2.6.2.2 The European Union

In 2001 the Commission asked a number of experts to offer independent advice on a pan-European approach regarding takeover bids and also to indicate key priorities for modernising company law in the European Union. In 2002 the ' High Level Group of Company Law Experts' issued a report that had corporate governance as one of its main subjects.1 In response to the report the Commission issued a communication in which it argued that company law and corporate governance rules within the EU should be modernised. It also provided a plan of action to achieve this aim (Action Plan).2

In the field of corporate governance the Commission proposed a fully integrated European approach which would improve business efficiency and competitiveness of EU based companies while strengthening shareholders' rights and legal protection for third parties. However, one single corporate governance code for all EU member states was not considered feasible. The national company law systems are widely divergent, thus precluding an overall agreement on the corporate governance structure and the distribution of powers among the various corporate bodies. Furthermore, the Commission claimed that binding rules on corporate governance would affect the competitiveness of European businesses. With these reasons in mind, the Commission proposed -in accordance with the recommendations of the report of the High Level Group of Company Law Experts - that each Member State should develop its own corporate governance code, with a strong involvement of market participants, on an apply or explain' basis, with which listed companies should comply. The apply or explain' rule means that companies are under an obligation (i) to include a corporate governance statement in their annual reports and (ii) to provide an explanation if they deviate from the code. The EU is to organise coordination of the actions of the Member States in this field. Moreover, at a European level, minimum standards have to be introduced with an aim to better information on corporate governance, the strengthening of shareholders' rights and modernisation of the role of directors and supervisory boards (composition, independence, remuneration and responsibility). The Commission has indicated that it expects that national codes and a series of Community measures will lead to a further convergence of the various corporate governance systems within the European Union. The OECD Principles will also contribute to this process of harmonisation.

By the end of 2004 the Commission issued a proposal for a directive amending the Fourth and Seventh European Annual Account Directives (Corporate Governance Amendment Directive).3 The Corporate Governance Amendment Directive proposes that listed EU-companies should include a reference to the national corporate governance code in their annual report, as well as explaining any deviation from this code (the comply or explain' rule). In addition, they should disclose information about their risk management systems. The proposal also contains provisions on the collective responsibility of the managing and supervisory board members towards the company for correctly drawing up and publishing the annual account and the annual report.

Lack of adherence to the accounting rules must be discouraged by the Member States by introducing appropriate sanctions and civil liability rules regarding the collective responsibility of board members towards the company. Member States are not prevented from applying stricter sanctions and liability rules than those envisaged in the Corporate Governance Amendment Directive. For instance, they may extend civil liability of board members to liability towards shareholders or even other stakeholders and they may also introduce criminal liability. The requirements laid down in the Corporate Governance Amendment Directive also apply to consolidated (group) annual accounts. Finally, all enterprises are obliged to increase transparency in transactions that involve conflicting interests.