Corporate governance practices in Europe vary dramatically from country to country and company to company, Jean-Nicolas Caprasse explains.

Good governance of a company cannot guarantee the success of its business, but requirements of adequate disclosure, accountability and control can ensure that appropriate rules and regulations are in place to produce an environment favourable to success. In addition, good governance can make a significant contribution to the prevention of malpractice and fraud, although it cannot prevent them absolutely.

A growing number of institutional investors, therefore, like to examine the corporate governance standards and practices applied by the companies they invest in, as part of their overall investment strategy and as a means of protecting their interests and rights asowners.

However, in Europe, corporate governance practices vary dramatically from country to country and company to company, making it exceedingly difficult and time-consuming for investors to compare the corporate governance practices of companies within their potential investment portfolio.

Déminor, an independent consultancy which acts on behalf of external shareholders, has, therefore, launched a European corporate governance rating service which will rate over 160 blue chip companies from six European countries, exclusively on corporate governance criteria. Each company is analysed and rated against a European benchmark which we have developed and continuously updated since 1993 in collaboration with large institutional investors who act as opinion leaders in this area.
The indicators can be classified into four main categories:
• Rights and duties of shareholders: criteria concerning voting right restrictions, pre-emption rights with capital increases, voting issues, shareholder proposals and voting procedures.
• Strength of takeover defences: the existence of measures such as poison pills, golden parachutes, extensive cross-shareholdings and co-optation systems, that could be used to protect the company from a hostile takeover and disenfranchisement of shareholders.
• Disclosure: the transparency of a corporation, measured by the quantity and quality of non-financial information on its governance structure, such as independent board members, board committees, directors' remuneration, accounting standards, information on major shareholders, environmental information, etc.
• Board structure: all issues relating to the governance of a board, such as independent directors, separate chairman and chief executive, election of the board, directors' remuneration and the workings and authorities of board committees.

Each company is rated in each of the four categories on a scale from A, representing best practice, to E, the most questionable standard. The first analyses and ratings will be produced shortly, based on the 1998 annual reports, articles of association, resolutions passed at 1999 annual meetings and other relevant, publicly available information. Ratings will be updated annually to reflect changes in the companies' performance.

National variations
We will also shortly be releasing the results of our 1999 European corporate governance survey, updating the research which we did in 1996 and 1997. The 1997 survey polled 110 institutional investors and covered 248 corporations in nine main European stock indices. The results showed that UK corporations were then performing best with regard to investor demands on corporate governance. We found that the debate on corporate governance was gaining momentum in France, the Netherlands, Belgium and Sweden, while other countries (Germany, Switzerland, Italy and Spain) were lagging.In 1997, we found that the presence of non-executive and independent directors was considered the most important corporate governance parameter, admittedly by a very narrow margin. We commented at the time that “the issue of independence is without exception one of the most neglected issues in all countries.”

We found generally that there were substantial gaps between investors' expectations and the corporate governance standards achieved by companies and made a number of recommendations for European companies wishing to compete for international capital. These included increasing transparency by keeping their shareholders better informed of their own governance standards and practices and increasing accountability by allowing more independent directors on their boards and committees.

Looking at a first sample of companies scrutinised for the 1999 rating, it is clear that the recent misjudgements and thoughtlessness in the field of derivatives trading have lead a significant number of companies in Europe to form committees to assist the directors in better assessingdevices that involve an enhanced degree of risk.

In Germany, the KonTraG law (law on control and transparency) passed in May 1998 obliges companies to ensure that they have an adequate risk management system in place. The purpose here was not to suppress the readiness to take risks, but to ensure that the executive board recognises the risks to which it is exposed. Banks, for example, felt it incumbent upon them to create committees that carefully examine their credit exposure in connection with the emerging-markets financial crisis.

In the UK, a consultation draft document called the Turnbull Report was published in April 1999, with the final draft is due for publication at the end of September. Its aim is similar to that of the German KonTraG – not to curb risk-taking in business, but to establish a sound system of internal control that helps to manage and control risk appropriately, as profits are regarded as the reward for successful risk-taking.

Since adoption of these guidelines are not expected before the end of 2000, even though early compliance is encouraged, it remains to be seen how they will affect the reporting structure of the company internally between the responsible entity and the board and externally between the company and its stakeholders.

Jean-Nicholas Caprasse is a partner in Déminor, based in Brussels. Having trained as a commercial engineer, he worked in the energy industry and financial markets before joining the firm. Tel: +32 2 648 43 93; fax: +32 2 648 24 47; e-mail:; web-site: