Corporate governance back on the agenda

The European Commission has published a green paper on corporate governance with a view to unifying best practice among Member States.

The European Commission’s green paper discusses three subjects which it considers to be at the heart of good corporate governance:

  • the role of the board of directors;
  • the role of shareholders; and
  • how to apply the “comply or explain” approach which underpins the majority of domestic corporate governance frameworks.

In each category, the green paper outlines the Commission’s general view and asks questions as to the policy options.

When it comes to the role of the board, the Commission emphasises the importance of clear divisions of responsibility between the board and the CEO, and of maintaining a diversity of board members. It also considers the requirement to appoint an external facilitator to help evaluate the board’s performance (something which is already included in UK best practice for FTSE 350 companies) and asks whether shareholders should have a greater say in the remuneration of board members.

Among the qualities which the Commission considers important for effective non-executive directorships is that the individual has sufficient time to devote to their role. The paper asks whether there ought to be a limit on the number of mandates that a non-executive director may hold.

Many non-executives and aspirant non-executives will have looked at the long lists of directorships held by the ‘great and the good’ with dismay and frustration wondering exactly how they can discharge their duties effectively.

The Commission’s discussion on the role of shareholders focuses on ways to encourage engagement and discourage short-termism. This part of the green paper strongly echoes the British Government’s consultation on the future of corporate governance in the UK .

The Commission voices a concern that the fee structure of asset managers is contributing toward short-termism.

The third major area discussed in the paper is the use of the “comply or explain” model. This is supported as the most appropriate way for delivering good corporate governance.

However, the paper also discusses areas where the model might be improved. The Commission cites a recent study claiming that explanations by companies which deviate from best practice are often insufficient. The paper asks whether monitoring agencies should check these explanations to give greater power to shareholders and whether more detailed explanations should be required when a company departs from the code.

It is unclear what route the Commission will pursue once it has reached its policy conclusions. Options include issuing EU-wide best practice guidance or legislation, or encouraging Member States to adopt their own individual codes.

One thing is clear – given the abject failure of the Banking community to regulate itself the EC’s attempt to strengthen corporate governance in the financial sector is a welcome and timely initiative.

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