Karel Lannoo
01/01/2004
The EU has recently introduced a breathtaking reform of its capital markets regulations. From 2005 on, all listed companies issuing securities in the EU will have to use International Accounting Standards. They will be subject to tighter insider trading rules, to a single EU-wide scheme for raising debt and equity capital, and may have to follow quarterly reporting standards. Stock exchanges and investment firms will be subject to more stringent investor protection rules. Investment funds will be allowed to sell a wider set of funds on a European basis with a single license. Moreover, a dramatic increase in cooperation between supervisory authorities in securities markets during the last few years should ensure that the same standards apply all over.
In contrast, corporate governance matters were, until recently, kept on the backburner. It is only the fallout from corporate events in the United States that led the European Commission to come forward with more far-reaching reform proposals. The European Commission used to argue that there was no need for a European initiative in the area of corporate governance, as this subject had already been well covered at the member-state level and national corporate governance codes were fairly similar in their nature and recommendations. The events in the United States brought radical ch-ange: Suddenly, the European Commission is proposing to compel companies to comply with a national corporate governance code based on some minimum supra-national criteria.
Misguided
The reasons for intervening in the area of corporate governance through legislative harmonization—that is, ensuring the rules in each EU member state are the same—are at least misguided and at most unwarranted. The EU has come forward with a single study arguing that a more integrated capital market would raise the EU’s real GDP level by 1.1 percent ($149.7 billion in 2002 prices) in the long run. While such measurements are politically popular and easily marketable, they are nevertheless fraught with methodological pitfalls. In addition, no attempt has been made to measure the extent to which the proposals put forward by the commission will effectively bring about an integrated financial market.
It is difficult to prove if harmonization matters in corporate governance: Company regulation is one of the least harmonized areas of EU law. Although the European Commission has attempted to advance harmonization for two decades, the effort has mostly failed thus far.
One barrier to progress in the area of corporate governance is the difficulty in arguing a sound case for harmonization. Such governance touches upon securities and company law regimes as well as enforcement mechanisms. Nevertheless, differences in corporate governance rules seem not to be a great burden to market integration in Europe. (The United States does not have a harmonized company-law framework either.) Moreover, the EU is promoting more competition between regimes by adopting the European Company Statute, which comes into effect this year, allowing companies to do business all over Europe with a single incorporation.
In the aftermath of Enron, the EU should have been more assertive in promoting corporate governance the European way. Corporate governance codes are more broadly developed and better implemented in Europe than they are in the United States. Splitting the roles of chairman and CEO, for example, is a standard accepted among the numerous national codes in Europe. Executive remuneration has never spiraled as it has in the United States, and stock options are much less developed. On average, CEOs of European-listed companies earned about 20 times more than the average pay of a manufacturing worker. In the United States, by contrast, the magnitude of the ratio of CEO pay to manufacturing worker pay is dramatic. It peaked at 1,046 in 1999 and then dropped to 531 and 411 in 2000 and 2001 respectively.
In sum, in the securities markets field, greater harmonizing measures allow a more integrated market to emerge while preserving a healthy degree of competition between jurisdictions. In the area of company law, by contrast, less harmonization can promote healthy competition. As in the United States, some jurisdictions may come out as preferred places of incorporation. The EU should ensure that its current Financial Markets Action Plan is well implemented and enforced, yet should abstain from its ambition to further harmonize company law and corporate governance.
A policy brief by the author on EU Corporate Governance Reform is available on the CEPS website: www.ceps.be
 | Karel Lannoo, chief executive officer of the Centre for European Policy Studies in Brussels, is a specialist in European financial markets, regulation and corporate governance. |