European Commission adopts measure to improve corporate governance, shareholder management of roughly 10,000 companies listed on Europe's stock exchanges, including shareholder 'say on pay' for largest companies to encourage transparency, accountability
April 9, 2014
– The European Commission has today adopted measures to improve the corporate governance of around 10 000 companies listed on Europe’s stock exchanges. This would contribute to the competitiveness and long-term sustainability of these companies. Other proposals would also provide cost-efficient company law solutions for SMEs which operate across borders. The package of measures implements key actions identified in the Communication on the long-term financing of the European economy of 27 March (IP/14/320).
Internal Market and Services Commissioner Michel Barnier said: "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". I also see it as a priority that company law offers European SMEs an efficient framework for their operations and growth. The European Single-Member Company will help entrepreneurs reduce costs and organise their activities abroad.”
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.
The proposals would both make it easier for shareholders to use their existing rights over companies and enhance those rights where necessary. This would help ensure shareholders were more engaged; better hold the management of the company to account and act in the long-term interests of the company. A longer term perspective creates better operating conditions for listed companies and improves their competitiveness. Key elements of the proposal include stronger transparency requirements for institutional investors and asset managers on their investment and engagement policies regarding the companies in which they invest as well as a framework to make it easier to identify shareholders so they can more easily exercise their rights (e.g. voting rights), in particular in cross-border situations (44% of shareholders are from another EU Member State or foreign). Proxy advisors would also have to become more transparent on the methodologies they use to prepare their voting recommendations and on how they manage conflicts of interests.
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. There would be no binding cap on remuneration at EU level but each company would have to put its remuneration policy to a binding shareholder vote. The policy would need to include a maximum level for executive pay. It would also need to explain how it contributes to the long-term interests and sustainability of the company. It would also need to explain how the pay and employment conditions of employees of the company were taken into account when setting the policy including explaining the ratio between average employees and executive pay.
Commission Recommendation on the quality of corporate governance reporting (‘comply or explain’ principle)
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% 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.
The Commission’s Recommendation aims to provide guidance to listed companies, investors and other interested parties in order to improve the overall quality of corporate governance statements published by companies.
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. Only a small number of SMEs (2%) invest and establish subsidiaries abroad.
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.
Key elements of the proposal:
Member States would be required to provide in their national legislation a company law form for single-member private limited liability companies with the same requirements across the EU. It would have a common label — Societas Unius Personae (SUP).
Member States would be obliged to allow for direct on-line registration of SUPs, without the need for a founder to travel to the country of registration for this purpose.
The proposal would provide for a template of articles of association, which would be identical across the EU, available in all EU languages and would contain the necessary elements to run a single-member private limited liability company. A minimum capital requirement of € 1 for SUPs would be introduced.
Adequate protection for creditors, through a balance sheet test and a solvency statement would be ensured.
Corporate governance and company law are essential to ensure that companies are well-governed and sustainable in the long term and therefore have an important role to play in the long-term financing of the European economy.
These proposals follow the 2012 Action Plan on European company law and corporate governance (IP/12/1340) and the Communication on the long-term financing of the European economy published on 27 March 2014 (IP/14/320).
See also MEMO/14/274 and MEMO/14/275.
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