The Financial Stability Board’s (FSB’s) published its peer review of implementation of the G20/Organisation for Economic Co-Operation and Development (OECD) Principles of Corporate Governance in April 2017. The peer review takes stock of how FSB member jurisdictions, including Australia, 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.

 

While Australia ranks highly in almost all areas identified by the FSB’s peer review, a look at the company it keeps in some of these leading practice areas may not imbue those of us dependent on the world’s financial health with a great deal of confidence. In addition, it indicates some surprising levels of poor compliance elsewhere among G20 members.

 

One of the main lessons from the global financial crisis of 2008-2009 learned by financial institutions, regulators and other stakeholders is the need to strengthen corporate governance, both in terms of the frameworks and related rules and in terms of the practices of financial institutions. The peer review found 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 the 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 (i.e. OECD, Basel Committee on Banking Supervision, International Association of Insurance Supervisors and International Organization of Securities Commissions) and financial institutions focusing, among others, on the following areas:

• Ensuring the basis for an effective corporate governance framework – identify and address gaps or inconsistencies in cases where corporate governance frameworks are found in multiple sources; and augment enforcement powers available to supervisory authorities to address weaknesses in corporate governance regimes or non-compliance with corporate governance requirements.

• Disclosure and transparency – consider improving disclosures related to governance structures, voting arrangements, shareholder agreements and significant cross-shareholdings and cross-guarantees; and identify remuneration information that could be usefully provided to shareholders.

• The responsibilities of the board – consider adoption, implementation and disclosure of codes of ethics or conduct; and encourage boards to undertake regular assessments of their effectiveness. 

• Rights and equitable treatment of shareholders and key ownership functions – consider 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– consider enhancing the effectiveness of whistle-blower programmes.
• Other– consider reviewing practices with respect to the effectiveness of rules regarding the duties, responsibilities and composition of boards within group structures; the framework for related party transactions; and the role and responsibilities of independent directors on the board and board committees.

 

So, how does Australia fare when compared to other G20 countries? It is signalled out in a number of areas:

• The jurisdictions which have corporate governance codes that apply on a comply or explain basis, where such disclosure to the market is mandatory, include Australia, France, Germany, Italy, Russia (for listed companies), Singapore, South Africa, Spain and the United Kingdom.
• In some jurisdictions (Australia, Italy, the United Kingdom and the United States, for example) regulatory agencies make cooperation arrangements with other regulatory authorities available on their website.
• It is interesting that it appears that only Australia has regulations that require a formal board renewal process. However, other regimes appear to have a stronger regulatory framework to ensure management succession.

 

Few countries have progressed on establishing frameworks for denoting a “tone from the top” to manage risk culture, with Australia (sanely!) saying that, in its formative stages of understanding what this means, it is too early to regulate. Nevertheless, Australia’s APRA has recently issued a standard that requires the board form a view of the risk culture in the bank and identify and address any desirable changes to the risk culture. The introduction of this requirement has resulted in risk culture becoming a key focus for prudentially regulated boards.

 

A review of the appendices to the FSB report comparing all FSB G20 countries indicates that Australia meets governance requirements well, while there are some surprising areas of poor governance from other G20 countries.

 

See the FSB report HERE

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