EUROPE - The European Commission is understood to be preparing a green paper on corporate governance in the wake of the financial crisis, but pension fund bodies are concerned that investors will be subject to onerous legislation.

Concerns about the quality of corporate governance during the financial crisis - leading to legal action against some companies - has prompted the EC to follow up on work started in 2003 to modernise company law and enhance corporate governance.

Michel Barnier, the new commissioner for the internal market and services, has mentioned corporate governance standards three times in speeches since the new year, most recently on 2 March.

"Too often, shareholders have been too absent or inactive," the commissioner said. "Sir David Walker described this problem well in his recent report on corporate governance in UK banks. We need shareholders to assume their responsibilities. And not only to look at making quick, short-term returns on their investment."

Similarly, the De Larosiere report published last year on the financial supervision system argued corporate governance was one of the most important failures of the financial crisis, although issues of corporate governance were already on the agenda as concerns had been raised about a crackdown on ‘acting in concert' situations.

IPE understands the EC is therefore now looking to assessing whether to fill this gap in corporate governance supervision with a series of reforms to support the long-term interest of stakeholders.

In particular, it is anticipated that the green paper will look at remuneration, in the hope of better aligning compensation packages with the interest of shareholders, particularly as many active shareholders are looking more closely at - and in some case rejecting - at company boards' remuneration proposals.

Likewise, there is a call for internal risk management to be improved so investors are not required to rely largely on ratings agencies to reveal the state of a company's internal practices.

European corporate governance is currently formed through a combination of existing legislation mainly relating to mergers and acquisitions and shareholder rights, as well as recommendations on the inclusion of independent directors, as well as on director's activities.

However, the strength of corporate governance differs widely between member states.

And there are some concerns that any changes could affect long-term institutional investors, such as pension funds, who were not directly responsible for the recent crisis but have been under attack from many directions about their role in engaging with companies over active ownership. So there is pressure on institutional investors to prove they take their rights and responsibilities seriously as shareholders.

Lord Myners, UK City Minister, argued in his report that closer scrutiny of corporate activity should be fulfilled by shareholders, and directly accused UK pension funds - at an National Association of Pension Funds seminar on corporate governance - of not doing enough to meet their governance "legal duty" (See earlier IPE story: Myners says trustees must meet governance legal duty)

Pension fund bodies have concerns about the barriers that institutional investors still face to the active ownership of companies.

In particular, the EFRP is lobbying for a change requiring all institutional investors to disclose their active ownership and voting policies, and seek changes requiring all parties to adhere to codes of practice on ‘comply or explain'.

It also hopes greater active ownership among institutional investors will be encouraged through rewards for voting at shareholder meetings, as well as loyalty dividends for long-term investors.

David Paterson, director of corporate governance at the UK's National Association of Pension Funds, noted the EC has been consulting on the European corporate governance regime in a bid to find out whether changes should be made.

"We are naturally keen to avoid prescriptive regulation, and it is a very difficult area to regulate," said Pattison.

"We do think the Stewardship Code in the UK is quite a good first step, although there is a lot of detail to be resolved. The responsibilities of different types of investors are looked at and it does go some way to resolving that problem. The key is to develop practices which are appropriate and proportionate to the nature of the problem," he added.