Abstract. Corporate administration systems play a cardinal function in economic public presentation because they provide mechanisms impacting the returns on providers ‘ investing of external finance to houses. The undertaking of overhauling company jurisprudence and heightening the quality of corporate administration poses itself in all industrial states. It is estimated that within the European Union, the contents of up to 80 per cent of all statute law in the field of concern jurisprudence is determined by the statute law in Brussels. This article provides a critical overview of the corporate administration statute laws. It suggests the steps for doing a better determination sing the construction of the board and a manner of efficient decision-making. In order to ease the communicating between stockholders, the legislator should mean to make a stockholders ‘ forum. This forum could be suited for organizing the exercising of voting rights, for interchanging information and for unifying in the exercising of their rights independent of their whereabouts. The decisions are based on the comparing of some EU statute law, and besides on EU and US legal powers.
Keywords: stockholder, board construction, corporate administration
Corporate administration is an first-class country in which the “ soft jurisprudence ” attack can be applied. The harmonisation in this country would endanger the strength of the diverseness of the national systems. During the last decennary, the corporate administration argument has spread to about all European states. The chief consequence of this activity is the acceptance of codifications that are loosely parallel in their Scopess and recommendations. By and large talking, the focal point is on the function of the board of managers, fiscal coverage, and the function of the hearers and the map of the general meeting.
* This paper is a portion of the Project ‘Developing Competitive Advantage of Enterprises in Serbia in Conditions of European Integrations ‘ ( No 149052 ) , realized by the Faculty of Economics Nis, with support of the Ministry for Science, and presented on 4th International Conference on Business, Economics, Management and Marketing, June 2006, Athens, Greece
2. Corporate GOVERNANCE DEFINITION
Corporate administration is a portion of a well working market-based system. Besides, it is a mix of internal company regulations, soft jurisprudence codifications and statutory statute law. But, what does the corporate administration precisely intend? We can non happen cosmopolitan definition of corporate administration. One of the footing definitions of this term is OECD ‘s definition, which determines it as “ the internal agencies by which corporations are operated and controlled ” .1 The UK was the innovator in corporate administration reform. The argument in this state resulted in the Cadbury Code ( 1992 ) , as the listing regulation for the London Stock Exchange. UK ‘s influence spread to the France, Netherlands, and other European states ( for illustration, Germany was one of the last in following this tendency and adopted its ain corporate codification in 2002 ) . The HLG Report II is one of the most of import Acts of the Apostless in the filed of corporate administration. It was issued in November 2002 and recommended steps for the betterment of internal mechanisms of corporate administration governments in the EU. The Report ‘s recommendations are based on the construct of “ stockholder democracy ” , which includes, particularly, stockholders ‘ rights and minority protection, and besides the function of non-executive managers, responsibilities of the board, and audit patterns. HLG Report besides announces 17 legislative and 7 non-legislative steps in the country of corporate administration. The concluding consequence should be a codification for European corporate administration based on the undermentioned points:
The construction of corporations,
Corporate administration revelation demands,
An built-in legal model to ease efficient stockholder communicating and decision-making,
Increased revelation of group construction dealingss, and
Enhanced revelation of institutional investors and their investing and, in peculiar, voting policies.
One of the nucleus characteristics of the corporate administration is investor ownership ; it means that stockholders have a important right of control over their companies. The 2nd feature is delegated direction, which implies that stockholders by and large exercise this control indirectly, by take parting in the choice of managers, for illustration. Sing the company forms, there is a different facet between Continental European corporate Torahs and UK company jurisprudence. The first one by and large distinguishes ‘open ‘ corporate signifiers with freely movable portions, and ‘closed ‘ signifiers, in which transferability is restricted. On the other manus, UK company jurisprudence uses the term ‘closely held ‘ to specify corporations whose portions do non merchandise freely, and term ‘publicly held ‘ for corporations that adopt the unfastened corporate signifier.
One of the most of import facets of corporate jurisprudence is the stockholders ‘ place. At first sight it could be concluded that the regulations in this field are based on different schemes: the assignment rights scheme, determination rights, trust territory, inducements, restraints, and association rights schemes. The assignment scheme is the dominant manner of protecting the stockholders ‘ involvements. The focal point is on the construction and power of the board, and the vote of stockholders in the unfastened companies. The other schemes are peculiarly based on management-shareholder bureau job.
3. SYSTEMS OF THE BOARD
HLG Report II highlights the equivalent ( but non equal ) chances and installations in stockholders ‘ engagement, information and communicating rights across the EU to let enhanced decision-making. It is wholly clear that the power of influence over the company should be conferred upon the stockholders. The stockholders have a dual function: they act on their ain behalf, but besides on behalf of their stakeholders. The HLG Report II particularly pays attending to state of affairss when stockholders prefer to sell out portions instead than proctor and influence corporate public presentation. This is known as “ rational apathy ” . ( Lanno, Khachaturyan, 2004, p. 46 ) The ballot government is really of import for that stockholders ‘ right and, connected with their place, the per centum of companies under bulk control on one manus, and barricading minority on the other. The HGL Report II makes specific recommendations about stockholders ‘ rights to inquire inquiries, to table declarations, to vote in absentia and to take part in general meeting by agencies of electronic communications. Not right but stockholders ‘ duty is their duty to institutional investors. Institutional investors have a cardinal function in the corporate administration of companies in which they invest. This is a ground why stockholders have to esteem investors and their relationship with donees.
Harmonizing to the HGL Report, board systems could be one-tier or two-tier. It means that companies have a pick between these two systems. Structure and composing of the board reflect legal and institutional bequests. The HGL Report confirms that commanding the stockholder construction mitigates the jobs of executive monitoring in the EU. But, the same activity creates the jobs, bureau jobs, between minority stockholders and commanding stockholders, but besides jobs between the minority stockholders and directors. The point of vote government is the one-share/one ballot. This manner of vote is associated by HLG and European Commission as the stockholder democracy method. But, no 1 has clear proposals and ends of this government, peculiarly for listed companies in EU.
In some documents the comparing between corporate boards and regulating constructions in political contexts could be found. ( Birds, Boyle, 2004, p. 451 ) Political constructions frequently offer a bicameral system, but corporate boards in about all legal powers involve electoral bulk ( without a individually elected executive ) . But, the jurisprudence might hold different attack and allows the minority stockholders to be protected through a bicameral board construction ( one board elected on a one-share/one-vote footing, and the other elected on a oneshareholder/ one-vote footing, for illustration ) . This state of affairs based on bicameral construction is really rare. The chief ground for this is serious hazard of dead end and that the involvement of minority stockholders can be protected using the other rights, or possibly it is better to state by the other schemes. The distribution of voting rights affects the value of the house even under measure uping conditions. The one-share/one-vote regulation is non in any instance optimum. Particularly, this construct could be politically marketable, but on the other manus, its economic foundations are really questionable. Sing the coup d’etats HGL Report endorses the rule of proportionality between the risk-bearing capital and decision-making ( non one-to-one lucifer ) .
By and large talking, corporate constructions in the EU, peculiarly in unfastened companies, are characterized by different policy steps about the figure and internal organic structures ‘ construction. The first inquiry is which sort of board construction is required: one-tier or two grade. The 2nd inquiry could be the manner of decision-making in the company ‘s board. France is one of major legal powers that permit a two-tier board structures for unfastened companies. Actually, this state likewise provides the option to take a one or two-tier board. German Aktiengesellschaft that is required under the Aktiengesetz to hold a two- grade board, and a Netherlands company that, except for companies with statutory two-tier position, offers both possibilities: a one-tier board of direction that does non separate between executives and non-executives, and two-tier board with clearly distinguishable undertakings direction and supervising. Many Netherlands companies, peculiarly Euronext companies, are non required to hold a two-tier board, but about all have chosen to hold one. Netherlands jurisprudence provides that the applicable default regulation for big corporations will be the revised structuurecht model2. An exclusion is made for international retentions, subordinates, and joint ventures. International retentions are corporations commanding a group of companies of which more so 50 % of its employees are employed outside the Netherlands. They are exempted as foreign keeping companies. The end is to forestall the board construction of Internationals from being dominated by Dutch employee representatives. In subordinates and joint venture corporations there is a company ‘s supervisory board, which has to supervise in administration matters3. As in the Netherlands jurisprudence, Germany jurisprudence besides restricts the power of stockholders to elect the managers of big corporations in order to guarantee the representation of labourers ‘ involvements in the council chamber. In both instances the two boards are organized vertically instead than horizontally. There is an elective supervisory board. On the other manus, pull offing board has members who are the chief directors of the house. Therefore, the two boards are in a semi-hierarchical relationship. This does non intend that the direction board is powerless in two-tier systems. In the German jurisprudence on joint stock companies the general purpose of beef uping stockholders ‘ rights can be seen, but on the other manus there is the purpose of curtailing possibilities for maltreatment. It focuses on two points: the duty of members of the companies ‘ variety meats ( direction and supervisory board ) , every bit good as on the action for turning away against declarations of the general meeting of stockholders.
A strong and balanced board is the key for good corporate administration. The board should closely supervise managerial schemes in an attempt to bridge the spread between uninformed stockholders and to the full informed directors. It has already been mentioned that HLG Report recognizes two different board systems. The HLG offers companies a pick between these systems. Indeed, this moves a wider ‘issuer pick ‘ government in the EU. ( Lanno, Khachaturyan, 2004, p. 48 ) Shareholder constructions, specially commanding stockholders, extenuate the jobs of executive monitoring in the EU. A set of bureau jobs, which exists between minority stockholders and commanding stockholders on one manus and the minority proprietors and directors on the other, should be highlighted. These relationships include the function of non-executive managers and their monitoring in the countries of executive nomination and auditing, for illustration. Because of that function, non-executive managers should be independent in the bulk.
The Statute ( Art. 43-45 ) defines the regulations regulating one-tier boards. Sing SE ( it means European Company ) , this signifier of company is wholly free to elect its ain
2 The Role of Employees in the European Company, art. 3:2 ( 5 ) and 4:3 ( B )
3 Netherlands Civil Code, humanistic disciplines. 2:153-155, 162-164 and 2:263-265, 272-274
board construction. SE will hold one-tier board construction if it proves merely to be of involvement to a cross-border combination of equal spouses into an SE keeping corporation of a group of companies4. The Statute merely provides a minimal figure of regulations on one-tier boards, defined as an ‘administrative organ ‘ manage the SE. The OECD sets out rules on Board decision-making in more item every bit good as the ‘key map ‘ to be performed by the Board. Member States may supply that one or more managing managers will be responsible for the daily direction under the same conditions as those using to their national public corporations. The figure of managers should be defined by the SE ‘s internal Acts of the Apostless. Harmonizing to Directive on Employee Involvement, the Board could dwell of a least three members, including the employees. But, the experience of using it is different in pattern and frequently gives unexpected consequences. Following these facts, peculiar major corporate failures as Maxwell, the UK Cadbury Committee strongly recommended:
- a redefinition of basic responsibilities of the Board peculiarly with regard to audit and concern controls ;
- a clear differentiation between independent non-executive managers and executive managers in the composing of UK Boards ; and
- the assignment of cardinal map of the Board to be executive by commissions composed of independent non-executive managers.
A Statute defines a two-tier board construction in a instance when Member States do non modulate for a one-tier board system for their public corporations. This instance is known for Germany and the Netherlands Torahs. Both Torahs restrict the power of stockholders to elect the managers of big corporations in order to guarantee the representation of labour ‘s involvements in the boardroom5. ( Kraakman, Davies, and others, 2004, p. 36 ) The Netherlands presents a more utmost illustration. Dutch jurisprudence presently establishes a alleged antecedently mentioned, ‘structure government ‘ . Under this government, stockholders of medium to big companies do non elect their managers at all. In 2001 the Dutch Government ( the Social and Economic Committee, precisely ) recommended the replacing of the construction government with a board elected two-thirds by stockholders and one-third by employees. The same organic structure besides recommended that the stockholders meeting retain the power to disregard the full board. Those legal powers, German and the Netherlands, necessitate a two-tiered board, which include inclinations to sabotage board reactivity to stockholder involvements instead than to heighten it. But the ground for this consequence has to make with the composing of these boards, non with their construction. ( Kraakman, Davies, and others, 2004, p. 35 ) .
4. Structure OF THE BOARD
It seems self-contradictory that the HLG recognizes the jobs of commanding constructions, and at the same clip mandates a solution for non-controlling structures6. Controling 4 Under Gallic jurisprudence the societe anonyme ( SA ) is governed by the one-tier conseil disposal, unless the charter provides that it shall be governed by the two-tier directoire et conseil de surveillance ; Art. L.225-57 Code de commercialism 5 For illustration, the corporation jurisprudence in some of import legal powers ( UK and Delaware ) would look to let corporate managers to be selected by non-shareholders if the charter so needed 6 Legal powers make differences in the decision-making features of the board. The chief differences are between EU and US systems, in peculiar sing the nature of bureau jobs of commanding stockholders in the EU and dispersed stockholder constructions in the US stockholders through advancing their ain involvements do the same for minority. Harmonizing to Gilson & A ; Gordon, commanding stockholders can one-sidedly and disproportionally profit from their retentions in three ways: through operating, selling control and freeze-outs. ( Gilson, Gordon, 2003, p. 228 ) Besides there are legion suggestions about the size and construction of the board. “ Best pattern ” is one of the basic facts. The inquiry could be what size of the board is the best ( are the little boards better or non ) ; or, commission construction of the board, the frequence of board meeting, and the ratio of insiders to independent managers ( is a bulk of independent managers good or non ) .
Obviously, there is a important difference between EU and US legal powers. Comparisons of German and UK ( and US ) corporate administration are typically focused on the function of German Bankss as holders of equity bets in big houses. Large German houses take several different legal signifiers. Two types of houses can publish portions: AG a stock corporation, and the KGaA a partnership partially limited by portions. AG and KGaA can be listed on a stock market, but many of them are unlisted. Both signifiers are required to hold a supervisory board, dwelling of both stockholder and employee representatives. The two- tier board system provides a construction in which the determination whether a claim of the company against a member of either the direction board or the supervisory board can be taken by a disinterested organic structure. The supervisory board has the legal right to name and disregard the direction board. The construction of supervisory board depends on figure of employees, and on a size of company. In companies of over 2000 employees, for illustration, there are equal Numberss of stockholders and employee representatives ( compulsory board-level engagement for employees ) . On the other manus, in smaller companies there are twice every bit many representatives of stockholders. General meeting is a organic structure by which the stockholder representatives on the supervisory board are elected. They are elected by a simple bulk ballot of stockholder representatives. The supervisory board decides sing claims against members of the direction board. Besides, the direction board has decision-making power in regard of claims against members of the supervisory board7. On the other manus, stockholders are in certain fortunes entitled to initiative but non to command the averment of claims against members of the administrative organs8. The ‘German theoretical account ‘ of corporate administration with its concentrated shareholdings and strong presence of Bankss has been advocated as a theoretical account for both developing states and states in passage procedure. German Bankss are, possibly, one of the best illustrations of board construction. These establishments are able to act upon corporate administration through their places on the supervisory boards of big companies. The Bankss act in this instance as stockholder representatives. For illustration, in 22 of 25 listed companies, supervisory board is chaired by a banker, and besides in some unlisted companies the same state of affairs could be found. Bank supervisory board representation is besides concentrated among the listed companies, and what is interesting, in the custodies of the three large Bankss. Obviously, the Bankss are non in a place to rule supervisory boards numerically. Measures of bank con Harmonizing to German jurisprudence, 147 I and III Aktiengesetz, a bulk of stockholders and a minority of stockholders keeping at least 10 % of the nominal portion capital can at a stockholders ‘ meeting request the averment of claims against members of the direction or the supervisory boards ; or, a minority keeping at least 5 % of the nominal portion capital or the pro rata sum of 500000euros can originate the averment of claims against such members control of equity vote rights should explicate two different dependent variables. The first 1 is the proportion of entire supervisory board seats held by bank representatives. The 2nd step depends on establishment whether the president of the supervisory board is a banker or non.
Harmonizing to German jurisprudence general meeting is a more popular company ‘s organic structure than direction board. This is the ground why a batch of determinations are made by ballot at the stockholders ‘ general meeting, instead than by the direction board. Decisions such as additions or lessenings in equity capital, alterations in the company ‘s legislative acts, amalgamations, and similar, normally need a 75 % bulk. It means, on the other manus, that a stockholder with 25 % of the vote equity or over this per centum can barricade these determinations. This relation ( majority-minority ballot ) is characteristic of German company jurisprudence.
One-tier board is a usual signifier for companies in UK. The figure ( minimal and maximal ) of members of boards is frequently defined by articles. Actually, there is no legal making sing being a member of company ‘s board. Company Act ( 1985 ) requires that every company must hold a manager or managers. Under subdivision 294 of mentioned Act it is provided that a individual who has attained the age of 70 can non be appointed manager of a public company or a private company that is a subordinate of a public company. It means that a individual appointed or proposed to be appointed a manager of such a company at the clip when he has reached 70 must give notice of his age to the company.
The Company Act does non necessitate that a manager be a stockholder, but article may make it. As it was said about the board construction, in a similar manner the articles define that a figure of managers shall organize a quorum. A quorum could be prescribed. If it is non, a bulk of the board is required to go to, unless quorum can be established by the pattern of the board. The board, harmonizing to British regulations, has a double map, to take and to command the company. The Cadbury Committee defined the differentiation between executive and non-executive managers, as a portion of the corporate administration, at least for listed companies. This act recommended that at least 1/3 of the board should be non-executive managers, most of whom should be independent9. However, in big companies in UK, the cardinal direction of company is in the custodies of the board. The modern jurisprudence introduced the Combined Code on the composing of the board. This act, as a portion of soft jurisprudence, is focused on the function of the independent non-executive managers.
5. Regulation OF CORPORATE GOVERNANCE IN EU
Corporate administration systems play a cardinal function in economic public presentation because they provide mechanisms impacting the returns on investing by providers of external finance to houses. In the beginning of the new century the ordinance in the field of corporate jurisprudence has received really of import regulations: Council ordinance on the Statute for a European Company, and the Directive on Involvement of Employees. European Company is known as Societas Europaea ( SE ) . This signifier has an international position and it will be governed by back uping corporate jurisprudence of the Member State in which the SE has its ‘registered office and has a existent and uninterrupted nexus a Member ‘s economic system ‘ . The Statute allows single 9 In study 2003 it was highlighted that at least 1 of the board should be non-executive managers and 1 should wholly be independent confirms to follow either a one-tier or a two-tier board construction to regulate the legal power of corporation. The Fourteenth narration of the Statute ‘s preamble provinces: “ An SE must be expeditiously managed and decently supervised. It must be borne in head that there are at present in the Community two different systems for the disposal of public limited-liability companies. Although an SE should be allowed to take between the two systems, the several duties of those responsible for direction and those responsible for supervising should be clearly defined ” 10. After following the Statute, Member States may now take from a bill of fare of options sing the degree of engagement granted to its corporate officers at the board degree. Organizations have to be decently governed harmonizing to their aims, whether private concerns, non-profit organisations, public utilities, or even bureaus of the authorities. The High Level Group of Company Law Experts, in its Report on a Modern Regulatory Framework for Company Law in Europe, recommended that the European Commission chorus from presenting a full harmonisation or a European Corporate Governance Code. Most Member States have already had such codifications and some have late been revised ( UK Combined Code on Corporate Governance, the German Corporate Governance Code, the Netherlands Corporate Governance Code, for illustration ) . Corporate administration systems differ significantly. The German system has attracted considerable involvement because it is thought to turn to corporate administration jobs more efficaciously than the Anglo-American system. For illustration, in big houses in UK and US, ownership and control are normally separated: proprietors are diffuse and legion stockholders, but control is exerted by directors.
By and large talking, the ‘ideal ‘ theoretical account of corporate administration recommended for all signifiers of companies is far off. Successful direction understands managers qualified for this map and one of the possible ways of puting the board. At the same clip, it is of import to state that managers may be unfit ( the ground is, surely, their disqualification ) . For illustration, in 2001-2002 1,761 managers of insolvent companies were disqualified for unfitness. But, the job besides could be the effectivity in discouraging improper behavior and advancing good criterions of pattern in corporate administration. ( Hicks, 2001, p. 433 ) For some other writer, disqualification of managers has become one of the most important parts of company jurisprudence. ( Walters, 2002, p. 531-538 ) Sing the EU significances about the board and its tantrum or unfit members, the HGL is focused on the virtues of presenting a disqualification countenance for non-compliance with revelation demands.
EU adopted the Action Plan on “ Modernizing Company Law and Enhancing Corporate Governance in the EU ” . The Action Plan has a deep influence on current company jurisprudence and reforms in this country in the Members States. Germany is traveling to do a particular act on corporate unity and on overhauling the right of turning away and the corporate administration codification, which is non an imperative jurisprudence. By and large, the focal point should be on duty of members of companies ‘ organic structures, peculiar, direction and supervisory boards. These individuals have to exert the due diligence of a prudent and painstaking individual in charge of a concern and insofar bear the load of cogent evidence. Harmonizing to German jurisprudence, they are apt already in the instance of ordinary negligence11. But, in spite the best international criterions applied as a base of legal base, experience and pattern instances show that rightful claims asserted by action in tribunal are really rarely. Actually, the facts could be defined as followers: enabling minority stockholders to efficaciously set claims through, presenting a particular judicial admittance process in order to forestall opprobrious legal action, statutory finding of demands for insurance against liability for entrepreneurial determination devising, in order to protect concern enterprise.
In order to advance the old ends German legislator defines a set of interesting new commissariats. In future, the rule of internal liability shall be retained. It means that under the bing jurisprudence the members of direction and of supervisory board are non straight apt to the stockholders, nor will a system of liability to stockholders be introduced by new legal solutions. Obviously, merely the company and non the single stockholder may have compensation for amendss ( action pro socio ) .
Stockholders may action directors or managers merely when their portion, separately or combined with those of other stockholders, reaches certain threshold values. These values will be dramatically lowered in future legal proposals12.
Company jurisprudence should hold an of import function in advancing economic integrating. European Company Statute was adopted in 2001. The Action Plan on “ Modernizing Company Law and Enhancing Corporate Governance in the EU ” which contains non less than 24 steps can be taken into history. The undertaking of overhauling company jurisprudence and heightening the quality of corporate administration poses itself in all industrial states. In order to ease communicating between stockholders, German legislator intends to make a stockholders ‘ forum. Creation of a stockholders ‘ forum could enable stockholders every bit good as associations of stockholders to interchange information. Besides, it should enable unifying these individuals in the exercising of their rights independently from their whereabouts. The stockholders ‘ forum is suited for organizing the exercising of voting rights. In add-on, the stockholders will be able to carry through a quorum ; it means to run with more strength.
In aforesaid new company ‘s organic structure the stockholders and company will non be allowed to plead their instance in the forum itself but print merely the petition. All steps should supply preventing of maltreatment. The highlighting thought is to set up filters through which merely those applications that have a realistic opportunity of success base on balls. For illustration, the action for amendss could be admitted if the stockholders who bring the action have acquired the portions before obtaining cognition of the breach of responsibility.
Obviously, a characteristic frequently claimed to separate the German from the Anglo-American system of corporate administration is the absence of hostile alterations in ownership in the former and their presence in the latter. In both systems, the chief function of board should be better minority stockholders protection, peculiarly when the new commanding stockholder is another company. Banks play an of import function in helping companies to do hostile acquisitions of ownership bets. The standard position of Bankss in the German corporate administration system is that of their close connexions to companies, through control of equity vote rights and supervisory board representation.
12 At the minute, harmonizing to German jurisprudence, the stockholders are non allowed, in the instance dealt with here, to action a company director manager in their ain name. Because of that, it is necessary to name a particular representative. The new act defines the stockholders will at least be entitled to move in their ain name