"The knock on effect of Enron on European Initiatives in the area of Corporate Governance has been immeasurable and promises to revitalise the whole of the company law harmonisation agenda" Discuss
"The knock on effect of Enron on European Initiatives in the area of Corporate Governance has been immeasurable and promises to revitalise the whole of the company law harmonisation agenda"
Discuss
Background and Introduction
"Company Law and Corporate Governance are right at the heart of the political agenda, on both sides of the Atlantic"1.
The extent of Enron's ruin was enormous, being the largest American company ever to file for bankruptcy2. Justifiably the tragedy sparked an enormous United States Senate Investigation and it was shown that directors of Enron intentionally ignored high risk accounting procedures that led to the energy company's collapse3. After the Enron misfortune, few people doubted the need to re-examine corporate governance globally.
Corporate Governance is a contentious issue for lawyers, accountants, politicians and businesses alike4 and in the last decade corporate governance has been a priority on the agenda of several governments and has been firmly under the spotlight. Corporate scandals such as Enron have exposed companies' susceptibility to mismanagement, conflicts of interest and corruption5. As a result, corporate governance has moved up from being a mere exercise to becoming a considerable concern for companies.
Corporate Governance is an incredibly extensive area of Company Law, and so for this reason it would be impractical to review its entire reach. This paper proposes to give an outline of how and when the issue of corporate governance has risen up the
political agenda for the European Union and the United Kingdom Government. The Author will be particularly concentrating on post-Enron developments and the path towards harmonisation of corporate governance in the European Union.
Corporate Governance: Its Definition and Role in Company Law
There is no universal definition of corporate governance6 but we may distinguish between formal definitions of corporate governance and why it is needed in an economic sense for listed companies7. A company is a collection of assets that fall under the control of its managers. The assets derive from capital contributions from its shareholders and the profits of preceding trading activities of the company. Corporate Governance is therefore a method to ensure that the contributor of capital funds get a return on their asset and prevents self-interest in respect of the managers, to act in a way to profit themselves to the disadvantage of the owners. The relationship between the company's board of directors and the company's shareholders, and the way in which companies are governed are issues at the heart of corporate governance.
Across the globe there are a wide range of corporate governance systems, which are determined and ever-changing by the apparent issues of that territory; "thus there is a distinction between developed, developing and transitional economies, between Anglo-Saxon and Continental European systems and between market-based and bank-based systems8".
Reviews on Corporate Governance in the United Kingdom
Corporate collapses of major companies in the United Kingdom, resulted anxiety over what was considered to be the 'falling standards of professional behaviour in the boardrooms of our companies'9 and as a result in May 1991, the Cadbury Committee10 was created to consult the area of corporate governance and in December 2002, the Cadbury Report was published11.
Cadbury's key proposal was in relation to non-executive directors12, in particular it proposed for companies to adopt a committee system as a means of enhancing the efficiency of the board structure13
Cadbury also recognised the need for a successor committee to review and update if necessary. A few years later, Sir Richard Greenbury was appointed chairman of a committee to do just that. Their study concluded in the 'Greenbury Report', whose focus was primarily on 'directors' remuneration'14, following the 'fat-cat' scandals on the mid 1990's15. The Greenbury Report proposed amendments to the Code of Best Practice, most of which focused on the responsibility of the Directors. A view was taken that statutory regulation was uncalled for, and instead self-regulation was pushed as the way forward16
In November 1995, Sir Ronald Hampel established another committee to focus on the behaviour of the Board17, commonly known as the Hampel Committee who published the Hampel Report in January 199818.
The role of non-executive directors was again addressed19, stressing the need for them to be wholly liberated from the company20 in order to prevent someone or a group of people from governing the board's decision making.
Hampel recommended that work on corporate governance should not stop with the publication of their report, but that the London Stock Exchange21 should produce a code setting out the principles and practice of good corporate governance22.
Following on initially form the work of the Cadbury Committee, the Combined Code has been drawn up in the United Kingdom and was initially adopted by the LSE in 1992 as part of the Listing Rules23, and has been further updated following the recommendations of the Greenbury and Hampel Committees, thus defining a Code of Best Practice for Corporate Governance.
Companies adopted these forms of 'best practice' but incidents such as Enron was evidence that many shareholders are still being deceived by the companies or at least are not being offered clear information. The codes were all a positive step in the right direction and although many companies do adopt a policy of best practice, and ensure transparency in their reporting, there have still been many incidents where the reporting of financial information has been erroneous or in some examples fraudulent. Corporate scandals24 highlighted the concerns of investors and the need for further measures to be taken to correct problems still surrounding corporate governance.
The process of reviewing and updating the Company Law legislation began in March 1998 with the Department of Trade and Industries25 report, 'Modern Company Law for a Competitive Economy'. The Company Law Review Steering Group26 developed the ideas of the DTI, added their own contributions and published the report entitled
'Developing the Framework'27 in March 2000. This document was superseded with 'Completing the Structure'28 published in November 2000, and the review process by
the CLRSG was completed in July 2001, in publishing 'The Final Report' and the White Paper was presented to Parliament in 200229, prior to the Companies (Audit, Investigations and Community Enterprise) Bill being given Royal Assent30.
When the scandal of Enron happened, the United Kingdom was productively looking into corporate governance, ahead of the rest of the globe. The only floor the United Kingdom saw in their corporate governance codes was regarding Non-Executive Directors, a cautious apprehension the DTI wanted to consult31. On April 15 2002, it was announced that there would be an 'Independent Review of Non-Executive Directors', carried out by Derek Higgs32.
The Higgs Report on Corporate Governance and the accompanying Smith Report on audit committee reform was both welcomed33 and criticised34 when published. The FRC when consulting the Higgs Report made specific changes to it35
The Establishment of Corporate Governance in Europe
The Treaty establishing our European Community recognised that due to the diversity of its Member States national company laws, there was a necessity to form some degree of harmonisation between the many legal structures if there was any chance to form a common market for private industry across Europe36
Between 1968 and 1989 the European Commission engaged in a Company Law Harmonisation Programme37, which resulted in the implementation of fourteen Directives specifically in respect of Company Law. It must be noted that some of the Company Law Directives were abandoned relatively early on whilst others are still not being implemented but are under review38. This period of development has been characterised as the early stages of harmonisation39.
During the early 1990's very little was done in respect of continuing to harmonise our European Framework in respect of Company Law. In March 1997, the European Commission recognised the period of inactivity and issued a consultation paper on
Company Law, which authenticated the point that the Commission were hesitant about what their obligations were. This period of inactivity can be seen as the second stage of harmonisation40..
In the year 2000, a Corporate Affairs Division was created within the OECD41 whose position was to administer and complete amongst other things the policy work of corporate governance matters.
The third stage of the harmonisation process was initiated many would say by corporate scandals and company collapses, like that of Enron in 2001. As a result of these scandals, it was obvious that something needed ...
This is a preview of the whole essay
Company Law, which authenticated the point that the Commission were hesitant about what their obligations were. This period of inactivity can be seen as the second stage of harmonisation40..
In the year 2000, a Corporate Affairs Division was created within the OECD41 whose position was to administer and complete amongst other things the policy work of corporate governance matters.
The third stage of the harmonisation process was initiated many would say by corporate scandals and company collapses, like that of Enron in 2001. As a result of these scandals, it was obvious that something needed to be done to restore the confidence of investors. Initiatives were developed to do just that, focusing particularly of enhancing the transparency and the accountability of businesses42.
The European Framework: A calm and effective response to the lessons of Enron
The most significant development in the European Union regarding Company Law as a whole was the establishment of the Societas Europea (2001), which recognises two governance structures of a European Company43. This alone highlights the essential differences that exist in companies across Europe although it has been commented on that 'the effectiveness of the corporation is not affected by this distinction'44.
The American Enron scandal was the cause of massive losses of shareholder value on both sides of the Atlantic and post-Enron initiatives were a matter of necessity. In the
United States, the American Authorities acted remarkably quickly in response, by drafting and implementing the Sarbanes-Oxley Act45. Europe were as anxious as the United States to respond to the scandal as the Enron failings of corporate governance had affected their European markets similarly, and wanted to respond positively as their American counterparts had done.
In September 2001, the Commission requested for a review in the modernisation of Company Law in Europe and employed a High Level Group of Company Law Experts46, to do just that. The main objective of the Report was to improve shareholder protection and restore confidence back in the system, which was inevitably shaken by the recent scandalous event47.
The Commission also requested for a complete review48 of the various corporate governance codes of the various Member States with very positive results49. Codes of Best Practice amongst the Member States were remarkably similar in their content and purpose. The survey made the suggestion that, as the Codes are already alike, the Commission should look more to other problems that are caused by legal and regulatory obstacles.
With these results and the Winter Report50, which considered the need for reform in a wide series of company law areas51, the Commission set to work on their own report synthesising the responses, called 'Modernising Company Law and Enhancing Corporate Governance in the European Union- A Plan to Move Forward, which was published in 200352.
This Action Plan53 defines the key policy objectives, which should inspire future actions to be taken at European Level in the areas of Corporate Governance and Company Law54. It prioritises over the short55, medium56 and long term57, the various actions, which appear necessary to achieve a modern European regulatory framework. The main objectives pursued by the Action Plan are to strengthen shareholder rights and third party protection, with a proper distinction between categories of companies, and to foster efficiency and competitiveness of business, with special attention to some specific cross-border issues58, in the hope to attain an integrated market by 2005.
The Action Plan is based of a broad set of proposals, grouped under six important chapters: corporate governance being the first. The focus on corporate governance was welcomed, as a large number saw it as a major step towards encouraging efficiency, promoting shareholders rights and defending the interests of third parties.
The Action Plan proposed that the commission should arrange in the short term a proposal for a Directive setting up the main principles related to an annual corporate governance statement which should appear in the annual documents published for listed companies59. The Commission considered that the provisions existing in the proposal for a Transparency Directive were a major first-step towards ensuring that shareholders are provided with the electronic means60 to access the relevant information in advance of General Meetings61.
The Commission also proposed its intention to put forward, in the medium term, a proposal for a directive to oblige investors to disclose their investment policy and their policy with respect to voting rights in companies in which they invest, and to disclose to their beneficial holders at their request how these rights have been used in a particular case, an idea that was already current practice in a number of Member States.
The Commission was set in developing a regulatory framework across the European Union to encourage the exercise of various shareholders' rights in listed companies and to solve problems related to cross-border voting. The Commission do not believe that a European Corporate Governance Code would offer significant added value but a self-regulatory approach wouldn't suffice to guarantee sound corporate governance. A balance needs to be established62.
It was recommended by the Commission, that the role of independent non-executive directors and supervisory directors should be strengthened. The Action Plan also proposed the development of an appropriate system for Directors remuneration in the short term and put forward for the medium term a proposal for a Directive to enhance the responsibilities of Directors.
The Action Plan was generally praised internationally but as with everything, it brought with it criticisms as well. There were concerns that a 'one size fits all63' approach would mean an over regulation in the field of corporate governance, which may not be appropriate64. The Action Plan aims to establish an extensive legislation programme, in particular the drafting and implementation of Directives65.
Conclusion
What is evident from this paper is that Enron represents a great failure in modern times, which has exposed the flaws of many of the systems in the corporate world. Enron's collapse was due to poor business operation and fraudulent attempts to mislead stakeholders over the company's true position. It was the degree of both losses and the dishonesty that made Enron's failure so significant.
The debate of corporate governance is intense and the convergence of 'Codes of Best Practice' is indeed desirable. In spite of the differences in corporate governance across the globe, there are signs of growing confluence66. At a regional level, this paper recognises the various European Union initiatives that are leading towards the harmonisation of corporate governance.
When the Enron scandal hit the headlines, the United Kingdom was less exposed than the United States and although were scarred by its impact, were in a much more stable position. The United Kingdom's model of corporate governance is far from perfect but certainly their reviews have been a step in the right direction, ahead of other developing and transitional countries. The European Union prior to the scandal had recognised a period of inactivity in respect of corporate governance but were actively addressing the situation. It took the huge financial losses and subsequent lack of investor confidence from Enron to really kick-start their consultation process to prevent further events of such magnitude67. The harmonisation of the Codes of their Member States was the paramount issue they wanted to deal with but the Commission has recognised that complete harmonisation would take years and may never be perfect68
Generally it can be said that it is critical that Companies should not only adopt 'Codes of Best Practice' as a statement of intent, but that these rules are clearly established publicly. By giving a greater degree of transparency with regards to the Company's internal workings the directors in some way gain security against calls to prove that they have abided the terms of corporate governance, that they have acted honestly and in good faith and that they have discharged their duty with care and skill. In doing so the other stakeholders69 can take comfort in the fact that the directors are guiding the company in a proper manner and are mindful of the diverse interests. Whether best practice will prevent another Enron is a debatable point70. Clearly although Codes, Directives and Statutes can be created to prevent corporate failures, there will always be those who are prepared to break the law to make money for themselves. Preventative measures can be taken to prevent fraud, however it is inevitable that there will be further corporate scandals in the future71.
Given the costs of compliance to the new rules, where are the incentives for the company to implement good governance? In other words, can we be sure that a new harmonised regulatory framework will prevent future corporate scandals without unnecessarily constraining companies and investors?
The idea of regulating corporate governance in the EU entirely through Statute has been widely discouraged. It has however been recognised that a certain set of standards are required, rather than a rigid specific corporate governance system. Self-regulatory codes are flexible, permitting them to evolve under the influence of
market forces. Flexibility is not only an advantage to current Member States but even more so for the Accession Countries, whose corporate governance systems are still relatively immature and will require considerable consultation. In the future it may become apparent that Countries may face the debate over whether or not self-regulation by firms is adequate enough or whether it will it be necessary to regulate by Statute, but for the meantime it seems clear that Codes of Best Practice are adequate.
It is clear from this paper that the corporate scandal of Enron in 2001 has affected Countries worldwide, but it could be said that there was perhaps a global over-reaction? Many companies feel that regulators may have gone too far in setting rules and are simply reacting to political pressures72. It is unnecessary and unfeasible to have total uniformity under the guise of a single European Union harmonisation agenda; however it has been argued that some form of consistency is required to serve for a level playing field within Europe. Corporate governance will always be a work-in-progress, which will constantly need reviewing with no specific end result.
Bibliography
Recommended Text
* Hannigan, B. (latest edition) Company Law, Lexis Nexis, Butterworths
* Pettet, B. (2001) Company Law, Longman Law Series
* French, D. (2003-2004) Blackstone's Statutes on Company Law, Seventh Edition, Oxford University Press
Other Books and Sources:
* Monks, R and Minnow, N (latest edition) Corporate Governance, Blackwell Publishing
* Barca, F. and Becht, M, (2002) The Control of Corporate Europe, Oxford University Press
* Cadbury, A. (1992) Report on the Committee on the Financial Aspects of Corporate Governance, Gee & Company Limited
* Higgs, D. (2003) Review of the Role and Effectiveness of Non-Executive Directors, Department of Trade and Industry, London
* Mallin, C. (2003) Corporate Governance, Oxford University Press
* OECD (1999) Principles of Corporate Governance, OECD Paris
* Williamson, O. E. (1996) The Mechanisms of Governance, Oxford University Press
* Smith, D. (1999) Company Law, Butterworth Heinmann Press
* Lowry, J. and Watson, L. (latest edition) Company Law, Butterworth's Core Text
* Erhard, L. (2004) Lectures 2004, Chapter 2: The origins of International Harmonisation
* Macalister, T. and Treanor, J. The Guardian Newspaper, Tuesday December 4, 2001 'Enron crash hits markets'
* The Financial Times, 12 March 2003 'Higgs'
* The Financial Times, 24 April 2003 'Higgs Breach'
* The Telegraph Newspaper, 12 March 2003 'Needing Non-Executive Directors'
* European Commission Communication, Modernising Company Law and Enhancing Corporate Governance in the European Union- A Plan to Move Forward, Com (2003) 284 final of 21 May 2003
* Bone, S. Osborn's Concise Law Dictionary, Ninth Edition
* Black, J. (2001) Proceduralising Regulation - Part 1
* Sarbanes-Oxley Act (2002) 13 PLC 6-9
* Hill and Jones (2002) Corporate Governance
* Dorey (2000) Corporate Governance
Journals
* Journal of Financial Regulation and Compliance, Volume 11, Number 4 Dewing, I. and Russell, P. 'Post Enron developments in the UK audit and corporate governance regulation'.
* Business Law Review, Volume 24, Number 10
Reid, A. S.
'The Internationalisation of Corporate Governance Codes of Conduct'
* Ebert, S. European Business Law Review (2003) Volume 14, Number 2
'The European Community on the Level Playing Field of the Community'
* [2003] I.C.C.L.R., Issue 2
Copp, S.
Corporate Governance: Change, Consistency and Evolution - Part 1
* [2003] I.C.C.L.R., Issue 3
Copp, S.
Corporate Governance, Change, Consistency and Evolution - Part 2
Websites
http://www.irmag.com/static/disclosure/Europe/WinterReport1102
http://www.europa.eu.int
http://www.dti.gov.uk
http://www.frc.org.uk/publications
http://www.chathamhouse.org.uk/corporategovernance2003
http://www.accountancyage.com/
http://www.athens.ac.uk
http://www.lawtel.co.uk
http://www.encycogov.com/WhatIsCorpGov.asp
http://www.cmck.com
http://www.mori.com
Regulations
* Council Regulation (EEC) 2137/85 of 25 July 1985, on the European Economic Interest Grouping (EEIG) [1985] OJ L 199/1
* Council Regulation (2001/2157/EC) of 8 October 2001 [2001] OJ L 294/1
Directives
* First Council Directive (EEC) 68/151 [1968] OJ L 65/8
* Second Council Directive (EEC) 77/91 [1977] OJ L 26/1
* Third Council Directive (EEC) [1977] OJ L 295/36
* Fourth Council Directive (EEC) [1978] OJ L 222/11
* Sixth Council Directive (EEC) [1982] OJ L 378/47
* Seventh Council Directive (EEC) [1983] OJ L 193/1
* Eight Council Directive (EEC) [1984] OJ L 126/20
* Eleventh Council Directive (EEC) [1989] OJ L 395/96
* Twelfth Council Directive (EEC) [1989] OJ L 395/4
Frits Bolkerstein- EU Internal Market Commissioner, May 2003
2 Enron's Abrupt Crash and Burn stuns energy markets, by Kenneth Betz: "Houston-Enron Corporation, champion of energy deregulation and a free market internet innovator that grew from a mundane pipeline company into one of the world's largest electronic traders in natural gas and electricity, filed for Chapter 11 bankruptcy protection on December 2 after a buyout deal with rival Dynergy Corporation fizzled"
3 Enron's Abrupt Crash and Burn Stuns Energy Markets- by Kenneth Betz
"Just five weeks before the late November implosion, the company admitted that it had shifted billions of dollars in debt off its balance sheets and into a variety of complex partnerships. As the result of an investigation by the Securities and Exchange Commission, Enron was forced to restate five years of earnings, wiping out nearly $600 million in profit."
4 Copp: Corporate Governance: Change, Consistency and Evolution- Part 1: [2003] I.C.C.L.R , page 65
"Many bodies have a direct or indirect interest in its reform. These include international organisations, professional associations across a range of disciplines, as well as market participants and representative bodies"
5 Frits Bolkerstein- EU Internal Market Commissioner, May 2003
"Economies only work if companies are run efficiently and transparently. We have seen vividly what happens if they are not: investment and jobs will be lost- and, in worst cases, of which there are too many, shareholders, employees, creditors and the public are ripped off."
6 There is no universal definition to corporate governance but as Alan Reid stated in his article on 'The Internationalisation of Corporate Governance Codes of Conduct', "the concept is thought to include an amalgamation of: efficiency concerns, economic concerns, management control concerns, political concerns societal concerns and legal concerns".
7 Osborn's Concise Law Dictionary, ninth edition: Edited by Sheila Bone
Limited Liability Company: Companies Act s.1 "A company where the liability of its members is limited. Liability may be limited by shares or by guarantee. In a company limited by shares, the liability of its members is limited by the memorandum to the amount, if any, unpaid on their shares. In a company limited by guarantee, the liability of its members is limited by the memorandum to the amount the members have agreed to contribute to the company's assets in the event of its being wound up."
8 Business Law Review, October 2003, Volume 24 Number 10 'The Internationalisation of Corporate Governance Codes of Conduct', by Alan S Reid, page 233-234
9 Butterworths Core Text on Company Law by John Lowry and Lorraine Watson: Chapter 12, Page 263
0 The Cadbury Committee was made up of members from the Financial Reporting Council, the London Stock Exchange and the people in the accountancy profession.
1 The Cadbury Report is based on the conception that 'effective corporate governance is achieved through striking a balance between allowing directors freedom of action to further the commercial interests of their companies on the one hand, and instituting a framework of effective accountability on the other' (Paragraph 1.1). The basic theory of Cadbury is that this equilibrium can be accomplished through a self-regulatory code. The committee drafted what we now commonly know as the 'Code of Best Practice', which is supplemented by more detailed recommendations on 'good practice'. It was intended for companies to comply with these codes as far as they possibly could and should this not be possible, they were to publish the reason for their investors to see; this publication is now recognised in 'The Listing Rules'.
2 Higgs, D. (2003) Review of the Role and Effectiveness of Non-Executive Directors, Department of Trade and Industry, London
"There is no statutory definition of a non-executive director. Non Executive Directors are however generally regarded as those directors who, unlike their executive colleagues, do not hold any executive or management position in the company, non executive directors have to comply with the duties of directors which have been established by common law and case law, such as the duty to exercise care, skill and diligence."
3 Therefore enhancing the strength of Non-Executive Directors.
4 Directors themselves are unable to vote their own payment. Their remuneration is a matter for the company in a general meeting to fix by ordinary resolution (Table A, article 82) often on the recommendation of a remuneration committee of non-executive directors (Greenbury Report)"
5 Like for example that of British Gas
6 The Greenbury Report
"The way forward as we see it lies not in statutory controls, which would be unnecessary and at worst harmful, but in action to strengthen accountability and encourage performance. Such actions should be built on progress made".
7 The Hampel Report Para 18
"The previous two reports had been concerned with the abuses of power by company directors leading to corporate failure or unjust compensation packages"
8 The Hampel Committee refocused on corporate governance and suggested that although Cadbury's ideals of complying with guidelines was a valid idea, they felt that certain principles would also need to be adhered to.
9 Hampel had an ideal that one third of the board should be non-executive directors.
20 It had been noted that many non-executive directors had often held executive posts originally
21 Hereafter the LSE
22 Which did in fact begin in March 1998.
23 N.B. In May 2000, the LSE's responsibility for 'Listing Rules' was given to the FSA: their first notable change was transferring the rules from a small yellow book to a rather large purple book.
24 Example: Enron, WorldCom, Vivendi
25 Hereafter the DTI
26 Hereafter the CLRSG
27 Developing the Framework is also known as the 'Green Brick'
The Green Brick covers four key areas, the first of which was corporate governance
28 Otherwise known as 'Green Brick 2'
Green Brick 2 introduced the Operating Financial Review (OFR) and can be linked with Directors duties.
29 The White Paper 'Modernising Company Law' incorporates two hundred draft clauses of the Companies (Audit, Investigations and Community Enterprise) Bill, which was some time off completion due to its complexity and length.
30 www.cmck.com Article: Companies (Audit, Investigations and Community Enterprise) Bill given Royal Assent (3/11/04)
The Bill that was given Royal Assent on 29th October 2004, as introduced by the House of Lords on 3rd December 2003 [HL Bill 8]. Its main provisions are designed to improve corporate governance and accountability, to strengthen the role and independence of auditors, and to increase the powers of the DTI company investigators. Additionally it will relax the restrictions on companies indemnifying their directors against liability, and will introduce a new type of company, the Community Interest Company (CIC). The Bill forms part of the Government's strategy to help restore investor confidence in companies and financial markets following recent major corporate failures. The legislative changes to the Companies Act 1985 and Companies Act 1989 are intended to complement a package of non-legislative measures designed to strengthen amongst other things, corporate governance.
31 www.mori.com Article: The Business World Will Never Be The Same: The Contribution Of Research To Corporate Governance Post-Enron, 16th December 2003
In a special interview with MORI, Higgs outlined the approach taken to his task and his perceived need for a re-evaluation of this area "It is not so much about reform, more about continuous product improvement. It is now five years since the previous Hampel Review of Corporate Governance; we cannot afford to be complacent about these things."
32 Higgs, D. (2003) Review of the Role and Effectiveness of Non-Executive Directors, Department of Trade and Industry, London
33 Positive opinions of Higgs: 1. Telegraph 12.03.03, 'Needing NED's':
"Ex-Clinton advisor helps DTI boss Hewitt in hunting out the '100 non-traditional' non-exec directors, the challenge set by the Higgs Report."
2. Financial Times 12.03.03, 'Higgs':
"Treasury Minister will back Higgs report on Corporate Governance, warn against complacency"
3. ICAEW president Peter Wyman defended Higgs, shifting the blame to the Government, calling the Higgs Report a 'Magnus Opus' and 'fine achievement' at the Institutes annual supper 25.03.03.
34 . Negative Opinion of Higgs: 1. BBC 10.03.03, 'Boss's Rebellion':
"Top executives are resisting recommendations of the Higgs Report, claim it would split board and reduce management effectiveness."
2. Financial Times 24.04.03, 'Higgs Breach':
"NAPF says Derek Higgs in breach of his own stipulations on independent directors, he was non-exec when he was at EGG while on board of major shareholder, Prudential."
35 ICAEY president Philip Wyman's speech at his Institute's annual supper 25.03.03:
"The consultation by the FRC should be seen as a positive improvement rather than some kind of defeat." At the same time he recommended that that the "code shouldn't be implemented until January 2004 in order to avoid widespread compliance due to companies not having sufficient time to make the changes."
36 Which included in its objectives the establishment of the free movement of persons, goods and services, and capital.
37 Commission "Company Law Action Plan 2003"
"...a common approach should be adopted at EU level with respect to a few essential rules and adequate co-ordination of corporate governance codes should be ensured."
38 Directives 1-4, 6-8, 11 and 12 have been implemented, Directives 5 and 9 have been abandoned, and Directives 10, 13 and 14 are currently being reviewed.
39 European Business Law Review (2003) Vol 14 No 2, The European Community on the Level Playing Field of the Community by Sabine Ebert
"In order to encounter harmful competition between the different jurisdictions of the Member States and thus distortion of competition not covered by the intentions of the EC Treaty, the laws within the community are to be harmonised... can be accomplished by the adoption of directives according to Article 44 para 2(g) EC Treaty."
40 Corporate Governance one could say was at a standstill during these years, the markets were soaring and shareholders were happy with their interests and so the pressure was off
'Investor confidence is central to the successful and efficient operation of the capital market' Company Law, Brenda Hannigan: Chapter 2, Page 40
41 In 1999 the OECD published the 'Principles of Corporate Governance'
located at: www.europa.eu
42 Julia Black, Proceduralising Regulation: Part 1 (2000)
"The solution being advocated to a range of regulatory and indeed constitutional questions is to devise procedures for participation, for democratisation... The dominant call is to develop procedures and institutional structures that will enhance deliberation and enable participation."
43Business Law Review, October 2003, Volume 24 No. 10 pg 236
"Either a one-tier system comprising an administrative organ or a two-tier system comprising a supervisory organ and a management organ"
44 Business Law Review, October 2003, Volume 24 No. 10 pg 237
45 Sarbanes-Oxley Act (2002) 13 PLC 6-9
46 Hereafter the HLG
47 It paid specific attention to corporate governance and in particular the areas of disclosure, shareholders rights, Board duties and the idea of developing a harmonised 'EU Corporate Governance Code'.
Consultative document: 'A Modern Regulatory Framework for Company Law in Europe [2002] pp.4'
"...develop and implement company law mechanisms that enhance the efficiency and competitiveness of business across Europe"
48 'Comparative Study of Corporate Governance Codes Relevant to the European Union and its Member States' conducted by lawyers Weil, Gotshal and Manges LLP (January 2002)
49 It was concluded that every Member State with only two exceptions, namely Luxembourg and Austria, has at least one code. There was little indication that code differences would hinder the development of a single European equity market.
50 The Winter Report is so named as it was chaired by Jaap Winter, a consultant to Unilever and professor at Erasmus University of Rotterdam. Jaap Winter and his group of High Level Company Law Experts set to work and published the report on November 4th 2002. Its aim was described in the Article 'Corporate Governance in Europe: American Enterprise Institute for Public Policy Research, by George Kaufman and Peter Wallinson' as:
'One motivation for their report is to co-ordinate and strengthen efforts undertaken by and within Member States to improve Corporate Governance'.
51 Including shareholders rights, capital formation and maintenance, groups and pyramids, corporate restructuring and mobility, the European Private Company and whose special attention was in several key corporate governance issues which include specific issues identified in the meeting of EU Finance Ministers in Oviedo April 2002.
52 European Commission Communication, Modernising Company Law and Enhancing Corporate Governance in the European Union- A Plan to Move Forward, Com (2003) 284 final of 21 May 2003
53 European Commission Communication, Modernising Company Law and Enhancing Corporate Governance in the European Union- A Plan to Move Forward, Com (2003) 284 final of 21 May 2003
54 Frits Bolkerstein, Internal Market Commissioner
"The Action Plan provides a clear and considered framework combining new law where necessary with other solutions. It will help deliver the integrated and modern company law and corporate governance framework which businesses; markets and the public are calling for. The Commission is shouldering its responsibilities: Corporate Europe must shape up and do the same. Working in partnership, we have a unique opportunity to strengthen European corporate governance- and be a model for the rest of the World"
55 Short Term: 2003-2005
56 Medium Term: 2006-2008
57 Long Term: 2009 onwards
58 Corporate Governance in Europe: American Enterprise Institute for Public Policy Research, by George Kaufman and Peter Wallinson
"The Winter Group also focuses on improving efficiency and competitiveness of EU firms, aiding the development of the Single Market and facilitating and empowering growing cross-border investment"
59 Enhanced corporate governance disclosure was considered an essential element to better the transparency of companies and to ensure companies provide investors with better information on the key elements of their governance structure and practices.
60 Technological progress does not equate to the use of electronic means being made compulsory, traditional methods should also be retained and made freely available.
61 Business Law Review, October 2003, Volume 24, Number 10 page 237
"Effective procedures for decision-making are vital to corporate governance and a welcome emphasis of recent legislative developments has been on facilitating the use of new technologies and ensuring that the regulatory requirements are appropriate for the type of companies to which they apply."
62 Whereby the European Union should adopt a common approach covering a few essential rules ensuring adequate co-ordination.
63 An idea that was commented on by the HLG
64 Respondents to the Action Plan recognised that directives may not necessarily be an appropriate instrument in the corporate governance area as they are overly prescriptive and detailed, with no flexibility.
65 Some clarification of the rules of corporate governance was supported for listed companies but applying the same rules to unlisted companies should be more carefully considered so that their implementation does not have an adverse impact on competitiveness and freedom of establishment.
66 Op cit, n 10, at p 91
"Despite the differences in corporate governance systems, there seems to exist a trend towards convergence. This convergence is not only occurring in developed economies, which are adopting corporate governance mechanisms as they develop their institutions, as well as in developing economies, which face pressure form international donors for more transparent governance systems. This trend toward convergence does not imply a movement towards a single model of corporate governance, but a transition towards common guiding principles of information, transparency and accountability. Variation in national contexts, especially in terms of legislation, institutions, the development of capital markets, concentration of ownership and separation of ownership and control, will sustain differences in corporate governance and control systems."
67 ECOFIN Oviedo 2002
"Enron's collapse has increased awareness that proper Corporate Governance is essential to the efficient functioning of capital markets and high quality financial reporting."
68 Company Law Action Plan 2003
"There is little indication that the development of a European corporate governance code as an additional layer between principles developed at the international level and codes adopted at national level would offer significant added value."
69 Hill and Jones 2002
"Groups of constituents who have a legitimate claim on the firm, based on an exchange relationship and which includes stockholders, creditors, managers, employees, customers, suppliers, local communities and the general public"
70 Dorey 2000
"Codification has been a rather toothless exercise, and that the shareholder is still dependent on Trust, that the Directors have given a fair and true value in their communication and reports"
71 www.mori.com Article: The Business World Will Never Be The Same: The Contribution Of Research To Corporate Governance Post-Enron, 16th December 2003
Higgs commented in his interview with MORI that "You can't absolutely prevent something like Enron or WorldCom happening if the people in that company are determined to do that"
72 Changes in the USA have so far included the introduction of the Sarbanes-Oxley Act and the accounting regulator, the Public Company Accounting Oversight Board. Company boards have increased the number of independent directors and audit committees are more carefully monitoring auditors