EU INTERNAL markets commissioner Michel Barnier is advancing plans to toughen corporate governance rules in an attempt to stamp out lax “group think” on company boards and boost the number of women directors. As new legal rules loom to intensify the regulation of financial institutions, Mr Barnier has turned his attention to the governance of listed companies outside the bank sector.
The initiative is the latest in a long line of measures designed to help avert any repeat of the biggest financial crisis since the second World War.
Mr Barnier believes serious weaknesses in the system of self-regulation meant corporate governance was not as effective as it could have been in the run-up to the crisis. “Too much short-term thinking has had disastrous consequences,” he said.
“Above all, we need company boards to be more effective and shareholders to fully assume their responsibilities.”
The European Commission believes directors failed in their supervisory functions “as there was no effective challenge to the management in boardrooms due to the phenomenon of group think.”
It also believes a lack of shareholder interest in holding company managers to account for their decisions and actions was “enhanced by the fact that most of them hold shares for only a short period”.
In a 24-page Green Paper setting out the scope of his thinking, Mr Barnier raised the prospect of quotas for female directors, shareholder votes on bonus packages and the mandatory identification of shareholders.
He is seeking better performance from boards, more shareholder involvement in company governance and improvements in the enforcement of existing “comply or explain” rules.
The opening of a consultation period on such measures comes months before the introduction of a new capital requirements directive to implement the Basel 3 bank regulations. This directive will include measures to fortify the oversight of risk in banks.
On board composition, Mr Barnier’s paper raised the question as to whether recruitment policies should be more specific about the profile of directors and whether European companies should be required to ensure a better gender balance on boards.
“Gender diversity can contribute to tackling group think. There is also evidence that women have different leadership styles, attend more board meetings and have a positive impact on the collective intelligence of a group,” the paper said.
“Studies suggest there is a positive correlation between the percentage of women in boards and corporate performance.”
The paper bemoaned the lack of appropriate shareholder engagement and the “inappropriate short-termism” of capital markets.
“Some investors have . . . complained of a ‘regulatory bias’ towards short termism, which hinders long-term investors, in particular, from adapting longer term investment strategies,” the paper said.
“During the commission’s preliminary consultations with stakeholders, it was said that solvency and pension fund accounting rules, which were intended to promote greater transparency and more effective market valuation, have an unintended consequences.”
The paper says corporate governance statements do not seem to be monitored and should be improved.
“Financial market authorities or stock exchanges and other monitoring bodies work within different legislative frameworks and have developed different practices,” the paper said.
“As regards the different practices developed by monitoring bodies, there is great potential for improving and extending the current exchange of best practice.”
