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EU Commissioner Barnier Links More Board Involvement to Sound Corporate Governance

By Jim Hamilton

Effective corporate governance requires that company directors limit the number of boards that they serve on so that they can dedicate more time to their governance duties, emphasized EU Commissioner for the Internal Market Michel Barnier at a Brussels seminar. In a major address on corporate governance, Commissioner Barnier also noted that the ability and willingness of a company?s directors, particularly non-executive directors, to exercise effective control over senior management must be improved.

In his view, during the financial crisis, directors too often failed to act as the principal decision-making body of the company and failed to challenge the decisions and practices of senior management. That must change in future, he said. The Commissioner also called for more diverse boardrooms since diversity in all forms creates the right conditions for a real exchange of views.

Commissioner Barnier also called for the reassessment of the role of board risk committees as part of an overall enhancement of risk management. Risk managers must be given more authority, he added, with the company?s Chief Risk Officer being given equal standing with the Chief Financial Officer.

On the issue of executive compensation, the Commissioner said that compensation must always be oriented towards mid and long-term achievements. It is imperative to move the corporate culture away from the short-term, hit-and-run culture that has caused so much damage. In particular, financial companies were obsessed by immediate and maximum profits, he noted, which led to irresponsible behavior as longer term interests were forgotten. The EU is leading the way on compensation reform, he said, with the Capital Requirements Directive 3, which will apply to 2010 bonuses.

Finally, the EU official said that regulatory enforcement must be enhanced to ensure that reforms actually happen. In this regard, Commissioner Barnier will soon propose enhancing the EU sanctions regime for market abuse and making it consistent across borders. Regulators can only make sure the financial markets work properly if they have at their disposal appropriate sanctioning powers that are applied consistently across the EU. Currently, sanctions differ significantly across the EU. They can be quite tough in some countries and virtually absent in others. The same is true for investigative tools. This leaves too much scope for regulatory arbitrage, noted the Commissioner, and puts financial stability at risk, with consumers suffering the consequences.

Full post as published by Jim Hamilton's World of Securities Regulation on October 28, 2010 (boomark / email).