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European Commissioner for Internal Market and
Listed Companies and Legislators in Dialogue Conference
Minister, Ladies and Gentlemen,
It is a pleasure for me to be here this morning to contribute to this dialogue between listed companies and legislators. You have asked me to talk about developments at EU level. In particular, how we are meeting the challenge of balancing the need to combat fraud, in the light of international financial scandals, with improving the competitiveness of EU business.
The two main guiding principles for our actions in the area of corporate governance and company law are: (1) improving transparency; and (2) empowering shareholders. These principles are equally valid for both objectives of combating fraud and improving competitiveness.
When the Commission adopted its Company Law and Corporate Governance Action Plan in 2003, financial scandals were uppermost in everyone’s mind. The short term priorities were therefore set with the primary objective of restoring investor confidence.
We are now about to embark on the medium term phase of the Action Plan. To my mind, the context for the medium term is different. The main thrust for what we will do over the next four to five years must be the Lisbon agenda and competitiveness, together with the Commission’s efforts on better regulation. This does not mean that the pendulum must swing back in the opposite direction. We must build on what we have in place and our two guiding principles - transparency and shareholder empowerment - will remain the same. But the emphasis must now be on ensuring our companies can thrive and make the most of the opportunities of globalisation. Before I consider how we might do this in the medium term, I would like to look at what has been achieved in the short term.
2. Short term priorities
a) Promote good corporate governance
Our first priority has been to promote good governance practices throughout the EU. Corporate governance practices vary among Member States because of their different economic, social and legal traditions. Nevertheless, there is a clear market-driven trend towards convergence in Europe. This phenomenon is likely to develop further with the growing integration of European capital markets. Indeed, I think that market participants, including investors, have every interest in taking the view that such convergence is vital for integration of our capital markets – and even for economic growth.
But rest assured: I have no intention of suggesting that the Commission should, in consequence, impose a European Corporate Governance code. There is no one-size-fits-all approach in corporate governance. The Commission should continue to encourage “best practices” to develop according to the demands of ever more integrated markets.
In implementing the Action Plan, the Commission has recognised that in this area soft law instruments such as recommendations, rather than prescriptive detailed legislation, are most appropriate. In so doing, the Commission was conscious of the need not to overburden companies with too much regulation. This “light touch” approach has also been followed in the European Corporate Governance Forum. This forum aims to promote convergence of Corporate Governance Codes through discussion and exchange of best practices.
Under our proposal to amend the Accounting Directives we have suggested that listed companies should disclose their corporate governance practices in an annual corporate governance statement. And where they depart from a chosen corporate governance code they must explain why. This is to set, as a minimum, the so-called “comply-or-explain” principle leaving it for the market to fill in the details. Through this mechanism we hope that shareholders will be in a position to make better informed decisions.
b) Transparency in company accounts
Our second priority has been to improve transparency in company accounts. We have proposed that, where so-called “Special Purpose Vehicles” are used to remove assets or liabilities from the balance sheet, this should be disclosed. Without disclosure, investors are kept in the dark on a matter which is highly relevant to their decision-making.
The same proposal also clarifies that board members have a collective duty to ensure that financial statements are prepared properly. I very much hope that this proposal will be adopted by the Parliament and the Council before the end of the year. Discussions are likely to focus in the coming weeks on how we can set the thresholds for application of the accounting directives at the right level to ensure that Member States have appropriate flexibility to lighten the burden for SMEs.
c) Shareholder rights
Our third priority relates to shareholders rights, in particular, cross border exercise of shareholder rights.
We must ensure that all shareholders, including non-resident shareholders, are able to exercise their rights easily. This is essential to shareholder democracy. The minimum here is to enable shareholders’ to participate in and vote at shareholders meetings.
To that end I intend to propose to my colleagues in the College, before the end of this year, a directive which aims at removing practical and legal obstacles that hinder the exercise of shareholder rights in a cross-border context. Our proposal will, of course, be subject to a rigorous impact assessment.
d) Higher quality in auditors’ work
Our fourth short term priority has been improving the EU audit framework.
Clearly, we cannot expect auditors to act as policemen. But they do have a public interest role to play. The audit profession in most Member States has, in the past, been self-regulated. But times have changed. Public oversight will soon become a reality across the EU. This should promote high quality audits and help enhance the credibility of auditors’ work in the eyes of the public. Credible checks of financial statements are crucial to the confidence in our companies and financial markets.
On the other hand, I am concerned that auditors are often perceived as having very deep pockets. Many seem to think that if damages cannot be recouped from companies, then the auditors should carry the can. Some Member States have already limited auditor liability or are moving in that direction. There are good arguments for analysing this issue at EU level, given the implications both for the internal market and on competition. As a first step, the Commission is commissioning an external study on auditor liability and has set up a group of market experts. Once we have the results of this work we will consider what recommendations may be appropriate.
3. Medium term priorities: Future of the Company Law Action Plan
In the medium to long term our actions must respond to the needs of the market and all interested parties must have the opportunity to be involved in shaping our policies. That is why I announced at the UK Presidency Corporate Governance Conference in London on Monday of this week that the Commission will, in the coming weeks, issue a consultation document followed by a three month period for comments.
I want to know whether the priorities originally set in the Action Plan for 2006 -2008 still respond to market needs. The consultation will include the issue of how to improve further shareholder democracy and the merits of the “one share, one vote” principle. I personally see merits in this principle that should bring a better balance between the owners of the capital of a company and those responsible for its day-to-day control.
Furthermore, as part of the drive towards better regulation, we envisage a recasting of European Company Law to make it more “user friendly”. This implies the adoption of a single legislative text which simultaneously modernises and codifies the existing company law directives.
4. Concluding remarks
Minister, Ladies and Gentlemen, to conclude. I am a firm believer that “less is more”. The Commission’s short term initiatives under the Company Law Action Plan have sought to restore some investor confidence but to strike a balance by establishing a few key rules at EU level and leaving the details to the markets and Member States.
Protectionism and unnecessary red tape can strangle business in Europe. And the costs of regulation should not outweigh the advantage of gaining access to capital via listing. As we move to the medium-term of the Action Plan, our main concerns must be to encourage competitiveness and apply better regulation principles in full. I would like to hear your views today, and in response to our consultation, on what should be the next steps. We need your help to get the balance right.
Thank you for your attention.