G-20 Finance Ministers Endorse Reform of Executive Compensation in Alignment with Long-Term Value Creation

In preparation for the upcoming G-20 summit in Pittsburgh, the G-20 Finance Ministers have issued a communiqué calling for a framework on corporate governance and executive compensation practices designed to prevent short-term risk taking and mitigate systemic risk. The new executive compensation regime should be globally consistent and build on and strengthen the application of the Financial Stability Board principles.
The Ministers specifically endorsed greater transparency of the level and structure of remuneration for those whose actions have a material impact on risk taking, as well as global standards on pay structure, including on deferral, effective clawback, and the relationship between fixed and variable compensation, including bonuses, to ensure that compensation practices are aligned with long-term value creation and financial stability.

The Ministers called for robust corporate governance reforms to ensure proper board oversight of compensation and risk, including greater independence and accountability of board compensation committees. Importantly, the finance officers called on the FSB to give the G-20 leaders specific proposals for developing this framework, which could be incorporated into supervisory measures, and closely monitoring its delivery. They also asked the FSB to explore possible approaches for limiting total variable compensation in relation to risk and long-term performance. G20 governments will also explore ways to address non-adherence with the FSB compensation principles.

On a separate point, the Ministers also emphasized the need for stronger systemic risk regulation and oversight of systemically important firms, including rapid progress on developing tougher prudential requirements to reflect the higher costs of their failure. Specifically, they endorsed a requirement for systemic firms to develop firm-specific contingency plans and establish crisis management groups for major cross-border firms to strengthen international cooperation on resolution.

Similarly, the Ministers seek the coordinated implementation of international standards, including Basel II, to prevent the emergence of new risks and regulatory arbitrage. This goal envisions global standards for central counterparties for credit derivatives, oversight of credit ratings agencies and hedge funds, and quantitative retention requirements for securitizations.

Finally, the G-20 Ministers endorsed convergence towards a single set of high-quality, global, independent accounting standards on financial instruments, loan-loss provisioning, off-balance sheet exposures and the impairment and valuation of financial assets. Within the framework of the independent accounting standard setting process, the IASB was encouraged to take account of the Basel Committee guiding principles on IAS 39 and the report of the Financial Crisis Advisory Group.

One Basel Committee principle is that fair value accounting should not be required for items which are managed on an amortized cost basis in accordance with the firm’s business model. In addition, Basel said that fair value is a proper measurement for trading activities and stand alone derivatives, as well as embedded derivatives which, in current IAS 39 language, are not closely related to the host contract. More broadly, Basel calls for increased transparency and the avoidance of undue complexity for the global accounting standards.

Recently, the FCAG, a joint FASB-IASB expert group, urged the standard setters to develop a single set of high quality, globally converged financial reporting standards providing consistent information, regardless of the geographical location of the reporting entity. In a seminal report, the Financial Crisis Advisory Group simultaneously encouraged all national governments that have not already done so to set a firm timetable for adopting or converging with IFRS. The Financial Crisis Advisory Group is co-chaired by former SEC Commissioner Harvey Goldschmid and Hans Hoogervorst, Chairman of the Netherlands Authority for the Financial Markets.

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