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Corporate Governance 2.0

van der Elst, C.F.; Vermeulen, E.P.M.

Published in:European Company Law

Publication date:2011

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Link to publication in Tilburg University Research Portal

Citation for published version (APA):van der Elst, C. F., & Vermeulen, E. P. M. (2011). Corporate Governance 2.0: Assessing the Green Paper of theEuropean Commission. European Company Law, 8(4), 165-174.

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European Company Law (ECL) is published under the aegis of the Centre for European Company Law (CECL), an academic partnership

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European Company Law

EUROPEAN COMPANY LAW AUGUST 2011, VOLUME 8, ISSUE 4140

A R T I C L E

* E-mail: [email protected], [email protected].

1 Directive 2004/25/EC of the European Parliament and of the Council of 21 Apr. 2004 on takeover bids, PBL no. 142, 30 Apr. 2004. See also J.A. McCahery & E.P.M. Vermeulen,

Does the Takeover Bids Directive Need Revision?, Working paper 2010, <http://ssrn.com/abstract=1547861>.

2 Directive 2006/46/EC of the European Parliament and of the Council of 14 Jun. 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 fi nancial institutions and 91/674/EEC

on the annual accounts and consolidated accounts of insurance undertakings, PBL no. 224, 16 Aug. 2006.

On 5 April 2011 the Eur opean Commission issued the Green Paper

on the EU Corporate Governance Framework. The paper invites all

interested parties to provide the Commission with ideas, propos-

als and arguments to improve the European corporate governance

scene. Although the paper is not taking position in the debate, it

follows from the structure of the paper that the European Commis-

sion considers that corporate governance 1.0, which is largely based

on (national) self-regulation instruments, does not adequately

address the recent fi nancial crisis and additional steps are neces-

sary. As a fi rst step towards an improved corporate governance

environment in the European Union (EU), the Green Paper starts

the debate on the measures that the European Commission wants

to consider for future regulatory action. The Commission identifi es

in the Green Paper the relevant issues in the fi eld of corporate gov-

ernance, which – in the Commission views – need to be strength-

ened and for which follow-up measures could be considered. The

European Commission divided these issues in three main items:

the functioning of the board of directors, the engagement of the

shareholders and the monitoring and enforcement instruments. We

will address these issues as well as the question of what the scope of

corporate governance rules should be. Section 1 briefl y provides an

overview of the state of the art of European corporate governance.

Section 2 addresses the major corporate governance issues that are

addressed in the Green Paper of the Commission, and section 3

discusses a number of these issues in light of the different sources

of corporate governance as well as the corporate governance prac-

tices in and outside the EU. Section 4 concludes.

1. STATE OF THE ART OF EUROPEAN CORPORATE GOVERNANCE

The European Commission is already paying attention to

corporate governance for more than a decade. The former

Commissioner Bolkestein appointed in September 2001 an expert

group, the High Level Group of Company Law Experts, to study

how corporate law in Europe could be improved. The expert

group focused on corporate governance issues and presented its

final report, ‘A modern regulatory framework for company law in

Europe’, late 2002. The Commission used the report to prepare its

communication on ‘Modernising Company Law and Enhancing

Corporate Governance in the European Union – A Plan to Move

Forward’ of May 2003. The plan provided in disclosure require-

ments for companies, professionalization of board of directors

with independent board members and strengthening the role

and the position of shareholders. It resulted in a number of new

directives and recommendations, of which the takeover direc-

tive, the shareholders’ rights directive, the directive modifying the

accounting directives, the auditor’s directive, the recommenda-

tion on the role of non-executive or supervisory directors and the

recommendation fostering an appropriate regime for the remu-

neration of directors are the most known in the field of corporate

governance. When a raider acquires a large voting block in a listed

entity, she has to make a public offer for all the remaining shares

and treat all shareholders equivalent.1 The sell-out right provides

minority shareholders the right to sell the shares to the offeror.

Listed companies must yearly provide in a corporate governance

statement, in which they refer to a corporate governance code,

shareholders’ rights, the operation and composition of the gover-

nance bodies and the control enhancing mechanisms.2 Sharehold-

ers must be treated equally, as stated in the shareholders’ rights

directive. In light of this, the directive stresses the importance of

sufficient notice periods to prepare the general meeting and to

elaborate convocations, of different means to participate in the

meeting, of the right to put items on the agenda and ask ques-

tions and of the right to be informed on the voting results of the

Corporate Governance 2.0: Assessing the Corporate Governance Green Paper of the European CommissionC H R I S T O P H V A N D E R E L S T , P R O F E S S O R O F B U S I N E S S L A W A N D E C O N O M I C S T I L B U R G U N I V E R S I T Y A N D G H E N T U N I V E R S I T Y A N D A T T O R N E Y - A T - L A W C O T T Y N A N D E R I K . P . M . V E R M E U L E N , P R O F E S S O R O F B U S I N E S S L A W T I L B U R G U N I V E R S I T Y A N D V I C E P R E S I D E N T A T T H E C O R P O R A T E L E G A L D E P A R T M E N T O F P H I L I P S I N T E R N A T I O N A L B V *

Van Der Elst, Christoph. ‘Corporate Governance 2.0: Assessing the Corporate Governance Green Paper of the European Commission’. European Company Law 8, no. 4 (2011): 165–174.


AUGUST 2011, VOLUME 8, ISSUE 4 EUROPEAN COMPANY LAW166

3 For an analysis of this directive, see F. Xiangxing, ‘Protection of Shareholders’ Rights at EU Level: How Far Does It Go?’, European Company Law 3 (2009): 124–130, and more

critically P. Masouros, ‘Is the EU Taking Shareholders Rights Seriously?: An Essay on the Impotence of Shareholdership in Corporate Europe’, European Company Law 5 (2010):

195–293.

4 Article 41 of 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, amend-

ing Council Directives 78/ 660/EEC and 83/349/EEC and repealing Council Directive 84/253/EEC PBL no. 156 of 9 Jun. 2006. For an analysis of the role and position of the

audit committee before the transposition of the Directive in eight countries, see E. Mouthaan, ‘The Audit Committee from a European Perspective’, European Company Law 1

(2007): 10–18.

5 Commission Recommendation of 15 Feb. 2005 on the role of non-executive or supervisory directors of listed companies and on the committees of the (supervisory) board,

PBL no. 52, 25 Feb. 2005.

6 Commission Recommendation of 14 Dec. 2004 fostering an appropriate regime for the remuneration of directors of listed companies, PBL no. 385, 29 Dec. 2004 and Com-

mission Recommendation of 30 Apr. 2009 complementing Recommendations 2004/913/EC and 2005/162/EC as regards the regime for the remuneration of directors of listed

companies, PBL no. 120, 15 May 2009. The transposition of the remuneration recommendations is assessed in Commission Staff Working Document, Report on the Applica-

tion by Member States of the EU of the Commission 2009/385/EC Recommendation (2009 Recommendation on Directors’ Remuneration) complementing Recommendations

2004/913/EC and 2005/162/EC as regards the regime for the remuneration of directors of listed companies, Brussels, 2 Jun. 2010 SEC(2010) 670. For an analysis of many

features on directors and executives’ pay in different European countries, see European Company Law 3, no. 2 (2006).

7 Banks, fi nancial institutions, insurance companies and undertakings for collective investments must have an effective system of governance that provides for sound and

prudent management of the business (Art. 11, CRD II (Directive 2006/48/EC), Art. 41 Solvency II (2009/138/EC), Art. 7 UCITS III (EC 2009/65)). Board members and key

personnel need to be fi t and proper and of good repute (Art. 11 CRD II, Art. 42 Solvency II, Art. 7 UCITS III) and must have risk management systems, internal audit and

internal control systems in place (Art. 22 and appendices CRD II; Arts 45, 46 and 44 Solvency II, Arts 4–16 Commission Directive 2010/43/EC).

8 Directive 2010/76/EU of the European Parliament and of the Council of 24 Nov. 2010 amending Directives 2006/48/EC and 2006/49/EC as regards capital requirements for

the trading book and for re-securitizations and the supervisory review of remuneration policies, PBL no. 329 of 14 Dec. 2010.

9 European Commission, Green Paper Corporate Governance in Financial Institutions and Remuneration Policies, 2 Jun. 2010, COM(2010) 284/3.

10 European Commission, Feedback Statement – Summary of Responses to Commission Green Paper on Corporate Governance in Financial Institutions, see <http://ec.europa.eu/

internal_market/consultations/2010/governance_en.htm>.

11 European Commission, Green Paper Audit Policy: Lessons from the Crisis, 13 Oct. 2010, COM(2010) 561 fi nal, 22.

general meeting.3 The auditor’s directive requires listed entities

to establish an audit committee to monitor the reporting process,

the effectiveness of internal control, the audit and the indepen-

dence of the auditor.4 Next to the audit committee, the European

Commission recommends to set up a remuneration committee

and a nomination committee, the latter to assist the board in

identifying and selecting board candidates as well as to assess the

board structure and the former to help the board in developing

the remuneration policy and individual remuneration schemes.

In a (supervisory) board, no individual or subgroup of members

must be able to dominate the decision-making process, and the

committees must be composed of a majority of independent

board members.5 Furthermore, it is recommended that the remu-

neration policy and remuneration packages are disclosed and that

shareholders approve this policy.6

Next to the requirements and recommendations for all listed

entities, the European Union (EU) issued specific duties for other

types of entities. In particular in the financial industry, many

additional governance requirements have been issued. Banks,

insurance companies, and UCITS must provide in competent

boards, risk management and internal control functions, compli-

ance management, etc.7 For banks, additional measures have

been taken on remuneration in the CRD III Directive, requiring

detailed remuneration policies for key personnel and promoting

sound and effective risk management and encouraging risk toler-

ated behaviour.8

The financial crisis fully shifted the interest of the EU and

the European Commission to the financial industry and, more

recently, also to the audit profession. In its Green Paper Corporate

Governance in Financial Institutions and Remuneration Policies,9

the European Commission addresses the position and composi-

tion of the board in light of its key role in controlling senior

management. It considers the knowledge, understanding and

expertise in risk management of boards as insufficient. It ques-

tions the short-termism of shareholders and investors pushing

for short-term value maximization. From the feedback statement,

it is clear that not many respondents advocate for more manda-

tory corporate governance rules but some (external) follow up of

boards should be endorsed.10 As the questions of the European

Commission regarding the position of shareholders are focusing

on institutional investors, many stressed the danger of different

treatment of shareholders (institutional shareholder versus other

shareholder type). The shareholders’ rights directive endorses the

principle of equal treatment of shareholders.

The supervision of the audit profession was significantly

restructured in the EU in the aftermath of the financial scandals

at the turn of the century. Directive 2006/43/EC further harmo-

nized the rules regarding the audit profession and the way the

external audit is conducted and monitored. The financial crisis

raised questions as to the relevance of these audits. In light of this

finding, the European Commission tested the market via a green

paper on audit to consider further measures to restore confidence

in the financial market.11 Mandatory rotation, joint audits and

specific contingency plans are put forward as possible techniques.

The final step that the European Commission started is

questioning the market on corporate governance improvements

for other commercial and industrial companies, both listed and

unlisted entities. These questions are addressed in the Green

Paper, which will be discussed next.

2. GREEN PAPER ON CORPORATE GOVERNANCE

The Green Paper distinguishes between four subjects. First,

attention is drawn to the applicability of corporate governance

measures. These measures were introduced around the turn of

the century and are mostly based on a ‘one-size-fits-all’ concept.


In the current system, there is hardly a distinction between large-

and medium-sized listed companies. The European Commission

asks whether this should be changed and what the role of Brussels

should be (see Table 1).

Furthermore, the Green Paper discusses the management of

a company. The European Commission is particularly interested

in the role of non-executive directors in a one-tier system. In

a two-tier system, such as the Netherlands, this role is usually

exercised by the supervisory board. This means that the question

of dividing the functions and duties of a chief executive officer

(CEO) from those of a chairman of the board as a supervisory

body are less relevant in two-tier systems. This is different for

questions about (1) the composition of the board of directors

and supervisory board, (2) the activities of the supervisory board,

(3) evaluating the performance of the supervisory board, (4) the

reward systems within the company and (5) risk management

issues (see Table 2).

The Green Paper devotes most attention to the role of share-

holders in a company (see Table 3). The European Commission

seems to assume that the financial crisis and abuses within busi-

nesses are largely attributable to the short-termism of investors.

It is acknowledged that activist shareholders such as hedge funds,

which attempt to gain a financial advantage from their invest-

ment, play an important role in the system of checks and balances

within a company. However, the emphasis should be on long-term

thinking. The interest of shareholders for sustainable returns and

business performance in the longer term, ensure better continuity

of businesses. An important role seems to be reserved for institu-

tional investors. Because these investors (pension funds, insurance

companies and sovereign wealth funds) have long-term obliga-

tions towards their constituency, they should be encouraged to be

more (actively) involved in their investments. This is necessary

in a financial world characterized by high-frequency trading and

the fast changes in share ownership. The growing importance of

stock prices when assessing the performance of companies seems

to encourage only short-term thinking. Therefore, involvement

of long-term shareholders is an important counterbalance to the

increasingly international and especially accelerating society.

The solution, according to the European Commission, should

be sought in making the relationship between institutional inves-

tors and asset managers more transparent. Because the perfor-

mance of asset managers is measured by looking at short-term

Table 1. Green Paper (General Provisions)

Subject Questions

One-size-fits-all

corporate governance

codes

Should corporate governance

measures distinguish among small-,

medium- and large-sized listed

companies?

Corporate governance

of non-listed companies

Should corporate governance initia-

tives be launched for non-listed

companies at the European level?

Table 2. Green Paper (Board of Management/Supervisory Board)

Subject Questions

Composition of the board of directors/

supervisory board

Should appointments of members of the board of directors/supervisory board be made

according to a predetermined ‘profile’? It is stated that a board of directors/supervisory

board should be composed of persons with different experiences, different profes-

sional backgrounds and skills. Moreover, it is recommended that persons with different

nationalities will be members of the board of directors/supervisory board. Finally, it is

argued that gender diversity in the boardroom will help reduce corporate governance

problems and agency costs.

What is the role of the EU policy maker to ensure the existence of a qualified board?

Time allocation of the members of the

board of directors/supervisory board

The supervisory role in listed companies is becoming increasingly complicated and time

consuming. The question is, therefore, whether limitations regarding the number of

mandates should be issued at the EU level?

Assessment The European Commission has issued recommendations that encourage an annual

review of the functioning of corporate bodies (Commission Recommendation

2005/162/EC, 15 February 2005). The question is whether periodic external evaluations

and assessments should be introduced?

Remuneration systems Should remuneration systems, individual salaries and bonuses be disclosed and

approved by the shareholders?

Riskmanagement Should the non-executive directors in a one-tier system or the supervisory board in a

two-tier system be responsible for the final approval of the ‘risk appetite’ of companies?


results, long-term strategies regarding the portfolio companies get

less attention. Moreover, the increasing involvement of institu-

tional shareholders may also be hampered by conflicts of interest

that may arise when institutional investors have other business

relationships with the company they invest in. Finally, the ‘acting

in concert’ regulations, which regulate the cooperation between

shareholders, are just another barrier to increasing the involve-

ment of institutional investors. Collaborative actions between

institutional investors could result in a public disclosure of

their shareholdings. In a worst-case scenario, they could even be

obliged to make a mandatory takeover bid. To be sure, the obliga-

tion to disclose shareholdings in a listed company, regardless of

the size of the interest, provides the directors with the necessary

information to enable them to start a dialogue with their inves-

tors. However, this transparency could have a negative spillover

effect in that the board is able to protect itself against ‘too much’

involvement of their shareholders.

Thus, there are a number of reasons that could hamper a

greater involvement of institutional investors. The fact that these

shareholders often invest a very large number of companies

makes it virtually impossible for them to be actively involved in

the decision-making process within each of their portfolio com-

panies. As a consequence, the voting behaviour of institutional

investors depends largely on the information given by ‘proxy

advisors’, such as voting recommendations and governance rat-

ings. The influence of these proxy advisors is increasing. In order

to solve these problems, the Green Paper draws attention to the

involvement of employees in a firm’s decision-making process.

Finally, the Green Paper has two questions about monitoring

and enforcing an adequate application of the ‘comply or explain’

principle (see Table 4). In practice, the explanations for the

deviations are rather vague and insufficient. Here, the European

Commission refers to Sweden, where, in addition to an explana-

tion of the deviation, the alternative corporate governance mea-

sure should also be stated and described in detail.

3. CORPORATE GOVERNANCE: THE WAY FORWARD

Convinced that Europe is facing an ‘innovation emergency’,

policymakers in Europe are hatching plans to achieve the objec-

tives of the Europe 2020 Strategy. The strategy aims to encourage

innovation and job creation by improving market conditions for

entrepreneurship and make the financing of companies more

accessible. The idea is that Europe should provide a sustainable

environment for potentially disruptive technologies to develop

into products and services that create new markets, improve

people’s lives and build greener and improved societies. The

European Commission is convinced that such an environment

can only be achieved when trust and credibility is established in

the single market in which corporations operate.

Restoring investors’ confidence in the integrity of capital

markets and addressing deficiencies in the relationship between

shareholders and managers of listed companies are two impor-

tant factors motivating the publication of a Green Paper on

5 April 2011, canvassing the possibility for an EU corporate

governance framework. Surprisingly, the Green Paper is also used

to start EU-wide discussions on the governance of non-listed

companies. Particularly, the European Commission addresses

some underlying concerns that are rooted in the one-size-fits-all

approach and wonders whether an effective corporate gover-

nance framework should take account of the size and type of

companies.

This essay argues that, even though the approach of the Green

Paper has some merits, a flexible national corporate governance

framework is more likely to generate value for corporations

due to its adaptability and responsiveness to the ever-changing

business needs and requirements. A more harmonized approach

will arguably have a petrifying effect on the growth and develop-

ment of European companies. This section proceeds as follows.

Section 3.1 provides an overview of the current practices and

Table 4. Green Paper (Compy or Explain)

Subject Questions

Explanations Should companies, besides explaining devia-

tions from a corporate governance code’s

principles, describe the alternative corporate

governance measure (as part of the explana-

tion of the deviation)?

Enforcement What is the role of a monitoring commit-

tee? Should this committee be empowered to

formally monitor the information that com-

panies provide in the corporate governance

statement?

Table 3. Green Paper (Shareholders)

Subject Questions

Appropriate

shareholder

engagement

Which measures should be intro-

duced to provide the asset managers

of institutional investors with long-

term view incentives?

Should the fiduciary duties of asset

managers be clarified?

Which measures would increase the

shareholder engagement?

Role of proxy advisors Which measures could increase the

transparency of the proxy advisors?

Shareholder

identification

Should listed companies (and, as a

consequence, the board of directors)

be granted a right to identify their

shareholders?

Employee involvement

in decision-making

process

Should employees be able to partici-

pate in a company’s decision-making

process as shareholders?


mechanisms for structuring and organizing the array of listed

and non-listed companies in the EU and attempts to explain the

incentive structures for adopting an improved corporate gover-

nance regime. Section 3.2 discusses the current pressures that are

forcing both executive and non-executive directors to respond to

the needs and requirements of shareholders and other stakehold-

ers. Section 3.3 considers the role of shareholders in an environ-

ment that is characterized by social networks and modern means

of communication.

3.1. Pillars of Corporate Governance

The corporate governance framework of listed companies can

generally be split in three separate pillars (see Figure 1). The core

pillar focuses on corporate law, which provides rules and stan-

dards for the formation, organization and operation of compa-

nies. The second pillar includes contractual mechanisms, such as

employment contracts and remuneration packages for corporate

directors and managers. Due to the inherent incompleteness of

corporate law statutes and the general lack of business expertise

on the part of adjudicators, which arguably limit their ability to

observe and verify corporate conflicts and, hence, hampers the

functioning of fiduciary duties and other company law standards,

corporate governance codes and best-practice principles (the

third pillar) were introduced to assist firms to organize and man-

age their business in the most effective manner.

The latter corporate governance measures that followed the

aftermath of the scandals in listed companies at the turn of the

twenty-first century have slowly but surely settled in the global

business environment. Still, even though firms allegedly began to

avail themselves of corporate governance principles, codes and

guidelines in their efforts to promote growth and innovation, they

allegedly never left the ‘box-ticking’ phase behind. Despite the

antipathy to corporate governance rules and regulations, however,

business leaders seem to recognize that corporate governance

shifts from a mere compliance environment – where firms and

their advisors are merely engaged in box-ticking to satisfy audi-

tors and other financial market watchdogs – to an area in which it

is viewed as an imperative for business success on a global scale.

Factors like improved board structures, financial transparency

and disclosure policies, and the alignment of executive pay with

shareholder value play a pivotal role in the choice of investment

decisions.

Corporate governance codes across jurisdictions usually

address similar issues: (1) an active and fair protection of the

rights of all shareholders, (2) an accountable management board

and effective monitoring mechanisms, (3) transparent informa-

tion about the financial and non-financial position of the firm,

and (4) responsibility for the interests of stakeholders, includ-

ing minority shareholders. Yet, the corporate governance codes,

updates and upgrades that arose in Europe and Asia offer a

high level of flexibility by following the ‘comply or explain’ rule.

Although firms tend to adopt and comply with the boilerplate

and standardized provisions of the codes rather than explain –

even though more optimal – such non-compliance, it is submit-

ted that the flexibility of codes prevails over the inflexible, hard

law rules and regulations of, for instance, the Sarbanes-Oxley

Act that contains less formalities than the average European

corporate governance code. The development of a ‘comply or

explain’ practice arguably gives companies the necessary room to

manoeuvre.

Opt-out / Contracting around

Enforcement

Com

pan

y La

w

Con

trac

ts

Cor

pora

te G

over

nan

ce C

odes

Opt-in

Figure 1. The Three Pillars of Corporate Governance

Source: Adapted from J.A. McCahery and E.P.M. Vermeulen, Corporate Governance

of Non-listed Companies, Oxford University Press, 2008.


12 M. Mace, Directors: Myth & Reality (Boston: Harvard University, 1971), 184.

13 J. Fanto, L. Solan & J. Darley, ‘Justifying Board Diversity’, North Carolina Law Review, vol. 89 (2011): 911.

Thus, even though the Green Paper seems to argue that a

‘one-size-fits-all’ approach may be inappropriate for smaller- and

medium-sized listed companies, where controlling shareholders

are usually involved in management, companies usually disre-

gard the provisions that have been drafted for companies with a

widely dispersed shareholder base in mind. For instance, restrict-

ing executive compensation is not necessary in a firm where

shareholders are supposed to be directly and actively involved in

monitoring management decisions. Moreover, institutions estab-

lished to counter and limit the managerial agency problem, such

as fully independent non-executive board members as a monitor-

ing device, are not always a priority in family-controlled busi-

nesses. Still, the divergent governance strategies for a number of

listed firms arguably do not call out for a separate set of recom-

mendations. It appears that, in a business setting with controlling

shareholders, parties actually engage in an ex ante search for the

deviations from the standard arrangements if these deviations

clearly improve their governance structure and maximize the

value the underlying business.

3.2. Corporate Governance Practices as Guidance for the European Principles: Partim I. The Boards Of Directors

The European Commission starts from the premise that effective

and efficient corporate governance structure, with appropri-

ate checks and balances to foster the interests of shareholders,

employees, creditors and society, contributes to the competitive-

ness of a company and the EU in general.

It must be emphasized that the ideas to further develop cor-

porate governance at the European level should take into account

all the different layers of corporate governance pillars and the

path-dependent developments of governance in different Member

States to reach the aforementioned goal. As we have discussed,

corporate governance is embedded in both national corporate

law and contract law. Corporate governance codes, which seem to

have many similarities, is an important instrument to foster the

corporate governance codes as long as it is not in conflict with the

other pillars of corporate governance. It is an important mean to

reach the goals of the European Commission that itself should

not be turned into a burdensome goal.

To illustrate the differences and similarities in corporate

governance and how the features are embedded in the national

systems, we studied the state of the art of corporate governance

features of ninety companies in nine different countries, four

European Member States and five other countries. For each coun-

try, we randomly selected ten large companies that are indexed

in a large national stock exchange index. The group of the latter

countries comprises the United States, Canada, Australia, South

Africa and Japan. These developed countries have been selected

for their merits in corporate governance developments. The

four European countries are the United Kingdom, France, The

Netherlands and Belgium, two large and two small countries with

different corporate governance frameworks and features (one-

tier board–two-tier board, civil law–common law, concentrated

ownership–dispersed ownership, shareholder oriented–stake-

holder oriented, etc.). Of each of these companies, we collected

all the information via their websites, their latest annual report

(which ended in 2010 or ended in the first months of 2011 if the

information was already publicly available) and the proxy state-

ment for the general meeting of shareholders 2011. We collected

information on the date the (supervisory) board member was

first elected, expertise of the members, other (supervisory) board

memberships, previous memberships, education, age, gender,

attendance at meetings, stock ownership, and composition of the

board (executive, non-executive or independent). We also provide

in the average number of woman on the boards as well as the

distribution of the number of woman per country.

It follows from our findings that, since the start of the new

millennium, the composition and functioning of the board of

directors significantly changed. Boards developed from rubber-

stamp bodies to active and independent boards. The disparity

between the board duties as they are described and the practiced

board functions is disappearing. The former Myles Mace defined

the roles of the board as:

(1) establishing basic objectives, corporate strategies, and broad

policies; (2) asking discerning questions; and (3) selecting the

president.12

While these duties were hardly performed until the late 1980s,

since the 1990s many companies and countries stress that their

boards and their countries endorse the main duties of the boards.

In summary, the board is the primary supervisory body for

the corporation, and its members must establish a large number

of qualifications to support the duties of the board. In its advis-

ing role, the board must serve management on strategic issues

the corporation is dealing with. The directors that can bring this

expertise must be of high calibre in order to be taken seriously

by the top management of the company. Steve Jobs, CEO and

chairman of Apple and elected a board member of Walt Disney,

can serve as an example of this class of directors. Clara Furse,

the CEO of LSE when she was admitted to the board of directors

of Fortis in 2006, is another example. Next, the board members

can provide invaluable connections to the company via their

networks. Connections with government and government agen-

cies can add value to provide in relevant legislative and regula-

tory changes and insight in dealing with the government, and

the member can even act as an indirect lobbyist.13 Albert Gore

became a director of Apple after he ended his term as Vice Presi-

dent of the United States. After Jean-Luc Dehaene stepped down


14 Ibid.

15 C. Carter & J. Lorsch, Back to the Drawing Board: Designing Corporate Boards for Complex World (Boston: Harvard Business School Press, 2004), 116–118.

16 In case of re-election.

as Prime Minister of Belgium, he became independent director of

ABInbev, the largest brewer in the world, and chairs the board of

directors of Dexia, a major financial services company in Belgium

and France. Fanto, Solan and Darley distinguish a third important

role for a director, closely related to the networking role, the sig-

nalling function.14 Corporate reputation is enhanced in the eyes

of both incumbents and third parties like customers and suppliers

by the simple fact that certain persons become or are member of

the board of directors. Bill Gates is a board member of Berkshire

Hathaway. Next to being founding member of Microsoft, he is the

chair of one of the largest charitable foundations in the world.

Overall, many boards combine via its individual members the dif-

ferent qualifications it requires.

Carter and Lorsch identified the fundamental qualities the

individual board member needs.15 These essentials are intellec-

tual capacity, interpersonal skills, instinct, interest, commitment

to contribute and integrity. These contributes cannot easily be

identified. In the different parts of the world corporate gover-

nance developments and companies stressed indirect elements to

show the quality of the boards. Table 5 summarizes the informa-

tion that is considered relevant in a European and American con-

text. All companies in all the different countries in and outside

the EU report the different kinds of board members, disclose

the first election date of the board member, the other positions

of the member of the board and the previous positions of the

board member. Only in Japan had not all companies disclose

this information, and in Belgium, a small number of companies

fail to disclose this information. In the latter country, the lack of

information can be due to the fact that the board members have

not been members of any other board.

Other features of board governance are less harmonized

than the worldwide development towards a majority controlled

non-executive board with many ties with other boards. This

is often due to the different legal structures or differences in

contract law. In the United States, the proxy statements issued

in front of the general meeting of shareholders provide detailed

information on the expertise of the different directors that stand

up for (re)election. The statement even discloses the identity

of the member who suggested the candidate to be elected as

board member and how this selection procedure took place. This

information allows the assessment of the possible existence of

conflicts of interests and enhances board diversity. The national-

ity of the candidate, the gender and attendance16 are considered

less important. When the candidate can strengthen the board of

directors and the independence vis-à-vis management in light of

the dispersed ownership structure, she can add value to the com-

pany and the board. When the board member holds a significant

block of shares in the company it enforces the commitment of

the board member. As long as the voting block does not influ-

ence the voting turnout at the general meeting of shareholders

the independence of the board member is not considered to be

compromised.

Table 5. Disclosure of Corporate Governance Characteristics of Board Members of Ten Large Companies in Nine Countries

Austr. Canada Japan

South

Africa

United

States Belgium France Netherlands

United

Kingdom

Kind of membership 10 10 7 10 10 10 10 10 10

Election date 10 10 6 10 10 9 10 10 10

Other memberships 10 10 6 10 10 8 10 10 10

Expertise 7 5 0 0 10 0 1 1 3

Previous memberships 10 10 1 9 10 7 10 10 10

Education 9 8 0 10 2 8 8 1 1

Age 4 10 5 10 10 9 10 10 10

Nationality 2 10 0 2 0 7 7 9 0

Number of woman 0–30% 7–27% 0–8% 0–33% 14–27% 0–36% 13–29% 0–38% 0–22%

Avg. Number of

woman

16% 17% 1% 20% 20% 9% 21% 21% 13%

Board attendance 10 10 0 9 gen. 9 3 3 10

Stock ownership 10 10 5 9 10 3 10 10 10

Source: Own research.


17 Section 366 Companies Act 2006.

18 Articles L225-38 and L225-40 Commercial Code.

19 Article 554 Companies Code. For an analysis, see H. De Wulf, C. Van der Elst & S. Vermeesch, ‘Radicalisering van corporate governance-regelgeving: remuneratie en transpar-

antie na de wet van 6 april 2010’, Tijdschrift voor Belgisch Handelsrecht 10 (2010): 909–963.

20 Exceptions are, e.g., the approval of mergers (third company law directive) and divisions (sixth company law directive) and the acquisition of own shares (second company

law directive).

The Japanese corporate governance structure differs signifi-

cantly from the structure in the Western world. Outside directors

are still relatively uncommon, but internal and external audit

is much more developed in Japan. Japanese companies stress in

their corporate governance reporting the structure and function-

ing of the external/internal audit (commission). When senior

managers are performing excellently, they are elected as a token

of appreciation as a board member. The invitation to become a

board member is sent at the end of a long career for the (same)

employer. It follows that the independence of the board member

is less of an issue as neither the election date as board member;

the other board memberships (if any at all) and the previous

memberships (generally one) are disclosed. The proxy informa-

tion that shareholders receive generally contains information on

the starting date as junior officer of the board member to illus-

trate his commitment and his long track record. This information

is considered as more relevant than the typical American and

European corporate governance features. It should be noted that

some Japanese companies start to report these features too, in

particular, in light of the internationalization of the ownership of

the company.

In Europe the added value of the candidate for the board of

directors is indirectly approached via the disclosure of previ-

ous and current board and management positions as well as

the nationality and age of the board member. The nationality

strengthens the feeling of expertise of the local markets and

habits. Contrary to US companies, European companies do not

disclose the methods which were used to find new candidates for

the board and presented to the general meeting of sharehold-

ers. Furthermore, the assessment of the required and provided

competences of the board is left to the investors and sharehold-

ers. It provides the board and company more leeway to discretely

organize the selection procedure.

Australia, Canada and South Africa developed their own

corporate governance system that resembles to a large extent

the American system. Canadian companies, like in South Africa,

provide detailed information on board members but do not

emphasize the expertise of the candidate. Most Australian

companies, but also a number of Canadian companies, stress

the importance of certain types of expertise and disclose, like

in a typical business plan, the different kinds of expertise of the

board of directors. It allows the shareholders and other stake-

holders not only to evaluate the expertise of the board but also

to control if the appropriate skills are represented in the board

of directors.

The different procedures and resources to (s)elect board can-

didates result in another resemblance. In all countries, with the

exception of Japan, a minority of the board members are woman.

In Canada, France and the United States, every board (one tier)

has at least one female director. A Dutch company has relatively

the most women as board members, followed by a Belgian com-

pany. It raises questions as to whether ‘group think’ is an issue

in all countries and whether mandatory instrument to increase

diversity is an appropriate mean. We believe that an indirect

method via an improved identification of the adequate skills and

expertise of a board, like in the United States, would result in

more diversity and strengthen corporate governance.

3.3. Corporate Governance Practices as Guidance for the European Principles: Partim II. The Shareholders

In length, the Green Paper emphasizes the position, role and

responsibilities of shareholders in corporate governance. For a

long period of time, the position of shareholder was under pres-

sure in company law. Recently, many countries reinforced the

rights of shareholders. In the Netherlands Article 107a Boek 2

Civil Code requires the approval of the general meeting of share-

holders to change the ‘identity and character’ of the company, the

American Dodd Frank Act empowers, in section 971, the SEC to

issue rules that shareholders can include, in the proxy statement

a nominee, to serve on the board of directors, a basic right for

shareholders of European companies. The British Companies Act

2006 requires the general meeting to approve political donations

of more than GBP 5000.17 The French Commercial Code provides

the general meeting of shareholders with the right to approve all

contracts entered into with a member of the (supervisory) board

and shareholder with a voting block of more than 10%18 and the

general meeting of Belgian companies must approve golden para-

chutes for board members or top executives of more than twelve

to eighteen months.19 The shareholders’ rights directive must not

be missing in this list although the directive focuses on formal

aspects of the general meeting of shareholders, like the require-

ment to provide in the timely information. The division of pow-

ers between the board and the general meeting largely remains

the competence of the Member States. 20

Next to the shareholders’ rights defined in corporate law, other

shareholder actions are regularly reported. The participation of

shareholders in corporate life comes in different forms: individual

contacts with CEO, discussions during road shows, open letters,

initiated general meetings, voting (with their feet), etc. Large

shareholders meet with top executives and board members to


21 See, for a market-based analyses, FESE, Share Ownership Structure in Europe, December 2008, 112, <www.fese.be/_lib/fi les/Share_Ownership_Survey_2007_Final.pdf>,

and for a detailed analysis, C. Van der Elst, Shareholder Mobility in Five European Countries (1 Apr. 2008). ECGI – Law Working Paper No. 104/2008, <http://ssrn.com/

abstract=1123108>.

22 European Commission, Green Paper, The EU Corporate Governance Framework, Brussels, 5 Apr. 2011, COM(2011) 164 fi nal, 2.

23 Of course the relationship at the level of shareholders can be and are governed via different corporate governance instruments. In particular the relationship between asset

managers and shareholders is specifi ed in a corporate governance code of EFAMA, which was published one day after the publication of the European Commission’s Green

Paper (EFAMA, Code for External Governance – Principles for the Exercise of Ownership Rights in Investee Companies, Brussels, 6 Apr. 2011, <www.efama.org>).

24 Article 21 of Commission Directive 2010/43/EU of 1 Jul. 2010 implementing Directive 2009/65/EC of the European Parliament and of the Council as regards organizational

requirements, confl icts of interest, conduct of business, risk management and content of the agreement between a depositary and a management company, PBL no. 176 of

10 Jul. 2010.

25 See also Art. 21 of Directive 2010/43/EU.

discuss issues of major concern. Sometimes the communication

takes place between the investor relations department of the com-

pany and the shareholders or investors. When private negotiations

do not result in satisfactory solutions, some shareholders send

an open letter to or contact the financial press. In other circum-

stances, the initiative to contact the financial press comes from

the CEO or investor relations of the company. These contacts and

discussions are already regulated to protect the equal treatment

of shareholders and the market: insider trading rules are harmo-

nized at the European level and regulate the disclosure of price-

sensitive information.

Over the last thirty years, the shareholder structure of many

listed corporations significantly changed. The position of the

individual acquiring and keeping shares for a long period of time,

the basic idea for developing many rules in company law, shifted

to trading by (professional and institutional) investors at the

speed of light. Many European companies encounter large institu-

tional investors like pension funds, insurance companies and asset

managers as well as families, non-financial companies, banks and

the government as their main shareholders.21 In individual cases,

private equity funds and hedge funds control significant blocks.

Many of these investors trade in the interest of beneficiaries and

use intermediaries like asset managers to optimize their returns. It

results in a myriad of relationships that not only create signifi-

cant difficulties to make use of the shareholders’ rights but also

initiate conflicts of interest, free riding problems and collective

action problems. These relationships are treated in financial law

and contract law. To the extent that corporate governance is ‘the

system by which companies are directed and controlled and as a

set of relationships between a company’s management, its board,

its shareholders and its other stakeholders’ 22 the company related

codes should not explicitly address the structure and relation-

ships of shareholders and its beneficiaries.23 In the present state

of corporate law, the shareholders can act in their own personal

interest, even if this interest is exclusively a short-term interest.

This interest will be directed by the interests of the beneficiaries,

contractual relationships and even (proxy) advisors and in some

circumstances the shareholders will even have a mandatory duty

to exclusively act in their own interest. Management companies

of UCITS must develop strategies for determining when and how

to vote in the exclusive benefit of the UCIT.24 In these cases, the

board of directors must appropriately balance the interests of the

shareholders and other stakeholders. The board of directors is

provided with instruments to tackle the demands of sharehold-

ers. In particular, the role of the independent directors must be

stressed in these situations as many boards reflect the balance of

power at the shareholder level. It must be facilitated for the board

members of listed entities to identify the shareholders to engage

in a dialogue and involve the shareholders in the strategic issues.

As many small shareholders do not take part in general

meetings, not only controlling shareholders but also significant

blockholders vote the majority of the participating shares during

the general meetings where directors stand up for (re)election.

For these cases, we would like to plead for the enforcement of

the position of minority shareholders taking part in the general

meeting. When independent directors have been selected and the

general meeting has to approve the selected candidates, it would

enhance the interest of smaller shareholders to participate in the

meeting when the ‘majority’ shareholder as it is ad hoc deter-

mined at the start of the meeting will not participate in the vote.

At the same time, it would enhance the independence in appear-

ance of the independent directors without depriving incum-

bent blockholders of any other shareholders’ right. The system

resembles the Italian right of minority shareholders to elect a

board member, but it disconnects ownership from the right to

present an independent director and prevent time consuming ex

ante negotiations and agreements.

Finally, the proposal does not influence the right for share-

holders not to vote. It can be in the interest of the shareholder not

to make use of her rights. In some cases, this right is even embed-

ded in European law. Management companies must establish

a strategy how and when they will vote with the shares in their

portfolio. From this duty, it follows that there are circumstances

that the management company must not or shall not vote.25

4. CONCLUSION

The Green Paper of the European Commission is the start of the

second phase of corporate governance in Europe. It questions

how the European Commission should continue its effort to

enhance the competitiveness of European companies and invites

all interested parties to participate in the discussion.

We support the European Commission in its commitment

to provide in an efficient corporate governance framework.


This framework should take into account the different pillars of

corporate governance: corporate law, contractual arrangements

and best practices. In light of the interconnection between these

pillars, a flexible national approach should be supported due to

its adaptability and responsiveness to the ever-changing business

needs and requirements.

The Green Paper questions the role and the position of the

board of directors. With respect to the composition of the board

of directors of listed companies, we support a recommendation

that the board should assess its required skills, expertise and

competence in light of the company-specific, industry-specific

and country-specific needs and disclose the assessment in the

annual report and the notice of the general meeting of sharehold-

ers. Together with the information on attendance and operations

that are already available in the reporting of European companies

it provides shareholders, investors and financial markets with the

necessary attributes to evaluate board engagement.

Shareholder engagement is only a means to improve corpo-

rate governance. The relationships at the level of the ownership

of companies are manifold and difficult to harmonize in the

corporate governance recommendations. Interference endangers

the delicate balance between the rights of shareholders to act

in their own interest and equal treatment of shareholders. One

of the options could be that to issue a recommendation to have

the independent directors elected by the minority shareholders

attending the meeting – independent from the ownership struc-

ture of the company – to enforce the position of these directors

acting in the interests of all stakeholders.

Submission GuidelinesECL’s Editorial Board encourages all readers to send in (proposals for) contributions and ideas

on contributions for publication. Contributions may deal with European company law in a broad sense,

including such topics as codetermination law, insolvency law and securities law.

All contributions should follow ECL’s SCIP-principle, which welcomes articles that are scientific,

concise, informative and practical. Contributions should have a range of approximately

4,000 to 5,000 words (footnotes excluded), and should be sent to both ECL’s main editor

([email protected]) and to its editorial secretary ([email protected]).

At the author’s request, contributions will be peer reviewed by at least two members of ECL’s

Editorial Board. Publication in ECL is subject to authors signing a “Consent to Publish & Transfer

of Copyright” form on behalf of Kluwer Law International.

C O L O P H O N

E D I T O R I A L B O A R D

STEEF BARTMAN (Main Editor), Professor of Company Law at Leiden University, the Netherlandse-mail: [email protected] BIRDS Professor of Commercial Law, School of Law, University of Manchester, United Kingdome-mail: [email protected] CAHN Director of the Institute for Law and Finance, Johann Wolfgang Goethe-University, Frankfurt, Germanye-mail: [email protected] DORRESTEIJN Professor of International Company Law at Utrecht University, the Netherlandse-mail: [email protected] VAN DER ELST Professor of Law and Management, Tilburg University, The Netherlandse-mail: [email protected] LAMANDINI Full Professor of Company Law at the University of Bologna, Italye-mail: [email protected] MARCOS IE Law School, Madrid, Spaine-mail: [email protected] MENJUCQ Professor of Company Law at the Univer-sity of Panthéon-Sorbonne, Paris, Francee-mail: [email protected] SCHWARZ Professor of Company Law at Maastricht Uni-versity, the Netherlandse-mail: [email protected] STROINSKI Warsaw University, Polande-mail: [email protected] WERLAUFF Professor of Company and Business Law at Aalborg University, Denmarke-mail: [email protected] WINTER Professor of International Company Law at the Universiteit van Amsterdam, the Netherlandse-mail: [email protected]

C O N T R I B U T I N G I N T E R N A T I O N A L L A W F I R M S

ALLEN & OVERY Jan Louis Burggraafe-mail: [email protected] & MCKENZIE Jeroen Hoekstrae-mail: [email protected] BRAUW Geert Potjewijde-mail: [email protected] PIPER Marnix Holtzere-mail: [email protected] BURUMA André G. de Neve e-mail: [email protected]

LOYENS & LOEFF / UTRECHT UNIVERSITY Tineke Lambooye-mail: [email protected] STIBBE Christian van Megchelene-mail: [email protected]

C O U N T R Y R E P O R T E R S

LIA ATHANASSIOU Law Faculty of Athens, Greecee-mail: [email protected] BARROCAS Barrocas Sarmento Neves,Sociedade de Advogados R.L., Portugale-mail: [email protected] BIRDS School of Law, University of Manchester, United Kingdome-mail: [email protected]ÇOIS CARLE & ISABELLE DESJARDINS e-mail: [email protected], [email protected] N. CATANA General Chancellor of Babes-Bolyai Univer-sity, Cluj-Napoca, Romaniae-mail: [email protected] DOTEVALL School of Business, Economics and Law, Göteborg University, Swedene-mail: [email protected] VAN DER ELST Professor of Law and Management, Tilburg University, The Netherlandse-mail: [email protected] HAVEL Institute of Law, Czech Academy of Science, Prague, Czech Republice-mail: [email protected] LAMANDINI University of Bologna, Italye-mail: [email protected] LENNARTS, Utrecht University, the Netherlandse-mail: [email protected] MARCOS Instituto de Empresa Business School, Madrid, Spaine-mail: [email protected] VAN MEERTEN-HEMELA e-mail: [email protected] SJÅFJELL Centre for European Law, Faculty of Law, University of Osloe-mail: [email protected] STROINSKI Warsaw University, Polande-mail: [email protected] TEICHMANN University of Heidelberg, Germanye-mail: [email protected] WERLAUFF Aalborg University, Denmarke-mail: [email protected]

E D I T O R I A L S E C R E T A R Y

CORNELIS DE GROOT Leiden University, the Netherlandse-mail: [email protected]

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