McCreevy Speaks At Transatlantic Corporate Governance Meeting

by Ulrika Lomas, Tax-News.com, Brussels

09 September 2008

European Commissioner for Internal Markets, Charlie McCreevy, on Tuesday gave a speech at the Transatlantic Corporate Governance Dialogue 2008.

Mr McCreevy observed that:

"Corporate governance is essentially about the behaviour of firms in good times and bad times. There is much room for improvement in the way financial institutions equip themselves to deal with the bad times. And that must inevitably start by addressing how they behave when the going is good."

"Industry itself is well aware of its duty to address the most pressing problems. In July of this year, industry came up with its own response in the form of a report by the Institute of International Finance’s Committee on Market Best Practices. However, many of industry's own recommendations were not news to me especially on risk management, transparency, remuneration and credit rating agencies."

With regard to risk management, the Internal Market Commissioner stated that: "Financial institutions will have to examine their internal governance framework with a view to embracing risk management. Risk management should be part of the strategy of the firm, the culture of the organisation."

Addressing the topic of market transparency, McCreevy suggested that: "There is an urgent need to improve transparency for investors, markets and regulators, by making sure that they are provided with proper information. This was one of our priorities in the ECOFIN roadmap of 2007."

And revealed that:

"We have strongly pushed the industry to come forward with a convincing proposal, in particular on exposures to structured products and off-balance sheet vehicles; and with basic data on primary and secondary markets. I very much welcome their efforts thus far, but would also like to stress that further efforts are needed to ensure meaningful disclosures about their risk exposures, risk management and accounting policies."

He continued:

"A word about remuneration. Up to now, there have been far too many perverse incentives in place. It cannot be either sensible or sane that compensation incentives encourage excessive risk-taking for short term gain such as the next bonus day or share option on offer. They need to be aligned with shareholder interest and long-term, firm-wide profitability."

And argued that: "What we currently have is a situation where shareholders behave too much like shrinking violets – unwilling, unable but most of all unequipped - to curb corporate excesses. Shareholders should push their Member States to have a vote on this issue as laid down in the Commission Recommendation."

He further observed that:"One conclusion that I have drawn from recent events is that the EU must take action with a view to the role and the use of credit rating agencies. CRAs played a major role in the market turmoil by greatly underestimating the credit risk of structured credit products."

On the role of regulators and legislators in ensuring good corporate governance, McCreevy stated that:

"We also need to look at the role of supervisors in all this. It is clear that EU regulators need to cooperate more –- it is not sufficient to have a national focus when financial markets are integrated at the EU level, and sometimes even at the global level. EU finance ministers agree with this, and there is a continued call for improvements to be made. That is why the Commission is preparing to revise its decisions establishing the EU supervisory networks."

"The aim is to ensure that EU supervisors take account of the EU dimension in their daily work, and improve the likelihood of delivering convergent, EU-wide regulation."

"Key points will include a revised decision making process, better financing and setting certain work priorities at the EU level. This would go a long way towards strengthening financial stability in the EU Single Market," he argued.

Finally, the Internal Market Commissioner concluded:

"Looking forward, I am convinced that broader international cooperation among policy makers in all markets developed as a result of the credit crisis should be seen as a governance model for the future. In globalised markets, we need an international policy approach if we want to deliver efficiency and financial stability."

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