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Speech by Mr Frits Bolkestein

Member of the European Commission, in charge of the Internal Market, Taxation and Customs

The EU Action Plan for Corporate Governance

Conference on the German Corporate Governance Code
Berlin, 24 June 2004

Ladies and gentlemen,


I have been invited to speak to you today on the EU’s Corporate Governance Action Plan. But before I do so I should like to begin with a few words about the starting point for the Commission’s Action Plan, namely the developments in Member States on this issue.

A process of convergence in Member States’ approaches to Corporate Governance is already underway. Our over-arching objective at EU level is to encourage this process. A shining example of convergence is the diffusion of codes of corporate governance based on the “comply-or-explain” principle, including the Cromme code which we are celebrating today. We have also observed with satisfaction the growing tendency in Germany to establish nomination, remuneration and audit committees. The Commission wants to build on and stimulate this process of convergence through a mix of legislative and non-legislative measures.

We intend to foster further co-ordination and convergence, in particular through the creation of a European Corporate governance Forum.

The EU Action Plan on Corporate Governance

Turning now to consider the Action Plan in more detail. As you know, in May 2003 the European Commission unveiled an Action Plan for corporate governance aimed at strengthening the single market and at providing a comprehensive, dynamic and flexible framework for company law and corporate governance in Europe. Our approach is to be firm on the principles but flexible on their application.

Enron, Worldcom, Ahold and most recently Parmalat, are part of a hall of shame and the Action Plan takes account of the lessons to be learned from them. But the Action Plan is much more than just a response to recent financial scandals. It is also a response to the potential of the Internet for corporate information and to the success of the Internal Market. That success means that more European companies are operating across borders and that capital markets are increasingly integrated. The Action Plan will boost the efficiency of business which is good for Europe’s growth. Well-managed companies with strong Corporate Governance records outperform their competitors. Europe needs more of them to generate employment and long term sustainable growth.

The Action Plan has 3 main features: (i) modernising the board of Directors; (ii) increasing disclosure and transparency; and (iii) empowering shareholders.

Modernising the board of directors

Bringing the boards of directors into the twenty-first Century in terms of composition, remuneration and responsibilities is essential. Moreover it goes hand-in-hand with generating shareholder power. Knowledgeable and independent board members who understand their fiduciary responsibilities have an important role in ensuring the markets and shareholders have confidence in the way companies function and boards take decisions.

With respect to board composition, we consider that, in key areas where executive directors clearly have conflicts of interests, in particular, remuneration of directors, supervision of the audit of the company’s accounts and nominations, boards should be organised in such a way that a sufficient number of independent non-executive or supervisory directors play an effective role.

The Commission is therefore working on a Recommendation to promote the role of independent, non-executive or supervisory directors. I hope this will be ready for the Autumn of 2004. The Recommendation will invite Member States to consider the possibility of introducing in their national framework, on a comply-or-explain basis at the minimum, a set of guiding principles to be used by listed companies. Member States will be free, when implementing the Recommendation, to use the instruments best suited to their legal environment. I will come back later in this speech to the importance of audit committees which I think you have already been discussing this morning.

Following the Parmalat crisis, we have also accelerated work on: (1) the collective responsibility of all board members for financial and key non-financial statements; and (2) on the full disclosure of offshore Special Purpose Vehicles.

Improving Transparency and Disclosure

Disclosure requirements are a highly effective market-led way of rapidly achieving results. The second feature of our Action Plan is therefore to enhance corporate governance disclosure.

All listed companies will be required to include in their annual documents a coherent and descriptive statement covering the key elements of their corporate governance structures and practices. This should cover, inter alia, the operation of the shareholder meeting and its key powers, the composition and operation of the board and its committees, and a reference to a code on corporate governance, designated for use at national level, with which the company complies or in relation to which it explains deviations.

Generating shareholder power

Better disclosure will help the markets to play their disciplining role, but only if shareholders can make their voices heard. In consequence, the third element of our Action Plan is to generate shareholder power by strengthening shareholders’ rights in listed companies. I firmly believe that a more accountable relationship between shareholders and directors is necessary in order to control excesses. The flipside of the coin is, of course, that shareholders must also take their responsibilities seriously.

It is essential to enhance the exercise of a series of shareholders’ rights in listed companies (for example, the right to ask questions, to table resolutions, to vote in absentia, to participate in general meetings via electronic means) by enabling the use of modern information technology. These facilities should be offered to shareholders across the EU, and the problems that currently make cross-border voting almost impossible in practice should be solved urgently. I also believe there is a strong medium-to-long-term case for establishing real shareholder democracy in the EU: the Commission intends to undertake a study into the way in which the principle of one-share-one-vote can be translated into reality.

Another area where shareholders should be enabled to better exercise their monitoring is the remuneration of directors. I firmly believe that shareholders should decide on whether executive pay is set at appropriate levels.

In addition to the monitoring exercise by non-executive directors through the remuneration committee which I mentioned earlier, prior approval by the shareholder meeting of share and share option schemes in which directors participate should be required. In order to allow shareholders to decide based on full knowledge of the impact of directors’ pay, we also propose full disclosure in the annual accounts of remuneration policy, of details or remuneration of individual directors, and of the costs of such schemes for the company. We need to act swiftly on this and a Commission Recommendation which is scheduled for adoption in Autumn of this year, is also being prepared.

Statutory audit and accounting standards

I should like now to say a few words on the importance of reliable statutory audit since the EU’s work in this area is an important complement to what we are doing more generally on Corporate Governance. Although the functions of auditors as monitors of accounting and reporting have already been harmonized at the EU level, the Commission suggested in May 2003 that further urgent action was required so as to guarantee that investors and other interested parties be able to rely more fully on the accuracy of audited accounts. Our conviction was confirmed by recent financial scandals and a significant step forward has been taken with the proposal for modification of the existing directive on Statutory Audit which the Commission put forward on 16 March this year. The Directive will clarify the duties of statutory auditors, their independence and ethics, and introduce the full responsibility of the group auditor for the audit of consolidated accounts of groups of companies.

It also includes the proposal that all public interest entities should establish an audit committee composed exclusively of non-executive directors. At least one of the independent members of the committee must be competent in accounting and/or auditing. This proposal is controversial but the Commission considers it is crucial, in the light of recent scandals, in order to strengthen the independent monitoring of the financial reporting process and of the statutory audit.

International Co-operation

The Commission also perceives the need for a stronger coordination among supervisors across sectors and across borders in order to guarantee that national legislation be duly enforced. The recent scandals have emphasised that companies and audit firms are global operators whose failures cause damage to investors everywhere in the world. Therefore, our proposal provides the framework for cooperation between relevant authorities of third countries. The EU is engaged, in particular, in an intense dialogue with the US authorities, specifically the Securities and Exchange Commission and the PCAOB (Public Company Accounting Oversight Board).


I think we all agree on the fact that a sound corporate governance framework will be achieved neither by markets acting of their own accord, nor by the introduction of an overly prescriptive legal infrastructure. The challenge we are all facing here is to find the right balance between regulatory and market-driven incentives.

In this context, the role of the EU is first and foremost to encourage and complement, rather than to substitute, the efforts of companies and national legislators and regulators in Europe. In consequence, our approach focuses for the moment on a common approach at EU level on a few essential rules and a mechanism to encourage convergence amongst national codes, rather than establishing a European Corporate governance Code. I look forward to an interesting debate on whether you think we have got the balance right.

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