Following on from the European Commission’s Green Paper on the EU Corporate Governance framework, the Commission has published its Action Plan. The Action Plan sets out a number of proposals, to be taken forward in 2013, some of which will require new legislation and others which are considered ‘soft law’ (ie. recommendations and guidance). The proposals include:
- Disclosure of board diversity policy and risk management arrangements – the Commission proposes to amend existing legislation to strengthen disclosure requirements on board diversity policy and risk management, including non-financial risks faced by the company. The initiative on board diversity will be complimentary to the Commission’s current proposal for an objective of a 40% presence of the under-represented sex amongst non-executive directors of listed companies;
- Improving the quality of corporate governance reports, in particular the explanations provided for non-compliance – the Commission acknowledges that action has been taken by some Member States to improve the quality of explanations (eg. the recent changes to the UK Corporate Governance Code). For this reason, it is not proposing to adopt any legislative measures but instead will encourage Member States to exchange best practices and may possibly make a Recommendation to improve the quality of corporate governance reports and, in particular, the quality of explanations to be provided by companies that depart from the corporate governance codes;
- Improving the visibility of shareholdings in listed companies – the Commission believes that greater transparency on who owns shares in a company can improve the corporate governance dialogue. It will propose an initiative, as part of its legislative work on securities legislation, to improve the visibility of shareholdings in Europe;
- Disclosure of voting policies, improving transparency on remuneration and improving shareholder control over related party transactions – these initiatives, to be taken forward possibly through an amendment to the Shareholder Rights Directive, are aimed at stimulating longer-term value. In some respects, the UK is ahead of the game – it recently closed its consultation on executive remuneration requiring a mandatory shareholder vote on a company’s remuneration policy and the existing Listing Rules require shareholder approval of certain related party transactions;
- Clarification of the relationship between investor cooperation on corporate governance issues and the rules on “acting in concert” – this is in response to feedback and the perceived obstacles to effective shareholder co-operation. The Commission will develop guidance to increase legal certainty in this area; and
- Codification of existing EU company law into one instrument – this exercise will encompass, among other things, Directives covering mergers and divisions, the formation of public limited companies and foreign branches.
Some of these proposals echo Professor Kay’s recent recommendations, in his Final Report, to reverse the culture of short-termism and encourage collective shareholder engagement. Businesses are likely to be pleased that no legislative measures have been proposed which seek substantial alteration to the ‘comply or explain’ approach.