EUROPEAN COMMISSION GREEN PAPER THE EU CORPORATE GOVERNANCE FRAMEWORK

Transcription

1 1 / 15 EUROPEAN COMMISSION GREEN PAPER THE EU CORPORATE GOVERNANCE FRAMEWORK The Portuguese Securities Market Commission (Comissão do Mercado de Valores Mobiliários or CMVM) welcomes the European Commission consultation on the European Union corporate governance framework and hereby presents its views on the issues raised in the green paper. Corporate governance of listed companies is one of the topics where European securities markets regulation has not yet adopted a comprehensive common approach. To some extent the lack of minimum harmonisation is comprehensible as corporate governance frameworks vary significantly, reflecting different combinations of company and securities laws, soft law and exchange-based rules. In addition, there are significant differences in the level of development of European securities markets, and within ownership structures of listed companies. But the CMVM hereby conveys a clear message that further harmonisation in European corporate governance framework is both possible and desirable in three different areas: common minimum standards, disclosure rules and enforcement practices. Firstly, a common set of corporate governance standards to a large extent already exists, resulting from directives and European Commission recommendations 1, as well as the overall consistency of governance codes across the European Union. European minimum standards, while respecting national corporate governance idiosyncrasies, could be put together to achieve not a code for companies listed on European Union regulated markets, but a harmonised benchmark for compliance in governance codes. More stringent or specific requirements, adjusted to Member States legal traditions could be developed and proportionality would be taken into account, through flexibility to adjust standards and the comply or explain framework. Secondly, on disclosure and enforcement, minimum harmonisation of the content of corporate governance statements, qualified as regulated information for the purposes of the Transparency Directive, would improve the comparability of listed companies. 2 Better disclosure comparability at EU level would facilitate the expected 1 Listed in the annex 2 of the consultation document. 2 On the qualification of corporate governance annual statements as regulated information under the transparency directive, see also CESR s response to the consultation on the modernization of the transparency directive, dated 25 October 2010.

2 2 / 15 monitoring role of shareholders, many of which act on a cross border basis. Therefore, the CMVM believes that the European disclosure system should be improved to achieve this goal. European Securities and Markets Authority (ESMA) should play a key role in drafting harmonized rules for corporate governance statements. Thirdly, and because the comply or explain framework is strongly supported by the CMVM, a common approach to the status of monitoring bodies as well as to its tasks and responsibilities should be developed. Indeed, monitoring of disclosure practices is essential to ensure the informative value of corporate governance statements and thus the corresponding added value for investor protection. The informative value of corporate governance statements should be clearly distinguished from the valuation of corporate governance choices. Thus monitoring and enforcement should focus on the quality of the information and not on its merits, aiming to achieve better information tools that reduce the costs of a more engaged exercise of the shareholder s role. This approach has in fact been considered in the work developed by the European Corporate Governance Forum 3 and is supported by CMVM. CMVM is also of the opinion that securities regulators (or delegated independent entities) are best suited to carry on this monitoring role. It is important to underline that this approach does not intent in any way to usurp the monitoring role that shareholders are expected to play. To the contrary, this monitoring role aims at helping and facilitating the role of shareholders, who, in all circumstances, should be able to rely on true, accurate and complete information when evaluating the merits of the corporate governance arrangements of a listed company. This consultation covering a wide range of issues, we acknowledge that some views expressed may only provide a high-level perspective on a possible regulatory framework for European corporate governance. CMVM stands ready to provide the European Commission with further input. PROPORTIONALITY AND SCOPE Question 1. Should EU corporate governance measures take into account the size of listed companies? How? Should a differentiated and proportionate regime for small and medium-sized listed companies be established? If so, are there any appropriate definitions or thresholds? If so, please suggest ways of adapting them for SMEs where appropriate when answering the questions below. The CMVM welcomes further consideration of the size and structure in listed companies governance codes. However, proportionality should not result in a differentiated code of conduct for small and medium-sized listed companies (listed 3 See Statement of the European Corporate Governance Forum on the comply-or-explain principle of February 22, 2006

3 3 / 15 SME) but rather in specific standards being tailored to reflect the size and structure of listed SME, within the applicable corporate governance code. We acknowledge that a major issue for listed SME is the negative impact of a non-compliance record on a corporate governance statement, in cases where a recommendation aims at blue chip companies and even if the SME provides a justification on grounds of proportionality. But European corporate governance standards could take proportionality into account, through flexibility to adjust the standards and the corresponding governance provisions. In fact, corporate governance regimes are better achieved at the level of Member States, given the structural differences in national company law that justify divergences in the recommendations of corporate governance codes but do not jeopardise the overall consistency of corporate governance standards within the European Union 4. A major strength of existing governance codes lies precisely in the fact that they address shared concerns in the context of national legal systems, through balances of interests that take into account market specificities. The CMVM therefore does not consider a European corporate governance code as the best way forward, but would support a set of European corporate governance standards serving as a common reference for governance codes. However, the debate should be limited to internal governance arrangements that do not affect the transparency requirements of companies listed on a regulated market, notably those relating to disclosure of financial information and qualifying holdings 5. Question 2. Should any corporate governance measures be taken at EU level for unlisted companies? Should the EU focus on promoting development and application of voluntary codes for non-listed companies? The CMVM shares the view that corporate governance has an expansive vocation, as many of its principles can benefit organisations other than listed companies. However, given the current level of harmonisation in European company law, corporate governance intervention in unlisted companies should remain within Member States. 4 A particular aspect in which SME face difficulties in complying with international corporate governance best practices refers to the inadequate number of independent directors, usually as a result of the reduced size of the board. In Portugal, where corporate law allows companies to choose the Latin corporate governance model (formed by a board of directors, a statutory audit board and an external auditor) as an alternative to one-tier and two-tier models that are common in most Member States, the role of the statutory audit board was enhanced to include functions and duties that are normally attributed in other models to independent or non-executive directors, thereby providing an alternative that facilitates compliance by SME with international best practices while at the same time maintaining a corporate structure more adequate and flexible for SME. 5 As CMVM agrees with the arguments put forward by CESR against creating a differentiated regime for SME in the context of the Transparency Directive review (CESR/ ).

4 4 / 15 Additionally, unlisted companies recourse to governance codes may prove unmeaningful as it would generally lack independent scrutiny of the comply or explain framework; the CMVM s review of listed companies governance statements has certainly played a role in the progressive adoption of a governance code and informative value of such statements. As for possible corporate governance measures within unlisted companies, a sector specific approach should be adopted (as opposed to a general corporate governance code), in particular for financial institutions, where the interest of depositors and other stakeholders justify the improvement and more stringent monitoring of corporate governance. To a certain extent, the outcome of the ongoing work on financial institutions governance could also be considered for certain publicinterest entities BOARDS OF DIRECTORS Question 3. Should the EU seek to ensure that the functions and duties of the chairperson of the board of directors and the chief executive officer are clearly divided? The CMVM has a favourable approach to the separation of functions of chairperson of the board of directors and chief executive officer (CEO). This separation should be achieved through a clear distinction, on a legal or recommendatory level, between the governance and management functions attributed, respectively, to the chairperson and CEO. Despite the debate on whether this form of corporate leadership has a significant influence in the valuation of listed companies, the rationale for separating these functions essentially lies in providing for a more balanced exercise of executive power and an enhanced oversight at the first level of management, enabling decisions to be subject to scrutiny within the decision-making process, thus with the benefit of higher and more timely access to information and more effective monitoring. A division of functions and duties along the distinction of governance and management responsibilities would also ensure that both the chairperson and CEO have clearly defined roles within the board, thereby enhancing its efficiency and reducing the potential for conflicts. However, separating the functions of chairperson of the board of directors and CEO is only viewed as a transparent means to achieve a balanced executive power. Different combinations of regulatory and organisational features 7 may also enable 6 Article 2(13) of the Directive 2006/43/EC on statutory audits of annual and consolidated accounts. 7 Although it is out of the scope of regulatory policy, we also mention the importance of individual skills: if the goal of Chairman/CEO separation is to achieve CEO monitoring by the chairman of the board of directors, it also requires a personal ability and willingness to do so.

5 5 / 15 effective checks and balances that result in an appropriate assessment of the company s management decisions and performance. Therefore, it is also admissible (but in general undesirable) that the Chairman of the board and the CEO coincide in the same person, as long as other mitigation measures are put in place to avoid excessive concentration of power (for instance, through the nomination of a lead director vested with appropriate power and resources). This perspective should be kept in mind in case further action is considered by the European Commission, as Recommendation n.º 2005/162/CE already advocates for separate roles for the chairman and the CEO in unitary boards and Section 972 of the Dodd-Frank Act only requires companies to disclose (and justify) whether they separated the functions of chairperson of the board of directors and chief executive officer or not. Question 4. Should recruitment policies be more specific about the profile of directors, including the chairman, to ensure that they have the right skills and that the board is suitably diverse? If so, how could that be best achieved and at what level of governance, i.e. at national, EU or international level? Question 5. Should listed companies be required to disclose whether they have a diversity policy and, if so, describe its objectives and main content and regularly report on progress? Question 6. Should listed companies be required to ensure a better gender balance on boards? If so, how? The CMVM supports minimum European standards on disclosure of board recruitment policies, including the envisaged skills and diversity of directors (and chairman), combined with an enhanced role of nomination committees. The corporate governance debate on diversity should focus on the issue of qualification, broadly understood in the sense that the company s board and senior management should reflect the balance of (diverse) experience, skills and backgrounds required to improve long-term performance and value of the company. Other personal requirements should also be taken into account in assessing the profile of prospective directors, including not only working and management skills but also their availability, competence and ethical qualities. The CMVM acknowledges the positive impact of an increased focus on diversity (whether it is based on gender, nationality or any other feature), in so far as diversity is exclusively considered for the purpose of better governance. In the case of the women on the board debate, gender per se may be a means to achieve diversity but not necessarily the diversity of skills required in corporate management. But it is not convincing that an economic case for gender diversity currently exists, despite the level and effect of the political demand for such diversity. In other words, qualification should remain the predominant decision criterion in board composition, but diversity may improve the company s decision making process.

6 6 / 15 International diversity should not be viewed as an element of a diversity policy, but the result of shareholder diversity (the greater the level of non-national qualifying shareholders, the higher the probability of having a non-national board member), cultural and economic factors (such as language or career opportunities) or even corporate strategy (i.e. expanding to new markets). Nomination committees should have a more significant role in the implementation of the company s recruitment policy, particularly in the selection process prior to the general meeting of shareholders, as it could be useful to the shareholders exercise of their appointment functions. As for disclosure practices, the minimum harmonised requirements of corporate governance statements should include the board s recruitment policy, including information on how diversity is addressed (for instance, in the context of the board s description, referring the company s recruitment sources and the balance of qualifications sought). Question 7. Do you believe there should be a measure at EU level limiting the number of mandates a non-executive director may hold? If so, how should it be formulated? The CMVM shares the European Commission s concern on the level of availability of non-executive directors with supervisory functions. Since 2006 Portuguese company law, not only establishes a specific duty of availability applicable to board members, as part of their duty of care, but also limits the number of mandates of certain non-executive members of listed company s boards, notably, those having specific responsibility for the supervision of financial statements and liaising with the external auditors. Although this was a positive change, only setting limits to the number of mandates may not be sufficient per se to improve effective non-executive supervision, just like the statement of the director s other mandates may not have significant added value for an availability assessment. In order increase its effectiveness, a limitation on the mandates that a nonexecutive director may hold should imply both an ex ante control (with nomination) and the ongoing monitoring of its situation, as well as an appropriate consideration of the consequences for its appointment in case pre-determined levels of availability and time commitment are not met. However, the appropriateness of absolute limits on the number of mandates should be carefully in certain cases, notably within corporate groups. Question 8. Should listed companies be encouraged to conduct an external evaluation regularly (e.g. every three years)? If so, how could this be done? The CMVM would welcome minimum European standards that further the Commission s Recommendation 2005/162/CE on the role of non-executive or

7 7 / 15 supervisory directors, as recommendations concerning their self-evaluation process have not always proven to be effective. Building on the existing European text, the supervisory board could be encouraged to have recourse to external advice, in so far as the envisaged evaluation is conducted by entities that are independent. Indeed, independence is of the essence, as conflicts of interests may put at risk the intended added value of such an advice, creating additional costs that do not result in enhanced corporate governance. And although it does not discharge the general meeting of shareholders responsibility regarding the board s evaluation and appointment, external advice may facilitate the assessment of the board s performance, providing additional information tools that enable a more effective use of shareholder rights. In addition, external advice could provide positive input to the board in the course of the mandate, with possible consequences on the (re)appointment of members (especially if it is conducted at the near-end of the mandate). In any case, recourse to external advice should not be mandatory. It should be noted that, especially in the context of smaller companies, external evaluations may represent to a relevant cost. Question 9. Should disclosure of remuneration policy, the annual remuneration report (a report on how the remuneration policy was implemented in the past year) and individual remuneration of executive and non-executive directors be mandatory? Question 10. Should it be mandatory to put the remuneration policy and the remuneration report to a vote by shareholders? There is clear support of the CMVM for the mandatory disclosure of the remuneration policy, subject to a shareholder vote. Portuguese public interest companies such as listed companies and financial institutions are legally required to have their remuneration policy for management and audit board members approved by the general meeting of shareholders on an annual basis. In addition, the remuneration policy as well as the annual amount of remuneration paid to members of the management and audit boards is mandatorily disclosed in the company s financial statements (both individually and in an aggregate form). This legislation was enacted in 2009, but since 2003 the disclosure of the individual remuneration of management board members was recommended by the CMVM Corporate Governance Code (and subject to comply or explain rule). The Portuguese legislation was assessed by the OECD in 2010, which concluded in its Peer Review on Corporate Governance that Portugal has significantly increased the level of transparency required for listed companies in respect to its remuneration and incentives structure, as a result of the legislative and regulatory changes enacted in 2009 and 2010 on setting and disclosing directors remuneration. This evolution was welcomed, considering the essential role of shareholders in setting directors

8 8 / 15 remuneration and the need to have timely access to accurate information for such purpose. These conclusions reinforce the positive impact for shareholders of greater transparency and disclosure of directors remuneration and, in our view, encourage the adoption of mandatory rules on this matter. Question 11. Do you agree that the board should approve and take responsibility for the company's 'risk appetite' and report it meaningfully to shareholders? Should these disclosure arrangements also include relevant key societal risks? Question 12. Do you agree that the board should ensure that the company s risk management arrangements are effective and commensurate with the company s risk profile? There is a full support of the CMVM for greater emphasis on risk management in corporate governance at the European level. In fact, the CMVM has attributed strategic importance to directors duties in respect to risk management in its Corporate Governance Code, which provides specific recommendations on this matter 8. Regulatory focus on risk management should require that the company s strategy, based on the consideration of all the risk factors that weigh in on the total risk-return tradeoff of the company, is disclosed to investors to enable an assessment of the impact of risk management on shareholder value. Thus, the major challenge for transparency on risk management is to enable meaningful disclosure that despite the specificities of each company, has sufficient informative value and comparability to effectively contribute to investor s decisions. In this respect, there is support for European minimum standards on risk management disclosure that facilitate the comparability of corporate governance statements, including at least description of the main economic, financial and legal risks that the company is exposed to and how they are addressed by the company s risk management system. 8 See CMVM Corporate Governance Code (2010), in particular Recommendations II and II.2.2: «II Companies shall set up internal control and risk management systems in order to safeguard the company s worth and which will identify and manage the risk. Said systems shall include at least the following components: i) setting of the company s strategic objectives as regards risk assumption; ii) identifying the main risks associated to the company s activity and any events that might generate risks; iii) analyse and determine the extent of the impact and the likelihood that each of said potential risks will occur; iv) risk management aimed at aligning those actual incurred risks with the company s strategic options for risk assumption; v) control mechanisms for executing measures for adopted risk management and its effectiveness; vi) adoption of internal mechanisms for information and communication on several components of the system and of risk-warning ; vii) periodic assessment of the implemented system and the adoption of the amendments that are deemed necessary.» «II.2.2 The Board of Directors must ensure that the company acts in accordance with its goals, and shall not delegate its duties, namely in what concerns: i) definition of the company s strategy and general policies; ii) definition of the corporate structure of the group; iii) decisions taken that are considered to be strategic due to the amounts, risk and particular characteristics involved.»

9 9 / 15 The board should clearly have direct responsibility for these matters: deciding on company s risk profile is a strategic decision of the management board, being primarily responsible for ensuring the alignment of the company s strategies and risk management systems, the effectiveness of these systems being already subject to a supervisory control imposed by the Audit Directive. 2. SHAREHOLDERS Question 13. Please point to any existing EU legal rules which, in your view, may contribute to inappropriate short-termism among investors and suggest how these rules could be changed to prevent such behaviour. The CMVM generally supports the view that despite the trend for shorter holding periods in capital markets, greater regulatory focus on institutional investors long-term investment may have a positive impact on listed companies corporate governance. Although increased short-termism is generally more a product of evolving investment strategies, combined with a higher level of intermediation and globalisation of securities holdings, improvement may be achieved through a combination of regulatory responses. Remuneration structures should certainly be addressed, to better align the interests of those institutional investors following long-term strategies and their asset managers making compensation contracts more sensitive to long-term performance and risk (see the answer to the next question). Additionally, in European markets where the great majority of asset managers are part of banking groups, conflicts of interest can arise between asset managers and banks with close ties with companies that are part of the manager s portfolio. Such conflicts of interest can encourage inappropriate absenteeism or short-term approaches by managers in line with the interests of other group companies. CMVM therefore considers that in markets where asset management is excessively concentrated in banking groups, measures that contribute to a more independent asset management market and which reduce the potential for conflicts of interest, can play a positive role in reducing the aforementioned fragilities. Other proposals of different nature have also been suggested to tackle the problems posed by inappropriate short-termism. Better disclosure being the light touch approach, greater transparency of the company s long-term strategy, performance and compensation practices has been considered. And disclosure of temporary holdings of shares that occur prior to listed companies general meetings, whilst shedding light on possible cases of empty voting, was recently introduced in French law to enhance transparency of such investments.

10 10 / 15 Within the investee company s internal governance, the fiduciary duties of directors could be expanded to include a clear reference to the consideration of shareholders long-term interests, as in Portuguese company law. Another measure based on French law would be to enhance the shareholder rights of long-term investors, with a duration-dependent sliding scale of voting rights, provided that certain pre-determined, non-discriminatory and objective criteria are satisfied. Additionally, acting directly on the compensation contract design, remunerating management in junior or convertible debt instead of equity could also be considered. Question 14. Are there measures to be taken, and if so, which ones, as regards the incentive structures for and performance evaluation of asset managers managing long-term institutional investors portfolios? Question 15. Should EU law promote more effective monitoring of asset managers by institutional investors with regard to strategies, costs, trading and the extent to which asset managers engage with the investee companies? If so, how? Question 16. Should EU rules require a certain independence of the asset managers' governing body, for example from its parent company, or are other (legislative) measures needed to enhance disclosure and management of conflicts of interest? Regarding institutional investors asset managers, there is strong support for European rules that ensure that the remuneration of asset managers (and consistently, the performance evaluation) is effectively aligned with the institutional investor s investment strategy. Considering that the focus of the Directive on Alternative Investment Fund Managers (and expectedly also to the UCITS V Directive), is the alignment of remuneration and sound risk management, based the Capital Requirements Directive framework, possible deferred payment and clawback clauses could also be combined with other instruments linked to future earnings, to take greater account of long-term performance. However, the effect of such an alignment of interests with long-term investment is somewhat limited to the existence of such a long-term perspective determined by the institutional investor. Another limitation to the role that institutional investors may play in the corporate governance context lies in the fact that asset manager s fiduciary duties exist only before its clients, regardless of whether the interests of the institutional investor clients are convergent with those of minority shareholders or other stakeholders of the listed company whose shares are held by the institutional investor. In addition, the excessive concentration of asset management within banking groups that exists in some Member States (see answer to previous question) can also limit the scope of measures aiming at aligning incentives structures of asset managers with long-term performance. Regulatory actions that contribute to a more independent asset management market could however enhance the effectiveness of

11 11 / 15 those measures. One possibility that could be envisaged, subject to proper cost benefit analysis, is requiring independent members on boards of asset management companies, as it is already practice in the US. Naturally, any regulatory response would only be complete if it would follow a functional approach to asset management (based on a cross-sector extended scope that reaches occupational pension fund managers, insurance undertakings envisaged in the Solvency II Level 2 or investment firms that manage client assets). This being said, there is also full support of the CMVM to an European Commission initiative to promote effective monitoring of asset managers by institutional investors. Enhanced disclosure could be a first level of intervention, through an European requirement for both ex ante transparency of voting policies (including detailed cost/benefit perspective on participation in general meetings and exercise of voting rights, recourse to proxy advisors, management of conflicts of interests) and the ex post reporting on voting records (including an explanation on departure from a voting policy). Based on the Portuguese experience, a regulatory initiative that combines mandatory information duties with guidelines on the structure and content of the voting policy could prove effective. The CMVM and the Portuguese insurance and pension fund regulator recently issued a set of guidelines for asset managers (and pension fund managers) on shareholder engagement and exercise of voting rights, which supplement existing voting policy disclosure requirements. The main purpose of these guidelines was precisely to help increase the level of institutional investor involvement in the governance of listed companies. And considering the currently existing practices regarding institutional shareholders involvement in the companies management and governance, the diligent and efficient exercise of rights by institutional investors may represent a considerable stepping up in better corporate governance practices in affiliates and contribute to a possible increase in the value of shareholdings. Question 17. What would be the best way for the EU to facilitate shareholder cooperation? The CMVM acknowledges the added value of shareholder cooperation to the strengthening of corporate governance. However, any measure aiming at facilitating exchange of information between shareholders or concerted action weighs in on the difficult balance between the positive outcomes of shareholder cooperation (i.e. more effective use of shareholder rights) and the risks arising from undisclosed acting in concert (i.e. hidden control of the company).

12 12 / 15 Striking such a balance is often a sensitive issue in listed companies regulation, although many of the current difficulties still result from divergent interpretations on the level of shareholder cooperation that shareholders can undertake within the limits of European and Member State legal frameworks. Therefore, the CMVM strongly supports clearer and more uniform rules on acting in concert, notably for the purposes of improving uniform application of the Transparency and Takeover Bids Directives. For this purpose, further ESMA s input on this would be welcomed. Question 18. Should EU law require proxy advisors to be more transparent, e.g. about their analytical methods, conflicts of interest and their policy for managing them and/or whether they apply a code of conduct? If so, how can this best be achieved? Question 19. Do you believe that other (legislative) measures are necessary, e.g. restrictions on the ability of proxy advisors to provide consulting services to investee companies? There is full support of the CMVM to an European Commission initiative to promote proxy advisors transparency, notably with respect to their analytical methods and management of possible conflicts of interest (specifically including restrictions to the provision of consulting services to investee companies or the rendering of voting advice on resolutions proposed by clients). Whilst acknowledging the positive effect that proxy advisors may have on corporate governance, an increasing demand of advisory services by institutional investors may have a significant impact on issuers, most especially in case of high levels of portfolio diversification and cross-border holdings, thus raising concerns on proxy advisors lack of independence and transparency in light of their level of influence, that thus need to be addressed at the European level. Although the use (or reliance on) proxy advisors does not relieve institutional investors from their fiduciary duties, mandatory disclosure of analytical methodology could contribute to a better understanding of the quality and comparability of proxy advisory services. And most of all, stringent requirements and disclosure on proxy advisors management of conflicts of interest are paramount to protect the credibility of voting advice and enable proxy advisors to contribute to corporate governance improvement, covering at least situations where the firm s directors, analysts or controlling shareholders are involved, or where multiple conflicting services are rendered by the firm. The CMVM would favour the view that the existence of conflicting services should generally result in one of the services not being rendered (as reporting on how they have been managed may prove insufficient).

13 13 / 15 Question 20. Do you see a need for a technical and/or legal European mechanism to help issuers identify their shareholders in order to facilitate dialogue on corporate governance issues? If so, do you believe this would also benefit cooperation between investors? Please provide details (e.g. objective(s) pursued, preferred instrument, frequency, level of detail and cost allocation). The CMVM supports the view that listed companies should be entitled to know their shareholders, beyond the investor transparency provided by the Transparency Directive s disclosure requirements on qualifying holdings and despite the increasingly high level of intermediation that hinders the possibility of issuers reaching shareholders (especially non-domestic). It is acknowledged that possible European measures to increase the level of investor transparency imply a limitation on national laws that allow listed companies to issue bearer shares, an increased responsibility on financial institutions intermediating the relationship between the issuer and the beneficial owner and require further harmonisation of European securities laws, notably to address identification difficulties posed by cross-border chains of securities holdings. Therefore, support for further European regulation in this respect would have to be based on an integrated approach to the Transparency, Shareholder Rights and (envisaged) Securities Law Directives. Question 21. Do you think that minority shareholders need additional rights to represent their interests effectively in companies with controlling or dominant shareholders? Question 22. Do you think that minority shareholders need more protection against related party transactions? If so, what measures could be taken? In continental Europe, where ownership structures generally feature controlling or dominant shareholders the importance of minority shareholders protection and representation is paramount. The CMVM shares the principle that fine-tuning of minority shareholder protection rules should be left to Member State legislation, as different rules, often based on different legal systems and characteristics of national markets, may achieve equivalent results and levels of protection. Regarding related party transactions, the CMVM fully agrees that minority shareholders generally need more protection. Accounting and disclosure requirements, as already applicable, are useful instruments but have proved insufficient to protect minority shareholders. Other strategies, such as ratification or approval of management proposals (solely) by independent and non-interested directors, by another corporate body (such as the supervisory board), or by shareholders can prove to be more efficient. Accordingly, these measures would be

14 14 / 15 best implemented at the national level, because of Member State differences in company law and corporate governance. However, any further measure should avoid the risk of overkilling related party transactions that, notwithstanding their nature, are efficient to the company. Question 23. Are there measures to be taken, and if so, which ones, to promote at EU level employee share ownership? Being a securities market regulator, this question is deemed outside the remit of the CMVM. 3. THE 'COMPLY OR EXPLAIN' FRAMEWORK MONITORING AND IMPLEMENTING CORPORATE GOVERNANCE CODES Question 24. Do you agree that companies departing from the recommendations of corporate governance codes should be required to provide detailed explanations for such departures and describe the alternative solutions adopted? There is full support for greater disclosure on compliance with corporate governance codes as a means to improve the informative value of listed companies corporate governance statements. Portuguese listed companies are required to provide a detailed individual description of their compliance with (or departure from) the recommendations contained in the corporate governance code they apply. Companies have to state whether they comply or do not comply with each recommendation, global statements or explanations not being accepted. In the case of a negative compliance assessment (which includes partial compliance), the company is required to describe its divergent governance practices and their justification (which may consist of a justified statement for considering that the relevant recommendation does not apply). It should be stressed that the adoption of an alternative solution is a departure from a recommendation, and as such, should always be viewed as a case of non-compliance. Based on CMVM s supervisory experience, a major challenge lies in the company s annual corporate governance statement being sufficiently clear, complete and precise, as it is an element essential to the informative value (and thus the usefulness) of a system based on a comply or explain framework. And to enable a more effective comparability, the content of corporate governance statements should be subject to minimum harmonisation requirements (that could also include emerging topics such as recruitment policies), to be developed by ESMA through regulatory and implementing technical standards.

15 15 / 15 Question 25. Do you agree that monitoring bodies should be authorised to check the informative quality of the explanations in the corporate governance statements and require companies to complete the explanations where necessary? If yes, what exactly should be their role? There is also full support for greater monitoring and enforcement of disclosure practices, as it is essential to the informative value of corporate governance statements and thus the added value of a comply or explain framework. Monitoring corporate governance statements ensures that the information provided is sufficiently clear, complete and precise and thus does not contain omissions nor false or misleading information. Indeed, review of explanations should only focus on the quality of the information and not on its merits, as the informative value of corporate governance statements should be clearly distinguished from the valuation of corporate governance choices. Investor protection is thus achieved through better information tools that may reduce the costs of a more engaged exercise of the shareholder s role (notably in cases of dispersed ownership or passive institutional investors). Our experience supports the view that securities market regulators are in a better position to monitor this information, as the CMVM plays a significant role not only at the level of Portuguese listed companies corporate governance statements, but also in the annual disclosure of its corporate governance evaluation report which is complemented by an independent assessment conducted by a Corporate Governance Consultative Panel established in We would thus support annual corporate governance statements being clearly qualified as regulated information for the purposed of the Transparency Directive. Delegation of the regulator s monitoring role could be envisaged, in so far as it also involves independent entities. The use of sanctions in the most serious cases of non-compliance may also prove effective, as we have a positive experience of the fact that in Portugal, if there is false or misleading information or omissions in the annual corporate governance statements, listed companies can be subject to enforcement action by the CMVM. In this respect, Directive 2004/109/CE should clarify that annual corporate governance statements are regulated information See the Report on Compliance Assessment of the CMVM Corporate Governance Code, in MVM2009.pdf (in Portuguese) 10 On the qualification of corporate governance annual statements as regulated information under the transparency directive, see also CESR s response to the consultation on the modernization of the transparency directive, dated 25 October 2010.