The European Commission has adopted an Action Plan outlining future initiatives in the areas of company law and corporate governance.
Advertisement
What type of initiative does the Action Plan include?
The Action Plan announces 16 different actions to be taken by the Commission. Some of these will be proposals for new legislation; others could require soft law (recommendations and corporate governance codes) or an information campaign, but all are priority actions.
What is the scope of the Action Plan what kind of companies will be covered?
The different measures in the Action Plan will not all have the same scope. A number of initiatives concern corporate governance. EU corporate governance rules only apply to companies listed on a stock exchange.
EU company law applies in principle to most EU limited liability companies. The precise scope of the different actions will be further assessed at a later stage.
CORPORATE GOVERNANCE
What is corporate governance?
Corporate governance is about how companies are managed and controlled. It defines relationships between a company’s management, its board, its shareholders and other stakeholders.
What is the difference between the corporate governance initiatives put forward in the Action Plan and proposals regarding corporate governance in banks?
The EU corporate governance rules apply in principle to all EU companies listed on a stock exchange. Since most banks are listed on a stock exchange they will also be covered by the actions announced in the Action Plan in the area of corporate governance.
However, in view of the specific nature of the activities of financial institutions, the Commission had already proposed measures to help avoid excessive risk-taking by individual banks and ultimately the accumulation of excessive risk in the financial system in July 2011 on revision of the Capital Requirements Directive). These specific measures will apply only to banks and will be complemented by the measures foreseen in the Action Plan.
What is shareholder engagement? Why is it so important? Why should it be promoted?
Shareholder engagement is a purposeful dialogue with companies on matters such as strategy, performance, risk, capital structure, corporate governance, including remuneration, etc. It is therefore more than just voting at the general meeting. Shareholder engagement (or “stewardship”) aims to promote long term success of companies. Effective engagement benefits companies, shareholders and the economy as a whole.
The two Green Papers on corporate governance in listed companies and banks have found that many shareholders are “absent” from companies. On the other hand, many shareholders have pushed banks to take excessive risks, rather than to promote the long-term success of the company. It is shareholders with long-term liabilities such as pension funds or life-insurers that are most likely to engage. However, evidence shows that many of these also have a rather short-term investment strategy once their funds are being managed by asset managers. Short-term investment strategies focus on turning over the portfolio rather than investing for a long time and engaging on corporate governance matters with investee companies. This mismatch of interests between asset owners and asset managers has substantially weakened shareholder engagement.
Are there any other initiatives aiming at tackling excessive short-termism?
Many aspects of shareholders’ and the capital markets’ short-termism will be the subject of a forthcoming Commission Green Paper on long-term financing of the European economy. It will also cover issues related to the above-mentioned mismatch of interests between asset owners and asset managers.
Why should institutional investors be obliged to provide information about their voting and engagement policies?
The objective is to promote shareholder engagement and ensure that institutional investors (pension funds, insurers, etc.) and their asset managers act in the best long-term interest of their beneficiaries and clients respectively. Transparency about voting and engagement policies would raise awareness on the importance of engagement, it would shed light on whether institutional investors and their asset managers take engagement seriously and how they fulfil their duties to act in the best long-term interest of their beneficiaries, including what the results of their engagement activities are.
This transparency would benefit all investors who would be able to invest on the basis of information on the voting and engagement policies of asset managers and institutional investors.
What is the Commission planning to propose as regards executive remuneration?
The Commission considers that companies should benefit from remuneration policies which stimulate longer-term value creation and that pay should be linked to performance. Poor remuneration policies and/or incentive structures lead to unjustified transfers of value from companies, and their shareholders and other stakeholders to executives. Given the insufficient progress across Member States following the previous recommendations on executive remuneration, the Commission it considers important to move forward and ensure that that shareholders hold the board accountable. This could be achieved by enhancing transparency on remuneration policies and individual remuneration of directors, as well as by granting shareholders the mandatory right to vote on remuneration policy and the remuneration report.
What are ‘related party transactions’ and why do the current rules need to be improved?
In case of related party transactions, companies contract directly with their directors or controlling shareholders. Such transactions may cause prejudice to the company and its minority shareholders, as they give the related party the opportunity to appropriate value belonging to the company. For this reason, adequate safeguards for the protection of shareholders’ interests are of great importance.
The current EU rules (1) require companies to include in their annual accounts a note on transactions entered into with related parties, stating the amount and the nature of the transaction and other necessary information. However, this requirement tends to be regarded as insufficient and in their reply to the 2011 Green Paper, a considerable proportion of stakeholders called for stronger safeguards. Therefore, the Commission will propose in 2013 an initiative aimed at improving shareholders’ control of related party transactions.
How does the initiative on board diversity fit with the Commission’s proposal introducing gender targets?
The two initiatives are complementary. The Commission’s proposal on gender targets sets an objective of a 40% presence of the under-represented sex amongst non-executive directors of companies listed on stock exchanges.
The initiative announced in the Action Plan aims to increase transparency and to have a broader diversity perspective, covering aspects such as age, nationality, professional and educational background and others. Moreover, the initiative will, in line with general corporate governance rules, be based on the “comply or explain” approach. Finally, it will cover all administrative, management and supervisory bodies in a company.
What is the ‘comply or explain’ approach and why does it need to be improved?
The corporate governance framework for listed companies in the European Union is a combination of legislation and ‘soft law’ (recommendations and corporate governance codes). Corporate governance codes present essential recommendations for the management and supervision of listed companies and standards for good and responsible governance. While corporate governance codes are adopted at national level, the EU legislation on company reporting (Directive 2006/46/EC) promotes their application by requiring that listed companies refer in their corporate governance statement to a code and that they report on its application on a ‘comply or explain’ basis.
This means in practice that a company choosing to depart from a corporate governance code has to explain which parts of the corporate governance code it has departed from and why it has done so. Therefore, the ‘comply or explain’ approach provides companies with the necessary flexibility to adapt their corporate governance to their specific situation. This approach only works if companies that depart from these codes provide sufficient explanations as to why they depart from them. There is however evidence of shortcomings in the application of the corporate governance codes when reporting on the ‘comply or explain’ basis: the information provided is in general unsatisfactory and the oversight by monitoring bodies is insufficient.
Does the Commission intend to propose measures on employee share ownership?
The Commission believes that employees’ interest in the sustainability of their company is an element to consider in the design of any well-functioning governance framework. Employees’ involvement in the affairs of a company may take the form of information, consultation and participation in the board. But it can also relate to forms of financial involvement, particularly to employees becoming shareholders. Since there are many angles to this issue (for instance taxation, social security and labour law) the Commission will analyse potential obstacles to employee share ownership in Member States, and will subsequently take appropriate action to encourage employee share ownership throughout Europe.
COMPANY LAW
What is European company law?
The legislation on company law includes a large number of Directives and regulations. The harmonisation of European company law covers the protection of interest of shareholders and others, the constitution and maintenance of public limited-liability companies’ capital, takeover bids, branch disclosure, mergers and divisions, minimum rules for single-member private limited-liability companies, shareholders’ rights and related areas such as financial reporting and accounting. It also includes different European legal forms such as the European Company (SE), the European Economic Interest Grouping (EEIG) and the European Cooperative Society (SCE).
What will the Commission propose as regards the European Private Company Statute?
The results of the 2012 public consultation on the future of EU company law show that stakeholders are hesitant as to the usefulness of continuing the negotiations on the proposal for a European Private Company Statute in the current political climate. The Commission will continue to explore alternative means improving the administrative and regulatory framework for SMEs acting cross-border. It will try to provide them with simple, flexible and unified rules across the EU to reduce the costs they are currently facing.
Will the Commission put forward a proposal on the cross-border transfers of seats?
The issue of the cross-border transfer of companies’ registered offices was addressed in the recent public consultation on the future of company law (IP/12/149). The majority of respondents expressed their interest and support for solutions at EU level which could facilitate cross-border transfers. However, further (economic) data – that could show that a possible future legislative initiative will bring real added value to European SMEs – is needed. Therefore, the Commission will shortly launch a public consultation to collect data. The results of the consultation should be known in late Spring 2013. On the basis of these data the Commission will consider a possible initiative.
What does the Commission intend to propose as regards groups of companies?
The 2012 public consultation (IP/12/149) has shown that stakeholders are in favour of well-targeted EU initiatives on groups of companies. The Commission will present an initiative that will improve the information available on groups and will recognise the concept of ‘group interest’.
Which company law are due to be merged and what is the purpose of this?
The purpose of merging different directives into a single directive is to simplify the existing legislation and to make it more accessible and comprehensible. The merged directive will include the provisions of the following directives:
division of public limited liability companies (82/891/EEC)
disclosure requirements in respect of branches (89/666/EEC)
cross-border mergers of limited liability companies (2005/56/EC)
coordination of safeguards (2009/101/EC)
single-member private limited liability companies (2009/102/EC)
mergers of public limited liability companies (2011/35/EU)
interconnection of central, commercial and companies registers (2012/17/EU)
formation of public limited liability companies and the maintenance and alteration of their capital (2012/30/EU).
ANNEX
Action Plan on European company law and corporate governance
Main initiatives
|
Initiative |
Instrument and expected timing |
||||
|
Disclosure of board diversity policy and of risk management arrangements |
Amendment of the accounting Directive, 2013 |
||||
|
Improving the visibility of shareholdings in listed companies in Europe |
Securities legislation, 2013 |
||||
|
Improving the quality of corporate governance reports and in particular the quality of explanations which should be provided by listed companies that depart from the corporate governance code provisions |
Possibly non-legislative initiative, 2013 |
||||
|
Possibly Shareholders’ rights Directive, 2013 |
||||
|
Working closely with competent national authorities and the European Securities and Markets Authority (ESMA) with a view to developing guidance to increase legal certainty as regards the relationship between investor cooperation on corporate governance issues and the rules on acting in concert |
Guidance, 2013 |
||||
|
Increasing awareness of the European Company (SE) Statute (including employees’ involvement) and possibly of the European Cooperative (SCE) Statute. |
Information campaign, 2013 |
||||
|
The Commission will continue to work on the follow-up to the SPE proposal with a view to enhancing cross-border opportunities for SMEs |
Further exploration |
||||
|
Identification of obstacles to employee share ownership in Member States |
On-going analysis |
|
Rules on cross-border transfer of registered office |
Further investigation, 2013 |
||
|
Study, 2013 and possibly amending the cross-border mergers Directive |
||
|
Codification of major company law Directives |
Proposal for a codified company law Directive, 2013 |
||
|
Improving the information available on groups and recognition of the concept of ‘group interest’ |
Initiative to be determined, 2014 |
Notes:
1 : Article 43(1)(7b) of Directive 78/660/EEC on annual accounts and Article 34(7b) of Directive 83/349/EEC on consolidated accounts
