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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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2.6. Shareholder identification There have been demands recently for EU action to increase the level of investor transparency52 towards issuers of shares53. Proponents argue that means of identifying their shareholders will enable issuers to engage in a dialogue with them, in particular in matters of corporate governance. This could also generally increase the involvement of shareholders in the companies they invest in54. About two thirds of Member States have already granted issuers the right to know their domestic shareholders55. In addition, the Transparency For more detailed information, see the Commission staff working document ‘The review of the operation of Directive 2004/109/EC: emerging issues’ accompanying document to the Report from the Commission to the Council, the European Parliament, the European Economic and Social Committee and the Committee of the Regions Operation of Directive 2004/109/EC on the harmonisation of transparency requirements in relation to information about issuers whose securities are admitted to trading on a regulated market - SEC(2009) 611, pp. 88-94.

This question was also raised in the Green Paper Corporate governance in financial institutions and remuneration policies - COM(2010) 284 - which was, however, limited to financial institutions.

The Commission already looked at the risk of abuse connected to ‘empty voting’ in its consultation on the Transparency Directive. That consultation suggested that the problem was one of ‘record date capture’.

For more details, see Market analysis of shareholder transparency regimes in Europe, ECB T2S

Taskforce on Shareholder Transparency, 9 December 2010:

http://www.ecb.int/paym/t2s/progress/pdf/subtrans/mtg7/2010-t2s-tst-questionnaire-responseanalysis.pdf?d6cc9adf38f63d24897c94e379213b81

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Others disagree with the demand to create a European tool for shareholder identification.

They consider that modern means of communication have made it very easy to inform shareholders and potential investors about corporate governance issues and to get their views.

Better knowledge of shareholders could also lead to management entrenchment, i.e. help management to better defend themselves against any actions by shareholders to challenge their conduct of business. In certain Member States there may also be privacy considerations related to data protection rules forbidding intermediaries to pass on information on shareholders to issuers.

Question:

(20) Do you see a need for a technical and/or legal European mechanism to help issuers identify their shareholders in order to facilitate dialogue on corporate governance issues? If so, do you believe this would also benefit cooperation between investors?

Please provide details (e.g. objective(s) pursued, preferred instrument, frequency, level of detail and cost allocation).

2.7. Minority shareholder protection Minority shareholder protection is relevant in relation to the role of shareholders in corporate governance for a number of reasons.

Minority shareholder engagement is difficult in companies with controlling shareholders, which remain the predominant governance model in European companies. This raises the question whether the ‘comply or explain’ system is viable in such companies, particularly where adequate protection of minority shareholders is not guaranteed.

Secondly, the question arises whether the existing EU rules are sufficient to protect minority shareholders’ interests against potential abuse by a controlling shareholder (and/or the management).

2.7.1. Scope for engagement and the functioning of ‘comply or explain’ where there is a controlling or dominant shareholder Minority shareholder engagement can be particularly challenging in companies with a dominant or controlling shareholder who is typically also represented on the board. The difficulties or inability of minority shareholders to efficiently represent their interests in companies with controlling shareholders may make the ‘comply or explain’ mechanism much less effective. In order to enhance the rights of shareholders, certain Member States (e.g.

Italy) reserve the appointment of some board seats to minority shareholders.

Directive 2004/109/EC.

In the revision of the Transparency Directive foreseen for 2011, the Commission is also envisaging introducing a disclosure requirement for the long economic positions having similar economic effect to holding of shares.

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(21) Do you think that minority shareholders need additional rights to represent their interests effectively in companies with controlling or dominant shareholders?

2.7.2. Protection against potential abuse Controlling shareholders and/or boards can extract benefits from a company to the detriment of minority shareholders’ interests in many ways. The main way is through ‘related party’ transactions.

Current EU rules already cover some aspects of related party transactions, basically accounting and disclosure. Companies are required to include in their annual accounts a note on transactions entered into with related parties, stating the amount and the nature of the transaction and other necessary information58.

However, some investors with whom discussions were held during the preparation of this Green Paper argue that the rules are insufficient. They believe that disclosure of related party transactions is not enough in all situations and is not always timely.





It has been suggested59 that, above a certain threshold, the board should appoint an independent expert to provide an impartial opinion on the terms and conditions of related party transactions to the minority shareholders. Significant related party transactions would need approval by the general meeting. The publicity associated with general meetings might dissuade controlling shareholders from some transactions and give minority shareholders the chance to oppose the resolution approving the transaction. Some propose that controlling shareholders should be precluded from voting.

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(22) Do you think that minority shareholders need more protection against related party transactions? If so, what measures could be taken?

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Employees' interest in the long-term sustainability of the company for which they work is an element that a corporate governance framework should take into account. Employees' involvement in the affairs of a company may take the form of information, consultation and participation in the board. But it can also relate to forms of financial involvement, particularly to employees becoming shareholders. Employee share ownership has a long tradition in some European countries60. Such schemes are mainly considered as means to increase the commitment and motivation of workers, raise productivity and reduce social tension. But See Article 43(1)(7b) of the Fourth Council Directive 78/660/EEC of 25 July 1978 based on Article 54(3)(g) of the Treaty on the annual accounts of certain types of companies and Article 34(7b) of the Seventh Council Directive 83/349/EEC of 13 June 1983 based on the Article 54(3)(g) of the Treaty on consolidated accounts.

See the Statement on minority shareholders’ rights by the European Corporate Governance Forum.

Communication on the framework for promoting employee financial participation - COM(2002) 364 -, The PEPPER IV Report: Benchmarking of Employee Participation in Profits and Enterprise Results in the Member and Candidate Countries of the European Union, 2008.

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Surveys among companies and investors show that most of them consider ‘comply or explain’ approach as an appropriate tool in corporate governance. Under the 'comply or explain' approach, a company which chooses to depart from a corporate governance code recommendation must give detailed, specific and concrete reasons for the departure. Its main advantage is its flexibility; it allows companies to adapt their corporate governance practices to their specific situation (taking into consideration their size, shareholding structure, and sectoral specificities). It is also thought to make companies more responsible by encouraging them to consider whether their corporate governance practices are appropriate and by giving them a target to meet. The ‘comply or explain’ approach is therefore widely supported by regulators, companies and investors, as shown by a study on monitoring and enforcement systems for Member States’ corporate governance codes published in autumn 200961.

However, the general introduction of the ‘comply or explain’ approach in the EU has had its difficulties. The study referred to above revealed important shortcomings in applying 'comply or explain' principle that reduce the efficiency of the EU’s corporate governance framework and limit the system’s usefulness. So some adjustments appear necessary to improve the application of the corporate governance codes. The solutions should not alter the fundamentals of the ‘comply or explain’ approach but contribute to its effective functioning by improving the informative quality of the reports. However, these solutions are without prejudice to the possible need to reinforce certain requirements at EU level by including them in legislation rather than making recommendations.

3.1. Improving the quality of the explanations given in corporate governance statements According to the study cited above, the overall quality of companies’ corporate governance statements when departing from a corporate governance code recommendation is unsatisfactory. Its explanations are used by investors to make their choices and assess the value of the company. The study showed, however, that in over 60% of cases where companies chose not to apply recommendations, they did not provide sufficient explanation.

They either simply stated that they had departed from a recommendation without any further explanation, or provided only a general or limited explanation.

Study on Monitoring and Enforcement Practices in Corporate Governance in the Member States, available at http://ec.europa.eu/internal_market/company/ecgforum/studies_en.htm.

EN EN In many Member States a slow but gradual improvement in this field can already be observed.

Companies are learning, and better explanations are being provided thanks to the educational activities of public or private bodies (financial market authorities, stock exchanges, chambers of commerce, etc). However, further improvement could be achieved by introducing more detailed requirements for the information to be published by companies departing from the recommendations. The requirements should be clear and precise – many of the present difficulties are due to misunderstanding of the nature of the explanations required.

A good example of a precise requirement for companies is the Swedish corporate governance code, which provides that ‘in its corporate governance report, the company is to state clearly which Code rules it has not complied with, explain the reasons for each case of noncompliance and describe the solution it has adopted instead’62. It would indeed seem appropriate to require that companies not only disclose the reasons for departure from a given recommendation, but also give a detailed description of the solution applied instead.

3.2. Better monitoring of corporate governance

The corporate governance statements that companies publish seem not to be monitored as they should be. In most Member States, responsibility for enforcing the obligation to publish is left to investors who, depending on the culture and traditions in their Member State, often take little action. Financial market authorities or stock exchanges and other monitoring bodies work within different legislative frameworks and have developed different practices. In most cases, they only have a formal role of verifying whether the corporate governance statement has been published. Few Member States have public or specialised authorities check the completeness of the information provided (in particular, the explanations).

‘Comply or explain’ could work much better if monitoring bodies such as securities regulators, stock exchanges or other authorities63 were authorised to check whether the available information (in particular, the explanations) is sufficiently informative and comprehensive. The authorities should not, however, interfere with the content of the information disclosed or make business judgements on the solution chosen by the company.

The authorities could make the monitoring results publicly available in order to highlight best practice and to push companies towards more complete transparency. Use of formal sanctions in the most serious cases of non-compliance could also be envisaged64.

One way to improve monitoring could be to define the corporate governance statement as regulated information within the meaning of Article 2(1)(k) of Directive 2004/109/EC and thus make it subject to the powers of competent national authorities laid down in Article 24(4) of the Directive.

As regards the different practices developed by monitoring bodies, there is great potential for improving and extending the current exchange of best practice.

See http://www.corporategovernanceboard.se/the-code/current-code, point 10.2.

The role of auditors is not discussed here, as a consultation on the role of statutory audit has been launched through a separate green paper available at http://ec.europa.eu/internal_market/consultations/docs/2010/audit/green_paper_audit_en.pdf.

As, for example, is done in Spain — see the Study on Monitoring and Enforcement Practices in Corporate Governance in the Member States, p. 63.

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(24) Do you agree that companies departing from the recommendations of corporate governance codes should be required to provide detailed explanations for such departures and describe the alternative solutions adopted?

(25) Do you agree that monitoring bodies should be authorised to check the informative quality of the explanations in the corporate governance statements and require companies to complete the explanations where necessary? If yes, what exactly should be their role?

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