Address by the Tánaiste and Minister for Enterprise, Trade and Employment, Ms. Mary Coughlan, T.D., at the Irish Stock Exchange Conference – Corporate Governance Challenges 2010 and beyond

Learning from Experience

Many economic analysts point to the mistakes made in the financial sector as the source of the current world economic crisis. As far as Ireland is concerned, it is clear that we also made mistakes, but what is essential now is that we learn from these errors and take action where necessary.

We need to fully understand what went wrong, including identifying any deficiencies with our regulatory system, if we are to avoid making mistakes again. We need to ensure this process is conducted thoroughly if we are to restore full credibility to our regulation of the banks and their governance. The inquiry into banking matters announced by the Government therefore must be robust and this is what we in Government intend to ensure.

Stabilising and recapitalising the banks is required to restart commercial lending and is a precursor to fundamental regulatory reform, including in the vital area of corporate governance. This consideration has informed our decision on the framework for this inquiry.

The inquiry will allow for the timely completion of expert, authoritative and structured examinations of the financial crisis. It will provide a comprehensive analysis which will enable us to understand the origins of the crisis and help us to learn lessons which will inform our future management of the banking sector. The framework will be transparent and constructive. It will be efficient and cost-effective. Most of all, it will restore confidence in our banks so that they can play their full and proper role in promoting economic recovery.

Getting the right reforms implemented in the right places will be crucial. One size will not fit all. We have to distinguish between commercial banks and investment banks- and between banks and other financial services institutions. We will have to be clear about what financial institutions are of systemic importance to Ireland and apply regulatory controls commensurate with that status. Getting the regulatory balance right between “narrow utility” banking and riskier investment banking will be difficult. Our reformed regulatory regimes and governance codes must be vigorously implemented to discourage recklessness by our systemically important banks and financial institutions. They must be robust enough to deflate any “bubbles” before they inflate to catastrophic proportions.

Banking and Corporate Ireland

In considering the corporate governance challenges now presenting it will be necessary to distinguish between our banking sector and the rest of “Corporate Ireland.” I know there is a temptation nowadays to knock “Corporate Ireland” generally and our entire enterprise sector as a consequence of the problems we have seen in the banking sector. I would like to put it on record that it is wrong to blacken, here and abroad, the reputation of all our companies because of serious failures in a particular sector. Equally, let us not forget that down in the IFSC some 400 financial services firms employing some 25,000 were and continue to generate significant added value for their shareholders and for the Irish economy.

Balanced Regulation

It has been suggested at times that we in Ireland have a so-called “light touch” regulatory regime for companies and corporations. There have been some fifteen Companies Acts since 1963 – two of them in 2009. This body of legislation, when consolidated, is expected to total some 1,400 substantive sections. Clearly there is no such thing as a “light touch” regulatory regime for Irish companies.

We have also established the Office of the Director of Corporate Enforcement, with appropriate enforcement powers, to enforce this body of law. It is also worth pointing out that in terms of filing returns with the Companies Registration Office, in 1998 the percentage of companies filing on time was 14%. At the end of 2008, ten years later compliance has risen to 90%.

Review of Corporate Governance Code

A Corporate Governance Code Review in 2009 generated quite a lot of publicity. What appears to have been overlooked in some of the comment is the very important fact that the Code is a “comply or explain” code and 97% of the companieswere fully compliant with the “comply or explain” requirements. This 97% compliance level demonstrates that:

there is a high level of compliance by Irish listed companies with the Code;

they take corporate governance seriously; and

they have put a considerable effort into building a robust governance framework based on the principles enshrined in the Code.

Corporate Governance standards in Irish listed companies are high and it’s not just me saying it. The European Commission and the “Risk Metrics 2009” assessment ranks Ireland in the top six Member States in terms of the quality of information disclosure and explanation. We should bear this in mind as we frame our responses. A balance must be struck between necessary regulation and avoiding unnecessary administrative burdens, which would only serve to hinder Irish companies’ efforts to regain competitiveness, improve productivity, and increase exports - so vital if we are to fight our way out of this recession.

We cannot be complacent however. Revelations in the banking sector over the past sixteen months have eroded public confidence in governance generally, and have raised serious questions for governments and regulators across the globe about the correct approach for oversight of the banking sector due to its systemic importance. You will be aware that the Government in its Renewed Programme has committed to placing the principles of the Combined Code on Corporate Governance on a legislative footing for all banks, public companies and state-sponsored bodies. While discussions in relation to implementation of this commitment have commenced between my Department and the Department of Finance, it is clear that placing a legal obligation on these entities to “comply or explain”, with the Code in the case of public companies, would send a significant further signal to a public concerned over its savings or pension investments - that in Ireland we have in place the most robust of corporate governance environments.

There is good reason for retention of the “comply or explain” approach however, rather than putting in place a “comply or else” regime. That is because compliance with the Code demands the exercise of judgement. There is no single “right way” to comply. It all depends on the circumstances of each individual company and the particular issues to be addressed. What might be “right” for one company in specific circumstances could equally be entirely wrong for another company faced with those very same circumstances. I believe that the subsidiarity principle and the “comply or explain” procedures underlying the code have already achieved a 97% compliance rate that, by any standards, is impressive. However, as I said we should not be complacent. We should strive to achieve 100% compliance.

Exercise of Business Judgement

The exercise of business judgment and prudence by management and shareholders, institutional, large and small, in achieving the most favourable outcomes for their companies is critical. Indeed, there was never a time when passivity by shareholders was considered prudent and recently there have been striking results achieved by greater shareholder activism in shaping the companies they own.

Recently however there have been increased calls for us as legislators to encroach on areas where shareholders currently hold the decision making power. For example, there have been calls for us:

to ban CEOs of companies succeeding outgoing Chairpersons;

to fix management pay, bonuses and pensions; and

to limit the number of directorships that may be held by any one individual,among others.

To take the first, a call to ban CEOs of companies succeeding outgoing Chairpersons, it may well be the case that such an arrangement can work to the advantage of the company and shareholders alike and in their best interests. There is nothing intrinsically wrong with a CEO succeeding an outgoing Chairperson. In my view, the proactive shareholders know best. The issues are never simply “black and white” and are a matter best judged by the shareholders. It differs substantially from the issues that arise in debate around whether one individual should hold the position of both CEO and Chairperson at the same time.

I believe that the same shareholder “subsidiarity principle” holds good when it comes to the control of management pay and pensions. Vigorous, proactive shareholders can and should hold directors and managers to account on matters such as pay and pensions. Only to the extent that the State itself is a shareholder in a particular company should it concern itself in these matters on behalf of taxpayers. We should think long and hard before extending the power of the State into the affairs of private sector enterprise where it has no prior property rights.

I do not believe that a mechanistic formula approach by the State in directors’ pay and pensions is either appropriate or proportionate at this time. Nor is it appropriate in the case of the number of directorships held by new executive directors in listed companies. These are matters that are best left for decision by their shareholders. The role, duties, and legal responsibilities are sufficiently onerous to give the prudent person, contemplating accepting the post of director in a PLC, cause to stop and think. They must possess the necessary skills and competencies to fulfil the fiduciary and other legal duties placed upon them. I am not convinced that a statutory limit for listed companies would necessarily improve the quality of the available pool in the way foreseen by its proposers. Any change in the current position for the general cohort of companies operating in Ireland would need to take account of the contribution that non-executive directors make by imparting their mix of expertise and the cross fertilisation of ideas from other areas of the business community.

Today’s Work and Recent Developments at EU Level

My remarks so far are, of course, without prejudice to the current review of the Combined Code on Corporate Governance being undertaken by the Financial Reporting Council in the UK, and indeed, the findings of the cases being investigated here by the Office of the Director of Corporate Enforcement. Until we have a fuller picture as to what precise changes are necessary and desirable, it would be unwise to hastily legislate to the disadvantage of compliant firms.

At the end of April last year the European Commission, as part of its response to issues raised by the financial crisis, published two recommendations on remuneration issues.

Remuneration in the Financial Services Sector

The first recommendation concerned remuneration in the financial services sector. It recommends that Member States should ensure that financial institutions have remuneration policies for staff whose professional activities have a material impact on the risk profile of the financial institution. These remuneration policies should be consistent with and promote sound and effective risk management. The recommendation sets out guidelines on the structure of pay, on the process of design and implementation of remuneration policies and on the role of supervisory authorities in the review of remuneration policies of financial institutions. The implementation of this recommendation is a matter for my colleague the Minister for Finance and the Financial Regulator and that work is ongoing in relation to it.

Remuneration of Directors of Listed Companies

The second recommendation deals with the remuneration of directors of listed companies and complements a previous recommendation on this matter published in 2004 and a recommendation dealing with the role of non-executive directors published in 2005. The key element of this second recommendation is that an appropriate remuneration policy should ensure pay for performance and stimulate directors to ensure the medium and long-term sustainability of the company.

The 2004 directors’ remuneration recommendation is based on the idea of pay for performance through disclosure of the remuneration policy. The new recommendation gives further guidance on achieving this by setting out best practice for the design of an appropriate remuneration policy. To this end it focuses on certain aspects of the structure of directors’ remuneration and the process of determining directors’ remuneration, including shareholder supervision.

The new recommendation invited Member States to promote the application of the new guidelines contained therein. My Department is consulting with key stakeholders in this regard.

As already indicated the guidelines of these recommendations represent up to date best practice in relation to remuneration matters and I think you will agree that it is highly desirable anyway that our top companies should be leading the way as far the application of best practice principles are concerned.

Currently, many of the principles contained in these recommendations already apply to listed companies here by means of the Combined Code and the Listing Rules of the Irish Stock Exchange. An important element that is not contained in the Code or the Listing Rules however, is that the director’s remuneration report, which should include a statement of the company’s policy on director’s remuneration, should be subject to a shareholder vote, at least of a non-binding nature, at the AGM. Shareholders, particularly institutional shareholders, have a key role to play in ensuring that good corporate practices apply in the companies in which they invest. I look forward to hearing the responses of the key stakeholders on this issue.

Ireland has to account to the European Commission on the implementation of these recommendations, as do other Member States. The Commission have not ruled out legislating in this area if the guidelines are ignored.

Summary and Concluding Remarks

Ladies and gentlemen, the Government is determined to steer our economy through these challenging times. Our priority is to stabilise the banking system and to get credit flowing again to the productive sectors of the economy. We will get to the causes of the crisis that has befallen our banking sector and reform banking regulation so as to minimise the risk of a repeat of past mistakes.

President Obama in his State of the Union Address earlier this week stressed the need for financial reform. He made the point that he was not just interested in punishing the banks but was interested in protecting the economy. He went on to say that a strong healthy financial market makes it possible for businesses to access credit and create new jobs. I share those sentiments.

We are pursuing our own inquiries into our own experiences. We must learn and we will learn from that process and adjust our regulatory regime as necessary. Where wrongdoing may have occurred, it is and will be investigated by the appropriate enforcement agencies. A robust, balanced and transparent regulatory regime is necessary in the interests of shareholders and citizens generally and gives us a significant competitive edge as an economy.

In our approach to the whole regulatory issue we have to retain proportion and balance. Clearly lessons have been learned and further lessons will be learned from the inquiry announced by the Government and from wider developments internationally. Our ultimate responses will have to take account of this learning and the Government will not be found wanting in putting in place appropriate responses which will address in a balanced way issues of regulation and enforcement.

Thank you again to the Irish Stock Exchange for the opportunity to be here this morning and I look forward to receiving a full report on the outcome of your important work and deliberations.

Thank you.

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