EXECUTIVE SUMMARY
6. EUROPEAN CONVERGENCE OR DIVERGENCE: AN EVALUATION BY PRACTITIONERS AND ACADEMICS
An inquiry with corporate governance practitioners and academics at the first European Corporate Governance Conference sheds new insights in the opinions on convergence of corporate governance within Europe. Although attention is mostly limited to setting standards for listed companies, the inquiry explicitly differentiated between listed and non-listed companies. Governance of private companies cannot be neglected. These companies that form the backbone of the (continental) European economy need appropriate governance structures and processes to contribute to the company's success.
6.1 Possible future outlook of European corporate governance models
The future corporate governance model for European listed companies.
Notwithstanding the fact that the attractiveness of listing is quite different from one company to another, empirical evidence in Chapter 3 showed that the Anglo- American (stock) markets can no longer be seen as the only examples of 'market- oriented countries'. Quite a number of Continental European countries are at least as market-oriented as the former ones. As a consequence, an EU level playing field for listed companies has become very important for capital market funding and corporate efficiency. The inquiry presented in Chapter 4 confirms the belief that different opinions persist on the future direction for corporate governance in Europe.
When discussing the future corporate governance model for European listed companies, the inquiry showed that no outspoken governance model is favoured. In addition, it is not a question of the 'Brits' against the 'continent' because Continental Europeans do not have a univocal approach as to the future model for European corporate governance. Notwithstanding the different views in relation to the 'reference model', the majority of the participants agree on a further convergence of the governance model for listed companies.
The future corporate governance model for European non-listed companies.
Comparing the future outlook of corporate governance in listed and non-listed firms, quite substantial differences were observed. First, listed companies and non-listed companies will evolve in different directions. Second, a majority thinks that different (national) models will persist as far as non-listed companies are concerned.
And finally, even participants from the U.K. do not believe that non-listed European companies will evolve towards an Anglo-American corporate governance model.
This means that the 'diversity model' reigns as far as non-listed firms are concerned.
Moreover these observations indicate that the European governance scenery should be differentiated according to the type of company.
6.2 How important is cross-reference for reaching a European solution?
As hybrid corporate governance patterns will emerge, the majority of participants agree on the possibility to transfer parts of a system to another governance system without breaking the equilibrium. The majority of the participants do not think this cross-reference policy will have severe distorting side effects. The academic group is however more reluctant to accept transferability or adaptability of governance models.
Such transferability enhances possibilities for policy makers. As participants believe that different governance structures serve different economic and political purposes, policy makers can create an optimal environment by implementing new features of corporate governance to enhance economic efficiency.
The global debate on the optimal fit between the governance system and its economic and political purposes focuses increasingly on the shareholder versus stakeholder emphasis. This debate is especially vivid in Europe. The governance structure of a corporation reflects the attitude of the political environment towards the objectives of the firm. Different governance structures serve different economic and political purposes. Almost three out of four of the respondents support the thesis that governance structures support and facilitate economic and political purposes.
6.3 The European Commission can take different routes to reach a playing field for corporate governance.
Possible options or scenarios vary from total reliance on pure market convergence, over actions to foster convergence, to (partial) harmonisation.
The theory of optimal regulation believes that a regulatory system adapts to the need of the market. In fact, it is the ultimate belief in cross-reference and flexibility of corporate governance systems.
The theory of mutual recognition accepts that all existing systems at EU level are equivalent and no need for an EU-wide solution.
The theory of regulatory competition believes in the need for a true European (or even global) solution but leaves it to the regulatory bodies and their regulations to compete with each other in attracting business firms in their legal territory. This 'Darwinian' struggle between regulatory systems with a 'winner takes it all' outcome could take the form of a competition for corporate charters or of regulatory arbitrage. Opting for partial harmonisation entails the need for identifying the main issues that need to be harmonised on a European level, while leaving the remaining governance elements diversified and national. As such, a partial harmonisation can be the start of gradual convergence.
Most of the participants encourage the European Union to partially harmonise the corporate governance structures. However, respondents disagree on the content of such harmonisation program. Respondents of Continental European countries (especially those with a one-tier board structure) urge the European Union to focus not only on the protection of minority shareholders rights but to include other topics like the possibility of issuing non-voting shares. Only one out of three participants agree to limit harmonisation to the enhancement of a better protection of minority shareholders.
Although the magnitude of harmonisation is not clear yet, some lines for discussion can be drawn. Partial harmonisation will have to focus on the failures of the current systems, certainly in the light of improving the attractiveness of the European capital markets. Harmonisation measures could also be developed at the level of corporate governance recommendations. Measures at the level of company law could encompass more than the European company directive; we could alternatively think of a two- or three-tier company law, based on a relevant typology of firms. Last but not least attempts to reach an agreement on a single set of accounting standards should be stimulated more actively.
6.4 The route of a European corporate governance code
The implementation of a European-wide corporate governance code can be seen as a first necessary step to reach one European capital market. Moreover this would be a pro-active policy towards greater accountability of multinational enterprises.
The movement towards a global capital market will be possible only with some kind of an agreement on corporate governance.
The survey results indicate that corporate governance guidelines must, first and foremost, be directed towards publicly listed companies, disregarding the ownership structure of those companies.
Most self-regulation in corporate governance (via codes and recommendations) focuses or is even limited to listed (or public) companies. Indeed, the pressure for good corporate governance first occurs on a level where external shareholders or outsiders intervene, i.e. at the level of companies listed on the stock exchange. By virtue of globalising capital markets, the discussion on convergence consequently is mainly of relevance for listed companies.
There are however a number of reasons why corporate governance is equally relevant for non-listed companies. In Europe, the non-listed companies are still very important (see Chapter 5). These relatively closed companies face different types of corporate governance challenges and potential problems. Since they lack the scrutiny of powerful and well-informed market parties as well as the critical eye of market watchers, our research of governance practices shows the necessity that non- listed companies are also in great need of good corporate governance structures, practices and processes.
Moreover, governance recommendations for listed companies are often used as benchmarks for non-listed enterprises and self-regulation often directly or indirectly leads to legal rules (migration path). Such rules can become applicable to all types of corporations, whether listed or not. Also from this perspective, we think that it is not allowed to ignore private companies, when studying the future outlook of corporate governance.
Minimal recommendations to safeguard good corporate governance.
Notwithstanding the need for flexibility and diversity to cope with the specific needs of different types of firms (see Chapter 5), a minimal harmonisation will be necessary to agree upon the specific requirements that must guarantee good corporate governance. The inquiry showed that accountability, transparency and ethical behaviour of the board of directors are the central themes, a corporate governance code must contain. This is confirmed by almost three out of four participants. Especially the business community seems to be in favour of limiting corporate governance guidelines to these minimal recommendations.
To enforce good corporate governance, some urge the development of a European Securities and Exchange Commission, while others rely on the free market as the best monitoring authority. Not surprisingly, the business community supports a market enforcement regime whereas academics believe a further development of a system with national authorities and mutual recognition should be encouraged.
7. DIVERGENCE WITHIN A CONVERGING TREND: A TENTATIVE