therefore make it easier for US companies to raise
money on European markets and for US investors to
profit from investment opportunities in the EU and
vice versa. But at the very heart of this process
is confidence: confidence that the company in which
transatlantic investors invest operate within a
sound corporate governance framework, and have sound
corporate governance practices.
ECONOMIC IMPORTANCE OF CORPORATE GOVERNANCE
The growing importance
of corporate governance on the political agenda
is not just a response to the recent wave of scandals
in the US and in Europe. First and foremost it is
a key component of a strategy to boost business’
competitiveness and to foster efficiency in a modern
Good corporate governance
is an essential prerequisite for the integrity and
credibility of financial institutions, stock exchanges,
individual corporations, and indeed the whole market
economy. By ensuring greater transparency, fairness
and accountability with respect to shareholders
and other stakeholders, good corporate governance
builds economic confidence and trust. It facilitates
access to external financing and plays a critical
role in channelling savings to productive investment.
Corporate governance is
thus not an end in itself. Rather, its aim is to
promote the long-run success of a company and to
ensure economic growth in a market economy. Undertaking
risky ventures and engaging in projects with more
distant payoffs, all that require the certainty
and trust that good corporate governance can provide.
We have to ask ourselves
today – whether it is not the well run, diligent,
transparent, productive companies – sensitive
to their shareholders – acting ethically and
responsibly, who will survive and in the long term.
Surely yes. The short-termism, cowboy, overrisky
activities of some companies – those won’t
Making this link between
corporate governance, investment and economic growth
illuminates the importance of corporate governance
for the domestic and global economies. In today’s
integrated markets, failure to deal with the regulatory
issues associated with corporate governance can
have strong repercussions on global financial markets
and jeopardize financial stability.
2. THE EU CORPORATE
All these concerns, together
with those raised by recent corporate scandals,
have triggered and nurtured the discussions across
the Atlantic, as well as in other parts of the world.
Given the strong transnational dimension of corporate
governance, the European Commission also endeavoured
to promote the development of a sound corporate
governance framework at the level of the European
Union. Such a framework relies on four pillars:
(i) Enhancing transparency
on EU capital and securities markets;
(ii) Encouraging loyal and competent financial
intermediaries and proper supervision of financial
(iii) Developing sound mechanisms for internal
controls, including real shareholders’ control;
(iv) Ensuring effective external controls by auditors.
Such a four-strand approach
to corporate governance is also followed by our
main trading partners. We share a common objective
of restoring investor confidence, preventing corporate
failures and strengthening the checks and balances
in companies by increasing transparency and accountability.
3. THREE COMMON
Recent cases of major
corporate governance framework failures on both
side of the Atlantic have meant that we both face
a number of key challenges that need to be addressed
urgently. Let me very briefly highlight some of
them and outline the Commission’s approach
to meet them.
3.1 First Challenge:
improve the integrity and accountability of board
The first challenge is to improve the integrity
and accountability of companies’ Boards.
Board reform, and the pros and cons of the one-tier
and two-tier board system, have been and still
are the subject of extensive academic discussion.
But what is more important is the role, competence
and responsibilities of board members.
Non-executive and supervisory
directors have a duty to fill the gap between
uninformed shareholders and fully informed executive
managers, by monitoring the latter closely. In
order to make the board of directors a more effective
tool to check on the power of the management,
special attention needs to be paid to the role,
quality and integrity of their non executive directors.
Board members should
also be truly accountable to the owners of the
company. Shareholders need to be able to ensure
that management pursues their interest. They must
therefore be given the means to act as watchdog,
to protect their interests as well as those of
the other stakeholders.
The European Commission
has proposed several initiatives aiming at modernising
the board of directors and enhancing shareholders’
rights.. It will soon adopt a legally non-binding
recommendation to the Member States to design
a framework to promote the role of (independent)
non-executive or supervisory directors. This should
define the minimum standards applicable to the
creation, composition and role of the nomination,
remuneration and audit committees and to assess
the degree of independence of board members. The
Commission will also propose to enhance directors'
responsibilities. The collective responsibility
of all board members for financial and key non
financial statements should be confirmed as a
matter of EU law in the short term. The Commission
is also developing a framework to ensure a high
level of transparency of directors’ remuneration
and to allow shareholders to make their voice
heard on the remuneration policy of the company
and on remuneration items linked to the share
price. Finally the Commission is working on the
elaboration of a proposal for a directive to facilitate
the exercise of fundamental shareholders’
rights and tackle the problems associated with
cross-border voting. This proposal should be adopted
challenge: restore the auditors’ credibility
A second challenge that I believe needs to be
addressed is to restore credibility in an effective
external control mechanism. The most prominent
external control mechanism is control by the auditors.
The independent audit of a company and the required
disclosure to the supervisory bodies constitute
the backbone of effective financial market regulation.
Concerns have been expressed about whether the
incentives for external auditors are properly
aligned with the interests of the shareholders.
Independent auditors have, on commercial grounds,
been tending to enter into activities that risked
compromising the objectivity that the shareholders
and the investing public expect. In many countries,
dramatic failures and financial scandals have
appeared without previous notice by the auditors.
In some instances, only months before, auditors
had still given their certification of the financial
statements of the company without any limitation.
Recent events have demonstrated
that urgent action was required to restore the
credibility of external audits. This led the European
Commission to adopt the proposal for a Directive
to modernise Statutory Audit within the European
Union. This proposal seeks notably to promote
the use of international auditing standards and
to ensure that independent quality assurance systems
will be in place in all Member States. It also
addresses other important issues, namely:
(i) Should European
law make audit committees mandatory? In the
light of the general confidence crisis, the
Commission considers that such a requirement
would strengthen the independent monitoring
of the financial reporting process and help
to prevent any undue influence by the executive
(ii) Should mandatory rotation of the audit
partner or the audit firm be imposed? The Commission
believes that mandatory rotation will contribute
to avoiding conflict of interest. Member States
would have the option of requiring either a
change of key audit partners dealing with an
audited company every five years, if the same
audit company keeps the work, or a change of
the audit firm every seven years.
(iii) How to strengthen public oversight over
the audit profession? The traditional concept
of relying solely on self regulation of the
audit profession is sometimes perceived as not
being sufficiently conducive to investor confidence.
The Commission proposal therefore requires Member
States to organise an effective system of public
oversight for all statutory auditors and audit
Recent corporate scandals
have emphasised the strong need for internationally
consistent oversight over audit firms. This
led the European Commission to propose a framework
for cooperation with relevant authorities of
third countries. This approach has been developed
in intense and close co-operation with the US
Public Company Accounting Oversight Board (PCAOB).
The PCAOB has issued a rule on oversight of
non US audit firms which is the counterpart
to our proposal. I believe that this innovative
co-operative work-sharing approach is the only
sound way to deal with the regulatory challenges
of globally operating audit firms.
3.3 Third challenge:
fair presentation of the company through sound
and reliable accounting
The third challenge is to make sure that an independent
audit nevertheless is accompanied by a high level
of “truth and fairness” of the financial
statements: they must fairly present the company
position in a way that is clear and transparent
to all stakeholders. Publicly traded companies
therefore should be required to apply a set of
high quality international accounting standards
for the preparation of their consolidated financial
statements. In this context the decision to adopt
International Accounting Standards is important.
Since they are based on principles, IAS standards
should be more easily adaptable to financial innovation
than other more rule based standards such as the
US GAAP. The remaining difficulties with IAS 39,
which is based on a US standard, demonstrate the
limits of a deeply-rooted rule based approach.
But I believe we need
to go further and work towards a global consensus
on the key prerequisites for a fair presentation
of the company in order to limit inconsistencies
and confusion. It is therefore extremely important
to promote the convergence of accounting standards
with determination. We are all encouraged by the
cooperation between the FASB and IASB. Nevertheless
we believe that ultimately the EU and US will
have to cooperate on recognising the equivalence
of each set of rules. This is an issue on which
more progress is needed over the coming months,
but we are cautiously encouraged by some of the
recent moves of the SEC. We hope that the SEC
will draw up a road map towards recognition of
IAS very shortly to show the intent of the United
States authorities to make this process work.
4. THE EUROPEAN
The European approach
to these challenges is to some extent substantially
different to the one followed in the United States:
it is a matter of “comply or explain”
versus law enforcement; principle versus rule based;
bottom up versus top down. Concepts such as flexibility,
subsidiarity, proportionality, mutual recognition
and home country control are common language in
an EU regulatory environment but somewhat alien
in a US environment. Any idea to design a “one
size fits all” approach to corporate governance
problems is rejected by market participants. As
highlighted by the Commission in its Action Plan,
what matters is to be firm on the principles but
flexible on their application: no overly prescriptive
regulatory infrastructure and legislation only where
this is necessary, for instance when legal obstacles
need to be tackled to facilitate cross-border restructuring
and cross-border voting.
5. TOWARDS A TRULY
EU-US CO-OPERATIVE APPROACH
As you have noticed, the
approach chosen at EU level is quite different from
the approach followed in the Sarbanes Oxley Act
which introduced detailed corporate governance requirements.
This was especially the case for financial reporting
and internal control.
Despite these differences
in approaches, I am convinced that the EU and the
US can find a new way forward for a transatlantic
cooperative approach to corporate governance. As
was demonstrated by our cooperation with the PCAOB
on the issue of audit firm registration and oversight,
the EU and the US can work together to solve problems
after they have arisen. Such cooperation for ex
post conflict resolution must be completed with
greater ex ante upstream cooperation to prevent
new conflicts from emerging. Surely this makes complete
sense when we are dealing with a transatlantic capital
market that, for bonds, equities and bank assets
alone is worth 50 trillion USD – or 6 times
our respective GDP’s.
The European Union has
a unique experience to offer in bringing together
different legal, cultural and regulatory traditions
in a common denominator of internal market legislation.
The cooperative approach has proven to work well
in the competition policy area. Should this successful
concept not be further explored in the context of
the EU-US regulatory dialogue on financial markets?
This could be the platform for developing a co-operative
approach in the globalising world.
Ladies and Gentlemen,
please let me conclude:
The EU and the US count
for more than 50% of the world economy and about
90% of the world capital markets. We do have a
specific responsibility to work together constructively:
to organise dialogue and cooperation with a view
to ensuring efficient and credible solutions which
guarantee effective levels of investor protection
and a high level of efficiency for business.
Not only must we avoid
unnecessary duplication of controls and costs
for regulators, companies and auditors and ensure
that regulatory authorities intervene effectively
and in a timely manner. I am convinced we have
a lot to learn from each other. This is why a
constructive and regular dialogue such as the
one launched today is important to appreciate
where one system has developed a more sophisticated
approach and to promote regulatory best practice.
This may foster a greater convergence in our respective
approaches. And convergence is important for investors
who want to be sure that they will get the same
level of protection in another jurisdiction and
for issuers who want to be clear that they are
on a level playing field with their US counterparts.
This is crucial to restore confidence in our market
economies. This is the challenge ahead of us which
we need to embrace.
Thank you for your attention
and I wish all of us a fruitful conference.