Essay written in 2020 for the course “International Corporate and Financial Law”, held by prof. Thomas Bachner at WU – Wirtschaft Universitat Wien. Evaluated with highest honors
In this essay I would express my disagreement with this statement: in fact the EU has intervened many times in company law, but has usually failed to do this by binding legislation in the corporate governance field, due to too-much strong structural differencies between different legal traditions. On the other hand, non-binding recommendations and national reception of international best practices have been much more successful in achieving a convergence between different countries in this area of law.
Indeed, the EU has tried for a long time to harmonize national company legislations by using binding – as to the result to be achieved, but not as to the national implementation means to do that[1] – directives, first with a large-scale harmonization program, later by much “narrower” – and more specific – measures. However, corporate governance proved to be a hard field to harmonize not only in the earlier phase, – with the 5th Company Law Directive being unacceptable by Member States because of their different legal traditions – but also in the more recent phase. In fact, apart from the Takeover Directive and the Shareholder Rights Directive, the EU Commission has preferred to limit itself to non-binding recommendations on this area of law.
National differences can therefore be considered the reason why we do not – and should not – have a binding “EU CGC”, but only a number of national codes each dealing with different issues in different ways.
In fact, if we consider the variety of board structures, – one-tier countries like the UK, two-tier countries like Austria (Gerner-Beuerle and Schuster, 2014) – the different market systems – liquid in the UK, illiquid in Austria – that lead to different CG-approaches towards shareholders and (other) stakeholders, and the actors who make CG rules in EU countries, we can easily say that current situation is the most natural outcome of such differences among nations! For instance, differences among board structures is the reason why the role of independent non-executive directors is relevant in the UK CGC – where, having managers and monitoring subjects sitting at the same board, risks of conflicts of interest arising from the principal-agent problem are very high – but not in the AT CGC – where there is a separation between management and supervisory board. Moreover, the differences between the several corporate governance approaches have also been the reason why the EU Takeover Directive has required over 30 years to be adopted, just to eventually see the most important provisions on board neutrality rule (artt. 9 and 11) being made optional – and not mandatory – for Member States (Mukwiri, 2019)! Furthermore, the relevant rule-makers for corporate governance are not the same in each country: in the UK, where the role of institutional investors is very strong (Tuch, 2019), they have been the propellers for a very shareholders-oriented CGC, while the AT CGC, in contrast, has been the result of “all involved interest groups” contributions[3].
However it may be argued, on the other hand, that some corporate governance differences among Member States have been partly overcome by EU binding legislation – and that doing this may be a good thing, because harmonization of national legislations is a core function of EU, art 114 TFEU. First, by using the “extraordinary power” of art 352 TFEU, the EU has created a supranational entity, the Societas Europaea (SE), that may be used to conduct a business in each Member State, regardless of national differences – and this SE has been a big success! Secondly, the “revised Shareholder Rights Directive” (2017) has the very good purpose of encouraging sustainability in the long-term providing for shareholders’ engagement (recital nr. 14), for instance by regulating in a uniform way related-party transactions. Thirdly, even though the Takeover Directive has not had a very big impact because of the non-mandatory character of the board neutrality rule, as mentioned above, an “exhaustive harmonization” of takeovers regulations would probably be necessary to reinforce the single market (Mukwiri), and therefore should be seen as a virtue. Fourthly, the Takeover Directive and the Shareholder Rights Directive are addressed (only) to listed companies, whose shareholders may therefore be nationals of different States – thus being good to have harmonized corporate governance regulations.
Nonetheless, we should always consider that the only reason why the SE has been a success, is because of its “centaur-like” shape, continuously referring to national legislations, and without providing for a mandatory board structure – allowing both one-tier and two-tier, thus avoiding objections by one Member State or the other. Moreover, the fact that the Shareholder Rights Directive and the Takeover Directive are addressed only to listed companies is actually a bad thing, because most players in the EU market are private limited-liability companies. Furthermore, I am not convinced that top-down harmonization (like EU harmonization) is always the best solution, also because regulation is increasingly happening in the CG field in the completely opposite mode of “self-regulation”: for example, even though UK and AT CGCs are different under many aspects, still they have both somewhat voluntarily transposed “in national language” many – non-binding – international best practices (e.g. C-rules in the AT-Code). And those practices aim at enhancing long-term firm-value (UK CGC Principles A and P, provision 18 etc.), i.e. a very valuable objective!
In conclusion, all those differences should not be regarded as problems, because they simply “push” countries not to passively receive a top-down harmonization, that may not take into consideration their own unique features. Furthermore, like the experience of UK and AT-CGCs clarified, when corporate governance reacts to issues arising from commercial reality through “best practices”, generally good things happen, regardless of how single Member States transpose such practices according to their own legal traditions. And this is obviously something that the EU can well continue to do via non-binding recommendations.
[1] Art 288(3) TFEU
[2] EU Company Law
[3] AT CGC, Preface