OUTGOING EUROPEAN internal market commissioner Charlie McCreevy has called for chief risk officers in banks to report directly to a special committee of nonexecutive directors, bypassing chief executives and executive directors.
In a speech today, which sets out some of the thinking in a forthcoming review of corporate governance by the European Commission, Mr McCreevy will say that chief risk officers should be supervised in the same way as internal auditors.
Although the review will be the responsibility of his successor, Michel Barnier, Mr McCreevy will say the question of board responsibility was a significant issue emerging from the financial crisis.
“Another significant issue emerging from the crisis is that of board responsibility. It seems that in a number of cases significant information about risk exposures failed to reach the board,” he will say in his speech.
“In others where it did, it was not heeded or was not properly understood. How did that happen? Was the problem that the risk management function did not have direct access to the board, or lacked the necessary authority?”
Mr McCreevy will say that a board cannot guess management’s day-to-day risk management, but must exercise effective oversight on risk appetite and profile.
“The boards of financial institutions must ensure that they have the right procedures in place to monitor the effective implementation of the risk management framework and that chief risk officers have a direct reporting line to the board, with their remuneration and performance goals set by the remuneration committee of the board in consultation with a risk management committee made up of non-executive directors,” he will say in his speech.
“This key officer – like the internal auditor – should be supervised and performance-monitored primarily by a committee of suitably experienced and independent non-executive directors rather than by an executive director or the group chief executive.”
Mr McCreevy will say the financial system remains fragile, adding that confidence has not been fully restored.
While he introduced new measures demanding that remuneration policy be consistent with sound risk management, he rejects the notion that full transparency necessarily tames excessive or poorly structured remuneration packages.
“Any meaningful empirical study will show that legislation to enforce full transparency in directors’ remuneration has actually had precisely the reverse effect to that which was intended.
“It has led to copycat pay packages, massive macho-driven leap-frogging and, in general, an endless upward spiral that was entirely contrary to either shareholders or indeed the wider public interest.”
