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Erhvervsudvalget 2010-11 (1. samling)
KOM (2011) 0164 Bilag 3
Offentligt

European Commission

DG Internal Market and Services

B-1049 Brussels

The Danish government’s response to the Commission’s Green Paper

on the EU corporate governance framework

MINISTRY OF ECONOMIC

AND BUSINESS AFFAIRS

General comments

The Danish government welcomes the Green Paper on the EU corporate

governance framework and appreciates the opportunity to respond to it.

The Green Paper has identified some important questions on what should

be the role, scope and content of the corporate governance framework in

the EU. The Danish government supports the approach of asking and ex-

amining such questions as it is necessary to have a thorough debate on the

future of the corporate governance framework in the EU before deciding

on the way forward. Having such a debate and analysing

ex ante

the po-

tential impacts of realising different possible directions for the future

framework is useful and necessary in order to decide what ideas should

be discarded and what ideas should be further developed. In that context

it should be noted that it is just as useful to reach the conclusion that cer-

tain ideas

are not

the proper way forward as reaching the conclusion that

the ideas

are

the way forward.

The Danish Government believes that any future regulatory initiatives in

the field of corporate governance – as in the area of company law in gen-

eral - should always satisfy the following key conditions:



The objective and the need for a possible initiative has been clear-

ly identified as a need for companies and/or relevant stakeholders

Convincing arguments support that regulation is a better tool than

leaving the matter to contractual freedom

Compelling arguments support that EU regulation would meet the

objective better than national regulation

The scope of the possible initiative is carefully aligned with its

objective

The cost of regulation and impact on administrative burdens are

taken into account and can be justified.

Slotsholmsgade 10-12

DK-1216 Copenhagen K

Tel.

Fax

+45 33 92 33 50

+45 33 12 37 78

CVR no. 10 09 24 85

[email protected]

www.oem.dk

The Danish government finds that the general EU corporate governance

framework needs to take into account the huge diversity of companies

and also the different traditions and frameworks existing in the Member

States. Good corporate governance can vary from company to company

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depending on the activities, needs and solutions found for each company.

This need for flexibility fits well with a soft law approach based on the

comply-or-explain principle, whereas hard law should be avoided or re-

served for particular cases where there is evidence that a soft law ap-

proach would not be sufficient and the costs of hard law are justifiable.

When contemplating on possible EU measures it is also very important

not to add unnecessary or disproportionate administrative burdens on

companies and not to take away the responsibility or influence of the

shareholders as they are the owners of the companies. Shareholders right

to be passive investors should also be respected. A flexible corporate

governance framework build on disclosure and transparency still seems to

be the most proportionate and sensible EU approach.

We have noted that the Commission has taken overlapping initiatives on

corporate governance regulatory frameworks, i.e. for listed companies

and financial companies respectively. Any potential new EU measures

must be designed in a way that ensures that listed companies in the finan-

cial sector are faced with a coherent corporate governance framework.

However, it is also important to stress that the crisis revealed more evi-

dence of failures in the corporate governance framework of companies in

the financial sector than failures in the corporate governance framework

for listed companies in general. EU measures in the area of corporate

governance in the financial sector should therefore not spill over on listed

companies in general without clear evidence of a specific need in this ar-

ea.

It should be stressed that Denmark fully supports the corporate govern-

ance initiatives taken in relation to the financial sector in CRD III. The

following comments should be seen in that perspective.

It is the opinion of the Danish government that the Green Paper does not

provide sufficient evidence for a need for EU action on several of the are-

as covered by the Green Paper. Only in a few areas there seems to be a

need for further reflections on possible EU actions, notably actions that

could ensure a better application and functioning of the “comply-or-

explain” principle and the separation of the roles of the chairman of the

board and the CEO.

Specific comments

Question 1 and 2

The Danish government does not see sufficient evidence for a need nei-

ther to establish a differentiated EU corporate governance regime for

small and medium-sized listed companies nor to develop EU corporate

governance measures for unlisted companies. The justification for any

corporate governance rules should be related to the status of a company

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being listed and thus raising money via public markets, and potentially

having many shareholders and investors.

Instead the EU corporate governance regime for listed companies should

be sufficiently flexible to take into account also the different needs of

SME’s. This is one of the strengths of the “comply-or-explain” approach.

Furthermore, one set of rules ensures a higher level of transparency, as

investors, the press and other interested parties might find it difficult to

distinguish between large and small listed companies.

Unlisted companies are significantly different from listed companies as

they do not have shares listed for public trading and generally do not have

a much dispersed ownership. Therefore the need for transparency for mi-

nority shareholders and the public is not the same as for listed companies.

It should be noted that the Danish government supports CSR-reporting

also for large unlisted companies, but that we do not consider CSR-

reporting as part of the corporate governance framework.

Question 3

Yes, the EU should seek to ensure that the functions and duties of the

chairperson of the board of directors and the chief executive officer are

clearly divided. It is essential for the proper functioning of the checks and

balances in the corporate governance system that the responsibilities of

senior management (executive directors) and the board of directors (non-

executive directors) are clearly divided, and that conflicts of interest are

avoided. Especially the chairperson of the board is important in this con-

text.

It is thus in the interests of the companies and their stakeholders and ul-

timately for the effectiveness of the capital market to ensure a clear divi-

sion. Evidence shows that such division is not always the case for listed

companies in Europe. This results in an uneven playing field for compa-

nies in the EU and it increases the risk of distrust from investors and oth-

ers to the detriment of an efficient internal market for capital.

Therefore the Danish government believes that in this particular area the

existing Commission Recommendation 2005/162/EC is not enough. The

Danish government supports an EU prohibition, possibly in a directive.

It should be noted that in Denmark, in order to ensure a proper separation

of the roles of executive directors and non-executive directors, the ma-

jority of the persons in the board must be non-executive directors, and it

is prohibited for the chairperson of the board to be an executive director

(i.e. not just the CEO) in the same company at the same time since. These

rules are stipulated in the Companies Act and therefore apply to all public

limited-liability companies, not only listed companies.

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Question 4-6

The existing Commission Recommendation 2005/162/EC already con-

tains provisions on recruitment policies, qualifications and diversity of

board members. These provisions appear to be sufficient.

The composition of the board and the skills of its members, individually

and collectively, must at all times reflect the demands posed by the com-

pany’s situation and circumstances.

The Danish government agrees that diversity on boards may improve the

quality of the work performed by the board and thus benefit the company.

Therefore diversity should be encouraged but not at an EU level.

It should be noted that gender balance is just one of several criteria rele-

vant for diversity, and that diversity should not be considered more im-

portant than expertise which should remain the most important criteria.

Therefore companies should not be required to ensure a better

gender

balance.

There can be good reasons for a certain composition of a board

that does not have great gender balance. It is the task of the board of di-

rectors to specify and publish which competencies it needs in order for

this to be debated at the general meeting. This is already recommended

by the Danish Corporate Governance Committee (hereafter DCG-

Committee).

The shareholders who own the company and carry the main economic

risk of the company should remain responsible for the composition of the

board.

The Danish government is of the opinion that one of the main reasons for

the lack of women on boards is the lack of women with experience from

an executive position. Efforts therefore need to be done to promote more

women in management positions. This will give more women the qualifi-

cations they need to be recruited for boards. On the contrary, establishing

gender quotas on boards will not ensure that more women get the neces-

sary qualifications.

Instead the Danish government believes in a close cooperation with the

business community in promoting the basis for recruiting women on

boards. For instance the Danish Government has established several pro-

jects to this aim including “Charter for more women on boards” and “Op-

eration chain reaction – Recommendations for more women in manage-

ment”.

It seems doubtful whether adding more detailed requirements to

the re-

cruitment policies

will add much value, as it is already in the spirit of the

existing recommendation that the (supervisory) board should take into

account its desired composition in relation to the company’s structure and

activities when recruiting new candidates to the (supervisory) board.

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Further reflection is needed to determine whether listed companies should

disclose whether they have a

diversity policy

and, if this is the case, de-

scribe its objectives and main content and regularly report on progress.

The question is whether such a requirement would be proportionate with

respect to the importance of the information for the public. The more

listed companies are required to report the higher is the risk of infor-

mation over-flow, thus reducing the benefits of disclosure. Administra-

tive burden considerations are also important. It would seem that a poten-

tial requirement should not go beyond a recommendation supplemented

by the comply-or-explain principle and potential administrative burdens

should be analysed first.

Question 7

Sufficient time devotion is crucial for the well functioning of a board.

Therefore the number of mandates occupied by a director, and other rele-

vant time constraints, should be a criterion that should not be neglected

when considering the appropriateness of a potential board member.

However, it varies widely how time demanding a mandate is, as it will

depend, inter alia, on the size and complexity of the particular company

and on the individual background of the director. Setting an arbitrary

threshold on the maximum number of mandates a non-executive director

may have does not ensure that non-executive directors devote sufficient

time to their duties and does not take into account the differences men-

tioned. It necessitates a qualitative and individual evaluation.

The existing recommendation on the time commitment of directors in

Commission Recommendation 2005/162/EC is sufficient.

Setting an arbitrary threshold or other mandatory limits on who can be

elected as board members, would also conflict with shareholders’ right to

compose the board they think is the best for the company.

Question 8

Self-evaluation can be useful to promote well-functioning boards and in-

crease their performance. The Commission Recommendation

2005/162/EC already recommends such self-evaluation.

The use of external consultants in the evaluation process can also be use-

ful, at least sometimes. However, there are many different ways of self-

evaluation and it should be for the board to decide how the evaluation

process should be designed. This would also ensure the necessary com-

mitment and candidness for the evaluation process to add value. Howev-

er, there should be a certain level of transparency on how the process is

organised, so the shareholders can evaluate the board when deciding the

composition of the board. This is already recommended by the Danish

DCG-committee.

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Mandatory external evaluations could be counter productive and result in

administrative burdens more than it will add value for the board perfor-

mances. External evaluations should therefore remain only a recommen-

dation.

Questions 9 and 10

The Danish government supports openness and shareholder influence on

the remuneration policy of listed companies. It could be relevant to en-

courage disclosure of the remuneration policy, the annual remuneration

report and the individual remuneration of executive and non-executive di-

rectors and encourage putting the remuneration policy and remuneration

report to a vote on the general meeting to allow for shareholders’ input.

However, this is already encouraged as it is part of Commission Recom-

mendation 2004/913/EC. The Danish government believes that the

Commission should provide more evidence for a need to turn the recom-

mendation into a mandatory requirement and the consequences of doing

so before taking any further steps in this direction.

Question 11

The Danish government agrees that the board should approve and take re-

sponsibility for the company’s risk appetite and report it meaningfully to

shareholders. However, this seems already to be the case in most, if not

all, Member States.

As regards the reporting of risk appetite to the shareholders the Transpar-

ency Directive (Art. 4(2)) requires the annual financial report to include a

description of the principal risks and uncertainties that the companies

face. The reporting of relevant key societal risks seems to be related more

for CSR-reporting than for financial reporting. In case key societal risks

are relevant for the financial reporting they should already be included in

the description of risks pursuant to the Transparency Directive.

Question 12

Yes, the board should ensure that the company’s risk management ar-

rangements are effective and commensurate with the company’s risk pro-

file. This also seems already to be the case today. A convincing need for

EU action has not been presented so far.

Question 13

At this stage, the Danish government has not identified any existing EU

rules which, in our view, may contribute to inappropriate short-positions

among investors.

We find it, however, important to distinguish between the problem of

short-termism and the problem of non-appropriate shareholder engage-

ment. High frequency trading is not necessarily inappropriate.

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A possible measure to promote long-term investments could be to en-

hance transparency. Transparency could contribute to more ownership

feeling and thereby long-term investments. In particular, challenges con-

cerning “hidden ownership” should be analysed and it should be consid-

ered whether more emphasis on notification rules is needed. The analysis

of “hidden ownership” is already taking place as part of the Commis-

sion’s review of the Transparency Directive. The Danish government

finds that regulatory initiatives in this regard are not needed in the corpo-

rate governance framework.

High frequency trading is a behaviour caused by the market development.

High frequency trading ensures liquidity in shares and a better pricing

mechanism at the market and therefore the high activity as such does not

harm corporate governance. We find that the Commission’s review of the

MiFID and MAD directives will be adequate to regulate that high fre-

quency trading is done in a prudent manner and therefore regulatory initi-

atives regarding high frequency trading is not needed in the corporate

governance framework.

Question 14-15

It is the task of long-term institutional investors to monitor and evaluate

the quality of asset managers’ performance and remuneration. The listed

companies themselves have no influence on this subject. The Danish

government is therefore of the opinion that regulation in company law or

in the field of corporate governance is not the right place to tackle any

identified problems in this area.

Question 16 and 18

The Danish government finds that adequate and sound rules on transpar-

ency, inducement and the counteraction of conflicts of interest (regarding

the role of advisers) are essential and are present in the MiFID directive.

From a Danish perspective, we would urge the Commission to await the

review of the MiFID directive which is currently taking place and which

could even further strengthen the area.

The Danish government would like to emphasise that retail investors

should be informed about advisor-related costs. In the UCITS V di-

rective, the Key Investor Information Document (KIID), the information

on costs should be broader to ensure that all direct and indirect trading

and administration costs are included.

However, it is important that the costs of any measure in this field match

the results achieved.

Question 17

The Danish authorities and stakeholder organisations are not aware of

significant problems in this area, and we are doubtful whether there is a

role for EU to play in this area. The EU has a role in ensuring that listed

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companies disclose information

their shareholders, whereas infor-

mation

between

shareholders is a different issue.

Requirements for companies to facilitate shareholder engagement could

impose major administrative burdens on the companies without any or lit-

tle added value. The companies would for instance need to set up elec-

tronic systems, introduce and maintain security standards to ensure that

only shareholders access the network, monitor the correspondence etc.

If companies find added value in doing this they can already do it. How-

ever, it is difficult to see the need to force companies to do so. Sharehold-

ers nowadays have the possibility to communicate via shareholder fo-

ra/social networks on the internet.

Question 19

The Danish government has not identified the need to introduce regula-

tion in this area.

Question 20

The Danish government has not identified a need for a technical and/or

legal European mechanism to help issuers identify their shareholders in

order to facilitate dialogue on corporate governance issues. Listed compa-

nies already have the possibility to contact major shareholders, cf. the rules

in the Transparency Directive on notification of the acquisition or dispos-

al of major holdings.

Questions 21-22

There does not appear to be a need for further protection, at the EU level,

of minority shareholders against related party transactions and in compa-

nies with controlling or dominant shareholders. The IFRS standards, the

Company Law Directive and the corporate governance recommenda-

tions supplemented with the comply-or-explain principle already provide

protection in these areas and to the extent a particular Member State

thinks further protection is necessary national legislation will provide

such protection.

National legislation also has the advantage of being able to adapt the

rules on minority protection to the specific national setting, culture and

company structure.

It should be noted that companies with controlling or dominant share-

holders can strengthen the basis for good corporate governance since

concentrated shareholdings provide a good basis for active ownership and

dialogue between the owners and the management of the company.

Question 23

It should remain the decision of the individual company to decide if they

think employee share ownership in their company should be promoted or

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not. There has been presented no convincing justification for promoting

employee share ownership at EU level and it is difficult to see what the

justification should be. Furthermore, employee share ownership is not a

question of corporate governance.

Question 24

The Danish government believes that the combination of recommenda-

tions and the comply-or-explain principle should remain the core instru-

ments used in the EU corporate governance framework. Therefore, efforts

should be done to make it work as efficiently as possible.

It is the strength of the comply-or-explain principle that companies can

decide not to follow a recommendation if they believe it is not in their in-

terest to do so, but that in return they provide shareholders, investors and

other stakeholders with an explanation for any departure they make. Such

explanation naturally must be meaningful and therefore needs to have

enough detail to make it meaningful. It would also be natural to describe

the alternative solutions adopted.

On the other hand companies should not be faced with more detailed re-

quirements than necessary to ensure a proper functioning of the comply-

or-explain principle.

Question 25

Primarily, it is up to the market and the investors to evaluate the corpo-

rate governance of a company. However, this can only be done, if there is

enough transparency.

In Denmark the monitoring bodies are authorised to check the informa-

tive quality of the explanations in the corporate governance statements

and can require companies to complete the explanations where necessary

or to issue new correct corporate governance statements. The monitoring

bodies do not interfere with the content of the information disclosed or

make business judgements on the solution chosen by the company.

The Danish government supports that something similar is introduced in

all Member States.