4.5.19 Corporate Governance at Banks

On 7 April 2009, the Advisory Committee on the Future of Banks in the Netherlands (Advies Commissie Toekomst Banken), also referred to as the Maas Committee after its chairman Cees Maas, former CFO of ING, presented its report "Restoring Trust" (the Maas Report or Maas (2009)).1 The Maas Committee was set up in November 2008 as an independent advisory committee on the initiative of the Netherlands Bankers' Association (Nederlandse Vereniging van Banken), with the mandate of making recommendations to improve the functioning of Dutch banks. The immediate reason for setting up the Maas Committee was the acute lack of trust in the financial sector that arose in the autumn of 2008 as a result of the financial crisis (the credit crunch). On 9 September 2009 the Netherlands Bankers' Association issued the "Code for Banks", which dealt with more or less the same points, but differed in some aspects. The Minister of Finance and the Netherlands Bankers' Association established a committee to monitor compliance with this Code. The Monitoring Committee published its first report in December 2010.

One of the key recommendations for banks is, once again, to make the customer their primary concern when weighing up the interests of the various relevant parties. The Maas Report also contains far-reaching recommendations on strengthening the governance structure and risk management of banks, with a key role being assigned to the chief risk officer (CRO) and a separate risk management committee, alongside the other three committees (i.e. the Audit, Nomination, and Remuneration Committees). In implementing the recommendations of the Maas Report and the Code for Banks, banks should apply the "comply or explain" principle.

The response to the Maas Report from both the financial sector and politicians has, in general, been positive. The Maas Committee's recommendations are particularly relevant to Dutch financial institutions, but it is possible that certain recommendations may also have an impact on businesses outside the financial sector. The committee's most important recommendations concern the areas of governance, risk management, the relationship with shareholders and remuneration.

Banks should once again focus primarily on the interests of customers and savers. In making this recommendation, the committee redefines the stakeholder model — under which directors should ensure that due consideration is given to the various interests of all of an enterprise's stakeholders — for financial institutions and possibly goes too far by singling out one category, i.e. the customer. The Code for Banks redresses the balance2 by saying that the supervisory board and the management board should consider all interests, i.e. those of customers, shareholders and employees, but does emphasize the duty of care (zorgplicht) towards customers. The renwed focus on the public role of banks is also emphasized by the recommendation in the Maas Report that a bank's management board members should sign an "ethics and morality statement", through which they acknowledge and affirm their corporate social responsibility. The Code for Banks has adopted this recommendation.3 By now board members of nearly all Dutch banks have signed such a statement.4

A much more intrusive requirement proposed by the Maas Committee is that all of the bank's managing directors should pass a banking examination prior to taking up their appointment, and should also follow compulsory further training while in office. This proposal too has been adopted by the Code for Banks.5 Banks have stoned to comply, but it remains to be seen how this unusual requirement will be enforced. Nothing similor exists in the UK or US.

Finally, the Maas Report recommends that banks aim for greater diversity on their supervisory and management boards. This recommendation too is taken up by the Code for Banks.6 The Maas Committee has gone a step further than the Frijns Code, which recommends that the composition of the supervisory board be more diverse. The Act advocates diversity in the composition of one-tier boards and also for management and supervisory boards: at least 30% women and 30% men.

The Maas Committee recommends that the duties of supervisory boards of financial institutions be expanded considerably in terms of content and responsibilities. This is echoed in the Code for Banks.7 It argues, for example, in favour of a statutory requirement for expertise assessments of supervisory board members, in combination with compulsory further training. In his response of 10 April 2009 to the report, the Minister of Finance has indicated that the expertise assessment will be provided for in the Financial Supervision Act, which is currently in the process of being amended. Supervisory board members — particularly the chairman of the supervisory board and the chairmen of the audit committee and the risk management committee — must have sufficient experience of the financial sector, and their time availability must be sufficiently guaranteed in order to ensure the proper fulfilment of their responsibilities.8 Here there is convergence with UK (Walker Committee) and US regulations.

Finally, both the Maas Committee and the Code for Banks emphasize the role of the external auditor. When auditing a bank's annual report, the auditor should make an in-depth assessment of the actual functioning of the bank's governance system. Besides carrying out an annual interaal assessment, the supervisory board should have an extemal party assess its performance once every three years.9

The Code for Banks, following the example of the Maas Committee, has drawn up a number of specific recommendations for the purpose of improving interaal checks and balances relating to risk management. The committee envisages a key role for the supervisory board in particular.10

First, when drawing up the bank's risk strategy, the management board should pay explicit attention to the formulation of a "risk appetite statement", i.e. a statement indicating the bank's readiness to accept risks, which must fit in with the bank's general strategy.11 This is the responsibility of the CEO. The Chief Risk Officer (CRO) must also be involved in the process.12 The Code for Banks puts more emphasis on the CEO and less on the CR0.13 The Code has followed the Maas Committee by requiring that a risk appetite statement be submitted to the supervisory board for approval at least twice a year. The decision making process in this regard is to be initiated by the supervisory board's risk committee; an interaal and an extemal auditor should also be involved in the process.14

The management board is charged with implementing risk policy based on the risk appetite statement; an important role for implementation is assigned to the CRO. The supervisory board should supervise the implementation of the risk policy and regularly examine whether the products offered by the bank and the client base to which the products are offered fall within the bank's overall risk profile. As part of an ongoing management of risks, the management board should set up the risk management system in such a way that it is at all times aware of the current risks affecting the bank's capital. Any interim decisions influencing the bank's risk profile must be submitted to the supervisory board for approval. Risk management approval is required prior to the introduction of new financial products ("product approval process").

In the view of the Maas Committee, a financial institution should strive for a shareholder structure that is in line with the institution's nature. The committee believes that the one-sided approach to shareholder value by groups of shareholders whose main focus is on short-term profits has led to undesirable developments in the past few years. To counteract this, it recommends that the shareholder structure of financial institutions should ensure the presence of a proper balance between the interests of the shareholders, on the one hand, and those of the other stakeholders (the customers, employees and society as a whole), on the other.

The Maas Committee recommends that listed banks strive in particular for a stable group of shareholders who are willing to commit themselves to the company for a longer period. According to the Committee, these long-term stewardship shareholders could be rewarded by, for example, a loyalty dividend. However, in light of the 2007 Supreme Court decision in the DSM case,15 the practical implementation of this recommendation is still to be worked out. The Maas Committee also points to the importance of registration and identification of shareholders in order to facilitate a dialogue with the management board. In his response to the report, the Minister of Finance has said that the soon-to-be-published corporate governance bill will contain proposed statutory rules for the identification of shareholders in listed companies.

Finally, the Maas Committee mentions depositary receipts — a defence mechanism that has made something of a comeback — as a useful way of preventing a situation in which a limited number of shareholders can exert a disproportionately large influence on the outcome of a vote at the general meeting of shareholders as a result of the absence of many of the other shareholders. The Maas Committee recommends that receipt holders who are present or represented at a general meeting should be able to exercise their voting rights at all times. This is a reference to the fact that, under the DCC,16 receipt holders may be prevented from exercising their voting rights in certain circumstances, for instance in a hostile takeover situation. In the Committee's view, such prevention should not be possible. The reactions to this proposal have so far been mixed: the Minister of Finance has largely endorsed it, but the Association of Shareholders (Vereniging van EffectenbezittersNEB) has been extremely critical. The Code for Banks has not adopted this recommendation.

The credit crisis has fuelled criticism of the remuneration paid to directors of financial institutions. The Maas Committee makes a number of specific recommendations regarding banks' management board members, which partly supplement and partly deviate from the Frijns Code. The Code for Banks has adopted most of these recommendations.

The total remuneration paid to a bank's management board members should, according to the Maas Committee, remain just onder the average of the remuneration for comparable positions outside the financial sector, taking into account international comparisons.17 In addition, the Code for Banks puts forward supplementary roles with respect to the variable income components of the remuneration and proposes that the total amount of variable remuneration for directors be limited to a maximum of 100% of the fixed remuneration,18 although an exception is granted for certain medium-sized banks. In any event, the remuneration structure must be compatible with the remuneration granted within the company as a whole.19 Moreover, the variable remuneration should consist only of cash and shares and not, for instance, of options.

The performance criteria by which the level of the variable remuneration component is judged must, according to the Maas Committee (and the Code for Banks) include non-financial indicators, such as client satisfaction and the quality of risk management.20 In addition, the supervisory board should have the discretion, in certain situations, to reduce retroactively the variable income component awarded or paid earlier.21 In any event, no variable remuneration should be granted to management board members if the bank is not generating a profit. The Code for Banks also confirms that the exit provisions of the Frijns Code — i.e. a maximum of one year 's salary — should also be applied by banks. Finally, the Code for Banks recommends that the supervisory board be required to approve the total remuneration of the individuals in the first layer below the management board (senior management). A detailed regulation for income of bankers is applicable since 1 January 2011.22