Grant Thornton corporate governance recommendations for the European Union

Grant Thornton supports Commissioner Barnier and the European Commission in their efforts to improve the corporate governance framework in the EU, to ensure sustainable growth and to build a stronger international financial system.   Greater transparency and surety to the users of financial reporting are goals we share.   

As one of the leading global accounting organisations with member firm operations in 100 countries, Grant Thornton International believes that the following issues should be addressed in any EU wide action on corporate governance:

Any EU-wide corporate governance code should be based upon the “comply or explain” framework to reflect the difference in maturity of markets and companies across the EU.  This system retains a degree of flexibility that facilitates implementation in different countries and different companies, whereas a mandatory legal framework would force one set of rules on companies in all sectors of all sizes and in all countries.  

In order for the comply or explain mechanism to be sufficiently rigorous, we believe that monitoring bodies should be authorised to conduct an external check on compliance with corporate governance codes and the quality of explanations if a company elects not to comply. Sanctions should also be available. 

Disclosure of remuneration policy, the annual remuneration report and individual remuneration of executive and non-executive directors (and executive management) should be mandatory within the “comply or explain” framework. 

Greater shareholder involvement in establishing remuneration policy is to be encouraged. It should be mandatory within the “comply or explain” framework for there to be a vote by the shareholders on the remuneration policy and report. 

Listed companies should not only be encouraged – but should also be required within the “comply or explain” framework – to conduct a triennial external evaluation of performance by the board, its committees and individual directors. If a company chooses not to do this, it should be required to explain why not. EU corporate governance measures should apply to all listed companies, regardless of size. Further, there should be a single corporate governance code applicable to all companies, whether unlisted or listed.

Within the “comply or explain” framework, we believe that companies should be required to divide the functions and duties of the chairperson of the board and the chief executive officer. If a company does not comply with this requirement, it should explain in detail why not and state what it is doing in the alternative. 

While the green paper appropriately addresses the relationship between directors and shareholders, it does not address disclosure, which is how information is passed from the company – including the full board of directors, the audit committee and management – and the independent auditors, to shareholders. Disclosures are highly relevant to good corporate governance.  

We believe that the auditor can do more than just report on the company’s historical financial statements and should provide better communication to investors.  Auditors could give a degree of assurance on risk data and could provide investors with assurance on increased narrative disclosures in audit committee reports and on non financial information. 

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Nelson Petrosyan, Partner and Director

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