„Action Plan 2003 - Com (2003)284 final
of the Commission - The Plan to Move Forward“
(Communication of the Commission to the Council and the EP)
Target
Modernising Company Law and
Enhancing Corporate Governance in the EU
Background
• Global and European Internal Capital Market
• global emergence of Corporate Governance Codes
• repercussions of various scandals:
(„recent events“ Enron, World Com, Parmalat)
• U.S. Sarbanes Oxley Act
• enlargement
Prof. Dr. Peter Doralt, Vienna
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7 Headings
1.
2.
3.
4.
5.
What ist Corporate Governance?
Sources of Corporate Governance
Why did Corporate Governance emerge?
Categories of Corporations
Separation of Ownership/Management
Two-tier – one-tier-system
6. Ownership structures and their respective risks for
inverstors
7. Remedies
Prof. Dr. Peter Doralt, Vienna
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1. Corporate Governance
= system by which companies are directed, controlled and
their performance monitored
• (precise) rules and
• (general) standards of organisation and behaviour for
corporate players:
- managing (executive) directors
- supervising (non executive) directors (NED)
- auditors
- shareholders
Prof. Dr. Peter Doralt, Vienna
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2. Sources: Corparate Law,
Corporate Governance Rules
and Standards
• Black Letter Law
(European Directives, Regulations, National Acts)
• European and National Court Decisions:
(e.g. Centros, Inspire Art)
• Soft Law
- (European) Recommendations
- (national) Corporate Governance Codes
(some 40 National Codes in Europe) *)
- OECD Principles 1999, 2004**)
*) (see Comp. Study prepared by Weil, Gotshal & Manges LLP, 2002,
http://www.ecgi.org/codes/documents/comparative_study_eu_i_to_v_en.pdf)
• **) (see: www.oecd.org/dataoecd/32/18/31557724.pdf)
Prof. Dr. Peter Doralt, Vienna
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3. Why did Corporate Governance
Codes emerge?
• first, where (uniform) legislation evolves slowly (UK, US):
Cadbury Code (U.K. 1992), Principles of Corp. Governance
(Am. Law Inst. 1982-1994)
• investor relations tool*) : UK and US investors expected CGC
abroad (export of an idea by „demand“)
• universal benchmark, easily accessible focus on typical
expectations of investors
• flexible adaptation over time – competition of codes (possibility
of „race to the top“ rather than „race to the bottom“?)
• flexible adaptation to different types of corporations: „Comply
or explain“.
*)http://www.mckinseyquarterly.com/article_abstract_visitor.aspx?ar=1205&L2=39&L3=3#registerNow……
Prof. Dr. Peter Doralt, Vienna
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4. Categories of Companies
• Listed Companies: (publicly raised capital, U.K.: public limited
company, plc)
Unlisted Companies: (private: UK: Limited or Ltd)
• Public Companies – Private Companies
• large companies – SME Companies (countries with
special flexible second type: GmbH)
• Company with core shareholder
(controlled company: typical on the European continent)
• Company without core shareholder
(only dispersed shareholders = Berle & Means Corp.): typ. in
U.K. and US
Prof. Dr. Peter Doralt, Vienna
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5. Separation of Ownership/Management
5.1 Two tier system – one tier system
• large public listed comp.: typically have separation of
- shareholders (absenter ownership)
- managers
• need for „Accountability of Managers“ vis a vis Owners
• This results in further separation of:
- monitoring (supervising) on behalf of shareholders by:
Non Exec. Directors (NED) or Supervisory Board
- day to day management: Exec. Directors or
Management Board
Prof. Dr. Peter Doralt, Vienna
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5.2 One tier system
• one board as a whole responsible for
+ strategic decisions
+ day to day managing ~ by executive director
+ monitoring ~ by non executive dir.
(internal separation)
Prof. Dr. Peter Doralt, Vienna
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5.3 Two tier system
• two boards:
- managing board responsible for day to day management
- supervisory board responsible for supervision
(monitoring)
Prof. Dr. Peter Doralt, Vienna
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5.4 Evaluation and Convergence
• no clear advantage of one system over the other
• good corp. governance does not depend on one or two tier
model but on sound principles
• convergence in strategic decision:
- even in one-tier system usually prepared by exec. dir. and
only approved by whole board
- even in two-tier system usually monitored by approval of
supervis. board
• full participation (co-determination) of workers
representatives easier in two-tier model
• SE implementation requires introduction of option between
both models
• trend: „pro choice“
Prof. Dr. Peter Doralt, Vienna
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6. Ownership structure and risks for
investors
6.1 Totally dispersed ownership*: US, UK
• shareholders have little factual influence, power lies
with management (inspite of blackletter law in U.K.)
• agency problem arises mainly between management
and all shareholders
• related party transaction risks because breach of
loyality by managers in their own interest
* first analysed by Berle & Means, 1932
Prof. Dr. Peter Doralt, Vienna
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• managers have influence on appointment of
- non executive (outside) directors, or
- members of supervisory board and
- of auditors
„reverse appointment flow“
• therefore: Sarbanes Oxley Act (US) and new U.K. Combined
Code are concerned with independence of non executive
directors and auditors (i.e. from management),
and with empowerment of independent directors (in various
crucial matters), General Meeting and shareholders
Prof. Dr. Peter Doralt, Vienna
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6.2 Core shareholder structure (Europ.
Continent) – risks for small shareholders
• Core Shareholder has factually strong influence on
management (even if denied in black letter law e.g. in
Germany)
• Core Shareholder can protect himself against
management
• special „agency“ problem: core shareholder +
management incl. NED (supervisory board) become
agents with potentially harmful power; their principals:
dispersed (minority) shareholders (and auditors)
Prof. Dr. Peter Doralt, Vienna
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• related party transactions: main risk from breach of
loyalty in the interest of core shareholder (e.g. unfair
transfer pricing in favour of group of core shareholder);
particular danger if core shareholder has strategic
interest
• „normal“ downward flow of appointment, increases
risk of dependency of management and/or coalition
between core shareholder + management against small
shareholders
• NED and auditors, independent of managers (SOX and
Combined Code remedies) do not help; true
independence of core shareholder required
• empowerment of Gen. Meeting does not empower small
shareholders
Prof. Dr. Peter Doralt, Vienna
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6.3 Summary: ownership-structure
Dispersed ownership:
STRONG managers – Weak owners
• Risks:
- management dominates General Meeting
- auditors/NED depend on managers
- strong managers tempted to harm all shareholders =
accountability to shareholders as a whole is at risk
(classic principal-agent-problem)
Prof. Dr. Peter Doralt, Vienna
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Core shareholder:
STRONG core-owner: weak small owners, dependent
managers
• Risks:
– core owner:
• dominates GM
• appoints supervisors and auditors - supervisors
and auditors dependent on him
• appoints managers - managers selected for their
loyalty to core shareholder
– managers tempted to act against interest of small
(minority) shareholders = accountability to minority
shareholders at risk, danger of unequal treatment
of small shareholders
Prof. Dr. Peter Doralt, Vienna
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7. Remedies
• appointment of NEDs and auditors independent (of
Management and of core shareholders)
• Chairman of one tier board ≠ CEO
- advantage of two-tier-system
• 3 strong committes - auditing, nomination, remuneration
– with majority of independent NEDs
• Recommendation on Independent Directors*
*http://europa.eu.int/comm/internal_market/company/independence/index_en.htm
Prof. Dr. Peter Doralt, Vienna
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•Strengthening of:
– independence of auditors and auditing process*proposal to amend the 8th Directive** - strong
auditing committe with „financially literate“
(knowledgeable) members
– corporate governance by disclosure requirements as
to adherence***)
– transparency in particular in pyramid (group)
structure of related parties transactions to prevent
tunnelling (syphoning) = violation of at arms length
principle***)
– board members responsibility for drawing up
financial statements - proposal for directive on
collective board responsibility***
*http://europa.eu.int/eur-lex/pri/en/oj/dat/2001/l_091/l_09120010331en00910097.pdf
**http://europa.eu.int/eur-lex/lex/LexUriServ/site/en/com/2003/com2003_0286en01.pdf
***http://europa.eu.int/eur-lex/lex/LexUriServ/site/en/com/2004/com2004_0725en01.pdf
Prof. Dr. Peter Doralt, Vienna
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•strengthening shareholder rights
- initiative for simplification of cross border voting
- Recommendation on remuneration of directors*
° transparency to the public
° independent remuneration committee
° vote of the GM (binding or not?) in particular on
share option programmes
* http://europa.eu.int/eur-lex/lex/LexUriServ/site/en/oj/2004/l_385/l_38520041229en00550059.pdf
Prof. Dr. Peter Doralt, Vienna
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