Strengthening European corporate governance

Strengthening European corporate governance

Following extensive consultation the European Union has announced a series of proposals aimed at strengthening corporate governance across Europe.  In the explanatory memorandum which sets out the proposals, the EU points to the need to create a “modern and efficient corporate governance framework for European undertakings, investors and employees that must be adapted to the needs of today’s society and to the changing economic environment.”

The proposals aim to address two key failings, namely “insufficient engagement of shareholders and lack of adequate transparency.”  Shareholder engagement issues can be further broken down into five areas which the EU Commission’s impact assessment highlights as:

  • Insufficient engagement of institutional investors and asset managers
  • Insufficient link between pay and performance of directors
  • Lack of shareholder oversight on related party transactions
  • Inadequate transparency of proxy advisors
  • Difficult and costly exercise of rights flowing from securities for investors

To address these issues the commission has come up with a series of proposals, all designed to increase engagement, enhance transparency, improve the flow of information and create tighter links between pay and outcomes.  All of these are linked to the overall aim of contributing to the long-term sustainability of EU companies, creating an attractive environment for shareholders and enhancing cross-border voting.

Turning to the lack of transparency issue which was identified by the commission, the proposals highlight shortcomings in the way the ‘comply or explain’ principle is applied.  In particular “companies often do not provide appropriate explanations when they depart from corporate governance codes.”  This is one area where the EU is following the UK lead with the UK Corporate Governance code already requiring enhanced levels of explanation.

Commenting on this proposal the FRC said that improving the quality of reporting would “help to enshrine good corporate governance throughout Europe.”  ACCA also welcomed the proposals but added that “companies have to be provided flexibility by allowing them to manage their corporate governance according to their specialities in each member state.”  Acknowledging this concern the directive does allow for transparency and information to be flexed to fit within the distinct corporate governance frameworks.  However the directive also states that to improve cross-border investment, information asymmetry “can only be dealt with through uniform transparency measures.”

Summing up the directive EU Internal Market and Services Commissioner, Michel Barnier said: “The last years have shown time and time again how short-termism damages European companies and the economy. Sound corporate governance can help to change that.”

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