European Union: Developments In Corporate Governance And Investor Stewardship And The Challenges Facing Companies

The importance of good corporate governance has taken on a new dimension in recent years, with the UK and many other European countries battling to restore trust in business after a succession of corporate collapses, governance failings and controversial pay awards.  Leading stock exchanges, regulators and academics from around the world agree that the adoption of high standards of corporate governance is paramount for an organisation's long-term strategy. Like culture, it is a core component of the unique characteristics of a successful organisation. 

Despite corporate governance being clearly defined and offering companies multiple benefits, across Europe there remain examples of so called dysfunctional corporate governance, with issues involving excessive high pay, a lack of boardroom diversity and problems with succession planning at board level.  

These so-called "corporate governance scandals," such as the emissions scandal at Volkswagen, the collapse of UK construction giant, Carillion, as well as the governance issues encountered by retailer Sports Direct, have led regulators across Europe to adopt a more stringent and hard lined approach. 

In the UK, the "UK Corporate Governance Code" was amended in 2018 to include several significant changes.  At the heart of this new Code is an updated set of principles that emphasise the value of good corporate governance to long-term sustainable success. For example, a new provision was included to encourage greater board engagement with the workforce, asking companies to describe how they have considered the interests of stakeholders. They are also required by the new Code to create a culture which "aligns company values with strategy and to assess how they preserve value over the long-term." By applying these principles regulators in the UK hope that companies will be able to demonstrate throughout their reporting how their governance contributes to long-term sustainable success and achieves wider objectives.

Furthermore, a code of governance has now been adopted for large private companies in the UK, taking effect in January this year. The Wates Corporate Governance Principles, developed in collaboration with the BVCA, IoD, CBI and The Investment Association, will offer an opportunity to demonstrate "good practice and how they achieve long-term success of the company."  This new reporting requirement applies to all companies that meet either or both of the following conditions: 

  • more than 2,000 employees; 
  • a turnover of more than £200 million, and a balance sheet of more than £2 billion.  

Moreover, significant changes to company law in Luxembourg were introduced in 2016 allowing for the possibility of shareholders, with at least 10% of the voting rights, to act against the management and supervision bodies of listed companies.  Amendments were also made to compel the largest companies and groups of companies in Luxembourg to disclose non-financial information concerning policy, risks and performance relating to social, environmental and employee matters.

More generally listed companies across Europe are subject to more disclosure and transparency requirements while executive compensation is also under increased scrutiny, with EEA Member States having to implement the Shareholder Rights Directive II by 10 June.  The main purpose of SRD II is to encourage long-term shareholder engagement, enhance transparency and increase directors' accountability and reinforce the link between pay and performance.

New laws and the additional regulatory scrutiny, including the establishment in the UK of the Audit, Reporting and Governance Authority, are making it harder for even the most sophisticated listed and private companies to navigate the ever-changing world of corporate governance standards.  As such they need support and guidance from trusted partners to ensure they are complying with best practice, and local laws and regulations.  

Whether you are a multinational; alternative investment fund, financial institution or entrepreneur, you need to be confident that all your administrative requirements are being adhered to the highest standards. Intertrust's Corporate Client Services team can assist you in implementing best practices aimed at delivering and increasing boardroom effectiveness, transparency and accountability, the cornerstones of good corporate governance. 

The team's expertise in corporate law and governance will strengthen your legal and regulatory compliance, corporate planning and strategic management. Our Corporate Client Services team will support you in managing operational risks and contribute to building a stronger relationship between your company's management and its shareholders, leading to long-term success.  

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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