Commission report on corporate governance monitoring and enforcement practices
22 January 2010
The Commission has published a study conducted by RiskMetrics, providing an overview of the various monitoring and enforcement mechanisms in member states regarding corporate governance rules. The Study evaluates the effectiveness of the different approaches and suggests improvements.
The study provides an overview of the various monitoring and enforcement mechanisms in the Member States of the European Union concerning corporate governance rules that are laid down in codes of corporate governance. It assesses the level of compliance of companies with the provisions of corporate governance codes and examines the availability and quality of explanations for deviations from these codes for a sample of 270 listed companies from 18 Member States. Two surveys were conducted in the framework of this Study. They aimed at evaluating the perception of corporate governance codes by director institutes and business associations on the one side, and EU shareholders on the other side. On this basis, the Study evaluates the effectiveness of the different monitoring and enforcement systems and presents suggestions to improve their effectiveness.
The careful scrutiny of the various market participants’ opinions shows an overwhelming support for the comply-or-explain regime from regulators, companies or investors:
· _ Regulator perspective: The comply-or-explain approach enjoys the support of regulators both on EU and national level. The European Commission expressed its preference for this approach by adopting the Directive 2006/46/EC, which mandated the application of corporate governance codes by way of comply-or-explain. Moreover, even before the harmonisation at EU level, the comply-or-explain mechanism had already been endorsed by many Member States. The European Corporate Governance Forum had also expressed strong and unanimous support for the comply-or-explain approach in 2006, as it judged it “best suited to take into account the variety of situations of individual companies” 2, and as it was considered to adapt well to the differences between national laws and governance framework. The ECGF, supported in this by the European Commission, considers that “when it is effectively implemented, this is better and more efficient approach than detailed regulation”. Therefore, the comply-or-explain approach is currently considered the preferred regulatory technique by regulators.
· _ Company perspective: The results of the company and director perception survey presented in Chapter III of this Study demonstrate that the great majority of respondents consider soft regulation in the form of corporate governance codes applied on a comply-or explain basis to be an effective regulatory tool. It is considered to offer sufficient flexibility to accommodate the specific situations of companies. There is a clear indication that soft regulation on a comply-or-explain basis is preferred to hard law, the reason for this being the ability of the comply-or-explain mechanism to take the diversity of needs of listed companies into account. Additionally, the majority of respondents believe that the benefits of implementing corporate governance codes exceed the implementation costs.
· _ Investor perspective: The results of the survey of 100 large institutional investors and institutional investor organisations presented in Chapter IV of this Study conclude that the majority of respondents support the comply-or-explain regime. Moreover, more than half of the respondents think that there is an acceptable balance between legislation and complyor- important issues relating to corporate governance. While being generally positive to the comply-or-explain system, investors point to the low disclosure quality of company statements. They also support the enhancement of both shareholder rights and shareholder reposabilites.
© European Commission
