Green Paper - Corporate governance in financial institu-tions and remuneration policiesGeneral commentsThe Danish government welcomes the initiative by the European Com-mission to review the adequacy of the corporate governance regulatoryframework. The Danish government agrees that a sound corporate gov-ernance framework could enhance the stability of financial institutionsand the financial system.The Danish government finds, however, that the European Commissionshould await the outcome of the changes to the European supervisoryframework as well as Solvency II and changes to the Capital Require-ments Directive, e.g. CRDIII, which the European Commission has al-ready initiated regarding remuneration, risk management and the role ofsupervisory authorities to ensure consistency and a smooth process.As regards remuneration policies the Danish government stresses the im-portance of ensuring a responsible remuneration policy in financial insti-tutions. Therefore, the Danish government has already taken steps to im-plement the revised capital requirements directive in this field.At this stage of the process, the Danish government would recommendthat the European Commission focuses on the role and composition of theboard of directors (non-executive directors). Principles of diversity andcompetency should be at the core of the decisions when appointing theboard of directors (non-executive directors).The Danish government would urge the European Commission to con-sider the responsibility of the board of directors (non-executive directors)in subsidiaries as well and finds that subsidiaries should not be allowed todelegate this responsibility to the board of directors at group level. Ingeneral only focusing on the financial group level could be problematicwhen implementing the new corporate governance framework.

The Danish government finds that the main focus of corporate govern-ance regulation should be the responsibility of the management of finan-cial institutions instead of the financial authorities’ supervision of the in-stitutions.The business areas of the financial institutions are of a great variety andcomplexity which means that it is the core assignment for the manage-ment to obtain the necessary level of skill and experience to be able tomanage the institution in a responsible way.The Danish government finds that this objective most suitably is obtainedby a heightening of the managements’ knowledge of and compliance withtheir duties as management on all levels and not by an increase of super-vision from financial authorities. In order to ensure this it is important toimprove the implementation of corporate governance principles and rec-ommendations within the management of the institutions.More specifically the Danish government finds that annual meetings, ifnot required more often, of the board of Directors (non-executive direc-tors) with the focus of identifying and handling of risks for the year tocome and an annual evaluation of the composition of the board of direc-tors (non-executive directors) and the experience and skills of the day today management is a fine initiative towards ensuring that any foreseeablerisks will be evaded.Specific comments

1. Board of directors (non-executive directors)

The Danish government welcomes the European Commission’s initia-tives to ensure a sound regulatory framework for the composition androle of the board of directors (non-executive directors). The Danish gov-ernment agrees with the European Commission that principles of diver-sity and competency should be at the core of the decisions to appointmembers to the board of directors (non-executive directors). The gov-ernment also agrees that more women and individuals with differentbackgrounds in the board of directors (non-executive directors) could im-prove the efficiency of boards.However, generally it would not be suitable to formulate detailed re-quirements regarding the role and composition of the board of directors(non-executive directors). This is due to the fact that business areas of in-stitutions are of varying size and complexity and thus the requirementsshould reflect these differences. As an example the European Commis-sion’s proposal to make external evaluations of the board of directors(non-executive directors) compulsory should rather be optional for insti-tutions. As should the establishment of risk committees on the board. Therelevance of both external evaluations and risk committees would dependon the size, complexity and organisation of the institution. The DanishFSA recommends that the management of a financial institution annually

initiates an internal evaluation of the experience and skills of the man-agement in correlation with the future challenges of the institution.Also the Danish government agrees that the division of responsibilitiesbetween senior management (executive directors) and the board of direc-tors (non-executive directors) as well as the adequate independency of theboard of directors (non-executive directors) is essential. Therefore, thegovernment also finds that it should be prohibited to combine the func-tions of chairman of the board of directors (non-executive directors) andchief executive officer to ensure the independence of the board of direc-tors (non-executive directors).Further, the Danish government does not expect it will be effective tomake it mandatory to transfer responsibilities from senior management(executive directors) to the board of directors (non-executive directors).As an example, daily risk management decisions and product develop-ment do not necessitate the involvement of the board of directors (non-executive directors), which should rather pursue a more strategic role.Also, it seems most effective that risk managers keep reporting directly tosenior management (executive directors).The Danish government agrees that sufficient time devotion is crucial forthe well functioning of a board and therefore the number of boards onwhich a director may sit should be a criterion that should not be neglectedwhen the competency of a potential board member is considered. TheDanish government finds, however, that a strict limit on the number ofboards will not obtain the intended purpose. Rather, both the number andscope of boards that a potential director sits on should be considered aswell as other time constraints the potential director might have. This ne-cessitates a qualitative evaluation of the potential director’s time schedulerather than simply setting a strict limit.In terms of external communication requirements, the Danish governmentfinds that a risk control declaration is not needed. On the other hand, theDanish government very much agrees with the European Commissionthat institutions should inform the relevant supervisory authorities ofrisks, which are fundamental and material, whereas the daily risk man-agement should not be subject to this requirement.2. Risk managementAs stated in our general comments, the Danish government finds that theEuropean Commission should await the outcome of Solvency II and thechanges to the Capital Requirements Directive that the European Com-mission has already initiated regarding risk management to ensure consis-tency and a smooth process. Please also refer to our comments above un-der paragraph 1 regarding risk management.

3. The role of auditorsThe Danish government finds that it will be useful to analyse how best toarticulate the existing cooperation between auditors and supervisory au-thorities and to examine the need for an adequate European legal frame-work. The Danish government would like to share a few of the Danishexperiences in this regard below.The experience of the Danish government is that there is already an effec-tive ongoing dialogue and cooperation between the FSA and the auditors,including a formal forum of auditors and supervisors meeting regularly todiscuss new legislative initiatives. At the same time the division of re-sponsibilities between the supervisory authorities and auditors should notbe neglected, since a blurred division would be problematic.The Danish government further receives a copy of the long form audit re-port to the board of directors (non-executive directors) and further infor-mation at request. Also, a Danish whistleblower mechanism for auditorsis implemented, but very seldom applied.According to the international financial reporting standards (IFRS) andDanish reporting standards for financial institutions, a description of fi-nancial risks has to be included in the financial statements of institutionsand is therefore audited. Therefore, the Danish government does not findthat there is an immediate need to extend the role of auditors to risk-related financial information that is not part of the financial statements.4. The role of supervisory authoritiesAs stated in our general comments, the Danish government finds that theEuropean Commission should await the outcome of the changes to theEuropean supervisory framework.As a part of the latest amendment of the Danish Financial Business Actthe regulation regarding fit & proper evaluation of the members of an in-stitution’s management was tightened up. All members of the manage-ment will be evaluated in accordance with the regulations in connectionwith their entering of the management and during their time of service onthe management.The purpose of the fit & proper regulation is to prevent members of themanagement who do not have the necessary experience and skills and/orwho may have a resume which makes them unfit for the position asmember of the management.Also the regulation enables the Danish FSA to order a member of theBoard of Directors (non-executive directors) to resign from his or her po-sition, if the person no longer complies with the regulation of fit andproper. If the person in question refuses to resign the Danish FSA is en-abled to order the institution to dismiss the person in question.

The regulation regarding fit & proper is a very valuable opportunity inthe work to ensure that the members of the management are conscious oftheir responsibility of the institution’s compliance with corporate govern-ance as well as other relevant legislation.On the basis of the above mentioned the Danish government finds thatthe existing regulation is sufficient with regard to actual legislation andthat any further regulation should be in the form of soft law and corporategovernance recommendations.5. The role of shareholdersThe Danish government welcomes that the role of shareholders is consid-ered as part of governance issues, since shareholders as owners are essen-tial stakeholders in ensuring sound governance principles. The Danishgovernment agrees with the European Commission that shareholdersshould be involved in the corporate governance of an institution.However, the Danish government finds that shareholders should not beimposed certain standards, such as the International Corporate Govern-ance Network. The standards are meant to be voluntary and will mostlikely be most effective if chosen by shareholders on a voluntary basis.As stated initially, the Danish government finds, however, that it could berelevant to encourage institutions to set the governance standards on theagenda of a general assembly to allow for shareholders’ input.Regarding the disclosure requirements, the Danish government finds thatthe initiatives proposed seem extensive and could in some cases be coun-terproductive, for example a shareholder’s vote is in certain cases subjectto confidentiality.6. Effective implementation of corporate governance principlesAs mentioned in our general comments the Danish government finds thatthe purpose of the European Commission’s green paper is best obtainedby an improvement of the corporate governance regulation in the form ofrecommendations instead of a detailed legislation and increase of super-vision from the financial authorities.Therefore it is crucial to find ways to improve the knowledge of the cor-porate governance recommendations within the institutions’ manage-ments and the Danish government finds that one of the objects of the fu-ture work from the European Commission should be with the focus ofimproving the implementation of existing and new recommendations.Also it should be noted that the members of the management is recruitedto lead the financial institutions and an increase of the supervision maychallenge the management’s inclination to do their job. Therefore it isvery important to emphasize that the responsibility in the end lies withthe management and they should be left with the necessary room for ma-noeuvre.

The knowledge of corporate governance regulation could be improved byincreasing the number of institutions who are subject to a principle of“comply or explain”.7. RemunerationAs stated in our general comments, the Danish government finds it im-portant that the European Commission awaits the outcome and imple-mentation of the initiatives that the European Commission has alreadycommenced i.e. the revision of the capital requirements directive (CRDIII) before further initiatives are presented.In Denmark a broad political agreement on the implementation of CRDIII as regards remuneration policies has just been reached. The politicalagreement i.e. prescribes that the general meeting of shareholders willhave a say on the financial institutions remuneration policy includingguidelines on performance pay and severance packages.The agreement also ensures that the main organisations representing thefinancial sector agrees on a binding code on remuneration policy in thefinancial sector with the aim of ensuring a remuneration policy whichpromotes efficient and responsible risk management and does not encour-age excessive risk taking. The code should i.e. include a provision ensur-ing that financial institutions should make public the salaries of individ-ual (executive and non-executive) directors.Furthermore, for the board of directors (executive and non-executive) thefollowing shall apply:a cap for variable remuneration at 50 percent of the non-variable re-munerationstock options or similar instruments may only comprise 25 % of vari-able remuneration,at least 40 percent of variable remuneration (and at least 60 percentfor larger variable payouts) is deferred for 4 years.

The agreement also prescribes that the board of directors in a financial in-stitution receiving public support is subject to a cap on variable remu-neration at 20 percent of non-variable remuneration. In addition there willbe a ban on new stock option programmes or the continuation of existingprogrammes in institutions receiving public support.The Danish Financial Supervisory Authority is empowered to supervisethe remuneration policies of financial institutions with the aim of ensur-ing that they have in place a remuneration policy which promotes effi-cient and responsible risk management.