The Impact of US Sub-prime Mortgage Crisis on the Corporate Governance of Financial Institutions –Focus on the Mechanism of Remuneration
Date Issued
2011
Date
2011
Author(s)
Lu, Szu-Hsien
Abstract
The late-2000s global financial crisis has resulted in universal credit crunch. Among the numerous causes, the remuneration of the financial institutions undoubtedly attracts the most attention. Many international economic organizations and European/American countries have submitted reports with respect to the remuneration practice of the financial institutions. The key issue is the problem of corporate governance, which is derived from risk management, including merely taking short-term performance into account, failing to consider the incentive of excessive risk-taking, etc. The author respectively introduces the latest legislative reforms and recommendations of G20 Finance Ministers and Central Bank Governors’ Meetings, Financial Stability Board, European Union, U.K. and U.S.A. These developments are worth of refering.
According to our current legal system in respect of the structure of remuneration, the director’s “compensation”, entitled by Article 196 of the Company Act, has been narrowly tailored into the consideration of the mandate by Ministry of Economic Affairs (MOEA). The author believes that this definition is inconsistent with the legislative intent. The keys of directors’ remuneration we should rather take into account are whether the remuneration aligns with the performance, whether the remuneration affects institutions’ long-term stability, and whether the remuneration harms the institutions’ risk management. Therefore, no matter what type of the remuneration is, it should be deemed as the “compensation” in Article 196 of the Company Act and be reviewed by remuneration committee if it is an economic benefit granted by financial institutions in exchange for professional services rendered by staff. Besides, MOEA doesn’t accept equity-based pay for director’s remuneration. However, the author believes that the stockholding of directors combined with proper restriction and negative incentives will align the director’s performance with institution’s long-term benefits. Thus, there is no reason to forbid company to use equity-based pay.
With respect to the remuneration committee, the author recommends that it should be set up in supervisory board or one-tier board. The responsibility of the remuneration committee is reviewing and setting out remuneration policy. Except the managers’ remuneration, in which the board of directors makes the ultimate decision, the director and supervisors’ remuneration laid out by remuneration committee should be directly submitted to shareholders for resolution and ignore the board of directors,
In financial industry, the remuneration structure of business agent tends to link with short-term performance. Nevertheless, the compensation which is based on overvaluing short-term performance may harm the long-term stability of the financial institution and even the clients or investors’ interests. The latest remuneration reforms, including “Regulations Governing the Scope of Business, Restrictions on Transfer of Beneficiary Rights, Risk Disclosure, Marketing, and Conclusion of Contract by Trust Enterprises”, “Directions for Establishing and Appraising of the Remuneration Systems of the Trust Enterprises” and “Regulations Governing Business Solicitation, Policy Underwriting and Claim Adjusting of Insurance Enterprises”, have provided that the compensation of the business agent shall align with long-term performance and risk. Besides, the annual reports regulations of financial holding companies, banks and bills finance companies have been revised to add more situations that financial holding companies, banks and bills finance companies shall disclose the remuneration paid to each individual director and supervisor and its president, in order to improve the transparency of executives’ remuneration and strengthen investors’ supervision.
Subjects
financial institution
Sub-prime Mortgage Crisis
financial crisis
corporate governance
independent director
remuneration
remuneration committee
Type
thesis
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