Responses came from 18 Member States and from a wide range of interested parties.

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1 EUROPEAN COMMISSION Internal Market DG FINANCIAL MARKETS Accounting and auditing Brussels, G5 D(2004) SYNTHESIS OF THE IPM-CONSULTATION, INCLUDING SUBSTANTIATED COMMENTS RECEIVED BEYOND 1. INTRODUCTION On 22 April 2004 the Services of the Internal Market Directorate General launched an on-line consultation (Interactive Policy Making) a possible legislative initiative following up the Commission s Action Plan on Company Law and Corporate Governance of May The consultation dealt with the following issues: on clarification of board members responsibility for drawing up financial statements and key non-financial information; increased transparency about a company s and a group s transactions; and the introduction of a corporate governance statement. The consultation closed on 4 June In total 208 responded to the on-line questionnaire. The Internal Market Directorate General in addition received 43 substantiated contributions. 2. BACKGROUND ON RESPONDENTS Responses came from 18 Member States and from a wide range of interested parties. Respondents broken down by Member States New MS Other DE Other MS UK FR C:\Documents and Settings\sorenld\Desktop\synopsis-consultation doc Commission européenne, B-1049 Bruxelles / Europese Commissie, B-1049 Brussel - Belgium. Telephone: (32-2) Office: 03/52. Telephone: direct line (32-2) Fax: (32-2)

2 Broken down by category of respondent Lawyer Other Authority Auditor Accountant Business Financial Institution 3. CLARIFICATION OF THE COLLECTIVE RESPONSIBILITY FOR BOARD MEMBERS FOR FINANCIAL AND KEY NON-FINANCIAL INFORMATION The questions in this part of the consultation focused on: definition of responsibility, differentiation and limitation of responsibility of board members; what non-financial information board members should be responsible for; towards whom should board members be responsible; sanctions; and board members responsibility for providing auditors with information. There was no support for a definition of the term responsibility at European level. Most substantiated contributions that it would be too difficult to reach a Community wide definition. There was some support both in the on-line responses and in the substantiated contributions - for differentiation of the responsibility between the management board and the supervisory board as well as differentiating responsibility between executive and non-executive board members. Some suggested allowing individual board members to limit their responsibility by disclosing a disagreement and the reasons for disagreeing with the documents prepared under their responsibility. Many respondents - both to the on-line questionnaire and in the substantiated contributions - were in favour of ensuring that board members responsibility for key non-financial information should also include the corporate governance statement and the risk management system. In contrast, investment plans and strategies in technical, organisational and human resources are seen as more of a managerial nature and should therefore not be subject to the principle of a collective responsibility. Some written contributions argued that board member should not have the responsibility for the efficiency of a company s risk management system as it is difficult to vouch for an infallible risk management system. 2

3 A majority of the on-line responses and numerous substantiated contributions highlighted that at EU-level it should only be confirmed that collective responsibility of board members applies towards the company whilst leaving it to the individual Member States to extend responsibility to other parties. However, a substantial number of the written contributions could support ensuring at EU-level that board members are responsible towards both the company and the shareholders. Some argue that confirming collective responsibility of board members at a European level would not provide for a sufficient level playing field since liability would continue to be dealt with differently at Member State level. It appears from the responses that there is only limited support for a common sanction system at EU-level, in contrast, many respondents considers that board members should be responsible for providing auditors with all relevant information. 4. TRANSPARENCY IN INTRA GROUP RELATIONS AND TRANSACTIONS WITH RELATED PARTIES The questions in this part of the consultation focused on: 1. Disclosure at company and/or group level; EU-definitions of related party, material transactions, Special Purpose Vehicles or other concepts; and applying the same requirements for listed and unlisted parent companies (this cover questions 1 and 2 in the on-line questionnaire); 2. Disclosure of transactions when a related party directly or indirectly is controlled or significantly influenced by the parent company or any other company of the group or their board members (this cover questions 3 to 6 in the on-line questionnaire); 3. Disclosure of key financial data (this cover question 7 in the on-line questionnaire); 4. Disclosure of relations with Special Purpose Vehicles, companies incorporated offshore; disclosure of significant sales; cash management agreements; and whether disclosure should be in the annual report or the notes to the accounts (this covers questions 8 to 14 in the on-line questionnaire). Ad 1. Ad 2. Respondents were split on whether transactions with related parties should only be disclosed at group level or not. On-line responses only show some support for ensuring EU-level definitions of the following concepts: related party, material transactions and special purpose vehicles. However, a high number of respondents did not show interest in this question that do not know, which indicates that they see no need for definitions. This is underpinned by numerous substantiated contributions that do not see any value added in providing definitions. Instead most prefer a reference to the definitions established under the international accounting standards. There was only very limited support for requiring the same level of transparency for listed and unlisted parent companies. In the written contributions it is acknowledged that transparency about transactions with related parties is a major issue. Some suggest limiting disclosure to related party transactions that are not at arms length to ensure that 3

4 only specific transactions important for investors, creditors and shareholders are disclosed. Acknowledging that companies, which are currently not subject to international accounting standards should not live up to the same requirements are provided for in IAS 24. The majority of respondents are in favour of disclosure of material transactions with related parties that are directly or indirectly controlled by the parent company. Opinions in the written contributions are divided on the need for disclosure of transactions with related party transactions that are directly or indirectly controlled by the parent company of a group. Some consider it necessary while others see this as going beyond international accounting standards and therefore not desirable. The picture is almost the same regarding disclosure of material transactions with related parties that are significantly influenced by board members of the parent company or any other company of the group. Ad 3. Ad 4. As for disclosure of key financial figures of the most important companies within a group respondents are almost evenly split. In the substantiated contributions there were only very limited support for this idea. There was some support for requiring the parent company to disclose relations with related parties, including special purpose vehicles and companies incorporated offshore. This picture is almost the same when asked whether any company of a group should disclose relations with related parties such as special purpose vehicles and companies incorporated offshore. As for special purpose vehicles and companies incorporated offshore, some substantiated contributions support setting specific disclosure requirements e.g. that a parent company of a group only disclose relations that are not part of the consolidation. If further disclosure requirements are to be laid down, some substantiated contributions point out that it must be well targeted to avoid disclosure of all sorts of irrelevant relations. Most respondents favour requiring that any company of a group should disclose significant sales of assets to another company within the group or to a third party which are directly or indirectly influenced by the group or board members. However, some substantiated contributions point out that this is already a requirement under the international accounting standards and suggested extending it to non-listed companies. There is only limited support for disclosure requirements regarding the nature and extent of cash management arrangements. Ad 5. Respondents seem to favour disclosure of the issues listed above in the annual report; others consider that disclosures should be made in the notes to the accounts. 5. DISCLOSURE ABOUT CORPORATE GOVERNANCE PRACTICES BY LISTED COMPANIES The questions in this part of the consultation focused on: requiring listed companies to publish a corporate governance statement using the comply-or-explain method; description of key elements of corporate governance practices applied in a company; 4

5 statement related to binding national rules; and the appropriate place where the corporate governance statement should be made available. A majority of the on-line responses and a clear majority of the substantiated contributions support requiring listed companies to publish a corporate governance statement. This statement should relate itself to national codes and/or provisions on corporate governance following the comply-or-explain principle. A minority opposes laying down any EU-level legislative disclosure requirements for description of key elements of corporate governance, such as the independence and specialized knowledge of the board members and the members of committees and the existence and functioning of an internal control system. Nevertheless, in many in many substantiated contributions it is argued that a corporate governance statement should include information about the risk management system actually applied by a listed company. In both the on-line responses and substantiated contributions there were some support for requiring information on controlling shareholders whereas the picture is less clear when it concerns the details of the information that should be required. There was some support for requiring that disclosure should be made about significant transactions provided it is not already in the accounts. Support was limited for requiring companies to include a statement confirming that they comply with national law. There was some support for requiring companies to include in the corporate governance statement information about shareholders rights in case of cross border investments. There was support for requiring publication of the corporate governance statement as part of the annual report. A large number of written and on-line responses support that the statement is also made public on the website but many suggest leaving the decision to do so companies and not make this mandatory at EU-level. 5