In its most recent update to the circular on central administration, internal governance and risk management (circular 20/759, updating the old circular 12/552), the CSSF emphasises the need for strengthening the management body of financial institutions in Luxembourg. Along with specific requirements on independent members, operational aspects for board committees and suitable documentation around work and decisions, the circular requires diversity aspects to also be a key consideration when setting up appointment and succession rules applicable to the management body. This includes aspects linked to gender, age, geographical origin, education and work experience.
What are the expectations?
The new circular provides detailed requirements for the composition of management bodies and introduces new aspects, including that of diversity. Similarly, European regulation requires institutions to implement diversity policies to promote non-discrimination principles.
Like at a European level, the CSSF has not set specific quotas. While significant institutions, which are directly supervised by the ECB, must set internal quantitative objectives for gender diversity and follow-up on these goals on an annual basis, there is no such requirement for less significant institutions.
Why diversity matters?
One could say that the main objective is to achieve a more balanced representation in management bodies as a response to broader social trends. However, there is also hard evidence which suggests that incorporating a broader range of views, opinions, experiences, perceptions, values and backgrounds can lead to safer and better performing financial institutions.
According to a report published by the European Banking Authority (EBA) in 2020, having a more diverse management and supervisory body reduces the phenomena of ‘group think’ and ‘herd behaviour’. Based on data gathered across over 800 institutions in the EU, credit institutions which incorporate executive directors of both genders perform better than credit institutions with executive directors of only one gender (i.e. return on equity at or above the average of 6.42%).
Luxembourg is lagging behind
What is also clear from the EBA report is that Luxembourg lags well behind the EU averages. 41% of institutions in Luxembourg have a diversity policy in place, but only 19% of them have a gender diversity policy – a result well below the EU average of 58% and 40% respectively. Interestingly, for those institutions which do set quantitative goals at a European level, only 31% of them aim for gender diversity between 33%-50%.
When it comes to gender representation, Luxembourg credit institutions have less than 10% of female executive directors (EDs) and less than 15% of non-executive directors. Among investment firms, numbers are slightly better for EDs (14%) but only 5% for non-EDs. For both types of institutions, Luxembourg falls below EU averages. The same trend continues for the management body of both credit institutions and investment firms, where around 90% of members are male.
While focusing on age diversity, 86% of EDs and 63% of non-EDs are between 41 and 60 years old. As few as 3% of directors are under 41 years old compared to 6% in the EU.
Towards greater diversity in financial institutions
The new CSSF circular came into force in January 2021, reiterating the importance of diversity of all kinds, in particular at management body level. In order to comply with these new requirements, Luxembourg financial institutions will need to show themselves to be more proactive in defining and implementing diversity guidelines. The numbers show that we are still at the very beginning of this journey.
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