Commission proposes more power to shareholders and directorship limits

A MAJOR shake-up of corporate governance proposes giving more power to shareholders and limiting the number of directorships a person can hold, initially in financial instructions but later in all public companies.

The proposals will come from the European Commission next week when it unveils a Green Paper on corporate governance in banks and other financialinstitutions together with a review on credit rating agencies regulation.

Internal Market Commissioner Michel Barnier has said the financial crisis revealed significant weaknesses in corporate governance and, while this did not cause the financial crisis, theeffects could have been mitigated by greater checks and balances.

Interested parties will be able to comment on the paper up to mid-August after which the Commission will decide whether to follow through with legislative or non-legislative proposals to be adopted next year.

Commission studies have found that broad oversight and control of management was insufficient; risk management was weak; and pay structures led to excessive risk taking.

The Green Paper will address these issues and focus specifically on how to improve the functioning and composition of boards of financial institutions to improve their oversight of senior management.

It will address the issue of cross directorships and possible conflicts of interest when the same person sits on the boards of several companies which may impinge on independence.

It will also deal with directors’ pay and stock options.

Risk and how to ensure it is properly evaluated and reported, taking into account the long-term interests of the business, will also be covered together with internal and external audits

The paper will also ask how shareholders, financial supervisors and external auditors can be more involved in corporate governance and, finally, how to change remuneration policies to discourage inappropriate risk taking. It will suggest for instance having large shareholders adopting a code of practice on their role in governance.