By Richard Ufland and Tamsin Nicholds, Hogan Lovells International LLP
The European Commission has recently published a Green Paper on the EU Corporate Governance Framework.1 The Green Paper has been awaited with some trepidation, because of concerns that there might be demand for Europe-wide regulation with the attendant costs and adverse impact on the attraction of European stock markets that that would bring.
While the Green Paper does appear to be in favor of increased corporate governance scrutiny, many of the areas in which shortcomings are identified have already been addressed in the UK through the UK Corporate Governance Code (Governance Code), the UK Stewardship Code or the Companies Act 2006 (CA 2006). This article looks at how the Green Paper might pave the way for some changes which would diverge from the current position in the UK and the extent to which those changes appear to be justified.
The Green Paper is a starting point for a broad debate on the issues it raises. The consultation is open until July 22, 2011 and feedback is scheduled for the autumn of 2011 and any necessary legislative proposals will follow an impact assessment. Any substantive regulatory change is therefore some way away, but it is important that those who are involved in the UK market engage in the process at this stage to ensure that their views and concerns are taken into account.
— Division of CEO/Chair Roles
— Diversity of Board Composition
— Time Commitment
— Board Evaluation
— Directors' Remuneration
— Risk Management
The second question asks whether there are measures to be taken at EU level to promote employee share ownership. It is important that any regulatory barriers preventing or limiting companies offering shares to the employees should be removed. The amendment of the Prospectus Directive9 from next July goes some way to achieving that although it is arguably still too Euro-centric. Wider incentivization of employee share ownership would probably require tax related legislation outside the scope of the Commission. It also has to be noted that employee share ownership should be facilitated but not necessarily promoted over other types of savings and investments. While employees are generally long-term holders of stock, the need to encourage long holders cannot be achieved by over incentivizing employee share ownership.
The Green Paper is premised on the findings of an earlier study on monitoring and enforcement of corporate governance and considers that the "comply or explain" approach has had its difficulties. There are two areas of focus.
First, the Green Paper suggests that the level of explanations given is insufficient. It suggests that this could be resolved by giving detailed requirements for the information to be published. This is quite a retrograde suggestion in that the use of standard formats could easily lead both to boilerplate explanations and an entrenched view of the underlying approach which should be taken (rather than a choice based on what is appropriate for the company in question). The standard of corporate governance reporting seen in the UK appears to be generally improving as companies and their shareholders are becoming more engaged. It would be interesting to see if the issues identified in the 2008/2009 study are still prevalent.
Second, the Green Paper suggests that there should be monitoring by regulators or stock exchanges of whether the available information is sufficiently informative and comprehensive. In the UK, the Financial Reporting Review Panel’s (FRRP) remit was extended in July 2009 to include monitoring company compliance with the FSA's Disclosure and Transparency Rules (DTR) at DTR 7.1.5 and 7.2 relating to audit committees and corporate governance statements. The FRRP's review is restricted to ensuring that the required disclosures are given and does not extend to challenging companies in relation to the accuracy of the content. The FRRP does, however, look at the main areas of non-compliance which it has identified and commented on the clarity of reporting in its annual report for 2010. While the Green Paper expresses concerns with increasing the role of regulators, the shadow of the financial crisis does hang over it and the pervading sense of the Paper is that all, or at least listed, issuers should meet a certain standard in relation to their corporate governance and that leaving "enforcement" to shareholders will not be sufficient to meet that aim. There is even a suggestion that formal sanctions for failing to make adequate disclosure could be considered.
Richard Ufland is a partner at Hogan Lovells International LLP and Tamsin Nicholds is of Counsel. Both are members of the firm's Corporate Governance Unit. Richard specializes in corporate law including public and private mergers and acquisitions, buyouts, securities transactions and joint ventures. Telephone: +44 (0) 20 7296 2000; E-mail: email@example.com or firstname.lastname@example.org.
(c) 2011 Hogan Lovells International LLP
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