Paper may be the first step towards European legislation on the governance of listed companies
The European Commission has today published its green paper (the Paper) on the EU corporate governance framework. The Paper can be read here. The related FAQs are here and the press release is here.
What does the Paper cover?
The Paper is structured around three subjects which it describes as being at the “heart of good corporate governance”:
- The board of directors
- Shareholders
- How to apply the “comply or explain” approach which underpins the existing EU corporate governance at national level.
On boards, the Paper discusses means of tacking “the phenomenon of group think” by improving the “effective functioning” of boards and ensuring they are composed of a mixed group of people (by “enhancing gender diversity and a variety of professional backgrounds and skills”). The Paper also looks at the functioning of boards in terms of the availability and time commitment of directors, and discusses risk management and directors pay.
Regarding shareholders, the Paper looks at possible reasons for what it describes as ”the lack of appropriate shareholder engagement”, such as financial short-termism, the agency problem, conflicts of interest and problems around joint shareholder action. The Paper also covers the role of proxy advisors, the identification of ultimate beneficial shareholders by companies, and employee share ownership.
On “comply or explain“, the Paper looks at how the monitoring and enforcement of existing national corporate governance codes could be improved.
Specific questions posed by the Paper
The Paper is a consultation paper and it asks 25 questions around its three core subjects. These questions are set out in Annex 1 of the Paper.
Purpose of the Paper
The FAQs issued at the same time as the Paper describe its objective as being “to have a broad debate on the issues” it raises. A green paper can be the first step in the eventual proposal of legislation by the Commission. For UK listed companies, and for the UK corporate governance community – both of which still largely support the “comply or explain” approach pioneered in the past twenty years in the UK, from Cadbury to the UK Corporate Governance Code – such legislation, however far off, is likely to be conceptually unwelcome.
Next steps
Responses to the questions contained in the Paper are requested by 22 July 2011.
Context
The Paper follows the Commission’s ongoing work on the corporate governance of financial institutions, the 2010 consultation paper for which can be read here and the summary of consultation responses read here.
The Commission work adds to the several workstreams around governance in train in the UK, led principally by the Department for Business, Innovation and Skills and the Financial Reporting Council, which are discussed in this post.
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