Ius Commune Congress 2010 25 November 2010 Denise E.M. Kromwijk, LL.M.

1. The influence of bonuses on the development of the financial crisis and the (intended/proposed) national and international regulation of bonuses Ius Commune Congress 2010 25 November 2010 Denise E.M. Kromwijk, LL.M. Prof.dr. Wilco J. Oostwouder

2. The influence of bonuses on the development of the financial crisis and the (intended/proposed) national and international regulation of bonuses • A short introduction to variable remuneration and the financial crisis • The international perspective • The Dutch perspective

3. Financial crisis and variable remuneration • Is there a connection? • PricewaterhouseCoopers: unbalanced variable compensation has led to undesirable behaviours ranging from excessive risk-taking to an overemphasis on short-term results • Not amount but structure

4. Three theories explaining variable remuneration Directors pay (vs. pay of ‘common’ employees): • Agency theory (predominant theory): tension between shareholders who are the ‘owners’ and board members who are the agents. Variable remuneration reduces agency costs • Market theory: remuneration is a result of supply and demand in the labour market • Corporate governance theory: the level of remuneration is a result of corporate governance

5. The international perspective • EU level • High-level Group on financial supervision in the EU • Committee of European Banking Supervisors • EU Recommendations • Capital Requirements Directive • Global level • Basel Committee on Banking Supervision • Financial Stability Forum/Financial Stability Board • OECD • Institute of International Finance

6. EU level – High Level Group and CEBS • High-level Group on Financial Supervision in the EU (De Larosière) • Structure of remuneration, not amount. • Recommendations • Focus on shareholders interests. • Not binding • Committee of European Banking Supervisors • High level Principles for Remuneration Policies • Draft guidelines on Remuneration Policies and Practices • National Supervisors • Not binding

7. EU level - Recommendations • 2004 and 2005: Recommendations of the EU (2004/913/EC and 2005/162/EC) • Update in 2009 of these two Recommendations (C(2009) 3177) • New Recommendation financial services sector (C(2009) 3159 ) • Article 288 Treaty of the European Union (ex article 249 Treaty establishing the European Community): Recommendations are not binding. • European Commission (EC) expects implementation by Members States • Report by EC in 2010 (COM(2010) 285 final and COM(2010) 286 final): application is disappointing.

8. EU level – CRD • 18 May 2010 Resolution of European Parliament: soft law approach of recommendations is not satisfactory (2009/2711 (INI)) • Therefore amendment of the Capital Requirements Directive (CRD) for credit instutions and investmend funds in which the remuneration subject is introduced: welcome • Not all listed companies, Parliament wants more (2010/2009(INI), Rapporteur: Saïd El Khadraoui) • Remuneration policies consistent with risk management • Cap to bonuses • EU: hopefully binding and mandatory rules on remuneration from January 2011 onwards

9. EU level - conclusion • Many rules, none binding • CRD binding hopefully January 2011 onwards • Bad implementation • Different systems corporate governance: serious issue • Competitive disadvantage

10. Global Level – OECD and IIF • OECD • 1999 and 2004: Rules on corporate governance • long-term interests • 2009: no change, follow rules of Financial Stability Forum • 25 February 2010: set of good practices • Not binding • Institute of International Finance • Market initiative • July 2008: best practices • Not binding • March 2009: bad implementation

11. Global level - Basel Committee on Banking Supervision • 1999 and 2006: Enhancing Corporate Governance for Banking Organisations • Not binding • 1999: • «Failure to link incentive compensations to the business strategy can cause or encourage managers to book business based upon volume and/or short-term profitability to the bank with little regard to short or long-term risk consequences. This can be seen particularly with traders and loan officers, but can also adversely affect the performance of other support staff.» • «In order to avoid incentives being created for excessive risk-taking, the salary scales should be set, within the scope of general business policy, in such a way that they do not overly depend on short-term performance, such as short-term trading gains.»

12. Global level - Financial Stability Forum/Financial Stability Board • FSF Principles for sound compensation practices (April 2009) • FSB Implementation standards (September 2009) • G20 fully ‘endorses’ Implementation standards (Pittsburgh Summit, September 2009) • Assessment by Institute of International Finance, Compensation Reform in Wholesale Banking 2010: Progress in Implementing Global Standards, September 2010 • Not binding

13. Global level - conclusion • In 1999 warning excessive risk-taking banks because of remuneration policy • Not binding • Different systems corporate governance: serious issue • Competitive disadvantage

14. The Dutch perspective • Mandatory and binding rules • Binding but non-mandatory rules • Non-binding recommendations and principles

15. Mandatory binding rules (i) • Dutch Civil Code (DCC): e.g. general meeting decides on remuneration policy • Fiscal rules on the extra taxation of excessive remuneration • Statutory provision on works councils • Provision on financial supervision • (Claw back: bill 32512)

16. Mandatory binding rules (ii) • Issue: except for fiscal rules no clear standards for the amount of variable remuneration, the relation with the fixed remuneration and the conditions for the reward of this remuneration or the claw back of the remuneration

17. Binding but non-mandatory rules • Frijns Code (for listed companies) • Banking Code • How do they work? • Apply or explain (in annual report) • Not binding • Shareholders decide: potential clash between long term and short term

18. Non-binding recommendations and principles • Gentleman’s agreement between the financial sector and the minister of finance • Principles of the Financial Market Authority and the Dutch National Bank • Recommendations Committee De Wit

19. Dutch perspective - conclusion • Few mandatory provisions • Soft law approach • Application of corporate governance codes difficult because of the position of shareholder: • short term/long term • position of other stakeholders • Many different sets of rules/recommendations • Self-assessment of compliance: bad

20. What is really needed? • Binding and mandatory regulations on a global scale • If that is not feasible at least binding and mandatory regulations on a European scale • Main issue: different corporate governance systems! • In shareholder system variable remuneration will be linked to shareholder value, in stakeholder system this remuneration will also depend on other factors • Solution?