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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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Accurate assessment of skills and expertise is the single most important factor in selecting new non-executive board members. Therefore, recruitment policies which identify the precise skills needed by the board could help increase its ability to monitor the company effectively.

1.1.2. International diversity

In a sample of large European listed companies, an average of 29% of board members were non-nationals22. There were, however, great disparities among European countries. While the Netherlands leads the way with 54%, only 8% of board members in Germany were nonnationals. Even today, one in four large European listed companies has no foreign directors on its board.

Some companies highlighted the importance of foreign board members for international companies while others underlined the difficulties deriving from different cultural backgrounds and languages. In companies with foreign board members there is a match between their regional presence and their international board members. Knowledge of regional markets is often mentioned as a key factor in choosing foreign candidates for board membership.

1.1.3. Gender diversity

The issue of gender diversity in economic decision-making is being addressed in a comprehensive manner by the Commission in its "Strategy for equality between women and men 2010-2015" of September 201023 and in the follow-up given to this strategy by the Commission24. According to the Commission's findings, the proportion of women on the (supervisory) boards of listed companies in the EU is currently on average 12%25. There is evidence that the increase in the number of women university graduates does not bring about Heidrick & Struggles, Corporate Governance Report 2009 — Boards in turbulent times, using a selection of 371 top companies in 13 countries based on the reference stock exchange.

See Heidrick & Struggles.

Communication from the Commission to the European Parliament, the Council, the European Economic and Social Committee and the Committee of the Regions, "Strategy for equality between women and men 2010-2015", COM(2010) 491 final.

See details in the Commission Staff Working Paper "The Gender Balance in Business Leadership", SEC(2011) 246 final.

European Commission, Database on women and men in decision-making http://ec.europa.eu/social/main.jsp?catId=764&langId=en.

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Gender diversity can contribute to tackling group-think. There is also evidence that women have different leadership styles28, attend more board meetings29 and have a positive impact on the collective intelligence of a group30. Studies suggest there is a positive correlation between the percentage of women in boards and corporate performance31, though for certain the overall impact of women on firm performance is more nuanced32. Although these studies do not prove any causality, the correlation highlights the business case for gender balance in management and corporate decision-making. Nonetheless, promoting women to boards has as one indisputably positive effect: it contributes to increasing the pool of talent available for a company’s highest management and oversight functions. This is why the Commission's "Strategy for equality between women and men" stresses that over the next five years, the Commission will "consider targeted initiatives to improve the gender balance in decisionmaking".

The introduction of measures such as quotas or targets to ensure gender balance in boards, however, is not sufficient if companies do not adopt diversity policies that contribute to worklife balance for women and men and encourage notably the mentoring, networking and adequate training for management positions that are essential for women wanting to follow a career path that leads to eligibility for board positions. While it should be for companies to decide whether they introduce such a diversity policy, boards should at least be required to consider the matter and disclose the decisions that they have taken. The Commission will consider these matters in the context of the follow-up to its "Strategy for equality between women and men 2010-2015" of September 2010 and to this Green Paper.

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(4) Should recruitment policies be more specific about the profile of directors, including the chairman, to ensure that they have the right skills and that the board is suitably diverse? If so, how could that be best achieved and at what level of governance, i.e. at national, EU or international level?

(5) Should listed companies be required to disclose whether they have a diversity policy and, if so, describe its objectives and main content and regularly report on progress?

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Women matter, McKinsey & Company 2007, 2010.

See the above mentioned Commission Staff Working Paper.

Women matter, McKinsey & Company 2008.

Adams and Ferreira ‘Women in the boardroom and their impact on governance and performance’, in Journal of Financial Economics 94 (2009).

Woolley, Chabris, Pentland, Hashmi and Malone, ‘Evidence for a Collective Intelligence Factor in the Performance of Human Groups’, Sciencexpress, 30 September 2010.

Women matter, McKinsey & Company 2007; Female Leadership and Firm Profitability, Finnish Business and Policy Forum — EVA 2007; The Bottom Line: Connecting Corporate Performance and Gender Diversity, Catalyst 2004.





See Adams and Ferreira.

EN EN

1.2. Availability and time commitment The role of non-executive directors has grown in complexity and importance. This is reflected in a number of national corporate governance codes and even in legislation. Member States have sought to establish the principle that non-executive directors should dedicate sufficient time to their duties. Some Member States have gone further and recommend or limit the number of board mandates a director may hold.

Limiting the number of mandates could be a simple solution to help ensure non-executive directors devote sufficient time to monitoring and supervising their particular companies. The limits would have to cater for the individual situation of non-executive directors and of the company in question. They should take into account whether the mandates are held in nongroup or non-controlled undertakings33, whether the person in question also holds executive positions, whether it is an ordinary non-executive mandate or a chairmanship, and whether additional positions are held in supervisory bodies of companies with requirements similar to those of listed companies.

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(7) Do you believe there should be a measure at EU level limiting the number of mandates a non-executive director may hold? If so, how should it be formulated?

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The Commission’s 2005 Recommendation on the role of non-executive or supervisory directors of listed companies34 stated that the board should evaluate its performance annually.

This includes assessing its membership, organisation and operation as a group, the competence and effectiveness of each board member and of the board committees, and how well the board has performed against any performance objectives set.

Regular use of an external facilitator (e.g. every third year) could improve board evaluations by bringing an objective perspective and sharing best practices from other companies35. But there still seems to be only a limited number of service providers in some domestic markets.

Greater demand, however, is likely to engender a better offer.

Evidence gathered by the Commission suggests that it is particularly at a time of crisis, or of a breakdown in communication between board members, that an external reviewer really adds value to the evaluation. The chairman’s attitude to evaluation seems to be key to its success.

In addition to the items mentioned in the Commission Recommendation, the review should also cover the quality and timeliness of information received by the board, the management’s ‘Controlled undertaking’, as defined in Article 2(1)(f) of Directive 2004/109/EC of the European Parliament and of the Council of 15 December 2004 on the harmonisation of transparency requirements in relation to information about issuers whose securities are admitted to trading on a regulated market and amending Directive 2001/34/EC. See also the parent-subsidiary relationship as explained in Article 1 of Directive 83/349/EEC on consolidated accounts.

Commission Recommendation 2005/162/EC of 15 February 2005 on the role of non-executive or supervisory directors of listed companies and on the committees of the (supervisory) board.

OECD, Corporate governance and the financial crisis: Conclusions and emerging good practices to enhance implementation of the Principles, 24 February 2010, p. 20.

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(8) Should listed companies be encouraged to conduct an external evaluation regularly (e.g. every three years) ? If so, how could this be done?

1.4. Directors’ remuneration As a concept, corporate governance essentially focuses on the issues which arise from separating ownership and control, in particular the principal-agent relationship between shareholders and executive directors. Directors’ remuneration has widely been used as a tool to align the interests of shareholders and executive directors and so reduce agency costs. In recent years, variable remuneration, normally linked to performance and responsibilities, has become much more prevalent. However, a mismatch between performance and executive directors’ remuneration has also come to light. Poor remuneration policies and/or incentive structures may lead to unjustified transfers of value from companies and their shareholders and other stakeholders to executives. Moreover, a focus on short-term performance criteria may have a negative influence on long-term sustainability of the company.

The Commission has addressed problems related to directors’ remuneration in three Recommendations37. The main recommendations are disclosure of remuneration policy and the individual remuneration of executive and non-executive directors, the shareholders´ vote on the remuneration statement, an independent functioning remuneration committee and appropriate incentives which foster performance and long-term value creation by listed companies. Commission reports38 show that a number of Member States have not adequately addressed these issues. On the other hand, there appears to be a growing tendency among Member States to legislate on disclosure and the shareholders´ vote. In 2009, the European Corporate Governance Forum recommended that disclosure of remuneration policy and individual remuneration be made mandatory for all listed companies39. It also recommended a binding or advisory shareholder vote on remuneration policy and greater independence for non-executive directors involved in determining remuneration policy. The Commission also consulted on this issue in the 2010 Green Paper on Corporate Governance in Financial Institutions40. The purpose of the consultation in this Green Paper is to receive feedback as regards the more detailed questions below.

See Higgs, D. Review of the role and effectiveness of non-executive directors, January 2003.

Commission Recommendations 2004/913/EC, 2005/162/EC and 2009/385/EC.

Commission reports SEC(2007) 1022 and (2010) 285.

Statement by the European Corporate Governance Forum of 23 March 2009.

See question 7.1. Respondents to the consultation generally expressed the view that incentives for directors must be properly structured in order to encourage long term and sustainable performance of companies. However, the majority was opposed to legislative measures as regards the structure of remuneration in listed companies. Nevertheless, certain respondents mentioned that they would welcome more transparency of remuneration policies of directors of listed companies and a shareholder vote.

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(9) Should disclosure of remuneration policy, the annual remuneration report (a report on how the remuneration policy was implemented in the past year) and individual remuneration of executive and non-executive directors be mandatory?

(10) Should it be mandatory to put the remuneration policy and the remuneration report to a vote by shareholders?

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All companies, whatever their specific fields of operations, face a wide variety of external or internal risks. According to their specificities (field of activity, size, international exposure, complexity) they should develop an adequate risk culture and arrangements to manage them effectively. Some companies may face risks that significantly affect society as a whole: risks related to climate change41, to the environment (e.g. the numerous dramatic oil spills witnessed in recent decades), health, safety, human rights, etc. Others operate critical infrastructure, the disruption or destruction of which could have major cross-border impacts42.

However, activities that might potentially generate such risks are subject to specific sectoral legislation and to monitoring by competent authorities. Thus, taking into account the diversity of situations, it does not seem possible to propose a 'one size fits all' risk management model for all types of companies. It is, however, crucial that the board ensures a proper oversight of the risk management processes.

To be effective and consistent any risk policy needs to be clearly ‘set from the top’ i.e.

decided by the board of directors for the whole organisation. It is generally recognised43 that the board of directors bears primary responsibility for defining the risk profile of a given organisation according to the strategy followed and monitoring it adequately to ensure it works effectively.

Some aspects may differ due to the variety of legal frameworks in place, e.g. the dual or unitary structure of board of directors. In each case, it is indispensable to define clearly the roles and responsibilities of all parties involved in the risk management process: the board, the executive management and all operational staff working in the risk function. The job descriptions must be known internally and externally.

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