EU Green Paper on Corporate Governance: Further Costly Regulatory Change or Leveling the EU Playing Field?

Bloomberg Law®, an integrated legal research and business intelligence solution, combines trusted news and analysis with cutting-edge technology to provide legal professionals tools to be...

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.1The 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.


The scope of the Green Paper is broad. It is largely focused on listed companies, but asks:

  • Should there be a differentiated approach based on the size of the company (as there currently is within the Governance Code and as provided by the Quoted Company Alliance Corporate Governance Guidelines for Smaller Quoted Companies2)?
  • Should there be a differentiated approach based on the structure of the company? Many continental European companies have a controlling shareholder and therefore the corporate governance issues which arise are different from those that arise in a listed company with widely held shares. While the difficulties of having a majority shareholder are clearly corporate governance issues, in the UK we tend to think of those of being of a different category to the type of corporate governance issues dealt with in the corporate governance codes. Minority shareholder protections are entrenched in company law and through the Listing Rules (LR) of the UK Listing Authority. Bringing these matters within the scope of corporate governance codes which call for a “comply or explain” approach does not seem appropriate.
  • Should the EU take action in relation to corporate governance in unlisted companies? The demand for improving corporate governance in unlisted companies is clearly increasing. The European Confederation of Directors’ Associations (ecoDa) published its Corporate Governance Guidance and Principles for Unlisted Companies in Europe in March last year and there has been significant engagement, in particular, from family businesses and private equity.3 Whether the EU needs to or should become involved in this area remains less clear.

In 2010, the Commission published a Green Paper on Corporate Governance in Financial Institutions4 which addressed the challenges in ensuring effective risk management and systematic risk in financial institutions, in particular in the wake of the financial crisis. The current paper is not focused on the financial crisis and is looking at ways of bringing about general improvements in corporate governance. The Green Paper itself is broken down into three areas of focus: the board of directors, shareholders’ involvement and the monitoring and enforcement of existing national corporate governance codes.



The Green Paper asks whether the EU should ensure that the functions and duties of the CEO and chairperson are clearly divided. In the UK, we believe that a clear division of these roles is an important factor in strong corporate governance and the roles are not expected to be exercised by the same individual. The Governance Code covers both issues (Main Principle A.2 and Code Provision A.2.1). The EU proposal is in line with the current UK position and there is no mandate in the UK market for requiring legislation at an EU level.


The Green Paper looks at three types of diversity in the boardroom: professional, international and gender diversity. Strategies to improve board gender diversity are being actively pursued through various channels at present5 which makes comparisons of the UK position against the EU proposals a moving target. The Financial Reporting Council (FRC) is currently consulting on changes to the Governance Code to require reporting on the companies’ gender diversity policy and progress on the application of the policy on an annual basis.6 That would bring the current UK requirements in line with the specific proposals in the Green Paper. Perhaps more interesting from a UK perspective is the discussion on professional and international diversity. Statistically, EU boards seem to lack a spread of professional and international expertise — 48 percent of boards have no director with a sales and marketing profile and 37 percent of audit committees are without someone with chief financial officer experience, while one in four European listed companies has no foreign directors on its board.7Specific quotas seem inappropriate to deal with this issue. In any case, audit committees are required to have at least one member with competence in accounting and/or audit. However, these are useful points for boards to consider in drawing up diversity policies.


The Green Paper is consulting over an EU limit on the number of directorships which a non-executive director may hold. The Governance Code suggests that full time directors should not take on more than one non-executive directorship in a FTSE 100-listed company nor the chairmanship of such a company. In any event, directors are required by Main Principle B.3 of the Governance Code to allocate sufficient time to their role. Companies should specify the time commitment required from new non-executives and the non-executives should undertake to have sufficient time to undertake what is expected of them. A fixed limit on the number of directorships that one person can successfully hold at the same time is quite difficult to impose as roles vary in their time requirements and the amount of time which different individuals are prepared to commit to their various duties varies. The subjective test we currently have which can be policed by nomination committees on appointment and at annual evaluations would seem more appropriate.


The Green Paper’s proposals for board evaluation are in line with the recent changes in the Governance Code. The Green Paper asks if listed companies should be encouraged to conduct external evaluations every three years, but notes the limited number of service providers in the market which was a factor in limiting the requirement to the FTSE 350 in the UK. The paper also stresses the importance of confidentiality, suggesting that subsequent disclosure is limited to explaining the review process.


The Commission has previously addressed issues relating to directors’ remuneration through recommendations, which are non-binding.8 The UK requirements for disclosure cover the issues raised by the Green Paper (disclosure of remuneration policy and individual remuneration of executive and non-executive directors) and also require a shareholder advisory vote on the remuneration report. Good, detailed disclosure and the advisory vote combine to give a very powerful control to shareholders and certain UK companies have had to reconsider their remuneration policy not just in the light of shareholder votes against the remuneration report but also in response to high levels of dissent being voiced. There does not seem to be any reason not to extend these requirements across those Member States which have not already implemented them. The nature of the vote as advisory is important though. It would seriously affect the competitive position of European business if directors’ remuneration was subject to subsequent shareholder approvals.


The Green Paper looks at two risk management issues. First, the responsibility of the board to determine the risk policy of the company and to report on it to the shareholders and, second, whether risk disclosures should also relate to “societal risks” (i.e., risks which the companies’ activities represent to the community rather than or as well as to its own success). Risk management and internal control was a major area of focus in the FRC’s review resulting in the Governance Code which emphasizes the board’s responsibility for determining the company’s risk appetite and reporting annually on risk management. Disclosure of corporate social responsibility issues is widely made in voluntary Operational and Financial Reviews, but is also required by the business review requirements of section 417 CA 2006 (which requires quoted companies to make disclosures relating to the environment, employees and social and community issues to the extent necessary for an understanding of the development, performance or position of the company’s business). It is difficult to see how any heavier disclosure requirement than this could be justified.


If part of the aim of good corporate governance is to establish a workable method of dealing with the principal-agent problem in traded companies (that is, the fact that the managers of the company who are not the owners are in practical control) then shareholders seem to be the obvious enforcers. If we want corporate governance to protect a wider group of stakeholders and produce a broadly more successful set of private enterprises in the EU then shareholders no longer seem so obvious a candidate. Shareholders have a limited exposure to losses and can easily exit by selling their investment. The Commission considers various options for improving shareholder engagement:

  • A requirement for institutional investors to publish their voting policies and records. The Green Paper suggests that the majority of respondents to the 2010 Green Paper broadly supported such a move. Key respondents from the UK, such as the Financial Services Authority (FSA) and the British Bankers Association, gave only limited support referring to the Stewardship Code. The FSA warned of creating a regulatory uneven playing field for institutions in the EU. It is unlikely that voting policies published in advance could amount to anything more than the type of guidelines already seen from collective investor bodies.
  • A request for suggestions for regulatory changes which might redress any regulatory bias towards short-termism.
  • Querying whether there are measures which could be taken to change the incentivization and performance evaluation of investments managers to encourage them to manage with a longer term view.
  • Using EU law to promote more effective management of asset managers by institutional shareholders. The suggestions are centered on greater transparency and therefore are premised on a willingness of investors to review and take action based on those disclosures.
  • Using EU law to protect the independence of asset managers from conflicts (e.g., if their parent company provides services to the investee company).
  • EU moves to facilitate shareholder co-operation.
  • The need to regulate proxy advisers.
  • Concerns around issuers’ ability to identify their shareholders.

The paper also raises two distinct questions relating to shareholders. The first relates to minority shareholders in companies with a controlling shareholder and the possible introduction of rules at an EU level relating to the approval of related party transactions. As issuers with premium listings in the UK are subject to the related party transactions rules, set out at LR 13 at present, the introduction of such rules at an EU level would not be a major change. It would be a new requirement for standard listings/global depositary receipt issuers.

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.


Corporate governance is largely policed in the EU through a “comply or explain” application of governance codes. In that sense, the Governance Code is not prescriptive as to what constitutes good corporate governance but regards transparency on corporate governance as an essential requirement. This means that the approach taken by a particular issuer on a specified issue is disclosed, that the disclosure is accurate (it represents what the company actually does) and that the explanation allows an investor to understand what the company is doing.

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.


The Green Paper raises a number of good questions relating to corporate governance and its enforcement. For that reason, many of those questions have already been discussed extensively in the UK and solutions adopted, even if the results are not yet being seen. This paper remains important for UK companies. UK market participants will be concerned to ensure that any changes arising from the issues aired in the Paper are proportionate and do not lead to a level of regulation which deters prospective issuers from coming to EU stock markets.

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: or  

(c) 2011 Hogan Lovells International LLP


This document and any discussions set forth herein are for informational purposes only, and should not be construed as legal advice, which has to be addressed to particular facts and circumstances involved in any given situation. Review or use of the document and any discussions does not create an attorney-client relationship with the author or publisher. To the extent that this document may contain suggested provisions, they will require modification to suit a particular transaction, jurisdiction or situation. Please consult with an attorney with the appropriate level of experience if you have any questions. Any tax information contained in the document or discussions is not intended to be used, and cannot be used, for purposes of avoiding penalties imposed under the United States Internal Revenue Code. Any opinions expressed are those of the author. The Bureau of National Affairs, Inc. and its affiliated entities do not take responsibility for the content in this document or discussions and do not make any representation or warranty as to their completeness or accuracy.  

©2014 The Bureau of National Affairs, Inc. All rights reserved. Bloomberg Law Reports ® is a registered trademark and service mark of The Bureau of National Affairs, Inc.  

Request Bloomberg Law®