A Theory of Corporate Governance for the EC: Assessing the economic and legal peculiarities as starting point for policy making

Abstract: This thesis provides a critical overview of the development of corporate governance practices in the EC. It seeks to determine if the Community should follow the US response to corporate governance fallouts or instead promote its own practices, taking into consideration the legal and economic backgrounds of the Member States. The analysis is supported with economic data, practical and doctrinal views and two important cases: the Enron case of the US, and the Parmalat case of Europe. To illustrate the argumentation, the paper is divided into four sections. The first section presents a general brief of the American and European responses to recent corporate governance scandals. It highlights that whereas at the national level of the EC Member States there are increasing efforts to establish a coherent set of corporate governance practices&semic at the Community level the development has been rather muted. The second section departs from two interdependent perspectives: the economic and the legal. The economic perspective shows that contrary to the US, the EC is rooted in a large-control system characterized by (i) high levels of shareholding concentration&semic (ii) close relationship between the major shareholders and the directors of the board and managers&semic (iii) implicit contracting between the directors of the board and the managers&semic (iv) illiquid capital markets, and (v) important role of the banks in corporate governance. The legal perspective shows that the degree of accountability and enforceability of governance codes is different between the US and the EC systems. This part of the paper concludes that different economic and legal backgrounds imply different governance problems and therefore, different rules. The third section of the paper reviews the different governance mechanisms that can be implemented to deal with governance fallouts. It stresses that the traditional internal and external governance control mechanisms are not sufficient to deal with governance problems in large-control economies (such as that of most Member States). Instead the study shows that the most efficient mechanism to deal with governance problems is the establishment of general governance standards at the EC level. This section of the paper is complemented by an analysis of the competences of the EC institutions in the area of corporate governance. The analysis concludes that a more dynamic participation of the EC institutions would not contravene the provisions of the EC Treaty, particularly the principle of subsidiarity. By running the ''better achievement test'' it is shown that a stronger involvement of the EC institutions would be more efficient to protect the internal market, than isolated efforts of the Member States. The last section of the paper analyzes the measures issued so far by the Community. It highlights that while some of the measures do not reflect its true needs&semic other measures are well oriented but lack the proper strength. The study emphasizes however, that the proposals for the modification of the Accounting directives and the Statute of Societas Europeae, represent good examples of how future legislation should be passed in the area of corporate governance.