Communication from the Commission of 22 March 2006 to the European Parliament, the Council and the European Economic and Social Committee – Implementing the partnership for growth and jobs: making Europe a pole of excellence on corporate social responsibility [COM(2006) 136 final – Not published in the Official Journal].

Summary

Corporate social responsibility (CSR) refers to the voluntary integration of social and environmental objectives into the commercial activities of enterprises and into their relationships with their partners.

CSR meets the objectives of the European Union’s (EU) social policy and the Strategy for Sustainable Development. This practice can also be of benefit to innovation, competitiveness and job creation.

Contributing to sustainable growth and employment

In the context of increased global competition and an ageing population, the EU must stimulate the production of enterprises which respect their social responsibilities. CSR may contribute to:

  • the inclusion of disadvantaged groups in the labour market;
  • an increase in investment in skills development, lifelong learning and the employability of employees;
  • improvements in public health, for example by means of voluntary labeling of foodstuffs and non-toxic chemicals;
  • innovation on social and environmental matters;
  • reduced levels of pollution and a more rational use of natural resources (obtaining the European Ecolabel scheme and investments in eco-innovation, etc.);
  • the respect for European values and standards on human rights, environmental protection and employment;
  • the Millennium Development Goals (MDGs).

European alliance for CSR

The Commission supports the establishment of an alliance to act as an umbrella for CSR initiatives. The Commission encourages the sharing of experience and good practice between enterprises, communicating the results to the public and the development of resources dedicated to CSR.

The new instrument is open to European enterprises of all sizes, on a voluntary basis. Their level of participation is flexible as no formal requirements are imposed.

Actions for promoting CSR

The development of CSR practice must involve a wide range of actors, including trade unions, investors, consumers and non-governmental organisations (NGOs). In this context, the Commission focuses on the following aspects in particular:

  • establishing a strengthened partnership that is broader than the alliance, including not only businesses but also all relevant stakeholders and national and regional authorities (particularly in Member States where CSR is a less well-known concept, as well as in acceding and candidate countries);
  • supporting multi-stakeholder initiatives, involving social partners and NGOs at sectoral level;
  • cooperating with Member States within the Group of High-Level National Representatives on CSR in order to mobilise the national and regional instruments;
  • raising consumer awareness of the impact of their choices;
  • incorporating CSR in the curricula of business schools and other education institutions;
  • promoting CSR among small and medium-sized enterprises (SMEs);
  • respecting international benchmarks, such as the MDGs and the Global Compact for businesses.


Another Normative about Promoting corporate social responsibility

Topics

These categories group together and put in context the legislative and non-legislative initiatives which deal with the same topic

Employment and social policy > Employment rights and work organisation

Promoting corporate social responsibility

Document or Iniciative

Communication from the Commission of 22 March 2006 to the European Parliament, the Council and the European Economic and Social Committee – Implementing the partnership for growth and jobs: making Europe a pole of excellence on corporate social responsibility [COM(2006) 136 final – Not published in the Official Journal].

Summary

Corporate social responsibility (CSR) refers to the voluntary integration of social and environmental objectives into the commercial activities of enterprises and into their relationships with their partners.

CSR meets the objectives of the European Union’s (EU) social policy and the Strategy for Sustainable Development. This practice can also be of benefit to innovation, competitiveness and job creation.

Contributing to sustainable growth and employment

In the context of increased global competition and an ageing population, the EU must stimulate the production of enterprises which respect their social responsibilities. CSR may contribute to:

  • the inclusion of disadvantaged groups in the labour market;
  • an increase in investment in skills development, lifelong learning and the employability of employees;
  • improvements in public health, for example by means of voluntary labeling of foodstuffs and non-toxic chemicals;
  • innovation on social and environmental matters;
  • reduced levels of pollution and a more rational use of natural resources (obtaining the European Ecolabel scheme and investments in eco-innovation, etc.);
  • the respect for European values and standards on human rights, environmental protection and employment;
  • the Millennium Development Goals (MDGs).

European alliance for CSR

The Commission supports the establishment of an alliance to act as an umbrella for CSR initiatives. The Commission encourages the sharing of experience and good practice between enterprises, communicating the results to the public and the development of resources dedicated to CSR.

The new instrument is open to European enterprises of all sizes, on a voluntary basis. Their level of participation is flexible as no formal requirements are imposed.

Actions for promoting CSR

The development of CSR practice must involve a wide range of actors, including trade unions, investors, consumers and non-governmental organisations (NGOs). In this context, the Commission focuses on the following aspects in particular:

  • establishing a strengthened partnership that is broader than the alliance, including not only businesses but also all relevant stakeholders and national and regional authorities (particularly in Member States where CSR is a less well-known concept, as well as in acceding and candidate countries);
  • supporting multi-stakeholder initiatives, involving social partners and NGOs at sectoral level;
  • cooperating with Member States within the Group of High-Level National Representatives on CSR in order to mobilise the national and regional instruments;
  • raising consumer awareness of the impact of their choices;
  • incorporating CSR in the curricula of business schools and other education institutions;
  • promoting CSR among small and medium-sized enterprises (SMEs);
  • respecting international benchmarks, such as the MDGs and the Global Compact for businesses.