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August 10, 2011
Sustainable Investors Respond to European Corporate Governance Report
    by Robert Kropp

Eurosif and UKSIF submit responses to the European Commission's green paper of corporate governance, calling for measures to improve board oversight, corporate reporting, and shareowner engagement.

Earlier this year, the European Commission (EC) published a green paper entitled The EU (European Union) corporate governance framework, in which it sought "to assess the effectiveness of the current corporate governance framework for European companies."

The green paper focused on three elements of corporate governance, which, according to EC, "are at the heart of good corporate governance:" boards of directors, shareowners, and corporate reporting.

"Boards of directors have a vital part to play in the development of responsible companies," the green paper stated. "Non-executive board members should be selected on the basis of a broad set of criteria, i.e. merit, professional qualifications, experience, the personal qualities of the candidate, independence and diversity."

The issue of diversity, in particular of gender, seems an especially important issue, as at present only 12% of the seats on boards of listed companies in Europe are occupied by women. The business case for increasing the number of women on boards includes findings that doing so can improve corporate performance, and the green paper notes that several member states have enacted legislation to do so.

report published in March by the US-based GovernanceMetrics International (GMI) found that a number of national legislatures and regulatory bodies have implemented mandatory diversity quotas in recent years.

In France, according to the report, "Legislation will impose a 20% quota within 3 years and 40% within 6 years." In Italy, a bill passed in 2010 by one house of Italy's Parliament "would require the boards at public and state-owned companies to be at least 1/3 female," the report continued. Legislation establishing quotas have been passed in Spain and the Netherlands as well.

In the US, incidentally, where the representation of women on boards has stagnated in recent years and the likelihood of legislation mandating quotas is nil,
Pax World Management enacted a proxy voting policy to oppose all-male slates of directors. In 2011, Pax World withheld votes from, or voted against, 264 director slates for insufficient gender diversity.

Citing the multitude of risks, both external and internal, faced by companies, EC also stated, "It is…crucial that the board ensures a proper oversight of the risk management processes."

Regarding the role of shareowners in effective corporate engagement, EC referred to an earlier green paper, stating, "The June 2010 Green Paper found that a lack of appropriate shareholder interest in holding financial institutions' management accountable contributed to poor management accountability and may have facilitated excessive risk taking in financial institutions."

One way to increase investor awareness and improve shareowner engagement, EC suggested, would be a requirement that institutional investors publish their proxy voting policies and records. Other steps considered by the green paper include a refocusing of markets on long-term investment horizons, facilitating shareowner cooperation in corporate engagement efforts, and easing burdens to cross-border proxy voting.

Regarding corporate reporting, the EU has had in place since 2003 a policy of "comply or explain" for reporting on environmental, social, and corporate governance (ESG) issues. However, the green paper reported, "the overall quality of companies’ corporate governance statements when departing from a corporate governance code recommendation is unsatisfactory."

"It would indeed seem appropriate," the paper continued, "To require that companies not only disclose the reasons for departure from a given recommendation, but also give a detailed description of the solution applied instead."

Interested parties were invited by EC to submit comments on the green paper through late July, and the continent's two major sustainable investment forums weighed in with their recommendations.

In its
response, the European Sustainable Investment Forum (Eurosif) offered detailed support for a clear separation of the Chairman of the Board and the Chief Executive Officer, policies to ensure board diversity, and increased transparency in the compensation paid to directors.

Also, Eurosif argued for measures to curb short-termism in the markets, evaluations of assert managers by institutional investors that account for ESG factors, and full implementation of the
Sharehol der Rights Directive.

Eurosif called as well for measures to ensure that companies departing from corporate governance code recommendations provide sufficiently detailed information on why they chose to do so.

UKSIF – the sustainable investment and finance association also submitted a response to EC's green paper, stating, "Effective European regulation must enable and encourage sustainable capital markets and long-term responsible investment and ownership."

"In general," the response continued, "UKSIF believes that principles-based approaches, backed up by strong industry and government commitment, can deliver deeper change than more prescriptive rules which may be insufficiently flexible, have unforeseen consequences and encourage a focus on compliance rather than effectiveness."

However, UKSIF added, when "comply or explain" measure fail, "a move to compulsion may be needed."

As a founding member of Eurosif, UKSIF endorsed its response, and chose to address specific questions relating to board diversity, risk management, and short-termism in the markets.


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