Mark Pring provides a pan-European perspective of corporate governance.

Companies and governments alike are now recognising the practical benefits of establishing a corporate governance regime, at least in name. Perhaps most significantly, international investors are increasingly taking account of such regimes when making investment decisions and are actively monitoring those corporations in which they decide to invest. What is harder to judge is whether any particular governance regime is more than skin deep and whether investors' 'due diligence' can ever go far enough.

Corporate governance
Across Europe the laws and regulations affecting corporate entities remain varied both in theoretical scope and practical application. In addition, there are different corporate 'cultures' within national boundaries and/or business sectors. Perceptions and expectations as to what corporate governance is and what it can achieve are bound, therefore, to fluctuate.

Only the broadest definition of corporate governance can therefore be offered, namely the process of aligning the interests of the managers of a corporate entity with those of all of its stakeholders - employees, creditors and, especially, shareholders.

Is there a recognised set of common standards? Unfortunately there is no straightforward answer.

The OECD 'Principles of Corporate Governance' (endorsed in 1999) are gaining increasing recognition as a set of minimum, outline standards. Among key principles are:

  • protection of shareholders' voting rights and ability to influence corporate strategies;
  • increased transparency with regard to executive remuneration;
  • increased use of international accounting standards;
  • appointment of more (and more able) 'independent' directors; and
  • greater internal controls.

    As minimum standards, however, these are considered to be far more relevant to 'developing' and 'transition' economies. In advanced economies, such developments have supposedly already taken place (although this may be a matter of form rather than of substance1). The OECD is now taking a more proactive stance where it perceives a failure in corporate governance. In November 2000, for instance, it published a new code of conduct for firms operating in Russia (coinciding with the use by Standard & Poor's of corporate governance standards within its rating systems for Russian firms). Certain other Eastern European countries require similar attention: in a survey of regimes in 25 emerging markets in October 20002, Russia came bottom with a score of 2.3, the Czech Republic next with 2.7 and Poland seventh from bottom with 3.0.

    Is there a common European corporate governance regime? The EU's stated objectives of 'harmonisation' and 'consumer protection' have led to the extension of the liabilities of companies and their directors and officers in a number of spheres - most notably employment, health and safety, and environmental legislation. The continuing delay, however, in the implementation of the Fifth Company Law Directive 3 (first proposed in 1972 to deal with the structure of public limited companies, in particular the power and obligations of their various organs) demonstrates the obstacles facing any initiatives seeking to impose uniform corporate governance standards at a supra-national level.

    Certain recognised key corporate governance indicators are also taking root. Corporations and/or regulators in a number of individual European nations are, for example, adopting international accounting standards. In Germany (following the passing of permissive legislation), whilst only 13% of DAX 30 companies were reporting financial accounts using IAS or US GAAP in November 1998, by November 1999 63% were doing so. In the UK, in the face of the increasing SEC scrutiny of audit reports relating to foreign SEC registrants, the Auditing Practices Board issued in late 2000 new material on quality control of audits and on communications between auditors and directors which is more in line with US GAAP provisions.

    The adoption of such accounting standards is just one of a number of key corporate governance indicators, although it is the most easily (and transparently) regulated. The establishment of a wider regime has been more haphazard, even among Western European nations.

    At a governmental level, considerable profile has been given to the adoption in the UK of a 'Combined Code' (setting out the principles of 'good corporate governance' and a code of practice that listed companies are expected to follow), which sits alongside the Listing Rules issued by the Financial Services Authority. That Combined Code embraces (at least to some degree) the key recommendations of three separate reports (Cadbury, Greenbury and Hampel) which dealt with various aspects of the regulation of directors and were stimulated by a series of corporate collapses, including Maxwell and BCCI. The accountants' regulatory body, the ICAEW, has also published (with the support and endorsement of the Stock Exchange) the Turnbull guidance for directors on the establishment and monitoring of "internal controls".

    Finally (and more fundamentally) the Company Law Review Steering Group recently published a 395-page consultation document - Completing the Structure - setting out its proposals to reform English company law, including in relation to directors' duties and financial reporting. It is proposed (amongst other matters) that a statutory statement of directors' duties would require them to act in such collective interests, take account of the short - and long - term consequences of their decisions and 'have regard to' employees, customers, suppliers, the impact on the community and the environment and, key for shareholders, the company's reputation. The Steering Group is due to present its final report to Ministers in the near future at which point it will be published.

    Similar, although less sweeping, codification initiatives are taking place in other European jurisdictions4. In France in 1999 the AFG-ASFFI fund managers' association published a stringent code of best practice addressing breaches of duty by CAC 40 companies. In the same year the Viénot Committee updated an earlier general corporate governance code (in response to draft company law reforms) which, amongst other matters, dealt with the release of more detail regarding executive remuneration and the splitting of the responsibilities of the 'président-directeur' between a separate board chairman and a chief executive. In Germany, key legislation has imposed new responsibilities on supervisory boards and has led to much greater disclosure of the existence and identity of the audit, remuneration and nomination committees.

    In January 2000, a group of German business leaders drafted a set of standards for listed companies, including the timing of price-sensitive information.

    It is worth noting that, even in those countries where high profile corporate governance reforms take place, questions remain as to whether the 'managers' are prepared in practice to align their interests with those of shareholders.

    The strongest will for improved corporate governance remains with the shareholders in most countries and this above all explains the uneven picture across Europe. Pension funds such as DWS and Union Investment in Germany are increasingly strident in scrutinising corporate performance.

    Shareholder groups have also grown in recent years. In Sweden, for instance, the 'Shareholders' Association' helped block a merger between Volvo and Renault. Such groups may even demand and gain seats on the board as occurred to a group of investors in France's Groupe André (supported by the 'Association for the Defence of Minority Shareholders').

    Such action will help ensure that where governments or regulators are slow to respond, shareholders will maintain the trend towards increased corporate governance. In reality, this can only be achieved in an environment where companies and their directors can see (or are made to see) the relative benefits as opposed to burdens of increased corporate governance.

    1 In a November 1999 comparison by Davis Global Advisors, Inc of how far in practice the five major world economies complied with the OECD guidelines, Japan 'scored' only 2.9 out of 10 and Germany and France 4.2 and 4.7 respectively.

    2 CLSA Global Emerging Markets

    3 OJ C240/83, as amended

    4 A detailed collation of (full text) corporate governance codes, principles of corporate governance and corporate governance reforms for a number of countries can be found at