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Corporate Governance

The concept of corporate governance is defined in different ways. The narrow definition focuses on the control of management by shareholders. The broader definition looks at the role of stakeholders in making and implementing strategic decisions in the company. Corporate governance must be understood as a system in which there is an interplay of different regulations and market forces. Therefore corporate governance deals with multiple issues in the field of corporate law, securities regulation, corporate finance and industrial relations. In 17 of the 27 EU member states and in Norway employees are represented in the companies' supervisory or administrative board.

The basic issue underlying the corporate governance debate is the fundamental choice between two competing conceptions of the company (or theories of the firm):

  • On the one hand, there is the shareholder model, according to which the company is a private association of shareholders who come together and found a company with the intention of increasing their wealth. In this model, the clear primary responsibility of managers hired to run the company is to the shareholders, and their main task is to increase the value of the company.
  • This may be contrasted with the stakeholder model, according to which the company is a community in which shareholders are only one of a number of stakeholders. Stakeholders are groups which are closely linked to the company. One important stakeholder group, especially from the trade union perspective, is the employees. According to the stakeholder conception of the firm, employees should have a “voice” in the decision-making process to ensure that a reasonable balance is achieved in the goals pursued by the company, not just the maximization of shareholder profits.

Despite scandals in the US like Enron or WorldCom, the shareholder model remains hegemonic in European policymaking circles. This model, it is argued, is the "international benchmark" for corporate governance and is used to justify the weakening of workers’ rights. However, there is little evidence of an economic need to change or adapt systems in Europe by copying the US model. EU company law initiatives should therefore endorse the emergence and evolution of a European model of corporate governance, fostering a company board orientation towards long-term value creation, high-trust labour relations, participation of employees in the company’s decision-making processes and societal responsibility.

In particular, worker participation in company decision-making is crucial for the development of the European corporate governance model from the trade union point of view. In the majority of EU member states it is obligatory to include a voice for workers in the national system of corporate governance. In 19 out of 27 EU- member states and in Norway, workers have the legal right to be represented on the boards of many large companies and to influence management decisions. Employee board-level representation in these countries is a fact, diverse in structure and extent, but deeply-rooted in different cultural and historically-developed environments. This fact plays an important role in the European corporate governance model and has to be recognised in future legislation.

What is Corporate Governance? - A definition

The concept of corporate governance is defined in a number of different ways. As a rule, however, it is understood to mean the system of company management and oversight. Governance is consequently to be understood as an integral organism in which there is an interplay of different regulations and market forces. This combination shapes the regulation of cooperate governance.

EU expert groups

In the field of corporate governance and company law the European Commission has relied on a number of expert groups for advice over the past decade, including the High Level Group of Company Law Experts, the European Corporate Governance Forum, the Corporate Governance Advisory Group, and the Reflection Group

European Commission recommendations

Besides directives and regulations the European Commission is also entitled, in accordance with Art. 211 EC, to lay down recommendations for member states. These recommendations are not binding (Art. 249 EC), but national courts have to take them into account when interpreting European law.