European Perspective on Corporate Governance
Author:
Daisy Downes
The fact that corporate governance is now at the heart of the political agenda is not simply a response to the recent wave of scandals in the US and in Europe according to the Director General, Internal Markets, of the European Commission. But Mr Alexander Schaub did concede that scandals like Parmalat and Enron have prompted consideration of the various tools that can be used to minimise the future risk of malpractice.
The Director General identified three key elements that contribute to reducing that risk: strengthening the internal controls within organisations; restoring the credibility of external audit; and promoting fair and reliable accounting.
Pointing to some of the achievements of the European Commission in reducing risks, Mr Schaub drew attention to two Directives: the Prospectus Directive which gives national authorities extensive supervisory powers, including the power to prohibit public offers when the provisions of the Directive are not complied with; and the Market Abuse Directive which sets clear standards for the prompt and fair disclosure of non-public price-sensitive information to the market.
Mr Schaub said that the Commission will shortly propose legislative measures imposing specific disclosure requirements with regard to off balance sheet arrangements, covering Special Purpose Vehicles, and plans to extend the requirement to disclose related party transactions to non listed companies.
Although there are differences in approach between the EU and the US, three key challenges are common to the corporate governance objectives in both jurisdictions:
i) improving the integrity and accountability of board members;
ii) restoring the credibility of audit;
iii) high standards of truth and fairness in financial statements
In contrast to the US’s rules-based approach in the Sarbanes-Oxley legislation, Mr Schaub said the EU is taking “a bottom-up, principle-based approach, with the ‘comply or explain’ principle as its cornerstone”.
Mr Schaub said that while concepts such as subsidiarity, proportionality, mutual recognition and home country control are common language in an EU regulatory environment but somewhat alien in a US environment.
Given the cultural diversity and the diversity of business traditions in the EU, a ‘one-size-fits-all’ approach would be counterproductive and strongly rejected by market participants, Mr Schaub said. The Commission’s policy, outlined in its Action Plan on Corporate Governance, was summarised by Mr Schaub being “firm on principles but flexible on their application”.
The European approach entails a mix of legislative and non-legislative measures with legislation limited to areas where legal obstacles need to be overcome.
Pointing out that, together, the EU and the US account for more than half of the world economy, Mr Schaub stressed the need for cooperation in the field of corporate governance and said that failure to deal with the regulatory issues associated with corporate governance would expose global financial markets to major adverse impacts.
Calling for intensification of efforts towards achieving convergence which would contribute to restoring confidence and building trust in the markets, Mr Schaub said his “clear conviction is that both sides are ready”.
Accountancy Ireland, Vol 36, No 6, December 2004.