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through directives that set a minimum standard for all Member States, while allowing for customisation to address local idiosyncrasies.

Nevertheless, the amount of EU legislation related to company law, governance and equity market transparency has been quite impressive: more than twelve directives and implementing directives, two recommendations and one regulation have entered the books between 2003 and 2007. As noted in the Commission’s report on the results of the 2006 consultation on the future of the ECAP, ‘a number of respondents stated their regulatory fatigue and called for a stabilisation period’.9 In many instances, the Commission has made it clear that it will heed these calls, take it easy on primary legislation and allow time for bedding-in the changes.

Transparency

Turning to the first of the EC’s regulatory objectives in the corporate governance area, the most important development is the emergence of harmonised standards of transparency and disclosure of governance, ownership and control arrangements. This is in addition to earlier harmonisation measures in financial reporting, where IFRS compliance has been implemented since 2005. At the end of the implementation period, investors should benefit from a uniform template for the supply of non-financial information across the EU. This may facilitate the growth of institutional portfolio internationalisation discussed in the first part of this chapter, putting issuers on a competitive footing as they seek capital across borders.

Comply-or-explain

The first, and most important, element of governance transparency has been the positioning of national, comply-or-explain voluntary codes at the heart of European corporate governance policy. The Commission accepted that ‘the adoption of detailed binding rules is not necessarily the most desirable and efficient way of achieving the objectives pursued’.10 It has adopted the UK approach of letting markets regulate governance of listed companies. Investors and other stakeholders benchmark governance arrangements in individual companies against a national codified body of best-practice principles and provisions. These Codes are typically the result of negotiation between market participants, blessed by the regulator. Thus, a key recent regulatory trend has been the proliferation of national corporate governance codes in Member States that are implemented on a comply-or-explain basis. As of July 2007, there is only one Member State,

9European Commission, Report on consultations for future priorities for Action Plan, July 2006, p. 7. http://ec.europa.eu/internal market/company/docs/consultation/final report en.pdf.

10Commission Recommendation 2005/162/EC on the role of non-executive directors or supervisory directors of listed companies and of the committees of the (supervisory) board.

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Greece, that does not have a comply-or-explain Code. A recent review11 of these Codes found that their substantive, normative content is broadly similar across EU borders and follows the lines enshrined in the OECD Principles,12 which is considered the global benchmark for the development of national policies. This confirms the Commission’s initial view that national Codes should act as bottom-up drivers of convergence.

While the Commission decided not to regulate core governance issues that go beyond transparency and shareholder empowerment, it did issue two nonbinding Recommendations whose primary purpose is to provide guidance to drafters of national codes. The first EC Recommendation addresses the role of non-executive directors and that of board committees in ways that will seem very familiar to any company that implements the UK Combined Code. Commission officials have made it clear on a number of occasions that, should the Recommendation not produce greater voluntary convergence, they might consider direct regulatory action.

The second Recommendation addresses the issue of director remuneration and lays down basic principles on accountability and transparency in setting pay. In a nutshell, shareholders should be fully informed about the executive remuneration policies of issuers and the remuneration of individual directors, and be given an opportunity to express their views at the annual general meeting; they should also have the right to approve share-based incentive schemes.

Reportedly, the EU remuneration Recommendation strongly influenced the adoption of German legislation in 2005 mandating the detailed disclosure of individual executive pay packages. It was felt that such legislation was needed because of the ineffectiveness of the relevant provisions in the German Code.

Annual disclosures

In order to underpin and consolidate the role of national codes in governance transparency and convergence, the EU has adopted amendments to the fourth and seventh company law directives (the ‘amendments’). The amendments provide for a set of annual disclosures pertaining to the governance, ownership and control arrangements of the company.13 All companies incorporated in EU Member States, and whose securities are traded on a regulated market in the EU, must include a specific corporate governance statement in their annual reports. The statement must be included as a separate part of the annual report (or as a separate report) and must contain at least the following information:

11Holly J. Gregory, International Comparison of Selected Corporate Governance Guidelines and Codes of Best Practice, Weil, Gotshal & Manges, July 2005.

12See OECD, Principles of Corporate Governance, available at www.oecd.org.

13EU Directive 2006/46/EC.

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a reference to the national corporate governance code applied by the company, and an explanation as to whether and to what extent the company complies with that corporate governance code; if the company does not apply a code, it should explain its corporate governance in the report;

a description of the company’s internal control and risk management systems;

the information required by Article 10 of the Directive on Takeover Bids (see below);

the operation of the shareholder meeting and its key powers, and a description of shareholders’ rights and how they can be exercised;

the composition and operation of the board and its committees;

to the extent a company departs from the national corporate governance code, the company must explain from which parts of the code it departs and its reasons for doing so.

Article 10 of the Takeover Bids Directive, adopted in 2004, requires that the annual reports of companies should include information regarding:

the structure of their capital and any restrictions on the transfer of securities;

significant direct and indirect shareholdings;

the system of control of any employee share scheme where the control rights are not exercised directly by the employees and restrictions on voting rights;

the rules governing the appointment and replacement of board members and the amendment of the articles of association;

the powers of board members, and in particular the power to issue or buy back shares;

any significant agreements to which the company is a party and which take effect, alter or terminate upon a change of control of the company following a takeover bid;

any agreements between the company and its board members or employees providing for compensation if they resign or are made redundant without valid reason or if their employment ceases because of a takeover bid.

Moreover, according to the amended eight company law directive, adopted in 2006, the audit committee (or, under certain circumstances, other equivalent bodies or the board as a whole) is obliged ‘to monitor the effectiveness of the company’s internal control, internal audit where applicable, and risk management systems’.14 The audit committee’s monitoring responsibility extends to the whole of the internal control and risk management system, a remit that mirrors the UK Turnbull guidance.

14 EU Directive 2006/43/EC.

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In addition to the general requirement to describe internal control and risk management systems, the amendments also require the management and supervisory bodies of listed companies to include a description of the group’s internal control and risk management systems in relation to the process for preparing consolidated accounts. This requirement should be read in conjunction with the provision which stipulates the collective responsibility of the board (or supervisory board) for ensuring the integrity of the annual report and accounts.15 On the one hand, the board’s collective responsibility for financial reporting contrasts sharply with the US approach, which places this responsibility squarely on the shoulders of management (the Chief Executive and the Chief Financial Officer). On the other hand, the EU stops short of requiring certification and auditor attestation of the effectiveness of internal control over financial reporting. The high-level responsibility of the board is seen as a guarantee that protects investors while allowing companies to tailor their control system to their special needs and their capacity to absorb control-related costs.

Given the US regulatory paradigm, there is a real risk that Member States, in transposing minimum harmonisation directives, might goldplate them by adding requirements which create onerous and costly obligations for boards and external auditors to certify and provide assurance on the adequacy of financial internal control. With this in mind, the European Corporate Governance Forum, a body set up to advise the Commission on governance issues, issued a statement which underlines that ‘the general purpose of risk management and internal control is to manage the risks associated with the successful conduct of business, not to eliminate them’. The Forum ‘considers that there is no need to introduce a legal obligation for boards to certify the effectiveness of internal controls at EU level’ and ‘urges Member States to take account of these points when implementing in national law the associated requirements of the new directives’.16

Interim and ad hoc disclosures

In addition to annual reporting on governance issues, EU issuers will have to report, on an interim and ad hoc timely basis, important governance-related information. These new reporting obligations are found in the Transparency Directive which was adopted in December 2004 as part of the Financial Services Action Plan.17 First and foremost, the Directive requires issuers to file, in addition to their annual report and accounts, non-audited half-yearly results. Along with the financials, the Directive requires half-yearly interim management statements which:

15COM (2004)725 final, amendments to Directive 83/349/EEC article 36a, Section 3A.

16European Corporate Governance Forum, Annual Report 2006, February 2007, p. 10, http://ec.europa.eu/internal market/company/docs/ecgforum/ecgf-annual-report-2006 en.pdf.

17EU Directive 2004/109/EC.

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