Europe: the challenges for corporate governance

Last week the European Internal Market Commissioner, Charlie McCreevy, spoke at a conference on European corporate law and corporate governance organised by MEDEF, the Paris Bar Association and the Association française des entreprises privées (AFEP). In his speech, Mr McCreevy highlighted several challenges for corporate governance in Europe. The following extracts deserve attention because of the indications they provide about future policy at European level:

In the past 10 years or so, corporate governance codes have either been adopted or modernised in many European countries. These codes have, in general, served EU companies well. They are important instruments in the area of corporate governance. However, that does not mean that codes are always the right solution. In certain circumstances, binding rules may be necessary. The current financial crisis has pushed systems of corporate and internal governance across the global financial system to the limit. As we know, these systems have unfortunately been found wanting.

Credit rating agencies played a major role in the market turmoil by greatly underestimating the credit risk of structured credit products. We can no longer leave it to the rating agencies themselves to deal with this. This business is much too important for the stability of the financial markets for us to sit by and watch from the sidelines. And that is why, I intend to propose in the next few weeks, a legally binding registration and external oversight regime whereby European regulators will supervise the policies and procedures followed by the CRAs. Reforms to the corporate and internal governance of rating agencies will also be included.

It seems that clearer guidance may be needed from policy makers [with regard to remuneration]. Only about a third of Member States followed the Commission's 2004 recommendation that shareholders should be able to vote on the remuneration criteria applying to board members. Shareholders must have a say on this - and they must be more engaged. However, I note that the issue of remuneration for executives now figures in some of the emergency measures that certain of our Member States have taken in response to the financial crisis. That must mean that the message is hitting home. 

Availability of independent board members alone is not a guarantee for a well functioning board. Indeed, the current turmoil has led many to question the usefulness of simply requiring independent board members. The whole of the board and the individual board members must not only be competent in relation to their tasks; they must also excercise a collective responsibility and due diligence with respect to the company. And I include non executive directors in this. That does not mean that companies should look for board members only within the traditional circles or the so called "old boys" network. Why not cast the net wider.

I am convinced that active shareholders are a pillar of good corporate governance and have a role in the supervision of the company. But what if they become too active? And are they destructive if they only take a short term view? Here my answer is dialogue. Let shareholders explain their vision and their interests and share the philosophy of the management with them. In this respect, it should be noted that hedge funds, as a type of 'activist' shareholders generally improve the performance of investee companies. This perception is widely held. But shareholders must not take on the role of management. Strong management with well organised, diligent boards, conscious of the long term health of the company is crucial".