While the European Commission does not plan a harmonised corporate governance code, it does intend to ensure a common approach, says Sue Copeman

During the last 10 years, a patchwork of corporate governance recommendations and regulations has developed throughout Europe. Inevitably, approaches differ, reflecting both national perceptions of the role of companies and different corporate structures, for example the difference between Germany's two-tier executive and supervisory board structure, and the single board concept where independent directors play an increasingly important part.

Another significant variation is the extent to which countries are prepared to enforce their corporate governance principles. In many cases, these principles take the form of recommendations, especially where they have been prepared by business associations, rather than by stock exchange committees or governments, who have the powers of disqualification or prosecution to ensure compliance.

The most commonly held view is that corporate governance generally should not be prescriptive. Speaking at a conference on corporate governance at Clifford Chance, Amsterdam, just over a year ago, EC internal market commissioner Frits Bolkestein suggested that a 'soft-law-approach', a self-regulatory market approach combined with disclosure and transparency obligations, should be the guiding principle for any initiative in corporate governance. However, he warned that such a self-regulatory market approach, based on non-binding recommendations, might not always be sufficient to guarantee the adoption of sound corporate governance practices. "A limited number of made-to-measure rules might therefore be necessary, so markets can play their disciplining role in an efficient way."

Action plan

We have since seen the possible shape of these rules in the form of the action plan on modernising company law and enhancing corporate governance published by the EC in May last year. Its main objectives are:

- to strengthen shareholders' rights and protection for employees, creditors and the other parties with which companies deal, while adapting company law and corporate governance rules for different categories of company
- to foster the efficiency and competitiveness of business, with special attention to some specific cross-border issues.

Although the Commission does not believe that a European corporate governance code would offer significant added value, it is keen that the EU should adopt a common approach covering 'a few essential rules' and should ensure adequate coordination of national corporate governance codes. The action plan prioritises the following initiatives.

- Introduction of an annual corporate governance statement: Listed companies should be required to include in their annual documents a coherent and descriptive statement covering the key elements of their corporate governance structures and practices.
- Development of a legislative framework aimed at helping shareholders to exercise their rights (for example asking questions, tabling resolutions, voting in absentia, participating in general meetings via electronic means).

These facilities should be offered to shareholders across the EU, and specific problems relating to cross-border voting should be solved urgently.

- Adoption of a recommendation aiming at promoting the role of (independent) non-executive or supervisory directors. Minimum standards on the creation, composition and role of the nomination, remuneration and audit committees should be defined at EU level and enforced by member states, at least on a 'comply or explain' basis.
- Adoption of a recommendation on directors' remuneration: Member states should be invited to put in place an appropriate regulatory regime to give shareholders more transparency and influence, including a detailed disclosure of individual remuneration.
- Creation of a European corporate governance forum to help encourage coordination and convergence of national codes and of the way they are enforced and monitored.

Other corporate governance initiatives proposed in the action plan cover achieving better information on the role played by institutional investors in corporate governance; giving further effect to the principle of proportionality between capital and control; offering listed companies the choice between one-tier and two-tier board structures, and enhancing directors' responsibilities for key financial and non-financial statements.


After a period of consultation, the Commission published the responses to its action plan in November. It said that there was widespread support for a very large majority of the proposals, with most respondents considering that the initiative was an essential step to restore confidence in capital markets and the EU economy. Most respondents also agreed on the proposed timing and the degree of priority attached to individual measures. However, some were concerned about certain specific measures and the legislative nature envisaged for some initiatives.

The first corporate governance initiatives under the action plan are expected in the second half of 2004. These are likely to include:

- the recommendation promoting the role of non-executive or supervisory directors (nomination, remuneration and audit committees)
- the recommendation on directors' remuneration, giving shareholders more information and influence.

Despite the EC's upbeat commentary on the response to its proposals, some organisations clearly have reservations. For example, the Institute of Chartered Accountants of Scotland (ICAS) has signalled its scepticism as to the benefits of any EC activity in the area of corporate governance.

It believes that any action by the Commission should be limited to defining key principles, which would act as a foundation for member states' own corporate governance codes. It points to the success of the UK corporate governance code, which is based on a 'comply or explain' approach rather than the imposition of 'essential rules'.

ICAS also points out, that given the increasing globalisation of business, the EC's efforts would be best directed towards international harmonisation of corporate governance. 'Assisting in the modernisation of the Organisation for Economic Cooperation and Development's corporate governance principles would be more effective than setting up a new EU code.'

The European Federation of Accountants (FEE), however, says that it actively supports the action plan. In September of last year, it launched a discussion paper with practical recommendations to strengthen corporate governance and to increase confidence in financial reporting. The recommendations specifically highlight the essential role the audit committee needs to play.

FEE suggests that an audit committee's core responsibilities should include: reviewing financial reporting arrangements (including internal control); monitoring the relationship with the external auditor, and monitoring the work and resources of the internal audit function. It should also establish a policy on purchasing non-audit services.


The European Federation of Accountants' (FEE) September 2003 discussion paper makes the following key recommendations for sound corporate governance.

- All listed companies should have an audit committee function discharged by non- executive directors or supervisory board members where, as a minimum, the majority of the committee's members are independent. Entities not having an audit committee should disclose in a corporate governance statement their reasons for not having an audit committee and how the audit committee function has been discharged.
- The audit committee should establish its policy on purchasing non-audit services in line with applicable legislation. The audit committee's report should set out its policy and explain its assessment that sufficient safeguards exist to ensure independence.
- Companies should be required to make a comprehensive corporate governance statement in their annual report. Information on the audit committee's responsibilities and activities should be provided as a part of the statement. There is a need to agree common principles on the form and content for corporate governance reporting.
- Boards should explore the use of extended (long form) reports by the external auditors in combination with presentations and discussions. This facilitates more informal and in-depth exchange of views between the auditor and the audit committee or board.
- The board should ensure a regular evaluation of the nature and extent of the risks to which the company is exposed and the controls to manage them.
- Boards should ensure that the company has an ethical code emphasising integrity, and that they and their staff understand and apply it.
- There is no need for a separate European corporate governance code. However, some principles and common benchmarks for national codes should be set at European level.
- No single individual, or group, should have unfettered control of the company. In a unitary board, the roles of chairman and chief executive should be held by different people balanced by a strong independent non-executive element. In a two-tier structure, at least for listed companies, the management board should have further members in addition to the chief executive. www.fee.be


The European Corporate Governance Institute (ECGI), a non-profit research network launched in January 2003, offers on-line information on corporate governance codes, principles and reforms, in Europe and elsewhere. Codes are collated by country. In most cases, ECGI's website allows you to download the full text; otherwise it provides information on ordering the document. www.ecgi.org


A corporate governance white paper, written by the Economist Intelligence Unit (EIU) and sponsored by KPMG International, discussed the views and concerns of executives regarding corporate governance and transparency.

Corporate governance - the new strategic imperative included a survey, held in mid-2002, of 115 senior executives worldwide. Its conclusions were:

- Regulations are only part of the answer to improved governance. Corporate governance is about how companies are directed and controlled. The balance sheet is an output of manifold structural and strategic decisions across the entire company, from stock options to risk management structures, from the composition of the board of directors to the decentralisation of decision making powers. As a result the prime responsibility for good governance must lie within the company rather than outside it.
- Designing and implementing corporate governance structures are important, but instilling the right culture is essential. Senior managers need to set the agenda in this area, not least in ensuring that board members feel free to engage in open and meaningful debate. Not all board members need to be finance or risk experts. The primary task for the board is to understand and approve the risk appetite of a particular company at any particular stage in its evolution and the processes that are in place to monitor risk.
- There is inherent tension between innovation and conservatism, governance and growth. Asked to evaluate the impact of strict corporate governance policies on their business, 45% of executives surveyed thought that M&A deals would be negatively affected, because of the lengthening of due diligence procedures, and 36% thought the ability to take swift and effective decisions would be compromised. State of the art corporate governance can bring benefits to companies but can impede growth.
- Transparency about a company's governance policies is critical. As long as investors and shareholders are given clear information about them, the market can be allowed to do the rest, assigning an appropriate risk premium to some companies, or cutting the cost of capital for others.

Too few companies are genuinely transparent, however, and this is an area where most organisations can and should do much more.


The OECD's annual report on the guidelines for multinational enterprises: 2003 edition was published in November 2003. It includes a special focus on enhancing the role of business in the fight against corruption, looking in particular at governments' roles and how the OECD's guidelines can be used in synergy with other anti-corruption instruments.