Corporate governance comes back to haunt EU

The business world and EU policymakers tend to wax and wane in their concern about corporate governance. How companies are run and how they manage their relations with shareholders, governments and the public comes in for attention only intermittently. But the issue of corporate governance is back in the public eye in early 2007 after a combination of unhappy events.

The German industrial giant Siemens is currently under investigation by prosecutors in Germany, Switzerland, Italy and the US, shaken by allegations of bribery and other misdeeds.

Another of Germany’s flagship companies, the carmaker Volkswagen, has been through a high-profile governance battle, with Ferdinand Piëch, the chairman, forcing out the chief executive Bernd Pischetsrieder. Porsche, in which Piëch is a controlling shareholder, won a trial of strength with the state of Lower Saxony and is effectively taking control of VW.

The Italian bank Capitalia was the subject of another battle between chairman and chief executive, with a group of controlling shareholders siding with Cesare Geronzi, the chairman, against Matteo Arpe. Mergers and acquisitions activity has intensified, adding to the debate about corporate governance: the high-profile involvement of private equity in some takeovers has provoked a backlash, with some warning that the buy-out firms were in danger of being "the unacceptable and unaccountable face of capitalism".

There has also been a whiff of more traditional corporate scandal, with allegations that share-options for executives were backdated favourably and allegations of bribery against BAE Systems.

The European Commission has seen much of this before. When the scandals over Enron and WorldCom broke, the Commission held firm arguing that European corporate governance was in better shape than the US and that no European version of Sarbanes-Oxley was needed.

But the collapse of the Italian dairy empire Parmalat and other scand-als prompted a review.

A company law and corporate governance action plan was launched by the Commission in 2003. Amendments on independent auditing and disclosure were made to the 4th, 7th and 8th company directives and a non-binding code of conduct was created. The Commission has steadily being working through the action plan.

A report on directors’ pay is expected in April. Before the summer a consultants’ report is expected on proportionality between ownership and control. In the next few weeks, the Council of Ministers is expected to adopt legislation on shareholders’ rights, intended to make it easier for them to exercise their rights across borders, which was approved at first reading by the European Parliament last month.

The European Commission’s basic objective has been greater transparency and common fair treatment of shareholders. But its efforts at clearing away obstacles to cross-border shareholders have not been helped by differences between member states’ rules and regulations. Last month (27 February), Internal Market Commissioner Charlie McCreevy condemned member states that do not allow shareholders a greater say in cross-border takeover bids.

"Europe is a very complex scene, made more complex still by the fact there are a lot of stock markets with their own listing practices. This creates a complex quilt," says Grant Kirkpatrick, an economist at the Organisation for Economic Co-operation and Development (OECD).

The German code is perhaps the least strict. The UK and Dutch codes are the strictest. "We have a code of conduct that has a basis in statutory law that has to be taken seriously," says Harm Jan De Kluiver, a partner at Dutch law firm De Brauw Blackstone Westbroek. De Kluiver says that making the EU code compulsory would not be the best way forward. "If you try to create something at EU level, you’d have a compromise that would be very vague," he says.

The OECD drew up a set of principles on corporate governance last year, which serves as an international benchmark for policymakers, investors and companies. It was created to make member countries aware of the contribution good governance makes to market stability, investment and economic growth. According to De Kluiver, the EU is still trying to find the best way forward on corporate governance. "Everyone is paying attention," he says. "They are moving things around. It’s obvious we are looking for a new balance between boards, employees and shareholders. It is a process of experiment-ation, which is fine, which is interesting."

The question now is whether the Commission can exploit the latest confluence of corporate governance controversies to push forward further legislative action.

The business world and EU policymakers tend to wax and wane in their concern about corporate governance. How companies are run and how they manage their relations with shareholders, governments and the public comes in for attention only intermittently. But the issue of corporate governance is back in the public eye in early 2007 after a combination of unhappy events.

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