Tuesday, December 18, 2012

European Commission Proposes Action Plan for Corporate Governance Reform

The European Commission has launched an Action Plan to improve corporate governance throughout the EU by means of enhanced transparency, increased shareholder engagement, and greater board diversity. While endorsing the comply-or-explain approach of EU corporate governance codes, the Commission urged an improvement in the quality of explanations to be provided by companies departing from the corporate governance codes. Currently, the explanations provided by companies are often insufficient. They either simply state that the company departed from a provision in code without any further explanation or provide only a general or limited explanation for such departure. These types of explanations for failure to implement a corporate governance code recommendation are not useful to investors faced with making investment decisions and assessing the value of a company.

The Commission also endorsed the two-tier board system extant in many EU member states, while at the same time urging non-executive supervisory boards to give broader consideration to the entire range of  risks faced by their  company. In the Commission’s view, the effective oversight of the executive directors or the management board by the non-executive directors or supervisory board leads to successful governance of the company. It follows that diversity of gender, competences and views among the board’s members is very important because it facilitates an understanding of corporate operations and thus enables the board to challenge the management decisions objectively and constructively. Thus, in 2013, the Commission will propose strengthening disclosure requirements with regard to board diversity policies and risk management through an amendment of the Accounting Directive

The 2011 Green Paper identified the need for an EU mechanism to help companies identify their shareholders in order to facilitate dialogue between the company and its shareholders on corporate governance issues. Thus, the Commission will propose, in 2013, an initiative to improve the visibility of shareholdings in the EU as part of its legislative work program in the field of securities law. The Commission will also consider an initiative in 2013, possibly in the context of the revision of the Shareholder Rights Directive, with a view to improving the transparency and conflict of interest frameworks applicable to proxy advisory services, which have become de facto corporate governance standards setters.

In 2013, the Commission will also begin an initiative, possibly through modification of the Shareholders Rights Directive, on the disclosure of voting and engagement policies as well as voting records by institutional investors. The Commission believes that the disclosure of such information could have a positive impact on investor awareness, optimize investment decisions, facilitate dialogue between investors and companies, encourage shareholder engagement and strengthen companies’ accountability to civil society. The Commission noted that, currently, the UK Stewardship Code and the Dutch Eumedion best practices for engaged share ownership recommend that institutional investors be transparent about the way they exercise their ownership responsibilities, which includes in particular information about voting and engagement.

Another 2013 initiative through a modification of the Shareholders Rights Directive would be to improve transparency on remuneration policies and individual remuneration of directors, as well as to grant shareholders the right to vote on remuneration policy and the remuneration report. In the Commission’s view, shareholders should be able to express their views on the matter through a mandatory shareholder vote on the company’s remuneration policy and the remuneration report, providing an overview of the manner in which the remuneration policy has been implemented. Currently, not all EU member states give shareholders the right to vote on remuneration policy and/or the report, and information disclosed by companies in different states is not easily comparable.

The Commission will also propose in 2013 an initiative aimed at improving shareholder control over related party transactions, possibly through an amendment to the Shareholder Rights Directive. Related party transactions may cause prejudice to the company and its minority shareholders, noted the Commission, since they give the related party the opportunity to appropriate value belonging to the company. Thus, adequate safeguards for the protection of shareholder interests are of great importance.

Current EU regulations require companies to include in their annual reports a note on transactions entered into with related parties, stating the amount and the nature of the transaction and other necessary information. However, since this requirement tends to be regarded as insufficient, the European Corporate Governance Forum issued a statement on related party transactions recommending the introduction of common principles across Europe. The Forum proposed in particular that transactions above a certain threshold should be subject to evaluation by an independent advisor and that the most substantial transactions should be approved by shareholders.


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