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“The
Future of Corporate Governance in Europe Post-Enron”
The panel discussion
was chaired by Brian Groom, the Editor of
the Continental European edition of the Financial Times.
Professor Bengt Holmström, Paul
A Samuelson Professor of Economics, Department of Economics
and Sloan School of Management MIT, pointed out that the current
crisis came about as a result of a limited number of excesses
or failures in corporate governance. These should not be taken
as a sign of system meltdown. He felt that the public and
political uproar was very much part of the overall corporate
governance system; the system reacted swiftly and it would
seem, effectively. |
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He said that Europe
cannot directly emulate the US model, but is has every reason
to try to understand what has been happening in the US and
why. Regulation at the EU level should focus on transparency
rather than a forceful leveling of the playing field. Self-regulation
at the national and institutional (exchange) levels would
appear to be a more natural route. |
| Professor Holmström
concluded that biggest challenge for Europe was not the break
up of old structures but rather the build up of new ones.
It will take a lot more than corporate governance reforms
to complete this second phase of the restructuring process. |
| Professor Julian
Franks, Corporation of London Professor of Finance,
London Business School, made the distinction between an investor
protection regime designed to prevent theft and one that disrupts
private contract. The approach to takeover regulation has
been very different in the US and the UK. The former has relied
more on freedom of contracting subject to fair price rules.
The latter has been predicated on detailed prescriptions,
restricting particular takeovers and limiting size of share
stakes through Company Law, The Takeover Panel and Stock Exchange
Listing Rules. The EU could have chosen a US form of regulation
but instead took the UK route. |
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| “Do we need to
dismantle ownership structures to reduce private benefits?”
he questioned. The evidence seems to suggest that private
benefits are large in countries with concentrated ownership
and less developed capital markets. He suggested that the
dismantling of concentrated ownership structures is not necessarily
essential to investor protection. According to Dyck and Zingales,
‘a crude attempt to disentangle them points to diffusion
of the press and a high rate of tax compliance as being the
important factors.’ |
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Professor Guido
Ferrarini, Professor of Law at the University of
Genova, suggested three reasons why the SOA could become a
benchmark in corporate governance: it 'federalizes' US (and
international) corporate governance standards; it is likely
to influence the reshaping of European and national corporate
laws and practices, and it is applicable to many European
companies having their shares listed in the US. |
He then compared
some provisions of the SOA with the conclusions of the Winter
Group of High-Level Company Law Experts. For instance, under
the SOA, all audit committee members must be independent
whereas the Winter Report says that a majority of audit
committee members should independent. In terms of the expertise
of audit committee members, the SOA says that at least one
member must be a financial expert which is defined as someone
‘having experience as a public accountant or auditor
or a principal financial officer, comptroller, or principal
accounting officer of an issuer.’ The Winter Report’s
recommendation, which says all board members should possess
basic financial understanding, would implicitly reject the
American requirement.
After examining further the different
approaches to financial reporting requirements, the certification
of internal controls and auditor independence, Professor
Ferrarini concluded that the SOA might become a benchmark
for corporate governance also in Europe, particularly in
the areas of independence of audit committee members, the
financial expert in the audit committee, the appointment,
compensation, and oversight of the outside auditors by the
audit committee, the emphasis on executives and officers’
responsibilities for financial reporting, the emphasis on
executives and officers’ responsibilities for internal
controls and the prohibition of a variety of non-audit services.
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| Count Maurice
Lippens, Chairman of the Board of Directors of Fortis,
spoke very much from the point of view of a practitioner.
“Corporate Governance is an ongoing process within Fortis,”
he said, illustrating this point by describing the recent
history of the Group. |
| Over the decade since
it was founded, Fortis had changed from an insurance group
with a combined balance sheet was in the region of €28
billion through acquisitions, merger and integration from
an insurance group into a more broadly based financial services
group with a balance sheet of around €500 billion. This
significant development was characterised by an ability to
anticipate, innovate and change. Within Fortis, the values,
codes of conduct, policies, processes and behaviours are the
outcome of a culture of personal and social responsibility
and accountability, a culture deeply embedded at all levels.
It is culture that determines behaviours and the ability to
design and manage business direction and control. |
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Looking ahead, he
said that Fortis would continue to make adjustments in its
governance structures especially as the financial services
sector within which it operated was becoming more complex
and more demanding. The high complexity and huge implications
of financial services governance lead to profound changes
in the way the sector will have to be organised, managed,
controlled and supervised. This means a fundamental shift
from 'Corporate Governance' to 'Risk Management Governance'
in terms of, for instance, structure, organisation, role
of Board and Management, interactions between them, skills
and competence required, processes and risk modeling.
Count Lippens concluded that the
main lesson from the Enron type of debacle is that corporate
governance should no longer be either a concern or an issue
in terms of what to do. In this context, he added “organisations
such as the ECGI can play an important role in Europe.”
Brian Groom then
chaired a lively discussion with the speakers responding
to questions from the assembled members.
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