Record attendance for Directors’ Day 2019
Nearly 350 ILA members were in attendance at the European Convention Center on the Kirchberg on 20th November for Directors’ Day 2019. This record figure underlines the growing importance and professionalisation of corporate governance in Luxembourg.
Working to ensure that members are best placed to perform their tasks is a key role for the association, explained Carine Feipel, ILA’s chair. “We are a catalyst for the exchange of information about best practice,” she said, pointing to the range of events and publications produced for the more than 2,200 ILA members (85% individual memberships, 15% corporate).
In the year to-date, 33 conferences and 63 training sessions have been held, attracting nearly 2,000 people to each type of event. ILA has now certified 132 directors and 18 company secretaries, as well as 33 people who took the aspiring directors programme,from which 12 are now being mentored by ILA Certified Directors. There is also an expanding library of self-help publications.
Strategy and policy is fine-tuned by a growing number of working committees there are currently 22, with 162 members. Next year will see the publication of at least two more brochures (on SMEs/family businesses, and a guide to resigning a mandate) plus a director remuneration survey. The idea of a board mandate exchange will also be discussed, to help members find roles. ILA will also conduct a media survey to understand the best ways to communicate with members and the general public.
Nurturing good corporate culture
What is good corporate culture and how can boards help? Tobias Sattler, a partner with Deloitte Switzerland gave some pointers. “What was once viewed as a ‘soft’ HR topic is now an important question for executives,” he said. Hence it is also top-of-mind for boards
The VW emissions scandal, the fixing of Libor, Deutsche Bank’s recent AML failings, and more have damaged brands, individual reputations and performance. Trust has been lost with clients and investors, thus making it harder to hire the best staff. Ultimately people want to be proud of brands with which they associate, and this is ultimately a question of corporate? culture.
One of Mr Sattler’s preferred definitions of business culture is “what do we do when we believe no one is looking”. Values provide standards to define what is desirable and what has proved successful over time.
To test culture he recommended looking at the stories the organisation tells about itself—via the mission statement and website—and whether policies and behaviour match. For example, a company might say it is about innovation, creativity and agility, yet require its people to clock-in each morning in a highly rigid fashion. Metrics such as the prevalence of sickleave, staff turnover, or innovation rates are further evidence.
Leadership behaviour is key, as is how people communicate. This comes down to who businesses hire, and how promotion is decided and rewarded, and thus trust developed. Mr Sattler also recommended identifying the 20% most positively inspirational people and giving them the tools to act as good-culture pathfinders. Focusing on the good rather than the less good will “help beneficial behaviour spread like a virus,” he said.
This is about communicating in the right way – leading by example and developing keystone habits. He recommended keeping an open mind and experimenting. When beneficial actions are identified, repeat and amplify them until they become good habits.
Notes from life on multinational boards
Norbert Becker is a star of the Luxembourg business scene. As an executive he rose to become EY’s global CFO, moving then to help create and grow an international tax advisory firm, a private bank and a real estate investment company. He now specialises in board work with multinational companies in North America, Europe and Asia. He gave the conference the benefit of this hard-won experience.
“When you accept a mandate, you have to understand and be interested in the underlying business,” was his number one rule. If you are on the board of a mining company, you will need to visit operations in sometimes tough conditions. If you are in insurance you will need to be fascinated by actuarial calculations. “Keeping up to date is a permanent job,” he said whether it be macro or micro details, as only then can directors add value and earn respect.
This reputation is a key tool for directors seeking to balance the interests of shareholders and executives. Mr Becker said it is not uncommon for the former to become over ambitious, and seek to impose unrealistic budget and business plans on management. In these cases the board has to be there to support executives and work with shareholders to make plans more realistic. Failure to meet publicly stated goals will harm the share price put the CEO’s position at risk.
On the other hand, once goals are set the board must stand up for the long term interests of the company. For example, they will need to step in if the CFO seeks to make excessive cuts to meet their annual numbers. “Directors have to say ‘no’ to suggestions for cuts to internal audit fees, to customer claims management, to marketing, etc,” Mr Becker said. Such short term moves could have major long term negative influences. “If the financial year is not going well, yes costs may need to be trimmed. But efforts must also be made to increase revenue by working with management to identify new markets, new services, new geographies,” he added.
At dividend time too, the board will need to be able to communicate home truths to shareholders if strategy doesn’t permit the payouts they would like. Yet given that boards are appointed by shareholders this can be a difficult line to tread.
How to hire a CEO
There is no bigger HR decision than the appointment of the CEO. “This is difficult...you can be lonely...there is no clear right or wrong answer,” were a few of Mr Becker’s comments about the concerns around the hiring process. For multinationals, a candidate list will be of high quality and each individual will have been tested thoroughly, so how to pick the best?
The chair and the board can help by establishing whether they can build the strong professional relationships they will need which each candidate. Mr Becker likes to try to gauge how the CEO would react under pressure (be it client claims, a challenging audit, negative compensation decisions, etc.) and their trustworthiness (“would I feel comfortable giving them my wallet”).
Then as the decision is made, he said it is important to make sure the employment contract doesn’t contain any clauses that would make it expensive to part company. As for on-going assessment, he likes to ask CEOs about what they think their successes and failures have been, and then to compare these comments with his own impressions.
Strategy and diversity
“You must be involved in company strategy, don’t nod along with a consultant,” was the next golden rule. This can be tricky as Mr Becker noted: “these days I see no new strategy that isn’t driven by technology to some extent.” Be actively engaged with creating the strategy, fill gaps in your knowledge, and then ensure that that financial and human resources are in place to carry it through, including commitment from shareholders.
Board gender, ethnic, and skills diversity are important to connect with market culture and prevent group-think. Mr Becker recommends reaching out whenever possible, particularly to employees. Do this either formally with staff delegations, or when guards are lowered at social occasions. Making these connections in the good times helps when the tough times come along. Boards also need to be self critical, and learn from criticism and mistakes.
As for the chairman’s role, Mr Becker insisted that discussing market trends, clients, technology and the rest must predominate in discussions, despite the constant pressure of regulatory and administrative matters. Presentations should be to the point, with the number of slides kept to a minimum to ensure adequate discussion time. Moreover, these conversations should be held without executives present to maximise independence. He also likes side meetings solely with independent directors who are able to shift the focus. Keeping regulators in the loop is also vital. “Be totally open and transparent, because no regulator likes nasty surprises,” he warned
Boards’ rising AML responsibilities
Global regulators are demanding that anti-money laundering (AML) procedures be applied more rigorously. Guilhem Ros, an attaché with the CSSF, explained the latest expectations from the local financial sector regulator on the "AML for Board Directors" panel.
Greater clarity is being brought to which AML-related procedures are expected. The most recent AML law features numerous ambiguities, in particular regarding the roles of the two people responsible for overall strategy (“responsable du respect”) and day-to-day operations (“responsable du contrôle”). “We have discussed with the industry and we are about to publish an FAQ where we will clarify roles and responsibilities,” said Mr Ros.
New CSSF FAQs
These FAQs should be read and acted upon by all investment funds and investment fund managers, whether they are regulated or not by the CSSF. Board members could perform the responsable du respect role, while a third party could be the responsable du contrôle, who gathers information from service providers and the asset manager. Mr Ros’ warning was stark: “if you are the responsable du respect you will be the last line of defence.”
The other members of the panel welcomed these clarifications. They noted that most UCITS funds are well prepared, but that these new requirements might represent a step up for many alternative funds. “Even if funds don’t appoint a single person at the board level there would be an expectation for at least one member to have sufficient expertise to scrutinise procedures,” noted Isabelle Scherf, global head of financial crime compliance at Fidelity International.
Have a risk-based approach
“The cornerstone of an efficient AML/CFT framework is a risk based approach with the risk appetite defined by the board–this is extremely important as it will steer all AML activities,” Mr Ros noted. The panel agreed that companies claiming zero tolerance to AML might not be being realistic, as where there are global financial flows there is the potential for financial crime. “There is counterparty risk, distribution risk, exposure to corruption risk: risks that are normal by nature of the business,” said Birgit Goldak, a partner with PwC Luxembourg.
The panel noted that working on a private equity or real estate project with a potential criminal adds to financial risk, while too often such considerations become mixed simply with concerns about KYC. Mr Ros said the CSSF was working at ways to align financial and AML risk reporting. “Firms have to do what they say–if there is an average level of risk appetite then it should not be a tick the box exercise,” he said.
He also underlined that the law requires trained people and solid systems, customer due diligence, broad on-going monitoring screening, and monitoring of transactions (which themselves should be automated). If suspicions are raised, reporting should be made via the GoAML tool. He said that all players should register on this system, for which they will need the LuxTrust one-time-password token. He also informed the conference that this token will be required to complete the next CSSF AML questionnaire.
Have clear policies
As well, financial firms should have a clear policy on whether and how they report their suspicions. Each decision has to be thought through on this basis and documented. Monika Barnes of IMBarnes Consult added that if these procedures are delegated to third parties boards need to ensure that all sides understand their responsibilities and that procedures are tested. “Your procedures and policies must be aligned with delegates’ practice,” she said. The panel agreed that it can matter less what is done as long as funds can demonstrate that they were acting in good faith.
Next year, the CSSF is going to conduct a sub-sector risk assessment using the key elements they use internally– customer /investor risk, distribution risk, product transaction risk and geographic risk. This is a similar methodology to that employed by the FATF.
Overview of remuneration
Key results of the 2019 KPMG financial sector remuneration survey were highlighted by Jean-Pascal Nepper, a partner, and Sabrina Bonnet, a senior manager. The majority of the results related to industry wide practices, including some details of direct personal relevance to directors. A dedicated ILA-sponsored survey related to directors will be conducted next year.
The presentation gave an overview of details such as the amount of base salary given versus bonuses and fringe benefits (60%/40% for CEOs, 89%/11% for junior officers) and the nature of fringe benefits (94% offer pension schemes, 17% crèches etc.). There was also raw data on the gender gap for pay and responsibilities. While there was a broadly 50/50 split for staff, management was 75% male. Also, on average, men earned more at each level: 24% more for managers and 8% for staff.
For non-executives, two-thirds had fixed fees, while a third were paid no extra fees but were remunerated by the group. Director’s fees ranged widely, with for example 10% of chairs earning more than €150,000 while 5% took less than €10,000. As for board committees, 79% received no extra compensation for this work. Two-third of boards met four times a year, with 20% more frequently. As for workload, 43% of directors said this had increased, with the rest saying there had been no change.
What governance for SMEs?
Small and medium sized businesses often grow and thrive around the expertise of a close-knit team, reacting to opportunities. Hence what could be the role for an added layer of governance and what should this look like? Michèle Detaille the chair of the FEDIL business federation discussed options with ex-ILA chair Raymond Schadeck in a breakout session.
Smaller businesses built around a charismatic founder CEO will tend to have a strong corporate culture, and this can be central to the firm’s appeal to clients and staff. Yet this familiarity can lead to an inability to recognise and embrace new opportunities. This is particularly the case when new technologies and markets are under consideration.
Yet creating a corporate governance structure might interfere with healthy and well tested internal company dynamics. “Often no extra governance is needed in strict terms, with outside consultants or mentors able to give a view,” Ms Detaille commented. She sees value in assessing procedures and ways of working, as a way to re-evaluate and enable this knowledge to be communicated to existing and future staff.
“Governance is often less formal but nevertheless is strong because these managers are managing their own money and assets,” Mr Schadeck noted. Yet in a changing world, receiving an external view is important. Rather than formal arrangements, Ms Detaille sees space to encourage more networking and sharing of best practice, potentially within FEDIL. The international nature of Luxembourg business can help, as often SMEs here are not direct competitors as they sell into different markets. This opens the way for neighbours to help share best practice, or as one intervention from the floor put it, to act as a “sparring partner” to challenge the entrepreneur.
The view from the CSSF
The traditional Directors’ Day conversation with Claude Marx, the CSSF director general, ended the conference. Although he sees Luxembourg’s financial sector to be in generally good health, he reminded directors of the need for vigilance regarding regulatory compliance and shifting market trends.
On the face of it, the Luxembourg financial sector is performing well despite the uncertain macro environment. Assets under management are up for the fund and wealth management sectors, Brexit has seen financial businesses move here or expand existing operations substantially, the insurance industry is healthy, e-payment institutions continue to arrive, and more. However, in the private banking sector in particular, Mr Marx sees headwinds for some of the smaller players.
“Too many banks”
“We have too many banks in Europe—and thus Luxembourg—and sub-threshold banks will not survive in today’s more challenging environment,” he said. Already last year there were 21 banks where costs exceeded income in the Grand Duchy, and this number has risen in 2019. For the sector as a whole the cost-to-income ratio has risen by about ten percentage points in recent years to around 60%. Over 50,000 people work directly in CSSF-regulated financial services businesses, with indirect employment in excess of 100,000–over 20% of the domestic workforce. However with digitalisation and the market shake out, Mr Marx expects these figures to fall.
He called on bank boards to face these challenges with objectivity, ensuring that clear, credible business plans are in place. “We should not forget that a loss making bank is dangerous bank,” he said. Persistent negative interest rates are a key challenge. As well as harming profitability, Mr Marx sees some players moving to charge large clients (principally corporates and UHNWIs) for holding cash. He hopes that small retail clients will not be affected, but he could not rule this out. On a more positive note, he sees an opportunity for investment funds, as hoarding cash will become an even less attractive alternative to putting money to work in the wider economy.
As for regulations, while understanding how these can be burdensome, Mr Marx pointed to a wider picture. Offering greater comfort to investors is central to helping Luxembourg players reach into international markets. Tougher regulation also matches the political realities of the post financial-crisis environment regarding capital, liquidity, AML and more. Anyway, he pointed out that “rules haven’t changed much but expectations have been increased.” Whether it is the OECD, ESMA, the EBA, the European Commission and the like, pressure is increasing.
These trends put the CSSF under a spotlight too, as they work to supervise around a thousand firms and some 4,000 products. They employ 900 people, which Mr Marx suggests is modest by international standards. He insisted that the CSSF seeks to be reasonable. For example, when the fund ManCo circular 18/698 was published firms were given 18 months to comply fully with the rules, other than those related to AML.
That said he recognises that the CSSF has become tougher while remaining open to discussions. For example, the frequency of on-site visits has increased to complete information not published fully in audit reports. Mr Marx now thinks the overall number of these checks has reached the correct level and are unlikely to increase.
Future rule changes
As for future Luxembourg specific regulatory changes, he said there will be a remodelling of CSSF circular letter 12/552 (related to central administration, internal governance and risk management) early next year. It will apply to banks and investment firms and will take new EBA guidelines into account. Regulation 12/02 related to AML will change in the light of new EU legislation. Circular 18/698 will be tidied up, with the AML section relocated to 12/02. There will also be new rules for the governance for payment institutions in response to PSD2, as well as revised industry wide regulations on outsourcing, use of the cloud, and remuneration.
At the EU level, he spoke of the move away from the use of directives (which are interpreted by each member state) toward regulations that will be applied immediately. A related positive note is that he sees less talk at the EU level of moving away from the current model of regulating the single financial market.
Mr Marx was asked about the growing practice of fund boards receiving letters from the CSSF addressing practical but relatively routine regulatory concerns. Often this can cause a stir—particularly with board members who do not live in the Grand Duchy—necessitating time-consuming conference calls, when often this can be more a matter for service providers. He welcomed this intervention and suggested certain procedures could be reviewed. Nevertheless, he pointed out that often the board embodies the fund in Luxembourg and thus can be the only destination for these letters.
Push for greater independence
Asked whether the CSSF will start to require each investment fund to have an independent director, Mr Marx said there are no plans to make this mandatory. However, in the case of funds where directors are geographically distant or have strong connections with head office, the CSSF can insist that an independent director be appointed. Otherwise this practice is encouraged and he would like to see it made obligatory, as well as more directors following specialist training courses. “It’s a journey: the situation is improving as more are being appointed,” he said.