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Revision of the Shareholder Rights Directive
The proposal to revise the existing Shareholder Rights Directive (Directive 2007/36/EC) would tackle corporate governance shortcomings relating to listed companies and their boards, shareholders (institutional investors and asset managers), intermediaries and proxy advisors (i.e. firms providing services to shareholders, notably voting advice). Too often, as the crisis showed, shareholders supported managers’ excessive short-term risk taking and did not monitor closely the companies they invested in.
For the first time, a European "say on pay" would be introduced. Today, there is an insufficient link between management pay and performance and this encourages harmful short-term tendencies. The proposals would oblige companies to disclose clear, comparable and comprehensive information on their remuneration policies and how they were put into practice.
Commission Recommendation on the quality of corporate governance reporting
The Recommendation aims to improve corporate governance reporting by listed companies more broadly. Most corporate governance is soft law and it is thus essential that the ‘comply or explain’ approach, whereby a company that chooses to depart from the applicable corporate governance code must give reasons for the departure, works well. This approach offers companies an important degree of flexibility, as it recognises that, in certain circumstances, non-compliance with some recommendations might correspond better to the company’s interest than 100 per cent compliance with the code. However, companies that depart from the applicable corporate governance code often fail to provide appropriate explanations for the departure, which makes it more difficult for investors to take informed investment decisions.
Single-Member Companies Directive
Today, SMEs face too many obstacles that hamper their economic activities within the Single Market. From the perspective of company law, they often find it costly and difficult to do business across borders. The proposal for a Directive on single-member private limited liability companies tackles these obstacles as it would standardise requirements for the creation of companies with a single shareholder. It would remove the burdensome process of registering subsidiaries and make it easier for SMEs to operate across the EU.
Internal Market and Services Commissioner Michel Barnier commented: "The last years have shown time and time again how short-termism damages European companies and the economy. Sound corporate governance can help to change that. Today’s proposals will encourage shareholders to engage more with the companies they invest in, and to take a longer-term perspective of their investment. To do that, they need to have the rights to exercise proper control over management, including with a binding "say on pay"."
FAQ on the corporate governance package
See also: Commission roadmap to meet the long-term financing needs of the European economy, 27.3.14
ACCA welcomes corporate governance package
John Davies, Head of Technical at ACCA says: 'The proposal for the revision of the Shareholders Rights Directive is a step forward towards increasing transparency as regards shareholder identification and shareholder oversight on directors’ remuneration and related party transactions. A strong call has been made to ensure shareholders gain timely access to information. The proposed ‘say on pay’ will give shareholders a new right to influence and approve their company’s remuneration policy, which will have to explain how the company believes pay practices will contribute to its long-term and sustainable development."
The recommendation on corporate governance calls for more detailed explanations to be given by companies that depart from the provisions of a relevant corporate governance code, and for member state governments to monitor compliance. "This initiative does not restrict the freedom for companies to choose not to comply with a standard provision of a non-mandatory corporate governance code, but instead calls on them to be forthcoming about why they decide to do so. This will allow shareholders to make their own judgments about whether a company’s action merits support or not. It will be vital though that appropriate monitoring takes place to ensure that companies are responding to the new recommendation", says John Davies.
"It is essential for Europe to create a modern and efficient company law and governance framework. ACCA welcomes cost-efficient company law solutions that will contribute to competitiveness and long-term performance. However, we believe that different economic environments in Europe must be acknowledged and companies have to be provided with flexibility by allowing them to manage their corporate governance according to their specificities in each member state", he concludes.
FRC
Stephen Haddrill, FRC CEO, responded: "The FRC welcomes the release of the Commission’s Recommendation on the quality of corporate governance reporting ('comply or explain'). The FRC supports the Commission’s assertion that an effective corporate governance framework plays a key role in contributing to growth, stability and long-term investment.
The FRC advocates the concept of 'comply or explain' as a key feature of European corporate governance structures and one which the FRC champions through the UK Corporate Governance Code. A European corporate governance framework will assist companies in how they report and help investors better to understand the companies in which they invest.
The FRC endorses the Commission’s focus on explanations. There will at times be legitimate reasons for departures from the requirements of corporate governance codes, but such departures must be considered and well explained. In this context, the FRC considers that outlining the elements required for explanations may be helpful in encouraging better reporting.