Fabian Demicoli

Corporate Governance framework for European companies

One of the lessons of the financial crisis is that corporate governance, until now usually based on self-regulation, was not as effective as it could have been. It is important that companies are better run. If companies are better run, not only is a future crisis less likely but they should also be more competitive.

 

The European Commission has launched a public consultation that addresses the ways in which corporate governance of European companies can be improved. Corporate governance is traditionally defined as the system by which companies are managed and controlled. 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 deadline for submitting contributions in response to the consultation is 22 July 2011.

What does the public consultation cover?

The lessons of the crisis will eventually lead to better supervision of financial institutions, stronger banks and effective resolution systems for failing institutions. As part of a longer term review of the corporate governance framework of companies at large, this public consultation will focus on how companies, not just financial institutions, work.  There are a number of findings that indicate that there is room for improvement in different areas of corporate governance, such as diversity in boards, shareholder engagement and the quality of corporate governance statements.

Thus, the Green Paper aims to launch a general debate on a number of issues such as:

Board of directors: questions addressed  refer to their effective functioning and ensuring they are composed of a mixed group of people, e.g. by enhancing gender diversity, a variety of professional backgrounds and skills as well as nationalities.  Functioning of boards, namely in terms of availability and time commitment of directors are also under scrutiny as well as questions on risk management and directors' pay..

how to enhance shareholders' involvement on corporate governance issues and encourage more of them to take an interest in sustainable returns and longer term performance, but also how to enhance the protection of minority shareholders. It also seeks to understand whether there is a need for shareholder identification, i.e. for a mechanism to allow issuers to see who their shareholders are, and for an improved framework for shareholder cooperation.

how to improve monitoring and enforcement of the existing national corporate governance codes in order to provide investors and the public with meaningful information. Companies who don't comply with national corporate governance recommendations have to explain why they deviate from them. Too often, this doesn't occur. The Green Paper asks whether there should be more detailed rules on these explanations and whether national monitoring bodies should have more say on companies' corporate governance statements.

The Green Paper is accessible at:
 http://ec.europa.eu/internal_market/consultations/2011/corporate-governance-framework_en.htm

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