Green paper – The EU corporate governance framework COM(2011) 164
The Swedish Investment Fund Association (SIFA)[1] would like submit its views on the Commission green paper The EU corporate governance framework. SIFA would like to begin with a few general comments on the Commission's work on corporate governance.
SIFA is pleased that the Commission has acknowledged the Swedish corporate governance code and its requirements. There is a high awareness of corporate governance issues in Sweden and a strong adherence to self-regulation. The fund industry considers the issues discussed by the green paper as highly important.
A general remark to the issues raised in the green paper is that the questions are very detailed and seem to imply an existing need for regulation at an EU level. However, the fundamental question should be whether measures should be taken at an EU level in the corporate governance area or if member states should be allowed to keep their national systems. The legal requirements for corporate governance are very different in the different Member States. Corporate governance is inevitably linked to the corporate legislation of each member state and as this legislation differs, corporate governance must also be allowed to differ.
The Nordic model of corporate governance is based on national legislation, stock exchange rules and self-regulatory measures such as corporate governance codes.
European rulemaking should be kept at a fundamental level allowing for member states to embrace the spirit of the regulations in a way adapted to their own regional model of corporate governance.
Self- regulation for fund-managers on the Swedish market
SIFA has had guidelines for the management of ownership since 2002 and issued a Code of Conduct for investment fund management companies in 2005 with principle-based rules for good governance. The rules are based on the principle of comply or explain. The code states, inter alia, that all members of the association shall adopt a corporate governance policy. The basis for the association’s rules is the common interests of the unit holders and in particular the importance of managing potential conflicts of interest.
The Code and the Guidelines contain rules on the managing of conflicts of interest, the disclosure of exercise of ownership etc. For example it requires that at least half of the members of an investment fund management company’s board of directors must be independent in relation to the management company and its associated companies.
The guidelines have contributed to an increased commitment to and engagement in corporate governance issues by the investment fund managers and there is a widespread acceptance of the rules and an understanding of the responsibility that ownership implies. Since the guidelines were introduced Swedish management companies have significantly increased their efforts and commitment to the companies in which their funds own shares. The Swedish system of nominating committees made up of representatives of the owners, has made fund companies increasingly involved in the companies in which their funds have invested, and shows that fund companies want to take a long-term ownership responsibility.
On a European level, EFAMA, the European Organization for the fund industry, has recently developed a new code of external corporate governance, The EFAMA code for external governance. This code is principles-based and focuses on the fiduciary responsibility to manage the ownership in the interest of the investors.
Corporate governance for Swedish companies
SIFA is one of the principals behind the Association for Generally Accepted Principles in the Securities Market that has as its objective to promote the observance and the development of good practice. The Swedish Code of Corporate Governance, which has been developed within this framework, is particularly suited for the Swedish securities market. Most of the issues addressed in the green paper have already been dealt with in the Swedish Code and the model has worked very well within the Swedish market.
Key features of the Nordic model for corporate governance is transparency, strong general meeting powers, a strong minority protection, effective individual shareholder rights, non-executive boards, the use of board committees, auditors appointed by and accountable to the shareholders and an active governance role of major shareholders[2].
According to the Nordic “model” three bodies form part of the decision-making, namely the shareholders’ meeting, the board of directors and the chief executive officer. An auditor, acting as a controlling body, is appointed by the shareholders’ meeting.
SIFA:s view is that the existing system is very well suited for the Swedish market and should be protected and developed by the market participants through self-regulation. If any regulatory measures are to be taken at a European level such measures must be principle-based and flexible (i.e. through a comply or explain system) taking into account the widely diverging corporate governance models of the member states.
SIFA would like to submit the following answers to the Commission:
General questions
(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.
(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?
No. SIFA is of the opinion that a code of corporate governance should be principle based and flexible and therefore be applicable by any company irrespective of size or listing.
Boards of directors
(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?
Such a regime is already used in the Nordic region and has SIFA:s full support. It is important to maintain a clear division of responsibilities between the chief executive officer and the board, and to avoid accumulating too much power in one single decision-maker. However, it is questionable if it is for the EU to try and achieve this division. Any such rule must be flexible and principle-based.
(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?
(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?
(6) Should listed companies be required to ensure a better gender balance on boards? If so, how?
SIFA believes in board diversity in all aspects. This includes composing boards with the right skills. SIFA believes that the responsibility to compose the board should be left with the owners of the companies. The owners’ right and responsibility to elect the board is fundamental and any rules applied should be directed at facilitating the exercise of this right rather than to restrict the composition of the board.
In Sweden a special procedure of nomination committees is applied. Nomination committees are appointed by the shareholders and made up predominantly of major shareholders or their representatives. There is a strong belief that the board should not nominate its own members, but instead nominations should be made by a body representing the shareholders.[3]
(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?
(8) Should listed companies be encouraged to conduct an external evaluation regularly (e.g. every three years)? If so, how could this be done?
As explained above SIFA believe that rules should be aimed at facilitating the exercise of the owner’s right to elect the board. This has been accomplished in Sweden through nomination committees elected by the shareholders. The Swedish corporate governance code requires the companies to evaluate the board through a structured and systematic process. This requirement will be fulfilled by the nomination committee which will evaluate the competence and skill of the board members as well as whether a certain board member has the time required for the task due to other engagements. The nomination committee should also perform evaluation of board members that are suggested for re-election. This way boards will also eventually become more diversified and better aligned with adequate competence for each company.
(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?
(10) Should it be mandatory to put the remuneration policy and the remuneration report to a vote by shareholders?
The Swedish corporate governance code contains far-reaching rules on disclosure and mandatory voting rights for shareholders in connection with remuneration policies. SIFA fully supports this rule.
However, SIFA believes that rules concerning the decision-making process for remuneration policies should be left for self regulation. Any rules by the Commission should be principle based so that member states can choose how the rules should be implemented and how the rules can be adapted to the different legal systems of the member states.
(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?
(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?
The responsibility of the board to manage the company in the best interest of its shareholders includes taking responsibility for the risks of the company. The role and the tasks of the board is one of the fundamentals of company law and any legislation or regulation addressing these aspects should be part of company law.
Shareholders
With regard to the issues specific to the institutional shareholder’s role it is SIFA: s view that self regulation has contributed both to engaged shareholders and a better ownership climate. As has been explained above Sweden does not recognize the lack of shareholder engagement referred to by the Commission. It is important to emphasize that investment into funds are long-term and account for a large part of pension savings. The industry is working continuously on the development of regulations and is constantly trying to improve their opportunities to influence the companies in which they invest, in the interest of the investors. One example of this is the code adopted by the European fund industry which has focused on the responsibility to take care of and raise awareness of influence. Fund managers are recommended to implement an ownership policy and to disclose how they exercise their ownership. There is also a responsibility to monitor the companies where shares are held and to have clear guidelines on how and when to act. As a general comment SIFA would like to urge the Commission to acknowledge the importance of self regulation in this area. This being said, SIFA would also like to point out that it is essential that ownership and corporate governance can be exercised cross border and it is an important task for the EU to facilitate active participation internationally.
In August 2010 SIFA responded to the European Commission Green Paper on Corporate Governance in Financial Institutions and Remuneration policies. The association's response from August 18, 2010 is attached.
SIFA would like to give the following answers to the questions of the Commission green paper:
(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 behavior.
SIFA cannot point at any specific legal rules contributing to short-termism. As has been discussed above fund savings account for a large part of pension savings and is therefore long-term investments.
(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?
(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?
(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?
No. SIFA cannot see a need for any measures regarding incentive structures, or performance evaluation of asset managers. It is a fundamental obligation of the institutional investors to protect their investments and a part of this responsibility consists in monitoring the asset manager it has chosen with regard to strategies, costs, trading etc. as well as designing relevant incentive structures. The relationship between the asset manager and the institutional investor is a relationship between professionals regulated in the MiFID directive.
The Commission has referred to an article by mr Paul Woolley discussing among other things the short-termism of financial markets.[4] The conclusions drawn by the Commission from this article are, in SIFA:s opinion, incorrect. Fund managers and asset managers will do their best to meet the requests of the end investors including retail investors. The end investors will always strive to get the most out of their investments and will turn to the manager delivering the best return. Regulating the asset managers in the way that is suggested in the Commission Green Paper will not remedy this situation.
(17) What would be the best way for the EU to facilitate shareholder cooperation?
The biggest problem when trying to cooperate cross border is the lack of shareholder transparency. This will be discussed under question 20.
Another obstacle towards cooperation are rules against acting in concert in some jurisdictions. Such rules are a major concern and should be investigated further by the Commission.
(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?
(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?
The proxy advisor industry has grown out of the US requirement for all institutional investors to vote at shareholders meetings. Since not all institutional investors and fund managers have the resources or know how to vote the proxy advisors have provided a viable service. However, proxy advisors often vote without knowledge of the companies or the situation in the local market where a specific company operates which leads to unintelligent or empty voting without any benefit to the real owner. The conclusion is that shareholders who can’t make their own voting decisions based on an intelligent analysis should be allowed to use their voting rights in other ways.
The Commission has acknowledged other problems with the proxy voting industry such as conflicts of interests etc. However, since proxy voting agents provide a service for their customers it is up to their customers to make sure that the service they pay for meets their objectives. EU law should not intervene as long as there is no threat to consumer protection or systemic risk.
(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).
SIFA is of the opinion that this is an area where the Commission can really make a difference. Cross border voting is important and should be facilitated. The transparency directive does not provide efficient mechanisms to find shareholders to cooperate with. If such mechanisms were in place SIFA is of the opinion that it would benefit cooperation between investors cross border.
The Swedish registration of shareholders in a central register is a very good example of a functioning public shareholder registration which could serve as an example for the Commission when investigating possible ways forward.
(21) Do you think that minority shareholders need additional rights to represent their interests effectively in companies with controlling or dominant shareholders?
(22) Do you think that minority shareholders need more protection against related party transactions? If so, what measures could be taken?
Every legal system should provide for efficient minority protection rules. However, minority protection rules must be organized according to the national legal system. The Swedish system for example offers far reaching minority protection rules such as a right to table agenda points at the shareholders meeting, the right to block certain important decisions etc. These minority protection rules are combined with rules to facilitate for major shareholders to take an active role. This combination works very well in Sweden. Related party restrictions are also regulated in the Swedish company law in a sufficient way. Such national rules must be allowed to remain.
(23) Are there measures to be taken, and if so, which ones, to promote at EU level employee share ownership?
Many companies provide incentive structures for their employees with the objective of making the employees into owners aligning the interests of the employees with the interests of the shareholders. However, there is no evidence that employees make more active owners than other shareholders. SIFA cannot see the reason for EU measures to promote employee ownership.
Monitoring and implementation of Corporate Governance Codes
(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?
(25) Do you agree that monitoring bodies should be authorized 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?
As the Swedish corporate governance code has shown it is possible to require more informative explanations. Companies should explain why they are not complying with the code and clarify what they are doing instead. This model could be made best practice for codes in the EU.
It is also suitable that some kind of monitoring of the explanations is in place. In Sweden all company reports are analyzed once a year and the absence of explanations can lead to disciplinary action. However, there is no valuation whether an explanation is appropriate from a shareholder perspective; instead this has to be decided by the actors on the market.
The Swedish Investment Fund Association
Lena Falk, Acting General Counsel
[1] The Swedish Investment Fund Association represents the majority of fund-based saving in the Swedish investment fund market.
[2] See “Corporate governance in the Nordic countries”, a presentation by the self regulatory bodies of the Nordic countries,
[3] More about Swedish nomination committees: Lekvall, P (2008) Nomination Committees in Swedish Listed Companies. The International Corporate Governance Network 2008 Yearbook. See also http://www.corporategovernanceboard.se/media/15381/nomination%20committees%20in%20swedish%20listed%20companies%20-%20artikel%20i%20icgn%20yearbook%202008.pdf
[4] Paul Woolley, ’Why are financial markets so inefficient and exploitative – and a suggested remedy’ in The Future of Finance: The LSE Report, 2010.
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