U.K. Audit Liability; German Governance Fixes; More

Britain’s Financial Reporting Council has published guidance for company directors on when and how to agree on liability limits with their auditors.

Under changes to British corporate law that took effect in April, auditors and their clients can negotiate liability caps to a limit that is “fair and reasonable in all circumstances.” But the company and the auditor have to negotiate an agreement for each year’s audit, and shareholders have to approve each one.

The guidance explains what agreements the law allows, what they should cover, and what process companies should use to get shareholder approval. It contains sample contract clauses and shareholder resolutions.

Hogg

The guidance also lists some of the factors companies should consider before agreeing on a liability cap, such as whether agreement to a cap widens their choice of audit firms or reduces the audit fee. Companies should also think about how shareholders might react, the guidance says.

“Each company must make its own decision as to whether to enter into such an agreement with its auditors,” FRC Chairman Sir Christopher Hogg says. “However, the FRC believes that it would be desirable for companies to discuss with their leading shareholders and with their advisers the merits of entering into an agreement in their particular circumstances.”

Niblett

Vince Niblett, head of audit at the British arm of Deloitte, says the guidance provides a “useful framework” for dialogue among auditors, companies, and shareholders. But he still warns of “challenges ahead” and says the guidance could have been stronger on some points, such as how liability caps apply to a corporate group.

“Those issues concern detailed implementation and will be dealt with between auditors and their clients, though the cost may be disproportionate for smaller companies and firms,” he says.

The FRC will review the guidance in 2010 to check how well it works.

UBS Banks on Governance Shakeup

Battered Swiss bank UBS has unveiled a corporate governance shakeup that includes a clearer split between the work of board directors and executive management.

The move is part of an effort to improve the once-cautious bank’s reputation after it became sucked into the U.S. sub-prime mortgage market.

The bank says the governance changes would “restore UBS to its premier position among global banks.”

Under its new governance model, the board of directors will have clear responsibility for setting strategy and supervising the business, while the chief executive and a group executive board will be responsible for executive management.

Kurer

The bank has abolished the chairman’s office and spread its role to a series of board committees. These include new committees responsible for risk and strategy. UBS has also expanded the remits of its governance and nominating committee, its human resources committee, and its compensation committee. Each of these committees now has a clear scope and mandate, the bank says.

There are also clearly defined roles for the positions of chairman, vice chairman, individual board members, and the new role of senior independent director.

UBS Chairman Peter Kurer said in a statement that the governance changes were “a big step forward” for the bank.

German Governance Guru Says No to Yes-Men

Germany’s new corporate governance supremo has started his time in office with a robust defense of the country’s two-tier board system. Klaus-Peter Müller, chairman of the German Corporate Governance Code Commission, says the German approach is preferable to the unitary board structure common to Anglo-Saxon governance.

Müller told a Berlin governance conference that “I don’t believe at all in U.S.-style, overly powerful chairmen-chief executives, who often surround themselves with yes men,” according to published reports.

Under the two-tier German governance model, executive boards make most decisions, with oversight coming from a supervisory board. Müller said supervisory boards needed to take their responsibilities more seriously in some areas—notably on executive pay—but overall, the system works.

Poor boardroom behavior has become a hot topic in Germany lately. There has been a “crisis in public trust in the business community,” according Brigitte Zypries, a government minister responsible for corporate governance law.

Müller

Muller’s predecessor, Gerhard Cromme, stood down with a valedictory address celebrating the governance improvements that Germany has made since the Commission was created in 2002.

Back then, companies operating under the German model still had their shares priced at a discount, he said, because the German model was reckoned to be weak—even though the Enron and WorldCom scandals had rocked American governance. “We have succeeded in dispelling this preconception,” Cromme said. “Today we can say that the German two-tier corporate governance system enjoys a level of acceptance at a national and international level we would not have dared dream of in 2001.”

French Bank Regulator Whacks SocGen

The French Banking Commission has fined Societe Generale $6.36 million for the “serious failings” in its internal control procedures that were exposed by a $7.8 billion rogue trading loss earlier this year.

The Commission said the penalty was the biggest it had ever levied for breaches of its risk-control regulations, reflecting the scale of the systemic and managerial failings its investigators found at SocGen.

Kerviel

The fine results from the first independent probe into how Jérôme Kerviel, a former equity derivatives trader, was able allegedly to rack up un-hedged positions worth nearly $80 billion.

SocGen management did nothing to fix weaknesses in its control systems, the Commission said, in spite of warning signs. It concluded that “failures particularly in the hierarchical controls continued over a long period, and the control system neither detected nor corrected them. These shortcomings went beyond simple repeated individual failures. They enabled the development of the fraud and its grave financial consequences.”

The bank’s claim that senior management was not aware of the control gaps “cannot be used by SocGen to absolve itself of responsibility. SocGen has infringed several essential rules on internal banking controls,” the regulator said.

The regulator found the bank had breached its rules on separation of trading and control staff; ensuring the security of its computer system; enforcing trading limits and providing enough qualified staff to monitor trading. The bank was far too focused on market risk, it said, rather than on risk of fraud and abuse in day-to-day operations.

Compensation Crackdown Clocks Options

German Chancellor Angela Merkel has set up a working group to develop proposals aimed at cracking down on what her government calls “excessive” levels of executive pay.

Merkel

The group will start work in September with a view to tightening corporate governance rules on pay and changing the tax treatment of share options by the end of the year.

The initiative is aimed at companies traded on Germany’s DAX share exchange, but would also affect executives of foreign companies who live in Germany.

Bernhardt

“We are seriously concerned about stock options, and I think we may even ask whether they can really be considered an acceptable means of payment,” says Otto Bernhardt, the politician leading the group.

The compensation of directors at German blue-chip companies has risen seven-fold since 1987, while employees and executives of private companies saw their pay only double, according to a recent study by Kienbaum, a German consultancy.