Corporate governance within the EU and international legislative and regulatory framework
1. Legislative Approaches Toward Corporate Governance Regulation: Soft Law vs Hard Law - 2. The EU Framework at a Glance: From Takeover Bids, Shareholders’ Rights to Sustainable Growth - 3. Corporate Governance as a Public vs. Private Matter: Are Corporate Governance Standards to Be Applied Only Vis-A-Vis Public Entities or Shall They Affect Private Firms Too? - 4. Conclusions - NOTE
1. Legislative Approaches Toward Corporate Governance Regulation: Soft Law vs Hard Law
This chapter aims to providing a high-level legislative overview on the developments of corporate governance principles across the EU and to attempt to identify certain selected trends in the evolution that such principles are following. Before analyzing the current EU framework and its expected developments, it seems suitable to introduce the concept of corporate governance as most commonly known and to provide a brief commentary on the two core policy approaches adopted in the regulation of corporate governance. Whilst there are several definitions of corporate governance, for the purpose of this chapter we refer to corporate governance as a system of rules, practices and processes which define relationships between a company’s management, its board, its shareholders and its other stakeholders  which are generally explained under the well-known agency theory doctrine . The key stakeholders under a corporate governance perspective can be identified with three main players, whose relationships are one of the focus of corporate governance itself, and namely: (i) the board of directors, in charge of overseeing the activities of the executive arm of the firm, (ii) the management, as body responsible for setting, managing and executing the strategies of a firm and (iii) the shareholders, the ultimate owners of the firm. Outside these three cornerstones of traditional corporate governance and with the evolution of the corporate governance doctrine toward a less orthodox approach to such theme, other stakeholders started to come into play (e.g. rating agencies, employees, citizens, the local community) as potentially heavily impacted by virtuous (or detrimental) corporate governance practices. Consequently, policy makers have developed different approaches in addressing corporate governance matters, leading to a split between countries / international bodies pushing for (i) principle based comply or explain regimes  or (ii) hard law, entailing a mandatory set of detailed rules applicable to firms under the threat of sanctions/penalties and other enforcement measures. The United Kingdom can be considered one of the most known example of virtuous jurisdiction adopting the first approach with its UK Corporate Governance Code and the UK Stewardship Code , whilst at EU level we assist to an hybrid system where corporate governance aspects are addressed through a combination of legislation and soft law at [continua ..]
2. The EU Framework at a Glance: From Takeover Bids, Shareholders’ Rights to Sustainable Growth
Without entering into details about the whole corporate and company law emanating from EU law, this section will focus exclusively on the bulk of EU corporate governance principles and related statutory instruments. As preliminary remark, it seems suitable to point out the EU institutions addressed corporate governance in multiple instances not only through binding instruments such as Directives or Regulations, but also in soft law documents such as actions plans, green papers and reports and studies. One of the cornerstones of the modern corporate governance rulebook promoted at EU-wide level consists of the 2012 Action Plan issued by the EU Commission on European company law and corporate governance , which followed the more outdated 2003 Action Plan on Modernising Company Law and Enhancing Corporate Governance in the European Union . Following the 2008 financial crisis, the gaps in the corporate governance of certain financial institutions boosted the EU initiatives aimed at strengthening the corporate governance ecosystem also with respect to non-financial companies. Several of the initiatives promoted within the aforesaid documents have been then effectively translated in legislative projects (see, amongst others, the Capital Requirements Package  and the Tenth Company Law Directive on Cross-border mergers ). Indeed, one of the most interesting and ambitious plans consists of the recently published Commission Action Plan on financing a sustainable growth  which elevates the ESG trend within the financial and corporate industry. Trying to identify few key principles pursued at EU level when promoting sound corporate governance, EU law focuses in particular on (i) enhancing transparency (by means of stronger and comprehensive reporting practices), (ii) promoting shareholders engagement and protecting minority shareholders’interests, and (iii) supporting companies’growth and competitiveness, especially among SMEs. Among the key legislative initiatives propelled by the EU, it seems noteworthy to list the following statutory instruments and briefly identify their content: Ÿ Shareholders rights Directive 2007/36/EC (“SRD 1”): this directive sets out certain rights for shareholders in listed companies, applying from August 2007; Ÿ SRD 1 has been recently amended by Directive (EU) 2017/828 (“SRD 2”), with the aim to [continua ..]
3. Corporate Governance as a Public vs. Private Matter: Are Corporate Governance Standards to Be Applied Only Vis-A-Vis Public Entities or Shall They Affect Private Firms Too?
As corporate governance effectively deals with the financial, managerial and disclosure dynamics within a firm, it seems interesting to highlight that issues may arise in the absence of proper check and balances arrangements within a firm. A similar absence is generally unlikely in public companies, where institutional investors and, in general, private investors outside the management of the company itself, are interested in ensuring sound corporate governance as driver for revenues and competitiveness. Furthermore, the Board role is often well defined and shaped by industry guidance, such as the Guidance on Board Effectiveness  which is designed to support the Board of Directors in ensuring effective decision making whilst aiming at long-term success and viability of the company for the benefit of stakeholders. Differently, private and family owned business, the typical model of SMEs, especially in countries like Italy  not only are subject to lighter requirements in terms of corporate disclosure (see the scope of application of Art. 19a of the NFRD), but also are intrinsically linked to family owned structures  which are reflected in a peculiar composition of the Board where the majority of members are family members  and the agency theory conflicts seem more diluted  toward social family dynamics  and the presence of special bodies like “family councils” . In this regard, it may be argued that sound corporate governance and strong financial and non-financial disclosure should be treated as key goal also for SMEs as these are the driver for certain local economies but also the backbone of national economies. SMEs would be indeed the perfect candidate for embracing a “corporate governance revolution”, as these are generally more flexible in implementing changes and innovation due to their shareholding structure . However, the biggest hurdle for this revolution is mostly represented by cultural elements which, in general, shape significantly the corporate life of SMEs . In this respect, initiatives such as the voluntary Corporate Governance Code for non-listed SMEs promoted in Italy , the Corporate Governance Guidance and Principles for Unlisted Companies in Europe (ecoDa 2010) , and the SME Governance Guidebook, do represent a useful and, according to the author, proportionate tool to [continua ..]
Whilst corporate governance is nowadays becoming a key element in the legislative and regulatory agenda of international bodies and national authorities by means of new statutory initiatives and amendments to previous legislation, it seems suitable to outline how, often, soft law instruments, such as industry-backed codes, do address corporate governance deficiencies through proportionate and bottom-down provisions suitable to reach not only structured firms but also smaller companies. The latter are indeed, according to the author’s view, those which would need the most a well-designed pathway to sound corporate governance and an effective and efficient compliance culture within the firm. If such corporate governance revolution would spread among the circa 25 million EU-based SMEs , it would be possible then to see how stronger corporate governance and stronger performance are just different sides of the same coin: virtuous business.
 See The Chartered Governance Institute, available at https://www.icsa.org.uk/about-us/ policy/what-is-corporate-governance, last accessed on the 21.02.2020, and OECD Principles of Corporate Governance, 2004, p. 11, accessible at http://www.oecd.org/dataoecd/32/18/31557724.pdf. Last accessed on 29.02.2020.  Jensen-Meckling, Theory of the firm: Managerial behavior, agency costs and capital structure, in Journal of Financial Economics, 3, (1976), pp. 305-360. See also Ross, The economic theory of agency: The principal’s problem, in American Economic Review, 63 (March), 1973, pp. 134-139.  CFA Institute, Corporate Governance Policy in the European Union, 2016, p. 7.  Financial Reporting Council, The UK Stewardship Code, 2020, available at https://ecgi.global/sites/default/files/codes/documents/stewardship-code_dec-19-final.pdf. Last accessed on 29.02.2020.  Among them, see the “Codice di Corporate Governance” (“Code”) published by Borsa Italia, aimed at all companies with listed shares on the Mercato Telematico Azionario (“MTA”) managed by Borsa Italiana. Adherence to the Code has been designed as voluntary but, if adopted, it is explicit in the government report corporate and ownership structure published during the relevant reporting periods.  https://www.unpri.org.  EU Commission, Action Plan: European company law and corporate governance – a modern legal framework for more engaged shareholders and sustainable companies, COM(2012) 740 final. Accessible at https://eur-lex.europa.eu/legal-content/EN/TXT/PDF/?uri=CELEX:52012DC0740&from=EN – last accessed on 21.02.2020.  Communication from the Commission to the Council and the European Parliament, Modernising Company Law and Enhancing Corporate Governance in the European Union – A Plan to Move Forward, COM(2003) 284 final.  Also known as so CRD IV package comprising Directive 2013/36/EU and Regulation (EU) N° 575/2013.  Directive 2005/56/EC. Available at https://eur-lex.europa.eu/legal-content/EN/TXT/?uri=celex:32005L0056. Last accessed on 29.02.2020.  https://eur-lex.europa.eu/legal-content/EN/ALL/?uri=CELEX:52012DC0740. Last accessed on 29.02.2020.  On the subject matter, readers may wish [continua ..]