The CBI yesterday warned that European Commission proposals for EU-wide legislation on corporate governance will “drive a coach and horses” through national plans to encourage best practice.
Speaking to business leaders in Belfast, Director-General Digby Jones stressed that UK business leaders have worked constructively with other interest groups to raise confidence in corporate governance through implementation of the Higgs Report.
But he said that business leaders across Europe oppose proposals for EU-wide legislation on corporate governance, arguing that national codes of best practice will prove most effective.
Digby Jones expressed fears that the EU initiative will lead to “the de facto creation of a Brussels-led code”, despite EU assurances to the contrary.
He said the UK already has a strong corporate governance system and that firms fail to see how the EU proposals would add value to investors, creditors or the boardroom.
He added that the EU plan will fuel business fears that intervention in the corporate governance arena is now “falling victim to the law of diminishing returns”.
Digby Jones said: “After the American crisis of Enron, it was right for the UK and other governments to raise the issue of confidence in corporate governance. Britain was responding from a strong position having resolved many problems in the 1990s – such as Robert Maxwell and Polly Peck – but there was and is no room for complacency.
“Now, as a result of the efforts of many different groups, money is probably more safely invested in the UK than anywhere else in the world. We should constantly keep the situation under review. But I am worried that corporate governance is becoming too much of a growth industry for EU bureaucrats and politicians.
“Although corporate governance is important, boards are there to make key decisions that will ensure the future health of the business. We need our businessmen and women fully focussed on responsible wealth creation, not only being the corporate administrators and bureaucrats that have clearly undermined the global competitiveness in other EU economies.
“It looks like Europe could be heading straight for the trap the UK managed to avoid: simply going too far. We need national codes, rather than EU-wide legislation which would completely undermine the comply-or-explain approach.
“Comply or explain is critical because it offers companies clear guidance but avoids the dangers of over prescription. The last thing we need is the EU driving a coach and horses through the whole thing. We must never damage our ability to generate wealth and jobs.
“The EU should concentrate on being globally competitive, not looking once again only internally. This matters more in the UK than anywhere else in Europe since we have the most developed and globally-aspected corporate environment in the EU.”
The Commission proposals come in two consultation papers, one on the responsibilities of company boards and one on the responsibilities of non-executive directors.
The paper on company boards suggests EU legislation that could prescribe what directors are responsible for and possibly redefine their legal liabilities.
It would also force companies to include in their annual reports a “corporate governance statement”. This would include information on the independence and specialised knowledge of board members and the existence and functioning of internal control systems.
The CBI submission on boardroom responsibilities says it would be “impossible for national codes to work” if legislation were to set out their contents. It says the Commission has not allowed companies enough time to respond by allowing only a few weeks for the consultation.
It also questions whether the time is right to consider major changes in company law when firms are now adopting new international accounting standards and when ten new EU countries are presently adapting to a raft of other EU rules.
The CBI submission on non-executive directors acknowledges that the EU says it does not want an EU code on corporate governance. But it says “the Commission’s actions in the detail of this consultation are clearly inconsistent with its stated intent”.
It says: “Instead of using disclosure to allow the markets to work, the Commission paper speaks of ‘measures aimed fundamentally at influencing the way in which listed companies are organised’. This goes much further than the simple provision of information.”
The CBI submission criticises proposals on the responsibilities of non-executives for being too detailed.
It says: “Reproducing what is in national codes will merely add another layer of bureaucracy and will not assist better governance. On the contrary, since the comply-or-explain approach works on the basis of buy-in by companies, it is likely to undermine the governance process.”