The cheek of it! There was a lot of indignation in the City of London in early August as the financial establishment huffed and puffed for the umpteenth time about the possibility that European Union regulations might weaken the UK’s approach to corporate governance.
The debate was kicked off by the UK’s Financial Services Authority as it began the process of modernizing – and hopefully simplifying – the London Stock Exchange’s listing rules. The FSA pointed out that the EU’s latest draft of its prospectus directive looks like it might prevent local regulators from creating their own rules and impose an EU-wide structure instead. The downside of this, according to several market commentators, might be that the UK ends up with weakened corporate governance as the EU imposes a one-size-fits-all solution.
In the post-Enron environment, this has given the City’s tub-thumpers a good excuse to have a bash at ‘Europe’ once again. (Where do they think the UK is actually located?) It is easy to extend the allegation into the charge that those evil Brussels-based bureaucrats are wasting ‘our’ money and forcing ‘us’ to accept weakened corporate governance. Set us free from our European chains!
The fact that the EU’s financial services action plan has not exactly been a secret, and that consultations over the prospectus directive have been ongoing for some time, appears to have been largely forgotten. And it is hard to see how the EU might actually go about achieving an integrated financial market by 2005 without harmonizing a few rules here and there. Nor is there a wide enough recognition that London is likely to be the world’s number one beneficiary of a true single financial market.
Despite the annoying nationalism that rallied around the FSA’s report, the UK regulator is right to raise the issue and publicly voice its concerns. In fact, its new discussion paper is fairly forward-looking – both in its thinking and in the scope of information it would like companies to publish.
The UK’s corporate governance model has evolved over a long period and is widely regarded as being up there with the best in the world. US observers regularly suggest that their own approach could probably benefit from a few UK-inspired tweaks here or there. Compare that to, say, Austria, which is in the throes of introducing its first ever corporate governance code and the gap between experience and practice in EU member states seems wide indeed.
Throwing all of that away as a by-product of the prospectus directive is not what the EU’s financial services action plan is all about. An integrated financial market will offer the most benefits to listed companies and investors if there is absolutely no whiff of weakened regulation around it. Corporate governance standards are too important to be allowed to be blown away by a blunderbuss of harmonizing zeal.
It may be that the best approach is to impose lowest acceptable standards at an EU level and to allow national regulators the freedom to ‘top up’ their own rules should they feel the need. That way we get the best of both worlds: A guarantee to investors of a high-level, minimum standard across the EU – something that was seen as crucial in the original thinking behind the financial services action plan – coupled with the recognition of differences in culture and tradition.
The EU may yet opt for that very route. IR professionals should watch intently – and give their own input – over the coming months. The forthcoming report from Jaap Winter’s high level group of company law experts should give an indication of the shape of things to come. The FSA and the City’s pundits will certainly be keen observers. In the meantime, investor relations practitioners all over Europe and beyond could do a lot worse than to read the FSA’s review of the listing regime (www.fsa.gov.uk/pubs/discussion/14) to get up to speed on current regulatory thinking in the UK. Similar thoughts might well be hitting a market near you one day soon.
