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«EN EN EUROPEAN COMMISSION Brussels, 5.4.2011 COM(2011) 164 final GREEN PAPER The EU corporate governance framework EN EN GREEN PAPER The EU corporate ...»

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Brussels, 5.4.2011

COM(2011) 164 final


The EU corporate governance framework



The EU corporate governance framework

(Text with EEA relevance)

The Commission recently reiterated its commitment to a strong and successful single market which refocuses on citizens and regains their trust. As its Communication Towards a Single Market Act stated, ‘It is of paramount importance that European businesses demonstrate the utmost responsibility not only towards their employees and shareholders but also towards society at large’1. Corporate governance and corporate social responsibility are key elements in building people’s trust in the single market. They also contribute to the competitiveness of European business, because well run, sustainable companies are best placed to contribute to the ambitious growth targets set by ‘Agenda 2020’2. In the field of corporate social responsibility the Commission has already issued a public consultation on non-financial disclosure by companies3 and will put forward a new framework initiative later this year to tackle issues related to the societal challenges that enterprises are facing.

The G20 Finance Ministers and Central Bank Governors Communiqué of 5 September 2009 emphasised that actions should be taken to ensure sustainable growth and build a stronger international financial system. Corporate governance is one means to curb harmful shorttermism and excessive risk-taking4. The purpose of this Green Paper is to assess the effectiveness of the current corporate governance framework for European companies in the light of the above.

Corporate governance is traditionally defined as the system by which companies are directed and controlled5 and as a set of relationships between a company’s management, its board, its shareholders and its other stakeholders6. The corporate governance framework for listed companies in the European Union is a combination of legislation and ‘soft law’, including recommendations7 and corporate governance codes. While corporate governance codes are adopted at national level, Directive 2006/46/EC promotes their application by requiring that listed companies refer in their corporate governance statement to a code and that they report on their application of that code on a ‘comply or explain’8 basis.

Communication from the Commission to the European Parliament, the Council, the Economic and Social Committee and theCommittee of the Regions Towards a Single Market Act – for a highly competitive social market economy - COM(2010) 608 final/2, p. 27.

See the Conclusions of the European Council of 17 June 2010, accessible at http://www.consilium.europa.eu/ueDocs/cms_Data/docs/pressData/en/ec/115346.pdf.

The consultation on ‘disclosure of non-financial information by companies’ closed in January 2011; see http://ec.europa.eu/internal_market/consultations/2010/non-financial_reporting_en.htm.

See also, e.g., OECD, Corporate Governance and the Financial Crisis - Conclusions and emerging good practices to enhance implementation of the Principles, February 2010.

Report of the Committee on the Financial Aspects of Corporate Governance (The Cadbury Report), 1992, p. 15, accessible at http://www.ecgi.org/codes/documents/cadbury.pdf.

OECD Principles of Corporate Governance, 2004, p. 11, accessible at http://www.oecd.org/dataoecd/32/18/31557724.pdf.

For a list of EU measures in the field of corporate governance, see Annex 2.

This approach means that a company choosing to depart from a corporate governance code has to explain which parts of the corporate governance code it has departed from and the reasons for doing so.

EN EN To identify the issues most relevant to good corporate governance in the EU and to prepare this Green Paper, the Commission conducted interviews with a sample of listed companies from different Member States and different economic sectors, with different levels of capitalisation and different shareholding structures. It also held meetings with corporate governance experts and with representatives of the investor community and of civil society.

Some relevant issues had already emerged in the context of the Green Paper on Corporate Governance in Financial Institutions and remuneration policies9 adopted in June 2010. For example, shareholder engagement matters not just to financial institutions, but to companies generally10. However, financial institutions are a special case, because of the particular challenges faced in ensuring effective risk management and the systemic risks they may pose to the financial system. So the solutions envisaged in the June 2010 Green Paper may not be relevant to EU companies in general. Accordingly, this Green Paper addresses the following

three subjects which are at the heart of good corporate governance:

• The board of directors – high performing, effective boards are needed to challenge executive management. This means that boards need non-executive members with diverse views, skills and appropriate professional experience. Such members must also be willing to invest sufficient time in the work of the board. The role of chairman of the board is particularly important, as are the board’s responsibilities for risk management.

• Shareholders – the corporate governance framework is built on the assumption that shareholders engage with companies and hold the management to account for its performance. However, there is evidence that the majority of shareholders are passive and are often only focused on short-term profits. It therefore seems useful to consider whether more shareholders can be encouraged to take an interest in sustainable returns and longerterm performance, and how to encourage them to be more active on corporate governance issues. Moreover, in different shareholding structures there are other issues, such as minority protection.

• How to apply the ‘comply or explain’ approach which underpins the EU corporate governance framework. A recent study11 showed that the informative quality of explanations published by companies departing from the corporate governance code’s recommendation is - in the majority of the cases - not satisfactory and that in many Member States there is insufficient monitoring of the application of the codes. It is therefore appropriate to consider how to improve this situation.

COM(2010) 284, see also Feedback Statement — Summary of responses to the Commission Green Paper on Corporate Governance in Financial Institutions, accessible at http://ec.europa.eu/internal_market/consultations/docs/2010/governance/feedback_statement_en.pdf.

See the abovementioned Green Paper, Sections 3.5 and 5.5.

Study on Monitoring and Enforcement Practices in Corporate Governance in the Member States, accessible on http://ec.europa.eu/internal_market/company/docs/ecgforum/studies/comply-or-explainen.pdf.

EN EN Two preliminary questions also deserve consideration.

Firstly, European rules on corporate governance apply to ‘listed’ companies (i.e. companies that issue shares admitted to trading on a regulated market). They generally do not distinguish according to company size12 or type. Some Member States, however, have specific corporate governance codes tailored to small and medium-sized listed companies13, e.g. where the controlling shareholder may also be the manager. Those codes include recommendations that reflect company size and structure, which are therefore less complex for small businesses to implement. In other Member States, codes designed for all listed companies contain certain provisions tailored to smaller companies14. So the question is whether the EU should have a differentiated approach and how best to take account of the potential difficulty of applying some corporate governance practices across the range of types and sizes of companies15.

Secondly, good corporate governance may also matter to shareholders in unlisted companies.

While certain corporate governance issues are already addressed by company law provisions on private companies, many areas are not covered. Corporate governance guidelines for unlisted companies may need to be encouraged: proper and efficient governance is valuable also for unlisted companies, especially taking into account the economic importance of certain very large unlisted companies. Moreover, putting excessive burden on listed companies could make listing less attractive. However, principles designed for listed companies cannot be simply transposed to unlisted companies, as the challenges they face are very different. Some voluntary codes have already been drafted and initiatives taken by professional bodies at European16 or national level17. So the question is whether any EU action is needed on corporate governance in unlisted companies.

But there are exceptions, for instance, Article 41(1), second subparagraph of the Directive 2006/43/EC of the European Parliament and of the Council of 17 May 2006 on statutory audits of annual accounts and consolidated accounts, amending Council Directives 78/660/EEC and 83/349/EEC and repealing Council Directive 84/253/EEC (OJ L 157, 9.6.2006, p. 87) allows Member States to permit SMEs that are listed companies not to set up a separate audit committee.

See, for example, Code de gouvernement d’entreprise pour les valeurs moyennes et petites, December 2009, Middlenext, accessible at http://www.middlenext.com/.

See for example the UK Corporate Governance Code, accessible at http://www.frc.org.uk/corporate/ukcgcode.cfm.

The logic of burden reduction for small and medium companies is also present in the ongoing review of the accounting directives (Council Directives 78/660/EEC and 83/349/EEC), although it will mainly target non-listed companies and in the Green on the Audit policy published in 2010 - COM(2010) 561 -, available at http://ec.europa.eu/internal_market/consultations/docs/2010/audit/green_paper_audit_en.pdf.

Corporate Governance Guidance and Principles for Unlisted Companies in Europe, European Confederation of Directors’ Associations (EcoDa), accessible at http://www.ecoda.org/docs/ECODA_WEB.pdf.

See for instance in Belgium the Buysse Code — Corporate governance recommendations for non-listed enterprises (http://www.codebuysse.be/downloads/CodeBuysse_EN.pdf); in Finland the Central Chambers of Commerce initiative Improving corporate governance of unlisted companies (http://www.keskuskauppakamari.fi/content/download/19529/421972); in the UK, Corporate Governance Guidance and Principles for Unlisted Companies in the UK, Institute of Directors (http://www.iod.com/MainWebsite/Resources/Document/corp_gov_guidance_and_principles_for_unlis ted_companies_in_the_uk_final_1011.pdf).



(1) Should EU corporate governance measures take into account the size of listed companies? How? Should a differentiated and proportionate regime for small and medium-sized listed companies be established? If so, are there any appropriate definitions or thresholds? If so, please suggest ways of adapting them for SMEs where appropriate when answering the questions below.

(2) Should any corporate governance measures be taken at EU level for unlisted companies? Should the EU focus on promoting development and application of voluntary codes for non-listed companies?

–  –  –

The term ‘board of directors’ in this Green Paper essentially refers to the supervisory role of directors. In a dual structure, this role generally falls to the supervisory board18. The term ‘non-executive director’ includes the members of the supervisory board in the dual system.

Boards of directors have a vital part to play in the development of responsible companies.

And in many respects, the role played by the chairperson seems to have a considerable impact on the board’s functioning and success. In view of this impact, it could be useful to define the position and responsibilities of the chairperson of the board more clearly.

–  –  –

(3) Should the EU seek to ensure that the functions and duties of the chairperson of the board of directors and the chief executive officer are clearly divided?

Other topics that merit closer examination, with a view to enabling boards of directors to challenge management decisions effectively, are considered below.

–  –  –

The composition of the board has to suit the company’s business. Non-executive board members should be selected on the basis of a broad set of criteria, i.e. merit, professional qualifications, experience, the personal qualities of the candidate, independence and diversity19.

Diversity in the members’ profiles and backgrounds gives the board a range of values, views and sets of competencies20. It can lead to a wider pool of resources and expertise. Different leadership experiences, national or regional backgrounds or gender can provide effective means to tackle ‘group-think’ and generate new ideas. More diversity leads to more discussion, more monitoring and more challenges in the boardroom. It potentially results in This Green Paper has no bearing on the roles assigned to different company bodies and board-level employee participation under national law.

It is worth noting that some Member States provide for regimes of employee participation in the boards ‘Enhancing stakeholder diversity in the Board room’, ‘The Erfurt meetings’ series, No 1, March 2008, European Citizens’ Seminars e.V. (Erfurt, Germany) publishers.

–  –  –

1.1.1. Professional diversity Diversified expertise is considered the key to efficient board work. A variety of professional backgrounds is needed to ensure that the board as a whole understands, for example, the complexities of global markets, the company’s financial objectives and the impact of the business on different stakeholders including employees. Companies interviewed by the Commission acknowledged the importance of identifying complementary profiles in selecting board members. However, this is not yet general practice. For example, 48% of European boards have no director with a sales or marketing profile and 37% of audit committees do not include a chief financial officer (CFO) or former CFO21.

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