Corporate Governance: a fig leaf for a clear conscience?



The expression “Corporate Governance” has become inextricably embedded – and therefore over used – in any serious discussion concerning business ethics. An ever wider gap is being created between the concept (which is as universally recognised as “motherhood and apple pie”) and its translation into action, where only too often, primacy of compliance with the form overshadows conformity with the substance emptying corporate governance of most of its ethical content.


In its codified form, Corporate Governance was born in the 1980’s, stemming from the need to reform sometimes doubtful financial practices which were no longer acceptable either morally or politically as the shareholder base increased dramatically. It is indeed under the pressure created by the explosion of savings in the form of share ownership both at private and institutional level (UCITS, pension funds etc.) as well as by the creation of thousands of new investors/voters through the privatisation process that political authorities were forced to take a closer interest in financial practices whose impact was no longer limited to a small circle of privileged citizens.


Thus, insider trading, long considered as a “normal” practice within the confines of transactions between professionals and/or wealthy capitalists was suddenly considered to be incompatible with the protection of the wider circle of shareholders. Similarly, abuses relating to majority control conferred by shareholder agreements or family ownership were considered to impact only the rights of the few that public opinion classified anyway as part of the “exploiting” class. With the democratisation of share ownership, this approach was bound to change.


The answers to these questions came about from two directions: first, on the legislative and regulatory level, where both national and European laws and directives came into force condemning the most obvious abuses such as insider trading, violation of minority rights, market manipulations as well as creating an appropriate framework for dealing with conflicts of interest, dissemination of financial information (accounts, prospectus, analyst’s reports) as well as specifying the legal responsibilities of the various management organs.  Secondly, on the level of voluntary undertakings, mostly translated into “codes of good behaviour”, whose efficiency was expected to work through peer pressure and the sanctions that the market would bring to bear in case of transgressions of rules freely accepted.


As each new scandal brought its contingent of new rules in the hope of closing remaining loopholes, it must nevertheless be observed that the initial objectives have not been fully realised, even if it is undeniable that positive results have been achieved. The reasons for this weakness are due to several factors:


-          On the legislative/regulatory level, it can be ascribed to the lack of will and of financial and human resources available to ensure the enforcement in particular of the repressive powers embedded in the legislation. Follows a feeling of impunity which reduces the efficiency of measures however skilfully they may have been drafted. Furthermore the legislative/regulatory process (“Lamfalussy”) is particularly burdensome and complicates the task of legislators and regulators to keep up with the constant innovations and developments brought about by the marketplace.

-          In the sphere of “codes of conduct”, the weakness derives from a tendency to salve one’s conscience by a strict compliance with the letter of the rules (or to simply ignore them) rather than their substance, when a conflict of interest arises.


These trends have been recently and unfortunately underscored in a series of showcase transactions:


-          In the case of the merger between Suez and Gaz de France one can wonder at the unqualified unanimity of the Board in support of the modalities of the transaction as of the first announcement concerning the deal. Did not a single board Member (independent or not) question the fairness of the terms of exchange offered to the shareholders whose interests each has a fiduciary responsibility to uphold? The current French parliamentary debate concerning the powers that the State wishes to retain concerning energy supplies and pricing policy demonstrates, if at all necessary, that the agreement at the outset of the financial parities in the exchange was, at a minimum, premature. Its is in the light of the outcome of this debate that terms and conditions of the merger should be negotiated, allowing to fully take into consideration as the case may be: a partial “nationalisation” of Suez, the emergence of a shareholder holding a “blocking” minority (depriving other shareholders of the benefit of future potential deals), as well as the peculiar role of the new lead shareholder in his capacity as “regulator” for the energy sector. All these factors should be properly evaluated in fixing fairly the final terms of exchange.

-          In the case of the Mittal/Arcelor merger, the recourse or obstruction to specific proposals submitted to the vote of the General Assembly, the voting rules to be applied as well as a unequal treatment of the alternatives of the merger with Mittal and the takeover of the Russian steel company (allowing to sidestep the Luxemburg legal requirements to force the Russian partner to make a full blown take over offer) gives the clear impression that the rules of corporate governance, to which the Board purports to adhere strictly, are being manipulated in support of the narrow interests of Board members to the detriment of a free vote by shareholders, regardless of the merits of the case.

-          Though clearly implicated due to the aspects impinging on competition rules, the review of these two mergers by the main governments involved (France, Belgium, Italy and Luxemburg) and by the European Commission has not extended to the compliance by the parties with existing corporate governance laws, directives and regulations. To the contrary, at the Member State level, a display of “nationalist” (politically motivated) positions seems to have constituted the main spur, pushing aside the aspects mentioned here above. Clearly such an attitude undermines the whole concept of governance from within, reinforced by the deafening silence at community level.


It appears therefore urgent to take concrete measures among which one may mention the following:


-          On the legislative/regulatory level:

o    Reopen the debate on the architecture of financial supervision in Europe in simplifying the framework by creating Supervisory Authorities at Union level. A federation of national regulators (on the model of the European System of Central Banks) endowed with the necessary resources and appropriate enforcement powers would contribute to achieve this objective.

o    Clarify - and abide by - the rules distributing power among the three levels of the “Lamfalussy process” in accordance with the original intent:  the responsibilities of Level One (directives) would be limited to the adoption of the general framework and political orientations capable of being adapted without modification to the technical innovations and evolutions served up periodically by the market. Level Two would ensure the detailed drafting of regulatory measures, coherent with Level One legislation, capable of flexible amendment through an administrative process. Level Three would ensure implementation of a single European level regulatory framework, taking full advantage of the expertise of national regulators better qualified to deal with local specificities.

o    Create within the European Court of justice a special financial court to judge transgressions within an accelerated procedure adapted to the needs of the market and ensuring the establishment of a Community wide uniform jurisprudence.


-          On the level of “voluntary” measures :

o    Impose the notion of preponderance of substance over form in all behavioural matters relating to “Corporate Governance” by underscoring that any contradiction between the two constitutes a basic contradiction in terms of Governance. Promote the dissemination of rules and best practices.

o    Publicise transgressions whether of form or substance. To that effect, it might prove interesting to consider the creation of a specific NGO “Corporate Governance Watch” distinct from organisations already active in the field (such as Proxinvest and ADAM in Paris, Deminor in Brussels, ISS in the USA DWS in Germany as well as specialists like “Global Proxy Watch” in Boston) who represent – quite appropriately – specific interests rather than the common good. The mission of such an organisation could be to disseminate, through an ad hoc Internet Webb site, all relevant information on current financial transactions and maintain an interactive debate in which economists, lawyers, market participants (including the organisations mentioned here above) could express their views. A rigorous management of such an instrument could acquire a real moral power that would prove far more effective than the often symbolic adherence to voluntary codes of conduct, in particular if its stated positions were regularly reflected in the media. Such an organisation could also lobby effectively government authorities in a sector were ethics should always prevail over narrow political interests.

o     Reopen the debate on power sharing between and among the various corporate stakeholders (Shareholders, Board, Management, Staff) including the voting structure, topics requiring qualified majority votes or, as the case may be, separate votes by category of shareholders.


In conclusion, it is appropriate to recall that in questions of ethics, it is the fundamental integrity of the actors that will always be the key factor. Being satisfied with ensuring a formal conformity with the rules, however well intended they may be, will empty the concept of Corporate Governance of all of its ethical content, comforting only those who have bought themselves on the cheap a clear conscience.


Brussels June 14th 2006


Paul N. Goldschmidt

Director, European Commission (ret.)