Brussels, 09/04/2014 (Agence Europe) - European Commissioner for the Internal Market Michel Barnier is putting democracy into European companies, with the right of shareholders to scrutinise executive pay. No ceiling, however, has been advocated for executive pay. On Wednesday 9 April, Barnier proposed revising shareholder rights in an effort to encourage them to get more involved.
This revision is part of the corporate governance package and also proposes a single status for single member companies. These initiatives stem from the recent communication on boosting long-term financing in the EU (see EUROPE 11048).
Highlighting dialogue, not ceilings. The European Commission is eager to tackle the trend for short-term profits and promote a more sustainable system of management for listed European companies by revising the directive on shareholder rights. The Commission is now proposing to grant these companies the right to scrutinise executive pay policies in European companies listed on the stock exchange in the EU. Fewer than half of all member states have legislation on the subject and rules vary from one country to another. Commissioner Barnier explained that this was not about capping executive pay but rather taking a look at the range between the average wage of employees and the pay of company directors. He explained that “it is it is up to shareholders to decide the value of good corporate management”. He also called on everyone to assume their respective responsibilities “with regard to shareholders and society at large”. He also highlighted the importance of transparency as a means of preventing excess in this area.
Voting on salaries. In practice, the Commission is proposing that companies' pay policy is presented to shareholders at the annual general meeting and that, every three years, shareholders are invited to vote on the matter. The Commission is not establishing the procedures that would result from a rejection of the approach on salaries adopted and is leaving this question to member states to decide. The main aim is to create dialogue between the shareholders on the issue of pay and involve them more. Ultimately, it is the whole governance system that is expected to benefit from this initiative, explained the Commission, which is counting on better company performances being obtained and long-term success. This is why the revision of the directive also calls on public investors with a more long-term perspective to promote more dialogue with shareholders who are more used to an approach that advocates profits in the short term (shares are resold within a period of eight months on average). The Commission therefore wants the respective objectives of each party to correspond on a more mutual basis.
The legislative review also calls on companies providing proxy advisers in general assemblies to be more transparent and fully explain the methodology they use for their advice. There are only six kinds of proxy adviser in this area and conflicts of interest are difficult to avoid. The revision is also expected to help to more effectively identify shareholders that have more than 5% share in the company listed on the stock exchange in an effort to establish dialogue with them. Finally, the new rules also intend to give minority shareholders more say during deals between related parties, such as subsidiaries or directors. Any such transactions will have to be notified when they involve more than 1% of shares and will be subject to a vote when they go above 5%.
Single-member companies. The package on enterprise governance does not stop there. The Commission has proposed a harmonised legal solution for single member companies in Europe that want to become more international. The draft directive sets out the conditions for becoming a European single-member company, which Barnier thinks would be more acceptable than the Private European Company Status rejected by the Council. The commissioner said that “any natural or legal body could directly create a company online, through an eSignature, and avoid having to travel, thanks to the internet”. The minimum capital required would be €1, similar to companies with limited responsibility that already exist in several member states, in an effort to stimulate start-ups. Nonetheless, guarantees are also planned for lenders (balance sheet tests and solvency certificates). Harmonised forms for registering this kind of company will have to be made available to companies by the member states based on standard conditions on corporate shares and governance. These companies will be known as Single Member Companies in the EU and, according to the commissioner, “will distinguish themselves from other companies by the SMC label in order to promote greater visibility and automatic recognition”. The commissioner is also counting on saving €300 million for companies whose costs for setting up and operations are expected to decrease thanks to this directive.
Complying or justifying. The corporate governance package is also accompanied by recommendations for member states to help strengthen the “comply or justify” principle for companies that breach the enterprise governance code. They will now have to show greater transparency in their explanations and outline the alternative measures they are putting in place, as well as the period in which they will be outside the Code. (MD)