However, FEE believes that audit is such an important part of corporate governance for European entities that any improvements to corporate governance can only be considered when also giving due consideration to how the audit of the entity interacts with the other elements of the governance of the entity. Good corporate governance highlights the importance of non-executive directors and their structures and relationships with the board(s), including any board committees that the board may have established, such as the audit committee. It also focuses on internal controls, internal audit, external audit and disclosures about corporate governance, and in particular, the fundamental relationships and obligations between boards, auditors and shareholders. An important step in this regard was taken in 2006 in Europe by introducing the requirement for listed companies to publish a corporate governance statement which has clearly increased the focus on corporate governance. On a European Union level, the auditor is only required to check whether the corporate governance statement has been produced, but the current structure of laws, regulations and corporate governance codes differs significantly from one EU Member State to another. More involvement of the auditor could be envisaged to increase the degree of confidence of users in the corporate governance information. FEE analysed this further in its Discussion Paper on Assurance on Corporate Governance Statements where FEE concluded that some information may be suitable for factual verification whilst other information may be subject to an assurance engagement.

 

Although not addressed in the Green Paper, the role of the audit committee could be further analysed, as there seems to be room for improvement of this particular part of the corporate governance of public interest entities including listed companies. Especially the relationship between the audit committee and the auditor is of key importance, and improvements could be made at regulatory level as well as in the application of already existing requirements and guidelines to enhance the quality of the cooperation between the two parties.

 

The improvements needed could be with regard to clarifying the responsibility of audit committees vis-à-vis the board, and also specifying in more detail what the monitoring responsibilities of the audit committee entail in practice. In some European Member States, audit committees are a new concept due to the transposition of the Statutory Audit Directive, and these clarifications could facilitate a more consistent approach as to how audit committees discharge their duties in the various Member States. More consistency across the Member States could also facilitate the presence of non-national members in audit committees.

 

The Green Paper focuses on the composition and the competences of the board. Other aspects of boards are their role and responsibilities, which, except for the considerations regarding risk appetite and risk arrangements, are not touched upon in this Green Paper. The role and responsibility of the board is the cornerstone of good functioning of corporate governance, and is broader than merely aimed at risk appetite and risk management. The approach to these matters differs to some extent across Europe. Therefore, more could be done to encourage harmonisation and the exchange of good practices regarding the role of and functioning of boards across different companies and countries in addition to the responsibilities in relation to risk management and risk appetite.

 

With regard to the specific issues raised in the Green Paper, FEE main comments can be summarised as follows:

1. Boards should collectively have the competences needed to discharge their duties which can be ensured by an appropriate composition that has sufficient diversity among the members. The diversity should be with regard to not only gender, but also background, age, ethnicity etc. The composition of boards should be based on the principle of “the best person for the job” which is not compatible with any kind of quotas which would therefore not be appropriate.

2. FEE fully supports the aim of engaging shareholders to a greater extent than is currently the case, and believes that the appropriate approach will be to recognise that shareholders are not a homogenous group. Different measures may therefore be appropriate depending on which group of shareholders that is targeted and for which purposes.

3. FEE continues to support strongly the “comply or explain” principle as FEE believes that this principle remains appropriate as one of the cornerstones for the implementation of good corporate governance. However, some improvements as to how the principle is applied in practice could be introduced, especially with regard to the quality and content of the explanations. This could be done by setting clearer criteria in a proportionate reporting framework.

4. With regard to the scope of companies, sound and sustainable corporate governance is important for any company, regardless of its size and whether or not the company is a listed company. With this in mind, corporate governance measures should be proportionate to the nature, size and complexity of the entity and its business. Smaller companies should therefore be subject to proportionate requirements where relevant and to less stringent requirements than larger companies, as smaller unlisted companies are typically managed by their owners. They have fewer staff and engage with a smaller group of stakeholders (such as suppliers, customers and government agencies). Any policy actions envisaged in this area should therefore equally be proportionate with regard to size, complexity and number of shareholders of the entity. The main difference between listed and unlisted companies is the need for transparency to the public and towards its shareholders. The large differences in size and complexity within the group of unlisted companies should also be noted as they range from micro-entities to very large, unlisted corporate companies.

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