How is good governance translated with regard to the financial sector?

Good governance is also called corporate governance. The concept covers all processes and regulations that relate to the manner in which a company is managed and monitored internally.
Whoever speaks of corporate governance immediately thinks of the shareholders of a company, its management and its board as the main actors. However, the employees of a company, the suppliers, the customers, the environment and society in the broadest sense are also important elements of corporate governance. This also applies to the financial sector.

The financial crisis of 2007-2008 exposed numerous shortcomings in the manner in which specific financial institutions were governed worldwide. The supervision of the institutions and the regulatory framework appeared to fall short too. Certain financial institutions, for example, paid insufficient attention to the long-term risks, and they were too big in proportion to their equity. At the end of June 2007, the Belgian financial sector had a balance sheet total (total of possessions or assets) of €1,595.2 billion. The equity amounted to only €48.5 billion.

In addition, the conviction was that, on the international financial stage in particular, the remuneration policy stimulated rather than restricted risky behaviour.

One of the major aspects of corporate governance is proper risk management. In the last few years, many initiatives and pieces of legislation have been introduced to encourage companies to adopt better corporate governance and more controlled behaviour with regard to risk. This tendency, for that matter, is not only perceivable in the financial sector but in all kinds of sectors in this country and abroad.

Some examples for the financial sector:

  • The Basel III-regulations[1] provided that the Belgian financial sector had to phase down its liabilities (the equity, such as share capital, plus the borrowed capital, such as deposits and debts on the interbank market) by more than a quarter from €1,595.2 billion at the end of June 2007 to €1,139.4 billion at the end of March 2012. Over that same period, its equity was raised by approximately 20% (from €48.5 billion to €57.8 billion).
  • It was laid down in the federal coalition agreement of 1 December 2011 that Directors and Board Members of the financial institutions that enjoy governmental support are not entitled to share options, free shares, bonuses or any other benefits. The agreement also stipulates that it will be ensured that the remuneration policies of institutions that enjoyed governmental support are linked to long-term results. A number of institutions have implemented, for example, so-called claw-back systems on a voluntary basis: Board Members and specific senior managers are paid bonuses, if any, which are not just spread in time, but their reimbursement may also be demanded if the results appear not to justify them in the long term.
  • On 27 September 2011, the European Banking Authority (EBA), the supervisor of the financial institutions in the EU, published its Guidelines on Internal Governance. These state for instance that within every lending institution, internal control mechanisms must be in place to identify, manage and report risks. On 19 December 2011 that same EBA published a document that shows that Belgium complies well with the guidelines.
  • The financial institutions make significant efforts to install better risk management and to further increase the importance of ethics in the decision-making process. Febelfin Academy, the training institute of the financial sector, for example, pays special attention to ethical arguments in decision-making. The course “Integriteitsmanagement: Voor een gezonde bedrijfsvoering” [integrity management: for sound operational management] is a good example in this respect. Moreover, ethical principles are now more than ever crucial ingredients in internal training sessions that employees of financial institutions are obliged to attend repeatedly.

Good governance in the EU

In various European consultations on good governance, Belgian financial institutions had themselves represented by Febelfin. The Federation, for instance, took part in discussions in September 2010 when the European Commission debated about Corporate Governance in the Financial Institutions. In July 2011, they also worked on the Green Paper on the EU Corporate Governance Framework, in which the regulatory framework for good governance in banks is described.

Based, amongst other things, on those initiatives, the European Commission is developing a plan of action on corporate governance. One of the recommendations in this respect is thought to be that all EU Member States must have a body that verifies if regulations imposed in respect of good governance are duly complied with. At the beginning of 2013, the plan of action will be published. The Commission is expected to develop a series of additional legislative initiatives based on its plan.

[1] The Basel III regulations require that banks maintain much more capital and liquidity in relation to their outstanding investments. The rules will be gradually implemented from 2013 and must be fully in force in 2018.