EU corporate governance: Transparency is key

It hardly needs to be said that this is a noble objective, but the harsh truth is that anyone who sincerely believes in the prospect of effective pan-European regulation is likely to be disappointed.

Legislating for or otherwise encouraging better corporate governance practice is in itself extremely difficult and is frequently regarded by firms as an intrusion on their internal affairs. With widely differing national conventions and architectures to consider and jurisdictions that are exercised by such issues to sometimes significantly varying degrees, intervention on a European level is inevitably even more fraught.

The EU Corporate Governance Framework, the green paper sets out the European Commission’s views on the key governance challenges facing corporate Europe. It follows 2010’s green paper on corporate governance in financial institutions, which was on the whole very similar in tone and theme – that is, a litany of hand-wringing over well-established and probably quite intractable problems.

Of all the countries in Europe, the UK has arguably led the field in corporate governance. For around 20 years it has been agonising over the roles the business community and government should play. This is evidenced by a string of committees and associated reports, among them Cadbury, Greenbury, Hampel, Smith, Turnbull, Higgs and Walker, as well as the development of the Combined Code and the Stewardship Code as indicators of good practice.

The 2011 green paper, therefore, raises few questions that have not been entertaining students of corporate governance for the past two decades. Nonetheless, it is helpful to examine some of its main points with a view to understanding why its overarching aspirations will prove so extraordinarily difficult to realise – and in due course to explain why, as perhaps most infamously demonstrated within the financial sector, policymakers seldom get the outcomes they desire.

- Boards of directors

Here we have all the increasingly familiar pleas, among them greater diversity, improved scrutiny of performance and enhanced commitment among non-executives. An analogous agenda was prominent in 2010’s Green Paper, which criticised the highest levels of financial institutions for a lack of risk-management expertise, a failure to comprehend the complexities of business and general supervisory inadequacies.

- Shareholders

Criticisms here include a paucity of shareholder engagement, tacit support for excessive risk-taking given the asymmetry of gains and losses, short-termism, the scarcity of incentives for active shareholders and the fundamental problem of free-riders.