6.3.4 Three levels of supervision of code compliance not common practice

As analysed in the comparative legal research, supervision of code compliance is necessary and desirable at three levels, as defined in the optimum framework for the comply or explain principle (see section 4.7.3). As the first and most important supervisors, the shareholders' task is to perform formal and material supervision of code compliance by means of their shareholder rights. Since supervision takes times, is costly and free-riding occurs, two more levels of supervision are deemed necessary. The statutory auditor performs supervision of formal code compliance (based on article 1(7) of the Directive). A third supervisor, for example the stock exchange authority, performs formal supervision of code compliance as well by exerting pressure and, if necessary, using its instruments. The standing (monitoring) corporate governance committees in the countries under research are not regarded as supervisors of code compliance, but as important participants in the corporate governance discussion. More information on their preferred role is provided under section 6.4.5. The country's regulation clearly ought to define what is expected of the supervisors and what their means of pressure and sanction instruments are.

Information on the actual use of their instruments (e.g. fines or delisting) must be easily available publicly. The comparative legal research showed that in the countries under research there is as yet no common practice (see table 6.3.4). In Germany three-level supervision does not apply, as may be the case in other Member States as well. Moreover, public information on the use or non-use of sanction instruments has been unnecessarily difficult to find.

As discussed before, the Green Paper on the EU Corporate Governance Framework also pays substantive attention to supervision of code compliance and suggests several solutions to this problem: (i) authorising securities regulators, stock exchanges or other authorities to check whether the available information (in particular the explanations) is sufficiently informative and comprehensive without interference with the contents, (ii) the monitoring results could be made publicly available as well as the use of formal sanctions in the most serious cases of non-compliance or (iii) defining the corporate governance statement as regulated information within the meaning of Article 2(1)(k) of Directive 2004/109/EC, thus making it subject to the powers of competent national authorities laid down in Article 24(4) of the Directive (EU Green Paper 2011, p. 19). Indeed, each Member State should have three levels of supervision of code compliance. Shareholders and external auditors have, EU-wide, already been assigned as supervisors, but it should be compulsory for all Member States to have a third level as well, i.e. the stock exchange authority or another assigned authority that, at least once a year, publishes in its annual report or on its website which sanctions have been used with respect to code compliance and how many times, even if this is zero. Option (iii) of the EU Commission is a possibility as well, but taking all the recommendations in this underlying chapter into account then, in addition to Directive 2006/46/EC (and thus the underlying Directive 78/660/EC) another Directive needs to be modified as well, hence extra costs, efforts and time; but nevertheless worth examining further.

Recommendation 4: The Member States need to be obliged by Directive 2006/ 46/EC to have three levels of supervision of code compliance (shareholders, external auditor and an assigned authority e.g. stock exchange authority) and the assigned authority that monitors formal code compliance must annually publish whether and how often sanctions are imposed.