Europe Ponders Next Governance Goals

The European Commission will hold a public hearing this week to debate priorities for the next phase of a far-reaching plan to overhaul corporate law and governance in the European Union.

Formally known as the EU Action Plan on Modernizing Company Law and Enhancing Corporate Governance, the economic blueprint brims with the lofty goals and Byzantine agenda points typical of the EU’s consensus-oriented politicking. At its heart, however, the plan seeks to make European businesses more competitive by strengthening shareholder rights and third-party protections, mostly through changes to corporate governance.

This week’s hearing, scheduled for May 3, caps a three-month comment period during which the EC sought input on what the Action Plan’s priorities should be for the next three years. Commissioners posed 14 questions, ranging from whether the original Action Plan goals matched market needs, to how to bolster shareholder democracy, to the merits of embracing the “one share, one vote” principle—something likely to be a prominent theme in EU governance debates in the near future. The hearing will set priorities for the plan’s second phase and largely focus on shareholder rights and obligations, the responsibilities of directors for internal control, and modernization of the European Company law.

McCreevy

The first phase of the Action Plan, enacted in 2003, is now largely complete. Among its achievements: creation of an Advisory Group on Corporate Governance and Company Law, to coordinate governance efforts among EU member nations and the European Commission; establishment of a European Corporate Governance Forum; revisions to the EU Accounting Directives to improve financial reporting and transparency; adoption of a directive for cross-border corporate mergers; and a proposal for a directive on shareholder rights. Charlie McCreevy, internal market and services commissioner for the EU, has called the first phase of the Action Plan “a real success.”

Jean-Nicolas Caprasse, managing director of Institutional Shareholder Services Europe, says two major issues he expects to be tackled during the hearing and in the next phase of the Action Plan are the directive on cross-border voting and the debate around the “one share, one vote” principle. While the principle is fundamental to American shareholder rights, several European countries allow exceptions to the concept; Spain and Switzerland, for example, allow companies to impose “voting right ceilings” that cap a shareholder’s voting power.

Caprasse says the directive on cross-border voting, which is being reviewed by members of the European Parliament, will facilitate the execution of voting rights in the EU member states, “more so on a cross-border basis.”

“We see a lot of clients refraining from exercising votes in markets where it’s too difficult to do so from a technical point of view,” Caprasse says. Once that barrier is removed across Europe, he continues, “we’ll see more investors in areas such as the U.S. and the U.K. exercise their voting rights in places like France and Germany, which could result in a dramatic shift in power at the level of listed companies,” Caprasse says. “It will have lot of impact on marketplace in next two to three years.”

And because the directive is largely a technical issue, Caprasse expects little objection from political circles. The European Parliament could act on the matter as quickly as this summer, he says.

Ballot Battles

The one share-one vote principle is also likely to remain a priority going forward. McCreevy last year said one of his goals is to get the principle accepted across the EU’s 25 member states. It also was listed as one of the Action Plan’s medium-term objectives in its first phase.

Caprasse notes that an EU-wide study is underway to explore the issue from both a “legal and market point of view” in each member state.

Caprasse

“The thinking is that, before there can be a debate around whether each company should respect this principle or not, we need to know where we stand,” Caprasse says. Since the study is expected to take a year to complete, Caprasse figures substantive debate and progress on the issue won’t occur until the latter half of 2007, “but the process has been engaged and they’re on schedule.”

While Caprasse says institutional investors “largely would embrace the adoption of one share-one vote, even though there may be reasonable exceptions,” the corporate world is more divided on the subject, he says. Companies that use dual-class shares have argued that there's no evidence that companies with one share-one vote systems perform any better.

In written comments on the Action Plan, ISS expressed support for an EU resolution on the one share-one vote principle, saying deviation from that standard is “an EU-wide problem” that should be addressed at the EU level. But rather than an outright requirement of the principle, ISS said a formal recommendation by the European Commission would be best suited to address the issue. Considering the size and number of companies where such deviations are prevalent, ISS said a binding measure forbidding any exceptions to this principle and requiring that companies remove them by a certain deadline may be “too drastic.”

The Association of British Insurers also expressed strong support for the one share-one vote principle. “The issue of shareholder voting rights must be addressed if we are to move forward over the longer term,” ABI said in its comment letter. “We emphasize our strong support for the progressive removal of distortions which entrench management at the expense of owners. Consideration should be given to a recommendation supporting this.”

ABI’s director of investment affairs, Peter Montagnon, a member of the European Corporate Governance Forum, is slated to moderate the May 3 panel on shareholders’ rights and obligations.

Baladi

André Baladi, a Geneva-based co-founder of the International Corporate Governance Network, said he hopes that the EC deliberations on company law and corporate governance will “take into consideration the global principles of the OECD [Organisation for Economic Co-operation and Development] and of the ICGN.” Among those principles: “Certain major principles, such as one share-one vote, should be embedded in all corporate governance statements worldwide,” Baladi said.

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