The Financial Stability Board (FSB) has published a thematic peer review report on corporate governance. The peer review examined the implementation of the G20 / Organisation for Economic Co-Operation and Development Principles of Corporate Governance (Principles). The peer review takes stock of how FSB member jurisdictions have applied the Principles to publicly listed, regulated financial institutions, identifying effective practices and areas where good progress has been made while noting gaps and areas of possible weakness.

In terms of findings, the peer review notes that while all FSB member jurisdictions have a comprehensive corporate governance framework, its effectiveness can be impacted if the division of responsibility among financial sector authorities is unclear or if various requirements overlap, leave unwarranted gaps, or are otherwise not well aligned with each other. The peer review also found that although FSB member jurisdictions’ corporate governance frameworks generally provide some degree of proportionality (typically requiring financial institutions to have risk management systems that are commensurate with their size, complexity and risk profile), other factors such as ownership and control structure, geographical presence and stage of development could also be considered.

The peer review offers 12 recommendations to FSB member jurisdictions, standard-setting bodies and financial institutions focusing, among others, on the following areas:

  • ensuring the basis for an effective corporate governance framework. This includes: (i) identifying and addressing gaps or inconsistencies in cases where corporate governance frameworks are found in multiple sources; (ii) considering if the ownership structure, geographical presence and stage development of financial institutions could be used, when appropriate as criteria, to implement corporate governance requirements in a proportional manner; and (iii) augmenting enforcement powers available to supervisory authorities to address weaknesses in corporate governance regimes or non-compliance with corporate governance requirements;
  • disclosure and transparency. This includes: (i) considering improving disclosures related to governance structures, voting arrangements, shareholder agreements and significant cross-shareholdings and cross-guarantees; and (ii) identifying remuneration information that could be usefully provided to shareholders;
  • the responsibilities of the board. This includes: (i) considering adoption, implementation and disclosure of codes of ethics or conduct; (ii) encouraging boards to undertake regular assessments of their effectiveness; and (iii) considering how financial institutions can improve their procedures and practices as they relate to succession planning and board training;
  • rights and equitable treatment of shareholders and key ownership functions. This includes: (i) considering requiring that shareholders be given opportunity to vote on financial institution remuneration policies and the total value of compensation for the board and senior management;
  • the role of stakeholders in corporate governance. This include considering enhancing the effectiveness of whistle-blower programmes; and
  • other. This includes considering reviewing practices with respect to: (i) the effectiveness of rules regarding the duties, responsibilities and composition of boards within group structures; (ii) the framework for related party transactions; (iii) shareholder votes on pay; (iv) the disclosure of beneficial ownership; and (v) the role and responsibilities of independent directors on the board and board committees.

In addition, among other things, the report notes that:

  • only Australia and the United Kingdom have a “shadow director” framework within their corporate law. The remaining FSB jurisdictions do not formally have the concept of “shadow director”, but have extended the concept of director to achieve the same goal;
  • the United Kingdom’s Senior Manager’s Regime (SMR) explicitly includes Group Entity Senior Managers – a clear use of the application of the concept of shadow director and applying it to regulatory responses; and
  • as part of its SMR and Senior Insurance Manager Regime, the United Kingdom requires firms to allocate the prescribed responsibilities relating to in-scope firms’ whistle-blowing policies and procedures, and the protection of those using them to a senior manager who is a non-executive director. In France, the corporate governance framework currently does not provide for compulsory requirements on whistle-blowing schemes but a draft bill on transparency is currently being discussed in the French Parliament, which will provide legal protection for whistle-blowers in the financial sector.

View FSB thematic peer review on corporate governance, 28 April 2017