The problem: market turmoil and corporate scandals. The solution: corporate governance. Corporate governance – better disclosure, greater shareholder involvement and clarified rules for directors – is now well back on the agenda following the publication of recommendations by a European Commission committee. But the committee’s recommendations on corporate governance conflict with a basic tenet of the EU’s plans to create a single market for financial services. And it’s unsure how the Commission will react – “let’s wait and see,” says a spokesman.
Corporate governance is clearly at or near the top of pension funds’ agendas. “I would like to see a landslide improvement in corporate governance, which will help restore investor confidence and, therefore, have an impact on financial markets,” in the words of Roderick Munsters, investment director at e47bn Dutch pension fund PGGM, Europe’s second largest.
EU Internal Markets Commissioner Frits Bolkestein responded to such demands and commissioned a ‘high- level’ group of company law experts to explore the whole area.
The seven-strong Winter group, led by Jaap Winter, professor at the Erasmus University of Rotterdam and a partner at law firm De Brauw Blackstone Westbroek, reported to Bolkestein late last year. It set out proposals to clarify corporate disclosure in Europe and give greater rights to shareholders. But, citing the difference in local corporate law in member states, the group asserts that there is no need to formulate pan-European standards of corporate governance. Yet the European Commission is clear: “Harmonisation of company law, accounting and auditing rules is essential for creating a single market for financial services and products.”
Whatever the eventual result, it is clear that the group’s 16 recommendations as they stand would put corporate disclosure on a more secure footing. If implemented they would amount to a step forward in the way European companies present themselves to the outside world.
Bolkestein’s initial response was to say that the report “gives us a platform to begin the definition of which areas need to be strengthened in the European Union.... I want a full and open debate on the report’s recommendations before we define our forward strategy.”
“A fundamental review of company law in Europe was certainly due,” Winter says. He says EU corporate law had not kept pace with developments such as a pan-European stock market and new technology that could be used to improve corporate governance.
A spokesman for Bolkestein says the Commission would release a communication setting out its response to the Winter findings before the summer. But he would not be drawn on the likely tone of the Commission’s response, saying it is “reflecting carefully” on the report. “Let’s wait and see,” he says.

The Winter group’s first proposal centres on creating parameters for disclosure. “Listed companies in the EU should be required to make a coherent, descriptive statement in their annual accounts covering the key elements of their corporate governance structure and practice.”
The group has also proposed sweeping powers for shareholders, the most radical of which would enable shareholders holding 5–10% of a company’s share capital to have the right to ask a court or “administrative authority” to grant a special investigation into the affairs of the company.
Other shareholder benefits would include making companies provide shareholders with relevant information and enabling them to vote in absentia, in particular through their website. And institutional investors are to be required to disclose their voting policies to the beneficiaries.
Directors’ conflicts of interest in areas such as nomination, numeration and the audit of accounts should be handled by non-executive or supervisory directors, the report says. “Certain minimum standards of what cannot be considered to be independent should be established at the EU level.”
As for directors’ payment, a disclosure of remuneration policy should be published in company accounts, alongside directors’ remuneration. Directors’ option schemes should be itemised and the costs accounted for.
“As a matter of EU law, it should be confirmed that the financial and key non-financial statements [like the corporate governance statements in the annual_accounts] are the collective responsibility of the board,” the group says.
“The EU should not strive to create a single European code of corporate governance, as the underlying company law in member states is not harmonised in key areas,” it says.
Instead, the EU “should actively co-ordinate the corporate governance efforts of member states through their company laws, securities laws, codes or otherwise”. Each member state should set up its own corporate governance code.
Such thinking goes against the grain in a shrinking corporate reporting world. As Allen White, acting chief executive at the Global Reporting Initiative, says: “Transparency and accountability are imperatives for doing business in the 21st century. The cost of failing to meet expectations can be severe, as we have seen recently in numerous cases of accountability breakdowns.”
He says sustainability reporting should follow the lead of more conventional financial reporting. “Sustainability accounting and reporting should follow the same path.”
“The corporate governance scandals that have rocked America and other major capital markets have placed the issues of ethics, accountability, and transparency firmly on the agenda of business leaders and regulators,” says Jane Nelson, director of business leadership and strategy at the International Business Leaders Forum.
She cites “massive pressure to rebuild public trust and investor confidence in a period of corporate governance scandals and accounting failures”. Companies need to focus on accountability, transparency and integrity.
The challenge for business leaders, Nelson says, is to demonstrate that delivering shareholder value, wider societal value and increased accountability and transparency can all be achieved together.
As EU Trade Commissioner Pascal Lamy told a conference on corporate social responsibility late last year: “The experience I gained as EU trade commissioner convinced me that there can be a positive link between social and environmental principles of behaviour of a company and its competitive advantages and performances.”