EU Green Paper on corporate governance: questions that need the right answers

Posted: September 26, 2010   By: Pierre Habbard Category: Corporate governance,

Every financial crisis revives the debate on corporate governance and the relationship between shareholders, directors, employees and regulators. After Enron in 2001, much of the policy discussions focused on the independence of auditors and the board of directors vis-à-vis top management and the “imperial CEO”. The European Commission have drawn lessons from the current crisis in a Green Paper on Corporate governance in financial institutions and remuneration policies, which was released in June 2010 and was for public consultation until 1^st September. It follows on recommendations by the OECD on its own set of Principles of corporate governance which were published earlier in 2010 (see Conclusions and emerging good practices to enhance implementation of the Principles).

Unsurprisingly both institutions call for more restraint on executive (and traders’) pay and better risk management. The questions listed in the Commission’s green paper for public consultation suggest growing concern in Brussels about board organisation and composition in financial institutions (“Should the number of boards on which a director may sit be limited?”, “Should combining the functions of chairman of the board of directors and chief executive officer be prohibited in financial institutions?”, “Do you agree that including more women and individuals with different backgrounds […] could improve the functioning and efficiency of boards of directors?”), and perhaps the need for more hands-on approach by supervisory authorities (“Should the role of supervisory authorities in the internal governance of financial institutions be redefined and strengthened?”). The OECD thinking on the notion of “independence” of the Board seems to evolve as well. By becoming ‘too much’ independent, OECD experts are warning, a board member runs the serious risk of becoming … incompetent, without any real knowledge of the company’s businesses and risks – just like the Board of Lehman Brothers became before its collapse.

Both the OECD and the Commission’s papers also come to terms with the need for more shareholder activism as a way to ensure proper risk management within companies. Transparency and accountability of voting policy across Europe is of particular concern for the Commission (“Should disclosure of institutional investors' voting practices and policies be compulsory?”, “How often? Should institutional investors be obliged to adhere to a code of best practice?”). Interestingly, the Commission does not exclude giving a role to workers’ representatives in tightening the governance rules for board and top management pay (“Do you think that the role of shareholders, and also that of employees and their representatives, should be strengthened in establishing remuneration policy?”).

All these questions by the Commission are more than welcome provided of course that they are answered the right way. Shareholder activism have been controversial in the past to the say the least. It has been synonymous to ‘locusts’ hedge funds whose key concern during the last stock market cycle 2002-2006 was to pump up as much dividends and share buy-back programmes as possible. All that money that was ‘given’ back to shareholders was badly missing in 20007-2008 when companies, and banks in particular were forced to recapitalise.

One will also regret the lack of consideration in the Green Paper for moving further toward a stakeholder approach to corporate governance and away from a simplistic – and short-termist – shareholder value model of governance. If the private corporation need to regain confidence of the public across Europe, then surely is the time to link corporate governance with worker participation mechanisms as they exist across member states: works councils and board representation among others. This is essential in situations in which decision centres are moving fast away from the workplace as is too often the case in multinational companies or in those firms that are owned by a private equity fund.