Europe Embraces Better Corporate Governance

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Byline: Kit Bingham

The architecture of corporate governance in Europe will continue to change in 2004 after a year of reforms. National regulators have been active: new best practice code requirements have been established in the UK, Spain and the Netherlands and for the first time in France and Germany.Reform has been intense on a cross-border basis as well. The institutions of the EU are pursuing several initiatives that will have an impact on corporate transparency and the accountability of companies to shareholders.

Prominent in this programme is the company law and corporate governance action plan, which was issued for consultation in May. It will require companies to make a clear statement of their governance practices, raise standards of board independence, and give investors more coherent voting rights.

In November, the EU revealed the feedback it had received. The internal markets commission said the action plan "was considered by the vast majority of respondents as an essential step to restore confidence in capital markets and the EU economy". The first governance initiatives under the action plan are expected in the second half of this year, focusing on promoting the role of non-executive directors, especially on matters related to audit, nomination and pay, and requiring a greater level of disclosure on executive remuneration.

The action plan is one element of the EU's bid to improve corporate accountability. A new takeover directive has been tabled, which hopes to achieve consensus where 15 years of negotiation have failed. Frits Bolkestein, the internal markets commissioner, said: "Swift adoption is especially important as enlargement will make it even more important for companies to be able to co-operate across borders."

Finally, the transparency directive, now under consideration in the European Parliament, aims to increase the quality of financial reporting. Much of the discussion on the directive has been dominated by opposition to mandatory quarterly reporting.

Mark Hynes, director of PR Newswire, the news dissemination service, said 190 amendments to the transparency directive had been filed in the European Parliament. He said: "Virtually all of them make the point that quarterly reporting is a bad idea. It is therefore not likely to succeed as a mandated reporting requirement. The parliament feels the argument hasn't been made yet. The big deals are yet to come, and the first six to eight weeks of the year will be critical."

The directive also sets the stage for a single European online database of company information, modelled on the US Securities and Exchange Commission's Edgar platform. One solution is a requirement for each market to create its own database as a first step to a single, continent-wide resource. "By linking these solutions, you are getting close to a European Edgar," said Hynes.

The International Accounting Standards Board will also have a critical impact on corporate governance. It is responsible for setting the accounting standards that will apply in Europe from 2005, and in the spring it will finalise the full set of standards. Richard Martin, head of financial reporting at the Association of Chartered Certified Accountants, said: "The end of March is a significant date for everybody."

The rapidly approaching deadline for applying international accounting standards will have been a significant project for most large companies last year, and will continue to be so. …