Archive for the ‘Pay regulation’ Category

November 27th, 2009

Facelift for Corporate Governance in U.K.

“The time has come,” the Walrus said,

 

“To talk of many things:

 

Of shoes–and ships–and sealing-wax–

 

Of cabbages–and kings–

 

And why the sea is boiling hot–

 

And whether pigs have wings.”

 

- From The Walrus and the Carpenter by Lewis Carroll.

 

Hopefully, the ongoing discussion and consequent recommendations by U.K. City Banker Sir David Walker will not dissolve into a hypothetical discussion like the one by Lewis Carroll’s The Walrus and the Carpenter.

 

The final recommendations by Sir David Walker on the state of corporate governance, particularly for banks in the U.K. was made public yesterday.

 

The big focus was on Board Committees and particularly the role that the board should play in the risk assessment and management process of the company. As the report puts it, boards have been discharging their risk related duties with a sense of ‘disclosure fatigue’ –full disclosure is the best way to fulfill risk related obligations by the board. In reality, boards should ensure that risks are identified in a timely manner, assessed and controlled effectively. Suitability and relevance of experience of such Board level Risk Committee members has also been examined in this report.

 

In addition, the Board Risk Committee should file a separate Risk Report, within the Annual Report. The report should describe thematically the strategy of the entity in a risk management context, including

 

1. information on the key risk exposures inherent in the strategy,

 

2. the associated risk appetite and tolerance and

 

3. how the actual risk appetite is assessed over time covering both banking and trading book exposures and

 

4. effectiveness of the risk management process over such exposures.

 

The report should also provide at least high-level information on the scope and outcome of the stress-testing program. An indication should be given of the membership of the committee, of the
frequency of its meetings, whether external advice was taken and, if so, its source.

 

This Risk Report recommendation while good in theory may not necessarily achieve the objective. If you look at the kind of information that a typical Audit Committee report discloses, you will see what I am talking about. Other than 98% being ‘CYA’ statements, there is barely any useful information.

 

Sir Walker’s report also comments on other broader corporate governance measures such as stock ownership requirements for executive management.

 

As far as pay related regulation goes, deferral of incentive payments was the primary ‘form of attack’ with one half of variable remuneration being offered in the form of performance based long term incentives.

 

As per the recommendations, half of this award should be handed out only after 3 years and the remainder after 5 years. Short term bonus awards to be paid over a three year period.

 

At InvesGuard, we have been actively mining information on exactly this type of information. For all the banking companies in our database, we have gathered information on the presence of Board level risk committees, suitability and relevance of experience for these Committee members. We also track changes to Chief Risk Officers at Banking companies.

 

Register today to view Companies in our database.

 

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October 27th, 2009

Bernanke +Feinberg = Board Compensation Committee

Last week saw a flurry of activity from the Obama administration’s specially appointed paymaster, Kenneth Feinberg as well as pay review measures from Mr.Bernanke of the Federal Reserve. The pay directives from both these sources attempt to curb excessive risk taking by limiting compensation that is tied to risk taking. The federal reserve directive is going to affect all the companies that it holds jurisdiction over while the pay Czar controls compensation for the highest earning executives at the 7 companies getting “exceptional financial aid”.

 

Plenty has been said of the sheer “socialist” nature of such pay oversight. But opponents of such external pay regulation need to review the current level of self regulation which is zero… zilch…nada.

 

Executive compensation details are designed by the Board of Directors’ compensation committee. One would expect that besides appointing an external consultant to aid in the development of a compensation structure , there would be a greater input from the Board members themselves to ensure that compensation does not encourage excessive risk taking. Why has it come to the point where external regulatory bodies have to ‘hand hold’ compensation officers and Board members to put them on the right track? Wasn’t that included in the responsibilities of the Board Compensation
Committee?

 

But the most pressing matter that comes to mind is whether this is going in the right direction which is away from a repeat financial apocalypse?

 

According to the Federal Reserve “Flaws in incentive compensation practices were one of many factors contributing to the financial crisis”. Although this factor has been addressed, how soon should we expect other critical contributing factors to be dealt with?

 

On the matter of self pay regulation, Credit Suisse became the first bank to announce sweeping changes in its executive compensation structure. By increasing base salary and changing the components of deferred compensation, bank officials have attempted to bring about a positive change in executive compensation. Deferred cash compensation will vest over three years and will be adjusted annually based on Credit Suisse’s return on equity and business performance. The deferred stock compensation will vest over four years and may increase depending on Credit Suisse’s share price and its return on equity over those years. These changes will not be applicable to employees at the vice-president positions and lower. Another meaningful change was the introduction of minimum share ownership requirements for executives.

 

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