directors’ remuneration and corporate social responsibity: post-crisis horizons by: serhiy...

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 UkraineInternational Center for Banking and Corporate Governance, Ukrainian Academy of Banking of the National Bank of Ukraine

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

StructureObservation of the CSR policies and remuneration practices in banking institutions

Two models of the corporate governance: Anglo-Saxon and Continental

Most interesting examples of banks

Regulative measures

Post crisis situation


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;


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


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 $4,000,000 000 $3,300,000,000 243,000 $16,461 $13,580

Bank of New York Mellon $1,400,000,000 $945,000,000 42,900 $32,634 $22,028

Citigroup, Inc. ($27,700,000,000) 5,330,000,000 322,000 ($85,812) $16,512

Goldman Sachs Group $2,322,000,000 $4,823,358,763 30,067 $77,228 $160,420

J.P. Morgan Chase & Co. $5,600,000,000 $8,693,000,000 224,961 $24,893 $38,642

Merrill Lynch ($27,600,000,000) $3,600,000,000 69,000 ($467,797) $61,017

Morgan Stanley $1,707,000,000 $4,475,000,000 46,964 $36,347 $95,286

State Street Corp. $1,811,000,000 $469,970,000 28,475 $63,600 $16,505

Wells Fargo & Co. ($42,933,000,000) $977 500,000 281,000 ($152,786) $3,475


Citygroup

($27,700,000,0

00)

5,330,000,0

00322,000

($85,812

)$16,512

Earnings/

(Losses)Bonus Pool

# of

Employee

s

Earnings/

Employee

s

Bonus/

Employee

s

• 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”;


Bank of America• In 2008-2009 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

Employe

es

Earnings/

Employee

s

Bonus/

Employe

es

Bank of

America

$4,000,000

000

$3,300,000,

000243,000 $16,461 $13,580


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 2009 - a section that allowed for a 'say on pay' for all public institutions in the USA


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.


The UK and Europe: Compensation

Compensation structure is similar the

one adopted in the USA, but the absolute

amounts are lower


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 2010. More than 100 senior bank executives were paid in excess of £1 million each in bonuses.


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.


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


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;


remuneration has also received loud public reaction and been on the continental European reform

agenda


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 the FSF Principles for Sound Compensation PracticesInternational Center for Banking and Corporate Governance, Ukrainian Academy of Banking of the National

Bank of Ukraine

European culture of bonus paying

Allied Irish Bank • State aid received: + 3.5 billion euro • Paid bonuses: - 40 million euro.

Deutsche Bank • CEO refused from 14 mln dollars in favor of

other bank’s employees.


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.


“...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, 2011. http://www.ubs.com

Remuneration. UBS. Bonuses granted

for 2010


Director Remuneration. UBS compensation model 2010 for senior employees

Sixty percent bonus deferrals

Performance condition for equity

awards

Reduction of leverage

Shareholders’ advisory vote


Director Remuneration. UBS. Total reward principles


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


Independent director remuneration in Europe

CG System Remuneration structure

Remuneration, th.USDChanges made after the

Crisis

“Pay for presence practice”In average Min. 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 Committee 43,4 29,3 84,7

Other Committees

22,4 12,2 32,5

Annual retainer for being a member of

Board of directors

36,9 5,0 68,8

Executive Committee

19,0 10,1 28,0


Other Committees

11,4 6,5 16,4

Remuneration per meeting of

Board of directors

4,9 0,3 9,4

Executive Committee

1,5 0,3 2,6


Other Committes 2,2 1,3 3,0

** 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

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”.


ConclusionsOutlining 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


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.


ConclusionsIt 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.


directors’ remuneration and corporate social responsibity: post-crisis horizons by: serhiy...

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