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Erhvervsudvalget 2009-10
KOM (2010) 0284 Bilag 3
Offentligt

European Commission

DG Internal Market and Services

B-1049 Bruxelles

MINISTER FOR ECONOMIC

AND BUSINESS AFFAIRS

Green Paper - Corporate governance in financial institu-

tions and remuneration policies

General comments

The Danish government welcomes the initiative by the European Com-

mission to review the adequacy of the corporate governance regulatory

framework. The Danish government agrees that a sound corporate gov-

ernance framework could enhance the stability of financial institutions

and the financial system.

The Danish government finds, however, that the European Commission

should await the outcome of the changes to the European supervisory

framework as well as Solvency II and changes to the Capital Require-

ments Directive, e.g. CRDIII, which the European Commission has al-

ready initiated regarding remuneration, risk management and the role of

supervisory authorities to ensure consistency and a smooth process.

As regards remuneration policies the Danish government stresses the im-

portance of ensuring a responsible remuneration policy in financial insti-

tutions. Therefore, the Danish government has already taken steps to im-

plement the revised capital requirements directive in this field.

At this stage of the process, the Danish government would recommend

that the European Commission focuses on the role and composition of the

board of directors (non-executive directors). Principles of diversity and

competency should be at the core of the decisions when appointing the

board of directors (non-executive directors).

The Danish government would urge the European Commission to consid-

er the responsibility of the board of directors (non-executive directors) in

subsidiaries as well and finds that subsidiaries should not be allowed to

delegate this responsibility to the board of directors at group level. In

general only focusing on the financial group level could be problematic

when implementing the new corporate governance framework.

MINISTRY OF ECONOMIC

AND BUSINESS AFFAIRS

Slotsholmsgade 10-12

DK-1216 Copenhagen K

Tel.

Fax

+45 33 92 33 50

+45 33 12 37 78

CVR no. 10 09 24 85

[email protected]

www.oem.dk

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The Danish government finds that the main focus of corporate govern-

ance regulation should be the responsibility of the management of finan-

cial institutions instead of the financial authorities’ supervision of the in-

stitutions.

The business areas of the financial institutions are of a great variety and

complexity which means that it is the core assignment for the manage-

ment to obtain the necessary level of skill and experience to be able to

manage the institution in a responsible way.

The Danish government finds that this objective most suitably is obtained

by a heightening of the managements’ knowledge of and compliance with

their duties as management on all levels and not by an increase of super-

vision from financial authorities. In order to ensure this it is important to

improve the implementation of corporate governance principles and rec-

ommendations within the management of the institutions.

More specifically the Danish government finds that annual meetings, if

not required more often, of the board of Directors (non-executive direc-

tors) with the focus of identifying and handling of risks for the year to

come and an annual evaluation of the composition of the board of direc-

tors (non-executive directors) and the experience and skills of the day to

day management is a fine initiative towards ensuring that any foreseeable

risks will be evaded.

Specific comments

1. Board of directors (non-executive directors)

The Danish government welcomes the European Commission’s initia-

tives to ensure a sound regulatory framework for the composition and

role of the board of directors (non-executive directors). The Danish gov-

ernment agrees with the European Commission that principles of diversi-

ty and competency should be at the core of the decisions to appoint mem-

bers to the board of directors (non-executive directors). The government

also agrees that more women and individuals with different backgrounds

in the board of directors (non-executive directors) could improve the effi-

ciency of boards.

However, generally it would not be suitable to formulate detailed re-

quirements regarding the role and composition of the board of directors

(non-executive directors). This is due to the fact that business areas of in-

stitutions are of varying size and complexity and thus the requirements

should reflect these differences. As an example the European Commis-

sion’s proposal to make external evaluations of the board of directors

(non-executive directors) compulsory should rather be optional for insti-

tutions. As should the establishment of risk committees on the board. The

relevance of both external evaluations and risk committees would depend

on the size, complexity and organisation of the institution. The Danish

FSA recommends that the management of a financial institution annually

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initiates an internal evaluation of the experience and skills of the man-

agement in correlation with the future challenges of the institution.

Also the Danish government agrees that the division of responsibilities

between senior management (executive directors) and the board of direc-

tors (non-executive directors) as well as the adequate independency of the

board of directors (non-executive directors) is essential. Therefore, the

government also finds that it should be prohibited to combine the func-

tions of chairman of the board of directors (non-executive directors) and

chief executive officer to ensure the independence of the board of direc-

tors (non-executive directors).

Further, the Danish government does not expect it will be effective to

make it mandatory to transfer responsibilities from senior management

(executive directors) to the board of directors (non-executive directors).

As an example, daily risk management decisions and product develop-

ment do not necessitate the involvement of the board of directors (non-

executive directors), which should rather pursue a more strategic role. Al-

so, it seems most effective that risk managers keep reporting directly to

senior management (executive directors).

The Danish government agrees that sufficient time devotion is crucial for

the well functioning of a board and therefore the number of boards on

which a director may sit should be a criterion that should not be neglected

when the competency of a potential board member is considered. The

Danish government finds, however, that a strict limit on the number of

boards will not obtain the intended purpose. Rather, both the number and

scope of boards that a potential director sits on should be considered as

well as other time constraints the potential director might have. This ne-

cessitates a qualitative evaluation of the potential director’s time schedule

rather than simply setting a strict limit.

In terms of external communication requirements, the Danish government

finds that a risk control declaration is not needed. On the other hand, the

Danish government very much agrees with the European Commission

that institutions should inform the relevant supervisory authorities of

risks, which are fundamental and material, whereas the daily risk man-

agement should not be subject to this requirement.

2. Risk management

As stated in our general comments, the Danish government finds that the

European Commission should await the outcome of Solvency II and the

changes to the Capital Requirements Directive that the European Com-

mission has already initiated regarding risk management to ensure con-

sistency and a smooth process. Please also refer to our comments above

under paragraph 1 regarding risk management.

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3. The role of auditors

The Danish government finds that it will be useful to analyse how best to

articulate the existing cooperation between auditors and supervisory au-

thorities and to examine the need for an adequate European legal frame-

work. The Danish government would like to share a few of the Danish

experiences in this regard below.

The experience of the Danish government is that there is already an effec-

tive ongoing dialogue and cooperation between the FSA and the auditors,

including a formal forum of auditors and supervisors meeting regularly to

discuss new legislative initiatives. At the same time the division of re-

sponsibilities between the supervisory authorities and auditors should not

be neglected, since a blurred division would be problematic.

The Danish government further receives a copy of the long form audit re-

port to the board of directors (non-executive directors) and further infor-

mation at request. Also, a Danish whistleblower mechanism for auditors

is implemented, but very seldom applied.

According to the international financial reporting standards (IFRS) and

Danish reporting standards for financial institutions, a description of fi-

nancial risks has to be included in the financial statements of institutions

and is therefore audited. Therefore, the Danish government does not find

that there is an immediate need to extend the role of auditors to risk-

related financial information that is not part of the financial statements.

4. The role of supervisory authorities

As stated in our general comments, the Danish government finds that the

European Commission should await the outcome of the changes to the

European supervisory framework.

As a part of the latest amendment of the Danish Financial Business Act

the regulation regarding fit & proper evaluation of the members of an in-

stitution’s management was tightened up. All members of the manage-

ment will be evaluated in accordance with the regulations in connection

with their entering of the management and during their time of service on

the management.

The purpose of the fit & proper regulation is to prevent members of the

management who do not have the necessary experience and skills and/or

who may have a resume which makes them unfit for the position as

member of the management.

Also the regulation enables the Danish FSA to order a member of the

Board of Directors (non-executive directors) to resign from his or her po-

sition, if the person no longer complies with the regulation of fit and

proper. If the person in question refuses to resign the Danish FSA is ena-

bled to order the institution to dismiss the person in question.

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The regulation regarding fit & proper is a very valuable opportunity in

the work to ensure that the members of the management are conscious of

their responsibility of the institution’s compliance with corporate govern-

ance as well as other relevant legislation.

On the basis of the above mentioned the Danish government finds that

the existing regulation is sufficient with regard to actual legislation and

that any further regulation should be in the form of soft law and corporate

governance recommendations.

5. The role of shareholders

The Danish government welcomes that the role of shareholders is consid-

ered as part of governance issues, since shareholders as owners are essen-

tial stakeholders in ensuring sound governance principles. The Danish

government agrees with the European Commission that shareholders

should be involved in the corporate governance of an institution.

However, the Danish government finds that shareholders should not be

imposed certain standards, such as the International Corporate Govern-

ance Network. The standards are meant to be voluntary and will most

likely be most effective if chosen by shareholders on a voluntary basis.

As stated initially, the Danish government finds, however, that it could be

relevant to encourage institutions to set the governance standards on the

agenda of a general assembly to allow for shareholders’ input.

Regarding the disclosure requirements, the Danish government finds that

the initiatives proposed seem extensive and could in some cases be coun-

terproductive, for example a shareholder’s vote is in certain cases subject

to confidentiality.

6. Effective implementation of corporate governance principles

As mentioned in our general comments the Danish government finds that

the purpose of the European Commission’s green paper is best obtained

by an improvement of the corporate governance regulation in the form of

recommendations instead of a detailed legislation and increase of super-

vision from the financial authorities.

Therefore it is crucial to find ways to improve the knowledge of the cor-

porate governance recommendations within the institutions’ manage-

ments and the Danish government finds that one of the objects of the fu-

ture work from the European Commission should be with the focus of

improving the implementation of existing and new recommendations.

Also it should be noted that the members of the management is recruited

to lead the financial institutions and an increase of the supervision may

challenge the management’s inclination to do their job. Therefore it is

very important to emphasize that the responsibility in the end lies with

the management and they should be left with the necessary room for ma-

noeuvre.

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The knowledge of corporate governance regulation could be improved by

increasing the number of institutions who are subject to a principle of

“comply or explain”.

7. Remuneration

As stated in our general comments, the Danish government finds it im-

portant that the European Commission awaits the outcome and imple-

mentation of the initiatives that the European Commission has already

commenced i.e. the revision of the capital requirements directive (CRD

III) before further initiatives are presented.

In Denmark a broad political agreement on the implementation of CRD

III as regards remuneration policies has just been reached. The political

agreement i.e. prescribes that the general meeting of shareholders will

have a say on the financial institutions remuneration policy including

guidelines on performance pay and severance packages.

The agreement also ensures that the main organisations representing the

financial sector agrees on a binding code on remuneration policy in the

financial sector with the aim of ensuring a remuneration policy which

promotes efficient and responsible risk management and does not encour-

age excessive risk taking. The code should i.e. include a provision ensur-

ing that financial institutions should make public the salaries of individu-

al (executive and non-executive) directors.

Furthermore, for the board of directors (executive and non-executive) the

following shall apply:



a cap for variable remuneration at 50 percent of the non-variable re-

muneration

stock options or similar instruments may only comprise 25 % of vari-

able remuneration,

at least 40 percent of variable remuneration (and at least 60 percent

for larger variable payouts) is deferred for 4 years.

The agreement also prescribes that the board of directors in a financial in-

stitution receiving public support is subject to a cap on variable remu-

neration at 20 percent of non-variable remuneration. In addition there will

be a ban on new stock option programmes or the continuation of existing

programmes in institutions receiving public support.

The Danish Financial Supervisory Authority is empowered to supervise

the remuneration policies of financial institutions with the aim of ensur-

ing that they have in place a remuneration policy which promotes effi-

cient and responsible risk management.