Corporate Governance Standards i n the European Union

1. Corporate Governance Standards in the European Union

2. About EuropeanIssuers • EU trade association - we aim: • To represent to EU policymakers the common interests of EU quoted companies as users of financial markets • To ensure that the EU creates a regulatory environment in which these companies can raise market capital and deliver growth

3. What will speak about • Emerging equity gap & changes global economy • Kay Report UK equity markets and implications • EU corporate governance - definition, content, other relevant areas • Legislative & industry developments   • What are we trying to achieve?

4. The emerging equity gap • McKinsey Report - Growth and Stability in the new investor landscape • Share of equity in global financial markets could fall from 28% to 22% by 2020 • Costs of equity will rise while banks have rising needs for equity (and implicit guarantees)  • Ageing in Europe means increased need for savings and investments but dislike of risk • Governments likely to push risk of savings onto companies and individual savers

5. The emerging equity gap • OECD reports: • The world is producing only one third of the IPOs as 20 years ago (over 2000 in early 1990s to less than 750 in 2012) • US markets have experienced 15 years of consecutive listing losses • EU IPOs are also badly hit. Over 2008-2012, only 6 out of the top 26 IPO markets were in the EU  • Asian markets produced 7 times as many IPOs in the same period

6. Kay Review of UK Equity Markets • "Equity markets today should primarily be seen as a means of getting money out of companies rather than putting it in" • New equity issuance has been negative over the last decade and obtaining a listing is no longer a natural step in the development of a new business  • smaller, mostly newer businesses have found it particularly dıfficult to access funding since the financial crisis - public offerings are rarely the exit route of choice for investors (6% IPOs v 50% trade sales)  

7. Kay Review of UK Equity Markets • Costs of equity are high by historical standards and in absolute terms • Regulators tend to measure the wrong things e.g. the breakdown of costs of trading an individual share but not the costs of buying and holding the same share   • Length and complexity of the chain means more complexity and less understanding • Active ownership is discouraged by current market structures

8. Relevant implications • Securities markets are expensive • They do not work well for smaller companies on whom Europe depends for growth and jobs • Some standardisation of documentation may help reduce costs, if done well   • Beware standardisation at highest common denominator as benefits tend to flow to largest companies • EU small-cap funds on market invest in companies under c.€3bn

9. Corporate Governance EU • System by which companies are directed and controlled • Role and responsibilities of board and management • Rights and responsibilities of shareholders • Interests of other stakeholders • Ethics • Disclosure / transparency

10. EU corporate governance • Company Law & Corporate Governance Action Plan mid 2000s • Shareholder rights directive implemented 2009 • Financial crisis 2009 • Green Paper corporate governance of banks and other financial institutions • Green Paper non-financial companies • Action Plan December 2012

11. EU Action Plan 2012 • Revision shareholder rights directive • Related party transactions, acting in concert • Comply or explain recommendation • Proxy advisers code of conduct   • Boardroom diversity • Non-financial information   • Company law codification

12. Not directly in Action Plan • Securities law treated separately from company law and shareholder rights • Securities law legislation • Industry General Meeting and Corporate Actions standards • Shareholder identification • Green Paper long-term financing of EU economy  

13. Cross-border voting • Long chain of intermediaries • Company law, securities law, industry standards • Clarify different expectations for who does what by when: • Issuers • CSDs & exchanges • Custodian & sub-custodian banks • Investors Standardised information along the investment chain

14. Enable communication • Implement shareholder rights • Help issuer needs • Ensure information about meeting sent down chain • Ensure entitlement communicated along chain • Notification of attendance and votes sent back up chain   • Shareholders know whether and how votes are cast on their behalf • Dialogue between companies and investors  - key goal of EU corporate governance

15. Need for clearer overview • Policymakers too buried in details - lack strategic overview how all fits together and what we want markets to do • Clear strategy / direction, not shopping list • e.g. Europe needs to move from being economy 70% based on bank finance to 50% bank / 50% market finance by 2020 / 2025

16. What we need • Then need provide environment for debt and equity finance to flourish: • costs target eg listing costs 15% too high   • standardised documentation, • different market segments with different standards of corporate governance for newly listed companies, etc • additional rules on securities law

17. What lessons can others learn • Look at problems trying to fix as to whether applicable to other markets - don't just copy blindly   • Look at whether implementation effective, not just legislation on paper • Don't try to harmonise corporate governance rules for boards • Think about financial markets as means of communication and whether securities law can help by clarifying responsibilities cross-border    

18. Further information • www.europeanissuers.eu • EU industry standards http://www.ebf-fbe.eu/index.php?page=market_standards