EU plans new measures to restrict bank directors

THE EUROPEAN Commission is advancing far-reaching plans to restrict the right of bank directors to sit on the boards of other companies, a practice common on the Irish stock market.

As the EU authorities work on sweeping governance reforms for financial institutions, they want to rein in pay structures which reward excessive risk-taking and improve oversight.

In addition to curtailing cross-directorships between the boards of banks and other listed groups, the EU executive also wants to limit the amount of time any individual can spend on a board.

These proposals, if adopted in law, would have radical implications for the operation of banks and companies on the Irish Stock Exchange, where multiple directorships are common and numerous directors have sat for many years on the same board.

The Tasc think tank recently found that financial institutions played a “central role” in 33 interlocking boards in private business and semi-State groups when the boom was at its height in 2005-2007.

More than half of a group of 39 leading directors held board positions in AIB, Bank of Ireland, Irish Life & Permanent and in Anglo Irish Bank, then publicly quoted. Former Anglo directors Seán FitzPatrick, Gary McGann, Ned Sullivan and Anne Heraty ranked among a group of 11 business people who had 10 or more links – via multiple directorships – to 40 of Ireland’s top private and State-owned companies.

Internal markets commissioner Michel Barnier will publish a discussion paper on the governance reform plan next Wednesday as European Commission chief José Manuel Barroso seeks a mandate from EU leaders to develop a package of measures to fulfil the reform agenda backed by the G20 group of industrial and emerging economies.

Mr Barnier will make legislative proposals “one way or the other by spring next year at the very latest”, said an official briefed on his plans.

With EU governments propping up European banks to the tune of €4.13 trillion since the outbreak of the financial crisis in autumn 2008, the authorities want to reinforce governance as part of the effort to prevent any repeat of the debacle.

The commissioner believes board oversight and control of management was insufficient, risk management was weak and the existence of inadequate remuneration structures led to excessive risk-taking and short-term thinking.

His objective is to ensure proper board oversight by strengthening the level and range of directors’ expertise. A further concern for the commissioner is that shareholders did not exercise concern over risk-taking in the financial institutions they owned.

Also on the table are proposals to bring credit rating agencies, criticised by the European authorities for amplifying the euro zone sovereign debt crisis, within the ambit of a new regulatory regime in the EU. This is the first phase of a reform process in which the EU hopes to increase competition in a sector dominated by three global agencies: Standard Poor’s, Moody’s and Fitch. Mr Barnier believes there are too few agencies in too few hands.

Having proposed a tax on banks and investment firms this week to insure against any future financial collapse, Mr Barnier will introduce plans to reform the derivatives market during the summer.