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DIRECTORS’ REMUNERATION AND CORPORATE SOCIAL RESPONSIBITY: POST-CRISIS HORIZONS by: Serhiy Kozmenko, Yaroslav Mozghoviy, Dmitriy Govorun, Dmitriy Riabichenko,

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Presentation on theme: "DIRECTORS’ REMUNERATION AND CORPORATE SOCIAL RESPONSIBITY: POST-CRISIS HORIZONS by: Serhiy Kozmenko, Yaroslav Mozghoviy, Dmitriy Govorun, Dmitriy Riabichenko,"— Presentation transcript:

1 DIRECTORS’ REMUNERATION AND CORPORATE SOCIAL RESPONSIBITY: POST-CRISIS HORIZONS by: Serhiy Kozmenko, Yaroslav Mozghoviy, Dmitriy Govorun, Dmitriy Riabichenko, Ukrainian Academy of Banking of the National Bank of Ukraine International Center for Banking and Corporate Governance, Ukrainian Academy of Banking of the National Bank of Ukraine

2 Introduction 2007 financial crisis is gaining a momentum and is not spread worldwide yet; top management of the American Wall Street got a total bonuses record of $39 billion; 2008 the most extensive dismissals and bankruptcies; $ trillions of loses in the global scale; What was the role of the distorted remuneration in the crisis? Did banks followed their CSR policies? What needs and can be done in future? International Center for Banking and Corporate Governance, Ukrainian Academy of Banking of the National Bank of Ukraine

3 Structure Observation of the CSR policies and remuneration practices in banking institutions Two models of the corporate governance: Anglo-Saxon and ContinentalMost interesting examples of banksRegulative measuresPost crisis situation International Center for Banking and Corporate Governance, Ukrainian Academy of Banking of the National Bank of Ukraine

4 The USA: CSR practices CSR is not addressed as a regulatory compliance issue but rather from a social and moral choice perspective; corporate activities encompassing corporate responsibility in the US go beyond environmental, legal and workplace issues to ones that best enhance a company’s external reputation; philanthropy and employee engagement are key areas of a company’s corporate responsibility platform; US companies defined and interpreted their own view of CSR within the context of their own company  they have been able to measure and promote activities with greater freedom than their international counterparts; International Center for Banking and Corporate Governance, Ukrainian Academy of Banking of the National Bank of Ukraine

5 Developed and liquid stock market  compensation in securities is wide spread; Structure of the compensation packages is not homogenous and differs from bank to bank; Salary could be less that 10% of the top managements’ and directors’ remuneration The USA: Compensation International Center for Banking and Corporate Governance, Ukrainian Academy of Banking of the National Bank of Ukraine

6 The USA: bonuses in crisis (2008) Several techniques as a response to the growth of executive compensation: Earnings/ (Losses)Bonus Pool # of Employee Earnings/ Employees Bonus/ Employees Bank of America$4,000, $3,300,000,000243,000$16,461$13,580 Bank of New York Mellon$1,400,000,000$945,000,00042,900$32,634$22,028 Citigroup, Inc.($27,700,000,000)5,330,000,000322,000($85,812)$16,512 Goldman Sachs Group$2,322,000,000$4,823,358,76330,067$77,228$160,420 J.P. Morgan Chase & Co.$5,600,000,000$8,693,000,000224,961$24,893$38,642 Merrill Lynch($27,600,000,000)$3,600,000,00069,000($467,797)$61,017 Morgan Stanley$1,707,000,000$4,475,000,00046,964$36,347$95,286 State Street Corp.$1,811,000,000$469,970,00028,475$63,600$16,505 Wells Fargo & Co.($42,933,000,000)$ ,000281,000($152,786)$3,475 International Center for Banking and Corporate Governance, Ukrainian Academy of Banking of the National Bank of Ukraine

7 Citygroup ($27,700,000,000)5,330,000,000322,000($85,812)$16,512 Earnings/ (Losses)Bonus Pool # of Employees Earnings/ Employees Bonus/ Employees In 2008 received by TARP $ 45 bln; The US Treasury also agreed to a loss-sharing agreement on approximately $301 bln of assets; From the Citizenship report of the Citygroup, 2008: “our key stakeholders include investors and shareholders, employees, clients, peer institutions, communities, regulators, vendors, suppliers and NGOs”; “our approach to executive compensation is based on the principle “pay for performance”; International Center for Banking and Corporate Governance, Ukrainian Academy of Banking of the National Bank of Ukraine

8 Bank of America In received by TARP $ 45 bln; $ 118 bln of assets were also guaranteed by the US Treasury; Bank of America made a greatest acquisition in it’s history – bought Merill Lynch for about $ 50 bln; a great burden for the shareholders and taxpayers; CSR is considered more like philanthropic activity than a part of corporate strategy; Earnings/ (Losses)Bonus Pool # of Employees Earnings/ Employees Bonus/ Employees Bank of America$4,000, $3,300,000,000243,000$16,461$13,580 International Center for Banking and Corporate Governance, Ukrainian Academy of Banking of the National Bank of Ukraine

9 The USA: compensation regulation  Emergency Economic Stabilization Act of 2008 (EESA): the Capital Purchase Program- new rules on executive compensation for participating institutions  Treasury guidelines under the EESA, restricting executive pay at companies receiving future federal financial assistance.  American Recovery and Reinvestment Act of 2009 (ARRA) - additional limitations on executive compensation for institutions participating in the TARP (limited bonus payments to one third the value of total annual compensation).  Corporate and Financial Institution Compensation Fairness Act of a section that allowed for a 'say on pay' for all public institutions in the USA International Center for Banking and Corporate Governance, Ukrainian Academy of Banking of the National Bank of Ukraine

10 The UK and Europe: CSR practices In the US companies focus often on what they do in the community – their communities. How you interact and how you support them. Europe tend to focus more on how you run your business in a responsible way – it’s about operations and how you work. Corporate behavior is managed through regulations and compliance in the UK and Europe. Everything you do is regulated and not left to the company to try to innovate on their side. Any leadership position you develop is very quickly turned into a government requirement. Difference in regulations and the community/operations dynamics also impacts key aspects of CSR – such as stakeholder engagement and CSR reporting. US companies tend to focus on the communications part more while Europe tend to focus more on the operational changes. International Center for Banking and Corporate Governance, Ukrainian Academy of Banking of the National Bank of Ukraine

11 The UK and Europe: Compensation Compensation structure is similar the one adopted in the USA, but the absolute amounts are lower International Center for Banking and Corporate Governance, Ukrainian Academy of Banking of the National Bank of Ukraine

12 The Royal Bank of Scotland Bank possessed a strong CSR department and proclaimed it’s responsibility to all groups of stakeholders; 84 percent of the RBS is now owned by the UK government (taxpayer), which bought RBS stock for £45 billion, representing 50 pence per share. In 2011, the shares were worth 19 pence, representing a taxpayer book loss of £26 billion; The large RBS bonus payments subsequent to the UK government bailouts have led to controversy. Staff bonuses were nearly £1 billion in 2010, even though RBS reported losses of £1.1 billion for More than 100 senior bank executives were paid in excess of £1 million each in bonuses. International Center for Banking and Corporate Governance, Ukrainian Academy of Banking of the National Bank of Ukraine

13 The UK October 2008 “Dear CEO” letter from FSA “There is widespread concern that inappropriate remuneration schemes, particularly but not exclusively in the areas of investment banking and trading, may have contributed to the present market crisis … The FSA shares these concerns.” March 2009 Turner Review aimed at undertaking systematic examination of the banking crisis “…bank regulators had paid insufficient attention to remuneration structure and its potential for creating unacceptable incentives for risk taking.” March 2009 FSA published a Consultation Paper and draft code on remuneration practices. International Center for Banking and Corporate Governance, Ukrainian Academy of Banking of the National Bank of Ukraine

14 July 2009 Walker Review focuses on improving CG in the banking and financial sector, with measures to strengthen boards and enhance institutional investor activism. October 2009 New bonus rules from HSBC Bank Holdings, Barclays, Standard Chartered, Royal Bank of Scotland Group, Lloyds Banking Group: More transparent disclosure of who receives what bonus; Payments to be made over three years rather than immediately; Clawbacks if the firm's performance suffers over time. The UK International Center for Banking and Corporate Governance, Ukrainian Academy of Banking of the National Bank of Ukraine

15 Postcrisis: Compensation is constantly growing from year to year as in the US so in the UK and Europe; CSR initiatives tend to be more regulated in Europe and no clear steps in this connection was made in the USA; International Center for Banking and Corporate Governance, Ukrainian Academy of Banking of the National Bank of Ukraine

16 remuneration has also received loud public reaction and been on the continental European reform agenda International Center for Banking and Corporate Governance, Ukrainian Academy of Banking of the National Bank of Ukraine

17 Global regulation The FSF – “compensation practices at large financial institutions contributed to the global financial crisis, by providing perverse incentives for risk-taking” The FSA - it is “mindful that to be effective action on this subject needs to be taken internationally”, and that regulatory success depends on its ability “to gain international agreement to enforce similar principles in all major financial markets” G20 – endorses t he FSF Principles for Sound Compensation Practices International Center for Banking and Corporate Governance, Ukrainian Academy of Banking of the National Bank of Ukraine

18 European culture of bonus paying Allied Irish Bank State aid received: billion euro Paid bonuses: - 40 million euro. Deutsche Bank CEO refused from 14 mln dollars in favor of other bank’s employees. International Center for Banking and Corporate Governance, Ukrainian Academy of Banking of the National Bank of Ukraine

19 France August 2009 New bonus rules by BNP Paribas, Societe Generale, Credit Agricole + Mr. Sarkozy all banks are required to disclose information about the awards; bonus payments are freezed for a period of three years; new scheme of bonus paying is worked out; system of penalties is established for losses caused by the top management’s actions; Minister of Finance: “bonuses should be directly tied to the financial performance of banks”. Michel Camdessus took new position for monitoring bank compensation. International Center for Banking and Corporate Governance, Ukrainian Academy of Banking of the National Bank of Ukraine

20 “...from a shareholder’s perspective, it is essential to weigh the short-term potential for raising profitability against the long-term requirement to retain and attract key staff. Although our financial performance in 2010 was markedly better than in 2009, with an increase in profitability of CHF 10 billion, given the considerations outlined above, the bonus pool for 2010 was set at CHF 4,245 million, 11% lower than it was last year...” UBS, Remuneration. UBS. Bonuses granted for 2010 International Center for Banking and Corporate Governance, Ukrainian Academy of Banking of the National Bank of Ukraine

21 Director Remuneration. UBS compensation model 2010 for senior employees Sixty percent bonus deferrals Performance condition for equity awards Reduction of leverage Shareholders’ advisory vote International Center for Banking and Corporate Governance, Ukrainian Academy of Banking of the National Bank of Ukraine

22 Director Remuneration. UBS. Total reward principles International Center for Banking and Corporate Governance, Ukrainian Academy of Banking of the National Bank of Ukraine

23 Studying remuneration in banks, it is obvious that remuneration for independent directors (specially trends after the crises) should be also under the scope of interest International Center for Banking and Corporate Governance, Ukrainian Academy of Banking of the National Bank of Ukraine

24 Independent director remuneration in Europe CG SystemRemuneration structure Remuneration, th.USD Changes made after the Crisis “Pay for presence practice” In averageMin.Max. European Banks Annual remuneration for being the chairman Board of directors --- Regulation became more strict; Significant changes in structures have not been identified Still used Audit Committee43,429,384,7 Other Committees 22,412,232,5 Annual retainer for being a member of Board of directors 36,95,068,8 Executive Committee 19,010,128,0 Audit Committee22,32,242,4 Other Committees 11,46,516,4 Remuneration per meeting of Board of directors 4,90,39,4 Executive Committee 1,50,32,6 Audit Committee2,40,34,4 Other Committes2,21,33,0 ** Total remuneration was calculated by suggesting the common conditions for various systems, i.e. number of board meetings, committee meetings attended etc. Total assets were calculated among banks from sample

25 In October 2011 the European Commission published a new policy on corporate social responsibility It states that to fully meet their social responsibility, enterprises (banks as well) “should have in place a process to integrate social, environmental, ethical and human rights concerns into their business operations and core strategy in close collaboration with their stakeholders”. International Center for Banking and Corporate Governance, Ukrainian Academy of Banking of the National Bank of Ukraine

26 Conclusions Outlining the post-crisis horizons we should focus on the following information: As the response to the negative consequences of the global financial crisis, inter alia unexpectedly high bonuses paid to the bankers of unsuccessful financial institutions, the remuneration issue and social responsibility of the companies attracted even more attention of the regulators. However, regulation may be more strict International Center for Banking and Corporate Governance, Ukrainian Academy of Banking of the National Bank of Ukraine

27 Conclusions CSR goes up to the level of obligatory part in regulation. However, the actual peculiarities and traditions in acceptance of CSR concept are different from country to country. International Center for Banking and Corporate Governance, Ukrainian Academy of Banking of the National Bank of Ukraine

28 Conclusions It is really hard to make homogeneous conclusions about effectiveness of the compensation regulation worldwide. But it is evident that adopted regulative measures were inevitable for gaining stability in financial sectors and overcoming the crisis. International Center for Banking and Corporate Governance, Ukrainian Academy of Banking of the National Bank of Ukraine


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