Directors limited to three boards

DIRECTORS of financial institutions will no longer be able to sit on more than three boards, and they must bring expertise to their positions, according to European Commission proposals to regulate corporate governance.

The Commission also proposes having a single centralised supervision at European level of Credit Rating Agencies, a system of fines of up to 20% of their income and a possible ban on the national office of a CRA.

As part of a major review of how banks and insurance companies are managed, they have issued a Green Paper with a range of questions aimed at reducing the risks of bankruptcy and ensuring greater transparency and less conflict of interests.

This includes how to improve the composition of the boards, including limiting directors to no more than three boards to eliminate conflict of interest and ensure they have the time to devote to the job. “They need to be fit for purpose”, according to one expert.

They want boards to have various channels of information about the functioning of the institution, including from shareholders, financial supervisors and external auditors. “We want people on boards who are willing to ask questions the CEO might not want asked and who know what they are talking about,” an official said.

The chief executive should not chair the board, while the risk officer should be on a par with the chief financial officer in a company and it should not be possible to sweep aside his or her assessments as has happened in several instances.

They also propose changing the remuneration policies to discourage excessive risk taking. But a survey of what states have adopted recommendations on remuneration policies in the financial services sector finds most have not done so fully. Ireland says it is in the process of doing so and it is has acted on golden parachutes fordirectors.

Auditors should evaluate the systems in operation and give assurances that they are sufficient, while shareholders, especially the big institutional ones such as pension funds, must be encouraged to take into account risk and not just short-term returns according to the Green Paper.

The Commission proposes that a new EU agency, European Securities and Markets Authority (ESMA) currently being negotiated by the European Parliament and national governments, should have oversight of Credit Rating Agencies.