MEMO/03/112
Brussels, 21st May 2003
Commission Action Plan on "Modernising Company Law and Enhancing Corporate Governance in the European Union" - Frequently Asked Questions
(see also IP/03/716)
General
What will this Action Plan do for the average European?
In short, good company law and good corporate governance practices throughout the EU will enhance the "real" economy by encouraging investment. That means better prospects for growth. It means more jobs. It means higher real incomes and more resistance in Europe to downturns in the global economy.
A dynamic and flexible company law and corporate governance framework is essential to protect investors from fraud and malpractice and make sure investors or those representing them have the information enabling them to make the right investment decisions.
Most Europeans are investors in one way or another, not only through direct shareholdings but also through pension funds, savings accounts, life assurance etc. Their livelihoods are tied up in the proper, responsible performance and governance of listed companies in which they invest.
A modern European company law framework is also a key to deepening the Internal Market and building an integrated European capital market, further motors for growth.
What is more, it will help maximise the benefits of enlargement for citizens of all the Member States, new and existing.
Won't all this just mean more red tape for businesses?
Far from it. An effective approach will increase the efficiency and competitiveness of businesses in the EU.
Well managed companies, with strong corporate governance records and sensitive social and environmental performance, outperform their competitors. Europe needs more of them to generate employment and higher long-term sustainable growth.
What is more, the proposals in the Action Plan will make it much easier for businesses to operate across borders, in some cases by further harmonising divergent national regulations through a few essential European rules, in others by encouraging co-operation between Member States and convergence of their laws. There are also proposals to facilitate cross-border mergers and transfers of "seat" (a company's centre of activities and/or its registered office), as well as to allow businesses to operate under a single European statute.
An effective approach will help to strengthen shareholders' rights and protection of third parties, and will contribute to rebuilding European investor confidence in the wake of a wave of recent corporate governance scandals.
All that is good news for responsible businesses.
The Financial Services Action Plan (FSAP) has not been completed yet. Do we really need another action plan?
Yes! Without a modern European company law framework, we cannot complete the Internal Market. But the proposals in the Company Law Action Plan are carefully prioritised over the short, medium and long-term. Many need further thought. Major initiatives will be consulted upon. It is essential to avoid hasty legislation which creates more problems than it solves.
The Company Law Action Plan complements the FSAP. Both are necessary to help maximise both opportunities and protection for companies, investors and consumers active in the Internal Market. Both will help restore confidence in the financial markets, help ensure genuine integration of European economies, make it easier for businesses to operate across borders and boost investment, growth and jobs.
To what extent does the Action Plan follow the recommendations of the High-Level Group of Company Law Experts chaired by Jaap Winter
Frits Bolkestein, the Internal Market Commissioner, has already made clear how much he appreciated the excellent work of the Group (see IP/02/1600)? In most respects, the Action Plan follows the Group's recommendations.
However, there are certain differences, for example:
The High Level Group, in its report, saw a case for setting up a permanent structure which could provide the Commission with independent advice on future regulatory initiatives in the area of company law. The Action Plan does not exclude this in the future but for now proposes instead, in addition to wide consultation, a "European Corporate Governance Forum" to meet once or twice a year.
The High Level Group made proposals aimed at obliging listed companies to facilitate electronic access by the general public to relevant company information via company websites, the creation of national central electronic filing systems and the establishment of links between the various registries containing formal company information. These are not addressed in the Action Plan, because they are already partly covered by the proposed Transparency Directive (see IP/03/436,
MEMO/03/68 ) and because the need for further EU intervention will depend upon forthcoming national initiatives.
On corporate governance, the High Level Group felt that the nomination and remuneration of directors of listed companies and the supervision by the board of the audit of accounts should be decided upon by exclusively non-executive or supervisory directors, a majority of whom would be independent. The Action Plan differs from this as far as the nomination of directors is concerned as the Commission considers that executive directors are best placed to know the qualities required for a board position and to assess candidates. However, the Plan proposes that non-executive directors ought to be included and specific safeguards should be put in place to deal with any conflicts of interest.
In the light of the views of the sectors concerned and of the European Parliament, the Commission has given a higher priority than the Group to the creation of a European Association Statute, a European Mutual Society Statute, and a possible European Foundation Statute.
Finally, there is one element in the Action Plan that was not explicit in the Group's report. The Action Plan notes that there is a strong medium to long term case for aiming to establish a real shareholder democracy – many corporate governance codes tend to support the one share/one vote principle, although many codes favour some flexibility in this respect. The Commission intends to undertake a study on the consequences of such an approach.
Do the European Parliament and the Council have to ratify this action plan?
No. The Commission is, however, submitting it for consultation and will give adequate consideration to any comments made. Of course, the individual legislative proposals arising from the Plan will have to be adopted by the Parliament and the Council in the usual way.
How does the Commission intend to consult on the Action Plan before starting to put it into effect?
This Action Plan has not appeared in a void. It aims to put into effect a lot of things the business community and other interested parties have asked for over the last few years. It follows many of the recommendations of the High-Level Group; a broadly based group of experts from various backgrounds which itself held extensive consultations.
The Action Plan also constitutes a considered response to recent corporate scandals, following discussions with Member States, notably at the Oviedo informal meeting of Ministers in April 2002 (see MEMO/02/72 and IP/02/584)
But the Commission is committed to further consultation. First, the Action Plan itself will be open for consultation until 31 August 2003. Responses should be sent to
With respect specifically to corporate governance, a European Corporate Governance Forum will be convened once or twice a year to contribute to co-ordinating the corporate governance efforts of Member States.
Corporate governance
Isn't this Action Plan an admission that EU corporate governance is not currently up to US levels post Sarbanes-Oxley ?
No. It is not helpful to look at this in terms of a race: neither side is "ahead" of the other. Clearly a lot of work is being done and will continue to be done on both sides of the Atlantic. The EU and the US have identified broadly the same problems and broadly share the same goals. Both recognise the importance of good corporate governance both for investors and for the economy as a whole.
On the US side the passing of the Sarbanes-Oxley Act is not the end of the story. The SEC and other regulators are assessing how to implement it.
Unfortunately the Act creates a series of problems due to its outreach effects on European companies and auditors, and the Commission is engaged in an intense regulatory dialogue with a view to negotiating acceptable solutions with the US authorities, in particular the Securities and Exchange Commission (SEC). Those solutions should avoid imposing double regulation on business already adequately regulated in the EU.
In Europe, a one-size-fits-all solution is not feasible or desirable given the many different national models. That is why the Action Plan proposes combining harmonising a few essential rules with closer co-ordination between national codes.
The Commission sees the Action Plan as an opportunity for the EU to help shape international regulatory developments, strengthening its influence in the world with good, sensible corporate governance rules – to be a potential model for other countries in the future.
Do the proposals on corporate governance go far enough, given that some Member States already have or are in the process of preparing tougher rules?
The proposals on corporate governance are far-reaching and based on best practice and on extensive consultation, in particular by the High Level Group of Company Law Experts, with investors, issuers and other interested parties. If some Member States wish to go further, that is their prerogative. The Commission is not aiming for total harmonisation but to implement a few essential principles and rules. Recent debates in the OECD, which is in the process of updating its 1999 corporate governance principles, confirm that the EU Action Plan will address the key issues at stake.
Some of the proposals for now stop short of formal legislation but aim to create strong moral and market pressure on companies to improve their corporate governance act and on Member States and regulators to enforce that improvement.
The Commission believes this approach will be effective and that the Action Plan will greatly improve transparency, reinforce shareholder rights and enhance corporate responsibility.
Why is the Commission only proposing Recommendations on reinforcing the role of non-executive directors, on disclosure of Directors' remuneration and shareholder approval of Director share options? What will happen if these are ignored?
The High Level Group advocated Recommendations as these can take effect much more quickly than Directives or Regulations. And speed is important here. We need to reinforce investor confidence quickly.
The Commission is confident Member States will give effect to the Recommendations in national law and that the spread of best practice will take on a momentum of its own. It is clearly in companies' own interests to ensure their corporate governance framework is worthy of investor confidence. A recent study by Deminor (for details see found that well governed companies perform up to 3 % better than less well-governed rivals.
It is also clear that investors are paying increasing attention to governance issues in making their investment choices. By requiring full reporting by companies of their corporate governance practices, the Action Plan will help them do that.
But this is not a closed book. The Commission will monitor carefully how the Recommendations work in practice and assess the need for further action, perhaps including binding legislation.
How would the proposal in the Action Plan on Directors' remuneration reinforce shareholders' power to veto excessive executive pay, as we saw in the UK with Glaxo Smith Kline ?
One of the key objectives of the Action Plan is to increase transparency and control for shareholders across the EU. They should be able to refuse excessive remuneration packages.
It proposes a Recommendation putting forward four specific measures in this regard
-the disclosure of remuneration policy of directors' remuneration in annual accounts
-the annual disclosure of the remuneration of individual directors
-prior approval by the shareholder meeting of share and share option schemes in which directors participate
-proper recognition of the costs of such schemes for the company in profit and loss accounts (and not just in notes to the accounts)
As previous examples have shown, once disclosure is required, the moral pressure shareholders can exert is considerable. It would be very difficult for a board to adopt a remuneration structure against the clearly expressed disapproval of shareholders. If it proves necessary, however, the Commission will consider following up the Recommendation with binding action.
Why is the introduction of a special investigation right for shareholders, of personal responsibility for wrongful trading by directors and of EU wide director- disqualification only for the medium-term?
Not everything can be done at same time. And it is important to get measures right. Knee-jerk responses can do more harm than good.
But already in the short term, effective measures are proposed reinforcing directors' responsibility. For example, the Commission intends in short-term to confirm through a Directive the collective responsibility of Directors for financial statements and for key non-financial statements such as the annual corporate governance statement proposed in the Action Plan.
Traditionally sanctions for corporate or individual malpractice have been an exclusive competence of Member States. The Commission is not advocating altering that general principle. But clearly it is undesirable for a director banned in one country to be able to start up a company in another. So in the case of director disqualification, there is a clear need to balance subsidiarity against protection of investors and the public and against the needs of the Internal Market. But that will require careful consideration.
The Winter Group recommended independent directors should sit on nomination committees. But the Action Plan recommends a key role for executive directors. Why?
The Commission believes that those on nomination committees need to know the company from the inside. That does not mean independent directors should not have a role. And safeguards need to be in place to prevent conflicts of interest. But executive directors are best placed to assess the expertise and experience boards need in new members.
What exactly would be the role of the Corporate Governance Forum proposed in the Action Plan? Would it have any formal powers? Who would be the members?
The exact composition of the Forum remains to be determined. It will have no formal powers or statute. It will be an informal structure set up by the Commission in close consultation with the European Parliament, Member States and interested parties. Issuers, investors, regulators, academics and exchanges will be among those represented.
Clearly the Forum itself, once constituted, will have an input into determining its own role. But the objective is clear. It will work to foster convergence of corporate governance codes and the adoption of best practice across the EU.
Isn't it unrealistic to propose, even in the long term, shareholder democracy based on one share one-vote when EU governments have repeatedly rejected this in the context of the proposed Takeovers' Directive?
The Commission will not apologise for aiming for more shareholder democracy. It's what most investors want and many existing corporate governance codes refer to it as an aim.
That said there are clearly tricky issues to be examined. That is why the Action Plan commits the Commission to an in-depth study of this issue in the short to medium term.
How will enlargement affect the corporate governance proposals, given the increased diversity of national codes with 25 Member States?
Enlargement makes it all the more important to establish essential rules and better co-ordination of national codes. But there is a great deal of agreement on what constitutes good corporate governance within the future EU 25. And several of the new Member States are taking an active role in OECD discussions.
In a globalised economy, corporate governance is an international issue. What work is taking place in international fora and how does this Action Plan link with that?
OECD issued its corporate governance principles in 1999. OECD Ministers have decided to adopt an updated version in spring 2004. Preparation work started with a meeting in Paris in March 2003. The Commission and Member States are making an important contribution to this.
In addition, progress at OECD level will be taken into account in implementing the Action Plan. The OECD is discussing many of the same issues, for example enhancing the role of non-executive/supervisory Directors and improved disclosure (including of directors' remuneration) by listed companies to investors.
The G8 also made a declaration last week at its meeting of Finance Ministers in Deauville confirming the importance of corporate governance. The issue will be further discussed at its forthcoming summit in Evian on 1-3 June.