30 June 2011

ICFR's response to Green Paper on ‘The EU corporate governance framework’

The ICFR replied to the Green Paper on 'The EU corporate governance framework' consultation. The ICFR is cognisant of balancing the need for international convergence and harmonisation to prevent regulatory arbitrage with the exigencies of domestic policies, markets and economic structures.

The ICFR is particularly interested in the subject of Corporate Governance: it is one of its seven research streams and, as such, it has been running a series of roundtables on ‘Best Practice in Corporate Governance in Emerging Markets’ over the last three months. It is currently in the process of releasing a call for papers on the topic; this will result in seminars in London and Hong Kong near the year’s end. One key lesson from the research and interviews it has conducted is that one size does not fit all in corporate governance – not by market, not by investor, and not by company.

For this reason, the ICFR would urge caution on prescriptive practices that would recommend or enforce similar processes and checks on companies regardless of business, size or structure. In any case, the very qualitative and adaptive nature of good governance itself pleads against such a prescriptive or ‘tick-box’ approach. The ICFR considers a ‘one-size-fits-all’ approach to be inappropriate in light of the different corporate traditions and structures among Member States of the EU, and the strongly varied stages of development of local capital markets, institutional, and retail investor bases in Member States.

Moreover, in light of the urgency for long-term equity funding across Europe it is critical to create incentives for good corporate governance which encourage equity investment and direct foreign investment, particularly in light of competing offers from higher growth economies. It is important not to impose constraints which would encourage companies and investors to look more favourably on listing and investment opportunities respectively outside the EU – Asia being the obvious example, given its demand for long-term investment and foreign direct investment (FDI). It is therefore critical to get the balance of corporate governance right.

One may wish to consider alternatives to a ‘tick-box’ approach. One example might be to think of a company’s governance structure as starting at a lowest common denominator, and improving using a ‘ladder of best practice’. Therein, the level of a firm’s compliance would become a function of the firm’s stage of development, devising for this purpose a minimum, an intermediate, and a ‘best’ level of compliance; reporting on the level might then be made mandatory. Such a scheme would offer a middle-ground – averting the ills of a one-size-fits-all model, and offering an alternative to an approach founded in the principle of ‘comply or explain’, as well as an ability to compare standards across EU companies.

Full paper

© ICFR - International Centre for Financial Regulation