|Newsletter: Summer 2011|
What's Coming Up Next
Here are the main consultation deadlines and likely timetable for future proposals.
10 August: deadline consultation on the new regime for Venture Capital.
14 September: deadline consultation on Promoting Social Investment Funds.
16 September: deadline consultation on Enhancing the Value of Auditor Reporting.
SEPTEMBER / OCTOBER: proposals expected:
Regulation on CSDs (Central Securities Depositaries), Securities Law Directive, MIFID (Markets in Financial Instruments Directive), Market Abuse Directive, country by country reporting, feedback statement on corporate governance Green Paper
NOVEMBER / DECEMBER: proposals expected:
Transparency Obligations Directive, Audit proposals
JANUARY 2012: proposals expected:
Corporate governance, Green Paper on company law, CSR (corporate social responsibility)
For the latest consultations from DG Internal Market and Services, click here.
For ESMA's work programme, click here.
For the European Commission's work plan 2011, click here.
At the end of 2010, Europe had already fallen to third place after both the US and Greater China in terms of the number of new global listings.
The focus for policymakers should thus be on making financial markets deliver better outcomes for their end users, including listed companies, on the implementation of existing directives before proposing new ones, and on facilitating dialogue between companies and shareholders.
The Green Paper states that companies must demonstrate utmost responsibility not only to shareholders and employees but also towards society at large. However, corporate governance is about the internal dynamics of companies and the responsibility of their different stakeholders. Corporate governance should not be used to implement social and societal policy issues.
Boards of companies
We consider that corporate governance needs to be practical and consistent with the different ways in which companies operate across Europe. It is thus best done at national level, consistent with the national company law structures.
We do not therefore support new EU action on Board composition, such as the separation of the roles of CEO and chairman.
Comply or explain
We support the comply or explain system and want to make it work well. Companies should communicate their explanations better when they choose not to follow particular recommendations of a code. Explanations in this context are acts of compliance with the code.
The explanations themselves should then be judged by the shareholders, who can vote against company resolutions if they are not happy. We do not, however, support a role for regulators in monitoring individual governance decisions.
Europe needs to develop better dialogue between companies and their shareholders to prevent misconceptions on both sides which we need to try to overcome.
One problem for EU companies in initiating the dialogue may be difficulties in identifying shareholders across borders. We would like to see all EU companies given the option to enjoy the rights that currently only some possess.
We support disclosure of voting policies by investors, in order to assist companies to understand their shareholders’ approach and to ensure greater understanding in advance of any possible areas of disagreement. This would facilitate better dialogue between companies and their investors.
As new requirements are being placed on the banks and other financial institutions in the wake of the financial crisis, this will mean fewer loans to companies, which will therefore need to access the capital markets more. Meanwhile insurers will hold fewer bonds due to new solvency requirements, while other investors may hold fewer corporate bonds due to new regulations on derivatives. This leaves us wondering who will provide the companies with capital - if not the public markets, then what is their ultimate purpose?
It is not very clear to non-financial companies, whose business is not financial risk, whether the Commission is seeking in the Green Paper to extend the use of risk-based models used in the financial sector or is referring to the potential downside of company strategy.
Given the plethora of existing requirements, it is not apparent what further disclosures would seek to achieve.
As I write, we have just finalised our response to the EU Green Paper on corporate governance for listed companies. One interesting question was whether EU regulation may itself be part of the problem in encouraging short-termism. Most companies struggle to understand how financial regulation may affect them, but see our response to Q13 and the recent report just issued by the Bank for International Settlements which suggests that regulation may indeed have unintended consequences.
The week before, we were disappointed to see that the first draft technical advice which is relevant to companies, which has been issued by the new European Securities Markets Authority has failed to achieve the goal set by the European Commission and Parliament of enabling a more proportionate regime for smaller quoted companies. This does not bode well for ESMA’s understanding of and interest in European companies.
With best wishes for the summer break
What's Coming Up Next
Companies may lose longer-term investors due to financial regulation
New report published on accounting and regulatory changes which may impact insurers and pension funds' ability to provide risk capital to companies.
Shareholders call on companies to challenge banks on underwriting fees
The Institutional Investor Committee in London has published best practice guidance for companies to follow when raising equity capital through a rights issue.
UK asset managers report on Stewardship Code
The Investment Management Association has published a report on how institutional investors have applied the UK Stewardship Code since its introduction last year. UK asset managers are required by the FSA to produce a statement of their commitment to the Code or to explain their alternative investment strategy.
European Commission's Conference on Company Law - 16/17 MAY 2011
The European Commission organised a conference entitled "European Company Law: the way forward" on 16 and 17 May 2011, at which it presented a Report of the Reflection Group on the Future of EU Company Law which was discussed in some panels. Below is a summary of the main issues discussed:
ESMA's Stakeholder Group
The European Securities Market Authority (ESMA) has appointed two of EuropeanIssuers' members to its Securities and Markets Stakeholder Group. Our members are Mr Carmine Di Noia (Assonime and member of our Legal Committee) and Mrs Sari Lounasmeri (Finnish Foundation for Share Promotion and member of our Board) and Prof. von Rosen as alternate (Deutsches Aktieninstitut).
Short-termism in investment decision-making
Andrew Haldane and Richard Davies discuss the effects of short-termism in investment decision-making. They argue that short-term behaviour is significant among investors in capital markets and is rising over time. This is a common theme but the evidence is often lacking. This speech sets out the financial analysis for the estimating short-termism in investments and their implications.
Workshop on general meetings standards
Following the endorsement of the EU industry standards for general meetings, Munich Re hosted a workshop in May 2011 to discuss their implementation. The aim is to ensure that foreign shareholders are able to vote their shares and receive information as easily as domestic shareholders.
Corporate Governance Green Paper
- We support the comply or explain system and want to make it work well. We do not, however, support a role for regulators in monitoring individual governance decisions
- We support a right for companies to identify their shareholders
- We do not support new EU action on Board composition, such as the separation of the roles of CEO and chairman
- We support disclosure of remuneration but not a mandatory rule on "say on pay"
- We support disclosure of voting policies by investors
- We believe that a differentiated and proportionate approach for smaller quoted companies should be encouraged
- We believe that the focus for policymakers should be on making financial markets deliver better outcomes for their end users.
Prospectus - ESMA's Consultation - Delegated Acts
ESMA's advice fails to achieve the aim of reducing administrative costs and burden to issuers when raising capital, as set out in the Commission's mandate and as supported by the European Parliament. Our key concerns are:
- A summary should remain a summary, not become a mini prospectus;
- We want a truly proportionate disclosure regime for SMEs and Small Caps;
- No mini-prospectus via final terms;
- A truly proportionate disclosure regime regarding rights issues;
- Exclusion of smaller companies from EU policymaking debate.
EuropeanIssuers speaks out for smaller issuers
Caroline Weber of Middlenext and Tim Ward of QCA gave a presentation on behalf of EuropeanIssuers to the SME Finance Forum set up by DG Enterprise.
EuropeanIssuers is calling for recognition of the need for different markets for companies at different stages of growth, ease of listing and delisting, recognition of the role played by sponsors for smaller companies and simplification of administrative burdens, which would reduce advisory costs.
Growth markets in Europe account for 19% of quoted companies and should not be subject to the same rules as the main markets. We are sceptical of the suggestion that listing rules should be harmonised at EU level for smaller companies.
AEM, the Portuguese Association of Issuers, who recently joined EuropeanIssuers, has launched its new website - http://www.emitentes.pt/
EuropeanIssuers has recently debated the subject of dividend disclosures that may have an effect on derivative contracts.
EuropeanIssuers' views are that in essence, we believe that it should be clear to all parties who is accountable for what. The companies have a relationship with their shareholders and are therefore accountable to them for any change in information concerning their shares, including dividend payments. In that respect, they are under the obligation to provide this information to the shareholders in a timely manner.
Derivatives issued and traded by third parties for purposes that are not connected to the welfare and ownership of the company, notwithstanding having issuers’ shares underlying their raison d’être, should be the responsibility of the third parties who derive commercial benefit from such products. If these third parties’ business is somehow affected by companies’ policies of distribution of dividends, they are free to enter into contractual relations with the companies in order to ensure they receive the necessary information. It is, however, not clear to us why companies should be obliged to incur the costs of providing additional information for the benefit of commercial parties who do not themselves invest in the company.
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