Corporate Governance in Financial Institutions and Remuneration Policies

This paper sets out recommendations to reform the regulatory and supervisory framework for financial markets in Europe.

The financial crisis of 2008 led governments to question the strength of financial institutions and the suitability of their regulatory and supervisory systems. They were determined to leverage lessons from the financial crisis to prevent a similar situation in the future. The paper states that:

• European Commission announced in March 2009 that it would examine corporate governance rules of financial institutions and make recommendations to remedy weaknesses;
• Strengthening corporate governance is at the heart of the Commission's program of financial market reform and crisis prevention;
• Sustainable growth needs awareness and healthy management of risks within a company;
• Boards of directors did not understand the nature and scale of the risks they were facing;
• Shareholders did not properly perform their role as owners of the companies;
• Lack of effective control mechanisms contributed significantly to excessive risk-taking by financial institutions.

The paper states that there is a need to understand whether existing corporate governance of financial institutions is deficient. It outlines options that could supplement legal provisions to strengthen financial system in Europe.