"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

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"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"


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
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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 ...

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