Response to consultation on Joint ESMA EBA Guidelines on suitability of management body
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In the German corporate governance-systems it is the responsibility of the management board to inform the supervisory board. The management board must provide for an internal reporting system in accordance with art. 90 of the German Public Limited Companies Act to be properly informed and based on this having an effective risk management framework implemented. The management board then derives a respective reporting for the supervisory board.
Against this, the supervisory board’s duty is limited to oversee and monitor the members of the management body, with respect to their responsibility on developing and implementing a risk management framework. This includes the supervisory board’s task to assess whether this risk management framework is effective and to check if responsibilities for the controls have been appointed.
Direct reporting lines and accountability from staff below management board level to the supervisory board is not complying with this principle and are not providing any advantage. The benefit of (at least) the German corporate governance-system is that the supervisory board has a direct counterpart responsible for all questions or enquiries the members of the supervisory board may have. Please bear in mind that there is a clear separated division of responsibilities. That also avoids to have the unfavourable situation of a conflict of interest for the heads of internal control functions to decide to whom report first. Giving these heads direct access to the supervisory board may from an organisational point of view lead to mistrust the management board’s members without cause.
We would therefore like to ask ESMA and EBA to abstain from the ability to report directly to the supervisory board (para 150, 168, 175, 193).
Credit institutions are defined in the CRR, which is why we would like to propose to call these institutions CRR-institutions. This term is also common and should become the official term in this context.
Definition of Key function holders
We support the definition of key function holders as persons who “have significant influence over the direction of the institutions, but who are not members of the management body nor the CEO. This should include the heads of the internal control functions and the CFO, where they are not members of the management body, and, where identified on risk-based approach by institutions, other key function holders.”
We would like to ask ESMA and EBA to set out in this definition that having significant influence on the direction of the institution typically does not include heads of internal functions like human resources, legal etc. Additionally, the heads of business lines are also generally not in scope, since in two-tier-systems decisions about the direction of the institution are taken within the management board (management body in its management function) according to company acts like art. 76, 77, 91 of the German Public Limited Companies Act. Heads of internal functions are usually only in charge to decide within derived competences, maybe about credits until a specific amount, but not about the (strategic) direction of the institution. They might prepare such decisions though, but may not eventually decide upon.
This might differ to one-tier systems where many managerial responsibilities can be derived to special officers (like a CCO not member of the management body). In this case, decisions could have significant influence on the direction.
Definition of heads of internal control functions
By defining the heads of the internal control functions as well as in the whole following paper, EBA concerns the risk “management” function. We ask EBA to clarify its intention by replacing the term risk “control” function, used in the current EBA Guidelines 44 from 2011, by risk management function without changing the subject. Does risk management function still encompass the same department as the risk control function?
We are uncertain whether different implications result from these terms. By comparing the corresponding BCBS papers we recognise even not a clear application of the terms. In BCBS Standards for Minimum capital requirements for market risks (p. 20 footnote 15) from January 2016 risk control function is mentioned while BCBS Guidelines Corporate Governance principles for banks from July 2015 as well as in BCBS “Guidance on the application of the Core Principles for Effective Banking Supervision to the regulation and supervision of institutions relevant to financial inclusion” from September 2016 concerns the risk management function.
Definition of Diversity
Despite the fact that diverse teams offer benefits with respect to decision taking processes it may also be observed that less diverse teams may be able to discuss a critical question or decision from different perspectives. However, the last part of the definition seems to connote it “... to the extent allowing”. Therefore, we would like to ask ESMA and EBA to shorten the definition and to finish it with “... are different.” Whether the current composition of a board allows discussions from different views, has to be assessed by the management body in its supervisory function and should not be derived from diversity aspects only. If it finds the degree of diversity to be insufficient, it has to change the composition of the respective management body. It may also be clarified that a lack of diversity should not automatically lead to the need of a composition’s change.
Definition of Geographical provenance
We would like to ask ESMA and EBA to give more guidance what gaining of cultural, educational or professional background means. If working in another country (e.g. for at least one year) would be deemed as sufficient for this specific requirement, we would like ESMA and EBA to confirm that.
Definition of Training
ESMA and EBA define training as any initiative or program to improve the skills, knowledge or competence. The common terms in this case are knowledge, skills, experience and sometimes expertise. We suggest not to use the term competence which is not explained or even used in the further paper. ESMA and EBA should remain in the common terminology of knowledge, skills and experience or in the generic term “qualification” and to delete the term “expertise”.
According to para 29, 30, CRD-institutions should ensure that key functions holders are of good repute, have honesty and integrity and possess sufficient knowledge, skills and experience for their positions at all times and assess such suitability requirements, among others (i) when appointing new key function holders, (ii) in the event of a material impact on the reputation of the individual or (iii) as part of the review of the internal governance arrangements by the management body.
(i) Pursuant to para 151 the responsible function reports the assessment results to the appointing function and the management body. The assessment results of heads of internal control functions have also to be reported to the competent authorities. According to para 152 the competent authority may require such information even from all key function holders.
We would like to ask ESMA and EBA to clarify, what management body in this context means. Especially in two-tier corporate governance systems, the management function (/management board) is responsible to select the upper management and should therefore – as being responsible the addressee of the assessment results.
In addition, we are uncertain what scope para 151, 152 does have. Is its scope limited to new appointments or does its scope even encompass the re-assessment as set out in para 29 and 30? According to these provisions, when the suitability assessment’s results have to be reported to the competent authority in case of a new appointment, this requirement should also apply on the results of a reassessment accordingly. When considering this point please bear in mind that competent authorities may expand reporting requirements. In case competent authorities do require information with respect to any reassessment performed for key function holders and given ESMA and EBA decide to apply para 151, 152 also to reassessments, institutions with a high amount of key function holders will face high administrative costs connected to the duty of documenting and having to submit plenty of reassessment results. The benefit of doing so is considered as minimal and does not outweigh the costs that will incur.
Therefore, we would like to ask ESMA and EBA to delete the power of the competent authorities to require information for all key function holders and to limit that requirement to information for heads of internal control functions.
(ii) To identify a material impact on the reputation of the individual, the institution has to monitor the internal and external behaviour of the key function holder. In the case of the appointment of a member of the management body, according to para 136 b the institution should gather information on the reputation which necessarily leads to a permanent monitoring by ways of internet search techniques and other observation tools. We are rejecting the principle idea behind this requirement as disproportionate and would express our sincere concerns on this requirement on a basis irrespective of any relevant events. If the reputation of a key function holder is hampered and the respective institution is informed about that fact or would have obtained knowledge without gross negligence we may recognize that this knowledge could be the basis for further institution and or supervisory actions. We would like ESMA and EBA to clarify para 30 b accordingly.
(iii) The review of the internal governance arrangements is, according to para 73 of the EBA paper on internal governance, duty of the supervisory function. Hence, the supervisory function should reassess the suitability of key function holders within the review of the internal governance arrangements. Reviewing the arrangements should only be construed as to review policies, processes and mechanisms and should not comprise the review and reassessment of the suitability of individuals. Especially in the case of key function holders it must be highlighted that this obligation does not apply to the supervisory function, but that it is the management function being responsible for the selection and especially the assessment in the case of a new appointment of key function holders (s. (i)). The obligation of the supervisory function should be limited to the review of the selection and suitability assessment processes that have been duly developed and implemented by the management function, like set out in para 19 g. Consequently, the reassessment of the key function holder’s suitability has to remain the sole responsibility of the management function.
Taking all this into account, we may ask for para 30 c to be deleted or at least to be adjusted in order to clarify that the management function has to reassess the suitability of key function holders on a periodical basis.
We may suggest to include the systemic risk assessment, i.e. classification as Global Systemically Important Institution or Other Systemically Institution, will affect the proportionate principle.
We support the general approach to advice potential new members on which time is expected by the institution to conduct the mandate efficiently.
Para 38 – Considering a buffer is difficult
However, we would like to ask ESMA and EBA for more guidance how a buffer should be calculated. Crisis’ and extraordinary situations are unpredictable and may not be reliably estimated in advance. The buffer, therefore, will be to small in case of a relevant situation and prevents the skilled member to accept another mandate where his skills and expertise would be highly appreciated.
Para 39a – Taking the number of directorships into account
In this case, we would like to refer to our above comments in regard of the directorships. The term group should not be restricted to prudential consolidated subsidiaries but also to all undertakings within a group consolidated by international accounting standards like IFRS, since the same rational applies.
Para 39b – Considering travel time is not up to date
Furthermore, we would like to ask ESMA and EBA to refrain from taking the travel time into account. Nowadays, i.e. in digital times it is possible to work and communicate virtually everywhere via mobile devices like smartphones, notebooks and to an increasing part via tablets. The general assumption that travel time is not equal to work time is outdated. Especially this time could be used for the preparation of the meetings and should therefore not be taken into account in addition to the preparation time.
Para 39j – Taking into account relevant benchmarks, among others EBA’s benchmark
We have appreciated EBA’s benchmark study. It is a suitable approach and first step to give guidance to institutions to estimate the expected time. However, we are against the consideration of the benchmark as mandatory because we deem this approach as too much like “ticking the box”. The EBA benchmark does not take the proportionality principle sufficiently into account. It only differentiates between a specific balance sheet volume and whether the institution is governed by a one- or two-tier system. It seems clear to us that the question of sufficient time – among others –depends on the complexity of an institution and the challenges it faces, respectively. We would like to avoid getting into a situation, where the Joint Supervisory Team assesses the sufficient time commitment by only taking EBA’s benchmark into account.
We would therefore like to suggest to remove para 39j and to supplement the catalogue in para 39 with the advice that there is an EBA benchmark study which gives useful additional guidance and an indication for the time typically required by a mandate.
Para 39 in general
In addition, we would like to ask ESMA and EBA to supplement their guidelines with an explanation corresponding to that of the ECB in its draft guide on page 17. ESMA and EBA should also emphasise in their guidelines that the level of experience influences the preparation time in order to clarify that the devoting of time might differ significantly between members of the management body and might still be realistic.
II. Collective and individual suitability in regard of professional qualification
Difficulties to draw a target image of collective suitability
We would like to ask ESMA and EBA to explain, using examples, the difference between individual and collective suitability. In particular, we need more guidance regarding future appointments especially which documents should be handed in that outline what added value the individual will bring to the collective suitability, para 142. This requires to develop a target image which determines what is necessary to be collectively suitable and the institution needs to assess whether the appointee’s qualifications accounts for the respective collective suitability.
Currently, we assume that there is no significant gap between the total of the minimum qualifications for each member of a board (management board as well as supervisory board) and the requirement to be collectively suitable. Each member of a board or a committee is legally required to make its own judgement on supervisory board duties, i.e. requires the same minimum level of suitability as all members. Taking a decision without the necessary suitability may be deemed as a breach of law.
Please note, there is a common understanding that a greater gap between individual and collective suitability exists. But, in the last years, the expected individual level of each member were increased and increased which is why the idea of this gap might be rethought. We appreciate to share our thoughts afterwards.
1. Both, the draft ECB guide as well as the ESMA/EBA-paper on the assessment of suitability set out that there are requirements concerning individual members of the management body, members of one of the two boards, management and executive board and the collective suitability of the body or board, respectively. According to paragraph 63 of the ESMA/EBA-paper the management body should collectively be able to understand the institution’s activities, including the main risks. In addition, paragraph 65 requires that only the members of the management body in its supervisory function have to collectively be able to effectively challenge and monitor decisions made by the management body in its management function. According to these provisions, not each and every member needs to understand the institution’s activities and main risks, but the majority so that collective suitability is given.
However, simultaneously, according to paragraph 54 of the ESMA/EBA-paper (individual) members of the management body should have an up-to-date understanding of the business of the institution and its risks, at a level commensurate with their responsibilities (even acknowledged by EBA in its draft guidelines on internal governance, para 21). This should include an appropriate understanding of those areas for which an individual member is not directly responsible but is collectively accountable together with the other members of the management body. These other areas are all duties of the management body or one of the boards, including duties delegated to a committee, for which each member needs an appropriate understanding. An appropriate understanding requests sufficient knowledge and experience about the issue to assess whether the conduct of other members was correct. Actually, this requires the respective member to have the same minimum competence like the directly responsible member. This again is acknowledged by EBA in its draft guidelines on internal governance, para 39, where it sets out that delegating to committees does not in any way release the supervisory board from collectively fulfilling its duties and responsibilities.
2. We are unable to notice that there is actually a significant gap between individual and collective suitability requirements stated in the catalogues in para 60 and 66. In order to compare both requirements, we have inserted a table afterwards which matches similar fields of individual and collective suitability criteria. Please bear in mind that according to para 54 each member should have an appropriate understanding of those areas for which an individual member is not directly responsible but collectively accountable.
Criteria of individual suitability, para 60 Criteria of collective suitability, para 66
a Financial markets = c Sectoral/financial competence, incl. capital markets [ ]
b Legal Requirements and regulatory framework = h Legal and regulatory environment
c Strategic planning, and the understanding of an institution’s business strategy or business plan and accomplishment thereof = a
b
g
j a. business of the institution and main risk related;
b. each of the material activities;
g. local, regional and global markets
j. the ability to plan strategically
d Risk management (identifying, assessing, controlling and mitigating the main types of risk of an institution) = a
c
e
f
k a. business of the institution and main risk related;
c. sectoral/financial competence, incl. [ ] solvency and models
e. risk management, compliance and internal audit (the control framework is part of the risk management framework)
f. information technology and security
k. the management of (inter)national groups and risk related to group structures
e The assessment of the effectiveness of an institution’s arrangements, ensuring effective governance, oversight and controls = e
f
k e. risk management, compliance and internal audit (the control framework is part of the risk management framework which is crucial for effective governance, oversight and controls)
f. information technology and security
k. the management of (inter)national groups and risk related to group structures
f The interpretation of an institution’s financial information, the identification of key issues based on this information, and appropriate controls and measure = d Financial accounting and reporting
i Managerial skills and experience (in our opinion each member of the management body needs such skills. It is not explained, whether “experience” requires more than the experience required from each individual)
As we understand the result of this comparison, the criteria for individual suitability have such a wide scope that all criteria of collective suitability are encompassed. If ESMA and EBA intend to uphold these two sets of requirements we may request to provide examples giving guidance what the difference should be and to elaborate on this issue. Currently, the aforementioned two sets of requirements may not be implemented in practice appropriately.
3. In addition, ESMA, EBA and ECB raise the importance to take decisions independent of mind. According to para 74 of the ESMA/EBA-paper members should engage actively in their duties and should be able to make their own sound, objective and independent decisions and judgements when performing their responsibilities. For example, in the case of supervisory board members this means that every member should take an independent assessment of the risk reports. In particular, each member has to assess on itself, whether the provided information is sufficient, comprehensive and correct. If a member does not dispose of sufficient knowledge and/or expertise to assess the provided information, this particular member is not able to make its own sound, objective and independent decision.
4. Furthermore, at least in Germany, the idea of a collectively suitable board is not applicable in the relevant company law. The Federal Court of Justice has never considered a collective suitability when the liability and accountability of board members were in question. Quite the contrary, in its decision from November, 6th 2012 (II ZR 111/12) the federal court of justice has decided that due to art. 111 paragraph 6 share corporations act (Aktiengesetz) the overseeing and monitoring of the management board members is an individual duty of each member for which appropriate knowledge and experience is necessary. If the member is not suitable to decide on issues of the supervisory board, the member breaches the law and is liable if damages occur causally determined from such decisions.
5. From the public discussion, we have considered different cases, which are discussed as not necessary as overall suitability requirement for each member, but necessary to be collectively suitable. IT or digital competence is one of the most discussed criteria in this case. In our opinion, each member of a management board as well as each supervisory board member needs appropriate knowledge about this particular field of knowledge. There are IT risks, and the understanding of risks – as mentioned above – is required for each member. If the digital transformation challenges the current business direction, each member has to understand why so and how to deal with it. Furthermore, the appointment or proposal of new members is a duty of all supervisory board members. As a result, each and every member has to assess the digital competence of new members to decide, if a new member may be deemed suitable with respect to understanding the risks and challenges stemming from IT / digital issues.
We have identified only one example for collective suitability concerning specific experience about the monitored entities. As set out in the ESMA/EBA-paper the duration of all mandates should not end at the same time (“staggered terms”), thus, at any time at least a few experienced members remain keeping specific knowledge of the respective institution and/or group.
6. Therefore, we believe, that there is only this narrow scope of collective suitability, since each member has to possess sufficient knowledge about the business, the material risks of the activities and for all other duties of the board, and needs to be sufficiently experienced to assess decisions on such issues. As a result, the authorities should review the approach of the differentiation between individual and collective suitability. In particular by taking into account, that requested knowledge or skills the authorities suppose being only required by collective suitability might lead to a raise of the minimum level for all members of the management body or one of its functions.
It seems to be useful if the management body consists of members with even more competence and experience than required by law. Hence, e.g. great experience in IT issues is actually useful. But, to reason how a single member fits in the collective suitability depends from which is required by law.
7. Moreover, the directive on statutory auditors as well as supervisory assessment approaches narrow the scope of diversity in professional backgrounds.
Please note, in regard of the above mentioned, we do not think that each member, especially members of the supervisory board, has to gain its experience from previous positions in the financial services sector because this is not necessary to be capable to decide on risk and business issues. If an appointee has had previous positions in other sectors that member might need special sector training before it starts the mandate to be sufficiently suitable from this date on. A necessary precondition is that the appointee possesses enough knowledge and experience to become suitable by the time the member starts its mandate. This in turn requires the dedicated member to possess basic capabilities to understand provided information and to implement training knowledge into its work and performance of duties.
Although we would like to promote diversity in professional backgrounds, we might lead your attention to the fact that the legislator has narrowed the selection of persons from other sectors with the directive on statutory auditors of annual and consolidated accounts (2006/43/EC). According to art. 39(1) of the directive, audit committee members shall have competence relevant to the sector in which the audited entity is operating. The German legislator has transposed this provision for the audit committee and in addition for the supervisory board as well. As a result, at least the majority of members have gained their experience from the financial services sector. Especially in Germany, if the institution exceeds a certain number of employees, the supervisory board as a rule consists of representatives of the shareholders but also from the employees. In group structures, the representatives of the employees may be elected by employees of the institution itself and also by employees of subsidiaries. This leads to the effect that employee representatives may be duly elected in compliance with applicable labour law but do not necessarily stem from the financial sector. Bearing in mind that the majority of the supervisory board members need to have experience in the financial services sector, the institution might be forced to secure that almost all shareholder representatives have a professional background in the financial sector.
When ECB, EBA and ESMA are now intending to demand diversity in professional and educational backgrounds, please take into account the narrowed scope of diversity in professional backgrounds due to these aforementioned restrictions, which especially apply for institutions in Germany.
In addition, ECB clarifies in its draft, that the authority assesses the suitability of appointees by primarily considering whether the experience has been gained from the banking sector. On page 11, ECB explains that they assume five years of such experience as sufficient to assess an appointee as suitable. As a result, the motivation of institutions to appoint members from other sectors is significantly reduced due to the requirement of justification and respective additional documentation.
As a result, opportunities of diversity in educational and professional backgrounds are restricted.
We would like the authorities to acknowledge, that it is not necessary to have such specific budget and estimated time in regard of training to maintain suitability. The institution has to offer all members the opportunity to inform themselves about current trends, new legal requirements and anything else what is new and may be assessed as material. It should be sufficient not to provide special training in this regard rather than an integrated approach, i.e. a comprehensive information in case of new requirements arising. If there are new legal requirements, like the guidelines on suitability, the fit & proper assessment or an adjustment of IFRS 9, comprehensive information in advance of a meeting may be provided, within the meeting and elaborated afterwards on the resulting challenges for the institution.
In addition, we would like to ask to refuse that there is a mandatory consideration of EBA benchmarking, according to para 86. As we have already set out, from our view the benchmark does not consider the proportionality principle sufficiently enough due to its only refers to balance sheets. Furthermore, comparing benchmarks is not suitable for the assessment of training days. The roles determine the required suitability and it depends on the appointee, which training induction he needs to achieve this. Hence, the expected induction and training sessions will differ between different appointee as well as their expected costs. Moreover, we would pay any training and induction costs to achieve suitability level. We do not understand the benefit of defining specific budgets against this background.
In addition, we would like to ask to adjust para 93. According to this provision, the diversity should at least refer to the following diversity aspects: educational and professional background, gender, age and, in particular institutions that are active internationally, geographical provenance. The provision sounds as it should be mandatory to have specific targets for all this aspects. Especially in dual tier systems would this mean that a (e.g.) management board of 3 persons has to fulfil a rate for all these aspects.
The rules for the independence of members of the supervisory function in para 124 should be extended. However, they still do not describe how to deal with representatives of employees. We would like to ask ESMA and EBA to confirm that these representatives are evenly independent, in particular, if rules to save their independence exist like in the German Industrial Constitution Act (Betriebsverfassungsgesetz). We would be grateful for the clarification in order to estimate what the EBA paper on internal governance specifically requires from German corporate governance-systems. Para 42, 44 and 45 of the EBA paper on internal governance demand a majority of independent members in the risk and audit committee and that their chair is independent respectively. ESMA and EBA have to take into account that to classify employee representatives as not independent means to exclude them from chairing committees and to unnecessarily weaken their position in important committees.
Para 124b – Three years period
Among others, due to para 124 b there should be a three years cooling-off-phase for members of the management function or staff of one level below. Currently, as also stated by the draft ECB guide on fit & proper assessments, p. 19, a two years cooling-off-phase is common. We would like ESMA and EBA to explain, why this threshold has to be raised to three years. If there are no reasonable grounds, we would like to ask to remain the currently used two years phase and deem this as sufficient.
In addition, we would like to ask to delete the extension to members of the first management level below the management function. To apply this requirement to one-tier systems might be suitable, but we reject this being useful or appropriate in two-tier corporate governance systems where only members of the management function can influence the strategic direction of the institution.
Para 124f – Serving in the management body for 12 years and more
According to para 124f members who have served in the management body within the group for 12 years or longer are deemed to be not independent anymore. If this requirement is applied on a two-tier corporate governance system, it would concern members of the management function as well as of the supervisory function. This means that a member of the supervisory function would lose its independence from the twelfth year on. We suggest that independence of board members must be regularly assessed. Independence should not automatically be denied after twelve years’ time of service. As it may be also useful to maintain specific knowledge and expertise, it may also be considered to allow executive board members to become supervisory board members. This is a common practice in Germany for stock listed companies, though it does not comply with the German Corporate Governance Code if the Chair of the Supervisory Board is the former CEO of the company.
The assessment process is not only determined in Title VI but also in Title I. According to para 25, among others, a new role within the management body triggers a new assessment by the authority. This should be applicable if an ordinary member changes from an ordinary position to a chairperson of a committee or the board. We understand this opinion in the case of the audit committee’s chairperson, because the respective level of knowledge and experience is specifically determined by law (e.g. art. 39 directive on statutory auditors, para 45 draft EBA guidelines on internal governance). However, there are no comparable provisions for the chairpersons of other committees. For example, the EBA guidelines of internal governance require special knowledge and experience about risk management systems from all members, independent on their function within the risk committee (s. para 43). This also applies for the nomination committee (s. para 43). The EBA Guidelines on sound remuneration only require that one member should also be a member of the risk committee (para 56). The chairpersons of these committees does not need to give more evidence on their knowledge, skills and experience than other members, except some little skills in chairing a meeting, which in regard of ESMA and EBA is a generally required skill for each member of a management body.
As a result, we would like ESMA and EBA to adjust this provision to a mandatory information in the case of changes within the management or supervisory function. A new fit & proper assessment should not be mandatory.
The disclosure of information
According to para 127, 128 the institution’s assessment results should be disclosed to shareholders, when they have to decide on the new members. We would like to know which degree of transparency this provision is intended to require. We won’t support an interpretation in which we have to justify why an individual member is suitable, which means to reveal all information in Annex III, perhaps, including the financial conditions on credits etc.
We advocate that the statement, that the individual member and the whole supervisory function is suitability must be sufficient.
Especially in cases, where members of the management body have to be appointed by an annual general meeting, an ex-ante assessment could lead to the situation that the assessment may not be timely finalized before the annual general meeting takes place or must be properly organized (the agenda being subject to further requirements limiting the time frame even further) and the institution would thus be forced to invite to a new meeting and to bear the costs incurred in order to have a sufficiently composed management body. If a member of the management board resigns from his duties in extraordinary cases, an ex-ante assessment might lead to the condition of a non sufficiently composed management body lasting for months.
Therefore, we would like to ask ESMA and EBA to repeal the idea of mandatory ex-ante assessments.
Question 1: Are there any conflicts between the responsibilities assigned by national company law to a specific function of the management body and the responsibilities assigned by the Guidelines to either the management or supervisory function?
In general, at different positions in the paper (e.g. para 88, 101, 102, 125) ESMA and EBA would like a direct communication between internal functions, respectively their heads, and the supervisory function or one of its committees. We would like to draw your attention to a specific point which is that the interaction between the supervisory function and personnel below the management board level is against the common understanding of German corporate governance principles and systems.In the German corporate governance-systems it is the responsibility of the management board to inform the supervisory board. The management board must provide for an internal reporting system in accordance with art. 90 of the German Public Limited Companies Act to be properly informed and based on this having an effective risk management framework implemented. The management board then derives a respective reporting for the supervisory board.
Against this, the supervisory board’s duty is limited to oversee and monitor the members of the management body, with respect to their responsibility on developing and implementing a risk management framework. This includes the supervisory board’s task to assess whether this risk management framework is effective and to check if responsibilities for the controls have been appointed.
Direct reporting lines and accountability from staff below management board level to the supervisory board is not complying with this principle and are not providing any advantage. The benefit of (at least) the German corporate governance-system is that the supervisory board has a direct counterpart responsible for all questions or enquiries the members of the supervisory board may have. Please bear in mind that there is a clear separated division of responsibilities. That also avoids to have the unfavourable situation of a conflict of interest for the heads of internal control functions to decide to whom report first. Giving these heads direct access to the supervisory board may from an organisational point of view lead to mistrust the management board’s members without cause.
We would therefore like to ask ESMA and EBA to abstain from the ability to report directly to the supervisory board (para 150, 168, 175, 193).
Question 2: Are the subject matter, scope and definitions sufficiently clear?
Definition of CRD-institutionsCredit institutions are defined in the CRR, which is why we would like to propose to call these institutions CRR-institutions. This term is also common and should become the official term in this context.
Definition of Key function holders
We support the definition of key function holders as persons who “have significant influence over the direction of the institutions, but who are not members of the management body nor the CEO. This should include the heads of the internal control functions and the CFO, where they are not members of the management body, and, where identified on risk-based approach by institutions, other key function holders.”
We would like to ask ESMA and EBA to set out in this definition that having significant influence on the direction of the institution typically does not include heads of internal functions like human resources, legal etc. Additionally, the heads of business lines are also generally not in scope, since in two-tier-systems decisions about the direction of the institution are taken within the management board (management body in its management function) according to company acts like art. 76, 77, 91 of the German Public Limited Companies Act. Heads of internal functions are usually only in charge to decide within derived competences, maybe about credits until a specific amount, but not about the (strategic) direction of the institution. They might prepare such decisions though, but may not eventually decide upon.
This might differ to one-tier systems where many managerial responsibilities can be derived to special officers (like a CCO not member of the management body). In this case, decisions could have significant influence on the direction.
Definition of heads of internal control functions
By defining the heads of the internal control functions as well as in the whole following paper, EBA concerns the risk “management” function. We ask EBA to clarify its intention by replacing the term risk “control” function, used in the current EBA Guidelines 44 from 2011, by risk management function without changing the subject. Does risk management function still encompass the same department as the risk control function?
We are uncertain whether different implications result from these terms. By comparing the corresponding BCBS papers we recognise even not a clear application of the terms. In BCBS Standards for Minimum capital requirements for market risks (p. 20 footnote 15) from January 2016 risk control function is mentioned while BCBS Guidelines Corporate Governance principles for banks from July 2015 as well as in BCBS “Guidance on the application of the Core Principles for Effective Banking Supervision to the regulation and supervision of institutions relevant to financial inclusion” from September 2016 concerns the risk management function.
Definition of Diversity
Despite the fact that diverse teams offer benefits with respect to decision taking processes it may also be observed that less diverse teams may be able to discuss a critical question or decision from different perspectives. However, the last part of the definition seems to connote it “... to the extent allowing”. Therefore, we would like to ask ESMA and EBA to shorten the definition and to finish it with “... are different.” Whether the current composition of a board allows discussions from different views, has to be assessed by the management body in its supervisory function and should not be derived from diversity aspects only. If it finds the degree of diversity to be insufficient, it has to change the composition of the respective management body. It may also be clarified that a lack of diversity should not automatically lead to the need of a composition’s change.
Definition of Geographical provenance
We would like to ask ESMA and EBA to give more guidance what gaining of cultural, educational or professional background means. If working in another country (e.g. for at least one year) would be deemed as sufficient for this specific requirement, we would like ESMA and EBA to confirm that.
Definition of Training
ESMA and EBA define training as any initiative or program to improve the skills, knowledge or competence. The common terms in this case are knowledge, skills, experience and sometimes expertise. We suggest not to use the term competence which is not explained or even used in the further paper. ESMA and EBA should remain in the common terminology of knowledge, skills and experience or in the generic term “qualification” and to delete the term “expertise”.
Question 3: Is the scope of assessments of key function holders by CRD-institutions appropriate and sufficiently clear?
There are specific requirements for key function holders in chapter 3, chapter 23 and in the draft EBA guidelines on internal governance. These guidelines are interacting, which is why our following comments refer also to other chapters or the EBA paper (relevant parts, see below).According to para 29, 30, CRD-institutions should ensure that key functions holders are of good repute, have honesty and integrity and possess sufficient knowledge, skills and experience for their positions at all times and assess such suitability requirements, among others (i) when appointing new key function holders, (ii) in the event of a material impact on the reputation of the individual or (iii) as part of the review of the internal governance arrangements by the management body.
(i) Pursuant to para 151 the responsible function reports the assessment results to the appointing function and the management body. The assessment results of heads of internal control functions have also to be reported to the competent authorities. According to para 152 the competent authority may require such information even from all key function holders.
We would like to ask ESMA and EBA to clarify, what management body in this context means. Especially in two-tier corporate governance systems, the management function (/management board) is responsible to select the upper management and should therefore – as being responsible the addressee of the assessment results.
In addition, we are uncertain what scope para 151, 152 does have. Is its scope limited to new appointments or does its scope even encompass the re-assessment as set out in para 29 and 30? According to these provisions, when the suitability assessment’s results have to be reported to the competent authority in case of a new appointment, this requirement should also apply on the results of a reassessment accordingly. When considering this point please bear in mind that competent authorities may expand reporting requirements. In case competent authorities do require information with respect to any reassessment performed for key function holders and given ESMA and EBA decide to apply para 151, 152 also to reassessments, institutions with a high amount of key function holders will face high administrative costs connected to the duty of documenting and having to submit plenty of reassessment results. The benefit of doing so is considered as minimal and does not outweigh the costs that will incur.
Therefore, we would like to ask ESMA and EBA to delete the power of the competent authorities to require information for all key function holders and to limit that requirement to information for heads of internal control functions.
(ii) To identify a material impact on the reputation of the individual, the institution has to monitor the internal and external behaviour of the key function holder. In the case of the appointment of a member of the management body, according to para 136 b the institution should gather information on the reputation which necessarily leads to a permanent monitoring by ways of internet search techniques and other observation tools. We are rejecting the principle idea behind this requirement as disproportionate and would express our sincere concerns on this requirement on a basis irrespective of any relevant events. If the reputation of a key function holder is hampered and the respective institution is informed about that fact or would have obtained knowledge without gross negligence we may recognize that this knowledge could be the basis for further institution and or supervisory actions. We would like ESMA and EBA to clarify para 30 b accordingly.
(iii) The review of the internal governance arrangements is, according to para 73 of the EBA paper on internal governance, duty of the supervisory function. Hence, the supervisory function should reassess the suitability of key function holders within the review of the internal governance arrangements. Reviewing the arrangements should only be construed as to review policies, processes and mechanisms and should not comprise the review and reassessment of the suitability of individuals. Especially in the case of key function holders it must be highlighted that this obligation does not apply to the supervisory function, but that it is the management function being responsible for the selection and especially the assessment in the case of a new appointment of key function holders (s. (i)). The obligation of the supervisory function should be limited to the review of the selection and suitability assessment processes that have been duly developed and implemented by the management function, like set out in para 19 g. Consequently, the reassessment of the key function holder’s suitability has to remain the sole responsibility of the management function.
Taking all this into account, we may ask for para 30 c to be deleted or at least to be adjusted in order to clarify that the management function has to reassess the suitability of key function holders on a periodical basis.
Question 4: Do you agree with this approach to the proportionality principle and consider that it will help in the practical implementation of the guidelines? Which aspects are not practical and the reasons why? Institutions are asked to provide quantitative and qualitative information about the size, internal organisation and the nature, scale and complexity of the activities of their institution to support their answers.
We appreciate the proportionality principle being applied here. We would like to emphasise that the suitability of its management body members must be defined depending on the situation, the challenges and the environment of the respective institution or group. E.g. if an institution is listed, specific knowledge about shareholder issues is needed which is not required in the case of non-listed institutions etc.We may suggest to include the systemic risk assessment, i.e. classification as Global Systemically Important Institution or Other Systemically Institution, will affect the proportionate principle.
Question 5: Do you consider that a more proportionate application of the guidelines regarding any aspect of the guidelines could be introduced? When providing your answer please specify which aspects and the reasons why. In this respect, institutions are asked to provide quantitative and qualitative information about the size, internal organisation and the nature, scale and complexity of the activities of their institution to support their answers.
As we have explained above. The specific situation of the institution determines suitability requirements and is therefore flexible enough.Question 6: Are the guidelines with respect to the calculation of the number of directorships appropriate and sufficiently clear?
Overall, we support the authorities’ drafts and approach how to count the directorships. In regard of the privileged counting of directorships in one group, we only would like to ask ECB, EBA and ESMA to extent the scope to the directorships in group undertakings, not only prudentially consolidated, but consolidated by accounting rules like IFRS or national accounting and consolidation rules. This should at least be applicable, if one of the directorships concerns the function as member of the management board of the parent undertaking and its non-executive directorships are used to monitor and control the activities of subsidiaries. The supervision of the subsidiaries in a group is part of the duties of a member of the management board at the parent undertaking, regardless whether the subsidiary is consolidated prudentially or due to international or national accounting rules and should therefore also be treated equally.Question 7: Are the guidelines within Title II regarding the notions of suitability appropriate and sufficiently clear?
I. Sufficient time commitmentWe support the general approach to advice potential new members on which time is expected by the institution to conduct the mandate efficiently.
Para 38 – Considering a buffer is difficult
However, we would like to ask ESMA and EBA for more guidance how a buffer should be calculated. Crisis’ and extraordinary situations are unpredictable and may not be reliably estimated in advance. The buffer, therefore, will be to small in case of a relevant situation and prevents the skilled member to accept another mandate where his skills and expertise would be highly appreciated.
Para 39a – Taking the number of directorships into account
In this case, we would like to refer to our above comments in regard of the directorships. The term group should not be restricted to prudential consolidated subsidiaries but also to all undertakings within a group consolidated by international accounting standards like IFRS, since the same rational applies.
Para 39b – Considering travel time is not up to date
Furthermore, we would like to ask ESMA and EBA to refrain from taking the travel time into account. Nowadays, i.e. in digital times it is possible to work and communicate virtually everywhere via mobile devices like smartphones, notebooks and to an increasing part via tablets. The general assumption that travel time is not equal to work time is outdated. Especially this time could be used for the preparation of the meetings and should therefore not be taken into account in addition to the preparation time.
Para 39j – Taking into account relevant benchmarks, among others EBA’s benchmark
We have appreciated EBA’s benchmark study. It is a suitable approach and first step to give guidance to institutions to estimate the expected time. However, we are against the consideration of the benchmark as mandatory because we deem this approach as too much like “ticking the box”. The EBA benchmark does not take the proportionality principle sufficiently into account. It only differentiates between a specific balance sheet volume and whether the institution is governed by a one- or two-tier system. It seems clear to us that the question of sufficient time – among others –depends on the complexity of an institution and the challenges it faces, respectively. We would like to avoid getting into a situation, where the Joint Supervisory Team assesses the sufficient time commitment by only taking EBA’s benchmark into account.
We would therefore like to suggest to remove para 39j and to supplement the catalogue in para 39 with the advice that there is an EBA benchmark study which gives useful additional guidance and an indication for the time typically required by a mandate.
Para 39 in general
In addition, we would like to ask ESMA and EBA to supplement their guidelines with an explanation corresponding to that of the ECB in its draft guide on page 17. ESMA and EBA should also emphasise in their guidelines that the level of experience influences the preparation time in order to clarify that the devoting of time might differ significantly between members of the management body and might still be realistic.
II. Collective and individual suitability in regard of professional qualification
Difficulties to draw a target image of collective suitability
We would like to ask ESMA and EBA to explain, using examples, the difference between individual and collective suitability. In particular, we need more guidance regarding future appointments especially which documents should be handed in that outline what added value the individual will bring to the collective suitability, para 142. This requires to develop a target image which determines what is necessary to be collectively suitable and the institution needs to assess whether the appointee’s qualifications accounts for the respective collective suitability.
Currently, we assume that there is no significant gap between the total of the minimum qualifications for each member of a board (management board as well as supervisory board) and the requirement to be collectively suitable. Each member of a board or a committee is legally required to make its own judgement on supervisory board duties, i.e. requires the same minimum level of suitability as all members. Taking a decision without the necessary suitability may be deemed as a breach of law.
Please note, there is a common understanding that a greater gap between individual and collective suitability exists. But, in the last years, the expected individual level of each member were increased and increased which is why the idea of this gap might be rethought. We appreciate to share our thoughts afterwards.
1. Both, the draft ECB guide as well as the ESMA/EBA-paper on the assessment of suitability set out that there are requirements concerning individual members of the management body, members of one of the two boards, management and executive board and the collective suitability of the body or board, respectively. According to paragraph 63 of the ESMA/EBA-paper the management body should collectively be able to understand the institution’s activities, including the main risks. In addition, paragraph 65 requires that only the members of the management body in its supervisory function have to collectively be able to effectively challenge and monitor decisions made by the management body in its management function. According to these provisions, not each and every member needs to understand the institution’s activities and main risks, but the majority so that collective suitability is given.
However, simultaneously, according to paragraph 54 of the ESMA/EBA-paper (individual) members of the management body should have an up-to-date understanding of the business of the institution and its risks, at a level commensurate with their responsibilities (even acknowledged by EBA in its draft guidelines on internal governance, para 21). This should include an appropriate understanding of those areas for which an individual member is not directly responsible but is collectively accountable together with the other members of the management body. These other areas are all duties of the management body or one of the boards, including duties delegated to a committee, for which each member needs an appropriate understanding. An appropriate understanding requests sufficient knowledge and experience about the issue to assess whether the conduct of other members was correct. Actually, this requires the respective member to have the same minimum competence like the directly responsible member. This again is acknowledged by EBA in its draft guidelines on internal governance, para 39, where it sets out that delegating to committees does not in any way release the supervisory board from collectively fulfilling its duties and responsibilities.
2. We are unable to notice that there is actually a significant gap between individual and collective suitability requirements stated in the catalogues in para 60 and 66. In order to compare both requirements, we have inserted a table afterwards which matches similar fields of individual and collective suitability criteria. Please bear in mind that according to para 54 each member should have an appropriate understanding of those areas for which an individual member is not directly responsible but collectively accountable.
Criteria of individual suitability, para 60 Criteria of collective suitability, para 66
a Financial markets = c Sectoral/financial competence, incl. capital markets [ ]
b Legal Requirements and regulatory framework = h Legal and regulatory environment
c Strategic planning, and the understanding of an institution’s business strategy or business plan and accomplishment thereof = a
b
g
j a. business of the institution and main risk related;
b. each of the material activities;
g. local, regional and global markets
j. the ability to plan strategically
d Risk management (identifying, assessing, controlling and mitigating the main types of risk of an institution) = a
c
e
f
k a. business of the institution and main risk related;
c. sectoral/financial competence, incl. [ ] solvency and models
e. risk management, compliance and internal audit (the control framework is part of the risk management framework)
f. information technology and security
k. the management of (inter)national groups and risk related to group structures
e The assessment of the effectiveness of an institution’s arrangements, ensuring effective governance, oversight and controls = e
f
k e. risk management, compliance and internal audit (the control framework is part of the risk management framework which is crucial for effective governance, oversight and controls)
f. information technology and security
k. the management of (inter)national groups and risk related to group structures
f The interpretation of an institution’s financial information, the identification of key issues based on this information, and appropriate controls and measure = d Financial accounting and reporting
i Managerial skills and experience (in our opinion each member of the management body needs such skills. It is not explained, whether “experience” requires more than the experience required from each individual)
As we understand the result of this comparison, the criteria for individual suitability have such a wide scope that all criteria of collective suitability are encompassed. If ESMA and EBA intend to uphold these two sets of requirements we may request to provide examples giving guidance what the difference should be and to elaborate on this issue. Currently, the aforementioned two sets of requirements may not be implemented in practice appropriately.
3. In addition, ESMA, EBA and ECB raise the importance to take decisions independent of mind. According to para 74 of the ESMA/EBA-paper members should engage actively in their duties and should be able to make their own sound, objective and independent decisions and judgements when performing their responsibilities. For example, in the case of supervisory board members this means that every member should take an independent assessment of the risk reports. In particular, each member has to assess on itself, whether the provided information is sufficient, comprehensive and correct. If a member does not dispose of sufficient knowledge and/or expertise to assess the provided information, this particular member is not able to make its own sound, objective and independent decision.
4. Furthermore, at least in Germany, the idea of a collectively suitable board is not applicable in the relevant company law. The Federal Court of Justice has never considered a collective suitability when the liability and accountability of board members were in question. Quite the contrary, in its decision from November, 6th 2012 (II ZR 111/12) the federal court of justice has decided that due to art. 111 paragraph 6 share corporations act (Aktiengesetz) the overseeing and monitoring of the management board members is an individual duty of each member for which appropriate knowledge and experience is necessary. If the member is not suitable to decide on issues of the supervisory board, the member breaches the law and is liable if damages occur causally determined from such decisions.
5. From the public discussion, we have considered different cases, which are discussed as not necessary as overall suitability requirement for each member, but necessary to be collectively suitable. IT or digital competence is one of the most discussed criteria in this case. In our opinion, each member of a management board as well as each supervisory board member needs appropriate knowledge about this particular field of knowledge. There are IT risks, and the understanding of risks – as mentioned above – is required for each member. If the digital transformation challenges the current business direction, each member has to understand why so and how to deal with it. Furthermore, the appointment or proposal of new members is a duty of all supervisory board members. As a result, each and every member has to assess the digital competence of new members to decide, if a new member may be deemed suitable with respect to understanding the risks and challenges stemming from IT / digital issues.
We have identified only one example for collective suitability concerning specific experience about the monitored entities. As set out in the ESMA/EBA-paper the duration of all mandates should not end at the same time (“staggered terms”), thus, at any time at least a few experienced members remain keeping specific knowledge of the respective institution and/or group.
6. Therefore, we believe, that there is only this narrow scope of collective suitability, since each member has to possess sufficient knowledge about the business, the material risks of the activities and for all other duties of the board, and needs to be sufficiently experienced to assess decisions on such issues. As a result, the authorities should review the approach of the differentiation between individual and collective suitability. In particular by taking into account, that requested knowledge or skills the authorities suppose being only required by collective suitability might lead to a raise of the minimum level for all members of the management body or one of its functions.
It seems to be useful if the management body consists of members with even more competence and experience than required by law. Hence, e.g. great experience in IT issues is actually useful. But, to reason how a single member fits in the collective suitability depends from which is required by law.
7. Moreover, the directive on statutory auditors as well as supervisory assessment approaches narrow the scope of diversity in professional backgrounds.
Please note, in regard of the above mentioned, we do not think that each member, especially members of the supervisory board, has to gain its experience from previous positions in the financial services sector because this is not necessary to be capable to decide on risk and business issues. If an appointee has had previous positions in other sectors that member might need special sector training before it starts the mandate to be sufficiently suitable from this date on. A necessary precondition is that the appointee possesses enough knowledge and experience to become suitable by the time the member starts its mandate. This in turn requires the dedicated member to possess basic capabilities to understand provided information and to implement training knowledge into its work and performance of duties.
Although we would like to promote diversity in professional backgrounds, we might lead your attention to the fact that the legislator has narrowed the selection of persons from other sectors with the directive on statutory auditors of annual and consolidated accounts (2006/43/EC). According to art. 39(1) of the directive, audit committee members shall have competence relevant to the sector in which the audited entity is operating. The German legislator has transposed this provision for the audit committee and in addition for the supervisory board as well. As a result, at least the majority of members have gained their experience from the financial services sector. Especially in Germany, if the institution exceeds a certain number of employees, the supervisory board as a rule consists of representatives of the shareholders but also from the employees. In group structures, the representatives of the employees may be elected by employees of the institution itself and also by employees of subsidiaries. This leads to the effect that employee representatives may be duly elected in compliance with applicable labour law but do not necessarily stem from the financial sector. Bearing in mind that the majority of the supervisory board members need to have experience in the financial services sector, the institution might be forced to secure that almost all shareholder representatives have a professional background in the financial sector.
When ECB, EBA and ESMA are now intending to demand diversity in professional and educational backgrounds, please take into account the narrowed scope of diversity in professional backgrounds due to these aforementioned restrictions, which especially apply for institutions in Germany.
In addition, ECB clarifies in its draft, that the authority assesses the suitability of appointees by primarily considering whether the experience has been gained from the banking sector. On page 11, ECB explains that they assume five years of such experience as sufficient to assess an appointee as suitable. As a result, the motivation of institutions to appoint members from other sectors is significantly reduced due to the requirement of justification and respective additional documentation.
As a result, opportunities of diversity in educational and professional backgrounds are restricted.
Question 8: Are the guidelines within Title III regarding the Human and financial resources for training of members of the management body appropriate and sufficiently clear?
By estimating sufficient time, induction and training times should be considered. Pursuant to para 85 ff. institutions should have an own induction and training policy, with a dedicated budget and an estimation of specific time needed to maintain suitability of members.We would like the authorities to acknowledge, that it is not necessary to have such specific budget and estimated time in regard of training to maintain suitability. The institution has to offer all members the opportunity to inform themselves about current trends, new legal requirements and anything else what is new and may be assessed as material. It should be sufficient not to provide special training in this regard rather than an integrated approach, i.e. a comprehensive information in case of new requirements arising. If there are new legal requirements, like the guidelines on suitability, the fit & proper assessment or an adjustment of IFRS 9, comprehensive information in advance of a meeting may be provided, within the meeting and elaborated afterwards on the resulting challenges for the institution.
In addition, we would like to ask to refuse that there is a mandatory consideration of EBA benchmarking, according to para 86. As we have already set out, from our view the benchmark does not consider the proportionality principle sufficiently enough due to its only refers to balance sheets. Furthermore, comparing benchmarks is not suitable for the assessment of training days. The roles determine the required suitability and it depends on the appointee, which training induction he needs to achieve this. Hence, the expected induction and training sessions will differ between different appointee as well as their expected costs. Moreover, we would pay any training and induction costs to achieve suitability level. We do not understand the benefit of defining specific budgets against this background.
Question 9: Are the guidelines within Title IV regarding diversity appropriate and sufficiently clear?
At first, we refer to our answer to question 7 (No. 7 – the directive on statutory auditors as well as supervisory assessment approaches narrow the scope of diversity in professional backgrounds)In addition, we would like to ask to adjust para 93. According to this provision, the diversity should at least refer to the following diversity aspects: educational and professional background, gender, age and, in particular institutions that are active internationally, geographical provenance. The provision sounds as it should be mandatory to have specific targets for all this aspects. Especially in dual tier systems would this mean that a (e.g.) management board of 3 persons has to fulfil a rate for all these aspects.
Question 10: Are the guidelines within Title V regarding the suitability policy and governance arrangements appropriate and sufficiently clear?
Rules for independenceThe rules for the independence of members of the supervisory function in para 124 should be extended. However, they still do not describe how to deal with representatives of employees. We would like to ask ESMA and EBA to confirm that these representatives are evenly independent, in particular, if rules to save their independence exist like in the German Industrial Constitution Act (Betriebsverfassungsgesetz). We would be grateful for the clarification in order to estimate what the EBA paper on internal governance specifically requires from German corporate governance-systems. Para 42, 44 and 45 of the EBA paper on internal governance demand a majority of independent members in the risk and audit committee and that their chair is independent respectively. ESMA and EBA have to take into account that to classify employee representatives as not independent means to exclude them from chairing committees and to unnecessarily weaken their position in important committees.
Para 124b – Three years period
Among others, due to para 124 b there should be a three years cooling-off-phase for members of the management function or staff of one level below. Currently, as also stated by the draft ECB guide on fit & proper assessments, p. 19, a two years cooling-off-phase is common. We would like ESMA and EBA to explain, why this threshold has to be raised to three years. If there are no reasonable grounds, we would like to ask to remain the currently used two years phase and deem this as sufficient.
In addition, we would like to ask to delete the extension to members of the first management level below the management function. To apply this requirement to one-tier systems might be suitable, but we reject this being useful or appropriate in two-tier corporate governance systems where only members of the management function can influence the strategic direction of the institution.
Para 124f – Serving in the management body for 12 years and more
According to para 124f members who have served in the management body within the group for 12 years or longer are deemed to be not independent anymore. If this requirement is applied on a two-tier corporate governance system, it would concern members of the management function as well as of the supervisory function. This means that a member of the supervisory function would lose its independence from the twelfth year on. We suggest that independence of board members must be regularly assessed. Independence should not automatically be denied after twelve years’ time of service. As it may be also useful to maintain specific knowledge and expertise, it may also be considered to allow executive board members to become supervisory board members. This is a common practice in Germany for stock listed companies, though it does not comply with the German Corporate Governance Code if the Chair of the Supervisory Board is the former CEO of the company.
Question 11: Are the guidelines within Title VI regarding the assessment of suitability by institutions appropriate and sufficiently clear?
The trigger of fit & proper testsThe assessment process is not only determined in Title VI but also in Title I. According to para 25, among others, a new role within the management body triggers a new assessment by the authority. This should be applicable if an ordinary member changes from an ordinary position to a chairperson of a committee or the board. We understand this opinion in the case of the audit committee’s chairperson, because the respective level of knowledge and experience is specifically determined by law (e.g. art. 39 directive on statutory auditors, para 45 draft EBA guidelines on internal governance). However, there are no comparable provisions for the chairpersons of other committees. For example, the EBA guidelines of internal governance require special knowledge and experience about risk management systems from all members, independent on their function within the risk committee (s. para 43). This also applies for the nomination committee (s. para 43). The EBA Guidelines on sound remuneration only require that one member should also be a member of the risk committee (para 56). The chairpersons of these committees does not need to give more evidence on their knowledge, skills and experience than other members, except some little skills in chairing a meeting, which in regard of ESMA and EBA is a generally required skill for each member of a management body.
As a result, we would like ESMA and EBA to adjust this provision to a mandatory information in the case of changes within the management or supervisory function. A new fit & proper assessment should not be mandatory.
The disclosure of information
According to para 127, 128 the institution’s assessment results should be disclosed to shareholders, when they have to decide on the new members. We would like to know which degree of transparency this provision is intended to require. We won’t support an interpretation in which we have to justify why an individual member is suitable, which means to reveal all information in Annex III, perhaps, including the financial conditions on credits etc.
We advocate that the statement, that the individual member and the whole supervisory function is suitability must be sufficient.
Question 12: Are the guidelines with regard to the timing (ex-ante) of the competent authority’s assessment process appropriate and sufficiently clear?
We may ask for a legal option to choose between an ex-ante and an ex-post assessment. ESMA, EBA and even the ECB argue that they would like to prevent any reputational risk for the institutions, if the competent authorities find a new appointee as not suitable. However, the assessing and managing of risk is first and foremost the duty of the institution itself. This is why we do not understand, why the competent authorities would like to give support in this specific risk. If an institution is willing to take the reputational risk by choosing the ex-post assessment, this should be an accepted and suitable outcome of the institution’s decision..Especially in cases, where members of the management body have to be appointed by an annual general meeting, an ex-ante assessment could lead to the situation that the assessment may not be timely finalized before the annual general meeting takes place or must be properly organized (the agenda being subject to further requirements limiting the time frame even further) and the institution would thus be forced to invite to a new meeting and to bear the costs incurred in order to have a sufficiently composed management body. If a member of the management board resigns from his duties in extraordinary cases, an ex-ante assessment might lead to the condition of a non sufficiently composed management body lasting for months.
Therefore, we would like to ask ESMA and EBA to repeal the idea of mandatory ex-ante assessments.