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
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:
case of the merger between
- 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.
clearly implicated due to the aspects impinging on competition rules, the
review of these two mergers by the main governments involved (
It appears therefore urgent to take concrete measures among which one may mention the following:
- On the legislative/regulatory level:
the debate on the architecture of financial supervision in
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.
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
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.
Paul N. Goldschmidt
Director, European Commission (ret.)