(1)

In a Communication adopted on 21 May 2003, the Commission presented its Action Plan ‘Modernising Company Law and Enhancing Corporate Governance in the European Union — A Plan to Move Forward’ (1). The main objectives of the Action Plan are to strengthen shareholders’ rights and protection for employees, creditors and the other parties with which companies deal, while adapting company law and corporate governance rules appropriately for different categories of company, and to foster the efficiency and competitiveness of businesses, with special attention to some specific cross-border issues.

(2)

In its Resolution of 21 April 2004, the European Parliament welcomed the Action Plan and expressed strong support for most of the initiatives announced. The European Parliament called on the Commission to propose rules to eliminate and prevent conflicts of interest, and stressed in particular the need for listed companies to have an audit committee, whose functions should include overseeing the external auditor’s independence, objectivity and effectiveness.

(3)

Non-executive or supervisory directors are recruited by companies for a variety of purposes. Of particular importance is their role in overseeing executive or managing directors and dealing with situations involving conflicts of interests. It is vital to foster that role in order to restore confidence in financial markets. Member States should therefore be invited to adopt measures which would be applicable to listed companies, defined as companies whose securities are admitted to trading on a regulated market in the Community. When implementing this Recommendation, Member States should consider the specificities of collective investment undertakings of the corporate type and prevent the various types of collective investment undertaking from being subjected, unnecessarily, to unequal treatment. As regards collective investment undertakings as defined in Council Directive 85/611/EEC of 20 December 1985 on the coordination of laws, regulations and administrative provisions relating to undertakings for collective investment in transferable securities (UCITS) (2), that Directive already provides for a set of specific governance mechanisms. However, in order to prevent the unnecessarily unequal treatment of those collective investment undertakings of the corporate type not subject to harmonisation at Community level, Member States should take into account whether and to what extent these non-harmonised collective investment undertakings are subject to equivalent governance mechanisms.

(4)

In view of the complexity of many of the issues at stake, the adoption of detailed binding rules is not necessarily the most desirable and efficient way of achieving the objectives pursued. Many corporate governance codes adopted in Member States tend to rely on disclosure to encourage compliance, based on the ‘comply or explain’ approach: companies are invited to disclose whether they comply with the code and to explain any material departures from it. This approach enables companies to reflect sector- and enterprise-specific requirements, and the markets to assess the explanations and justifications provided. With a view to fostering the role of non-executive or supervisory directors, it is therefore appropriate that all Member States be invited to take the steps necessary to introduce at national level a set of provisions based on the principles set out in this Recommendation, to be used by listed companies either on the basis of the ‘comply or explain’ approach or pursuant to legislation.

(5)

If Member States decide to use the ‘comply or explain’ approach (whereby companies are required to explain their practices by reference to a set of designated best practice recommendations), they should be free to do so on the basis of relevant recommendations developed by market participants.

(6)

Any measures adopted by Member States in line with this Recommendation should aim fundamentally at improving the corporate governance of listed companies. Since that objective is relevant to the protection of investors, actual or potential, in all companies listed in the Community, whether or not they are incorporated in one of the Member States, the measures should also cover companies incorporated in third countries but listed in the Community.

(7)

The presence of independent representatives on the board, capable of challenging the decisions of management, is widely considered as a means of protecting the interests of shareholders and other stakeholders. In companies with a dispersed ownership, the primary concern is how to make managers accountable to weak shareholders. In companies with controlling shareholders, the focus is more on how to make sure that the company will be run in a way that sufficiently takes into account the interests of minority shareholders. Ensuring adequate protection for third parties is relevant in both cases. Whatever the formal board structure of a company, the management function should therefore be subject to an effective and sufficiently independent supervisory function. Independence should be understood as the absence of any material conflict of interest; in this context, proper attention should be paid namely to any threats which might arise from the fact that a representative on the board has close ties with a competitor of the company.

(8)

In order to ensure that the management function will be submitted to an effective and sufficiently independent supervisory function, the (supervisory) board should comprise a sufficient number of committed non-executive or supervisory directors, who play no role in the management of the company or its group and who are independent in that they are free of any material conflict of interest. In view of the different legal systems existing in Member States, the proportion of (supervisory) board members to be made up of independent directors should not be defined precisely at Community level.

(9)

The supervisory role of non-executive or supervisory directors is commonly perceived as crucial in three areas, where the potential for conflict of interest of management is particularly high, especially when such matters are not a direct responsibility for shareholders: nomination of directors, remuneration of directors, and audit. It is therefore appropriate to foster the role of non-executive or supervisory directors in these areas and to encourage the creation within the (supervisory) board of committees responsible respectively for nomination, remuneration and audit.

(10)

In principle, and without prejudice to the powers of the general meeting, only the (supervisory) board as a whole has statutory decision-making authority and, as a collegiate body, is collectively accountable for the performance of its duties. The (supervisory) board has the power to determine the number and structure of the committees which it deems to be appropriate to facilitate its own work, but these committees are in principle not to be a substitute for the (supervisory) board itself. As a general rule, therefore, the nomination, remuneration and audit committees should make recommendations aimed at preparing the decisions to be taken by the (supervisory) board. However, the (supervisory) board should not be precluded from delegating part of its decision-making powers to committees when it considers it appropriate and when this is permissible under national law, even though the (supervisory) board remains fully responsible for the decisions taken in its field of competence.

(11)

Since the identification of candidates to fill unitary or dual board vacancies raises issues relevant to the selection of non-executive or supervisory directors who are to oversee management or relevant to the continuation in office of management, the nomination committee should be composed mainly of independent non-executive or supervisory directors. That would leave room on the nomination committee for non-executive or supervisory directors who do not meet the independence criteria. It would also leave room for executive/managing directors (in companies where the nomination committee is created within the unitary board and as long as executive/managing directors do not form a majority on that committee).

(12)

Given the different approaches in the Member States with respect to the bodies responsible for appointing and removing directors, the role of a nomination committee created within the (supervisory) board should essentially be to make sure that, where the (supervisory) board plays a role in the appointment and removal process (either through a power to table proposals or to make decisions, as defined by national law), this role is performed in as objective and professional a way as possible. The nomination committee should therefore essentially make recommendations to the (supervisory) board with respect to the appointment and removal of directors by the body competent under national company law.

(13)

In the area of remuneration, corporate governance codes adopted in Member States tend to focus primarily on the remuneration of executive or managing directors, since the potential for abuse and conflicts of interest is essentially located there. Many codes also recognise that some consideration should be given at board level to the remuneration policy for senior management. Finally, the issue of stock options is granted special attention. Given the different approaches in the Member States with respect to the bodies responsible for setting the remuneration of directors, the role of a remuneration committee created within the (supervisory) board should essentially be to make sure that, where the (supervisory) board plays a role in the remuneration setting process (either through a power to table proposals or to make decisions, as defined by national law), this role is performed in as objective and professional a way as possible. The remuneration committee should therefore essentially make recommendations to the (supervisory) board with respect to those remuneration issues for decision by the body competent under national company law.

(14)

Two key responsibilities of the (supervisory) board seem to ensure that the financial reports and other related information disseminated by the company present an accurate and complete picture of the company’s position and to monitor the procedures established for the evaluation and management of risks. In this context, most corporate governance codes assign to the audit committee an essential role in assisting the (supervisory) board to fulfil these duties. In some Member States, such responsibilities are attributed, wholly or partly, to corporate bodies external to the (supervisory) board. It is therefore appropriate to provide that an audit committee created within the (supervisory) board should, as a general rule, make recommendations to the (supervisory) board with respect to those audit issues, and that such functions may be performed by other structures — external to the (supervisory) board — which would be equally effective.

(15)

In order for non-executive or supervisory directors to play an effective role, they should have the right background and sufficient time for the job. In addition, a sufficient number of them should meet appropriate independence criteria. Before the appointment of non-executive or supervisory directors, adequate information should be provided on these issues and that information should be updated with sufficient frequency.

(16)

With respect to the qualifications of directors, most corporate governance codes insist on the need to have qualified individuals on the board, but at the same time recognise that the definition of what constitutes proper qualifications should be left to the company itself, because such qualifications will depend, inter alia, on its activities, size and environment and because they should be met by the board as a whole. There is nevertheless one issue which usually raises particular concern, namely the need for particular competence in the audit committee where some specific knowledge is deemed to be indispensable. The (supervisory) board should therefore determine the desired composition of the audit committee and evaluate it periodically, devoting specific attention to the experience necessary in that committee.

(17)

With respect to the commitment of directors, most corporate governance codes seek to make sure that directors devote sufficient time to their duties. Some of these codes limit the number of directorships that may be held in other companies: the positions of chairman or of executive or managing director are usually recognised as more demanding than those of non-executive or supervisory director, but the precise numbers of other directorships acceptable vary widely. However, the involvement required from a director may vary widely depending on the company and its environment; in such a situation, each director should undertake to strike a proper balance between his various engagements.

(18)

Generally, corporate governance codes adopted in the Member States recognise the need for a significant proportion of non-executive or supervisory directors to be independent, that is to say, free of any material conflict of interest. Independence is most often understood as the absence of close ties with management, controlling shareholders or the company itself. In the absence of any common understanding of what independence precisely entails, it is appropriate to provide a general statement describing what the general objective is. Provision should also be made to cover a (non-exhaustive) number of situations, involving the relationships or circumstances usually recognised as likely to generate a material conflict of interest, which Member States must duly consider when introducing at national level the criteria to be used by the (supervisory) board. The determination of what constitutes independence should principally be an issue for the (supervisory) board itself to determine. When the (supervisory) board applies the independence criteria, it should focus on substance rather than form.

(19)

In view of the importance attaching to the role of non-executive or supervisory directors with respect to the restoration of confidence, and more generally to the development of sound corporate governance practices, the steps taken for the implementation of this Recommendation in Member States should be monitored closely,