Monthly report

03/04/2012 Framework for improving the governance of European Businesses

The financial crisis has had very serious consequences for businesses, causing many closures and the loss of many jobs. As a consequence of these events, the European Commission has suggested various ways in which to improve the governance of businesses, publishing a green paper on the framework of business governance in the EU in 2011. In its report on the framework of business governance for European companies, published on March 8th 2012, European deputy Sebastian Valentin Bodu (Romania-EPP) welcomes the initiative to revise the framework of business governance launched by the European Commission, while pointing to some gaps.

Priorities for European companies

In addition to economic gains, better management and more monitoring of businesses would make the sector more transparent, stable, reliable and responsible in the EU, which would in turn restore citizens’ confidence. The need to restore confidence is also present in businesses themselves. According to the rapporteur, a well managed company must also show transparency its employees, its shareholders and any other stakeholders.

According to the OECD definition, business governance encompasses the relationship between the management of the company, its board, its shareholders and the various other stakeholders. Governance also creates the atmosphere in which business objectives are created and establishes how to implement measures to achieve them, as well as monitoring performances. 

Rather than imposing restrictive European regulations related to governance, Sebastian Valentin Bodu recommends the prioritization of the better application and respect of the existing rules and recommendations with regard to governance. The Euro deputy highlights the need for a personalized approach, to take the diverse nature of European businesses into account; difference size, structure and complexity.
However, the report states that all businesses, even those that are well managed, must avoid taking excessive risks. This is why it recommends the reinforcement of the role of audit committees, as they play an essential role in establishing financial information, and the efficiency of internal monitoring systems and risk management, and also legal monitoring of annual accounts.

According to the rapporteur, social and environmental dimensions are also important. In addition to business governance, social responsibility reinforces links between businesses and the society in which they carry out their activities. The rapporteur cites the example of ‘financial fair play’ (not to spend more than we earn) in the sporting sector.
The rapporteur particularly highlights two elements to improve governance in European businesses: the role of the board and of the shareholders.

The importance of the board in accountability in business  

According to Sebastian Valentin Bodu, the profiles and careers of the members of the boards must be diverse, and have various different values, points of view and different abilities. This kind of diversity, when taken in conjunction with professional development, international development and acceptable gender ratios (only 12% of board members of public companies in the EU are women) could give birth to new ideas. Members of the board should allocate enough time to carry out their duties, and also be committed to any possible exterior activities.

Regular external evaluations will monitor the efficiency of the governance practices, as the administrators must have the training needed to accomplish their tasks.

Even in the present crisis, some executives continue to have astonishing salaries. The rapporteur is in favour of reinforced monitoring and the creation of new rules to curtail abuses related to salaries, bonuses and directors’ pay. Also, long term payments could be increasingly based on the performance of the administrator and of the business.

Sebastian Valentin Bodu is a member of the European People’s Party, the Romanian Liberal-Democratic party, and is vice-president of the commission on legal affairs.

To encourage businesses to promote the social and environmental aspects, a variable part of executive remuneration could be dependent on reaching goals related to the social responsibility of the business, especially in the area of health, security in the work place, or workers’ satisfaction…

Increased involvement of shareholders

The role of shareholders in governance was examined in the green paper on corporate governance in financial institutions, published in June 2012. The European Commission particularly highlighted the lack of shareholder interest in the monitoring of governing bodies in financial institutions, as they sometimes take excessive risks. According to Sebastian Valentin Bodu, this shareholder apathy can be traced back to the cost of getting involved, the difficulty in evaluating profitability and uncertainty about the effects.

While recognizing that shareholder involvement should be on a voluntary basis, the rapporteur thinks that the establishment of long term investment measures would be beneficial. Institutional investors (organizations that pool funds and invest in the markets) encourage the short term holding of shares. As they are in charge of protecting their investments and controlling named asset managers, they should be able to freely establish the structures applicable to their professional relationships with asset managers.

To strengthen shareholders’ participation, the rapporteur calls for the modification of the directive on shareholders’ rights. For example, electronic voting during the general assembly of public companies could encourage shareholder participation, especially for international shareholders. European directives on the nature of the information divulged to shareholders in annual reports would allow them to be of a higher quality and more instructive.

The report also welcomes best practice codes (or ‘stewardship codes’) for the use of institutional investors throughout the EU and recommends that this be backed up by a European code of best practice.

Sebastian Valentin Bodu’s report will be debated and then voted on during the mini-plenary session with will take place on the 28th and 29th of March in Brussels.

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