It is widely acknowledged that disclosure plays a fundamental role in corporate governance. In a climate of crisis, this phrase gains even more importance. Indeed, disclosure does much to create confidence in shareholders and investors, as well as to instill credibility in the workings of companies, which would otherwise remain outside the realms of scrutiny.
The European Commission lays down guidelines on corporate governance, considered to be best practices for successful market economies in order to be followed by member states of the EU. In its guidelines, the Commission highlights the "proper" mechanisms by which an enterprise should be directed and controlled, including how its staff can be held accountable for corporate conduct and performance.
As part of its policy on good governance, the Commission in 2004 adopted a recommendation dealing with directors' remuneration. This recommendation came about due to dissatisfaction of shareholders and investors with the way directors received their remuneration. Sometimes, executive directors take part in setting their own pay, which could create a conflict of interest. Shareholders as members of the company feel that they should take a more active role when it comes to establishing directors' remuneration, and be better informed.
In its 2004 recommendation, the European Commission specified that member states should ensure listed companies disclose their policy on directors' remuneration and tell shareholders how much individual directors are earning and what for, while ensuring that shareholders are given adequate control.
Disclosure of the remuneration of individual directors was at the heart of this recommendation. But this recommendation was not legally binding on member states and therefore had little overall effect. Recently, the established European Corporate Governance Forum issued a public statement addressing the main principles that should govern the remuneration of executive directors in a bid to restore confidence in EU companies.
The forum recognises that remuneration of executive directors is an important element of the governance regime of companies but it also recognises that pay schemes sometimes lead to excessive remuneration dished out to executive directors.
This public statement supports a regulatory treatment of directors' remuneration, which favours disclosure of the remuneration policy and its structure, and an open process establishing the payable remuneration.
The forum considers that for such process to be appropriate, executive directors' remuneration must be set by the shareholders and the non-executive directors, without any involvement of the recipients.
The statement also provides guidance to member states to ensure that shareholders are well informed, by providing them with sufficient detail to understand the components of directors' remuneration, and are given effective control over directors' remuneration to secure change when such is required. Shareholders would be able to vote on the remuneration policy and any material change to it.
While the forum leaves the pay structure and levels of directors' remuneration to the companies and their shareholders to determine, it highlights the fact that excessive remuneration is to be excluded in all circumstances.
The forum considers that member states should ensure that the principles laid down in the public statement are incorporated in the national corporate governance codes and suggests that the Commission should issue a recommendation to this end. Furthermore, it suggests that a directive be adopted in line with the principles set down in the public statement.
Dr Grech is an associate with Guido de Marco & Associates and heads its European law division.
The European Commission lays down guidelines on corporate governance, considered to be best practices for successful market economies in order to be followed by member states of the EU. In its guidelines, the Commission highlights the "proper" mechanisms by which an enterprise should be directed and controlled, including how its staff can be held accountable for corporate conduct and performance.
As part of its policy on good governance, the Commission in 2004 adopted a recommendation dealing with directors' remuneration. This recommendation came about due to dissatisfaction of shareholders and investors with the way directors received their remuneration. Sometimes, executive directors take part in setting their own pay, which could create a conflict of interest. Shareholders as members of the company feel that they should take a more active role when it comes to establishing directors' remuneration, and be better informed.
In its 2004 recommendation, the European Commission specified that member states should ensure listed companies disclose their policy on directors' remuneration and tell shareholders how much individual directors are earning and what for, while ensuring that shareholders are given adequate control.
Disclosure of the remuneration of individual directors was at the heart of this recommendation. But this recommendation was not legally binding on member states and therefore had little overall effect. Recently, the established European Corporate Governance Forum issued a public statement addressing the main principles that should govern the remuneration of executive directors in a bid to restore confidence in EU companies.
The forum recognises that remuneration of executive directors is an important element of the governance regime of companies but it also recognises that pay schemes sometimes lead to excessive remuneration dished out to executive directors.
This public statement supports a regulatory treatment of directors' remuneration, which favours disclosure of the remuneration policy and its structure, and an open process establishing the payable remuneration.
The forum considers that for such process to be appropriate, executive directors' remuneration must be set by the shareholders and the non-executive directors, without any involvement of the recipients.
The statement also provides guidance to member states to ensure that shareholders are well informed, by providing them with sufficient detail to understand the components of directors' remuneration, and are given effective control over directors' remuneration to secure change when such is required. Shareholders would be able to vote on the remuneration policy and any material change to it.
While the forum leaves the pay structure and levels of directors' remuneration to the companies and their shareholders to determine, it highlights the fact that excessive remuneration is to be excluded in all circumstances.
The forum considers that member states should ensure that the principles laid down in the public statement are incorporated in the national corporate governance codes and suggests that the Commission should issue a recommendation to this end. Furthermore, it suggests that a directive be adopted in line with the principles set down in the public statement.
Dr Grech is an associate with Guido de Marco & Associates and heads its European law division.