IP/04/594

Brussels, 5th May 2004

Corporate governance: Commission consults on the role of independent directors

The European Commission has launched a consultation on the role in listed companies of non-executive or supervisory directors, focusing in particular on those who may be considered as independent. Responses will be taken into account in the preparation of the Commission's forthcoming Recommendation to Member States on this issue, scheduled for autumn 2004. The consultation document covers, inter alia, the composition, role, operation and transparency of board committees, and the criteria according to which directors can be regarded as independent. The deadline for responses is 4 June 2004.

Internal Market Commissioner Frits Bolkestein said "Managing companies efficiently is a tough job, and I fully share the view that executive directors should not be unduly hindered by overly prescriptive corporate governance frameworks. But recent scandals have shown that to prevent fraud, a sufficient number of committed and qualified non-executive or supervisory directors need to play a significant role in some key areas where conflicts of interest may arise, such as the nomination and remuneration of directors and audit. More particularly, the presence of a series of strong independent directors can help ensure that the interests of all shareholders and other stakeholders are duly taken into account in the preparation of company decisions. The Commission is committed to promoting the role of these directors, but is fully conscious of the need to take into account national corporate governance structures and practices. So I encourage all interested parties companies, individual and institutional shareholders and regulators - to respond. We will listen to them."

The Commission's consultation paper presents and explains the broad form and contents proposed for the forthcoming Recommendation.

The role of independent non-executive or supervisory directors is covered by corporate governance codes in many Member States. Some, however, have adopted binding measures on that role, in their company law, securities law, or listing rules

The forthcoming Recommendation will invite Member States to introduce in their national framework, on a comply or explain basis as a minimum, a set of detailed principles, derived from minimum standards to be defined in the Recommendation, to be used by listed companies.

In this context, the main issues covered by the present consultation document are:

• the scope of the forthcoming Recommendation (EU listed companies);

• the need for some board committees, within a collegial board

• the profile of non-executive or supervisory directors (qualifications, commitment, independence)

• the main features of the nomination, remuneration and audit committees (composition, role, operation and transparency).

Responses

The consultation paper is available at:

http://europa.eu.int/comm/internal_market/company/independence/index_en.htm

Responses should be concise. In view of the tight timing for adoption of the Recommendation, they should arrive no later than 4 June 2004. They should be sent to DG MARKT G3, European Commission, B-1049 Brussels. Responses may also be sent by e-mail to

Markt-COMPLAW@cec.eu.int

Unless an explicit request for confidentiality is made, contributions will be treated as documents that the Commission can make public.

Background

The Commission's Action Plan to modernise company law and enhance corporate governance in the EU, announced in May 2003 (see IP/03/716 and MEMO/03/112) contains a set of initiatives aimed at strengthening shareholders' rights, reinforcing protection for employees and creditors, increasing the efficiency and competitiveness of European business and boosting confidence on capital markets.

Public consultation on the Action Plan as a whole, which ended in mid-September 2003, showed a strong consensus behind the main measures within it. The Commission is now committed to further open consultation on each of those key measures and the consultation exercise on the role of (independent) non-executive or supervisory directors is therefore the fourth of several arising from the Action Plan.

The presence of independent representatives on the board, capable of challenging the decisions of the management, is widely considered as a means of protecting the interests of shareholders and, where appropriate, other stakeholders. The Commission intends therefore to adopt a Recommendation on the role of (independent) non-executive or supervisory directors by autumn 2004. It will then monitor the application of the Recommendation to identify whether any further action is required in the medium term.