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Brussels, 6th October 2004

Corporate governance: Commission urges Member States to ensure a strong role for independent directors

The European Commission has formally invited Member States, through a Commission Recommendation, to reinforce the presence and role of independent non-executive directors on listed companies’ boards. Protecting shareholders, employees and the public against potential conflicts of interest, by an independent check on management decisions, is particularly important to restore confidence in financial markets after recent scandals. The Commission has also adopted a Recommendation on directors’ remuneration (see IP/04/1183).

Internal Market Commissioner Frits Bolkestein said: “There are groups within listed companies which sometimes have different interests – management, major shareholders, minority shareholders. There need to be ‘referees’. So boards should have a sufficient number of independent non-executive or supervisory directors who can nip potential conflicts of interest in the bud. Independent directors have a role to play both in companies with dispersed ownership, where managers need to be made accountable to weak shareholders, and in companies with controlling shareholders, where independent directors can help protect minority shareholders.”

The non-binding Recommendation concentrates on the role of non-executive or supervisory directors in key areas where executive or managing directors may have conflicts of interest. It includes minimum standards for the qualifications, commitment and independence of non-executive or supervisory directors.

The main principles in the Recommendation are:

  • The administrative, managerial and supervisory bodies should include overall an appropriate balance of executive/managing and non-executive/supervisory directors so that no individual or small group can dominate decision-making.
  • Boards should be organised so that a sufficient number of independent non-executive or supervisory directors play an effective role in defining and dealing with potential conflicts of interest. To this end, nomination, remuneration and audit committees should normally be created within the (supervisory) board. The Recommendation defines minimum standards for the creation, composition and role of those committees.
  • A director is considered independent when free from any business, family or other relationship - with the company, its controlling shareholder or the management - which might jeopardise his or her judgement.
  • The (supervisory) board should be composed of members who, taken together, have the diversity of knowledge, judgement and experience to properly complete their tasks.
  • All directors should devote to their duties the necessary time and attention. When the appointment of a director is proposed, his or her other significant professional commitments should be disclosed.

The Recommendation is addressed to Member States. Since differing approaches to corporate governance are deeply rooted in national traditions, particular care has been taken to provide for maximum flexibility in the ways Member States can apply the principles in the Recommendation. The Recommendation takes account of efforts already made in Member States and aims by identifying best practices to foster convergence on these issues in the EU.

The Commission will closely monitor the application of this Recommendation to identify whether additional measures may be desirable in the medium term.

The full Recommendation is at:

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