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II. Corporate Governance in a European Perspective
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– 79 – Corporate Governance in a European Perspective Hilde Laga1 and Floris Parrein2 Jan Ronse Institute – K.U.Leuven Abstract Corporate governance has become an important issue at European level. Indeed, on the basis of the Winter Report, the Commission launched several initiatives aimed at enhancing corporate governance disclosure, the exercise of shareholders’ rights and the independence of the board of directors. The question arises to what extent the European legislator should take action. This question is very intriguing. We argue for a rather limited role, since European corporate governance inevitably has to take the differing ownership structures into account. European corporate governance can formulate general principles, but filling in the details will remain a shared task. Table of contents 1. Introduction 79 2. Growing interest in corporate governance at European level 81 3. General outline: European corporate governance and ownership structures 84 4. Monitoring by the market 86 5. The shareholders in the Corporate Governance debate 93 6. Monitoring by an independent board of directors 101 7. Monitoring by the legislator 110 8. What should be on the European agenda? 115 1. Introduction 1. Separation of ownership and control. Corporate governance refers to the organization of the relationship between owners and managers of a corporation. It stands for the way in which corporations are directed and controlled3 and deals 1 Professor K.U.Leuven, Attorney Courtrai Bar (Laga). 2 Ph. D. Candidate K.U.Leuven. 3 This definition of corporate governance can be found in the Cadbury Report. The OECD Principles of Corporate Governance, which were revised in 2004, suggest a more general approach. According to these Principles, corporate governance “involves a set of relationships between a company’s management , its board, its shareholders and other stakeholders. It also provides the structure through which – 80 – with the way in which suppliers of finance to corporations assure themselves of getting a return on their investment4 . Framing this issue is necessary in a situation where the suppliers of finance do not run the company themselves but hire a management team that is responsible for the daily activities of the company. This separation of ownership and control lies at the heart of the need for corporate governance5 6 , which is about optimizing the structure of decisionmaking within companies7 . The separation of ownership and control is an old problem which was already pointed out by Adam Smith. He wrote that “the directors of companies however, being the managers rather of other people’s money than of their own, it cannot well be expected, that they should watch over it with the same vigilance with which the partners in a private copartnery watch over their own”8 . This does not mean that corporate governance only protects the private interests of investors. Indeed, the way in which a company is directed has an impact on its general economic setting. An indirect relationship between sound corporate governance and the financial stability of the market can be proven: the stability of firms and markets are essential elements for maintaining financial stability. Corporate governance tools contribute to the intermediate objectives at the firm level9 . Therefore, the importance of sound corporate governance should not be underestimated. the objectives of the company are set, and the means of attaining those objectives and monitoring performance are determined. Corporate governance essentially focuses on the problems that result from the separation of ownership and control, and addresses in particular the principal-agent relationship between shareholders and directors” (Preamble of the OECD Principles of Corporate Governance 2004). 4 H. OOGHE and T. DE LANGHE, “The Anglo-American versus the Continental European corporate governance model: empirical evidence of board composition in Belgium”, European Business Review 2002, 437. 5 H. OOGHE and T. DE LANGHE, “The Anglo-American versus the Continental European corporate governance model: empirical evidence of board composition in Belgium”, European Business Review 2002, 437; M. LITTGER, “Funktion und Verwendungschancen der neuen Kodizes am Beispiel von Corporate Governance”, Rechtstheorie 2008, 496; P. NOBEL, “Stakeholders and the legal theory of the corporation”, M. TISON et al. (eds.), Perspectives in Company Law and Financial Regulation – Essays in Honour of Eddy Wymeersch, Cambridge University Press 2009, 167; C. TEICHMANN, “Corporate Governance in Europa”, ZGR 2001, 646. 6 For an overview of the different American crises caused by this separation, see: M.J. ROE, “The Inevitable Instability of American Corporate Governance”, (September 2004). Harvard Law and Economics Discussion Paper No. 493. Available at SSRN: http://ssrn.com/abstract=615561 or DOI: 10.2139/ssrn.615561, 4-7. 7 S...