EUROPE - The European Commission plans to require institutional investors to publish their voting and engagement policies and records, and "adhere to stewardship codes", a green paper on corporate governance has revealed.
The draft regulations, which are open to consultation until 1 September 2010, have been issued in response to "numerous failings" by financial institutions, such as insufficient oversight of senior management by boards, a lack of independence and authority in risk management functions and a failure by shareholders to exercise control of management.
Recommendations from the Green Paper on Corporate governance in financial institutions and remuneration policies also include an enhanced role of supervisory authorities in the review of corporate governance structures, making the role of chief risk officer equal to chief financial officer, and separating the functions of chief executive and chairman.
On the recommendation relating to shareholder behaviour the Green Paper stated: "Shareholders' lack of interest in corporate governance raises questions in general about the effectiveness of corporate governance rules based on the presumption of effective control by shareholders for all listed companies. Similarly, engaging shareholders presents a real challenge for financial institutions".
To motivate shareholders to engage with institutions, the document highlighted a range of topics for focus, including voting disclosure, the use of discussion platforms to strengthen shareholder cooperation and adherence to stewardship codes of best practice.
One of the general questions raised by the consultation was whether respondents believed shareholder control of financial institutions was "still realistic" following the recent failings.
The role of supervisory authorities in relation to corporate governance was also under review, including proposals to create a duty for supervisory authorities to check the correct functioning and effectiveness of the board of directors, and to regularly inspect the risk management function to ensure its effectiveness.
It also noted that cooperation between supervisory authorities on corporate governance of cross-border financial institutions "should be strengthened, particularly within colleges of supervisors but also in the context of future European supervisory authorities".
The scope of the paper is initially limited to financial institutions, such as banks and life insurance companies, given these institutions "present specific features which differentiate them from listed companies in general". But the Commission said it "recognises that issues relating to corporate governance of listed companies more generally also deserve to be addressed and has started work to this end. A further Green Paper will follow in the autumn."
Michel Barnier, Internal Market and Services Commissioner, said: "I am convinced that true crisis prevention starts from within companies. If we are to prevent future crises, financial institutions themselves need to change.
"We need to ensure more effective internal controls. Promote better risk management. Strengthen the role of supervisory authorities. And existing rules on sound remuneration policies should be implemented quickly to help curb excessive risk-taking."
Liz Murrall, director of corporate governance and reporting at the UK's Investment Management Association (IMA) said: "We will be carefully reviewing the proposals. Although the main focus appears to be on banks and life companies, it is important that a "one size fits all" approach is not adopted and that the differences in the underlying systemic risks that particular financial institutions pose are recognised."