Position Paper
Corporate Governance in the financial
institutions
Green Paper of the European Commission
Febelfin’s answer – 31 August 2010
Febelfin
Febelfin, the Belgian Financial Sector Federation, is the umbrella organization and shared voice of
the financial sector. It defends the latter’s views and interests and accepts the challenge of playing
an important role as a bridge between its members and a range of national and European parties,
including policy-makers, supervisory authorities, professional federations and interest groups.
Febelfin monitors trends and developments and helps its members position themselves accordingly.
It informs and advises them on legal, tax, prudential and industrial relations issues, and on
technical product matters.
Febelfin shares the values of its sector:
Customer service
Trust and transparency
Dynamism and proactivity
Together with its members, Febelfin aims to express these values through the messages and
viewpoints the sector communicates. It seeks, by means of a proactive attitude and maximum
openness, to engage constructively and positively in the general social debate and to keep in touch
with developments in society. At the same time, Febelfin takes full account of the priorities of the
different pressure groups and determines how best to respond to their views.
Belgian Financial Sector Federation
Rue d'Arlon 82 - 1040 Brussels | http://www.febelfin.be
T + 32 2 507 68 11 | F + 32 2 888 68 11
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1. Febelfin general remarks
Promoting effective Corporate Governance in the financial institutions
The Belgian banking industry welcomes the opportunity to comment on the
Commission’s Green Paper on Corporate Governance in financial institutions, COM
(2010) 284 of 2 June 2010.
Febelfin considers Corporate Governance as a very important topic and this has also been stressed
by the European Banking Federation in its contribution. Moreover, our members share the
European Commission’s goal of promoting effective corporate governance for financial
institutions and therefore support the policy intent underlying the principles articulated
in the Green paper.
Ongoing initiatives and debates
In the wake of the major financial crisis we have been witnessing these l ast few months, the
financial institutions have been reflecting thoroughly and intensively upon their
organisation and structure as well as upon the already existing internal governance mechanisms,
including those which have yielded satisfactory results and those which, on the contrary, will have
to be improved.
Here are two preliminary remarks as for the general context and the conclusions which are at the
basis of some of the questions in the Green Paper :
 In our opinion, the Green Paper does not always make a well-balanced analysis of the
corporate governance issues which may have played a role in the financial crisis. The
impact of macroeconomic factors and the unsatisfactory role played by a number of (corporate
governance) actors, other than the Board of Directors, such as regulators, financial supervisors,
shareholders and rating agencies for example is underrated. Another field in which the role of
the Board of Directors is overrated in the Green Paper, is that of systemic risk, which is the
financial supervisors’ liability rather than that of individual Boards of Directors.
 On the other hand, the Green Paper mostly assumes that a financial institution has a
fragmented ownership. Although it briefly refers to block-holdings, the Green Paper does
little to point out the consequences of single or multi-block holders for the governance
of a financial institution.
Even before the publication of this Green Paper, the financial institutions had already taken a
number of initiatives in order to eliminate some of the weak spots that had appeared during this
major crisis. Febelfin is pleased to see that some of the proposals or reflections mentioned in the
Green Paper, are already being dealt with or are on the verge of being put into practice by the
financial institutions.
Taking the already existing regulations into account
Just like their international and European colleagues, the Belgium-based financial institutions have
fallen victim to the financial crisis. Internal governance has been blamed for this, together with
supervision and regulation.
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It would be unjust to say that in the end, internal governance is the only cause of the crisis, but
nevertheless the Belgian array of laws and regulations governing this matter has been
expanded since the outbreak of the crisis.
In the field of corporate governance, Belgium consequently has at its disposal a vast legal
framework consisting of laws, regulations or circulars published by the Banking, Finance and
Insurance Commission (CBFA) that must be applied by the financial institutions under the
supervision of CBFA.
As a consequence of the recent financial crisis, most of these rules recently have been adapted or
tightened.
Here are some examples :
 the Law of 6 April 2010 on the reinforcement of corporate governance of listed companies (executive
compensation, golden parachutes and corporate governance).
 the Royal Decree of 2 June 2010 which enforces the Law of 6 April 2010 and holds the obligation for
listed companies to take the 2009 version of the Belgian Corporate Governance Code as their reference
code
http://www.corporategovernancecommittee.be/library/documents/final%20code/CorporateGovUKCode2
009.pdf.
 the Law of 2 June 2010 on the expansion of rescue measures for undertakings in the banking and
finance sector
 circular PPB-2007-6-CPA on the CBFA’s prudential expectations as for sound governance of financial
instruments, http://www.cbfa.be/eng/cs/bhv/circ/pdf/ppb_2007_6_cpb_cpa.pdf
 circular CBFA-2009-34 of 26 November 2009 - Recommendation on sound remuneration policies in
financial institutions, http://www.cbfa.be/eng/cs/bhv/circ/pdf/cbfa_2009_34.pdf
If the authorities think there still is a need for new initiatives in the field of corporate governance,
Febelfin would like to see them take this fact into account in order to avoid an excess of
regulations in a matter where soft law should continue to be considered as the prime
option and, at any rate, certainly does not deserve to be simply put aside as a consequence of the
financial crisis.
When it comes to corporate governance, soft law enables companies to set up their internal
governance in a way which ideally corresponds with their situation, size, activities, etc. It could
even be detrimental to good corporate governance to turn some of the proposals into hard law, as
many of the principles of corporate governance are qualitative in nature and are unfit for being put
into hard law.
We also would like to point out that some of those regulations – which tie in with or even go
beyond the measures proposed by the Commission in its Green Paper – had been approved
shortly before the outbreak of the crisis and consequently, have not yet come into full
effect in the financial institutions. This goes, more particularly, for circular PPB-2007-6-CPA on the
CBFA’s prudential expectations as for sound governance of financial institutions, according to which
an internal governance memorandum defining the internal organization and governance must be
drafted and updated by each financial institution.
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According to Febelfin, the best option is to make sure that the already existing rules actually
will be applied, be it with a number of adaptations and readjustments wherever necessary, and
to avoid any further extension of the existing set of laws and regulations.
Taking account of the variety of structures – putting the proportionality principle into
practice
Febelfin fully endorses the remarks made by the European Banking Federation as for the
suggestions and proposals which have been made and that should be aimed at a “principlebased solution and no one-size-fits-all solution”.
Given the differences in governance models and thereby inherent complexity, the EBF believes - as an
overarching principle – that rules, regulations and guidance in the field of corporate governance should
remain principle-based, balanced and adequately flexible (comply or explain principles) to reflect the
different national structures and business models. In addition, the principle of proportionality should be
applied in practice to enable banks (both large and small) to adapt the concrete application according to
their legal form, size, nature, activities, markets, international or national focus, and complexity. Indeed,
given those differences and variations we fear that a one-size-fits-all solution would just not be efficient or
successful.
Febelfin also lends its support to the declarations as a matter of principle, but, in addition, it
considers it to be fundamentally important that the specific character of each institution is being
taken into account and that the authorities pay special attention to putting the proportionality
principle into practice depending on the size and nature of the financial institutions’ activities.
Within this context, attention also should be paid to the economic reality of international
financial groups, which must have adequate room for further development. Taking into account
the economic reality of international financial groups also implies that there should be sufficient
room for introducing consistent governance at group level across the various countries in
which the group subsidiaries are established and this in its turn calls for a certain degree
of harmonization of corporate governance rules at least at EU level.
A cross-sector and international level playing field seems to be highly useful within an
environment where competition is growing steadily. In practice, there should be a minimum set
of corporate governance rules that apply to any company (not only financial institutions),
regardless of the country or sector in which it is active.
A holistic view on the matter
Corporate governance concerns the very foundations of a company structure and covers a
multitude of aspects (structure, transparency, effectiveness…). So, we think that all of the
measures proposed in this field should tie in with a holistic view on the matter.
Hence, Febelfin asks the European Commission, in its reflection upon potential new regulation, to
refrain from creating an artificial superposition of new regulations.
Those initiatives should rather lead to a form of synergy in order to develop an effective
Corporate Governance in the companies.
Multiple workstreams are under way or have already been implemented in different
international bodies (OECD, FSB, Basel Committee, EU Commission, and CEBS) and at national level. In
particular, the CRD 3 covers some of the aspects covered in this consultation document (notably
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remunerations issues). The Green Paper being only one (although important) part of such initiatives,
coordination is of great importance, so that also already well-functioning national laws and guidelines
do not have to be replaced. Moreover, it is essential to ensure consistency between those different
initiatives in order to ensure legal certainty across the world (especially for cross-borders
institutions) and maintain a level playing field.
2. Responses to specific questions
Preliminary remark :
Febelfin took part in the preparatory discussions which eventually have led to the European Banking
Federation’s contribution.
Our members fully endorse the general point of view as mentioned in this document as well as the
specific remarks that have been communicated to the European Commission.
However, there are some aspects we believe should be pointed out or put into the right
perspective, especially with respect to the financial institutions that are active in Belgium. Those
aspects will be dealt with hereafter (as for the other questions, we refer to the EBF position).
1. Board of Directors
Interested parties are invited to express whether they are in favour of the proposed
solutions concerning the composition, role and functioning of the Board of Directors,
and to indicate any other measures they believe would be necessary.
Limitation of the number of mandates (1.1.)
Febelfin does not see the usefulness of imposing this kind of limitation of the number of
mandates at the European level. The existing set of Belgian laws and regulations is sufficient for
guaranteeing the required level of the directors’ availability and competence and for giving
companies enough room, more particularly in the standing orders of the body concerned, to fix the
number of mandates that is acceptable in those particular circumstances.
If, however, the EU imposes a limitation in the form of a particular number, this should not apply to
the mandates within companies that are part of one single group.
Combined function of Chairman of the Board of Directors and CEO (1.2.)
No objection against Europe imposing a formal interdiction on the combined function of
Chairman of the Board of Directors and CEO, since in Belgium, this kind of incompatibility
already follows from the joint application of the CBFA circular on corporate governance and the
Belgian Code of conduct on corporate governance.
Policy for appointment : definition of competence – diversity – evaluation of the Board
of Directors (1.3. up to 1.5.)
As for appointment and job description, preference should be given to soft rules that are
specific for each institution, rather than strict rules that are not necessarily custom-made for each
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institution. The only criteria that are important for the appointment of directors, are competence
and experience.
Both Belgian Law and regulation impose "fit & proper" tests. It is up to Nomination Committees to
evaluate the balance of skills, experience, independence, diversity and knowledge of a board.
Furthermore, nominations to the board are submitted to a General Shareholders Assembly and to
the regulator. This enables shareholders and supervisors to assess the qualification/suitability of a
new director.
The need for diversity in the composition of the Board of Directors does not have to be put down
in one or several specific ratios (such as the ratio between men and women).
Finally, the Board of Directors should be subject to an evaluation at regular intervals, but
it would be best to let the institutions decide upon the way in which this will be organised and the
person who will be responsible for this, who may (but does not necessarily have to be) an external
person. However, Febelfin is not opposed to providing a summary report of an evaluation in the
Annual Report and a full report to the regulator with a description the findings and consequences of
the evaluation.
Link between risk and Board (1.6. up to 1.12.)
The Board as a whole (collegial body) should remain responsible for risk management but indeed
with the possibility (no obligation) to set up a separate risk committee or a similar
committee within the Board.
A number of financial institutions have created separate committees (Risk Committee, Audit
Committee, …), whereas others combine Audit and Risk (and compliance as well, in some cases)
into one Committee, because, in their opinion, these aspects are closely interwoven and should
better be dealt with together in one single Committee. Other institutions have split up the Audit
Committee into a Risk Committee and an Accounts Committee.
According to Febelfin, this should be a possibility rather than an obligation given the principle
of proportionality and the specific characteristics of each institution. More than ever before, the
Board must pay special attention to risk management. However, it should also be pointed out that it
is up to the chairman of the Board of Directors to speak on behalf of the Board as a
whole, at the shareholders’ meeting, in order to defend the work that has been
accomplished by the Board as a whole. The Board’s joint liability must be maintained, its chairman
being the spokesman. Moreover, the role of the Committees within the Board is a purely advisory
role vis-à-vis the Board.
The Board of Directors must (1) lay down the general risk policy (risk policy, willingness for risk
taking, ….) and (2) ensure the follow-up of its application. Defining and drawing up the risk profile
is part of corporate strategy and consequently, belongs to the competence of the Board of
Directors.
Interest of the depositors and other stakeholders (1.13.)
In managing the company, the Board must keep an eye on the ‘social interest’, which can be
interpreted in a rather broad sense encompassing the interest of the (current and future)
shareholders, the employees, the creditors, ….
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2. Risk-related functions
Interested parties are invited to express whether they are in favour of the proposed
solutions regarding the risk management function, and to indicate any other measures
they believe would be necessary.
The Risk Management function
Given the principle of proportionality as mentioned above, there seems to be no need for a
formal obligation to appoint a Chief Risk Officer (CRO) in all of the financial institutions.
The efficiency of a supervisory function does not depend on the power balance between this
function and those who are the subject of supervision (a single status in order to allow for equal
arms), bur rather on its independence, its right to inspect the bank’s activities and its
reporting margin.
In this respect, there should be a direct reporting line to the Board of Directors in case of urgent,
serious and persisting conflict with the Executive Committee.
3. External auditors
Interested parties are invited to express whether they are in favour of the proposed
solutions concerning the role of external auditors, and to indicate any other measures
they believe would be necessary.
In Belgium, the involvement of external auditors is clearly described in the Banking Law: article 55
of the Banking Law e.g. imposes on external auditors the legal obligation to report to the CBFA
each time they identify situations that may jeopardize the financial situation of the bank,
weaknesses in its internal control functions and breaches of the relevant prudential laws.
4. Supervisory authorities
General question 4: Interested parties are invited to express whether they are in favour
of the proposed solutions concerning the role of supervisory authorities, and to indicate
any other measures they believe would be necessary.
Within the current context, we doubt whether it would be an adequate solution to take additional
measures aimed at extending the supervisory authorities’ role as for corporate governance. Piling
up one regulation on another may soon lead to a situation in which rules become impossible to
swallow, incomprehensible and inapplicable at worst.
Febelfin would like to draw the attention to the fact that at present, there is already a multitude of
rules at the national level (legal provisions most of which are taken from the Law on companies
(which, in itself, stems from the Directives governing this matter), CBFA circulars and regulations,
soft law), and that currently, new texts are being prepared which concern the financial sector
among other things.
The new provisions will be added to the already existing rules.
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According to these new rules (the Bill has been approved by Parliament and is due for publication in
the Moniteur belge), the supervisor will have :
 a veto as for the strategic decisions taken by the system-relevant financial institutions;
 a right to interfere in matters such as solvency, liquidity, risk concentration and risk exposures.
So, we think there is no need, under these circumstances, for pushing the modifications to the law
further ahead. One should limit oneself to set up instruments and structures aimed at improving
consultation at the level of the various Member State policies.
5. Shareholders
Interested parties are invited to express their view on whether they consider that
shareholder control of financial institutions is still realistic. If so, how in their opinion
would it be possible to improve shareholder engagement in practice?
Febelfin endorses the remarks made by the EBF as for enhanced engagement from the financial
institutions’ shareholders.
Here are some of the proposals made by Febelfin with respect to the measures which, from a
« win-win » point of view, may contribute to enhancing this engagement on the one hand and to
making corporate governance more significant on the other hand :
 think about the allowance of specific advantages to shareholders (multiple voting right)
who accept to take a long-term interest in the company.
o Long-term shareholdership indeed contributes to the stability the management is looking for in order to
concentrate on long-term projects.
o The result of this may be twofold: on the one hand, this kind of shareholders indeed will pay more
attention to matters of corporate governance so as to protect their (temporarily fixed) interests, and on
the other hand, the management will take a bigger interest in corporate governance in order to please
and keep their long-term shareholders.
 ‘abstention’ voting in a systematic way/as a matter of principle should be discouraged
(cf. the previous questions), for this is hard to combine with a clear policy vis-à-vis the
management of the institution;
 in addition, short-term speculation against (the shares of) a financial institution should also
be discouraged (e.g. through higher costs or a less favourable taxation in case of buying
followed by quick selling, etc.). This measure should apply to all listed companies and not be
limited to the financial sector.
6. Effective implementation of corporate governance principles
Interested parties are invited to express their opinion on which methods would be
effective in strengthening implementation of corporate governance principles.
In the light of the principle of a cross-sector and international level playing field as
mentioned in the general remarks, it is inacceptable for Febelfin to introduce an exceptional
scheme for financial institutions’ Directors, all the more because the (especially penal)
sanction system for breaches of financial regulation becomes more and more stringent.
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The law should be the same for all and there is no reason for an extended liability depending on
the category of Director : there must be proportionality between the (civil and penal) liability of an
executive and his level of autonomy.
Given the requirements pertaining to competence, experience, availability, remuneration restrictions
and the possibility of a bigger legal liability for a bank manager, one may indeed seriously ask
where to find candidates who can meet all of those conditions and who will be willing to invest
themselves in this kind of environment.
7. Remuneration
Interested parties are invited to express their views on how to enhance the consistency
and effectiveness of EU action on remuneration for directors of listed companies.
As for the problem of remuneration, Febelfin wants to point out that this concern already has been
eliminated thanks to the numerous regulations that recently have been introduced at the national
and international level :
 at the international level: multiple recommendations (FSB Principles, CEBS guidelines,
recommendations put forward by the European Commission…) and Directives (the latest being
CRD3)
 at the Belgian level : more particularly the Law of 6 April 2010 aimed at enhancing corporate
governance, the chapters on remunerations in the Belgian Code on Corporate Governance as
well as CBFA-circular 2009-34 of 26 November 2009 on sound remuneration policies in financial
institutions.
Banks should now be given sufficient time for implementing these new rules and for
acting in accordance.