Response to consultation on Guidelines on internal governance (revised)
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Before answering the question, we would like to explain why Spencer Stuart is responding to this consultation.
Spencer Stuart is one of the world’s leading global executive search and leadership consulting firms, specialising in chief executive, board director and senior executive roles.
Spencer Stuart Board Practice provides two worldwide types of services across industries but with a strong focus in the Financial Services area:
- Board director recruitments with more than 1300 placements over the last years o/w 15% are done in the FIG industry. More than 30% of our placements were female.
- Board effectiveness assessment with more than 50 assignments per year o/w around 20% in the European Banking Industry which gave us the opportunity to assess
over the years the governance of a majority of European banks. We have an unquestioned leading position in that field.
In addition to these services, Spencer Stuart produces a series of intellectual capital pieces:
- Annual board indexes in 15 markets where we survey the status of governance and the progress made.
- Specific surveys on subjects such as:
- Board and Crisis Management
- Board Best Practices
- Bank boards in crisis
For all these reasons, we hope that our contribution could be helpful to EBA.
Answer to question 1
Guidelines are clear on subject matter and addressers.
On scope of application (point 9-10-11), there is a clear confusion regarding what is called management body as two different types of governance structure and two types of functions are mixed, and the text is not fully consistent with local laws and regulations:
- In a dual board structure (supervisory board and management board), the supervisory board has no management power; it has only a supervisory function and an ex post
control function. The management in that case is clearly the management board and you cannot say that the supervisory board has a management function since it
neither approves the strategy nor takes management decision.
- In an unitary board, the board is a collective body in charge of the supervisory function and some management functions (including the determination of the institution’s
strategy); whereas the executive function (i.e the daily management of the institution) is ensured by one or more physical persons (i.e the CEO and Deputy CEOs).
It would be much clearer, broader in its application and more consistent with local laws to use the legal terms of:
- Board
- Senior management (CEO and responsible managers)
EBA should clarify the notion of a management body in clearly attributing:
- the supervisory function to the Board
- the management function to the Senior Management
On scope of application point 12
Applying the same rules for the parent company (consolidated) and the subsidiaries where they are fully controlled doesn’t make a lot of sense since it is the responsibility of the parent company to control its wholly owned subsidiaries and it normally falls under the duty of its management and ultimately of its board to unsure that subsidiaries are compliant.
By considering at the same level, the parent company and the 100% owned subsidiaries, it would make the governance of the latter a lot heavier, with no evident additional benefit.
However, in the case of not wholly owned subsidiaries, the situation would be different.
In definition, there is no comment, except:
1. For the “key function holders”, which is a new notion introduced in this document and which seems not to be consistent with the CRD4 reference document.This notion
introduces a real limitation in the powers of the management since according to all business laws in Europe, appointing the management team is the responsibility of the
CEO and not of the board.
2. For the directorship, EBA proposed definition seems to mean that a director is a member of the management body in its management role which is totally wrong (cf. our
first point above).
3. The guideline should consider that in the one-tier system, the CEO and the deputy CEO could be allowed to be board members but when acting as such members, they do
not conduct executive missions, but are part of the Board.
Our comments on question 1 also apply to question 2 and the notion of management body remains highly confusing with its two functions: management and supervisory. This section should be called the duties and responsibilities of the CEO under the supervision of the board.
The missions allocated to the management body should be allocated to the right body (i.e Board of Directors or CEO/Deputy CEO) under applicable national law.
On point 17, this statement is contradictory with the common rule of joint and united responsibility of the full board, as it is stated in the common law in Continental Europe.
The board is united and responsibility is global and not individualized which limits the value of the two categories of board members.
Again, it would be much clearer to relate to the traditional legal terms of:
- Board
- CEO and its management team
On 19 g: Again the responsibility of appointing the key function holders is the responsibility of the CEO, not of the board and again the concept of management body is misleading since it leads to think that it is a board decision.
2. Supervisory function of the management body
This is clearly the board role.
Point 24
The definition on a) is relatively unprecise and leads to a misunderstanding of what is a good composition of a board. A board is a collective body whose competencies and know how is not an addition of similar profiles but a combinaison of talents, experiences and know-hows.
After the 2008/2009 financial crisis, Spencer Stuart led a survey on how the boards of the 18 major European banks behaved during the crisis. Interestingly, the result of our interviews was that at the paroxysm of the crisis, board members were split in 3 categories:
- The banking specialists (bankers, former bankers, risk specialists) who for most of them didn’t understand why the historical trends and behaviours of the market didn’t
work anymore and who were unable to predict the crisis.
- The “exotic” profiles (economist, diversity, former civil servant, etc.) who were totally afraid of what could be the personal consequences of the crisis for them in terms of
responsibility and were paralysed by the consequences of their potential decisions.
- The last category made of CEOs of industrial and commercial companies, who didn’t understand any better than the others, but who were the most useful board
members at that specific time, because as CEOs they were used to deal with crisis management and make decisions under pressure.
There is an underlying risk in trying to build boards for banks with only banking or risk specialists because banks will then lose the very useful input of entrepreneurs or CEOs of large groups who bring a real input in terms of understanding economy, knowing how to manage complex organisations and ability to manage crisis.
By focusing on the requirements for independent board member profiles on technical and risk matters, EBA will significantly reduce the size of the candidate pool excluding potential high quality candidates to privilege former bankers or auditors who by definition should be retired (not to be conflicted) which will distance them from todays’ economy.
EBA should not underestimate the potential shortage of adequate candidates ready to join bank boards.
For the last 10 years, we have noticed a real disinterest of many potential qualified candidates for bank boards for the following reasons:
- Impression of being permanently put under scrutiny by regulators
- Increasing responsibility compared to other boards
- Lack of interest for a conception of the board role over focused on compliance rather than dealing with business
In ten years’ time, the ratio of qualified candidates for one board position has dramatically dropped from 10 to 1 to 2/3 to 1.
The independence criteria should be left to national law or soft law and deleted from these guidelines. Should the criterion of independence be maintained in the guidelines, it should only refer to the independence of mind.
Last but not least, if we read in between the lines of the EBA recommendation, we see a temptation to be willing to give a right to the regulator to approve the nomination of board members prior to their appointment.
Such a process will have dramatic effect on the ability for banks to attract high quality candidates for the following reasons:
- It will create uncertainty in the nomination process
- It will generate a risk of not being able to present a candidate on time for election at the AGM in case the regulatory authority does not approve his candidacy
- It may discourage candidates who will not accept to take the risk of not being confirmed by the ECB after having been selected by the NomCo
3. Role of the chair of the management body
4. Management functions of the management body
Again instead of using this confusing notion of chair of the management body, which in fact recalls to either the chair of the management board or the chair of the supervisory board in the dual governance structure, it would be much more meaningful to call him the chairman of the board.
Since the management body in the EBA sense has two roles (supervisory and management) it is misleading to use the term of chair of the management body, which relates in fact to an executive function.
Again why complicate, when the governance vocabulary uses two self-meaning titles:
- The chairman of the board (non-executive)
- The CEO (executive)
5. Committees
The committees are not there to replace neither the board nor the management. They are there to facilitate the work of the board but the EBA committee job specs tend to give them specific powers which are against common law.
As for the board, we have noticed for the last ten years during which we conducted board assessments (200 in total), the quality of committee composition lies more in their diversity and seniority than in their only technicity. Having a committee only made of specialists is far less efficient than a committee made of diverse profiles including specialists but also CEOs.
6. Organisational framework and structure
As it’s written, it is unclear whether it concerns the management body in its management function or in its supervisory function.
Again instead of using words which are clearly defined like board, chair of the board, CEO, the EBA recommendation creates confusion in creating new concepts such as:
- Management body in its supervisory role
- Management body in its management role
which complicates things rather than simplifying them.
Question 1: Are the guidelines regarding the subject matter, scope, definitions and implementation appropriate and sufficiently clear?
PreambuleBefore answering the question, we would like to explain why Spencer Stuart is responding to this consultation.
Spencer Stuart is one of the world’s leading global executive search and leadership consulting firms, specialising in chief executive, board director and senior executive roles.
Spencer Stuart Board Practice provides two worldwide types of services across industries but with a strong focus in the Financial Services area:
- Board director recruitments with more than 1300 placements over the last years o/w 15% are done in the FIG industry. More than 30% of our placements were female.
- Board effectiveness assessment with more than 50 assignments per year o/w around 20% in the European Banking Industry which gave us the opportunity to assess
over the years the governance of a majority of European banks. We have an unquestioned leading position in that field.
In addition to these services, Spencer Stuart produces a series of intellectual capital pieces:
- Annual board indexes in 15 markets where we survey the status of governance and the progress made.
- Specific surveys on subjects such as:
- Board and Crisis Management
- Board Best Practices
- Bank boards in crisis
For all these reasons, we hope that our contribution could be helpful to EBA.
Answer to question 1
Guidelines are clear on subject matter and addressers.
On scope of application (point 9-10-11), there is a clear confusion regarding what is called management body as two different types of governance structure and two types of functions are mixed, and the text is not fully consistent with local laws and regulations:
- In a dual board structure (supervisory board and management board), the supervisory board has no management power; it has only a supervisory function and an ex post
control function. The management in that case is clearly the management board and you cannot say that the supervisory board has a management function since it
neither approves the strategy nor takes management decision.
- In an unitary board, the board is a collective body in charge of the supervisory function and some management functions (including the determination of the institution’s
strategy); whereas the executive function (i.e the daily management of the institution) is ensured by one or more physical persons (i.e the CEO and Deputy CEOs).
It would be much clearer, broader in its application and more consistent with local laws to use the legal terms of:
- Board
- Senior management (CEO and responsible managers)
EBA should clarify the notion of a management body in clearly attributing:
- the supervisory function to the Board
- the management function to the Senior Management
On scope of application point 12
Applying the same rules for the parent company (consolidated) and the subsidiaries where they are fully controlled doesn’t make a lot of sense since it is the responsibility of the parent company to control its wholly owned subsidiaries and it normally falls under the duty of its management and ultimately of its board to unsure that subsidiaries are compliant.
By considering at the same level, the parent company and the 100% owned subsidiaries, it would make the governance of the latter a lot heavier, with no evident additional benefit.
However, in the case of not wholly owned subsidiaries, the situation would be different.
In definition, there is no comment, except:
1. For the “key function holders”, which is a new notion introduced in this document and which seems not to be consistent with the CRD4 reference document.This notion
introduces a real limitation in the powers of the management since according to all business laws in Europe, appointing the management team is the responsibility of the
CEO and not of the board.
2. For the directorship, EBA proposed definition seems to mean that a director is a member of the management body in its management role which is totally wrong (cf. our
first point above).
3. The guideline should consider that in the one-tier system, the CEO and the deputy CEO could be allowed to be board members but when acting as such members, they do
not conduct executive missions, but are part of the Board.
Question 2: Are there any conflicts between the responsibilities assigned by national company law to a specific function of the management body and the responsibilities assigned by the Guidelines, in particular within paragraph 23, to either the management or supervisory function?
1. Duties and responsibilities of the management bodyOur comments on question 1 also apply to question 2 and the notion of management body remains highly confusing with its two functions: management and supervisory. This section should be called the duties and responsibilities of the CEO under the supervision of the board.
The missions allocated to the management body should be allocated to the right body (i.e Board of Directors or CEO/Deputy CEO) under applicable national law.
On point 17, this statement is contradictory with the common rule of joint and united responsibility of the full board, as it is stated in the common law in Continental Europe.
The board is united and responsibility is global and not individualized which limits the value of the two categories of board members.
Again, it would be much clearer to relate to the traditional legal terms of:
- Board
- CEO and its management team
On 19 g: Again the responsibility of appointing the key function holders is the responsibility of the CEO, not of the board and again the concept of management body is misleading since it leads to think that it is a board decision.
2. Supervisory function of the management body
This is clearly the board role.
Point 24
The definition on a) is relatively unprecise and leads to a misunderstanding of what is a good composition of a board. A board is a collective body whose competencies and know how is not an addition of similar profiles but a combinaison of talents, experiences and know-hows.
After the 2008/2009 financial crisis, Spencer Stuart led a survey on how the boards of the 18 major European banks behaved during the crisis. Interestingly, the result of our interviews was that at the paroxysm of the crisis, board members were split in 3 categories:
- The banking specialists (bankers, former bankers, risk specialists) who for most of them didn’t understand why the historical trends and behaviours of the market didn’t
work anymore and who were unable to predict the crisis.
- The “exotic” profiles (economist, diversity, former civil servant, etc.) who were totally afraid of what could be the personal consequences of the crisis for them in terms of
responsibility and were paralysed by the consequences of their potential decisions.
- The last category made of CEOs of industrial and commercial companies, who didn’t understand any better than the others, but who were the most useful board
members at that specific time, because as CEOs they were used to deal with crisis management and make decisions under pressure.
There is an underlying risk in trying to build boards for banks with only banking or risk specialists because banks will then lose the very useful input of entrepreneurs or CEOs of large groups who bring a real input in terms of understanding economy, knowing how to manage complex organisations and ability to manage crisis.
By focusing on the requirements for independent board member profiles on technical and risk matters, EBA will significantly reduce the size of the candidate pool excluding potential high quality candidates to privilege former bankers or auditors who by definition should be retired (not to be conflicted) which will distance them from todays’ economy.
EBA should not underestimate the potential shortage of adequate candidates ready to join bank boards.
For the last 10 years, we have noticed a real disinterest of many potential qualified candidates for bank boards for the following reasons:
- Impression of being permanently put under scrutiny by regulators
- Increasing responsibility compared to other boards
- Lack of interest for a conception of the board role over focused on compliance rather than dealing with business
In ten years’ time, the ratio of qualified candidates for one board position has dramatically dropped from 10 to 1 to 2/3 to 1.
The independence criteria should be left to national law or soft law and deleted from these guidelines. Should the criterion of independence be maintained in the guidelines, it should only refer to the independence of mind.
Last but not least, if we read in between the lines of the EBA recommendation, we see a temptation to be willing to give a right to the regulator to approve the nomination of board members prior to their appointment.
Such a process will have dramatic effect on the ability for banks to attract high quality candidates for the following reasons:
- It will create uncertainty in the nomination process
- It will generate a risk of not being able to present a candidate on time for election at the AGM in case the regulatory authority does not approve his candidacy
- It may discourage candidates who will not accept to take the risk of not being confirmed by the ECB after having been selected by the NomCo
3. Role of the chair of the management body
4. Management functions of the management body
Again instead of using this confusing notion of chair of the management body, which in fact recalls to either the chair of the management board or the chair of the supervisory board in the dual governance structure, it would be much more meaningful to call him the chairman of the board.
Since the management body in the EBA sense has two roles (supervisory and management) it is misleading to use the term of chair of the management body, which relates in fact to an executive function.
Again why complicate, when the governance vocabulary uses two self-meaning titles:
- The chairman of the board (non-executive)
- The CEO (executive)
5. Committees
The committees are not there to replace neither the board nor the management. They are there to facilitate the work of the board but the EBA committee job specs tend to give them specific powers which are against common law.
As for the board, we have noticed for the last ten years during which we conducted board assessments (200 in total), the quality of committee composition lies more in their diversity and seniority than in their only technicity. Having a committee only made of specialists is far less efficient than a committee made of diverse profiles including specialists but also CEOs.
6. Organisational framework and structure
As it’s written, it is unclear whether it concerns the management body in its management function or in its supervisory function.
Question 3: Are the guidelines in Title I regarding the role of the management body appropriate and sufficiently clear?
See previous question 2Again instead of using words which are clearly defined like board, chair of the board, CEO, the EBA recommendation creates confusion in creating new concepts such as:
- Management body in its supervisory role
- Management body in its management role
which complicates things rather than simplifying them.