Tilburg University
Corporate Governance 2.0
van der Elst, C.F.; Vermeulen, E.P.M.
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European Company Law
Publication date:
2011
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Link to publication in Tilburg University Research Portal
Citation for published version (APA):
van der Elst, C. F., & Vermeulen, E. P. M. (2011). Corporate Governance 2.0: Assessing the Green Paper of the
European Commission. European Company Law, 8(4), 165-174.
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ANDREAS CAHN Director of the Institute for Law and Finance, Johann Wolfgang Goethe-University, Frankfurt, Germany e-mail: cahn@ilf.uni-frankfurt.de
ADRIAAN DORRESTEIJN Professor of International Company Law at Utrecht University, the Netherlands
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MARCO LAMANDINI Full Professor of Company Law at the University of Bologna, Italy
e-mail: marcolamandini@forschung.it FRANCISCO MARCOS IE Law School, Madrid, Spain e-mail: Francisco.Marcos@ie.edu
MICHEL MENJUCQ Professor of Company Law at the Univer-sity of Panthéon-Sorbonne, Paris, France
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e-mail: c.schwarz@pr.unimaas.nl RAFAL STROINSKI Warsaw University, Poland e-mail: Rafal.Stroinski@uw.edu.pl
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C O N T R I B U T I N G I N T E R N A T I O N A L L A W F I R M S
ALLEN & OVERY Jan Louis Burggraaf e-mail: JanLouis.Burggraaf@AllenOvery.com BAKER & MCKENZIE Jeroen Hoekstra e-mail: Jeroen.Hoekstra@BAKERNET.com DE BRAUW Geert Potjewijd
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LOYENS & LOEFF / UTRECHT UNIVERSITY Tineke Lambooy e-mail: t.lambooy@law.uu.nl
NAUTADUTILH
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C O U N T R Y R E P O R T E R S
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MANUEL BARROCAS Barrocas Sarmento Neves, Sociedade de Advogados R.L., Portugal e-mail: mpbarrocas@barrocas.com.pt
JOHN BIRDS School of Law, University of Manchester, United Kingdom
e-mail: john.birds@manchester.ac.uk FRANÇOIS CARLE & ISABELLE DESJARDINS
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RADU N. CATANA General Chancellor of Babes-Bolyai Univer-sity, Cluj-Napoca, Romania
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ROLF DOTEVALL School of Business, Economics and Law, Göteborg University, Sweden
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CHRISTOPH VAN DER ELST Professor of Law and Management, Tilburg University, The Netherlands
e-mail: C.vdrElst@uvt.nl
BOHUMIL HAVEL Institute of Law, Czech Academy of Science, Prague, Czech Republic
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MARCO LAMANDINI University of Bologna, Italy e-mail: marcolamandini@forschung.it
MARIE-LOUISE LENNARTS, Utrecht University, the Netherlands e-mail: M.Lennarts@law.uu.nl
FRANCISCO MARCOS Instituto de Empresa Business School, Madrid, Spain
e-mail: Francisco.Marcos@ie.edu KRISTINA VAN MEERTEN-HEMELA e-mail: vanmeerten@casema.nl
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CHRISTOPH TEICHMANN University of Heidelberg, Germany e-mail: christoph.teichmann@urz.uni-heidelberg.de ERIK WERLAUFF Aalborg University, Denmark e-mail: erik@werlauff.com
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European Company Law (ECL) is published under the aegis of the Centre for European Company Law (CECL), an academic partnership of the Universities of Leiden, Utrecht and Maastricht, the Netherlands (www.cecl.nl). The purpose of CECL is to further the study of company law by focusing on supranational issues. These include both developments in the EU and on other international levels, as well as comparative law. Leiden University acts as the leading partner in CECL, with Professor Dr. Steef M. Bartman, head of the corporate law department of that University, as coordinating director. ECL aims to be interesting for both practising and academic law-yers in the field of European company law. There are six issues of ECL per year. Two of these (April and October) concentrate on specific topics. The other issues (February, June, August and December) contain articles on various subjects and also include country reports of a general nature, highlighting important developments in a number of EU jurisdictions, as well as columns that offer summaries of recent EU legislation, ECJ case law and of selected articles from various national legal periodicals.
European Company Law
A R T I C L E
* E-mail: Christoph.VanDerElst@UGent.be, e.p.m.vermeulen@uvt.nl.
1 Directive 2004/25/EC of the European Parliament and of the Council of 21 Apr. 2004 on takeover bids, PBL no. 142, 30 Apr. 2004. See also J.A. McCahery & E.P.M. Vermeulen,
Does the Takeover Bids Directive Need Revision?, Working paper 2010, <http://ssrn.com/abstract=1547861>.
2 Directive 2006/46/EC of the European Parliament and of the Council of 14 Jun. 2006 amending Council Directives 78/660/EEC on the annual accounts of certain types of companies, 83/349/EEC on consolidated accounts, 86/635/EEC on the annual accounts and consolidated accounts of banks and other fi nancial institutions and 91/674/EEC on the annual accounts and consolidated accounts of insurance undertakings, PBL no. 224, 16 Aug. 2006.
On 5 April 2011 the Eur opean Commission issued the Green Paper on the EU Corporate Governance Framework. The paper invites all interested parties to provide the Commission with ideas, propos-als and arguments to improve the European corporate governance scene. Although the paper is not taking position in the debate, it follows from the structure of the paper that the European Commis-sion considers that corporate governance 1.0, which is largely based on (national) self-regulation instruments, does not adequately address the recent fi nancial crisis and additional steps are neces-sary. As a fi rst step towards an improved corporate governance environment in the European Union (EU), the Green Paper starts the debate on the measures that the European Commission wants to consider for future regulatory action. The Commission identifi es in the Green Paper the relevant issues in the fi eld of corporate gov-ernance, which – in the Commission views – need to be strength-ened and for which follow-up measures could be considered. The European Commission divided these issues in three main items: the functioning of the board of directors, the engagement of the shareholders and the monitoring and enforcement instruments. We will address these issues as well as the question of what the scope of corporate governance rules should be. Section 1 briefl y provides an overview of the state of the art of European corporate governance. Section 2 addresses the major corporate governance issues that are addressed in the Green Paper of the Commission, and section 3 discusses a number of these issues in light of the different sources of corporate governance as well as the corporate governance prac-tices in and outside the EU. Section 4 concludes.
1. STATE OF THE ART OF EUROPEAN CORPORATE GOVERNANCE
The European Commission is already paying attention to corporate governance for more than a decade. The former
Commissioner Bolkestein appointed in September 2001 an expert group, the High Level Group of Company Law Experts, to study how corporate law in Europe could be improved. The expert group focused on corporate governance issues and presented its final report, ‘A modern regulatory framework for company law in Europe’, late 2002. The Commission used the report to prepare its communication on ‘Modernising Company Law and Enhancing Corporate Governance in the European Union – A Plan to Move Forward’ of May 2003. The plan provided in disclosure require-ments for companies, professionalization of board of directors with independent board members and strengthening the role and the position of shareholders. It resulted in a number of new directives and recommendations, of which the takeover direc-tive, the shareholders’ rights direcdirec-tive, the directive modifying the accounting directives, the auditor’s directive, the recommenda-tion on the role of non-executive or supervisory directors and the recommendation fostering an appropriate regime for the remu-neration of directors are the most known in the field of corporate governance. When a raider acquires a large voting block in a listed entity, she has to make a public offer for all the remaining shares and treat all shareholders equivalent.1 The sell-out right provides
minority shareholders the right to sell the shares to the offeror. Listed companies must yearly provide in a corporate governance statement, in which they refer to a corporate governance code, shareholders’ rights, the operation and composition of the gover-nance bodies and the control enhancing mechanisms.2
Sharehold-ers must be treated equally, as stated in the shareholdSharehold-ers’ rights directive. In light of this, the directive stresses the importance of sufficient notice periods to prepare the general meeting and to elaborate convocations, of different means to participate in the meeting, of the right to put items on the agenda and ask ques-tions and of the right to be informed on the voting results of the
Corporate Governance 2.0: Assessing
the Corporate Governance Green
Paper of the European Commission
C H R I S T O P H V A N D E R E L S T , P R O F E S S O R O F B U S I N E S S L A W A N D E C O N O M I C S T I L B U R G U N I V E R S I T Y A N D G H E N T U N I V E R S I T Y A N D A T T O R N E Y - A T - L A W C O T T Y N A N D E R I K . P . M . V E R M E U L E N , P R O F E S S O R O F B U S I N E S S L A W T I L B U R G U N I V E R S I T Y A N D V I C E P R E S I D E N T A T T H E C O R P O R A T E L E G A L D E P A R T M E N T O F P H I L I P S I N T E R N A T I O N A L B V *AUGUST 2011, VOLUME 8, ISSUE 4 166 EUROPEAN COMPANY LAW 3 For an analysis of this directive, see F. Xiangxing, ‘Protection of Shareholders’ Rights at EU Level: How Far Does It Go?’, European Company Law 3 (2009): 124–130, and more
critically P. Masouros, ‘Is the EU Taking Shareholders Rights Seriously?: An Essay on the Impotence of Shareholdership in Corporate Europe’, European Company Law 5 (2010): 195–293.
4 Article 41 of 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, amend-ing Council Directives 78/ 660/EEC and 83/349/EEC and repealamend-ing Council Directive 84/253/EEC PBL no. 156 of 9 Jun. 2006. For an analysis of the role and position of the audit committee before the transposition of the Directive in eight countries, see E. Mouthaan, ‘The Audit Committee from a European Perspective’, European Company Law 1 (2007): 10–18.
5 Commission Recommendation of 15 Feb. 2005 on the role of non-executive or supervisory directors of listed companies and on the committees of the (supervisory) board, PBL no. 52, 25 Feb. 2005.
6 Commission Recommendation of 14 Dec. 2004 fostering an appropriate regime for the remuneration of directors of listed companies, PBL no. 385, 29 Dec. 2004 and Com-mission Recommendation of 30 Apr. 2009 complementing Recommendations 2004/913/EC and 2005/162/EC as regards the regime for the remuneration of directors of listed companies, PBL no. 120, 15 May 2009. The transposition of the remuneration recommendations is assessed in Commission Staff Working Document, Report on the Applica-tion by Member States of the EU of the Commission 2009/385/EC RecommendaApplica-tion (2009 RecommendaApplica-tion on Directors’ RemuneraApplica-tion) complementing RecommendaApplica-tions 2004/913/EC and 2005/162/EC as regards the regime for the remuneration of directors of listed companies, Brussels, 2 Jun. 2010 SEC(2010) 670. For an analysis of many features on directors and executives’ pay in different European countries, see European Company Law 3, no. 2 (2006).
7 Banks, fi nancial institutions, insurance companies and undertakings for collective investments must have an effective system of governance that provides for sound and prudent management of the business (Art. 11, CRD II (Directive 2006/48/EC), Art. 41 Solvency II (2009/138/EC), Art. 7 UCITS III (EC 2009/65)). Board members and key personnel need to be fi t and proper and of good repute (Art. 11 CRD II, Art. 42 Solvency II, Art. 7 UCITS III) and must have risk management systems, internal audit and internal control systems in place (Art. 22 and appendices CRD II; Arts 45, 46 and 44 Solvency II, Arts 4–16 Commission Directive 2010/43/EC).
8 Directive 2010/76/EU of the European Parliament and of the Council of 24 Nov. 2010 amending Directives 2006/48/EC and 2006/49/EC as regards capital requirements for the trading book and for re-securitizations and the supervisory review of remuneration policies, PBL no. 329 of 14 Dec. 2010.
9 European Commission, Green Paper Corporate Governance in Financial Institutions and Remuneration Policies, 2 Jun. 2010, COM(2010) 284/3.
10 European Commission, Feedback Statement – Summary of Responses to Commission Green Paper on Corporate Governance in Financial Institutions, see <http://ec.europa.eu/ internal_market/consultations/2010/governance_en.htm>.
11 European Commission, Green Paper Audit Policy: Lessons from the Crisis, 13 Oct. 2010, COM(2010) 561 fi nal, 22.
general meeting.3 The auditor’s directive requires listed entities to establish an audit committee to monitor the reporting process, the effectiveness of internal control, the audit and the indepen-dence of the auditor.4 Next to the audit committee, the European Commission recommends to set up a remuneration committee and a nomination committee, the latter to assist the board in identifying and selecting board candidates as well as to assess the board structure and the former to help the board in developing the remuneration policy and individual remuneration schemes. In a (supervisory) board, no individual or subgroup of members must be able to dominate the decision-making process, and the committees must be composed of a majority of independent board members.5 Furthermore, it is recommended that the remu-neration policy and remuremu-neration packages are disclosed and that shareholders approve this policy.6
Next to the requirements and recommendations for all listed entities, the European Union (EU) issued specific duties for other types of entities. In particular in the financial industry, many additional governance requirements have been issued. Banks, insurance companies, and UCITS must provide in competent boards, risk management and internal control functions, compli-ance management, etc.7 For banks, additional measures have been taken on remuneration in the CRD III Directive, requiring detailed remuneration policies for key personnel and promoting sound and effective risk management and encouraging risk toler-ated behaviour.8
The financial crisis fully shifted the interest of the EU and the European Commission to the financial industry and, more recently, also to the audit profession. In its Green Paper Corporate Governance in Financial Institutions and Remuneration Policies,9 the European Commission addresses the position and composi-tion of the board in light of its key role in controlling senior management. It considers the knowledge, understanding and
expertise in risk management of boards as insufficient. It ques-tions the short-termism of shareholders and investors pushing for short-term value maximization. From the feedback statement, it is clear that not many respondents advocate for more manda-tory corporate governance rules but some (external) follow up of boards should be endorsed.10 As the questions of the European Commission regarding the position of shareholders are focusing on institutional investors, many stressed the danger of different treatment of shareholders (institutional shareholder versus other shareholder type). The shareholders’ rights directive endorses the principle of equal treatment of shareholders.
The supervision of the audit profession was significantly restructured in the EU in the aftermath of the financial scandals at the turn of the century. Directive 2006/43/EC further harmo-nized the rules regarding the audit profession and the way the external audit is conducted and monitored. The financial crisis raised questions as to the relevance of these audits. In light of this finding, the European Commission tested the market via a green paper on audit to consider further measures to restore confidence in the financial market.11 Mandatory rotation, joint audits and specific contingency plans are put forward as possible techniques.
The final step that the European Commission started is questioning the market on corporate governance improvements for other commercial and industrial companies, both listed and unlisted entities. These questions are addressed in the Green Paper, which will be discussed next.
2. GREEN PAPER ON CORPORATE GOVERNANCE
EUROPEAN COMPANY LAW 167 AUGUST 2011, VOLUME 8, ISSUE 4
In the current system, there is hardly a distinction between large- and medium-sized listed companies. The European Commission asks whether this should be changed and what the role of Brussels should be (see Table 1).
Furthermore, the Green Paper discusses the management of a company. The European Commission is particularly interested in the role of non-executive directors in a one-tier system. In a two-tier system, such as the Netherlands, this role is usually exercised by the supervisory board. This means that the question of dividing the functions and duties of a chief executive officer (CEO) from those of a chairman of the board as a supervisory body are less relevant in two-tier systems. This is different for questions about (1) the composition of the board of directors and supervisory board, (2) the activities of the supervisory board, (3) evaluating the performance of the supervisory board, (4) the
reward systems within the company and (5) risk management issues (see Table 2).
The Green Paper devotes most attention to the role of share-holders in a company (see Table 3). The European Commission seems to assume that the financial crisis and abuses within busi-nesses are largely attributable to the short-termism of investors. It is acknowledged that activist shareholders such as hedge funds, which attempt to gain a financial advantage from their invest-ment, play an important role in the system of checks and balances within a company. However, the emphasis should be on long-term thinking. The interest of shareholders for sustainable returns and business performance in the longer term, ensure better continuity of businesses. An important role seems to be reserved for institu-tional investors. Because these investors (pension funds, insurance companies and sovereign wealth funds) have long-term obliga-tions towards their constituency, they should be encouraged to be more (actively) involved in their investments. This is necessary in a financial world characterized by high-frequency trading and the fast changes in share ownership. The growing importance of stock prices when assessing the performance of companies seems to encourage only short-term thinking. Therefore, involvement of long-term shareholders is an important counterbalance to the increasingly international and especially accelerating society.
The solution, according to the European Commission, should be sought in making the relationship between institutional inves-tors and asset managers more transparent. Because the perfor-mance of asset managers is measured by looking at short-term
Table 1. Green Paper (General Provisions)
Subject Questions
One-size-fits-all corporate governance codes
Should corporate governance measures distinguish among small-, medium- and large-sized listed companies?
Corporate governance of non-listed companies
Should corporate governance initia-tives be launched for non-listed companies at the European level?
Table 2. Green Paper (Board of Management/Supervisory Board)
Subject Questions
Composition of the board of directors/ supervisory board
Should appointments of members of the board of directors/supervisory board be made according to a predetermined ‘profile’? It is stated that a board of directors/supervisory board should be composed of persons with different experiences, different profes-sional backgrounds and skills. Moreover, it is recommended that persons with different nationalities will be members of the board of directors/supervisory board. Finally, it is argued that gender diversity in the boardroom will help reduce corporate governance problems and agency costs.
What is the role of the EU policy maker to ensure the existence of a qualified board? Time allocation of the members of the
board of directors/supervisory board
The supervisory role in listed companies is becoming increasingly complicated and time consuming. The question is, therefore, whether limitations regarding the number of mandates should be issued at the EU level?
Assessment The European Commission has issued recommendations that encourage an annual review of the functioning of corporate bodies (Commission Recommendation
2005/162/EC, 15 February 2005). The question is whether periodic external evaluations and assessments should be introduced?
Remuneration systems Should remuneration systems, individual salaries and bonuses be disclosed and approved by the shareholders?
AUGUST 2011, VOLUME 8, ISSUE 4 168 EUROPEAN COMPANY LAW
results, long-term strategies regarding the portfolio companies get less attention. Moreover, the increasing involvement of institu-tional shareholders may also be hampered by conflicts of interest that may arise when institutional investors have other business relationships with the company they invest in. Finally, the ‘acting in concert’ regulations, which regulate the cooperation between shareholders, are just another barrier to increasing the involve-ment of institutional investors. Collaborative actions between institutional investors could result in a public disclosure of their shareholdings. In a worst-case scenario, they could even be obliged to make a mandatory takeover bid. To be sure, the obliga-tion to disclose shareholdings in a listed company, regardless of the size of the interest, provides the directors with the necessary information to enable them to start a dialogue with their inves-tors. However, this transparency could have a negative spillover effect in that the board is able to protect itself against ‘too much’ involvement of their shareholders.
Thus, there are a number of reasons that could hamper a greater involvement of institutional investors. The fact that these shareholders often invest a very large number of companies makes it virtually impossible for them to be actively involved in the decision-making process within each of their portfolio com-panies. As a consequence, the voting behaviour of institutional investors depends largely on the information given by ‘proxy advisors’, such as voting recommendations and governance rat-ings. The influence of these proxy advisors is increasing. In order to solve these problems, the Green Paper draws attention to the involvement of employees in a firm’s decision-making process.
Finally, the Green Paper has two questions about monitoring and enforcing an adequate application of the ‘comply or explain’ principle (see Table 4). In practice, the explanations for the deviations are rather vague and insufficient. Here, the European
Commission refers to Sweden, where, in addition to an explana-tion of the deviaexplana-tion, the alternative corporate governance mea-sure should also be stated and described in detail.
3. CORPORATE GOVERNANCE: THE WAY FORWARD
Convinced that Europe is facing an ‘innovation emergency’, policymakers in Europe are hatching plans to achieve the objec-tives of the Europe 2020 Strategy. The strategy aims to encourage innovation and job creation by improving market conditions for entrepreneurship and make the financing of companies more accessible. The idea is that Europe should provide a sustainable environment for potentially disruptive technologies to develop into products and services that create new markets, improve people’s lives and build greener and improved societies. The European Commission is convinced that such an environment can only be achieved when trust and credibility is established in the single market in which corporations operate.
Restoring investors’ confidence in the integrity of capital markets and addressing deficiencies in the relationship between shareholders and managers of listed companies are two impor-tant factors motivating the publication of a Green Paper on 5 April 2011, canvassing the possibility for an EU corporate governance framework. Surprisingly, the Green Paper is also used to start EU-wide discussions on the governance of non-listed companies. Particularly, the European Commission addresses some underlying concerns that are rooted in the one-size-fits-all approach and wonders whether an effective corporate gover-nance framework should take account of the size and type of companies.
This essay argues that, even though the approach of the Green Paper has some merits, a flexible national corporate governance framework is more likely to generate value for corporations due to its adaptability and responsiveness to the ever-changing business needs and requirements. A more harmonized approach will arguably have a petrifying effect on the growth and develop-ment of European companies. This section proceeds as follows. Section 3.1 provides an overview of the current practices and
Table 4. Green Paper (Compy or Explain)
Subject Questions
Explanations Should companies, besides explaining devia-tions from a corporate governance code’s principles, describe the alternative corporate governance measure (as part of the explana-tion of the deviaexplana-tion)?
Enforcement What is the role of a monitoring commit-tee? Should this committee be empowered to formally monitor the information that com-panies provide in the corporate governance statement?
Table 3. Green Paper (Shareholders)
Subject Questions
Appropriate shareholder engagement
Which measures should be intro-duced to provide the asset managers of institutional investors with long-term view incentives?
Should the fiduciary duties of asset managers be clarified?
Which measures would increase the shareholder engagement?
Role of proxy advisors Which measures could increase the transparency of the proxy advisors? Shareholder
identification
Should listed companies (and, as a consequence, the board of directors) be granted a right to identify their shareholders?
Employee involvement in decision-making process
EUROPEAN COMPANY LAW 169 AUGUST 2011, VOLUME 8, ISSUE 4
mechanisms for structuring and organizing the array of listed and non-listed companies in the EU and attempts to explain the incentive structures for adopting an improved corporate gover-nance regime. Section 3.2 discusses the current pressures that are forcing both executive and non-executive directors to respond to the needs and requirements of shareholders and other stakehold-ers. Section 3.3 considers the role of shareholders in an environ-ment that is characterized by social networks and modern means of communication.
3.1. Pillars of Corporate Governance
The corporate governance framework of listed companies can generally be split in three separate pillars (see Figure 1). The core pillar focuses on corporate law, which provides rules and stan-dards for the formation, organization and operation of compa-nies. The second pillar includes contractual mechanisms, such as employment contracts and remuneration packages for corporate directors and managers. Due to the inherent incompleteness of corporate law statutes and the general lack of business expertise on the part of adjudicators, which arguably limit their ability to observe and verify corporate conflicts and, hence, hampers the functioning of fiduciary duties and other company law standards, corporate governance codes and best-practice principles (the third pillar) were introduced to assist firms to organize and man-age their business in the most effective manner.
The latter corporate governance measures that followed the aftermath of the scandals in listed companies at the turn of the twenty-first century have slowly but surely settled in the global business environment. Still, even though firms allegedly began to avail themselves of corporate governance principles, codes and
guidelines in their efforts to promote growth and innovation, they allegedly never left the ‘box-ticking’ phase behind. Despite the antipathy to corporate governance rules and regulations, however, business leaders seem to recognize that corporate governance shifts from a mere compliance environment – where firms and their advisors are merely engaged in box-ticking to satisfy audi-tors and other financial market watchdogs – to an area in which it is viewed as an imperative for business success on a global scale. Factors like improved board structures, financial transparency and disclosure policies, and the alignment of executive pay with shareholder value play a pivotal role in the choice of investment decisions.
Corporate governance codes across jurisdictions usually address similar issues: (1) an active and fair protection of the rights of all shareholders, (2) an accountable management board and effective monitoring mechanisms, (3) transparent informa-tion about the financial and non-financial posiinforma-tion of the firm, and (4) responsibility for the interests of stakeholders, includ-ing minority shareholders. Yet, the corporate governance codes, updates and upgrades that arose in Europe and Asia offer a high level of flexibility by following the ‘comply or explain’ rule. Although firms tend to adopt and comply with the boilerplate and standardized provisions of the codes rather than explain – even though more optimal – such non-compliance, it is submit-ted that the flexibility of codes prevails over the inflexible, hard law rules and regulations of, for instance, the Sarbanes-Oxley Act that contains less formalities than the average European corporate governance code. The development of a ‘comply or explain’ practice arguably gives companies the necessary room to manoeuvre.
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Opt-in Figure 1. The Three Pillars of Corporate GovernanceSource: Adapted from J.A. McCahery and E.P.M. Vermeulen, Corporate Governance
AUGUST 2011, VOLUME 8, ISSUE 4 170 EUROPEAN COMPANY LAW 12 M. Mace, Directors: Myth & Reality (Boston: Harvard University, 1971), 184.
13 J. Fanto, L. Solan & J. Darley, ‘Justifying Board Diversity’, North Carolina Law Review, vol. 89 (2011): 911.
Thus, even though the Green Paper seems to argue that a ‘one-size-fits-all’ approach may be inappropriate for smaller- and medium-sized listed companies, where controlling shareholders are usually involved in management, companies usually disre-gard the provisions that have been drafted for companies with a widely dispersed shareholder base in mind. For instance, restrict-ing executive compensation is not necessary in a firm where shareholders are supposed to be directly and actively involved in monitoring management decisions. Moreover, institutions estab-lished to counter and limit the managerial agency problem, such as fully independent non-executive board members as a monitor-ing device, are not always a priority in family-controlled busi-nesses. Still, the divergent governance strategies for a number of listed firms arguably do not call out for a separate set of recom-mendations. It appears that, in a business setting with controlling shareholders, parties actually engage in an ex ante search for the deviations from the standard arrangements if these deviations clearly improve their governance structure and maximize the value the underlying business.
3.2. Corporate Governance Practices as Guidance for
the European Principles: Partim I. The Boards Of Directors
The European Commission starts from the premise that effective and efficient corporate governance structure, with appropri-ate checks and balances to foster the interests of shareholders, employees, creditors and society, contributes to the competitive-ness of a company and the EU in general.
It must be emphasized that the ideas to further develop cor-porate governance at the European level should take into account all the different layers of corporate governance pillars and the path-dependent developments of governance in different Member States to reach the aforementioned goal. As we have discussed, corporate governance is embedded in both national corporate law and contract law. Corporate governance codes, which seem to have many similarities, is an important instrument to foster the corporate governance codes as long as it is not in conflict with the other pillars of corporate governance. It is an important mean to reach the goals of the European Commission that itself should not be turned into a burdensome goal.
To illustrate the differences and similarities in corporate governance and how the features are embedded in the national systems, we studied the state of the art of corporate governance features of ninety companies in nine different countries, four European Member States and five other countries. For each coun-try, we randomly selected ten large companies that are indexed in a large national stock exchange index. The group of the latter countries comprises the United States, Canada, Australia, South Africa and Japan. These developed countries have been selected for their merits in corporate governance developments. The
four European countries are the United Kingdom, France, The Netherlands and Belgium, two large and two small countries with different corporate governance frameworks and features (one-tier board–two-(one-tier board, civil law–common law, concentrated ownership–dispersed ownership, shareholder oriented–stake-holder oriented, etc.). Of each of these companies, we collected all the information via their websites, their latest annual report (which ended in 2010 or ended in the first months of 2011 if the information was already publicly available) and the proxy state-ment for the general meeting of shareholders 2011. We collected information on the date the (supervisory) board member was first elected, expertise of the members, other (supervisory) board memberships, previous memberships, education, age, gender, attendance at meetings, stock ownership, and composition of the board (executive, non-executive or independent). We also provide in the average number of woman on the boards as well as the distribution of the number of woman per country.
It follows from our findings that, since the start of the new millennium, the composition and functioning of the board of directors significantly changed. Boards developed from rubber-stamp bodies to active and independent boards. The disparity between the board duties as they are described and the practiced board functions is disappearing. The former Myles Mace defined the roles of the board as:
(1) establishing basic objectives, corporate strategies, and broad policies; (2) asking discerning questions; and (3) selecting the president.12
While these duties were hardly performed until the late 1980s, since the 1990s many companies and countries stress that their boards and their countries endorse the main duties of the boards.
EUROPEAN COMPANY LAW 171 AUGUST 2011, VOLUME 8, ISSUE 4 14 Ibid.
15 C. Carter & J. Lorsch, Back to the Drawing Board: Designing Corporate Boards for Complex World (Boston: Harvard Business School Press, 2004), 116–118. 16 In case of re-election.
as Prime Minister of Belgium, he became independent director of ABInbev, the largest brewer in the world, and chairs the board of directors of Dexia, a major financial services company in Belgium and France. Fanto, Solan and Darley distinguish a third important role for a director, closely related to the networking role, the sig-nalling function.14 Corporate reputation is enhanced in the eyes of both incumbents and third parties like customers and suppliers by the simple fact that certain persons become or are member of the board of directors. Bill Gates is a board member of Berkshire Hathaway. Next to being founding member of Microsoft, he is the chair of one of the largest charitable foundations in the world. Overall, many boards combine via its individual members the dif-ferent qualifications it requires.
Carter and Lorsch identified the fundamental qualities the individual board member needs.15 These essentials are intellec-tual capacity, interpersonal skills, instinct, interest, commitment to contribute and integrity. These contributes cannot easily be identified. In the different parts of the world corporate gover-nance developments and companies stressed indirect elements to show the quality of the boards. Table 5 summarizes the informa-tion that is considered relevant in a European and American con-text. All companies in all the different countries in and outside the EU report the different kinds of board members, disclose the first election date of the board member, the other positions of the member of the board and the previous positions of the board member. Only in Japan had not all companies disclose
this information, and in Belgium, a small number of companies fail to disclose this information. In the latter country, the lack of information can be due to the fact that the board members have not been members of any other board.
Other features of board governance are less harmonized than the worldwide development towards a majority controlled non-executive board with many ties with other boards. This is often due to the different legal structures or differences in contract law. In the United States, the proxy statements issued in front of the general meeting of shareholders provide detailed information on the expertise of the different directors that stand up for (re)election. The statement even discloses the identity of the member who suggested the candidate to be elected as board member and how this selection procedure took place. This information allows the assessment of the possible existence of conflicts of interests and enhances board diversity. The national-ity of the candidate, the gender and attendance16 are considered less important. When the candidate can strengthen the board of directors and the independence vis-à-vis management in light of the dispersed ownership structure, she can add value to the com-pany and the board. When the board member holds a significant block of shares in the company it enforces the commitment of the board member. As long as the voting block does not influ-ence the voting turnout at the general meeting of shareholders the independence of the board member is not considered to be compromised.
Table 5. Disclosure of Corporate Governance Characteristics of Board Members of Ten Large Companies in Nine Countries
Austr. Canada Japan
South Africa
United
States Belgium France Netherlands
United Kingdom Kind of membership 10 10 7 10 10 10 10 10 10 Election date 10 10 6 10 10 9 10 10 10 Other memberships 10 10 6 10 10 8 10 10 10 Expertise 7 5 0 0 10 0 1 1 3 Previous memberships 10 10 1 9 10 7 10 10 10 Education 9 8 0 10 2 8 8 1 1 Age 4 10 5 10 10 9 10 10 10 Nationality 2 10 0 2 0 7 7 9 0 Number of woman 0–30% 7–27% 0–8% 0–33% 14–27% 0–36% 13–29% 0–38% 0–22% Avg. Number of woman 16% 17% 1% 20% 20% 9% 21% 21% 13%
Board attendance 10 10 0 9 gen. 9 3 3 10
Stock ownership 10 10 5 9 10 3 10 10 10
AUGUST 2011, VOLUME 8, ISSUE 4 172 EUROPEAN COMPANY LAW 17 Section 366 Companies Act 2006.
18 Articles L225-38 and L225-40 Commercial Code.
19 Article 554 Companies Code. For an analysis, see H. De Wulf, C. Van der Elst & S. Vermeesch, ‘Radicalisering van corporate governance-regelgeving: remuneratie en transpar-antie na de wet van 6 april 2010’, Tijdschrift voor Belgisch Handelsrecht 10 (2010): 909–963.
20 Exceptions are, e.g., the approval of mergers (third company law directive) and divisions (sixth company law directive) and the acquisition of own shares (second company law directive).
The Japanese corporate governance structure differs signifi-cantly from the structure in the Western world. Outside directors are still relatively uncommon, but internal and external audit is much more developed in Japan. Japanese companies stress in their corporate governance reporting the structure and function-ing of the external/internal audit (commission). When senior managers are performing excellently, they are elected as a token of appreciation as a board member. The invitation to become a board member is sent at the end of a long career for the (same) employer. It follows that the independence of the board member is less of an issue as neither the election date as board member; the other board memberships (if any at all) and the previous memberships (generally one) are disclosed. The proxy informa-tion that shareholders receive generally contains informainforma-tion on the starting date as junior officer of the board member to illus-trate his commitment and his long track record. This information is considered as more relevant than the typical American and European corporate governance features. It should be noted that some Japanese companies start to report these features too, in particular, in light of the internationalization of the ownership of the company.
In Europe the added value of the candidate for the board of directors is indirectly approached via the disclosure of previ-ous and current board and management positions as well as the nationality and age of the board member. The nationality strengthens the feeling of expertise of the local markets and habits. Contrary to US companies, European companies do not disclose the methods which were used to find new candidates for the board and presented to the general meeting of sharehold-ers. Furthermore, the assessment of the required and provided competences of the board is left to the investors and sharehold-ers. It provides the board and company more leeway to discretely organize the selection procedure.
Australia, Canada and South Africa developed their own corporate governance system that resembles to a large extent the American system. Canadian companies, like in South Africa, provide detailed information on board members but do not emphasize the expertise of the candidate. Most Australian companies, but also a number of Canadian companies, stress the importance of certain types of expertise and disclose, like in a typical business plan, the different kinds of expertise of the board of directors. It allows the shareholders and other stake-holders not only to evaluate the expertise of the board but also to control if the appropriate skills are represented in the board of directors.
The different procedures and resources to (s)elect board can-didates result in another resemblance. In all countries, with the exception of Japan, a minority of the board members are woman. In Canada, France and the United States, every board (one tier) has at least one female director. A Dutch company has relatively the most women as board members, followed by a Belgian com-pany. It raises questions as to whether ‘group think’ is an issue in all countries and whether mandatory instrument to increase diversity is an appropriate mean. We believe that an indirect method via an improved identification of the adequate skills and expertise of a board, like in the United States, would result in more diversity and strengthen corporate governance.
3.3. Corporate Governance Practices as Guidance for the European Principles: Partim II. The Shareholders
In length, the Green Paper emphasizes the position, role and responsibilities of shareholders in corporate governance. For a long period of time, the position of shareholder was under pres-sure in company law. Recently, many countries reinforced the rights of shareholders. In the Netherlands Article 107a Boek 2 Civil Code requires the approval of the general meeting of share-holders to change the ‘identity and character’ of the company, the American Dodd Frank Act empowers, in section 971, the SEC to issue rules that shareholders can include, in the proxy statement a nominee, to serve on the board of directors, a basic right for shareholders of European companies. The British Companies Act 2006 requires the general meeting to approve political donations of more than GBP 5000.17 The French Commercial Code provides the general meeting of shareholders with the right to approve all contracts entered into with a member of the (supervisory) board and shareholder with a voting block of more than 10%18 and the general meeting of Belgian companies must approve golden para-chutes for board members or top executives of more than twelve to eighteen months.19 The shareholders’ rights directive must not be missing in this list although the directive focuses on formal aspects of the general meeting of shareholders, like the require-ment to provide in the timely information. The division of pow-ers between the board and the general meeting largely remains the competence of the Member States. 20
EUROPEAN COMPANY LAW 173 AUGUST 2011, VOLUME 8, ISSUE 4 21 See, for a market-based analyses, FESE, Share Ownership Structure in Europe, December 2008, 112, <www.fese.be/_lib/fi les/Share_Ownership_Survey_2007_Final.pdf>,
and for a detailed analysis, C. Van der Elst, Shareholder Mobility in Five European Countries (1 Apr. 2008). ECGI – Law Working Paper No. 104/2008, <http://ssrn.com/ abstract=1123108>.
22 European Commission, Green Paper, The EU Corporate Governance Framework, Brussels, 5 Apr. 2011, COM(2011) 164 fi nal, 2.
23 Of course the relationship at the level of shareholders can be and are governed via different corporate governance instruments. In particular the relationship between asset managers and shareholders is specifi ed in a corporate governance code of EFAMA, which was published one day after the publication of the European Commission’s Green
Paper (EFAMA, Code for External Governance – Principles for the Exercise of Ownership Rights in Investee Companies, Brussels, 6 Apr. 2011, <www.efama.org>).
24 Article 21 of Commission Directive 2010/43/EU of 1 Jul. 2010 implementing Directive 2009/65/EC of the European Parliament and of the Council as regards organizational requirements, confl icts of interest, conduct of business, risk management and content of the agreement between a depositary and a management company, PBL no. 176 of 10 Jul. 2010.
25 See also Art. 21 of Directive 2010/43/EU.
discuss issues of major concern. Sometimes the communication takes place between the investor relations department of the com-pany and the shareholders or investors. When private negotiations do not result in satisfactory solutions, some shareholders send an open letter to or contact the financial press. In other circum-stances, the initiative to contact the financial press comes from the CEO or investor relations of the company. These contacts and discussions are already regulated to protect the equal treatment of shareholders and the market: insider trading rules are harmo-nized at the European level and regulate the disclosure of price-sensitive information.
Over the last thirty years, the shareholder structure of many listed corporations significantly changed. The position of the individual acquiring and keeping shares for a long period of time, the basic idea for developing many rules in company law, shifted to trading by (professional and institutional) investors at the speed of light. Many European companies encounter large institu-tional investors like pension funds, insurance companies and asset managers as well as families, non-financial companies, banks and the government as their main shareholders.21 In individual cases, private equity funds and hedge funds control significant blocks. Many of these investors trade in the interest of beneficiaries and use intermediaries like asset managers to optimize their returns. It results in a myriad of relationships that not only create signifi-cant difficulties to make use of the shareholders’ rights but also initiate conflicts of interest, free riding problems and collective action problems. These relationships are treated in financial law and contract law. To the extent that corporate governance is ‘the system by which companies are directed and controlled and as a set of relationships between a company’s management, its board, its shareholders and its other stakeholders’ 22 the company related codes should not explicitly address the structure and relation-ships of shareholders and its beneficiaries.23 In the present state of corporate law, the shareholders can act in their own personal interest, even if this interest is exclusively a short-term interest. This interest will be directed by the interests of the beneficiaries, contractual relationships and even (proxy) advisors and in some circumstances the shareholders will even have a mandatory duty to exclusively act in their own interest. Management companies of UCITS must develop strategies for determining when and how to vote in the exclusive benefit of the UCIT.24 In these cases, the board of directors must appropriately balance the interests of the
shareholders and other stakeholders. The board of directors is provided with instruments to tackle the demands of sharehold-ers. In particular, the role of the independent directors must be stressed in these situations as many boards reflect the balance of power at the shareholder level. It must be facilitated for the board members of listed entities to identify the shareholders to engage in a dialogue and involve the shareholders in the strategic issues.
As many small shareholders do not take part in general meetings, not only controlling shareholders but also significant blockholders vote the majority of the participating shares during the general meetings where directors stand up for (re)election. For these cases, we would like to plead for the enforcement of the position of minority shareholders taking part in the general meeting. When independent directors have been selected and the general meeting has to approve the selected candidates, it would enhance the interest of smaller shareholders to participate in the meeting when the ‘majority’ shareholder as it is ad hoc deter-mined at the start of the meeting will not participate in the vote. At the same time, it would enhance the independence in appear-ance of the independent directors without depriving incum-bent blockholders of any other shareholders’ right. The system resembles the Italian right of minority shareholders to elect a board member, but it disconnects ownership from the right to present an independent director and prevent time consuming ex ante negotiations and agreements.
Finally, the proposal does not influence the right for share-holders not to vote. It can be in the interest of the shareholder not to make use of her rights. In some cases, this right is even embed-ded in European law. Management companies must establish a strategy how and when they will vote with the shares in their portfolio. From this duty, it follows that there are circumstances that the management company must not or shall not vote.25
4. CONCLUSION
The Green Paper of the European Commission is the start of the second phase of corporate governance in Europe. It questions how the European Commission should continue its effort to enhance the competitiveness of European companies and invites all interested parties to participate in the discussion.
AUGUST 2011, VOLUME 8, ISSUE 4 174 EUROPEAN COMPANY LAW
This framework should take into account the different pillars of corporate governance: corporate law, contractual arrangements and best practices. In light of the interconnection between these pillars, a flexible national approach should be supported due to its adaptability and responsiveness to the ever-changing business needs and requirements.
The Green Paper questions the role and the position of the board of directors. With respect to the composition of the board of directors of listed companies, we support a recommendation that the board should assess its required skills, expertise and competence in light of the company-specific, industry-specific and country-specific needs and disclose the assessment in the annual report and the notice of the general meeting of sharehold-ers. Together with the information on attendance and operations that are already available in the reporting of European companies it provides shareholders, investors and financial markets with the necessary attributes to evaluate board engagement.
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RADU N. CATANA General Chancellor of Babes-Bolyai Univer-sity, Cluj-Napoca, Romania
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European Company Law (ECL) is published under the aegis of the Centre for European Company Law (CECL), an academic partnership of the Universities of Leiden, Utrecht and Maastricht, the Netherlands (www.cecl.nl). The purpose of CECL is to further the study of company law by focusing on supranational issues. These include both developments in the EU and on other international levels, as well as comparative law. Leiden University acts as the leading partner in CECL, with Professor Dr. Steef M. Bartman, head of the corporate law department of that University, as coordinating director. ECL aims to be interesting for both practising and academic law-yers in the field of European company law. There are six issues of ECL per year. Two of these (April and October) concentrate on specific topics. The other issues (February, June, August and December) contain articles on various subjects and also include country reports of a general nature, highlighting important developments in a number of EU jurisdictions, as well as columns that offer summaries of recent EU legislation, ECJ case law and of selected articles from various national legal periodicals.
