Terms of reference: corporate governance and remuneration inquiry
28 April 2012
The Treasury Select Committee today publishes the terms of reference for a new inquiry into corporate governance in systemically important financial institutions
All written evidence should be sent to firstname.lastname@example.org. The deadline for submissions is 24 May 2012.
"The task of improving corporate governance is not just about avoiding mistakes of the past but also providing opportunities for the future.
The global financial marketplace will locate to places with high quality governance. So the UK can benefit by taking a lead on improving it.
The Committee will seek to address, among other things, why it was that so many experienced and technically competent non-executives - the cream of British corporate life - appeared to be asleep in some of the boardrooms of our major financial firms.
In systemically risky institutions, it is particularly important to find a way to encourage more constructive engagement with shareholders on crucial governance issues, including risk and remuneration.
We will look at whether, and if so how, they can and should do more. Rightly, shareholders have shared the blame and the losses.
When it came to the destruction of major banks, the taxpayer also lost out, making corporate governance a crucial issue of public and Parliamentary concern."
The terms of reference
Board structure and composition
- What outcomes should corporate governance in the financial services sector seek to achieve?
- Are Board structures effective? For example, should UK financial institutions consider adopting alternatives to the unitary Board structure?
- Does the UK approach to regulation and supervision of financial services incentivise Boards to perform their role effectively? Is more intrusive regulation a substitute or complement to effective corporate governance? Is a "comply or explain" approach an effective framework for governance?
- What type of corporate culture should financial services firms seek to foster? In what way can this be encouraged? How effective are Boards at shaping corporate culture within their institutions?
Impact of previous reviews and new regulatory developments
- What difference would the proposals in the Independent Commission on Banking's report on the Boards of ring-fenced banks make to corporate governance in these institutions?
- What benefits, if any, come from EU regulatory engagement with corporate governance issues?
- What impact has the Walker Review (2009) had on corporate governance and corporate behaviour in financial services?
Non Executive Directors
- Should non-executive directors bear greater liabilities than under current law? Should executives in FTSE 100 companies be able to hold non-executive positions in other firms?
- Is the existing FSA approval process for significant influence functions (SIF), including non-executive directors, effective?
The role of shareholders
- Should shareholders be required to exercise a stronger role in systemically important financial institutions? What are the key barriers to greater shareholder activism by institutional investors in financial institutions? What risks are associated with it?
- Is it realistic to expect sovereign wealth funds and hedge funds to undertake a more active role?
- What role should institutional investors, remuneration consultants, employees and others play with respect to remuneration in the financial services sector?
- Is there a case for introducing still greater transparency for senior executives with respect to remuneration in the financial services sector?
- Should there be further reform of the remuneration arrangements of senior executives in the financial services sector? Should this extend to those highly paid individuals who sit below executive level?
- The Chairman of the Financial Services Authority has argued that there may be a case for changing the personal risk return trade-off for bank executives. He has suggested either a 'strict liability legal sanctions or an automatic incentives based approach. What are the merits and drawbacks of these proposals? Are there other ways to achieve the same objective?
Governance of risk
- Has the management of risk in firms improved since the financial crisis?
Diversity and background
- What is the relationship, if any, between Board diversity and company performance in the financial service sector?
Any further comments relevant to corporate governance in financial institutions would be welcomed.
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