Measures to strengthen control and risk management in institutions, directors’ liability and increased shareholder engagement were the cornerstone of Commissioner Barnier’s Green Paper on strengthening “Corporate Governance in Financial Institutions”. The paper also provided broader reflections on corporate governance in listed companies and corporate social responsibility. The governance reform plan is part of the Commission’s roadmap to meet commitments made at various G20 meetings to strengthen transparency, responsibility and capital requirements.
The European Commission mentions that the financial crisis has revealed noticeable weaknesses in the corporate governance of financial institutions and suggests that timely and effective checks and balances in the governance systems would have helped mitigate some of the risks. The Green Paper explains clearly that the Commission supports the view that previously shareholders did not exercise control over risk-taking in financial institutions they owned.
Currently European corporate governance is a mix of existing rules mainly relating to mergers and acquisitions and shareholders rights, alongside recommendations on the inclusion of independent directors and directors’ activities and remuneration policies. The Green Paper is an early stage policy document which is seeking to bring together governance policy at the EU level to “ensure that the interest 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”.
The AMIC responded to the Green Paper and focused on two main aspects of the consultation, namely shareholder engagement and remuneration policy.
2. GREEN PAPER - THE EU CORPORATE GOVERNANCE FRAMEWORK
The EC published in April 2011 its Green Paper entitled ‘The EU corporate governance framework’.
The EC recognises that the Green paper on corporate governance in financial institutions and remuneration policies adopted in June 2010, but explained that the solutions envisaged in the June 2010 Green Paper may not be relevant to EU companies in general. Accordingly, this Green Paper addresses the following three topics:
- The board of directors
- Shareholders- and shareholders engagements with management
- How to apply the comply or explain approach with underpins the EU corporate governance framework.
3. FSA CP 10/19 REVIEW OF REMUNERATION CODE
The AMIC responded to the FSA CP 10/19 Review of its Remuneration Code. Because of the European and international remit of the AMIC and the impact of this consultation on the asset management industry. You will also have noted that the Committee of European Banking Supervisors (CEBS) has published its draft guidelines on Remuneration Policies and Practices. Under the revised CRD III, CEBS is required to elaborate and issue guidelines on sound remuneration policies in the financial sector. We were in touch with CEBS on this topic.
4. BIS- LONG-TERM FOCUS FOR CORPORATE BRITAIN
The AMIC corporate governance working group has also responded to the UK BIS paper titled ‘A long-term focus for corporate Britain’. The AMIC is of the view that the BIS support to the Financial Reporting Council’s Stewardship Code is welcome and the FRC initiative to encourage investors to publish a statement on their website of the extent to which they have complied with the Code.
5. FRC - STEWARDSHIP CODE
The AMIC also publicly supported the FRC Stewardship Code. The members of the AMIC share the view that (industry) codes on a ‘comply-or-explain’ basis are better suited than rigid regulation to achieve the envisaged higher level of investor engagement. Such codes allow for sufficient flexibility to accommodate different investment strategies, approaches and models while providing asset owners with relevant information on the investment manager’s approach to engagement to make an informed decision when appointing a manager.
The AMIC therefore welcomes efforts that have been made in the UK to improve corporate governance standards through market-led initiatives such as the FRC Stewardship Code. The AMIC encourages the asset management industry to adopt the Code.
Moreover, the AMIC believes that the European and international dimensions of the corporate debate are key and urged the FRC to work with the relevant authorities. While the provisions included in the Stewardship Code are specific to the UK, AMIC members believe that the seven principles in the Code have international relevance and could be applied globally. AMIC members are looking to do this and would look to the support of the European institutions and EU member states in so doing.
6. Kay review of UK Equity Markets and Long-Term Decision-Making
The AMIC welcomes the opportunity to respond to the Kay review of UK Equity Markets and Long-Term Decision-Making. The AMIC has been very interested and engaged in the issue of shareholder participation. We believe that there is a need for an effective corporate governance framework, particularly one based on the premise of ‘comply or explain’. Institutional investors have been criticised for not exercising their responsibilities as shareholders and failing to hold boards to account for their activities. Regulators have called upon institutional investors to be more proactive in engaging with the management of companies. The need for the industry to improve in this area has been recognised by the AMIC. We believe that it is good practice to be transparent (and publish voting records for instance) and to ensure that clients are made aware of certain issues to be voted on.
However, whilst being engaged is part of the commitment when taking a stake in a company, it is important to emphasise that asset managers are not the ultimate owners of the assets. Any regulation trying to regulate the agents as a proxy for encouraging desired behaviour by principals may be counterproductive, as agents have a fiduciary role and can only act on behalf of their clients as contractually agreed. If principals decline to empower agents, or go further and positively instruct them not to act, agents have no authority to follow regulators’ instructions to do otherwise.
The AMIC has responded to questions affecting its membership.
7. Best Practice Principles for Governance Research Providers Group
The AMIC welcomes the opportunity to respond to the Best Practice Principles for Governance Research Providers Group. See the AMIC's response here.