to download a Special Report of this meeting - The Europaeum

Strategies and Balance
principles is that they can create an atmosphere
in which company managers recognise what
trust-engendering behaviour is. Rules cry out to
be avoided. Principles – set with a high enough
objective – must be aspired to by the exercise of
honest judgement by company managers.
Does it work As George said, the evidence is
inconclusive, but there does seem to be a growing
body of evidence. First of all, in the Company
Law Review we were told overwhelmingly that
whilst good governance could not create good
companies, good governance could prevent bad
companies, which was George’s point. I have
great difficulty in seeing how you could regard
these two propositions as not contradictions in
terms; I would expect that if good governance
could prevent bad companies, then such an outcome
would show up in the empirical research
that has been done. In fact there is some evidence
for this: a growing body of empirical
research suggests that good governance does
matter.
There is an initial study by Paul Gompers and
others; there is also a much more recent study by
Lucien Bebchuck which unpacks the Gompers
study and shows that for America (and it may not
be true for either the United Kingdom or
Continental Europe), there are key factors within
the Gompers set that are crucial. One is the
entrenchment or lack of entrenchment of boards,
and the other is the openness or lack of openness
of the company to takeovers - neither of which
has got much to do with the Combined Code, it
has to be said.
I said I would come to the European agenda.
The Winter group was not influenced by Enron.
Of course the Winter group looked at Enron and
looked at the Sarbanes-Oxley Act as it emerged.
Butut it came to the conclusion that the
Sarbanes-Oxley Act was not an appropriate way
to achieve a corporate governance regime within
Europe, primarily because of the lack of flexibility
and the huge disparities of practice and culture
within Europe. The Winter group focused on
conflicts of interest, as did Cadbury, and that led
to a series of outcomes which are now embodied
in the European Action Plan.
We have two recommendations which cover
the heartland of corporate governance codes in
the traditional sense, and which adopt the UK
approach, i.e. a comply-or--explain regime for
board structure and a mandatory regime with
annual general meeting approval for remuneration
structure.
In the other direction we have an audit directive,
which has been heavily influenced by
Sarbanes Oxley and creates mandatory audit
committees. In yet another direction, we have a
Thirteenth Directive on Takeovers which illustrates
my final point. It seems to me that there is
a real question whether the mandatory component
on which the enabling strategy (in the
Cadbury code sense) that has been adopted in the
UK is likely to be replicated in Europe. If it is not,
there is a big question about the European strategy
on corporate governance.
If you look at what happened in terms of
political and economic influences on the
Thirteenth Directive on Takeovers, what happened
was a combination of governments with
protectionist instincts, management with protectionist
instincts (but, of course their own protection),
and trade unions with protectionist
instincts (their own protection) came together to
emasculate the propositions in the Thirteenth
Directive in favour of an open market and corporate
control.
I fear that may be illustrative of the likely
reactions of the block holders and protectionist
governments towards the approach of openness,
enabling strategies, and the empowering of
shareholders that is the underpinning for
approach in the United Kingdom. If that fear is
justified then the European strategy will not
work. Lets hope that I am wrong and that the
evidence of protectionism in Europe turns out to
be ephemeral.
Additional discussion followed. Edited
extracts are below.
The role of governance in emerging & developed
markets
In developed markets, there is a danger of
treating new codes as a box-ticking exercise:
1) Companies in more developed markets
may be presumed innocent of bad governance
until proving themselves guilty through fraud and
scandal; and
2) Any approach which varies from the code
is likely to be presumed invalid (perhaps unfairly).
There is some evidence to suggest that open
systems of corporate governance do add value
and reduce the cost of capital in developed markets:
a recent article by Mark Rower shows that
capital premiums are very high in continental
Europe, intermediate in the US, and lower in the
UK, which seems to be a reflection of the different
regulatory situations. A piece by Lewis and
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