EU Commission to consider changing company law to boost ‘comply or explain’ governance

First impact assessment meeting next week

The European Commission, the executive arm of the European Union, is to consider changing company law as an option to improve the ‘comply or explain’ regime of corporate governance to help give investors better information.

A change to the so-called ‘Fourth Directive’ on company accounts – which dates back to 1978 – is one option that is being considered, according to a new ‘roadmap’ document published by the Commission.

“The initiative could take the form of a legislative instrument, namely amending Directive 78/660/EEC which contains rules on the corporate governance statement in its Article 46a,” the document states. Another option is a “recommendation”. Article 46 covers corporate annual reports.

The amendment would seek to establish “a greater level of uniformity” in how firms report on corporate governance under the ‘comply or explain’ regime, whereby firms comply with a governance code or explain why they do not.

Alongside the corporate governance work, the Commission is also studying a revision to the Shareholder Rights Directive, which aims to encourage greater engagement by shareholders in corporate governance.

The policy options on the table include “rules to regulate disclosure of voting and engagement policies as well as voting records by institutional investors” as well as improvements to transparency of executive pay.This could mean amending the Shareholder Rights Directive – with alternative options to be examined carefully.
The benefits are summarised as a “better functioning of the corporate governance framework in which all actors in the chain take more responsibilities and ultimately improve the way companies are run”.

“The initiative could take the form of a legislative instrument”

It has all grown out of an ‘action plan’ on company law and corporate governance adopted by the commission in December last year.

A steering group to oversee the impact investments of both the governance and shareholder rights proposals will have its first meeting on February 28.

Meanwhile, Internal Markets Commissioner Michel Barnier has reportedly stressed he plans to “calibrate” all the new regulatory moves in the pipeline, such as the Solvency II review of finance firms’ capital adequacy and the revision to the pensions directive, with the results of the Green Paper on long-term investing. The paper is expected “within a few weeks”.
Earlier this week the European Securities and Markets Authority (ESMA) ruled there is no market failure in the proxy voting advisory market, recommending instead that the sector self regulate via a code of conduct.