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28. What are the main obstacles to integrated capital markets arising from company law
and corporate governance? Are there targeted measures which could contribute to
overcoming them?
The UK believes that maintaining and improving standards of corporate governance across
the European Union plays a key role in contributing to growth, stability, and long-term
investment.
The European Commission can play an important role in establishing common standards
upon which Member States can build, and in encouraging high standards of corporate
governance by spreading best practice across Member States. However, it is essential that
the Commission ensures that there is sufficient flexibility to accommodate the very wide
range of company law and corporate governance systems, and the differences in market
structures and the shareholder base, across Member States. We do not believe that
harmonisation of the different approaches to company law and corporate governance is
necessary to achieve a Capital Markets Union, and indeed would have concerns that a “one
size fits all” approach could risk weakening existing shareholder protections at Member
State level.
The UK has been broadly supportive of the Commission’s recent reforms to corporate
governance at EU level, which have sought to improve common standards while maintaining
appropriate levels of flexibility, drawing on input from Member States, including notably
from the UK’s approach and recent reforms. We would highlight in particular:
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The Commission’s Recommendation on the quality of corporate governance
reporting (the ‘comply or explain’ principle) (2014/208/EU) which recognises the
concept of ‘comply or explain’ as a mechanism which can be used successfully
throughout Europe.
EU Directive (2014/95/EU) which seeks to improve the quality and comparability of
non-financial information reporting.
The EU Accounting Directive (2013/34/EU) which requires companies to report
which corporate governance code they adhere to and relevant information required
by the code.
The EU Directive (2013/50/EU) amending the Transparency Directive, which
removed the mandatory requirement for quarterly reporting by companies to
address the widespread concern that this requirement imposed unnecessary
burdens on companies and prompted an excessive focus on short-term performance
on the part of investors.
These reforms complement the UK’s domestic reforms to the corporate non-financial
reporting regime, which seeks to make annual reporting less burdensome, more relevant to
investors, and more focused on long-term company strategy. Early evidence suggests that
the combination of these reforms are already delivering a significant improvement in the
quality of corporate reporting, including to meet the needs of long-term investors, and will
better equip shareholders to hold company boards to account.
The UK is a strong supporter of the ‘comply or explain’ principle, which assists companies in
how they report and helps investors better understand the companies in which they invest.
‘Comply or explain’ provides companies with flexibility by allowing them to adapt their
corporate governance to their size, stage of development, shareholding structure, or
business sector. The UK supports proposals which will embed the spirit of the Commission’s
Recommendation in practice and promote a culture of accountability, encouraging
companies to disclose their corporate governance arrangements. Comply or explain is now
widely supported by companies, investors, and regulators throughout the EU as an
appropriate tool to promote good corporate governance.
Looking forward, the UK is broadly supportive of the objectives of the Commission’s
proposals to amend the Shareholder Rights Directive (SRD) and welcomes the constructive
negotiations to date which have sought to ensure that the proposals achieve common
standards across Member States, while retaining sufficient flexibility to accommodate the
variety of company law and corporate governance systems in Member States. The UK has
been pleased to share its own experiences in a number of policy areas, including on
proposals to enhance the reporting regime for the remuneration of company directors, to
improve transparency and engagement on the part of asset managers and institutional
investors, and to ensure effective and proportionate shareholder scrutiny of related party
transactions.
In light of the requirement in the Central Securities Depository Regulation (Regulation (EU)
No 909/2014) for the dematerialisation of paper share certificates, the UK has
commissioned research to examine how shares are currently held by institutional and
individual investors. This will also provide an insight into how we might encourage greater
investor participation and oversight of corporate governance.
We would encourage the Commission to focus on securing agreement to the Shareholder
Rights Directive and on monitoring the implementation and assessing the impact of existing
policy interventions in the corporate governance area, rather than developing further
proposals at this stage.
Equally, while the UK is supportive of the policy objective of improving cross-border working
for companies in EU Members States, we do not believe there are significant obstacles to
achieving this objective arising from corporate governance and company law framework.
There are already clear rules of establishment of a company and the place of registration of
a company determines the company law rules that apply to that company. EU company law
currently deals with some elements of registration, publication of company information,
accounts and audit requirements, and in addition sets clear rules on cross border
mergers. Companies remain free to establish subsidiaries in other Member States or other
establishments such as branches. UK stakeholders do not tell us that there are significant
problems in relation to establishing a company or other entity in other Member States and
have more concerns about understanding rules on matters such as employment which
might apply to them. The UK has yet to see conclusive evidence that the current approach
to company law relating to cross border movement of companies is a significant barrier to
companies.
Any new proposals should clearly demonstrate that there is a significant problem which
needs to be addressed by European intervention. The UK would want to see a detailed
impact assessment of any new proposals in these areas, which clearly demonstrates the
benefits of EU intervention.