Corporate Governance in Europe : Recent Evolutions

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Corporate governance

in Europe: recent

evolutions

Isabelle Corbisier – University of Luxembourg and HEC-Ulg

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From harmonization to marketization

European company law: evolution from

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Ordoliberalism (between social liberalism and

neoliberalism) as one the economic foundations of the Treaty of Rome: contrary to neoliberalism, premised on the promotion of deregulation, ordoliberalism promotes the role of (state) regulation as there are no such

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As a result European company law was, in its vision

prevailing in the sixties-seventies, one of the most

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Three decades later (Bolkenstein declaration, 2003) the focus

of European company law had shifted to neoliberalism and “shareholder democracy” (takeovers directive from 2004 and

shareholders rights directive from 2007). During the same period the Court of the European Union had undergone a similar

evolution : from the “Daily Mail” case (1988) – not favourable to a company’s mobility - to the “Vale” case (2012), rather favourable to such mobility. Directives and regulations have become

increasingly optional. Self-regulation and co-regulation are

promoted in line with a crisis of legitimacy affecting the European authorities. A “shareholder approach” was adopted and

attention given to the involvement of employees was pushed to the margin. The Commission’s Company Law Action Plan

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Explanation : influence of neoliberalism enhanced by the

UK’s EU membership in the early seventies, relayed by “Reganomics” and “Thatcherism” in the late seventies

But problems with self or co-regulation: representativity, power asymmetries of participants, determination of the interest(s) promoted, poor perception of the differences between the actors involved, reduction of the role of

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Financial and corporate governance crisis

The financial crisis = a crisis of the

“invisible hand” of the market coupled

with a crisis of the “visible hand” of

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Financial crisis: a credit crisis, subprime lending,

securitization. Crisis spread to the whole planet as a result of the globalization of financial markets.

Deregulation of corporate governance (casino

capitalism). Credit crunch and, later, crisis of the

European debt. Efficient market hypothesis cannot be sustained. Perception that the US-British

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Corporate governance crisis: induced by shareholder

primacy leading to short-term profit maximization, a

system of remuneration promoting management focused on financial maximization rather than a management

striving for the best interest of the company. Deregulation, speculation, short-termism

In Europe the De Larosière Report (of 25 February 2009) declared

corporate governance as “one of the most important failures of the present crisis” (

http://ec.europa.eu/internal_market/finances/docs/de_larosiere_report_en.p df

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A response to the crisis: finding ways in order to encourage shareholders in expressing their “voice”

within companies with a view on their long term interest rather than opting for an “exit” strategy fueled by

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Subsequent European efforts in the field of corporate governance

Subsequent European efforts in the field

of corporate governance, culminating in

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Recommendation on remuneration of directors (2009)

1) New Commission Recommendation on the

remuneration of directors of listed companies (30 April 2009) (

http://eur-lex.europa.eu/LexUriServ/LexUriServ.do?uri=OJ:L:2009:120:0028:0031 :EN:PDF

)

•- remuneration should promote long-term viability •- transparency on the structure of remunerations

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Report of the reflection group (2011)

2) Report of the Reflection Group On the Future of EU Company Law (5 April 2011) (

http://ec.europa.eu/internal_market/company/docs/modern/reflectiongroup_report _en.pdf

)

•Financial short-termism in management is identified as the main problem. Long-term shareholders should be encouraged and institutional investors should be driven in that direction. Management stability (staggered

boards) should be encouraged. The role of independent directors should be further analyzed. Neutrality

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Report of the reflection group (2011)

This group’s work was also the inspiration of a proposed

directive on single-member private limited companies (“SUP”) from April 2014 (http://eur-lex.europa.eu/legal-content/EN/TXT/?

uri=COM:2014:212:FIN), a recognition of the role of SMEs to the

prosperity of the European economy (SMEs = 99% of Europe’s enterprises and 2/3 of the jobs). Objectives: fostering

cross-border activities of SMEs (and accidentally also of bigger

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Green Paper on the « EU corporate governance framework » (2011)

3) Commission Green Paper on “The EU corporate

governance framework” (5 April 2011) and feedback received

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- structure and functioning of the board of

directors: should the role of the chairman and of the

CEO be clearly separated?; shouldn’t a greater

professional and gender diversity be promoted within the board?; shouldn’t be better information be provided on remuneration policies and shouldn’t there be a

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- shareholders’ role in making management

accountable: identification of legal provisions that

might foster short-termism; asset managers and their control by institutional investors; means to promote a better cooperation between shareholders; transparency of proxy advisors policies; should there be a mechanism for the identification of shareholders?; should minority shareholders’ protection be reinforced; should

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- effectiveness of the “comply or explain” principle in corporate governance codes: should companies be

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The responses of the interested parties to the Commission Green Paper (November 2011:

http://ec.europa.eu/internal_market/company/docs/modern/20111115-feedback-statement_en.pdf)

Rather mixed:

- seen with favor: information on board diversity; transparency on

remuneration policies, board involvement in risk management, greater information at implementation of the “comply or explain” principle

- seen with disfavor: measures bearing on the structure of the board; further minority shareholder protection; “say on pay” given to the

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The European Parliament (March 2012,

http://www.europarl.europa.eu/sides/getDoc.do?pubRef=-//EP//TEXT+TA+P7-TA-2012-0118+0+DOC+XML+V0//EN) expressed discontent as to the Commission’s alleged lack of regard for the other

stakeholders involved in the enterprise and as to the

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Communication on CSR (2011)

4) Commission Communication on “A renewed EU strategy 2011-14 for Corporate Social

Responsibility” (25 October 2011)

(http://eur-lex.europa.eu/LexUriServ/LexUriServ.do?uri=COM:2011:0681:FIN:en:PDF) Context:

CSR is largely perceived as an antidote to the “age of greed”. Nowadays one trend in that field consists into developing

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CSR consists in a management conduct reducing negative and enhancing positive externalities in

pursuance of transnational standards of ethical conduct. As a result CSR is not to be reduced with mere

compliance to existing legal rules

Main problems: embeddedness of CSR vs Universalism

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A new definition of CSR : ““the responsibility of enterprises for their impacts on society”. Respect for applicable legislation, and for

collective agreements between social partners, is a prerequisite for meeting that responsibility. To fully meet their corporate social

responsibility, enterprises should have in place a process to integrate social, environmental, ethical, human rights and consumer concerns into their business operations and core strategy in close collaboration with their stakeholders, with the aim of:

– maximising the creation of shared value for their

owners/shareholders and for their other stakeholders and society at large;

– identifying, preventing and mitigating their possible adverse impacts.

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A new approach rather than merely self-regulatory?

Not really as the Commission continues to insist on the voluntary aspect of a CSR-driven approach.

Competitiveness remains the Commission’s primary concern

Link to follow up on that topic:

http://ec.europa.eu/growth/industry/corporate-social-responsibility/index_en.htm (a 2011-2014 public consultation was

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Consultation on the future of European Company Law (2012)

5) Commission Consultation on the future of European company law (February 2012)

(http://ec.europa.eu/internal_market/consultations/docs/2012/companylaw/questio nnaire_en.pdf).

Feedback received in July 2012 (problem of representativity):

- divided between the promoters of competitiveness and companies’ mobility and the proponents of a long-term stakeholder-approach - should be ameliorated: rules on transparency, branches and

cross-border mergers. To be further harmonized: rules on transfer of the seat, bankruptcy, conflict of laws rules and protection of

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- participants are in favour of the distinction listed-non

listed to replace the distinction public-private as the dividing regulatory line in European company law

- relating to the SPE proposal (a European private limited liability company): most respondents are in favour of the continuing exploration of such statute with, however, some reluctance from the employees’ representatives. Finally the Commission abandoned the SPE proposed regulation in 2013 and adopted the

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- respondents are in favour of the adoption of rules

relating to the transfer of the seat and a majority of them approve the possibility of the decoupling of the real seat and of the statutory seat (but some members remain against that idea, like Germany, for instance)

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- some transparency should be promoted within groups of a company and an “interest of the group” should be

recognized. To be noted : the Commission’s “SUP” proposal would be some recognition of the kind as the sole

shareholder will be given the possibility to give binding instruction to the SUP’s management

- a majority of the respondents is not in favour of a new

revision of the rules relating to the protection or maintaining of the capital

It was on the basis of this feedback that the Commission will prepare its new Company Law Action Plan (see

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New Company Law Action Plan (2012)

6) The Commission new Company Law Action Plan (12 December 2012): “Action Plan: European company law and corporate governance - a modern legal

framework for more engaged shareholders and sustainable companies” (

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Three main orientations: enhancing transparency, engaging shareholders and supporting companies’

growth and their competitiveness. These orientations reveal that the Commission is still mainly concerned with the needs of the market (transparency,

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- the Commission will propose a modification to the

accounting directive, introducing new transparency rules as

to board diversity and risk management. This was achieved

with Directive 2014/95/EU of the European Parliament and of the Council of 22 October 2014 amending Directive

2013/34/EU as regards disclosure of non-financial and diversity information by certain large undertakings and groups (http://eur-lex.europa.eu/legal-content/EN/TXT/?

uri=CELEX:32014L0095) applicable to listed companies and, for

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- the Commission will come up with an initiative (possibly a recommendation) enhancing transparency when

implementing the “comply or explain” principle. This was achieved with Commission Recommendation of 9

April 2014 on the quality of corporate governance

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- the Commission will come up with an initiative relating to the identification of shareholders. This is to be

achieved through the proposed modification of the

shareholders rights directive from 2007 (Proposal

amending Directive 2007/36/EC as regards the

encouragement of long-term shareholder engagement and Directive 2013/34/EU as regards certain elements of the corporate governance statement of April 2014

http://eur-lex.europa.eu/legal-content/EN/TXT/?uri=COM:2014:213:FIN),

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- providing information as to the voting policies of

institutional investors, asset managers and proxy advisors in order to encourage their implication in the

enterprise. See chapter Ib of the proposed amended

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- the Commission will enhance transparency concerning remuneration policies and individual remuneration and will grant a shareholder’s vote on remuneration policy

and remuneration report. See art. 9a and 9b of the

proposed amended shareholders rights directive

- the Commission will reinforce shareholders’ control

on transactions between related parties. See art. 9c

of the proposed amended shareholders rights directive - the Commission will regulate proxy advisors and

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New Company Law Action Plan (2012) - as the rules relating to “acting in concert”

discourage cooperation between shareholders, the

Commission will strive towards more legal certainty in that field. In 2013 the European Securities and

Markets Authority (ESMA) has published a statement on practices governed by the Takeover Bid Directive (TBD), focused on shareholder cooperation issues

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- as to the employees: the Commission will encourage their participation in the company’s capital. See the Study on the Promotion of Employee ownership and Participation (Oct. 2014,

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- the Commission is still hesitant about a regulation relating to the transfer of the seat and deems more study to be necessary on that topic. In 2013 the

Commission launched a consultation on that topic

(

http://ec.europa.eu/internal_market/consultations/2013/seat-transfer/index_en.htm). For instance the proposed “SUP”

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- the Commission will focus on the amelioration of the rules relating to cross-border mergers and consider the adoption of rules relating to cross-border divisions. Recently the Commission launched a public consultation on cross-border mergers and divisions (closed in

January 2015):

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- the Commission will promote the existing European

entities (SE, SCE) but is not considering changes to

their statute

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The conclusion of the Commission is the following: “The initiatives in the area of corporate governance do not

aim at altering the current approach, but ensure, by

encouraging proper interaction between companies, their shareholders and other stakeholders, that this

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Corporate Governance in Europe : Recent Evolutions