In questo interessante e stimolante studio, l’A. – giurista trilingue, esperta in diritto fallimentare e che ci onoriamo di ospitare – dopo una disamina delle principali basi normative in tema di Corporate Governance, operata in modo comparato, affronta alcuni aspetti più problematici della soluzione del problema: fino a quando e per quanto si può “infrangere la forma societaria” per garantire il mercato.

Inutile ricordare come la materia trattata abbia – tra gli altri – un impatto immediato sul diritto dei consumatori.

Corporate governance. How it is regulated in the us and in europe

di avv. Liana Rupnk [1]

( già pubbl. su: http://www.filodiritto.com/diritto/privato/commercialeindustriale/corporategovernanceusaeurupnik.htm )

THE PROBLEM OF CORPORATE GOVERNANCE

In the wake of the financial scandals that have rocked the corporate world both in the United States (Enron and WorldCom) and in Europe (from Vivendi all the way to Parmalat), the issue of the corporate governance has taken on an ever more crucial importance on both side of the Atlantic. To avoid a permanent breakdown in the chain of trust between management and shareholders, the regulatory authorities on both continents have pushed for a tightening of the auditing controls on company accounting and asset management as well as for an increase in the personal responsibility and liability of the senior managers.

A corporate reform bill was rushed through the Congress and signed into law in the summer of 2002. This law, known as the Sarbanes Oxley Act, has augmented the potential legal liability of the CEO and the CFO because they are now obliged to approve specifically the annual and the quarterly financial statements. In Europe, in contrast, the European Union has strengthened several important policies concerning corporate governance but has not chosen to require senior management to vouch for the accuracy of the corporate financial statements.

The ever growing globalization of capital markets is apt eventually to achieve a better integration of the different laws on corporate governance. If that should not happen, however, the Sarbanes Oxley law will become a sort of invisible wall arising in the middle of the Atlantic Ocean, tending to discourage European companies from setting foot on Wall Street.

SARBANES OXLEY: MAIN PROVISIONS

BOARD OF DIRECTORS

It has been said that the "predations of robber barons led to anti-trust legislation in the early 20th century" and that the crisis of Wall Street of 1929 was the perfect occasion to jumpstart the reform of the legislation governing American companies. In a similar fashion, the Enron and WorldCom debacles led the Congress to pass the Sarbanes-Oxley Act, which has been accurately termed the "most sweeping piece of reform legislation" on the corporate governance of the past seventy years.

The reaction to scandals in the United States through this new legislation was immediate. The new law principally focuses on corporate management responsibilities and auditor obligations for all companies registered under the 1934 Act (the companies touched by the Act are those are traded on a national Security Exchange, have more than $10 million in assets or have at least five hundred shareholders of record. The Sarbanes-Oxley modified numerous parts of legislation, such as the Security Act of 1933, the Security Act of 1934 and other parts of legislation concerning criminal law federal fraud and bankruptcy). It is the ultimate test for the public companies of the new millennium and a necessary precondition to regain the trust of investor shareholders after the unprecedented wave of corporate scandals in the last decade. The new legislation on "corporate governance"- which has taken on different aspects all over the world - has reshaped the role and function of the Chief Executive Officer and the board of directors to which he/she has to report.

The relationship between the two sides had in reality begun changing in the Seventies with the publication by the American Bar Association of the Corporate Director's Guidebook in 1978, which already called for a majority of directors to be independent. Similarly the principles of corporate governance proposed by the American law institute clearly stated already in the eighties and early nineties that the board of directors had the power to replace management and to set the strategy for the company. It is however only with the Sarbanes Oxley that it becomes mandatory for the majority of the board to be composed of independent directors whose main job is to keep pressure on the management (Furthermore the Security Stock Exchange has the authority to issue dispositions in order to enforce the Sarbanes-Oxley Act ). The result is that of a CEO who needs to constantly convince the board of the soundness of his strategy rather than taking for granted its support as it had become the rule in many companies in the years leading to the Enron and WorldCom scandals.

Under state corporate law rules, the Board of Directors is elected by shareholders at the time of the annual meeting. The number of directors is established in the articles or in the bylaws of the company, and it can be a fixed number or variable one (minimum and maximum number of directors). The traditional role of the board of directors was to manage the company but in the last 40 years both statutes and commentary tend to emphasize the board's role is to oversee executive management. Moreover, US corporate law has always required directors to be subject to fiduciary duties to shareholders. One aspect of this is that in decision making, directors have to act with due care, which in general is interpreted by courts to mean that they are required to act in good faith and with the care that a prudent person in their position would use under similar circumstances.

Furthermore they must believe they are acting in the best interest of the company. In conjunction with the duty of care, there is the so-called Business Judgment Rule that is the presumption that the directors act in good faith and on an informed basis in making their decisions. Therefore they are not considered liable for business decisions that turned out to be bad for the company, if they acted honestly and with reasonable diligence.

The directors are also vested with the duty of loyalty. It means that they are not allowed to profit "at the expense of the corporation", and this duty is the result of the fiduciary relation between the directors and the corporation. It follows that they can not use their privileged position in the company to enrich themselves even if there is no resulting loss to the corporation.

The modern American corporate law view is that the board of directors is not supposed to participate in the usual management of the corporation. In order to better monitor the company's performance, the board of directors is allowed to appoint an Executive Committee to whom certain functions are delegated. Such a committee has to be composed of two or more members of the Board and can act on behalf of the Board within the limitations set by the board itself or by the law. In recent years, such committees have however become less and less common in larger corporations.

In modern American corporate governance, the principal role of the Board of Directors is also to carry out diligent oversight of executive management, meaning that the directors are called to supervise and monitor the activities of the management, and take all the appropriate measure in order to respond to the different challenges. It has to be remembered however, that directors can breach their duty of oversight both by ignoring a problem and by deciding that there is no such problem.

PRESENCE OF INDEPENDENT DIRECTORS

Reintroduced with greater emphasis to restore credibility to the corporate boards all over the world, the figure of the independent director is reshaping the landscape of public companies in and outside the United States. It is the independent directors that the shareholders trust with the task to look after their best interests by keeping a vigil eye on the performance of the management. In the mind of the legislators, the emphasis on the role of independent directors should help to avoid new scandals like those that have led to the collapse of so many companies.

As the SEC states in its new dispositions, in order to enforce the principle of fairness that is supposed to inspire corporate governance, a majority of the Board of Directors should be composed of independent directors. This new requirement was formally set forth by the SEC on August 27, 2002 when the regulatory agency adopted a series of Rules concerning some duties of the CEO and CFO (Section 302 of Sarbanes-Oxley Act) and the NYSE and Nasdaq set out a list of common standards for corporate governance. On November 4, 2003, the SEC approved the standards established by the NYSE and the Nasdaq requiring that the majority of members of the Board of Directors be independent and gave them full effect of law. To qualify as independent, a director may not have any material relation with the corporation which could lead to a lack of independence in his judgment capacity. This obviously means that the director can not be an employee of the corporation, or have a family relation with a member of the executive management, or receive from the company compensation exceeding $100,000 per year. In sum, he has to be "truly autonomous from the business". Furthermore, a person cannot qualify as an independent director if he also works for another company either as employee or a manager and this latter company has a business relationship with the first company that produces 2% or more of the annual gross revenues of the initial company.

In establishing the new standard, the SEC established specific rules that companies are obligated to adopt. For example, independent directors of the company must meet in a special meeting on a regular basis, without the presence of the inside directors. Moreover the audit committee and the compensation committee must be composed solely of independent directors.

Going further into details, the standards established by the NYSE require that in order to qualify as "independent", a director must be found by the board to have "no material relationship" with the company either directly either as a shareholder, partner or officer of another company or organization that has a business relationship with the initial company.

It is however to be noted that the NYSE recognizes a different status for foreign listed companies: while the board of directors of American public companies must be composed in majority of independent directors, this same requirement does not apply to foreign companies. The NYSE requires them anyway to make public, through filings with SEC, how the legislation in their countries differs from the one adopted in the United States. This requirement serves two different goals: on one side it allows investors to make an educated decision when they decide whether to buy or not to buy the stock of a foreign company; on the other side, the foreign company is not forced to change completely its corporate structure in order to list in the United States. The end result achieved by the NYSE through a more flexible approach is notwithstanding the same: provide the investors with all the necessary tools to make the best decisions while recreating a sentiment of confidence in the transparency of the corporate world (on the same reasoning was stated that Directors can not receive loans from the corporation).

CEO: CERTIFICATION OF REPORTS AND RESPONSIBILITY

One of the biggest elements of novelty introduced by the Sarbanes-Oxley Act in 2002 concerns the direct responsibility of the senior management, and in particular of the CEO and the CFO, for the soundness of a company's annual and quarterly financial statements. The new requirement was forged in a moment of public outcry for the seemingly unstoppable wave of corporate scandals and in response to the perception that many CEO's at companies in trouble were going to escape the tornado largely unscathed. Those were the times when Enron's Kenneth Lay and WorldCom's Bernard Ebbers claimed their innocence by saying that they had never been involved in the daily running of the company. Such an explanation upset investors and forced the hand of the authorities who recognized the need for a reform that would preempt in the future any such line of defense on the part of the CEO's. It was in this climate that the rule was crafted that requires the CEO and the CFO of a company to personally certify the financial statements and assume consequently all legal liabilities.

The Section 404 of the Sarbanes-Oxley Act states that the CEO has to personally certify the soundness of the financial report (Section 906) that the company has to file annually with the SEC. Section 302 furthermore says that the CEO has to personally certify that the reports comply with the SEC requirements and that content "fairly presents, in all material aspect the financial condition and results of operations of the issuer". The reports are to be filed with SEC in application of Rules 131-15 and 15d-15, requiring companies to maintain "disclosure controls and procedures" within 90 days prior the filing of the due reports. The CEO certifies therefore that he has reviewed the report and that, at the best of his knowledge, the report is materially and substantially true and correct.

In order to respond in a proper manner to the market's demand for fairness and increase investor confidence, the Act establishes that CEO is vested with a "double duty". He is not only obliged to certify the reports, but he must also set and maintain a system of disclosure controls that he has to personally evaluate in the ninety days prior to the filing with the SEC. The CEO has therefore a double responsibility that on one hand makes him responsible for establishing a fair control system, and on the other hand obliges him to supervise the effectiveness of such a control. In the mind of legislators, this double duty should help the CEO to fully realize his personal responsibility in ensuring the soundness of his company's financial statements.

It has to be remembered that certifications that are to be signed by CEO and Executive Officers reflect the corporation's financial situation, in order to give to investors the most accurate representation of the company's financial conditions.

The Act states that CEO and Officers who will make false certifications will incur in criminal responsibilities, and they will have to pay a fine up to $1 million for violations of certification requirements under Section 906 of the Act. Furthermore they can be sentenced to up to 10 years in prison for knowing violations and up to 20 years and a fine up $5 million for willful violations.

The next few years will show if these new provisions will have been capable to make CEOs more "careful" and, most of all, more "conscious" of their company's financial situation. The Sarbanes-Oxley Act has therefore changed completely the structure of the corporate governance system, making the CEO the main actor on the stage and rendering the Board of Directors like the public that at the end of a performance must decide whether to cheer the CEO or to boo him off the theater.

THE REMUNERATION OF CEO: DISCLOSURE

If in the nineties the CEO's were the emblem of success and power, at the beginning of the new decade the situation changed drastically with the wave of scandals that followed the Enron debacle. For a few years, the perception among investors was that something was rotten in Corporate America and that CEO's were chiefly responsible for the decay.

To try to restore public confidence, the authorities felt compelled to update the legislation on the crucial issue of disclosure in a similar fashion to what had been done seventy years before in 1933 and 1934 when the trust in the markets was virtually non-existent in the wake of the Great Depression. The Securities Acts of those two years set the ground-rules for the disclosure requirements that would have then been completely enforced towards the end of the Seventies when the Congress passed many disclosure-based statutes such as the Employee Retirement Income Security Act (Erisa). Amongst the most important rules introduced in the late Seventies, deserves particular attention the required disclosure of the compensation of the top 5 highest employees. In the summer of 2002, the Sarbanes-Oxley Act improved on this base by introducing the principle that members of the remuneration committee must be independent Directors with sufficient expertise in the field. To determine whether a package of compensation is right and legitimate or whether it is out of proportions has always proven a difficult task. Different solutions were proposed throughout the years but none was ever considered the ultimate answer. Some companies tied CEO's compensation to the performance of the stock on the market, others to the yearly profit, but each solution presented a drawback. Senior management could easily pump the stock's value by making decision benefiting the company in the short term but harmful in the long run. And equally, management could augment yearly profit by selling assets or reducing workforce, which might not be in the best interest of the investors. The issue of executive compensation was however more speculative than real until the explosion of the scandals at the beginning of the decade. When it became clear that many CEO's had gained millions while defrauding investors, authorities quickly realized that executive compensation was now a crucial issue and that companies had to show they were making good use of corporate money.

The SEC gave new instructions to the public companies about what is to be considered as part of executive compensation: salary; bonus; perks and other personal benefits; stock; stock options and other compensation arrangements. In 1992 the SEC Commission had already voted an amendment to the CEO and director compensation disclosure requirements to the purpose of making a more "understandable presentation of the nature and extent of compensation to executive officers and directors". In the proxy annual statement, companies had to show the amount paid to the CEO and the criteria used to determine the amount of the compensation. The SEC also required that every member of the compensation committee put his name on the report and that every discussion of the committee be given account of in the report. With the provision of Section 403, Sarbanes-Oxley amended section 16 (a) of the Securities Exchange Act of 1934 by adding the paragraph: Directors of transactions involving management and principal stockholders. It prescribes that every person owning 10% or more of any class of any equity security, or who is a director or an officer, is due to file with SEC within ten days after becoming director or officer or gaining the stake. Furthermore, at number (4) it is also stated that the statement can be filed electronically and that the "Commission will provide each such statement on a publicly accessible Internet site not later than the end of the business day following that filing" (SECTION 403, 4: ELECTRONIC FILING AND AVAILABILITY).

The new rules of corporate governance have placed much higher responsibility on boards to disclose how they come to the determination of the compensation packages for their CEO's. The directors now are required to be more knowledgeable than in the past about how an executive's compensation is determined and they must reveal to the public whether the compensation offered to the CEO includes perks such as stock options and golden parachutes.

EUROPE: EUROPEAN DIRECTIVES

GENERAL PERSPECTIVE

Since the late sixties, the European Community has worked actively to try to harmonize some aspects of the different legislations of member countries in the area of the corporate law. The importance of this mission is apparent: in order to create a real common market out of so many different realities, it was essential to set the ground for companies to enjoy a similar discipline all over Europe. Overcoming differences amongst national laws, was in other words, crucial to ensure fair competition, enable cross-border shareholder investments, give real implementation to a company's right of establishment and, more generally, reduce as much as possible the obstacles in the commercial relations between member states. The process of harmonization of the different legislations was set in motion for the first time in 1968 and it's still in full swing up to these days. The European company law, as the end result of this process is commonly referred to, is a series of directives issued by the authorities in Brussels and woven into the fabric of each state's national legislation. At the core of the European company law, are twelve directives which are divided into two distinct groups. The first group (which includes the directives 1-3) relates to various aspects of a company's life, such as establishment, capital infusion, marketing, merger and acquisition; to this group can be added also directives 11 and 12 which regulate the establishment in another State of the branch of a Company. The second group on the other hand (which includes directives 4, 7 and 8) regulates the accounting tasks of a Company setting the standards for public communications such as the annual report.

The twelfth and last directive was approved by the European Union on June 19, 2000 and calls for common rules on the subject of hostile takeovers. The objective of the legislators in this case was to ensure across the continent the same standards in terms of transparency of the procedure used in cases of takeover and secondly, to ensure a fair treatment for minority shareholders in cases when the control of their company changes of hand. In concrete, the European directive aims to make sure that an equitable offer is given also to minority shareholders once the takeover process has already been successful.

THE BACKGROUND OF WINTER REPORT

When on May 21, 2003 the European Commission decided to adopt the Action Plan presented by the High Level Group of Company Law in Europe (HLG) on November 4, 2002, one important step in the history of Europe was taken. The Old Continent had in fact been rocked by a series of scandals in a similar fashion to what had happened in the US and authorities felt the same need to intervene quickly to restore investor confidence. It was however clear that in order to achieve significant results, new legislations on the side of each member State would not be sufficient. It was on the contrary necessary a radical action on the side of the European Union to write new rules in the area of Company law and in particular in the area of corporate governance, since this would be the crucial tenet in restoring confidence in the short and the long term.
In the wake of accounting scandals at Vivendi, Ahold and finally Parmalat, the necessity for intervention on the side of the European authorities became ever more apparent and impossible to resist. What had became obvious even to the casual observer, it was that the existing laws were no longer able to shield companies and shareholders from executives willing to cut corners in order to reach their goals. And this problem was even more dramatic in Europe because the "central government" in Brussels did not have - and in large part still does not, at present moment - the power to impose on member states a universal regulatory frame as it is in the power of the Federal Government of Washington in the United States. Even if the European Community can issue Directives, the goals must be reached through national legislation.

For this reason the European Union had to utilize a second legislative tool - the so called "comply or explain approach"- such as Recommendations, which force companies to explain clearly why they refuse to apply a code of conduct created in Brussels. This tool aims to make companies liable in the eyes of the public opinion and especially of the international investors. Foreign capital will tend in fact to the companies which offer the better guarantees to the investors.

The lack of power on the side of the European Union to issue laws immediately binding for all member States has led many observers to say that the European Union in many respects can be considered a sort of "fictio legis", because even though it has all the appearance of a coherent organism with its own set of laws, in reality it is a patch of different realities each going into its own direction. What truly gives the European Union its unity, it's the fact that its internal market offers great chances of growth for the companies of each member state but up to now, the regulatory framework still lags behind reality.

If it is true that "when economies grow together, legislators have to do the same", then it has to be recognized that it a primary task for European Union is to improve harmonization of the legislations of the member States.

This disconnect has proven itself true also for what concerns the new legislation on corporate governance. On November 2002, the European Union was presented by a special commission with the Winter Report, which outlined the necessary steps to be undertaken to recreate faith among investors and give new credibility to a corporate world tainted with suspects of widespread corruption.

SHAREHOLDER MODEL AND STAKEHOLDER MODEL

The Winter Report laid on the table a set of necessary reforms such as improving shareholder protection through the right to ask questions and present resolutions at shareholders' meetings. The Winter Report also encourages companies to utilize the Internet to make public all relevant information in a timely fashion. More generally, the Winter Report underlines the need for reforms to enhance corporate mobility in the entire European market. Only by ensuring more mobility for companies - that in concrete means the right for a company to choose the jurisdiction of incorporation- competition can be guaranteed and achieved.

The issue of jurisdiction plays an important role in the determination of the corporate governance because in Europe there is not just one system of corporate governance, but actually two: the "stakeholder model", widespread all over the continent, and the "shareholder model", dominant in the United Kingdom. In the first model, the board of a company must make their decision in the best interest of all parties who have a stake in the company itself, may these be shareholders, bond-holders, creditors and suppliers. This kind of company is a sort of a microcosm of the society at large and faces the same challenges: while it is more difficult to reach a common agreement on any decision and make everyone happy, at the same time, the system of check and balances that comes from a wider representation of interests make sure that the company aims at broader goals that ultimately benefit society at large (typical is the case of the German corporate Governance [Aktiengesetz] where interests of stakeholders' are represented in the structure of the company).

In the shareholder model, on the contrary, the board of directors is only responsible to the shareholders and is called to look after their best interest. In this kind of company, the ultimate goal of the management and of the board is to accrue the value of the company, meaning the value of the stock on the market. By doing so, the board rewards the shareholders that have believed in the company and invested in it. Even in this model, however, stockholders are the most protected when the company is forced to file for bankruptcy. While in the majority of cases this means that stocks are suddenly worth no more than the paper they're printed on, the bond-holders retain the right to be among the first to compensated (of course behind the banks). This having being said, bond-holders usually are compensated only fractionally, for instance only 30 cents for each dollar. It is easy to notice how these two models protect different interests. By choosing a jurisdiction, a company therefore also chooses a model of corporate governance.

The so called Winter Report underlined the necessity for a better integration of the various codes existing in the European Union on the subject of the corporate governance but it refrained from offering too many particular provisions to be adopted by member states. The reason for such caution is mainly an historical one: while American companies stem from the same root and share the same corporate culture, their European counterparts are as different as the languages that are spoken in the community. In same states, for instance, the presence of the government in the capital of some companies (often monopolies in the field of energy) has only recently been diminished through a series of privatizations, while in other countries, like in Germany, employee representatives play an important role in the steering of the company. Furthermore, control of the companies has often remained in the hands of the funding family in many European states like Italy, Spain and Greece while in the United States the number of such companies is relatively small.

Finally there is the problem of access to capital. In many European countries, access to capital from banks was until recently obtained mainly in exchange for representation within the board of directors and obviously an adequate amount of shares. This direct representation of the banks in the board is now diminishing in frequency, for example in Germany where many financial institutions have been selling their stakes in industrial concerns. Companies have been tapping more and more in the bond market, which has grown greatly over the course of the last few years. This process, which represents an important step toward the creation of a more dynamic market capital across Europe, is bound to enhance the need for a better integration of the laws on corporate governance and ultimately, will require the introduction of a unified code on corporate governance as cross-border investments will keep growing.

Since the European Union cannot impose legal changes in the corporate structure of European companies, the Winter Report stresses the importance of disclosure because this element constitutes an incentive for companies to be efficient and, above all, "to avoid actions that are in breach of fiduciary duties or regulatory requirements or could be criticized as being outside best practice". Disclosure requirement allows the parties-investors who have an interest, to supervise the management and take any actions necessary to protect their interests. New technologies, such as the use of the web, facilitate disclosure because they make it easy, efficient and fast to provide the public relevant information about the company. These technologies have a direct impact on aspects like: "form of legal acts in company law; time within which information has to be produced and disclosed; place where the company is located (important for establishing where the Seat of the company is); function that existing company law mechanism perform (relevant for the problem concerning the requirement of maintenance of the capital). The Winter Report also suggests the creation of a website for the companies, especially the listed ones, because it gives benefits both to investors as to companies themselves. In fact the regular use of a website allows the public to have all information they need promptly and at no cost, thus enhancing the investments and ultimately spurring the growth of the stock on the market. The web site is also useful for the companies because it allows them to comply with the disclosure requirements with very low costs while at the same time allowing them to satisfy the investors' demand for information. This last aspect also increases the chances for a company to see its stock rise on the market because also cross-border investors are enabled to have access to the information of the company at the same condition as national investors: at a low cost and immediately.

A coordinated action at a European level is necessary in this area, because when the company posts its information on the web, these documents must be easy to read and to understand for all investors. Cross-border investors should be able to understand any information that the company is due to make public, such as the annual corporate governance statement, the date of shareholder meeting or any other relevant information.

THE BOARD OF DIRECTORS

The Winter Report focuses with particular attention on the role and the nature of the board of directors in the European Union. While recognizing that the "board reform is at the core of the corporate governance in the Member States", it does not call for a particular structure to be implemented as it would be in its powers.

In the European Union, in fact, are commonly found two different systems of board of directors. In the first system, the one-tier board, "the functions of management and management control are combined in a single body. In general the one-tier board supervises itself" because in the same board sit both executive and non executive directors. This system may lead (as it has in the recent past) to disappointing results such as in the case of Parmalat and Vivendi and the reason for such failures lays primarily in the fact that in such boards are absent, or nearly absent, independent directors.

In the second system, the two-tier board, at the helm of a company are on the contrary found both a supervisory board and a board of management. In the supervisory board, as it happens in Germany, also sit representatives of the employees and labor union and it is up to this board to nominate and eventually dismiss executives on the management board and approve all critical decisions, such as mergers and acquisitions. But there is a drawback in this system: because the law requires that management makes immediately public any decision of any relevance to investors - such as a possible acquisition or a dividend cut or increase - the supervisory board is often informed too late of the decisions made by management and this makes it more difficult for them to play an active role in a variety of situations. If the supervisory board was to intervene and change a decision made by management, it would result in a major embarrassment for the company itself and that is why such instances happen quite rarely. As the law states, however, the two-tier system is about supervision with the ultimate power to ouster management, not about direct control over the company.

As clearly stated in the "Communication from the Commission to the Council and the European Parliament" of 21st may 2003, the HLG "further recommended that at least listed companies in the European Union should generally have the option between a one-tier board structure and a two-tier board structure". Also the Group, taking into consideration the important role that non-executive or supervisor directors play in protecting the interest of the minority shareholders, recommended the definition of minimum standards for the creation of special committees charged with the task to define executive remuneration and to audit company's performance. In the views of the Group, however, it is neither appropriate nor necessary to impose for European companies that such committees be composed exclusively of independent directors since the diversity of corporate structure across the continent is too great to be annulled under a common principle. In the case of the Germany, for instance, some of the directors who sit in the supervisory board are chosen by the employees and the labor union to represent their best interest. As the remuneration of executives is clearly a crucial issue in the eyes of the employees, to call for the exclusion of these directors from the special committee on compensation would go against Germany's traditional policy of representation for the employees. In the analysis of the group, therefore, in many cases in Europe it is more recommendable a solution which calls for the majority of directors in the special committees to be independent but not all of them.

The Winter Report also called for a Commission Recommendation to regulate the "role of non-executive or supervisory directors and on the committees of the (supervisory) board", recommendation eventually issued in 2004.

THE COMMISSION RECOMMENDATION ON NON-EXECUTIVE DIRECTORS

First of all, the Recommendation set the definitions of directors, executive directors, non-executive directors, managing directors and furthermore of supervisory directors. Secondly, it states that within each body (administrative, managerial and supervisory) it has to maintained an "appropriate balance of executive/managing and non-executive/supervisory directors" in order to ensure that no particular component has the upper hand within the committee.

To the same purpose aims another important passage in the Recommendation of the Commission that dwells on the risks associated with uniting the roles on chairman and chief executive in the same person. As the commissioners clearly state in their document, the present or past executive responsibilities of the chairman of the supervisory board should not become an obstacle hindering him from exercising objective oversight. The solution to this problem depends on the structure of the board. If the board is unitary, then one of the possible remedies would be to keep separate the roles of chairman and chief executive. Another solution that applies well both to unitary and dual board is that the chief executive does not immediately takes over the post of chairman of the supervisory board. When however a company decides to unite the two roles or appoint immediately the chief executive as chairman of the supervisory board, then it should also make public any safeguards put in place to ensure objective oversight on the side of the executive.

For the same reason, there should be enough independent directors, or supervisory directors, in order to ensure that any conflict of interest could be appropriately evaluated and approved or not. These independent directors should be put in the position to play a particularly effective role in those areas where the risk of conflict of interest is particular high. To avoid this risk of conflict of interest, moreover, the board itself will not have any competence in the decision-making process regarding nomination, remuneration and auditing. Special committees composed of independent non executive or supervisory directors, will be vested with this power, and the board of directors will be able to make non-binding recommendations to the committees. In the Recommendation is clearly explained that these committees will not substitute the supervisory board which "remains fully responsible for the decisions in its fields of competence".

Directors' qualifications -The Recommendation also indicates in section 11 that the supervisory board must be composed in a way to reflect the core activity of the company. In other words, a majority of the directors must have the necessary knowledge in the field in which the company itself operates, so that they ensure that the best decisions are made in order to reach the best performance. For the same reason, a clear system of reference to ensure the independence of the directors is indicated at section 12 of the Recommendation: a director must be able to spend sufficient time to perform his duties and therefore he must limit his external commitments, especially any directorship in other companies.
The performance of the directors taken individually and of the board in its entirety must also be reviewed at least once a year and the final analysis made public. Such a review aims at understating whether the board has been able to reach the performance goal set for the company or whether their actions have fallen short of the target. Likewise the contribution given by each director must pass the efficiency test in order to ensure that his presence in the board is not only nominal but on the contrary effective to the company's goals. Once a year, the company furthermore has to make public the full profile of the supervisory board's compositions and provide information regarding the areas of the competence of each director. By doing so, the company takes into consideration the best interest of its stakeholders and their right to be fully informed on all relevant information.

THE COMMISSION RECOMMENDATION ON REMUNERATION OF DIRECTORS

The European Union requires publication either in the company annual report to shareholder or in an ad hoc statement, of the remuneration policy that will be used for the following financial year. In recognition of the increasing importance of Internet to the investors, the EC calls for the statement to be published also on the Company's website (COMMISSION RECOMMENDATION ON FOSTERING AN APPROPRIATE REGIME FOR THE REMUNERATION OF DIRECTORS OF LISTED COMPANIES, Section II, n.3-Disclosure of the Directors' remuneration, p.4). According to the minimum requirements indicated by Brussels, this statement must include details regarding the relative importance of the basic and variable components of the remuneration, the elements of compensation related to performance, the entitlement to shares or stock options and all other relevant information, such as golden parachute, early retirement schemes or termination conditions. The Commission also calls for complete disclosure of the process followed to prepare and determine remuneration policy, including the role of the remuneration committee and all information relative to outside consultants whose services have been hired for the occasion.

The annual statement should likewise include information regarding all the financial and non-financial benefits that have been received by all the directors of the company in the previous year. In particular, the report must indicate what has been paid for the services rendered, the bonuses granted to the directors and the value of all non-financial benefits. Also in the statement must be given account of any remuneration or benefit received by a director from another company belonging to the same group so that stakeholders can have a complete picture of the director's overall income. As for share option, the statement should include the number of options offered or of the shares granted and their conditions. In the case of options, the company needs to indicate at what price the options were exercised and at what cost for the company itself. Any options unexercised should equally be accounted for in the statement and the same applies to all pension schemes, including amounts paid by the company for each director's retirement fund.

According to the guidelines of the European Union, the remuneration policy should appear as an explicit item on the agenda at the annual general shareholder meeting and should be submitted for vote. Member States however can limit the opportunity to vote on this item to cases when at least 25% of the shareholders present formal request. Shareholders should also receive information, well in advance of the annual meeting, regarding all remuneration linked to price movements, such as share and stock options. The communication should include an assessment of the cost for the company and information regarding long term incentives that are being offered to the directors and not to all other employees. Shareholders should then have the faculty to vote on this item.

Executive compensation in Europe is however less subject to shareholder scrutiny because most often European companies are controlled by a single controlling shareholder of shareholder group. The difference compared to the American system is that the controlling shareholder in Europe can fire at will the management team if he senses that the company is not moving in the right direction or if he believes that illicit actions are being taken. In such a scenario, the importance of control mechanism is diminished while it is crucial in the United States where property is shared among a much bigger shareholders base. The risk in Europe, on the other hand, is that the controlling shareholder can manipulate the balance-sheet at will as it happened in the case of Parmalat, where the CEO, according to the prosecutors, defrauded the company of several billions by hiding the money in foreign accounts and by forging fake letters of credit for about 4 billion euros.

While less protected than its American counterpart in terms of control mechanisms, the European systems has however proven to be more effective against frauds because executive directors' pay is less linked to company's performance - which means less incentive to manipulate earnings in order to achieve set goals - and because the controlling shareholder is often involved in the daily operations of the company, such as it was the case in Italy with Gianni Agnelli and Fiat. In fact, in the majority of cases, the scandals that have taken place in the Old Continent were originated in the U.S. subsidiaries of European companies, such as in the case of Ahold, or in companies, such as Vivendi, which had transformed themselves in American-style conglomerate.

For what concerns the reforms of corporate governance of the last few years, however, the U.S. have gone further than Europe in trying to provide a new set of laws for the corporate world.

While in the United States the authorities have been able to implement a sweeping reform with the Sarbanes Oxley Act and with the new rules set forth by the SEC - reforms that are immediately binding for all American listed companies - in Europe the process has had to be necessarily softer since Brussels has no power to force member state to change their legislations. A lot has been made out of the fact that European Union has chosen not to require CEO's and CFO's to certify the company's financial statements as it is now the case in the US and with some reason. In Italy for instance, the Parliament has decided to take a softer stance on accounting fraud: if in the past a manager who cooked the books faced criminal charges, now he only risks administrative punishment - most commonly in the form of a penalty - if he didn't cause any material loss to the shareholders and the creditors. If his acts have caused such a loss, the manager faces different criminal charges depending on whether the company is privately held of public. By introducing so many distinctions, the Italian Parliament has in effect made the legislation against fraud more lax, since it is also difficult to prove that a manager's action is directly responsible for the loss incurred by a shareholder. The American legislation appears to be also more effective also for what concerns the figure of the independent director. While in the U.S. it is now mandatory that the majority of the board be composed of independent directors, in Europe progress has been much slower and the risk of conflict of interest is still relatively high also because many companies are still tightly controlled by founding families. The European Union has however offered a series of recommendations that, if duly followed, should help make significant step forward. In particular the recommendation on the disclosure of how directors are remunerated and the requisite that their performance be subject to review every year should lead to a heightened attention on the part of the shareholders on the inner working of the board. And that in turn should lead to better oversight over senior management. Given the fact that Europe is not a real political entity, the results achieved so far are probably the best that could have been gotten considering the reality of the situation. More however remains to be done and the U.S., in this field at least, are leading the way.