EU lays out a way forward for boards, shareholders, compliance

The European Union appears to be on the verge of taking collective action on corporate governance. The European Commission has issued a green paper – an early stage of policy-making – examining the role of boards and shareholders in the affairs of corporations, as well as the principle known as "comply or explain", which makes existing provisions in most countries voluntary.

• Boards: How do boards deal with the phenomenon of groupthink? What difference can policy make? The green paper's tentative answer lies in improving how boards work and ensuring they are composed of a mixed group of people. That means gender diversity, a variety of professional backgrounds and skills, and different nationalities. The inquiry will also look into guidelines about the availability and time commitment of directors, as well as risk management and director pay.
  
• Shareholders: The paper identifies several underlying reasons for what the commission calls "the lack of appropriate shareholder engagement", including short-termism in financial markets, principal-agent problems between investors and their asset managers, conflicts of interests and difficulties with shareholder cooperation. The green paper seeks views on encouraging them to take an interest in sustainable returns and longer term performance. It also wants ideas about the role of proxy voting agencies, protecting rights of minority shareholders, shareholder identification, and employee share ownership.
  
• Compliance and explanation: The commission seeks ways to improve monitoring and enforcement of existing national corporate governance codes, focusing in particular on quality of information provided by companies and the oversight by monitoring bodies.

In previous attempts – particularly after the lapses at Enron in the US, Parmalat in Italy and Ahold in the Netherlands – the European Commission has backed off, leaving the matter in the hand of member states, apart from a requirement for companies to make some sort of statement on their governance arrangements. But this time there seems to be a greater sense of urgency. After the financial 2007-09 financial crisis it seems less likely to yield to national sensibilities. You can tell that from the introductory paragraph:

The Commission recently reiterated its commitment to a strong and successful single market which refocuses on citizens and regains their trust. As its Communication Towards a Single Market Act stated, "It is of paramount importance that European businesses demonstrate the utmost responsibility not only towards their employees and shareholders but also towards society at large". Corporate governance and corporate social responsibility are key elements in building people's trust in the single market.

The way that the financial crisis spread across boundaries, together with a more centralising and interventionist commissioner – the former French agriculture minister Michel Barnier – now in charge of the directorate on the internal market, suggests stronger intent for collective, EU-wide action this time, not just a collection of separate national moves. But the paper notes that remedies for the financial sector might not be appropriate across all of industry.

This paper is not just an EU matter. The subtitle of the paper – "Text with EEA relevance" – suggests that any change in regulation would probably apply across the European Economic Area. This is, however, just a green paper, not a white one, which would signal legislative intent.

Source documents: The EU green paper "The EU corporate governance framework" is a 26-page pdf file. The consultation page gives links to other information, including how to reply. Comments, please, by July 22.