On 12 December 2012, the European Commission published the Action
Plan which outlined the initiatives that the Commission intends to
take in order to modernise the company law and corporate governance framework.
See Background Papers for reference documents. The Action
Plan identified three main lines of action:
- Enhancing transparency – companies need to provide
better information about their corporate governance to their investors
and society at large. At the same time companies should be allowed
to know who their shareholders are and institutional investors should
be more transparent about their voting policies so that a more fruitful
dialogue on corporate governance matters can take place.
- Engaging shareholders – shareholders should be encouraged
to engage more in corporate governance. They should be offered more
possibilities to oversee remuneration policy and related party transactions,
and shareholder cooperation to this end should be made easier. In addition,
a limited number of obligations will need to be imposed on institutional
investors, asset managers and proxy advisors to bring about effective
- Supporting companies’ growth and their competitiveness –
there is a need to simplify cross-border operations of European businesses,
particularly in the case of small and medium-sized companies.
The Action Plan followed a period of consultation undertaken
by the Commission after its publication of two Green Papers, the first
in June 2010 on the Corporate Governance of Financial Institutions and
the second in April 2011 on Corporate Governance of all European corporations.
It also followed an academic conference organised by ECGI in September
2011 to identify the corporate governance research agenda of relevance
to issues raised in the two Green Papers.
With the publication of the Action Plan, with the support of the European
Commission and with sponsorship from the London Business School's Centre
for Corporate Governance, the ECGI held a further academic conference on
23 January 2013 to discuss the implications of the Plan. Those attending
the meeting were ECGI Research and Board Members, representatives of European
Commission DG Internal Market and Services, the London Business School
Centre for Corporate Governance, and a number of invited guests and observers.
See List of participants for a list of those who attended.
The meeting was structured in four sessions as follows:
||Session 1: The European Commission Action Plan
Chaired by Marco Becht with presentations from Pierre-Henri Conac and Joe McCahery
||Session 2: Diversity on Boards
Chaired by Karin Thorburn with presentations from Paolo Giudici and Maria Isabel
||Session 3: Short-termism – The Kay Review
Chaired by: Julian Franks with presentations from Mike Burkart, Maria Gutiérrez
Urtiaga, Stefano Lombardo, Fausto Panunzi and Theo Vermaelen
||Session 4: Bank Governance, Remuneration and Resolution
Chaired by: Colin Mayer with briefing from Tom Snels, DG Markt and presentations
from Arturo Bris, Christoph Van der Elst, Holger Fleischer, Klaus Hopt, Peter
Muelbert and Alessio Pacces
This report summarises the main observations of the participants. Where
slides were used by speakers, this report identifies that use and copies
of the slide presentations can be found in the Programme
|SESSION 1: THE EUROPEAN COMMISSION ACTION
Chaired by Professor Marco Becht, Professor of Finance
and Economics, Université Libre de Bruxelles (ULB)
Introducing the session with slides (see the
Becht commented on the lack of research into the issue
of ‘comply or explain’, and expressed his hope that this was something
which ECGI members might be able to address in the future. On the
proposals by the Commission to remove cross-border obstacles to
employee share ownership, he acknowledged that while this was clearly
something which the Commission should do, he wondered if in practice
this would prove difficult to achieve.
|In the first of the presentations by ECGI research members, Professor
Joe McCahery commented on the issues of enhancing transparency,
engaging shareholders and business forums. He drew particular attention
to aspects of ‘risk management strategy’, pointing out that the Action
Plan dealt with non-financial risk management, not covered therefore
by IFRS. Risk management is outsourced by many financial institutions
and it is difficult to see how much more traction this issue would
get at EU level. Generally, the supervision of risk management is
as well done at country level within the EU and the USA.
Commenting on the ‘comply or explain’ issue, he opined that institutions
wanted context and mitigation.
In relation to disclosure of voting policies by institutions, Dutch
surveys and other empirical studies showed that engagement and resources
had been committed and went beyond the ‘declared’ policy: it was perhaps
difficult to ask more.
He then commented on proxy adviser reform: He identified the issues
of methodology, conflicts of interest and consistency of quality (i.e.
accounting for local market conditions) as the main concerns. A code
of conduct would be preferred over mandatory disclosure and a new set
of procedural rules.
On the topic of cross-border measures in the Action Plan, he said that
a lot of academic work had been done in Germany on the European Company
(SE). The SE was a popular vehicle for enhancing corporate governance
at the cross-border level. Innovative companies used it and found that
the benefits were manifest. The process was not burdensome, but numbers
were still rather small (less than 1000), and many (40%) were ‘off the
shelf’ companies. It was still expensive, however, and if ways could
be found to reduce costs, it would, maybe, become more popular.
Professor Pierre-Henri Conac said that his general
view was that the Action Plan was an important step, but not the final
answer. Nevertheless, it was ‘better than nothing.’ It wasn't, he felt,
however, very ambitious. There was a clear distinction between listed
and non-listed companies. More forward thinking was a feature in relation
to non-listed companies and it was regrettable that the same thinking
did not appear in relation to listed companies.
On cross-border issues, there were some technical proposals in the Plan,
but despite case law, indicating that a transfer of seat cross-border
could be legitimately done, it needed a Directive to force the issue,
especially for smaller companies and groups.
Shareholder identification was a very important issue because at present,
all systems stopped at the border.
On corporate governance, the forcing of disclosure of directors’ remuneration
was something on which he had originally been unconvinced but now was
feeling more positive. He was very interested in the UK proposed legislation
to require a binding vote.
The proposed work on acting in concert in order to enable greater shareholder
collaboration was good thinking, he concluded.
In a tour de table of the researchers, the discussion ranged
over many issues which can be summarised as follows:
‘Say on pay’
Should this be for the EU or for member states? The UK seemed to be in
the lead in terms of a binding vote, but was that alone going to stop
excesses? Transparency was in one view the most important factor. There
was evidence, however, that showed that pay actually went up when shareholders
voted on it. Reference was made to the German experience where in the
past three years, only one vote against had been recorded.
It was also argued that the primary virtue of shareholder ‘say on pay’
was making management feel that they were working for shareholders.
There was great diversity of views as between voluntary/advisory/compulsory/intermittent
‘say on pay’ regimes. There needed to be harmonisation.
Although the evidence was mixed, there did not seem to be a trend where
‘say on pay’ reduced overall levels of remuneration. There was, however,
perhaps more dialogue going on between shareholders and directors ‘behind
the scenes’. Thus, by the time the issue reached a meeting, a measure
of agreement had been reached resulting in a vote in favour. Management
was in a sense thereby protected by the vote.
Some questioned the value of EU wide legislation, was it too intrusive?
There was a strong view that banking sector remuneration structures
encouraged excessive risk-taking and it was argued that restrictive legislation
should only apply to financial institutions. The issue of financial sector
pay was considered a highly political issue.
In the UK there was quite abundant evidence that shareholders in some
recent cases were voting down remuneration policies. In the case of Aviva,
the CEO had resigned because shareholders voted against his pay package
on the grounds of his poor performance. Engagement by shareholders on
this issue might encourage more engagement on other issues, especially
where ownership was highly fragmented.
In Sweden, statutory and binding ‘say on pay’ had existed since 2006.
However, the ‘principles’ had become standardised. The evidence seemed
to show that when the decisions on pay were delegated from the board
to members, a small majority could overrule a large minority in a way
that was not done at board level. A governmental inquiry had proposed
that the regime be returned to self-regulation.
On one view expressed, there was a danger of taking responsibility away
from boards, for which this issue should be a ‘core responsibility’,
and putting it onto shareholders. Shareholder engagement was not always
necessarily a good thing for the company: see Stock market
turnover and corporate governance by Alex
Edmans, Vivian W Fang and Emanuel Zur, 16 February 2013 http://www.voxeu.org/article/stock-market-turnover-and-corporate-governance which
uses American data.
Cross-border company law initiatives
It was generally felt that there was a need for wide consultation, but
to be meaningful this would require more economic data.
Professor Becht suggested that there was more in the Action Plan than
at first met the eye and that more meetings were needed to
continue the debate.
SESSION 2: DIVERSITY ON BOARDS
Chaired by Professor Karin Thorburn, Professor of
Finance, Norwegian School of Economics (NHH)
Introducing the session with slides (see the
Thorburn said that the session was intended to put into
context the proposed directive on gender balance and the diversity
proposals in the Action Plan. As a general theme, it was suggested
that the evidence showed no causal relationship with performance,
and therefore the issue was essentially one of gender equality.
Professor Thorburn identified both the monitoring and
the advisory role of boards, and that although the literature shows that
where a high fraction of women is on a board there is higher performance
(stock returns, return on equity return on assets), there is no evidence
of causality. The literature also appeared to show that female directors
were more likely to join different ‘monitoring ‘ committees of the board
(e.g. audit, nomination) and there seemed to be a correlation between
that heightened monitoring and increased CEO turnover. On the other
hand in terms of share value, such increased monitoring was not reflected
in enhanced share values - if anything, the reverse.
Professor Thorburn examined the performance characteristics of the boards
of Norwegian companies (where there is a quota law) but again, it was
not possible to discern a clear performance improvement as against pre
quota performance. However, a study from Italy appears to show that a
gender quota in politics increases the average level of education (in
Sweden the average IQ levels of male politicians went up following political
Finally Professor Thorburn made the point that a recent study in the
UK appeared to show that golf club membership was a better predictor
of receiving a board position than a university degree. In the end, the
issue of gender was more a question of whether we wanted the society
we were living in to have equal influence on the economic power system.
Professor Paolo Giudici agreed that there was no clear
evidence of any connection between there being more women on boards and
performance, and that the issue was one of gender equality. He referred
to a set of articles on corporate board gender diversity recently published
in Volume 89 Issue 3 of the North Carolina Law Review 2011. Those articles
cover the issue from many different angles and are worth reading. He
questioned why legislation was being introduced which would affect only
listed companies. If jurisdictions are really serious about the matter,
legislation should apply to all companies.
Professor Maria Isabel Saez Lacave thought that boards
around the world are under increasing pressure to choose directors that
are independent, and directors that are female (gender diversity). Nevertheless,
neither independence nor diversity is that valuable on their own without
expertise. Gender politics have in this sense a positive effect: if females
with business expertise should be considered part of the pool, corporations
would benefit from a broader pool of talent from which to select their
directors. But it can also have a negative effect: if the pool is small,
the pressure to select women imposes further restrictions inside the
pool. Expertise was the most important quality in a director and that
this was a good way to pursue diversity: Diversity in itself was a good
thing – it led to a less ‘cosy’ atmosphere. On the other hand, it is
not clear in the empirical literature that gender diversity in the boardroom
affects governance in meaningful ways. So, the push for less uniformity
in the boardroom may be driven by social or ethical reasons, rather than
better corporate governance or firm profitability.
Two questions that arose on several occasions were: was the argument
for diversity a business case or a moral case; and why was the debate
limited to listed companies?
If, as per the evidence cited by Professor Thorburn, women on boards
tended to be bigger risk-takers than men, there was a danger when quotas
operated that the supply of able ‘risk-taker’ women might be exhausted
rather quickly, leaving a pool of less qualified women.
It was also pointed out on several occasions that real power was in
higher management and therefore the emphasis should be on ‘getting it
right’ in terms of diversity at that level.
The view was expressed that ‘we’ve been here before’, namely on the
issue of ‘independent’ directors where the same issues arose - not that
there was nothing to do, but that legislation was not needed. ‘Comply
or explain’ would allow greater diversity to happen.
The legislative background was Article 157 of the Treaty of Rome for
the proposed Gender Quotas Directive; and Article 50 in relation to initiative
on disclosure of diversity policy to be adopted. However, sanctions would
need careful thought through.
Professor Thorburn concluded the session by observing that in her view
although integrity was more important than expertise, it was not practical
to list that virtue on a CV. She also congratulated Norway on making
the quota an effective threat in forcing through change.
SESSION 3: SHORT-TERMISM - THE KAY REVIEW
Chaired by Professor Julian Franks, Professor of Finance,
London Business School
Professor Mike Burkart commented that the Kay Review
was somewhat difficult to navigate. It seems to suggest that everyone
is ‘short-termist’. For instance, in Chapter 1 (point 1.1), it states “Short-termism,
or myopic behaviour, is the natural human tendency
to make decisions in search of immediate gratification at the expense
of future returns.....” The phrase ‘natural human tendency’
implies that everybody suffers from it. The whole structure of the
financial industry was about emphasising exit over long-term investment
and this was why there was a lack of engagement.
|There was an accusation that boards listened too much to agents, but
there is a good argument for saying that in fact they didn’t listen enough.
In his view, the Review’s appeal to more group behaviour was not going
to get anywhere.
Professor Maria Gutierrez Urtiaga agreed
that the Kay Review could have usefully employed more clarity of direction.
The Review was unclear as to how to persuade long-term investors to take
the long-term view. Among the possible incentives, Professor Gutierrez
Urtiaga favoured loyalty shares. More research was needed, in particular
on the issue of whether the gains outweighed the costs.
Professor Fausto Panunzi observed
that it was not clear what was meant by short-termism. There were many
factors which might legitimately create a short-termist view. Share prices
could sometimes be very ‘noisy’, thus influencing behaviour. Long-term
performance required involvement by long-term holders. The desire for
liquidity might militate against long-termism. Although the Review blamed
the demands of asset management, short-termism might nevertheless be
right in a given set of circumstances.
Professor Theo Vermaelen disagreed with most of the
recommendations of the Review such as the abolition of short-term information,
giving managers restricted stock. The crucial assumption made by John
Kay is that the market is inefficient in the sense that it does not reflect
expectations of long term cash flows. If the market is efficient, the
distinction between long term and short term investors is irrelevant.
If the market is efficient then stock prices will reflect the quality
of corporate governance. This means that an investor can expect the same
risk adjusted return in a high quality governance firm than in a low
governance firm. Kay confuses market efficiency with perfect foresight:
in an efficient market stock prices at time t reflect all available
information at time t, not information that becomes only available
at time t+1.
Professor Julian Franks observed that the Review did
not demonstrate that long-term shareholding versus activism was of itself
better. In relation to M&A activity, the evidence seemed to suggest
that where shareholder approval was required, the outcome was more profitable
than those deals where no consent was required.
The general feeling was that there was an issue here which needed to
be addressed but that the Review did not do it. The solutions offered
were impractical and undesirable.
People tended to be optimistic about the future and that optimism was
inevitably reflected in the stock markets. The objective in many countries
was to preserve the company but regulation had been short-termist in
nature – for example regulations in 2009 against ‘shorting’ the market.
The Commission indicated that it was also looking at incentives for
long-term holding such as: loyalty shares enhanced voting rights, taxation
options and increased dividends. The Commission also held the view that
not all short-termism was negative; but how did one encourage investors
to engage with boards also taking the long-term view? That was the difficult
issue to resolve.
It was argued that the Commission should create enabling legislation
which allowed companies to offer choices. Several voices asked: ‘why
regulate at all?’
Bonus shares for long-term membership militated against one-share-one-vote
It was pointed out that the laws of several EU countries made the incentive
suggestions illegal, but not in the UK or the US.
It was argued that more powers should be given on an EU wide basis to
re-elect the board. There was much debate around the arguments for and
against giving shareholders more powers to dispose of and appoint boards:
some felt that this was the way to make boards more effective whilst
others felt that this would detract negatively from the principle of
Professor Franks said that the central issue was how to encourage a position
where there were more shareholders who have a long-term interest
as well as the presence of short-term holders.
SESSION 4: BANK GOVERNANCE, REMUNERATION AND
Professor Colin Mayer introducing the session with
slides (see Appendix 3) felt that there were clearly a number of issues
for discussion: Bank governance and whether or not one should be thinking
about changing the nature of the fiduciary responsibility of directors
of banks; the capitalization of banks and the use of bail-ins; whether
or not bailouts can be organized at lower cost than at present and
avoid moral hazard problems; and finally, potential structural solutions
and the extent to which competition should be encouraged or discouraged
in banking and in that context the relevance of banks to ownership.
Professor Mayer hoped that these issues could form the
Chaired by Professor Colin Mayer, Peter Moores Professor
of Management Studies, Said Business School, University of Oxford
Tom Snels said that the Commission had
adopted in July 2011 a proposal for a Directive [the Capital Requirements
Directive – CRD IV] and a Regulation [CRR] which would replace the existing
CRD III. CRD III included a set of principles which credit institutions
must comply with when establishing and applying remuneration policies
for “identified staff”, i.e. staff whose activities have a material impact
on the risk profile of the bank and these are incorporated unchanged
into CRD IV. They principles also reflect the Financial Stability Board
principles for sound compensation. The substantive governance and remuneration
provisions can be found in CRD4. The disclosure and transparency provisions
as regards remuneration are laid down in the CRR (the Regulation). The
proposed rules on corporate governance in CRD IV are new.
The CRD IV proposal contains the following key provisions:
- Art 75- Risk management;
- Art 86: Governance arrangements and details about the nomination
- Art 87: Management body: including diversity and sufficient time
The Council had not yet reached agreement with the Parliament but it
was hoped to reach agreement by March 2013. The issues under discussion
- Diversity in respect of which there were several divergent views;
- Role of the risk management function and its ability to report direct
to the management body in its supervisory function; a limitation on
the number of directorships;
- Pay: There was a need to combat excessive risk taking. On the fixed
to variable issue, the Parliament thinks that the ratio should be one
to one and was in discussion with the Council about that and as to
whether shareholders should have the power to increase the ratio within
Professor Arturo Bris said it was necessary to address
the different types of banks, and be clear about the kinds of banks
we wanted for the future, risk takers willing to provide liquidity
to the economy, or safe institutions with no economic value. On the
topic of risk management, it was necessary to look at the management
of risk once they materialize versus analysis of future risk. On the
topic of remuneration, there was a concern that the European Parliament
was imposing risk ratios. The Commission would not stop excessive bonuses
and more ‘say on pay’ would not affect levels of pay.
Professor Peter Muelbert felt that Directors’ fiduciary
duties must look beyond shareholders. There were two other stakeholders:
First, depositors/bond holders (one should facilitate debt holder engagement);
and second, the government. Scepticism was felt about the view that shareholders
would come in and change behaviours. CRD IV would not solve the next
Professor Mayer suggested that risk management was
a way of trying to manage controlled risk taking.
Professor Christoph Van der Elst said that one could
start from the premise that banks were different and the question was
what kind of supervision did one want? One could organize that at different
levels. There should be tight rules on thresholds of risk (e.g. repo)
with opt outs. ‘Bail-ins’ were attractive but needed to be looked at
in the context of who should run banks. He did not believe that 100%
public ownership was the answer. Supervisors could be given much greater
powers to, for example, write down debt, increase equity, require management
to remove board members, appoint special managers and convert debt to
equity. The ECB would not be a satisfactory supervisor since it was
too conflicted. However, he was against these ideas because these were
non market-led solutions. An innovative market led solution which had
been suggested was the so-called ‘CoCo’ (Contingent Convertible) instrument
for which the ‘triggers’ would not be ratio-driven but market-based.
This would have made an early stage difference to capital structures.
Reference was also made by Professor Vermaelen to the
‘Call Option Enhanced Reversed Convertible’ instrument: ‘COERC’,
as a similar efficient market-led solution to capital structures which
reflected the underlying risks. When a (market-led) trigger was hit,
bonds would be converted at a deep discount to the market price. If the
bond holders converted, they wiped out the equity holders. However, one
would give shareholders the option to buy back the converted equity if
they wanted to avoid dilution. Shareholders who could not afford to buy
could sell their rights to the market. This might be said to create a
credit spread which was not much higher than the ‘risk-free’ rate. Market-led
solutions were better than bail-outs or bail-ins.
Professor Klaus Hopt said that academic
evidence showed that banks were special and were different in a number
of ways, including the principal/agent relationship; remuneration; boards;
management (where evidence seemed to show that banks with more shareholder-friendly
boards did worse in the crisis); and risk (where shareholder structures
had an effect on risk-taking and, it seemed, that a high institutional
presence resulted in worse performance in the crisis).
In risk evaluation, it should be remembered that banks had more stakeholders
than most non-financial entities: for example, depositors who had no
power; and large creditors who were secured so they did not see any need
to step in. As for increasing the powers of supervisors, this would have
the effect of weakening the independence of boards. Bail-ins could have
a beneficial effect. ‘Special Inquiries’ had been shown in some jurisdictions
to have resulted in prompt corrective action.
Professor Mayer suggested that maybe there needed to
be a combination of actively engaged long-term shareholders or, in the
case of banks, creditors.
The Commission’s view was that the
ideas expressed were very interesting; there was a need to study them
carefully because of the risks of the unforeseen consequences of a given
course of action. More research was needed.
Professor Hopt said that banks were different. He referred
to a number of research papers over the years by, for instance, Fahlenbrach
Beltratti, Stulz, Hopt, Wohlmannstetter, Mehran, Spong et al. and it
had been stressed that bank structures in particular had become more
opaque and complex than non-financial businesses. Moreover principal/agent
conflicts in banks differed considerably from those in non-financial
entities for all those involved - management, the board, shareholders,
debt-holders, creditors and even supervisors.
Professor Hopt then examined each of these components. He also drew
attention to the before-mentioned work by Fahlenbrach & Stulz, Bank
CEO Incentives and the Credit Crisis http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1439859 which
seemed to show that where CEOs were given incentives aligned with shareholders,
they performed worse than those without such incentives. He also pointed
out that the evidence showed that banks had evaluated risk badly, yet
banks whose boards were more ‘shareholder friendly’ performed significantly
worse than banks with ‘non-friendly’ boards.
In that connection, he cited the paper by Beltratti & Stulz Why
Did Some Banks Perform Better during the Credit Crisis? http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1433502 which
raised the question as to whether bank governance was in fact a major
cause of the banking crisis. He argued that the evidence would seem
to show the negative influence of shareholders in the lead-up to
the crisis. He also argued that strengthening official supervision
weakened the independence of the board and the monitoring effects
of stakeholders. For more details, see the recently published Better
Governance of Financial Institutions http://ssrn.com/abstract=2212198 and,
earlier, Corporate Governance of Banks After the Financial
Professor Alessio Pacces said there is a case for regulating
the corporate governance of banks only if banking regulation alone is
unable to police socially excessive risk-taking. One reason for this
inability is that not all the risks are known and financial crises cannot
be predicted. Two pieces of academic evidence counsel against direct
regulation of corporate governance. First, banks that were more insulated
from shareholders’ influence were less likely to need bailout. Second,
a good predictor of bailout was how banks did in the previous crisis,
showing the persistence of an unobservable risk-taking culture in financial
institutions. Regulating the corporate governance of banks may require
a radical change in approach. On the one hand, exclusive governance rights
(e.g. appointment of directors; say-on-pay) could be conferred upon creditors
that – via bail-in instruments – are credibly committed not to benefit
from bailout. On the other hand, because short-term creditors of banks
cannot credibly be excluded from bailout, the supervisory authority should
also have corporate governance rights. However, in order to have the
right incentives to exercise them, the supervisory authority should have
the power to resolve a bank in trouble and bear the consequences of failing
to do so timely. The EU project of a Single Supervisory Mechanism is
largely incomplete in this perspective.
Points raised during the general discussion
CoCo’s and COERC’s were innovative solutions in the capital structures
There was much discussion on the powers of supervisors. Might they not
include: the replacement of managers; the cancellation of shares; conversion
of bonds into equity; and bail-outs against an approved business plan?
Other voices expressed reservations to the effect that these were entirely
non market-led solutions; and in any event, the record of supervisors
in the banking crisis was questionable to say the least.
Views were also expressed concerning powers which could be given the
ECB to intervene. One view put forward was that bonds which would never
require the taxpayer to bail-out the issuer could be regarded as tier
Professor Mayer acknowledged concerns if not scepticism
expressed by the panelists about the role of corporate governance in
relation to both the past failures and the future governance of banks.
Aligning the interests of management and shareholders might not work
for banks. There was a view that there should be a combination of fiduciary
responsibilities and creditor enforcement as a way of introducing incentives
for creditors to be involved. Bail-ins warranted more exploration. Finally,
the suggestion that there should be more alignment of supervisors with
risks to the system through central bank links should also be further