Corporate Governance[en][fr] 

Rules and norms of corporate governance are important elements of the regulatory framework for successful market economies. Although corporate governance can be defined in a variety of ways, Commission communications generally refer to the mechanisms by which a business enterprise, organised in a limited liability corporate form, is directed and controlled. It usually concerns mechanisms by which corporate managers are held accountable for corporate conduct and performance.

Over the past decade, interest in the role corporate governance plays in economies has increased in the EU and Member States, driven by factors such as the introduction of the euro, the freer flow of capital, the growth and diffusion of shareholding, the increased merger activity among large corporations and the competitive pressures of globalisation. Until now, EU policy action has been mainly to coordinate the safeguards required by Member States of companies and firms with a view to making such safeguards equivalent throughout the Community. Several Company Law Directives have resulted.  

The collapse of Enron in the US and European corporate scandals (Dutch retailer Ahold and Italian agri-food giant Parmalat) have forced issues of corporate governance and financial reporting onto the EU policy agenda. The EU has thus begun to systematically address corporate governance issues within the scope of its Company Law and Financial Services Policies.

From 1991 through 1997, ten national codes were issued in EU Member States. In 1998, however, code development surged across the EU, with seven codes issued in that year alone. Another seven codes were issued in 1999, and six were issued in 2000. Five more codes were issued in 2001. Code activity in Europe was driven by the issuance in 1998 of an influential report by the OECD,

"the Millstein Report," and the related issuance of the  OECD Principles of Corporate Governance in 1999. The economic downturns and flight of capital from Asia, Russia and certain South American nations also brought attention to the link between investor confidence and the basic corporate governance principles of transparency, accountability, responsibility and fair treatment of shareholders. 

In its Financial Services Action Plan (FSAP) published in May 1999, the Commission identified issues and actions to achieve efficient European capital markets that better answer the needs of issuers and investors. The FASP announced that the Commission would launch a review of existing codes of corporate governance with a view to identifying any legal or administrative barriers which could frustrate the development of a single EU financial market. A proposed Takeover Directive, part of the EU's FASP, was identified as a top priority. 

Following the rejection of the proposed Dire ctive by the Parliament in July 2001, the Commission set up the Group of High Level Company Law Experts, the so-called Winter Group, whose task was to advise the Commission on a new proposal for a Takeover Directive and on how to set up a modern framework for company law, including corporate governance in the European Union.

Current Corporate governance initiatives In reaction to the Enron collapse , at the Barcelona European Council of March 2002, it was declared that responsible corporate governance is the precondition for economic efficiency, and measures have been asked for in order to guarantee the transparency of corporate governance and corporate accounts and to better protect the shareholders and others concerned. The Commission and the ECOFIN Council in Oviedo in April 2002 agreed to extend the mandate of the Winter Group to review a number of specific issues related to corporate governance and auditing: the role of non-executive and supervisory directors, management remuneration, the responsibility of management for financial statements, and auditing practices.

These and other corporate governance issues form a major part of the final Winter Report. The report also addresses a number of company law subjects, such as capital formation and maintenance rules, group and pyramid structures, corporate restructuring and mobility, the European Private Company and other European legal forms of enterprise, as well as certain general themes for future development of company law in Europe.

The Winter Report , presented on 4 November 2002, recommends that the short-term priorities should be to improve the EU framework for corporate governance through: 

• defining enhanced corporate governance disclosure requirements;
• providing for a strong and effective role for independent non-executive or supervisory directors, particularly in three areas where executive directors have conflicts of interests, i.e. nomination and remuneration of directors and supervision of the audit of the company's accounts;
• establishing an appropriate regime for directors' remuneration, requiring disclosure of the company's remuneration policy and individual directors' remuneration, as well as prior shareholder approval of share and share option schemes in which directors participate, and accounting for the costs of those schemes to the company;
• confirming as a matter of EU law the collective responsibility of director for financial and key non-financial statements of the company
• creating an integrated legal framework to facilitate efficient shareholder information, communication and decision-making on a cross-border basis, using where possible modern technology, in particular the company's website
• setting up a structure to co-ordinate the corporate governance efforts of Member States.

The Winter Report, however, argues that the EU should not strive to create a single European code of corporate governance, as the underlying company law in Member States is not harmonised in key areas and the other conditions which discipline company governance also vary widely in the different Member States. Instead, it proposes that the EU actively coordinate the corporate governance efforts of Member States through their company laws, securities laws, listing rules, codes or otherwise, to facilitate convergence and avoid divergence, and to facilitate mutual learning. Member States are to designate a national code of corporate governance with which listed companies subject to their jurisdiction are to comply or in relation to which they are to explain deviations. Mem ber States are then to participate in the coordination process by the EU; the process itself is to be voluntary and non-binding, with a strong involvement of market participants.

The Winter Group also calls upon the Commission to pursue its recommendations in establishing an Action Plan for a modernization of European Company Law.

On 21 May, the Commission adopted an Action Plan to improve corporate governance rules in the EU and published ten priorities to improve the quality of statutory audit. The Communication aims at strengthening shareholders' rights and protection for employees and creditors, as well as fostering the efficiency and competitiveness of business. Among the most urgent initiatives, the Commission lists the:

• mandatory publication by listed companies of an Annual Corporate Governance Statement,
• detailing companies' corporate governance structures and practices;
• development of a legislative framework governing shareholders' rights (such as asking questions or voting in absentia);
• adoption of a Recommendation, which aims at promoting the role of (independent) non-executive or supervisory directors;
• adoption of a Recommendation on Directors' Remuneration, promoting more transparency and influence among shareholders;
• establishment of a European Corporate Governance Forum to encourage the coordination of national codes' enforcement and monitoring.

The Action Plan whose proposals are prioritised over the short, medium and long-term, aims at restoring market confidence. In order to achieve that, the Action Plan on company law and corporate governance is complemented by ten priorities the Commission has proposed to improve and harmonise the quality of statutory audit.

A majority of responses to the Winter Groups' consultation process rejected the creation of a European corporate governance code.

Some industry observers argue that a voluntary European Union-wide code could conceivably result in some benefits. However, efforts to achieve broad agreement among Member States on detailed best practices that fit well with varying legal frameworks are more likely to be a negotiated "lowest common denominator" of acceptable practice rather than true "best practice."

Others argue that while agreed European Union code might focus on basic principles of good governance, the OECD Principles of Corporate Governance (which issued in 1999 after considerable consultation with, and participation from, Member States) already set forth a coherent, thoughtful and agreed set of basic corporate governance principles.

The European Federation of Accountants (FEE) has expressed its support for the Commission's proposals and underlined the "fundamental importance of public trust in capital markets, financial reporting and the work of the profession, together with the need to work continuously to maintain that trust". In addition, the FEE called on Member States to ensure consistent implementation of the reforms, as outlined in the European Commission's framework.