Corporate governance issues: United States and the European Union.

This Article has demonstrated that the European Commission's Action Plan to modernize company law and enhance corporate governance in the European Union apparently has broadly identified the same problems and goals as the United States. In responding to perceived market failure (as depicted by Enron and its progeny), to generate dependable corporate governance, the United States seemingly replaced its traditional reliance on state law, self-regulatory organization rules, and best practice codes with government-mandated uniform requirements (a one-size-fits-all law), (180) with the hope of dealing with and preventing similar corporate governance failure. As a result, the United States moved towards greater regulation (while Europe has been traditionally heavily-regulated domestically) and now is moving away from prescriptive, national legislation in corporate governance and attempting to embrace a more uniform law. Unfortunately, this adoption of a uniform approach to corporate governance has been hampered by inherent factors, such as different corporate governance structures among member states. For example, the European Commission, in its Action Plan, acknowledged the virtual impossibility of creating a single E.U. corporate governance code, and instead opted to rely on disclosure as a tool to promote good corporate governance; and on a substantive level, the E.U. sought only to adopt a common approach covering a few essential rules. (181)

In other words, as with SOX (which required compliance or, failing this, disclosure as to why a corporation is unable to so comply), the E.U. approach to corporate governance is one of self-regulation by corporate governance codes; public companies then reveal whether or not they are in compliance. (182) As such, companies are expected to make an annual statement disclosing compliance or explaining their failures to comply with national codes of corporate conduct.

Does this mean corporate governance systems between the United States and the European Union are following converging trends? If so, one would expect this to be even more obvious with the extraterritorial application of SOX to foreign companies registered on the U.S. stock markets. (183)

It is worth noting that the E.U. initiatives (at various stages of adoption and implementation) also have the potential to create new, significant regulatory obligations for both E.U. and non-E.U, companies, such as the United States.

However, an expected convergence is not necessarily the case within Europe, where the diversity of firm structures, the fragmentation of political and economic power, the role of employees in corporate governance in some states, the primacy of shareholder interests, the rights of minority shareholders, board structures, and relationships between management and supervisory body all differ so greatly and consequentially that no common system is apparent or likely to emerge. (184) Logically, it follows without uniform corporate governance in Europe, a substantive convergence between the United States and Europe is unlikely, (185) leaving the somewhat amicable option of recognizing each other's systems as the best way forward. Mutual recognition is ideal, as no system is assumed to be optimal; each is accepted as equally valid, subject to its compliance with certain core principles. (186)

Overall, therefore, the spate of new legislation and regulation on both sides of the Atlantic underscores the need for U.S. and European business communities to work together for their common good. Cooperation, therefore, should no longer be a matter of courtesy, but rather, obligation. This does not mean the business communities will have to adopt an identical approach; instead, they should agree to make their different approaches mutually consistent and effective in achieving the same goals. A very good example of this approach is the converging of International Accounting Standards and U.S. Generally Accepted Accounting Principles (GAAP). (187)

Regardless of which side of the Atlantic one is referring to, it is undoubtedly true corporate governance has drawn tremendous attention in light of a growing consensus that an effective corporate governance system may be a crucial precondition for a thriving and sustainable market economy.

(1.) The definition of corporate governance per some European members' states is worth noting. See COMM. ON FIN. ASPECTS OF CORP. GOVERNANCE, REPORT OF THE COMMITTEE ON FINANCIAL ASPECTS OF CORPORATE GOVERNANCE 14 (1992) ("Corporate governance is the system by which companies are directed and controlled."); BERLIN INITIATIVE GROUP, GERMAN CODE OF CORPORATE GOVERNANCE 4 (2000) ("Corporate governance describes the legal and factual regulatory framework for managing and supervising a company."); WEIL, GOTSHAL & MANGES LLP, EUR. COMM'N, COMPARATIVE STUDY OF CORPORATE GOVERNANCE CODES RELEVANT TO THE EUROPEAN UNION AND ITS MEMBER STATES, FINAL REPORT & ANNEXES I-III 28 tbl.1 (2002), available at http://ec.europa.eu/internal_market/company/docs/corpgov/ corp-gov-codes-rptpartl_en.pdf [hereinafter COMPARATIVE STUDY] ("Corporate Governance is the goals, according to which a company is managed, and the major principles and frameworks...." (quoting NORBY COMM., CORP. GOVERNANCE IN DENMARK RECOMMENDATIONS FOR GOOD CORPORATE GOVERNANCE IN DENMARK 1 (2001), available at http://www.ecgi.org/codes/documents/haa_kap05-01uk.pdf)); COMM'N OF THE EUR. CMTYS., COMMUNICATION FROM THE COMMISSION TO THE COUNCIL AND THE EUROPEAN PARLIAMENT: MODERNISING COMPANY LAW AND ENHANCING CORPORATE GOVERNANCE IN THE EUROPEAN UNION--A PLAN TO MOVE FORWARD 10 n.10 (2003), available at http://eur-lex.europa.eu/LexUriServ/site/en/com/2003/com2003_0284en01.pdf [hereinafter COMM'N OF THE EUR. CMTYS] (Principles issued by the Organization for Economic Co-operation and Development Governance (OECD) of 1999, (an ad-hoc task force on corporate governance), also known as the OECD Principles, describe corporate governance as: "involv[ing] a set of relationships between a company's management, its board, its shareholders and other stakeholders. Corporate governance also provides the structure through which the objectives of the company are set, and the means of attaining those objectives and monitoring performance are determined.").

(2.) George L. Bustin et al., 2003 Annual Review of European Union Legal Developments, 38 INT'L LAW. 639, 639 (2004); Romania and Bulgaria join the European Union, INT'L HERALD TRIB. (EUR.), Dec. 31, 2006, available at http://www.iht.com/articles/ap/2006/12/31/europe/ EU_GEN_Romania_Bulgaria_EU.php (listing Romania and Bulgaria as the two most recent states to join the European Union, pushing the total to twentyseven). There have always been fundamental differences between Europe and the United States over the conduct of international affairs that are not likely to diminish anytime soon, but "the clashes reflect inevitable tensions between a United States that feels its sole-superpower status gives it a broad entitlement to get its way in world affairs and a uniting Europe that is struggling to become a more influential political and economic actor on the global scene." Reginald Dale, European Union, Properly Construed, POL'Y REV., Dec. 2003-Jan. 2004, at 39. Perhaps this is why the Europeans think they are on the ascent in world affairs, that is, the European Union will "restore Europe to its rightful place as a continental-scale economic and political grouping more or less on a par with the United States." Id. at 41.

(3.) Bustin et al., supra note 2, at 647.

(4.) See COMM'N OF THE EUR. CMTYS., supra note 1, at 4, 8, 12, 16-17, 20-21; see Bustin et al., supra note 2 (discussing a recent review of corporate developments in the European Union). This group of High Level Company Law Experts was organized by the European Commission in 2001 "to make recommendations on a modern regulatory framework in the European Union for company law." EUR. COMM'N, REPORT OF THE HIGH LEVEL GROUP OF COMPANY LAW EXPERTS ON A MODERN REGULATORY FRAMEWORK FOR COMPANY LAW IN EUROPE 1 (2002). [hereinafter EUR. COMM'N, REPORT] The group published this consultative document on the issues specified in their mandate. Id. at 43. Four issues were discussed concerning corporate governance in section 3.1 of the consultative document: 1) "[b]etter information for shareholders and creditors, in particular better disclosure of corporate governance structures and practices, including remuneration of board members;" 2) "[s]trengthening shareholders' rights and minority protection, in particular supplementing the right to vote by special investigation procedures;" 3) "[s]trengthening the duties of the board, in particular the accountability of directors where the company becomes insolvent;" and 4) "[n]eed for a European corporate governance code or coordination of national codes in order to stimulate development of best practice and convergence." Id.

"In a direct reaction to the Enron case, the Commission and the ECOFIN [Economic and Financial Affairs Subcouncil of the Council for the European Union] have agreed to extend the mandate of the Group to review 'issues related to best practices in corporate governance and auditing, in particular: [] the role of non-executive and supervisory directors; [] remuneration of management; [] responsibility of management for financial statements; [] and auditing practices."' Id. (footnote omitted).