EU Paper on the Banking Industry Foreshadows a Heavier Regulatory Approach on Pay, Governance

October 15, 2010

A controversial European Commission concept paper questions whether board and shareholder-based corporate governance should be replaced by government-controlled pay standards, potentially including the prohibition of stock options and change-in-control agreements.  The Commission “green paper” seeks comments on a number of issues regarding pay and governance in the financial services industry, including whether:

  • “the role of shareholders, and also that of employees and their representatives [should] be strengthened” in establishing compensation, thus moving away from a board-centric model;
  • stock options should be prohibited or their favorable tax treatment be limited;
  • governments should require boards to become more diverse (i.e., to include women and "directors with different social, cultural and educational backgrounds”); and
  • institutional investors should be held to “stewardship codes” of best practice.

The paper focuses on the financial services industry, but also notes that “it raises questions about the effectiveness of corporate governance rules” among companies generally and that it “will launch a broader review” of pay and governance among all industries next spring.  This has shareholders in the UK concerned.  “We feel quite threatened,” the Financial Times quoted Hugh Savill, acting director of investment shares at the Association of British Insurers, which owns about one-fifth of shares in the UK.  Echoing the arguments U.S. companies made against say on pay before its adoption, he indicated, “Unlike most of Europe, the UK has a dispersed shareholder base and the entire corporate governance model has grown up around that.”  For U.S. companies, the paper raises concerns that any new EU governance requirements would ultimately expand to the U.S., similar to what happened with say on pay.