Until recently, corporate governance was off-limits for EU legislators. As with company law, member states largely had the freedom to set their own rules and guidelines. However, the European Commission (EC), with little prompting from companies or shareholders, is keen to see greater harmonisation. The EU Action Plan on company law and corporate governance is seen as the means to this end.
Corporate governance first became a hot issue at EU level in May 2002 when the High-Level Group of Company Law, led by a Dutch professor was asked to report on corporate governance standards in Europe. The resulting “Winter Report”, published in November 2002, was well received and its recommendations became the foundations of the EC’s Action Plan.
What does it mean?
On corporate governance, there are a mixture of recommendations and proposed directives for the short-term (2003-05) and medium–term (2006-08).
EC’s corporate governance should promote the engagement of shareholders and boards, not legislating for it
These are some of the key proposals for the legislative calendar:
- A directive detailing what should be included in annual corporate governance statements:
- How the shareholder meeting operates and its key powers, and a description of shareholder rights and how they can be exercised.
- The composition and operation of the board and its committees.
- Which shareholders have major holding, their voting record, control rights and key agreements.
- Other direct and indirect relationships between major shareholders and the company.
- Any material transactions with other related parties.
- The company‘s risk management systems.
- How the company complies with the relevant national corporate governance code and any deviation from its recommendation.
- A legislative framework to make it easier for shareholders to exercise their rights across borders (asking questions, tabling resolutions and participating in AGM electronically).
- A directive setting out director’s responsibilities, including collective board responsibility for disclosure of financial and non-financial statements.
Some of the EC’s most important recommendations include:
- Setting up a European corporate governance forum to co-ordinate, monitor and encourage the convergence of national corporate governance codes.
- Minimum standards on the creation, composition and the role of nomination, remuneration and audit committees defined at EU level on a “comply or explain” basis.
- Giving listed companies the option of having either one –or to-tier board structures.
- A regime for directors’ remuneration supporting the detailed disclosure of individual directors’ pay and bonuses in annual account, prior approval of directors’ share and share option schemes by the shareholder meeting, and proper recognition of the costs of such schemes in the annual accounts.
Responses to the Action Plan
A large majority of those who contributed to the consultation process on the Action Plan welcomed it as a means of restoring trust in the market. However, while respondents tended to recognise the need for legislation in important company laws areas, some argued that directive are not the best way to tackle corporate governance. One of the main concerns was that the directives would be followed by overly prescriptive and detailed implementing measures.
Corporate governance should be different in each company because every board works in a different way
Some major industrial and financial players consider that the EC is in danger of over-regulating.
Although the EC corporate governance recommendations are not binding the EC will evaluate what has been complied with after one year. If people aren’t complying, the EC will consider making them compulsory. There are two concerns with this. First, one year is too short to build up compliance. Second, there are worries that the spirit of “comply or explain” could be replaced by a mandatory “box-ticking” approach.
Let the market drive…
Several European business associations feel that another layer of regulation could inhibit the move towards best practice. “Disclosure is more important than regulation” is the credo.
Investors are asking for more information and it will follow. Companies don’t need regulation to discuss remuneration very year at the AGM. If the shareholders want to discuss it, they can ask….there is no need for a binding rule.
On a more broaden aspect; EC’s corporate governance should promote the engagement of shareholders and boards, not legislating for it.
The shareholders should specify what they require of companies, rather than governments requiring companies to do what they think would be a good thing…
The spirit of the Law
The cultural differences between member states should not be underestimated
Some aspects of the corporate governance do fit naturally with the legal imposition of a minimum standard. The disclosure of directors’ pay is already covered by UK statute….
Prescribing the terms and conditions under which audit committees work could lead to unthinking application of legal requirements.
Corporate governance should be different in each company because every board works in a different way.
The cultural differences between member states should not be underestimated either.
In some countries (UK, Netherlands) people follow the letter of the law but, in other countries, people are more reluctant until forced…
A European approach
Despite these reservations, greater harmonisation of corporate governance standards is broadly seen to be a good thing. The question is what is the best way to go about this?
A too binding EU regulation could be counter productive.
A smooth alternative would be to encourage competition between different national legal systems to stimulate innovation…and let the best win!
Action Plan Timeline
i. Requiring companies to publish an annual corporate governance statement.
ii. Requiring collective board responsibility for disclosure of financial and non-financial statements.
iii. Removing obstacles to cross-boarder shareholder communication and participation
I. Requiring institutional investors to disclose their investment and voting policies
II. Allowing companies to choose between single-tier and two-tier boards
III. Enhancing the responsibility of board members (special investigation right, wrongful trading rule, director’s disqualification).
Serge Ejzenberg is President of the association “Cercle Alexis de Tocqueville”.