1. 27th May 2005 Enforcing Corporate Governance Codes Eddy WYMEERSCH Prof. Univ. Ghent – ECGI Fellow Chairman of the Banking, Finance and Insurance Commission

2. 2 27th May 2005 Enforcing Corporate Governance Codes Whether and How Corporate Governance Codes are enforced – or have to be - is a real issue  It is sufficient today?  Who is doing the monitoring?  What can be monitored: difference between formal requirements and substance?

3. 3 27th May 2005 Enforcing Corporate Governance Codes  Who is doing the monitoring?  What are the instruments for monitoring Disclosure “name and shame” Fines? Delisting? Company Law Sanctions?

4. 4 27th May 2005 Three cases  Voluntary code: self regulation: most European Jurisdictions  Voluntary Codes with legal backing: Germany, Netherlands; comparison U.K.  Legally Mandated Rules: SOX, others?  In most states: mix of the three  Increasing transfer from Self Regulation to State Regulation Inappropriate for internal functioning of the board

5. 5 27th May 2005 Case 1 Voluntary Code  No explicit legal basis - Not legally binding Primary responsibility of the Board  Origin of the Code: St X’s, Business groups, Academics, Experts  Market Pressure Effect on prices: controversial Monitoring by AGM, Proxy services, Specialized Ratings, Media, Public Opinion,  Is it effective? In case of “scandal”: effective Not if governance is unsatisfactory, but formally largely compliant

6. 6 27th May 2005 Case 1 Voluntary Code (2) How improve?  Private monitoring board: see Dutch Frijns Commission  Public monitoring: Securities Supervisor? Difficult: public law to enforce private rules Conflict with existing powers  What is to be monitored? Substance or Formal requirement  How to monitor: disclosure? Fines? More?

7. 7 27th May 2005 Case 1 Voluntary Code (3) Legal remedies  Liability for untrue statement: ex post instrument  Adoption by General Meeting: could strengthen

8. 8 27th May 2005 Case 2 Voluntary Code with legal backing D + N  Adhesion is legal obligation Liability Supervision Role of auditor  Listing Conditions: UK Enforced by FSA on a risk based approach Fines; Delisting

9. 9 27th May 2005 Case 2 Voluntary Code with legal backing D + N (2) Is it efficient?  In case of refusal to apply: yes?  In case of weak implementation: no  On substance: no

10. 10 27th May 2005 Case 3 Legally Mandated Code  SOX - diverse provisions in all EU states  Heavy, Costly but: back stop if self regulation does not work  See German case on remuneration

11. 11 27th May 2005 Conclusion  Dividing line between three cases is unclear + changing over time  Enforcement: Preference for market led enforcement Facilitate: enforcement by shareholders Approval by Agm may strengthen Strengthen the role of the company’s internal monitoring (BoD; Agm)