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Mr Frits Bolkestein
Member of the European Commission, in charge of the Internal Market, Taxation and Customs
Corporate Governance in the European Union
European Corporate Governance Conference
The Hague, 18 October 2004

European Commission - SPEECH/04/460   18/10/2004

Other available languages: none

SPEECH/04/460












Mr Frits Bolkestein

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



Corporate Governance in the European Union
























European Corporate Governance Conference
The Hague, 18 October 2004

It is an honour and a particular personal pleasure for me to deliver the opening speech at this conference organised by the Dutch Presidency. This is the first time that a Presidency of the European Union has organised such a high level gathering of distinguished experts in corporate governance to exchange views on how to promote sound corporate governance practices across the European Union. The Presidency, and in particular the Ministry of Finance, deserve our congratulations for their initiative. I hope it will not be the last such initiative.

This conference is timely. It takes place at a moment when the European Commission has just taken the first measures to implement the EU’s Action Plan on Company Law and Corporate Governance. In so doing, the Commission has been praised but it has also been criticised by the business community, perhaps because there are some misunderstandings of the intentions of the Commission. Dialogue between regulators, issuers, investors and all interested parties is an essential precondition for mutual understanding. So I hope I will be able to slay some of the dragons today.

  1. The Economic Importance of Corporate Governance

Corporate governance is now high on the European political agenda. This is not just a response to the wave of scandals in the US and in Europe. It is due first and foremost to the fact that businesses which have sound corporate governance practices perform better and are valued more highly. Good corporate governance is an essential prerequisite for the integrity and credibility of our financial institutions, stock exchanges and individual corporations, indeed of our capital markets in their entirety.

Corporate governance is not an end in itself. Its aim is to promote the long-term success of companies and economic growth. Asking shareholders to support companies that take risks and embark on projects with only long-term payoffs requires trust. Good corporate governance helps to create this trust.

We have to pose ourselves a simple question. Is it not the well run, diligent, transparent, productive companies – sensitive to the concerns of their shareholders – which act ethically and environmentally, which will survive in the long term? Without doubt, the answer is yes. Those with a short-term view, which engage in cowboy-like activities and are untransparent: they won’t survive. The list of victims is long. Many have suffered as a result of their activities.

In today’s integrated markets, failure to deal with the regulatory issues associated with corporate governance will have repercussions on global financial markets and jeopardise financial stability. That is why responsible policy makers at all levels cannot ignore the issue and why the European Union, and the European Commission must not.

  1. The Role of the EU – Fostering Greater Convergence

These concerns, the corporate scandals, have triggered discussions in the EU and in other parts of the world. As a result of them, the Commission is now promoting the development of a sound corporate governance framework at the level of the European Union.

We have, of course, taken account of the great diversity of corporate governance practices and systems within the EU. This is why we proposed a balance of binding and non-binding measures in the Action Plan. But with a clear objective: to promote greater convergence within the European Union towards best corporate governance practice. The dosage and calibration of activity at EU level has been carefully thought out – respecting the subsidiarity and proportionality principles of the Treaty and attentive to different national cultures and approaches.

The Two Recommendations

The two Commission recommendations on directors’ remuneration and on the role of non-executive and supervisory directors, which were adopted recently, are aimed at meeting this objective. These recommendations were based on a thorough assessment of the situation at national level and of the efforts in a number of Member States to improve their corporate governance framework. They have been subject to extensive consultation of all interested parties. The Commission has taken due account of the, sometimes contradictory, comments received from issuers and investors.

Both recommendations aim at improving the integrity and accountability of companies’ boards. We believe non-executive and supervisory directors have a duty to fill the gap between uninformed shareholders and fully informed executive managers, by making executives more accountable. Special attention needs to be paid to the role, quality and integrity of non-executive directors.

Board members must be truly accountable to the owners of the company. Shareholders need to be able to ensure that management pursues their interests. They own the company. Not managers. Shareholders must therefore be given the means to act as watchdogs, to protect their interests as well as those of the other stakeholders. This is particularly the case in areas where there are conflicts of interest such as in remuneration matters. The Commission has recommended that Member States should ensure a high level of transparency for directors’ remuneration and encourage shareholders to make their voice heard on the remuneration policy of the company and on remuneration items which are closely linked to the share price.

The European Corporate Governance Forum

Another means to foster convergence of corporate governance systems and practice is to encourage an exchange of information and best practice in the Member States. That is why the Commission has decided to set up a “European Corporate Governance Forum” to co-incide with this Conference today. This Forum, which should meet for the first time before the end of the year, will be composed of 15 outstanding high-level experts in corporate governance – many of whom are present at today’s conference. We have sought to ensure a balanced representation of all those having an interest in sound corporate governance practices: investors, issuers, regulators, worker representatives and academics. A spokesperson will be appointed from amongst the forum’s members.

Fears have been expressed about the Forum playing a regulatory role. Some allege it will secretly design a fully-fledged European corporate governance code. I want to reassure you: this is not the Commission’s intention.

The objective of gathering a small group of very knowledgeable people is to help the convergence of national efforts, encourage best practice and advise the Commission. It will however not provide advice or expertise on legislative initiatives.

We will, of course, ensure transparency in the operation of the Forum.

  1. Transatlantic Convergence

Capital markets, economies and businesses are interconnected and global. What we do will affect, for example, the US and vice versa. This makes it essential to ensure effective cooperation with our main trading partners, in particular with the United States. Yet the approaches followed on both side sides of the Atlantic are quite different. The European approach is essentially based on a principle and “comply or explain” basis. The US approach is rule-based and relies more on law enforcement.

What is important is that on both side of the Atlantic, we aim for the same basic goals. Wherever possible, we should aim to converge our thinking, before laws are made. If we don’t do this, if we don’t make these efforts, friction will arise; and we will be faced with downstream regulatory repair. And we know how difficult this is – on both sides of the Atlantic.

I believe that, for example, ultimately the EU and US will have to cooperate on recognising the broad equivalence of their own accounting rules – the IAS and US GAAP. We are all encouraged by the cooperation between the FASB and IASB. But much more progress is needed over the coming months.

  1. Regulatory Initiatives

Shareholders’ Rights

There are, however, cases where convergence may not be enough, especially when greater integration of our capital markets is hindered by the persistence of deeply-rooted legal obstacles which justify regulatory initiatives.

This is notably the case when it comes to facilitating the exercise of certain basic rights by shareholders, in particular voting rights. In cross-border situations, difficulties arise from the presence of a chain of securities intermediaries between the issuer and the ultimate investor who has an economic interest in the shares. In mid-September, the European Commission launched a public consultation addressing this issue and is seeking views on the design of a framework defining intermediaries’ obligations and investors’ rights. This should help us in our efforts to prepare a proposal for a directive aiming to facilitate the exercise of basic shareholders’ rights throughout the EU by the end of next year.

In order to allow shareholders to exercise greater control, they should first be better informed about their rights and the company’s corporate governance practices. This is one of the reasons why the Commission intends to propose that all listed companies should be required to include in their annual documents a coherent and descriptive statement covering the key elements of their corporate governance structures and practices. They should indicate what code they follow on a “comply or explain” basis. They should also disclose complete information with regard to group’s structure and intra-group relations, including the listing of all Special Purpose Vehicles and other offshore structures. The Commission intends to adopt a proposal in this respect very soon.

Clear and transparent information needs to be accompanied by effective external control mechanisms. The independent audit of a company and the required disclosure to the supervisory bodies constitute the backbone of an effective financial market regulation. Concerns have been expressed about whether the incentives for external auditors are properly aligned with the interests of the shareholders. Urgent action was required to restore the credibility of external audits. This led the European Commission to adopt the proposal for a Directive to modernise Statutory Audit within the European Union. This proposal introduces new requirements concerning the manner in which an audit should be carried out and the structures needed to ensure audit quality and trust in the audit function.

One important issue in relation to corporate governance is the requirement for an audit committee for public interest entities – this is not popular with some Member States. But I strongly believe that audit committees are crucial for ensuring audit quality and to keep a healthy distance between the auditor and management.

I am confident that the efficient work of the Irish and Dutch presidencies will lead to political agreement around mid November. This could open the door to the prospect of its adoption in one reading by summer 2005.

  1. Conclusion

To conclude:- “Is there a clear role for the EU in this process?”

I am convinced the answer is yes. EU action on corporate governance and company law is fully justified as part of the EU economic reform agenda. This action must be measured and proportionate in order to ensure financial stability and market confidence. Corporate governance systems within the EU must all move towards higher standards. Shareholders must exercise their rights across EU borders.

We have a lot to learn from each other. This is why the Corporate Governance Forum the Commission is setting up and the Conference today are important.

Corporate governance is not an optional bolt-on. It is part of modern economics and business practice. Our challenge is to lead the debate in the European Union, and beyond and to adopt the right policy approach to the different issues. I am sure your discussions today will help meet this objective.

Ladies and Gentlemen, thank you for your attention.


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