EU wants better governance of European firms

The European Commission wants to help overcome current weaknesses in the functioning, remuneration and ethics of boards of directors in European companies in general and not just in banks.

With this in mind, Internal Market Commissioner Michel Barnier on Tuesday published a Green Paper on corporate governance kicking-off a debate to determine how to make boardrooms more effective and their members more accountable.

“In the current economic situation, we need more than ever to ensure that companies are well governed. Corporate boards must function better and improve the quality of their decisions. Better governance means a better managed and more competitive company,” he said as he presented the Green Paper.

The consultation covers a number of issues such as how to improve the diversity and functioning of the boards of directors and the monitoring and enforcement of existing national corporate governance codes, and how to enhance the engagement of shareholders.

The Green Paper focuses on three chapters: boards of directors, shareholders and monitoring and enforcement of corporate governance codes.

The chapter on boards addresses means to tackle the phenomenon of group think in the boards of companies by improving their effective functioning and ensuring they are composed of a mixed group of people, for example by enhancing, gender diversity, a variety of professional backgrounds and skills as well as nationalities. It will also look at the functioning of boards, namely in terms of availability and time commitment of directors. Questions on risk management and directors’ pay are also included.

In the chapter on shareholders, the Green Paper addresses several underlying reasons for the lack of appropriate shareholder engagement, such as the short-termism of the financial markets (if we consider the fact that holding periods of shares has decreased over the last decades and the average holding period of shares is eight months), problems arising from the principal-agent relationship between investors and their asset managers, conflicts of interests and difficulties with shareholder cooperation. The Green Paper seeks views on enhancing shareholders’ involvement on corporate governance issues by encouraging them to take an interest in sustainable returns and longer term performance.

Other issues covered in this chapter are: proxy advisors (i.e. firms providing services to shareholders, such as voting advice for general meetings), minority shareholder protection (i.e. to protect small shareholders against potential abuse by a controlling shareholder), shareholder identification (i.e. a mechanism to allow issuers to see who their shareholders are) and employee share ownership (i.e. schemes allowing employees to participate in the stock capital of the company where they are employed).

The last chapter focuses on ways to improve monitoring and enforcement of existing national corporate governance codes, focusing in particular on quality of information provided by companies and the oversight by monitoring bodies.

The public consultation will remain open until July 22.

The Commission said that it will carefully examine all the replies to the consultation and issue a feedback statement summarising the results in autumn. On that basis a decision will be made whether legislative proposals are necessary.