Submission to Financial Regulator on Corporate Governance

The Society has submitted a response to the Financial Regulator’s Consultation Paper on “Corporate Governance for Credit Institutions”.

In our submission, we endorse the Financial Regulator’s view that enhancement of corporate governance along with more demanding regulatory requirements and improved risk management are required in order to improve the resilience of the Irish financial services sector to future crises.  We believe that many of the proposed corporate governance requirements will contribute to more effective corporate governance for many institutions.  We welcome the requirements to:

• document Board and other responsibilities clearly;
• establish an appropriate balance between executive and non-executive Directors;
• ensure there is an appropriate representation of independent views on the Board;
• document the institution’s risk appetite; and
• establish effective risk management processes and risk oversight systems.

We welcome the requirement to include both quantitative metrics and qualitative terms in the expression of risk appetite. We believe that the quantification of risk in many areas facilitates and aids management and mitigation of those risks.

In our submission, we highlight the risks that can arise from misalignment of a Board’s responsibilities to shareholders and other stakeholders.  We emphasise that, while appropriate systems of governance are a precondition to effective regulation, they are not a substitute for direct prudential regulation.  It is important to recognise the limitations of any governance system, arising from the inherent tension that often exists between the Board’s responsibilities to shareholders and its responsibilities to other stakeholders. Thus, both corporate governance, exercised by

the Board, and prudential oversight, exercised by the Financial Regulator, are essential.  Prudential oversight could be significantly strengthened through an increased focus on agency risk within institutions in the supervisory processes.  These processes must reflect the fact that the role of the supervisory authority increases in importance where the institution presents systemic risk.

We also emphasise that, in implementing the proposed requirements, regard needs to be paid to the nature of the institution. Institutions that pose significant stakeholder risk, and in particular those that pose significant systemic risk, should be subject to onerous obligations to implement and demonstrate compliance with the highest standards of governance as articulated in the

proposals.  Those organisations that pose lower levels of stakeholder/systemic risk should be subject to a lower level of requirements.  This differentiation is acknowledged in the consultation paper, but greater clarity is needed as regards the requirements applicable to different types of institution.   

We also believe that the proposals should be underpinned by general principles that all Boards would be expected to observe.  Such an approach could be supported by a “comply or explain” regime, as is envisaged by the recent Green Paper on Corporate Governance from the European Commission.

We comment in the submission on the importance of substance over form.  In relation to independent directors, there should be a focus on ensuring ongoing independence of mind.  We suggest that limits on the number of directorships that an individual may hold should have regard to the specific time commitments involved.  We call for a strengthening of the provisions relating to conflicts of interest, particularly in the context of multiple directorships.

We endorse the fast-track approach to implementing an appropriate set of minimum standards, in particular in sectors of industry which do not already have such standards. However, we express some concerns regarding the fast-track implementation of a set of standards containing minimum requirements that might be disproportionate (and unclear) for many institutions.

Consultation Paper

Response