27th May 2005

Enforcing Corporate Governance Codes

Eddy WYMEERSCH

Prof. Univ. Ghent – ECGI Fellow Chairman of the Banking, Finance and

Insurance Commission

227th May 2005

Enforcing Corporate Governance Codes

Whether and How Corporate Governance

Codes are enforced – or have to be - is a

real issue It is sufficient today? Who is doing the monitoring? What can be monitored: difference

between formal requirements and substance?

327th May 2005

Enforcing Corporate Governance Codes

Who is doing the monitoring?

What are the instruments for monitoring Disclosure “name and shame” Fines? Delisting? Company Law Sanctions?

427th May 2005

Three cases

Voluntary code: self regulation: most European Jurisdictions

Voluntary Codes with legal backing: Germany, Netherlands; comparison U.K.

Legally Mandated Rules: SOX, others? In most states: mix of the three Increasing transfer from Self Regulation to

State Regulation

Inappropriate for internal functioning of the board

527th May 2005

Case 1 Voluntary Code

No explicit legal basis - Not legally bindingPrimary responsibility of the Board

Origin of the Code: St X’s, Business groups, Academics, Experts

Market Pressure• Effect on prices: controversial• Monitoring by AGM, Proxy services, Specialized

Ratings, Media, Public Opinion,

Is it effective? • In case of “scandal”: effective• Not if governance is unsatisfactory, but formally

largely compliant

627th May 2005

Case 1 Voluntary Code (2)

How improve? Private monitoring board: see Dutch Frijns

Commission Public monitoring: Securities Supervisor?

Difficult: public law to enforce private rules

Conflict with existing powers What is to be monitored? Substance or Formal

requirement How to monitor: disclosure? Fines? More?

727th May 2005

Case 1 Voluntary Code (3)

Legal remedies

Liability for untrue statement: ex post instrument

Adoption by General Meeting: could strengthen

827th May 2005

Case 2 Voluntary Code with legal backing D + N

Adhesion is legal obligation Liability Supervision Role of auditor

Listing Conditions: UK

Enforced by FSA on a risk based approach

Fines; Delisting

927th May 2005

Case 2 Voluntary Code with legal backing D + N (2)

Is it efficient?

In case of refusal to apply: yes? In case of weak implementation: no On substance: no

1027th May 2005

Case 3 Legally Mandated Code

SOX - diverse provisions in all EU states

Heavy, Costly but: back stop if self regulation does not work

See German case on remuneration

1127th May 2005

Conclusion

Dividing line between three cases is unclear + changing over time

Enforcement: Preference for market led enforcement Facilitate: enforcement by shareholders Approval by Agm may strengthen Strengthen the role of the company’s

internal monitoring (BoD; Agm)