Corporate Governance at European level

Brussels, 14-15 March 2006

1. ETUC and its affiliates strongly support the objective of creating a highly productive European economy and a social Europe, as laid down in the Lisbon Agenda. That agenda speaks out in favour of a 'high road' strategy and against a 'low road' strategy for industrial restructuring and wealth creation. However, following the 'high road' of a highly skilled, committed workforce and high productivity requires the acceptance by European companies of the broader notion of social quality, rather than just a narrow approach geared towards serving shareholder interests. In this connection, companies need to respect and consider the interests and wishes of their employees very carefully in the interests of achieving a high level of economic performance. EU company law initiatives should therefore endorse the emergence and evolution of a European model of corporate governance, fostering company boards' orientation towards long-term value creation, high-trust labour relations, workers' participation in companies' decision-making processes and societal responsibility. Not only shareholders, but also workers, other citizens and the community at large have an interest in good corporate governance. Accordingly, the European corporate governance framework should lay down proper institutional conditions for companies to promote long-term profitability and employment prospects, define mechanisms that prevent mismanagement and guarantee transparency and accountability with regard to investments and their returns.

2. The current trend of global competition pushes companies to constantly expand to new markets and to implement strategies based on the cut of labour costs. Such strategies, however, require huge investments. The structural need to activate the financial leverage implies a pervasive presence of the the financial world (banks, investment funds, pension funds and insurance companies) in the companies' risk capital, often with negative effects on the governance functioning and decision-making processes. “New” models of governance are coming up and the “old” regulation cannot guarantee a suitable transparency of the market. The “illness” of European capitalism must be found in a lack of democracy and of transparency, together with the lack of participation of employees and stakeholders in the decision-making process of companies. The classical structure of industrial relations at national level could also be seen to be under attack. Fast changing markets, organisational flexibility, and new shareholding set-ups are obliging companies to re-arrange their governance systems. It is clear that a need for new models of corporate governance must be based on common rules or principles at European level and the role of employees in company governance must, once again, be at the core of this new regulatory framework.

3. The globalisation of both product and financial markets is causing countries with different legal corporate governance frameworks to compete with one another to attract investment. Financial markets are pushing companies to give priority to maximising profits and increasing shareholder value in the short term. Therefore, some people argue that those countries and companies which apply a corporate governance model focussing on the 'market of corporate control' as the leading mechanism for disciplining management have a clear competitive advantage. ETUC, by contrast, believes that a corporate governance model which motivates capital and labour to agree on all key elements of a company's policy and management will certainly perform better in the long run. It will also introduce stability and enable orientation to long-term goals.

4. Well-balanced corporate governance is irreconcilable with investors exercising direct control over company policy. Certainly, the general meeting of shareholders has to be the forum where the board accounts for its actions to the company's risk-bearing financial backers. However, the open character of the general meeting of shareholders in stock market companies precludes any truly meaningful debate on the company's risks and strategy. Shareholder attendance at general meetings varies considerably. Consequently, careful, consistent and responsible decision-making at the general meeting is far from guaranteed. It would thus be irresponsible to place the company's business in the hands of (the general meeting of) shareholders. This fundamental fact raises serious doubts about the tenability of the concept of the financial market as a 'market for corporate control'. ETUC believes that this concept is based on a simplistic representation of the relationship between investors and company executives as a 'principal/agent' relationship. Particularly in a battle for control, it becomes clearly apparent that the players on the stock exchange are driven not so much by the aim of long-term value creation, but rather by a perceived opportunity to make an instant profit on shares (by cashing in on a takeover premium). It is vital therefore that a company's board and employees should be entitled to avoid unilateral changes in the governance mechanisms resulting from major changes in the company's capital structure. In addition, overall labour standards should be unaffected by a company's financial transactions.

5. With respect to corporate governance, shareholder models are contrasted with stakeholder models. The distinguishing criterion here is not whether or not ultimate control lies with the shareholders. Of course a company's board should account to its shareholders, and shareholders need some way of intervening in the event of a loss of confidence. But the real question here is what checks and balances are needed to enable a company to maximise its profits in the long run and perform optimally in social and economic terms. In that connection, the preconditions for a sound corporate governance would appear to be that:

• the board takes up a position that is independent, so as not to become a plaything of stock market forces;
• the company's executives are subject to expert, independent supervision by non-executives and/or supervisors, who constitute a buffer between the management and shareholders;
• these non-executives and/or supervisors are appointed in a manner that guarantees their expertise and independence from management and keeps them at arms' length from the stakeholders;
• workers, through both their trade unions and/or works councils, are given a clear-cut role in the company's decision-making system. Existing systems establishing workers' involvement in decisions must be shored up to make sure they guarantee that due consideration is given to the viewpoint of the workers' representatives.

6. Workers are not only parties to an employment contract, but at the same time are investors and citizens. Workers should be seen as participants in the company, just like shareholders, in the sense that they sustain risks arising from the company's choices. They are concerned with corporate decisions in different capacities:

- as workers constituting the 'human capital' of a company and seeking a source of income for their livelihood, good working conditions and employment, regulated by both legislation and collective agreements;
- as investors, owning shares either directly or indirectly, for the most part providing an income for their retirement;
- as citizens interested in social justice and business ethics, not just locally, but also globally.

Corporate governance cannot be reduced to the problem of how shareholders (the 'principals') can control managers (their 'agents') . Workers firmly claim the right to be fully involved in the strategic choices of companies in which there are employed

7. In many European countries it is mandatory for the workers' voice to be included in the national system of corporate governance. Indeed, in European companies, employee participation has deep roots and it operates in different ways. In 12 out of 28 EU and EEA Member States (including Norway), workers have a mandatory, legally binding right to be represented in company boards and to influence management decisions in both state-owned and private companies. Co-determination in these countries is a fact, diverse in structure, but deeply-rooted in different cultural and historically developed environments. Worker participation seems to work well in both single and two-tier board environments, making a positive contribution to companies' performance. In other countries participation is the result of bargaining practices and also guarantees an influence on the strategic choices of the company. In any case, all the different participation models allow for different interests in the company to develop in full autonomy. European trade unions have no preference regarding these two models. They merely insist on respecting each of these historically developed structures. There is no evidence of an economic need to change or adapt systems in Europe to copy the US style of company management. On the contrary, an examination of micro and macro indicators indicates better performance by national economies with strong, widespread worker representation at board level, as recent studies conducted by the World Bank, the ILO and ETUI-REHS have shown.

8. The EU's current policy on corporate governance is not reassuring, and it certainly lacks any clear direction. On the one hand, the European Works Councils Directive emphasises that 'sound corporate governance' requires labour relations in which workers' participation in decision-making is statutorily recognised and guaranteed, as is the case with the European Company Statute, which allows for staff representatives to be assigned a seat on the board on a cross-boarder basis. This reflects the reality and legitimacy of a model whereby a multinational company is run in respect of stakeholders' interests and in a spirit of social partnership. On the other hand, however, the European Commission and Council were narrow-mindedly led by the idea of a 'market for corporate control' to draft the thirteenth directive on takeover bids. It was only pressure from the European Parliament that resulted in this false orientation being adjusted to enable boards to take measures to defend the companies' long-term interests and make the break-through provision optional. Of course the rules governing takeover bids needed to be improved and harmonised in the interest of the equal treatment of shareholders and the protection of minority shareholders. But this is different from relinquishing control over companies to the stock market, which is not a reliable compass for allocating control precisely because when takeover bids occur it is vulnerable to speculative fluctuation and exposed to greed for immediate gains.

9. The EU and its Member States should help develop a strong, reliable European model of corporate governance which should essentially be enshrined in European and national legislation and provide for:

- Full transparency with regard to accounting and investments: the auditors responsible for verifying and certifying the accounts must be independent. This would not be the case if they, or the network to which they belong, are the marketing departments of the same company as that which they are responsible for auditing in the general interest.
- A clear distinction between executive and non-executive and/or supervisory board positions in both the two-tier and single board models. Incompatibility between responsibility as an executive and responsibility as chairman of the board in the one-tier model.
- The publication of details of the remuneration received by individual (executive and non-executive and/or supervisory) board members and top managers.
- Workers' participation in the company's decision-making process - either via representation on the company's (supervisory) board (including a seat on its main committees), or through (central) works councils at company level or trade union representation - being allocated adequate consultation and participation rights.
- The awarding of rights both to shareholders representing a specified percentage of the company's share capital and to representative trade unions to request a legal investigation into a company's affairs and management if they arouse serious misgivings, and to have recourse to legal action if the investigation turns up proof of mismanagement.
- Mechanisms to promote long-term investment and responsibility, such as incentives to encourage long-term ownership.
- Upholding the ability of a company board's - subject to judicial control - to counteract a takeover bid that may reasonably be deemed to be prejudicial to the company's independent and long-term profitable entrepreneurial activities.
- Social audit must become a permanent and continuous tool to monitor and control transparency in order to ensure a balance between the economic aims of the company and its social responsibility.

10. Within the statutory framework, an additional role should be played by codes of governance, which ought to be based on a common understanding by the organisations representing all the stakeholders of the respective financial and labour markets. These codes of governance should be anchored in law through mandatory 'comply or explain' provisions. ETUC stresses that many national corporate governance codes suffer from a lack of legitimacy in that they fail to meet these procedural criteria and the requirement of representativeness. For the time being at least there is no need for a European Corporate Governance Code, since existing national corporate governance codes have converged somewhat, whilst at the same time remaining distinct owing to their roots in different national systems. A national code on corporate governance is more important in those countries (e.g. the UK), which has sparser legal provisions, than in countries (e.g. Germany), where many elements of the national corporate governance code invoke existing laws.

11. One important basic contribution to corporate social responsibility by the European Union and its Member States entails the establishment and maintenance of a well-balanced corporate governance framework by legislation, whilst of course recognising that both one-tier and two-tier company board systems exist in Europe. This framework should basically enable and stimulate company boards to deliberately gear corporate policy and decision-making to long-term value creation, taking account of public interests and respecting fundamental rights and values. Certainly, companies are economic organisations which aim to generate profits, and they relate to the outside world through markets. But it would not be accurate to reduce companies' social and economic significance to the outcome of such a drive for profits and thereby gauge it by the financial returns netted by owners or investors. Corporate social responsibility is the other side of the coin. ETUC thinks that values related to environment protection, equal opportunities, enhancing women‘s employment, making the most of human resources, rights of employees and citizens should be endorsed in the economic activities of companies. The concept of social responsibility should be developed as well. It should not be considered any longer a mere outcome of the governance but it should be an integral part of the process of governance. ETUC looks with interest at practices of “control governance” based on transparency, disclosure and accountability of directors and company decisions. ETUC is concerned by the failure of attempts to find an agreement on the implementation of CSR tools. There is a risk that the entire reform of company law will lean just on the management-shareholders relationship and the “share value” approach and not therefore in tune with the European labour movement.

12. Many national corporate governance codes show a striking similarity in including workers as main stakeholders in a company. In this regard, for the most part they draw on the OECD Principles governing corporate governance. Principle IV.C states that employee participation should be permitted to develop and help to improve economic performance. Most national codes on corporate governance, e.g. in the new EU Member States, include a chapter on the role played by stakeholders. In accordance with the OECD principles often invoked as the bases for such national codes, workers are explicitly mentioned as constituting an important stakeholder category. Just recently, a stand-alone principle on board-level worker representation was introduced into the OECD Guidelines on Corporate Governance of State-Owned Enterprises, and the value of such representation - in terms of contribution to the board's expertise, information and independence - has been recognised (Guidelines VI.D). ETUC, operating in close contact with TUAC, shares the OECD principles as a minimum standard and asks the European Union, in coherence with its positions, to endorse them in its own initiatives on company law and corporate governance.

- ETUC answer Re: The public consultation on future priorities for the action plan on modernising Company law and enhancing Corporate Governance in the European Union