GREEN PAPER The EU corporate governance framework
Date: 2011-04-05
Institutions: European Commission
Subjects: European Union, board of directors, operation of the Institutions, shareholder

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EUROPEAN COMMISSION 

Brussels, 5.4.2011 
COM(2011) 164 final 

GREEN PAPER 

The EU corporate governance framework 

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GREEN PAPER 

The EU corporate governance framework 

(Text with EEA relevance) 

The Commission recently reiterated its commitment to a strong and successful single market 
which refocuses on citizens and regains their trust. As its Communication Towards a Single 
Market Act stated, ‘It is of paramount importance that European businesses demonstrate the 
utmost  responsibility  not  only  towards  their  employees  and  shareholders  but  also  towards 
society at large’1. Corporate governance and corporate social responsibility are key elements 
in building people’s trust in the single market. They also contribute to the competitiveness of 
European business, because well run, sustainable companies are best placed to contribute to 
the  ambitious  growth  targets  set  by  ‘Agenda  2020’2.  In  the  field  of  corporate  social 
responsibility  the  Commission  has  already  issued  a  public  consultation  on  non-financial 
disclosure by  companies3  and  will  put  forward  a  new  framework initiative later this  year to 
tackle issues related to the societal challenges that enterprises are facing. 

The G20 Finance Ministers and Central Bank Governors Communiqué of 5 September 2009 
emphasised  that  actions  should  be  taken  to  ensure  sustainable  growth  and  build  a  stronger 
international  financial  system.  Corporate  governance  is  one  means  to  curb  harmful  short-
termism  and  excessive  risk-taking4.  The  purpose  of  this  Green  Paper  is  to  assess  the 
effectiveness of the current corporate governance framework for European companies in the 
light of the above. 

Corporate governance is traditionally defined as the system by which companies are directed 
and controlled5 and as a set of relationships between a company’s management, its board, its 
shareholders  and  its  other  stakeholders6.  The  corporate  governance  framework  for  listed 
companies  in  the  European  Union  is  a  combination  of  legislation  and  ‘soft  law’,  including 
recommendations7  and  corporate  governance  codes.  While  corporate  governance  codes  are 
adopted at national level, Directive 2006/46/EC promotes their application by requiring that 
listed companies refer in their corporate governance statement to a code and that they report 
on their application of that code on a ‘comply or explain’8 basis.  

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Communication  from  the  Commission  to  the  European  Parliament,  the  Council,  the  Economic  and 
Social  Committee  and  the  Committee  of  the  Regions  Towards  a  Single  Market  Act  –  for  a  highly 
competitive social market economy - COM(2010) 608 final/2, p. 27. 
See the Conclusions of the European Council of 17 June 2010, accessible at 
http://www.consilium.europa.eu/ueDocs/cms_Data/docs/pressData/en/ec/115346.pdf. 
The consultation on ‘disclosure of non-financial information by companies’ closed in January 2011; see 
http://ec.europa.eu/internal_market/consultations/2010/non-financial_reporting_en.htm. 
See also, e.g., OECD, Corporate Governance and the Financial Crisis - Conclusions and emerging good 
practices to enhance implementation of the Principles, February 2010. 
Report  of  the  Committee  on  the  Financial  Aspects  of  Corporate  Governance  (The  Cadbury  Report), 
1992, p. 15, accessible at http://www.ecgi.org/codes/documents/cadbury.pdf. 
OECD Principles of Corporate Governance, 2004, p. 11, accessible at   
http://www.oecd.org/dataoecd/32/18/31557724.pdf. 
For a list of EU measures in the field of corporate governance, see Annex 2. 
This  approach  means  that  a  company  choosing  to  depart  from  a  corporate  governance  code  has  to 
explain which parts of the corporate governance code it has departed from and the reasons for doing so. 

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To identify the issues most relevant to good corporate governance in the EU and to prepare 
this  Green  Paper,  the  Commission  conducted  interviews  with  a  sample  of  listed  companies 
from  different  Member  States  and  different  economic  sectors,  with  different  levels  of 
capitalisation  and  different  shareholding  structures.  It  also  held  meetings  with  corporate 
governance experts and with representatives of the investor community and of civil society. 
Some  relevant  issues  had  already  emerged  in  the  context  of  the  Green  Paper  on  Corporate 
Governance  in  Financial  Institutions  and  remuneration  policies9  adopted  in  June  2010.  For 
example, shareholder engagement matters not just to financial institutions, but to companies 
generally10.  However,  financial  institutions  are  a  special  case,  because  of  the  particular 
challenges faced in ensuring effective risk management and the systemic risks they may pose 
to the financial system. So the solutions envisaged in the June 2010 Green Paper may not be 
relevant to EU companies in general. Accordingly, this Green Paper addresses the following 
three subjects which are at the heart of good corporate governance: 

•  The  board  of  directors  –  high  performing,  effective  boards  are  needed  to  challenge 
executive management. This means that boards need non-executive members with diverse 
views, skills and appropriate professional experience. Such members must also be willing 
to  invest  sufficient  time  in  the  work  of  the  board.  The  role  of  chairman  of  the  board  is 
particularly important, as are the board’s responsibilities for risk management. 

•  Shareholders  –  the  corporate  governance  framework  is  built  on  the  assumption  that 
shareholders  engage  with  companies  and  hold  the  management  to  account  for  its 
performance. However, there is evidence that the majority of shareholders are passive and 
are often only focused on short-term profits. It therefore seems useful to consider whether 
more shareholders can be encouraged to take an interest in sustainable returns and longer-
term performance, and how to encourage them to be more active on corporate governance 
issues.  Moreover,  in  different  shareholding  structures  there  are  other  issues,  such  as 
minority protection. 

•  How  to  apply  the  ‘comply  or  explain’  approach  which  underpins  the  EU  corporate 
governance  framework.  A  recent  study11  showed  that  the  informative  quality  of 
explanations  published  by  companies  departing  from  the  corporate  governance  code’s 
recommendation  is  -  in  the  majority  of  the  cases  -  not  satisfactory  and  that  in  many 
Member  States  there  is  insufficient  monitoring  of  the  application  of  the  codes.  It  is 
therefore appropriate to consider how to improve this situation. 

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COM(2010)  284,  see  also  Feedback  Statement  —  Summary  of  responses  to  the  Commission  Green 
Paper on Corporate Governance in Financial Institutions, accessible at  
http://ec.europa.eu/internal_market/consultations/docs/2010/governance/feedback_statement_en.pdf. 
See the abovementioned Green Paper, Sections 3.5 and 5.5. 
Study  on  Monitoring  and  Enforcement  Practices  in  Corporate  Governance  in  the  Member  States, 
accessible  on  http://ec.europa.eu/internal_market/company/docs/ecgforum/studies/comply-or-explain-
090923_en.pdf. 

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Two preliminary questions also deserve consideration. 

Firstly, European rules on corporate governance apply to ‘listed’ companies (i.e. companies 
that issue shares admitted to trading on a regulated market). They generally do not distinguish 
according to company size12 or type. Some Member States, however, have specific corporate 
governance  codes  tailored  to  small  and  medium-sized  listed  companies13,  e.g.  where  the 
controlling shareholder may also be the manager. Those codes include recommendations that 
reflect company size and structure, which are therefore less complex for small businesses to 
implement.  In  other  Member  States,  codes  designed  for  all  listed  companies  contain  certain 
provisions tailored to smaller companies14. So the question is whether the EU should have a 
differentiated  approach  and  how  best  to  take  account  of  the  potential  difficulty  of  applying 
some corporate governance practices across the range of types and sizes of companies15. 

Secondly, good corporate governance may also matter to shareholders in unlisted companies. 
While certain corporate governance issues are already addressed by company law provisions 
on  private  companies,  many  areas  are  not  covered.  Corporate  governance  guidelines  for 
unlisted companies may need to be encouraged: proper and efficient governance is valuable 
also for unlisted companies, especially taking into account the economic importance of certain 
very large unlisted companies. Moreover, putting excessive burden on listed companies could 
make  listing  less  attractive.  However,  principles  designed  for  listed  companies  cannot  be 
simply transposed to unlisted companies, as the challenges they face are very different. Some 
voluntary  codes  have  already  been  drafted  and  initiatives  taken  by  professional  bodies  at 
European16  or  national  level17.  So  the  question  is  whether  any  EU  action  is  needed  on 
corporate governance in unlisted companies. 

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But there are exceptions, for instance, Article 41(1), second subparagraph of the Directive 2006/43/EC 
of the European Parliament and of the Council of 17 May 2006 on statutory audits of annual accounts 
and  consolidated  accounts,  amending  Council  Directives  78/660/EEC  and  83/349/EEC  and  repealing 
Council Directive 84/253/EEC (OJ L 157, 9.6.2006, p. 87) allows Member States to permit SMEs that 
are listed companies not to set up a separate audit committee. 
See, for example, Code de gouvernement d’entreprise pour les valeurs moyennes et petites, December 
2009, Middlenext, accessible at http://www.middlenext.com/. 
See for example the UK Corporate Governance Code, accessible at 
http://www.frc.org.uk/corporate/ukcgcode.cfm. 
The logic of burden reduction for small and medium companies is also present in the ongoing review of 
the  accounting  directives  (Council  Directives  78/660/EEC  and  83/349/EEC),  although  it  will  mainly 
target non-listed companies and in the Green on the Audit policy published in 2010 - COM(2010) 561 -, 
available at 
http://ec.europa.eu/internal_market/consultations/docs/2010/audit/green_paper_audit_en.pdf.  
Corporate  Governance  Guidance  and  Principles  for  Unlisted  Companies  in  Europe,  European 
Confederation of Directors’ Associations (EcoDa), accessible at 
http://www.ecoda.org/docs/ECODA_WEB.pdf. 
See for instance in Belgium the Buysse Code — Corporate governance recommendations for non-listed 
enterprises  (http://www.codebuysse.be/downloads/CodeBuysse_EN.pdf); 
the  Central 
initiative  Improving  corporate  governance  of  unlisted  companies 
Chambers  of  Commerce 
(http://www.keskuskauppakamari.fi/content/download/19529/421972); 
the  UK,  Corporate 
Governance  Guidance  and  Principles  for  Unlisted  Companies  in  the  UK,  Institute  of  Directors 
(http://www.iod.com/MainWebsite/Resources/Document/corp_gov_guidance_and_principles_for_unlis
ted_companies_in_the_uk_final_1011.pdf) . 

in  Finland 

in 

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Questions: 

(1) 

(2) 

Should  EU  corporate  governance  measures  take  into  account  the  size  of  listed 
companies?  How?  Should  a  differentiated  and  proportionate  regime  for  small  and 
medium-sized  listed  companies  be  established?  If  so,  are  there  any  appropriate 
definitions or thresholds? If so, please suggest ways of adapting them for SMEs where 
appropriate when answering the questions below. 

Should  any  corporate  governance  measures  be  taken  at  EU  level  for  unlisted 
companies?  Should  the  EU  focus  on  promoting  development  and  application  of 
voluntary codes for non-listed companies? 

1. 

BOARDS OF DIRECTORS 

The term ‘board of directors’ in this Green Paper essentially refers to the supervisory role of 
directors.  In  a  dual  structure,  this  role  generally  falls  to  the  supervisory  board18.  The  term 
‘non-executive director’ includes the members of the supervisory board in the dual system. 

Boards  of  directors  have  a  vital  part  to  play  in  the  development  of  responsible  companies. 
And in many respects, the role played by the chairperson seems to have a considerable impact 
on the board’s functioning and success. In view of this impact, it could be useful to define the 
position and responsibilities of the chairperson of the board more clearly.  

Question: 

(3) 

Should the EU seek to ensure that the functions and duties of the chairperson of the 
board of directors and the chief executive officer are clearly divided? 

Other  topics  that  merit  closer  examination,  with  a  view  to  enabling  boards  of  directors  to 
challenge management decisions effectively, are considered below. 

1.1. 

Board composition 

The  composition  of  the  board  has  to  suit  the  company’s  business.  Non-executive  board 
members  should  be  selected  on  the  basis  of  a  broad  set  of  criteria,  i.e.  merit,  professional 
qualifications,  experience,  the  personal  qualities  of  the  candidate,  independence  and 
diversity19. 

Diversity in the members’ profiles and backgrounds gives the board a range of values, views 
and sets of competencies20. It can lead to a wider pool of  resources and expertise. Different 
leadership  experiences,  national  or  regional  backgrounds  or  gender  can  provide  effective 
means  to  tackle  ‘group-think’  and  generate  new  ideas.  More  diversity  leads  to  more 
discussion,  more  monitoring  and  more  challenges  in  the  boardroom.  It  potentially  results  in 

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This  Green  Paper  has  no  bearing  on  the  roles  assigned  to  different  company  bodies  and  board-level 
employee participation under national law. 
It is worth noting that some Member States provide for regimes of employee participation in the boards 
‘Enhancing stakeholder diversity in the Board room’, ‘The Erfurt meetings’ series, No 1, March 2008, 
European Citizens’ Seminars e.V. (Erfurt, Germany) publishers. 

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better  decisions  but  getting  to  those  decisions  may  take  more  time.  Therefore,  the 
commitment and support of the chairperson is indispensable. 

1.1.1.  Professional diversity 

Diversified expertise is considered the key to efficient board work. A variety of professional 
backgrounds  is  needed  to  ensure  that  the  board  as  a  whole  understands,  for  example,  the 
complexities  of  global  markets,  the  company’s  financial  objectives  and  the  impact  of  the 
business  on  different  stakeholders  including  employees.  Companies  interviewed  by  the 
Commission acknowledged the importance of identifying complementary profiles in selecting 
board  members.  However,  this  is  not  yet  general  practice.  For  example,  48%  of  European 
boards have no director with a sales or marketing profile and 37% of audit committees do not 
include a chief financial officer (CFO) or former CFO21.  

Accurate  assessment  of  skills  and  expertise  is  the  single  most  important  factor  in  selecting 
new non-executive board members. Therefore, recruitment policies which identify the precise 
skills needed by the board could help increase its ability to monitor the company effectively. 

1.1.2. 

International diversity  

In a sample of large European listed companies, an average of 29% of board members were 
non-nationals22. There were, however, great disparities among European countries. While the 
Netherlands  leads  the  way  with  54%,  only  8%  of  board  members  in  Germany  were  non-
nationals. Even today, one in four large European listed companies has no foreign directors on 
its board.  

Some  companies  highlighted  the  importance  of  foreign  board  members  for  international 
companies  while  others  underlined  the  difficulties  deriving  from  different  cultural 
backgrounds  and  languages.  In  companies  with  foreign  board  members  there  is  a  match 
between  their  regional  presence  and  their  international  board  members.  Knowledge  of 
regional markets is often mentioned as a key factor in choosing foreign candidates for board 
membership. 

1.1.3.  Gender diversity 

The  issue  of  gender  diversity  in  economic  decision-making  is  being  addressed  in  a 
comprehensive manner by the Commission in its "Strategy for equality between women and 
men  2010-2015"  of  September  201023  and  in  the  follow-up  given  to  this  strategy  by  the 
Commission24.  According  to  the  Commission's  findings,  the  proportion  of  women  on  the 
(supervisory)  boards  of  listed  companies  in  the  EU  is  currently  on  average  12%25.  There  is 
evidence that the increase in the number of women university graduates does not bring about 

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Heidrick  &  Struggles,  Corporate  Governance  Report  2009  —  Boards  in  turbulent  times,  using  a 
selection of 371 top companies in 13 countries based on the reference stock exchange. 
See Heidrick & Struggles. 
Communication  from  the  Commission  to  the  European  Parliament,  the  Council,  the  European 
Economic  and  Social  Committee  and  the  Committee  of  the  Regions,  "Strategy  for  equality  between 
women and men 2010-2015", COM(2010) 491 final. 
See  details  in  the  Commission  Staff  Working  Paper  "The  Gender  Balance  in  Business  Leadership", 
SEC(2011) 246 final. 
European Commission, Database on women and men in decision-making 
http://ec.europa.eu/social/main.jsp?catId=764&langId=en. 

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significant  change  in  this  respect26.  Consequently,  a  number  of  Member  States  have  taken 
steps  to  ensure  gender  balance  on  boards,  or  plan  to  do  so27.  Moreover,  some  companies 
interviewed  mentioned  that  such  requirements  had  helped  to  professionalise  the  selection 
procedure. 

Gender  diversity  can  contribute  to  tackling  group-think.  There  is  also  evidence  that  women 
have different leadership styles28, attend more board meetings29 and have a positive impact on 
the collective intelligence of a group30. Studies suggest there is a positive correlation between 
the  percentage  of  women  in  boards  and  corporate  performance31,  though  for  certain  the 
overall impact of women on firm performance is more nuanced32. Although these studies do 
not  prove  any  causality,  the  correlation  highlights  the  business  case  for  gender  balance  in 
management and corporate decision-making. Nonetheless, promoting women to boards has as 
one indisputably positive effect: it contributes to increasing the pool of talent available for a 
company’s  highest  management  and  oversight  functions.  This  is  why  the  Commission's 
"Strategy  for  equality  between  women  and  men"  stresses  that  over  the  next  five  years,  the 
Commission  will  "consider  targeted  initiatives  to  improve  the  gender  balance  in  decision-
making". 

The  introduction  of  measures  such  as  quotas  or  targets  to  ensure  gender  balance  in  boards, 
however, is not sufficient if companies do not adopt diversity policies that contribute to work-
life  balance  for  women  and  men  and  encourage  notably  the  mentoring,  networking  and 
adequate training for management positions that are essential for women wanting to follow a 
career path that leads to  eligibility  for board positions. While  it should be for companies to 
decide  whether  they  introduce  such  a  diversity  policy,  boards  should  at  least  be  required  to 
consider  the  matter  and  disclose  the  decisions  that  they  have  taken.  The  Commission  will 
consider  these  matters  in  the  context  of  the  follow-up  to  its  "Strategy  for  equality  between 
women and men 2010-2015" of September 2010 and to this Green Paper. 

Questions: 

(4) 

(5) 

(6) 

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Should recruitment policies be more specific about the profile of directors, including 
the  chairman,  to  ensure  that  they  have  the  right  skills  and  that  the  board  is  suitably 
diverse? If so, how could that be best achieved and at what level of governance, i.e. at 
national, EU or international level? 

Should listed companies be required to disclose whether they have a diversity policy 
and, if so, describe its objectives and main content and regularly report on progress? 

Should listed companies be required to ensure a better gender balance on boards? If so, 
how? 

Women matter, McKinsey & Company 2007, 2010. 
See the above mentioned Commission Staff Working Paper. 
Women matter, McKinsey & Company 2008. 
Adams  and  Ferreira ‘Women  in  the  boardroom  and  their impact  on  governance  and performance’,  in 
Journal of Financial Economics 94 (2009). 
Woolley, Chabris, Pentland, Hashmi and Malone, ‘Evidence for a Collective Intelligence Factor in the 
Performance of Human Groups’, Sciencexpress, 30 September 2010. 
Women  matter,  McKinsey  &  Company  2007;  Female  Leadership  and  Firm  Profitability,  Finnish 
Business and Policy Forum — EVA 2007; The Bottom Line: Connecting Corporate Performance and 
Gender Diversity, Catalyst 2004. 
See Adams and Ferreira. 

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1.2. 

Availability and time commitment 

The role of non-executive directors has grown in complexity and importance. This is reflected 
in a number of national corporate governance codes and even in legislation. Member States 
have sought to establish the principle that non-executive directors should dedicate sufficient 
time  to  their  duties.  Some  Member  States  have  gone  further  and  recommend  or  limit  the 
number of board mandates a director may hold.  

Limiting  the  number  of  mandates  could  be  a  simple  solution  to  help  ensure  non-executive 
directors devote sufficient time to monitoring and supervising their particular companies. The 
limits  would  have  to  cater  for  the  individual  situation  of  non-executive  directors  and  of  the 
company in  question. They should take into account whether the mandates are held in non-
group or non-controlled undertakings33, whether the person in question also holds executive 
positions,  whether  it  is  an  ordinary  non-executive  mandate  or  a  chairmanship,  and  whether 
additional positions are held in supervisory bodies of companies with requirements similar to 
those of listed companies.  

Question: 

(7) 

Do you believe there should be a measure at EU level limiting the number of mandates 
a non-executive director may hold? If so, how should it be formulated? 

1.3. 

Board evaluation 

The  Commission’s  2005  Recommendation  on  the  role  of  non-executive  or  supervisory 
directors of listed companies34 stated that the board should evaluate its performance annually. 
This  includes  assessing  its  membership,  organisation  and  operation  as  a  group,  the 
competence and effectiveness of each board member and of the board committees, and how 
well the board has performed against any performance objectives set.  

Regular use of an external facilitator (e.g. every third year) could improve board evaluations 
by bringing an objective perspective and sharing best practices from other companies35. But 
there still seems to be only a limited number of service providers in some domestic markets. 
Greater demand, however, is likely to engender a better offer.  

Evidence gathered by the Commission suggests that it is particularly at a time of crisis, or of a 
breakdown in communication between board members, that an external reviewer really adds 
value to the evaluation. The chairman’s attitude to evaluation seems to be key to its success.  

In  addition  to  the  items  mentioned  in  the  Commission  Recommendation,  the  review  should 
also cover the quality and timeliness of information received by the board, the management’s 

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‘Controlled  undertaking’,  as  defined  in  Article  2(1)(f)  of  Directive  2004/109/EC  of  the  European 
Parliament and of the Council of 15 December 2004 on the harmonisation of transparency requirements 
in relation to information about issuers whose securities are admitted to trading on a regulated market 
and  amending  Directive  2001/34/EC.  See  also  the  parent-subsidiary  relationship  as  explained  in 
Article 1 of Directive 83/349/EEC on consolidated accounts. 
Commission  Recommendation  2005/162/EC  of  15  February  2005  on  the  role  of  non-executive  or 
supervisory directors of listed companies and on the committees of the (supervisory) board. 
OECD,  Corporate  governance  and  the  financial  crisis:  Conclusions  and  emerging  good  practices  to 
enhance implementation of the Principles, 24 February 2010, p. 20. 

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response to requests for clarification and the role of the chairman36. To encourage openness, a 
degree  of  confidentiality  should  be  maintained.  So  any  evaluation  statement  to  be  disclosed 
should be limited to explaining the review process.  

Question: 

(8) 

Should  listed  companies  be  encouraged  to  conduct  an  external  evaluation  regularly 
(e.g. every three years) ? If so, how could this be done? 

1.4. 

Directors’ remuneration 

As  a  concept,  corporate  governance  essentially  focuses  on  the  issues  which  arise  from 
separating  ownership  and  control,  in  particular  the  principal-agent  relationship  between 
shareholders and executive directors. Directors’ remuneration has widely been used as a tool 
to align the interests of shareholders and executive directors and so reduce agency costs. In 
recent years, variable remuneration, normally linked to performance and responsibilities, has 
become  much  more  prevalent.  However,  a  mismatch  between  performance  and  executive 
directors’  remuneration  has  also  come  to  light.  Poor  remuneration  policies  and/or  incentive 
structures  may  lead  to  unjustified  transfers  of  value  from  companies  and  their  shareholders 
and  other  stakeholders  to  executives.  Moreover,  a  focus  on  short-term  performance  criteria 
may have a negative influence on long-term sustainability of the company.  

The  Commission  has  addressed  problems  related  to  directors’  remuneration  in  three 
Recommendations37.  The  main  recommendations  are  disclosure  of  remuneration  policy  and 
the individual remuneration of executive and non-executive directors, the shareholders´ vote 
on  the  remuneration  statement,  an  independent  functioning  remuneration  committee  and 
appropriate  incentives  which  foster  performance  and  long-term  value  creation  by  listed 
companies. Commission reports38 show that a number of Member States have not adequately 
addressed  these  issues.  On  the  other  hand,  there  appears  to  be  a  growing  tendency  among 
Member  States  to  legislate  on  disclosure  and  the  shareholders´  vote.  In  2009,  the  European 
Corporate  Governance  Forum  recommended  that  disclosure  of  remuneration  policy  and 
individual remuneration be made mandatory for all listed companies39. It also recommended a 
binding  or  advisory  shareholder  vote  on  remuneration  policy  and  greater  independence  for 
non-executive  directors  involved  in  determining  remuneration  policy.  The  Commission  also 
consulted  on  this  issue  in  the  2010  Green  Paper  on  Corporate  Governance  in  Financial 
Institutions40.  The  purpose  of  the  consultation  in  this  Green  Paper  is  to  receive  feedback  as 
regards the more detailed questions below. 

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See Higgs, D. Review of the role and effectiveness of non-executive directors, January 2003. 
Commission Recommendations 2004/913/EC, 2005/162/EC and 2009/385/EC. 
Commission reports SEC(2007) 1022 and (2010) 285. 
Statement by the European Corporate Governance Forum of 23 March 2009. 
See  question  7.1.  Respondents  to  the  consultation  generally  expressed  the  view  that  incentives  for 
directors must be properly structured in order to encourage long term and sustainable performance of 
companies.  However,  the  majority  was  opposed  to  legislative  measures  as  regards  the  structure  of 
remuneration  in  listed  companies.  Nevertheless,  certain  respondents  mentioned  that  they  would 
welcome more transparency of remuneration policies of directors of listed companies and a shareholder 
vote. 

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Questions: 

(9) 

Should disclosure of remuneration policy, the annual remuneration report (a report on 
how  the  remuneration  policy  was  implemented  in  the  past  year)  and  individual 
remuneration of executive and non-executive directors be mandatory?  

(10)  Should it be mandatory to put the remuneration policy and the remuneration report to a 

vote by shareholders? 

1.5. 

Risk management 

All companies, whatever their specific fields of operations, face a wide variety of external or 
internal  risks.  According  to  their  specificities  (field  of  activity,  size,  international  exposure, 
complexity) they should develop an adequate risk culture and arrangements to manage them 
effectively. Some companies may face risks that significantly affect society as a whole: risks 
related  to  climate  change41,  to  the  environment  (e.g.  the  numerous  dramatic  oil  spills 
witnessed  in  recent  decades),  health,  safety,  human  rights,  etc.  Others  operate  critical 
infrastructure, the disruption or destruction of which could have major cross-border impacts42. 
However, activities that might potentially generate such risks are subject to specific sectoral 
legislation and to monitoring by competent authorities. Thus, taking into account the diversity 
of situations, it does not seem possible to propose a 'one size fits all' risk management model 
for all types of companies. It is, however, crucial that the board ensures a proper oversight of 
the risk management processes. 

To  be  effective  and  consistent  any  risk  policy  needs  to  be  clearly  ‘set  from  the  top’  i.e. 
decided by the board of directors for the whole organisation. It is generally recognised43 that 
the  board  of  directors  bears  primary  responsibility  for  defining  the  risk  profile  of  a  given 
organisation  according  to  the  strategy  followed  and  monitoring  it  adequately  to  ensure  it 
works effectively. 

Some  aspects  may  differ  due  to  the  variety  of  legal  frameworks  in  place,  e.g.  the  dual  or 
unitary structure  of board of directors. In each case, it is indispensable to define clearly the 
roles and responsibilities of all parties involved in the risk management process: the board, the 
executive  management  and  all  operational  staff  working  in  the  risk  function.  The  job 
descriptions must be known internally and externally. 

Questions: 

(11)  Do you agree that the board should approve and take responsibility for the company’s 
‘risk  appetite’  and  report  it  meaningfully  to  shareholders?  Should  these  disclosure 
arrangements also include relevant key societal risks? 

(12)  Do  you  agree  that  the  board  should  ensure  that  the  company’s  risk  management 
arrangements are effective and commensurate with the company’s risk profile?  

41 

42 

43 

E.g.  resilience  of  the  company's  investments  to  climate  change,  financial  or  other  implications  from 
regulation on greenhouse gas emissions. 
EU ‘critical infrastructure protection’ webpage: 
http://europa.eu/legislation_summaries/justice_freedom_security/fight_against_terrorism/jl0013_en.htm 
From Commission interviews. 

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2. 

SHAREHOLDERS 

Shareholders’  role  in  corporate  governance  was  addressed  in  the  Green  Paper  on  corporate 
governance in financial institutions, published in June 2010.  

institutions'  management  accountable  contributed 

The June 2010 Green  Paper found  that a lack of appropriate shareholder  interest in holding 
financial 
to  poor  management 
accountability and may have facilitated excessive risk taking in financial institutions. It found 
that,  in  many  cases,  shareholders  deemed  the  expected  profits  from  taking  these  risks 
worthwhile and so implicitly supported excessive risk taking, especially though high leverage. 
The reason is that shareholders would fully benefit from the upside of such a strategy, while 
they participate in losses only until the value of shareholder equity reaches zero, after which 
further  losses  would  be  borne  by  the  creditors  (known  as  the  "limited  liability"  of 
shareholders).  

The  behaviour  of  shareholders  in  financial  institutions,  in  relation  to  excessive  risk  taking, 
may  be  a  special  case  because  their  operations  are  complex  and  difficult  to  understand. 
Nonetheless, the evidence gathered during the preparation of this Green Paper suggests that 
the findings of the 2010 Green Paper regarding the lack of shareholder engagement and the 
reasons  for  this  are,  to  a  large  extent,  also  relevant  to  shareholder  behaviour  in  listed 
companies  with  dispersed  ownership.  In  companies  with  a  dominant  or  controlling 
shareholder,  it  seems  that  the  major  challenge  is  to  ensure  that  the  (economic)  interests  of 
minority  shareholders  are  adequately  protected.  In  addition,  minority  shareholders  who  are 
willing to engage with companies may also be confronted with the difficulties set out below. 

2.1. 

Lack of appropriate shareholder engagement  

Shareholder engagement is generally understood as actively monitoring companies, engaging 
in  a  dialogue  with  the  company’s  board,  and  using  shareholder  rights,  including  voting  and 
cooperation  with  other  shareholders,  if  need  be  to  improve  the  governance  of  the  investee 
company  in  the  interests  of  long-term  value  creation.  Although  engagement  on  the  part  of 
short-term  investors  may  have  a  positive  effect44,  it  is  generally  understood  as  an  activity 
which improves long-term returns to shareholders45. Therefore, the Commission believes that 
it is primarily long-term investors46 who have an interest in engagement.  

Some  of  the  reasons  for  a  lack  of  shareholder  engagement  were  set  out  in  the  2010  Green 
Paper and will not be repeated here. Some of these reasons, such as the cost of engagement, 
the  difficulty  of  valuing  the  return  on  engagement  and  the  uncertainty  of  the  outcome  of 
engagement,  including  free  rider  behaviour,  seem  to  have  an  impact  on  most  institutional 
investors47.  In  the  2010  Green  Paper  the  Commission  also  asked  whether  institutional 
investors,  including  asset  owners  and  managers,  should  be  required  to  publish  their  voting 
policies  and  records.  The  vast  majority  of  respondents  supported  such  a  rule.  They  thought 
public  disclosure  would  improve  investor  awareness,  optimise  investment  decisions  by  the 

44 

45 
46 

47 

For instance, engagement by typical short-term-oriented institutional investors, such as ‘activist’ hedge 
funds, may be beneficial, because it can act as a catalyst for a change in governance and raise awareness 
among other shareholders. 
See the UK Stewardship Code. 
Investors with long-term obligations towards their beneficiaries, such as pension funds, life insurance 
companies, state pension reserve funds and sovereign wealth funds. 
For the purposes of this Green Paper, ‘institutional investor’ is understood in a broad sense, i.e. as any 
institution which professionally invests (also) on behalf of clients and beneficiaries. 

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ultimate  investors,  facilitate  issuers’  dialogue  with  investors  and  encourage  shareholder 
engagement. One of the options currently considered by the Commission would therefore be a 
framework  for  transparency  in  voting  policies  and  disclosure  of  general  information  about 
their implementation while respecting the equal treatment of shareholders. 

2.2. 

Short-termism of capital markets 

Major developments in capital markets in recent decades, including innovative products and 
technical change, mostly focused on the trading function of the capital markets and facilitated 
faster and more efficient trading. Innovations such as high-frequency and automated trading 
seem to have resulted in increased liquidity but also helped to shorten shareholding periods. 
Over the past two decades, investment horizons have shortened considerably. Turnover on the 
major equity exchanges is now running at 150% per year of aggregate market capitalisation, 
which implies average holding period is eight months.  

At the same time, intermediation of investments has increased, amplifying the importance of 
the  agency  relationship  between  long-term  investors  and  their  asset  managers.  It  has  been 
argued that the agency relationship actually contributes to short-termism on the market, which 
may  also  cause  mispricing,  herd  behaviour,  increased  volatility  and  lack  of  ownership  of 
listed companies. This issue is explained in Section 2.3.  

Some  investors  have  also  complained  of  a  ‘regulatory  bias’  towards  short-termism,  which 
hinders  long-term  investors,  in  particular,  from  adopting  longer-term  investment  strategies. 
During  the  Commission’s  preliminary  consultations  with  stakeholders  it  was  said  that 
solvency  and  pension  fund  accounting  rules,  which  were  intended  to  promote  greater 
transparency and more effective market valuation, have had unintended consequences. 

Question:  

(13)  Please  point  to  any  existing  EU  legal  rules  which,  in  your  view,  may  contribute  to 
inappropriate  short-termism  among  investors  and  suggest  how  these  rules  could  be 
changed to prevent such behaviour. 

2.3. 

The agency relationship between institutional investors and asset managers  

The  Commission  recognises  that  not  all  investors  need  to  engage  with  investee  companies. 
Investors are free to choose a short-term-oriented investment model without engagement. 

However,  the  agency  relationship  between  institutional  investors  (asset  owners)  and  their 
managers  contributes  to  capital  markets’  increasing  short-termism  and  to  mispricing48.  This 
issue is particularly relevant as regards the inactivity of long-term-oriented shareholders.  

2.3.1. 

Short-termism and asset management contracts 

It appears that the way asset managers’ performance is evaluated and the incentive structure 
of  fees  and  commissions  encourage  asset  managers  to  seek  short-term  benefits.  There  is 
evidence  (confirmed  in  the  Commission’s  dialogue  with  institutional  investors)  that  many 
asset  managers  are  selected,  evaluated  and  compensated  based  on  short-term,  relative 

48 

Paul Woolley, ‘Why are financial markets so inefficient and exploitative — and a suggested remedy’, in 
The Future of Finance: The LSE Report, 2010. 

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performance.  Performance  evaluation  on  a  relative  basis,  i.e.  the  extent  to  which  they 
outperform or underperform a market index, can encourage herd behaviour and a short-term 
focus, particularly if short interval is used to measure performance. The Commission believes 
that short-term incentives in asset management contracts may contribute significantly to asset 
managers’ short-termism, which probably has an impact on shareholder apathy.  

Many  respondents  to  the  June  2010  Green  paper49  supported  greater  disclosure  of  the 
incentive structures for asset managers. The question is then whether additional measures to 
better  align  the  interests  of  long-term  institutional  investors  and  asset  managers  are 
appropriate (for example developing a set of investment principles).  

Question:  

(14)  Are  there  measures  to  be  taken,  and  if  so,  which  ones,  as  regards  the  incentive 
structures  for  and  performance  evaluation  of  asset  managers  managing  long-term 
institutional investors’ portfolios? 

2.3.2.  Lack of transparency about the performance of fiduciary duties  

More  transparency  about  the  performance  of  fiduciary  duties  by  asset  managers,  including 
their  investment  strategies,  the  cost  of  portfolio  turnover,  whether  the  level  of  portfolio 
turnover  is  consistent  with  the  agreed  strategy,  the  cost  and  benefits  of  engagement,  etc., 
could shed more light on whether or not asset managers’ activities are beneficial for long-term 
institutional investors and long-term value creation on their behalf.  

Furthermore,  information  about  the  level  of  and  scope  of  engagement  with  investee 
companies  that  the  asset  owner  expects  the  asset  manager  to  exercise,  and  reporting  on 
engagement activities by the asset manager could be beneficial50.  

More  transparency  on  these  issues  would  help  institutional  investors  to  better  monitor  their 
agents and thus have a greater influence on the investment process. As a consequence of such 
improved  monitoring,  long-term  institutional  investors  might  decide  to  renegotiate  asset 
management contracts to introduce portfolio turnover caps and require their asset managers to 
be more active stewards of the investee companies51. 

Question:  

(15)  Should EU law promote more effective monitoring of asset managers by institutional 
investors  with  regard  to  strategies,  costs,  trading  and  the  extent  to  which  asset 
managers engage with the investee companies? If so, how? 

49 

50 

51 

Respondents  in  favour  were  mostly  investors,  asset  managers,  the  (financial  services)  industry  and 
business professionals. 
See also paragraph 7.3.4 of the Public consultation on the Review of the Markets in Financial 
Instruments Directive (Mifid): 
http://ec.europa.eu/internal_market/consultations/docs/2010/mifid/consultation_paper_en.pdf 
On  31  January  2010,  the  ICGN  Shareholder  Responsibilities  Committee  has  published  a  call  for 
evidence  with  regard  to  model  contract  terms  for  agreements  between  asset  owners  and  their  fund 
managers: http://www.icgn.org/policy_committees/shareholder-responsibilities-committee/-/page/307/. 

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2.4. 

Other possible obstacles to engagement by institutional investors 

2.4.1.  Conflicts of interest 

Conflicts  of  interest  in  the  financial  sector  seem  to  be  one  of  the  reasons  for  a  lack  of 
shareholder  engagement.  Conflicts  of  interest  often  arise  where  an  institutional  investor  or 
asset  manager,  or  its  parent  company,  has  a  business  interest  in  the  investee  company.  An 
example of this can be found in financial groups where the asset management branch may not 
want  to  be  seen  to  actively  exercise  its  shareholder  rights  in  a  company  to  which  its  parent 
company provides services or in which it has a shareholding.  

Question: 

(16)  Should  EU  rules  require  a  certain  independence  of  the  asset  managers’  governing 
body, for example from its parent company, or are other (legislative) measures needed 
to enhance disclosure and management of conflicts of interest?  

2.4.2.  Obstacles to shareholder cooperation  

Individual  investors,  in  particular  those  with  diversified  portfolios,  may  not  always  engage 
successfully. Shareholder cooperation could help them to be more effective.  

Many  respondents  to  the  2010  Green  Paper  proposed  that  existing  EU  law  on  acting  in 
concert,  which  may  hinder  effective  shareholder  cooperation,  should  be  amended.  The 
Commission recognises that clearer and more uniform rules on acting in concert would indeed 
be  beneficial  in  this  respect.  Other  ideas  have  been  advanced  to  facilitate  shareholder 
cooperation:  some  suggest  setting  up  shareholder  cooperation  fora,  while  others  propose  an 
EU proxy solicitation system where listed companies would be required to set up a specific 
function on their website enabling shareholders to post information on particular agenda items 
and seek proxies from other shareholders. 

Some  investors  have  mentioned  that  cross-border  voting  is  still  problematic  and  should  be 
facilitated by EU legislation. The Shareholders' Rights Directive (2007/36/EC) improved this 
situation  considerably.  However  late  transposition  of  the  directive  by  many  Member  States 
means  the  real  impact  for  the  individual  end  investor  is  only  now  becoming  apparent. 
Furthermore, there seems to be a problem in the actual transmission of relevant information 
between  the  issuer  and  the  shareholder  through  the  chain,  particularly  in  cross-border 
situations. The Commission is aware of the difficulties and will look into this issue in relation 
to its work on harmonising securities law. 

Question: 

(17)  What would be the best way for the EU to facilitate shareholder cooperation? 

2.5. 

Proxy advisors  

Institutional  investors  with  highly  diversified  equity  portfolios  face  practical  difficulties  in 
assessing in detail how they should vote on items on the agenda  of the  general meetings of 
investee  companies.  So  they  make  frequent  use  of  the  services  of  proxy  advisors,  such  as 
voting  advice,  proxy  voting  and  corporate  governance  ratings.  In  consequence,  proxy 
advisors’  influence  on  voting  is  substantial.  Moreover,  it  has  been  argued  that  institutional 
investors rely more heavily on voting advice for their investments in foreign companies than 

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for  investments  in  their  home  markets.  As  a  consequence,  the  influence  of  proxy  advisors 
would be greater in markets with a high percentage of international investors. 

The influence of proxy advisors raises some concerns. During the preparation of this Green 
Paper,  investors  and  investee  companies  shared  their  concerns  that  proxy  advisors  are  not 
sufficiently  transparent  about  the  methods  applied  with  regard  to  the  preparation  of  the 
advice. More specifically, it is said that the analytical methodology fails to take into account 
firm-specific characteristics and/or characteristics of national legislation and best practice on 
corporate  governance.  Another  concern  is  that  proxy  advisors  are  subject  to  conflicts  of 
interest.  When  proxy  advisors  also  act  as  corporate  governance  consultants  to  investee 
companies, this may give rise to conflicts of interest. Conflicts of interest also arise when a 
proxy advisor advises on shareholder resolutions, proposed by (one of) his clients. Finally, the 
lack  of  competition  in  the  sector  raises  concerns,  partly  about  the  quality  of  the  advice  and 
whether it meets investors’ needs. 

Questions: 

(18)  Should  EU  law  require  proxy  advisors  to  be  more  transparent,  e.g.  about  their 
analytical  methods,  conflicts  of  interest  and  their  policy  for  managing  them  and/or 
whether they apply a code of conduct? If so, how can this best be achieved? 

(19)  Do you believe that other (legislative) measures are necessary, e.g. restrictions on the 
ability of proxy advisors to provide consulting services to investee companies?  

2.6. 

Shareholder identification 

There  have  been  demands  recently  for  EU  action  to  increase  the  level  of  investor 
transparency52  towards  issuers  of  shares53.  Proponents  argue  that  means  of  identifying  their 
shareholders will enable issuers to engage in a dialogue with them, in particular in matters of 
corporate governance. This could also generally increase the involvement of shareholders in 
the  companies  they  invest  in54.  About  two  thirds  of  Member  States  have  already  granted 
issuers  the  right  to  know  their  domestic  shareholders55.  In  addition,  the  Transparency 

52 

53 

54 

55 

For  more  detailed  information,  see  the  Commission  staff  working  document  ‘The  review  of  the 
operation of Directive 2004/109/EC: emerging issues’ accompanying document to the Report from the 
Commission to the Council, the European Parliament, the European Economic and Social Committee 
and  the  Committee  of  the  Regions  Operation  of  Directive  2004/109/EC  on  the  harmonisation  of 
transparency  requirements  in  relation  to  information  about  issuers  whose  securities  are  admitted  to 
trading on a regulated market - SEC(2009) 611, pp. 88-94. 
This  question  was  also  raised  in  the  Green  Paper  Corporate  governance  in  financial  institutions  and 
remuneration policies - COM(2010) 284 - which was, however, limited to financial institutions. 
The Commission already looked at the risk of abuse connected to ‘empty voting’ in its consultation on 
the  Transparency  Directive.  That  consultation  suggested  that  the  problem  was  one  of  ‘record  date 
capture’. 
For  more  details,  see  Market  analysis  of  shareholder  transparency  regimes  in  Europe,  ECB  T2S 
Taskforce on Shareholder Transparency, 9 December 2010: 
http://www.ecb.int/paym/t2s/progress/pdf/subtrans/mtg7/2010-t2s-tst-questionnaire-response-
analysis.pdf?d6cc9adf38f63d24897c94e379213b81 

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Directive56 and related national implementation measures provide for a degree of transparency 
of holdings above a certain threshold57.  

Others  disagree  with  the  demand  to  create  a  European  tool  for  shareholder  identification. 
They  consider  that  modern  means  of  communication  have  made  it  very  easy  to  inform 
shareholders and potential investors about corporate governance issues and to get their views. 
Better  knowledge  of  shareholders  could  also  lead  to  management  entrenchment,  i.e.  help 
management  to  better  defend  themselves  against  any  actions  by  shareholders  to  challenge 
their conduct of business. In certain Member States there may also be privacy considerations 
related  to  data  protection  rules  forbidding  intermediaries  to  pass  on  information  on 
shareholders to issuers. 

Question: 

(20)  Do  you  see  a  need  for  a  technical  and/or  legal  European  mechanism  to  help  issuers 
identify  their  shareholders  in  order  to  facilitate  dialogue  on  corporate  governance 
issues?  If  so,  do  you  believe  this  would  also  benefit  cooperation  between  investors? 
Please provide details (e.g. objective(s) pursued, preferred instrument, frequency, level 
of detail and cost allocation). 

2.7.  Minority shareholder protection  

Minority shareholder protection is relevant in relation to the role of shareholders in corporate 
governance for a number of reasons.  

Minority  shareholder  engagement  is  difficult  in  companies  with  controlling  shareholders, 
which  remain  the  predominant  governance  model  in  European  companies.  This  raises  the 
question  whether  the  ‘comply  or  explain’  system  is  viable  in  such  companies,  particularly 
where adequate protection of minority shareholders is not guaranteed.  

Secondly, the question arises whether the existing EU rules are sufficient to protect minority 
shareholders’  interests  against  potential  abuse  by  a  controlling  shareholder  (and/or  the 
management).  

2.7.1. 

Scope  for  engagement  and  the  functioning  of  ‘comply  or  explain’  where  there  is  a 
controlling or dominant shareholder 

Minority  shareholder  engagement  can  be  particularly  challenging  in  companies  with  a 
dominant  or  controlling  shareholder  who  is  typically  also  represented  on  the  board.  The 
difficulties  or  inability  of  minority  shareholders  to  efficiently  represent  their  interests  in 
companies with controlling shareholders may make the ‘comply or explain’ mechanism much 
less  effective.  In  order  to  enhance  the  rights  of  shareholders,  certain  Member  States  (e.g. 
Italy) reserve the appointment of some board seats to minority shareholders. 

56 
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Directive 2004/109/EC. 
In  the  revision  of  the  Transparency  Directive  foreseen  for  2011,  the  Commission  is  also  envisaging 
introducing a disclosure requirement for the long economic positions having similar economic effect to 
holding of shares. 

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Question: 

(21)  Do  you  think  that  minority  shareholders  need  additional  rights  to  represent  their 
interests effectively in companies with controlling or dominant shareholders? 

2.7.2.  Protection against potential abuse  

Controlling shareholders and/or boards can extract benefits from a company to the detriment 
of  minority  shareholders’  interests  in  many  ways.  The  main  way  is  through  ‘related  party’ 
transactions.  

Current  EU  rules  already  cover  some  aspects  of  related  party  transactions,  basically 
accounting and disclosure. Companies are required to include in their annual accounts a note 
on  transactions  entered  into  with  related  parties,  stating  the  amount  and  the  nature  of  the 
transaction and other necessary information58.  

However,  some  investors  with  whom  discussions  were  held  during  the  preparation  of  this 
Green Paper argue that the rules are insufficient. They believe that disclosure of related party 
transactions is not enough in all situations and is not always timely. 

It  has  been  suggested59  that,  above  a  certain  threshold,  the  board  should  appoint  an 
independent  expert  to  provide  an  impartial  opinion  on  the  terms  and  conditions  of  related 
party  transactions  to  the  minority  shareholders.  Significant  related  party  transactions  would 
need approval by the general meeting. The publicity associated with general meetings might 
dissuade controlling shareholders from some transactions and give minority shareholders the 
chance  to  oppose  the  resolution  approving  the  transaction.  Some  propose  that  controlling 
shareholders should be precluded from voting. 

Question: 

(22)  Do  you  think  that  minority  shareholders  need  more  protection  against  related  party 

transactions? If so, what measures could be taken?  

2.8. 

Employee share ownership 

Employees' interest in the long-term sustainability of the company for which they work is an 
element  that  a  corporate  governance  framework  should  take  into  account.  Employees' 
involvement in the affairs of a company may take the form of information, consultation and 
participation in the board. But it can also relate to forms of financial involvement, particularly 
to employees becoming shareholders. Employee share ownership has a long tradition in some 
European  countries60.  Such  schemes  are  mainly  considered  as  means  to  increase  the 
commitment  and  motivation  of  workers,  raise  productivity  and  reduce  social  tension.  But 

58 

59 
60 

See  Article  43(1)(7b)  of  the  Fourth  Council  Directive  78/660/EEC  of  25  July  1978  based  on 
Article 54(3)(g) of the Treaty on the annual accounts of certain types of companies and Article 34(7b) 
of  the  Seventh  Council  Directive  83/349/EEC  of  13  June  1983  based  on  the  Article  54(3)(g)  of  the 
Treaty on consolidated accounts. 
See the Statement on minority shareholders’ rights by the European Corporate Governance Forum. 
Communication on the framework for promoting employee financial participation - COM(2002) 364 -, 
The PEPPER IV Report: Benchmarking of Employee Participation in Profits and Enterprise Results in 
the Member and Candidate Countries of the European Union, 2008. 

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employee  share  ownership  also  involves  risks  from  lack  of  diversification:  if  the  company 
fails, employee shareholders may lose both their job and their savings. However, employees 
as  investors  could  play  an  important  role  to  increase  the  proportion  of  long-term-oriented 
shareholders.  

Question: 

(23)  Are  there  measures  to  be  taken,  and  is  so,  which  ones,  to  promote  at  EU  level 

employee share ownership? 

3. 

THE  ‘COMPLY  OR  EXPLAIN’  FRAMEWORK  –  MONITORING  AND  IMPLEMENTING 
CORPORATE GOVERNANCE CODES 

Surveys among companies and investors show that most of them consider ‘comply or explain’ 
approach  as  an  appropriate  tool  in  corporate  governance.  Under  the  'comply  or  explain' 
approach,  a  company  which  chooses  to  depart  from  a  corporate  governance  code 
recommendation must give detailed, specific and concrete reasons for the departure. Its main 
advantage is its flexibility; it allows companies to adapt their corporate governance practices 
to  their  specific  situation  (taking  into  consideration  their  size,  shareholding  structure,  and 
sectoral specificities). It is also thought to make companies more responsible by encouraging 
them to consider whether their corporate governance practices are appropriate and by giving 
them  a  target  to  meet.  The  ‘comply  or  explain’  approach  is  therefore  widely  supported  by 
regulators,  companies  and  investors,  as  shown  by  a  study  on  monitoring  and  enforcement 
systems for Member States’ corporate governance codes published in autumn 200961. 

However, the general introduction of the ‘comply or explain’ approach in the EU has had its 
difficulties. The study referred to above revealed important shortcomings in applying 'comply 
or explain' principle that reduce the efficiency of the EU’s corporate governance framework 
and  limit  the  system’s  usefulness.  So  some  adjustments  appear  necessary  to  improve  the 
application  of  the  corporate  governance  codes.  The  solutions  should  not  alter  the 
fundamentals of the ‘comply or explain’ approach but contribute to its effective functioning 
by  improving  the  informative  quality  of  the  reports.  However,  these  solutions  are  without 
prejudice to the possible need to reinforce certain requirements at EU level by including them 
in legislation rather than making recommendations. 

3.1. 

Improving  the  quality  of  the  explanations  given  in  corporate  governance 
statements 

According  to  the  study  cited  above,  the  overall  quality  of  companies’  corporate  governance 
statements  when  departing  from  a  corporate  governance  code  recommendation 
is 
unsatisfactory.  Its  explanations  are  used  by  investors  to  make  their  choices  and  assess  the 
value  of  the  company.  The  study  showed,  however,  that  in  over  60%  of  cases  where 
companies chose not to apply recommendations, they did not provide sufficient explanation. 
They either simply stated that they had departed from a recommendation without any further 
explanation, or provided only a general or limited explanation. 

61 

Study  on  Monitoring  and  Enforcement  Practices  in  Corporate  Governance  in  the  Member  States, 
available at http://ec.europa.eu/internal_market/company/ecgforum/studies_en.htm. 

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In many Member States a slow but gradual improvement in this field can already be observed. 
Companies are learning, and better explanations are being provided thanks to the educational 
activities of public or private bodies (financial market authorities, stock exchanges, chambers 
of  commerce,  etc).  However,  further  improvement  could  be  achieved  by  introducing  more 
detailed  requirements  for  the  information  to  be  published  by  companies  departing  from  the 
recommendations.  The  requirements  should  be  clear  and  precise  –  many  of  the  present 
difficulties are due to misunderstanding of the nature of the explanations required. 

A good example of a precise requirement for companies is the Swedish corporate governance 
code, which provides that ‘in its corporate governance report, the company is to state clearly 
which  Code  rules  it  has  not  complied  with,  explain  the  reasons  for  each  case  of  non-
compliance  and  describe  the  solution  it  has  adopted  instead’62.  It  would  indeed  seem 
appropriate to require that companies not only disclose the reasons for departure from a given 
recommendation, but also give a detailed description of the solution applied instead. 

3.2. 

Better monitoring of corporate governance 

The  corporate  governance  statements  that  companies  publish  seem  not  to  be  monitored  as 
they should be. In most Member States, responsibility for enforcing the obligation to publish 
is left to investors who, depending on the culture and traditions in their Member State, often 
take little action. Financial market authorities or stock exchanges and other monitoring bodies 
work within different legislative frameworks and have developed different practices. In most 
cases, they only have a formal role of verifying whether the corporate governance statement 
has  been  published.  Few  Member  States  have  public  or  specialised  authorities  check  the 
completeness of the information provided (in particular, the explanations). 

‘Comply  or  explain’  could  work  much  better  if  monitoring  bodies  such  as  securities 
regulators,  stock  exchanges  or  other  authorities63  were  authorised  to  check  whether  the 
available  information  (in  particular,  the  explanations)  is  sufficiently  informative  and 
comprehensive.  The  authorities  should  not,  however,  interfere  with  the  content  of  the 
information disclosed or make business judgements on the solution chosen by the company. 
The authorities could make the monitoring results publicly available in order to highlight best 
practice and to push companies towards more complete transparency. Use of formal sanctions 
in the most serious cases of non-compliance could also be envisaged64. 

One  way  to  improve  monitoring  could  be  to  define  the  corporate  governance  statement  as 
regulated  information  within  the  meaning  of  Article  2(1)(k)  of  Directive  2004/109/EC  and 
thus make it subject to the powers of competent national authorities laid down in Article 24(4) 
of the Directive.  

As regards the different practices developed by monitoring bodies, there is great potential for 
improving and extending the current exchange of best practice.  

62 
63 

64 

See http://www.corporategovernanceboard.se/the-code/current-code, point 10.2. 
The  role  of  auditors  is  not  discussed  here,  as  a  consultation  on  the  role  of  statutory  audit  has  been 
launched through a separate green paper available at  
http://ec.europa.eu/internal_market/consultations/docs/2010/audit/green_paper_audit_en.pdf. 
As,  for  example,  is  done  in  Spain  —  see  the  Study  on  Monitoring  and  Enforcement  Practices  in 
Corporate Governance in the Member States, p. 63. 

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Questions: 

(24)  Do  you  agree  that  companies  departing  from  the  recommendations  of  corporate 
governance  codes  should  be  required  to  provide  detailed  explanations  for  such 
departures and describe the alternative solutions adopted? 

(25)  Do  you  agree  that  monitoring  bodies  should  be  authorised  to  check  the  informative 
quality  of  the  explanations  in  the  corporate  governance  statements  and  require 
companies to complete the explanations where necessary? If yes, what exactly should 
be their role? 

4. 

NEXT STEPS 

Member States, the European Parliament, the European Economic and Social Committee and 
other  interested  parties  are  invited  to  submit  their  views  on  the  suggestions  set  out  in  this 
Green Paper. Contributions should be sent to the following address to reach the Commission 
by  22  July  2011  at  the  latest:  markt-complaw@ec.europa.eu.  In  the  follow-up  to  this  Green 
Paper and on the basis of the responses received, the Commission will take a decision on the 
next  steps.  Any  future  legislative  or  non-legislative  proposal  will  be  accompanied  by  an 
extensive  impact  assessment  taking  into  account  the  need  to  avoid  disproportionate 
administrative burden for companies. 

Contributions  will  be  published  on  the  internet.  It  is  important  to  read  the  specific  privacy 
statement  attached  to  this  Green  Paper  for  information  on  how  your  personal  data  and 
contribution will be dealt with. 

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General questions 

Annex 1: List of questions 

(1) 

(2) 

Should  EU  corporate  governance  measures  take  into  account  the  size  of  listed 
companies?  How?  Should  a  differentiated  and  proportionate  regime  for  small  and 
medium-sized  listed  companies  be  established?  If  so,  are  there  any  appropriate 
definitions or thresholds? If so, please suggest ways of adapting them for SMEs where 
appropriate when answering the questions below. 

Should  any  corporate  governance  measures  be  taken  at  EU  level  for  unlisted 
companies?  Should  the  EU  focus  on  promoting  development  and  application  of 
voluntary codes for non-listed companies? 

Boards of directors 

(3) 

(4) 

(5) 

(6) 

(7) 

(8) 

(9) 

Should the EU seek to ensure that the functions and duties of the chairperson of the 
board of directors and the chief executive officer are clearly divided? 

Should recruitment policies be more specific about the profile of directors, including 
the  chairman,  to  ensure  that  they  have  the  right  skills  and  that  the  board  is  suitably 
diverse? If so, how could that be best achieved and at what level of governance, i.e. at 
national, EU or international level? 

Should listed companies be required to disclose whether they have a diversity policy 
and, if so, describe its objectives and main content and regularly report on progress? 

Should listed companies be required to ensure a better gender balance on boards? If so, 
how? 

Do you believe there should be a measure at EU level limiting the number of mandates 
a non-executive director may hold? If so, how should it be formulated? 

Should  listed  companies  be  encouraged  to  conduct  an  external  evaluation  regularly 
(e.g. every three years)? If so, how could this be done? 

Should disclosure of remuneration policy, the annual remuneration report (a report on 
how  the  remuneration  policy  was  implemented  in  the  past  year)  and  individual 
remuneration of executive and non-executive directors be mandatory?  

(10)  Should it be mandatory to put the remuneration policy and the remuneration report to a 

vote by shareholders? 

(11)  Do you agree that the board should approve and take responsibility for the company’s 
‘risk  appetite’  and  report  it  meaningfully  to  shareholders?  Should  these  disclosure 
arrangements also include relevant key societal risks?  

(12)  Do  you  agree  that  the  board  should  ensure  that  the  company’s  risk  management 
arrangements are effective and commensurate with the company’s risk profile? 

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Shareholders 

(13)  Please  point  to  any  existing  EU  legal  rules  which,  in  your  view,  may  contribute  to 
inappropriate  short-termism  among  investors  and  suggest  how  these  rules  could  be 
changed to prevent such behaviour. 

(14)  Are  there  measures  to  be  taken,  and  if  so,  which  ones,  as  regards  the  incentive 
structures  for  and  performance  evaluation  of  asset  managers  managing  long-term 
institutional investors’ portfolios? 

(15)  Should EU law promote more effective monitoring of asset managers by institutional 
investors  with  regard  to  strategies,  costs,  trading  and  the  extent  to  which  asset 
managers engage with the investee companies? If so, how? 

(16)  Should  EU  rules  require  a  certain  independence  of  the  asset  managers’  governing 
body, for example from its parent company, or are other (legislative) measures needed 
to enhance disclosure and management of conflicts of interest? 

(17)  What would be the best way for the EU to facilitate shareholder cooperation?  

(18)  Should  EU  law  require  proxy  advisors  to  be  more  transparent,  e.g.  about  their 
analytical  methods,  conflicts  of  interest  and  their  policy  for  managing  them  and/or 
whether they apply a code of conduct? If so, how can this best be achieved? 

(19)  Do you believe that other (legislative) measures are necessary, e.g. restrictions on the 
ability of proxy advisors to provide consulting services to investee companies? 

(20)  Do  you  see  a  need  for  a  technical  and/or  legal  European  mechanism  to  help  issuers 
identify  their  shareholders  in  order  to  facilitate  dialogue  on  corporate  governance 
issues?  If  so,  do  you  believe  this  would  also  benefit  cooperation  between  investors? 
Please provide details (e.g. objective(s) pursued, preferred instrument, frequency, level 
of detail and cost allocation). 

(21)  Do  you  think  that  minority  shareholders  need  additional  rights  to  represent  their 
interests effectively in companies with controlling or dominant shareholders? 

(22)  Do  you  think  that  minority  shareholders  need  more  protection  against  related  party 

transactions? If so, what measures could be taken? 

(23)  Are  there  measures  to  be  taken,  and  is  so,  which  ones,  to  promote  at  EU  level 

employee share ownership? 

Monitoring and implementation of Corporate Governance Codes 

(24)  Do  you  agree  that  companies  departing  from  the  recommendations  of  corporate 
governance  codes  should  be  required  to  provide  detailed  explanations  for  such 
departures and describe the alternative solutions adopted? 

(25)  Do  you  agree  that  monitoring  bodies  should  be  authorised  to  check  the  informative 
quality  of  the  explanations  in  the  corporate  governance  statements  and  require 
companies to complete the explanations where necessary? If yes, what exactly should 
be their role? 

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Annex 2: List of EU measures in the field of corporate governance 

–  Directive  2006/46/EC  of  the  European  Parliament  and  of  the  Council  of  14  June  2006 
amending  Council  Directives  78/660/EEC  on  the  annual  accounts  of  certain  types  of 
companies, 83/349/EEC on consolidated accounts, 86/635/EEC on the annual accounts and 
consolidated  accounts  of  banks  and  other  financial  institutions  and  91/674/EEC  on  the 
annual  accounts  and  consolidated  accounts  of  insurance  undertakings  (OJ  L  224, 
16.8.2006, p. 1–7). 

–  Directive  2004/109/EC  of  the  European  Parliament  and  of  the  Council  of  15  December 
2004  on  the  harmonisation  of  transparency  requirements  in  relation  to  information  about 
issuers  whose  securities  are  admitted  to  trading  on  a  regulated  market  and  amending 
Directive 2001/34/EC (OJ L 390, 31.12.2004, p. 38–57). 

–  Directive 2007/36/EC of the European Parliament and of the Council of 11 July 2007 on 
the exercise of certain rights of shareholders in listed companies (OJ L 184, 14.7.2007, p. 
17–24).  

–  Directive 2004/25/EC of the European Parliament and of the Council of 21 April 2004 on 

takeover bids (OJ L 142, 30.4.2004, p. 12–23). 

–  Commission  Recommendation  2005/162/EC  of  15  February  2005  on  the  role  of  non-
executive  or  supervisory  directors  of  listed  companies  and  on  the  committees  of  the 
(supervisory) board (OJ L 52, 25.2.2005, p. 51–63). 

–  Commission  Recommendation  2004/913/EC  of  14  December  2004  fostering  an 
appropriate  regime  for  the  remuneration  of  directors  of  listed  companies  (OJ  L  385, 
29.12.2004, p. 55–59). 

–  Commission  Recommendation  2009/385/EC  of  30  April  2009  complementing 
Recommendations  2004/913/EC  and  2005/162/EC  as  regards  the  regime  for  the 
remuneration of directors of listed companies (OJ L 120, 15.5.2009, p. 28–31). 

–   

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