1.2.2 Directive 2006/46/EC

In line with this third driver the Commission wanted to enhance the corporate governance disclosures through a directive that states indirectly that EU countries must have a corporate governance code and directly that listed companies should be required to include a corporate governance statement in their annual report regarding the compliance with this code (EU Action Plan 2003, p. 13). Hence, as part of the EU Company Law Action Plan, Directive 2006/46/EC was adopted by the EU parliament and EU Council on 14 June 2006. Directive 2006/46/EC includes 7 articles that amend four other EU directives1,2 all concerning regulations on annual accounts.

With respect to the corporate governance statement the Directive states in preamble 10 that listed companies should be obliged to disclose an annual corporate governance statement as a specific and clearly identifiable section of the annual report that provides shareholders with easily accessible key information about the corporate governance practices actually applied. The corporate governance statement makes clear whether the company applies any corporate governance code. There is no need to impose the requirement of a separate corporate governance statement on undertakings drawing up a consolidated annual report. However, the information concerning the group's risk management system and internal control system should be presented. Subsequently, article 1(7) amending article 46a of Directive 78/60/EEC states that:

Of further relevance is that preamble 3 states that liability for drawing up and publishing annual accounts is based on national law. Appropriate national liability rules should be applicable to members of the administrative, management and supervisory bodies and Member States should remain free to determine the extent of this liability. Therefore article 1(8), amending article 50b and 50c of Directive 78/660/EEC, states that:

In summary and clear language the above means that:

The Member States should have brought into force the laws, regulations and provisions necessary to comply with the Directive 2006/46/EC by 5 September 2008 at the latest. This implies that today all Member States should have a national corporate governance code with a mandatory comply or explain principle; apart from Latvia this is indeed the case (see table 1.2.2 below).

The above shows that in recent years the principle has become a central element in the EU, initiated by driving forces such as the corporate scandals, developments towards one single EU market and a modern regulatory framework. Some argue that currently severe difficulties are being faced to come to one single EU market: such as the increasing impact of the Anglo-American ideology on shareholder value (Clarke 2007, p. 170 and 173), as well as increasing influence of institutional investors, privatisation and shareholders activism (Clarke 2007, p. 192). The EU and US corporate governance can no longer be regarded as pure opposites and do cross-fertilize each other. In addition, the financial crisis has possibly resulted in protectionism that prevents the further development of one single EU market. The crisis has taught us that sufficient disclosures are necessary to achieve public confidence in financial reports, EU-wide comparability and even to facilitate the - today more than ever - necessary cross-border investments. Recently, the EU Commission confirmed the above in its 2011 Green Paper on the EU corporate governance framework. The EU Commission assessed the effectiveness of the current EU corporate governance framework consisting of national corporate governance codes and Directive 2006/46/EC and concluded that the comply or explain principle does underpin the EU corporate governance framework (EU Green Paper 2011). However, recent study shows that the explanations for deviations are not satisfactory (over 60%) and in many Member States insufficient monitoring of the application of the codes exists (EU Green Paper 2011). Therefore, a common understanding of the principle'sscope and the conditions that need to be put in place for it to work effectively is the next goal to aim for.