Bad Apples, Bad Oranges: A Comment from Old Europe on Post-Enron Corporate Governance Reforms

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BAD APPLES, BAD ORANGES: A COMMENT FROM OLD EUROPE ON POST-ENRON CORPORATE

GOVERNANCE REFORMS

Luca Enriques*

Corporate scandals have hit on both sides of the Atlantic, but the public’s reaction to them has been much stronger in the United States than in Europe. This comment first speculates on what accounts for this difference in the reaction on the two continents. Part III provides an account of recent corporate law reform initiatives within the European Union, highlighting the ways in which the Sarbanes-Oxley Act is often used as a model for reform. Part IV then reflects upon the increasing emphasis which reform initiatives place on independent directors, questioning whether it is realistic to expect so much from them in terms of improved governance and management of listed corporations. Part V concludes that the similarity of reform initiatives in Europe and in the United States appears to overlook the differences in corporate ownership between continental Europe on the one hand, and the United States and the United Kingdom on the other.

I. INTRODUCTION

Is it true that corporate scandals have hit the United States and Europe on a different scale? If this is not true, at least in terms of number of companies hit, then why has the reaction to the scandals been less strong in Europe than in the United States? What corporate governance reform initiatives are the European Union (“E.U.”) and major E.U. Member States currently bringing forward? Is it wise to rely so much on independent directors in order to achieve better corporate governance arrangements? How relevant are the differences in ownership structures between continental Europe and the United States in shaping corporate governance reforms, or should these differences be relevant at all?

This comment tries to answer these questions. Part II compares * Professor of Business Law in the Faculty of Law at the University of Bologna.

912 WAKE FOREST LAW REVIEW [Vol. 38

American and European corporate scandals from the last two years or so, and speculates as to why the political reaction has been so much stronger in the United States than in Europe. Part III provides an account of current corporate law reform initiatives around Europe and briefly comments on the most recent developments in the area of soft law (i.e., corporate governance codes and reports) concerning corporate directors. Part IV comments on the greater role to be assigned to independent outside directors according to most reform initiatives, while Part V is a final reflection on how different ownership structures pose different corporate governance problems and raise different concerns with regard to corporate malfeasance.

One caveat must be made beforehand: It is always difficult to talk about “European” developments in this area of law. The economic, legal, and cultural diversity among European states is still much wider than within the United States so that any general comment concerning “European companies” or “European corporate law” and “European corporate governance” will risk either being over-inclusive or providing an unfaithful picture of such a diverse reality.

II. (CORPORATE) SCANDAL IS IN THE EYE OF THE BEHOLDER: WHY HAS THE REACTION TO CORPORATE SCANDALS IN THE UNITED STATES

AND IN EUROPE BEEN DIFFERENT?

In Europe, it is still widely believed that nothing comparable to corporate scandals such as Enron and the like has happened there. Most European scholars’ and policymakers’ attitudes towards American corporate scandals are commonly ones of Schadenfreude and smugness. Comments like “Enron could have never happened in Europe” are common.1 Academics on both sides of the ocean point out that the well-known differences in the ownership structures between United States companies and European ones provide an explanation for the immunity of Europe from Enron-like corporate scandals: Block-holders of European companies must have been working as more effective monitors than boards and institutional investors in the United States in order to prevent managers’ malfeasance.2 And while politicians around Europe commissioned studies and issued proposals on how to improve the corporate

1. See, e.g., Ahold Out, THE ECONOMIST, Mar. 1, 2003, at 12. 2. See JOHN C. COFFEE, JR., WHAT CAUSED ENRON?: A CAPSULE SOCIAL AND

ECONOMIC HISTORY OF THE 1990’S 45-46 (Columbia Law Sch. Ctr. for Law and Econ. Studies, Working Paper No. 214, 2003), available at http://ssrn.com/ abstract_id=373581.

2003] BAD APPLES, BAD ORANGES 913

governance of European companies, the idea behind these initiatives is mainly (albeit tacitly) that U.S. corporate scandals impose a reflection on current European practices, because they might have been tainted by U.S.-style corporate governance mechanisms like stock options and by the shareholder value concept rather than a conviction that any serious corporate disease is already in place.3

To be sure, since Enron imploded quite a few companies have experienced serious problems in Europe as well: Marconi (U.K.), Elan (Ireland), EmTV (Germany), Vivendi (France), Swiss Life (Switzerland), and Bipop (Italy), to mention but a few from different countries.4 These companies have all suffered from corporate governance failures. For various reasons, however, these failures have led to bankruptcy proceedings in only exceptional circumstances.

On February 24, 2003, Royal Ahold, a Dutch company and the world’s third-largest food retailer, admitted overstating earnings by at least $500 million in 2001 and 2002. The stock price fell by 63%.5 The company’s Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”), who had cashed their share of stock options in the previous years, resigned, leaving investors (a multitude of whom had bought Ahold shares “with coupons and points earned by shopping in Ahold stores”6) furious. After one month or so, it appears that it was premature to call Ahold “Europe’s Enron,” as The Economist did. Ahold does not look like the straw that broke the camel’s back, or, in other words, as final evidence that European corporate governance is no more immune to corporate disease than that of the United States7 Whatever the long-term outcome in terms of perceived severity of European corporate governance problems, corporate scandals in the Old Continent thus far barely differ in number and relevance from those which have taken place in the United States,8 but the public’s reaction to the series of scandals is 3. As recently as March 2003, Frits Bolkenstein reportedly rejected a proposal to cap auditor liability because it “would damage attempts by regulators to restore investor confidence following corporate scandals in the U.S.” Andrew Parker, Brussels Rejects Big Four’s Plea on Liability, FIN. TIMES

(London), Mar. 25, 2003, at 25 (emphasis added). 4. Other examples include Freedomland and Cirio (Italy), KpnWest and World Online (the Netherlands), MobilCom and ComRoad (Germany), ABB (Sweden-U.K.), Lernout & Hauspie (Belgium), Bz Group (Switzerland), France Telecom (France). See, e.g., Alessandro Penati, Le Inutili Enron d’Europa [The Useless Enrons of Europe], CORRIERE DELLA SERA (Milan), Mar. 6, 2003, at 18. 5. Ahold: Europe’s Enron, THE ECONOMIST, Mar. 1, 2003, at 55. 6. Carol Matlack et al., The Year of Nasty Surprises, BUS. WK., Mar. 10, 2003, at 48, 49. 7. See Ahold Out, supra note 1, at 12. 8. Cf. Douglas M. Branson, ENRON—WHEN ALL SYSTEMS FAIL: CREATIVE


by no means comparable to the one in the United States. It is true, then, that “[s]o far, Europe hasn’t produced a

bombshell to rival Enron Corp.”9 This means that Europe has not experienced a scandal the size of Enron, and no European scandals have uncovered as much greed as that displayed by Houston’s Andrew Fastow and Kenneth Lay.

There are good reasons, however, why neither a single corporate scandal, however bad, nor all corporate scandals taken together, have had, and possibly never will have, such an impact in corporate Europe. First of all, one feature of the U.S. landscape is lacking in Europe: the fact that the government lets big businesses fail. The Bush administration raised no finger to help Enron out of its problems. It is highly instructive to compare this stance with European governments’ habit to step in and bail out distressed companies, or at least help them out of trouble. In the last couple of years, this has happened more or less directly with France Telecom, MobilCom, Fiat, etc. Politicians intervene mainly to avoid massive layoffs, but in doing so they clearly benefit investors and, even more, managers and controlling shareholders.

It is no wonder then that in Europe there has been no backlash against corporate governance failures such as those experienced in the United States. Intuitively, social rage against dishonest CEOs is exponentially larger when their behavior leads to job losses and losses in pension accounts (a form of saving which is still almost absent in continental Europe). In a system in which bailouts by the State are, so to speak, normal and no one but investors are harmed, the media and the politicians will produce less information than that provided in the United States on Enron and on other troubled companies, and will search less for information on corporate malfeasance elsewhere. There is simply less demand for it by public opinion. In other words, if financial crises remain such and do not have an impact on people’s lives and jobs, the odds are much lower that all the rot will be uncovered.

Another reason why European scandals have not, thus far, received as much attention as U.S. scandals is connected with my initial caveat about the danger of talking about Europe and European corporate governance. Much in the same way as there is no European corporate governance system, no common set of rules, no stock exchange playing any role similar to that of the NYSE or

DESTRUCTION OR ROADMAP TO CORPORATE GOVERNANCE REFORM? 3 (noting that corporate scandals in the United States have involved “approximately 20 companies out of the 16,200 which file periodic reports with the SEC”), available at http://papers.ssrn.com/sol3/papers.cfm?abstract_id=366841. 9. Matlack et al., supra note 6, at 48.


NASDAQ, no European corporate law, and perhaps even more importantly no European public opinion, there are no “European corporate scandals” outside the restricted circle of the readers of the international financial and business press. It may well be easy to find common features to corporate scandals around Europe. But Spanish people, for example, do not feel that the Ahold scandal calls their own model of corporate governance into question. In a word, European corporate scandals just do not add up as such within the main national political arenas.

Another reason for this distorted perception of European scandals may also be that the public opinion in most European countries is much more disenchanted than in the United States. At least in some European countries, and certainly in the one from which I come, most people have feelings of admired envy rather than of outrage in the face of a CEO who cashes in a pile of stock options before the market price of her company’s shares collapses, or even in the face of insider trading violations.

For an Italian, it was fascinating to observe, back in 2002, how the United States media and politicians made a big fuss about Martha Stewart’s alleged trading on the basis of a tip from a friend.10 In the recent past, two prominent representatives of corporate Italy, Carlo De Benedetti (once the controlling shareholder of the main computer maker and now still at the head of a conglomerate) and Emilio Gnutti (a financier who played a central part in the takeover of Telecom Italia four years ago and who still controls or jointly controls several listed companies) had been involved in insider trading trials.11 After those trials, their reputations have remained absolutely intact. In fact, the role of the latter in Italian finance has actually become stronger.12

All this might help to understand why, in the presence of a number of major corporate scandals in Europe, no legislation comparable to the Sarbanes-Oxley Act has yet passed in Europe, either at the European Community (“E.C.”) level or in individual

10. See, e.g., Diane Brady et al., Sorting out the Martha Mess, BUS. WK., July 1, 2002, at 44. 11. Carlo De Benedetti plea-bargained on an insider trading charge, while Emilio Gnutti was convicted for insider trading by a first instance criminal court. See Luca Enriques, I Giornali, il Mondo Politico e gli Scandali Finanziari. Perché l’Europa è Immune dall’ “Enronite” [Newspapers, Politicians, and Corporate Scandals: Why Europe is Immune from “Enronitis”], LA VOCE, Oct. 10, 2002, available at http://www.LaVoce.info/news/view.php?id= 14&cms_pk=147&from=index. 12. Emilio Gnutti is now a partner with the Italian Prime Minister’s holding company in a few ventures and still participates in the coalition jointly controlling Telecom Italia, the main telecommunications company in Italy.


member states. This does not mean, of course, that legislative proposals and reform initiatives are not under way. In Part III, I account for these forthcoming developments.

III. POST-ENRON CORPORATE GOVERNANCE REFORM IN EUROPE

This part provides an account of selected current or recent corporate governance reform initiatives in Europe, focusing on those more related to the role of the board of directors. It highlights that, while little legislative reform on the lines of the Sarbanes-Oxley Act (“SOA”) is to be predicted at the E.C. level, some of the main member states are planning to transplant many of the SOA’s main provisions into their own company laws. It also shows that some of the SOA’s provisions and corporate governance reform proposals in the United States have been inspired or at least are similar to pre-existing soft or hard law provisions of some European countries’ legal systems. This part also provides an account of the ever-increasing emphasis on independent directors by soft as well as (projected) hard law.

European politicians’ reactions to Enron have been ambivalent. On the one hand, they have been keen to claim that corporate governance in Europe works better than in the United States, claiming their part of the credit for this. On the other hand, they have seen U.S. corporate scandals as providing plenty of justification for a review and possibly a reform of at least some areas of corporate governance, especially the auditing function and the role of the accounting profession. In other words, U.S. corporate scandals have provided an occasion for “political activism” juicy enough for any well-taught politician and bureaucrat willing to extract rents.13 This second reaction is of course gaining momentum as more and more scandals are brought to light.

A. European Union

The first to move after Enron, perhaps reflecting the higher “efficiency” of Brussels’ officials, was the E.C. In April 2002, taking advantage of the existence of the High Level Group of Company Law Experts (“the Group”), the European Council and the E.C. Commission asked the Group to “review further corporate governance and auditing issues in the light of the Enron case.”14

13. See generally FRED S. MCCHESNEY, MONEY FOR NOTHING: POLITICIANS, RENT EXTRACTION, AND POLITICAL EXTORTION 20-68 (1997). 14. See REPORT OF THE HIGH LEVEL GROUP OF COMPANY LAW EXPERTS ON A

MODERN REGULATORY FRAMEWORK FOR COMPANY LAW IN EUROPE 129 (November 4, 2002), available at http://europa.eu.int/comm/internal_market/en/company/ company/modern/consult/report_en.pdf [hereinafter HIGH LEVEL GROUP].


The Group had originally been set up in September 2001 in order to help the Commission prepare a new proposal for a takeover directive and “to define new priorities for the broader future development of company law in the European Union.”15

The Group issued its report on corporate governance in November 2002. The report covers most corporate governance topics and, reflecting the fact that company law and corporate governance practices widely differ from member state to member state, calls for little, but significant legislative action by the E.C. The report suggests that the E.C. should issue a set of recommendations on corporate governance. Recommendations are non-binding acts by the E.C. Commission,16 the effectiveness of which relies on moral suasion and greatly varies from case to case. Although not infrequently completely disregarded by Member States,17 recommendations are often used as a sort of warning to Member States, explicitly or implicitly threatening hard law initiatives in case Member States do not follow suit.

With regard to director-related issues, the Group has recommended the adoption of the following rules in the form of E.C. directives (i.e., hard law): listed companies shall include in their annual report a corporate governance statement providing information, inter alia, about the operation of the board and its committees, the role and qualifications of individual board members, the system of risk management applied by the company, related party transactions, and so on.18 The Group further recommended that companies should be given a choice between a one-tier and a two-tier board structure,19 and responsibility for financial statements and for statements on key non-financial data should be attributed to all board members, consistent with a rule already in place in many Member States.20

Other than these directives, the Group suggested the Commission adopt its proposals in the form of recommendations.21 Thus, the Commission should recommend that Member States have in place rules, which, at least on a comply or explain basis, call for

15. Id. at 128. 16. See, e.g., BENGT BEUTLER ET AL., L’UNIONE EUROPEA: ISTITUZIONI, ORDINAMENTO E POLITICHE [THE EUROPEAN UNION: INSTITUTIONS, LEGAL SYSTEM, AND POLICIES] 259 (1998). 17. See, e.g., NIAMH MOLONEY, EC SECURITIES REGULATION 19 (2002) (reporting that a 1977 recommendation on insider trading was largely ignored by Member States). 18. HIGH LEVEL GROUP, supra note 14, at 46. 19. Id. at 59. 20. Id. at 67. 21. Id. at 61.


audit, remuneration, and nomination committees to be composed exclusively of non-executive directors, the majority of whom should be independent; provide a definition of independence and recommend that Member States require companies to disclose annually which of the directors they consider independent; define an appropriate regulatory regime for listed companies’ directors’ remuneration, calling for thorough disclosure and for shareholders’ approval of schemes granting shares or share options; and define the role and responsibilities of audit committees.

On May 25, 2003, the European Commission issued a Communication to the Council and the European Parliament setting out its agenda to modernize European corporate law and to enhance corporate governance in the E.U.22 The Communication plans to issue a set of directive proposals covering a broad range of issues, like corporate governance disclosure requirements, shareholder communication and voting rights, minority shareholder rights, and so on.23 Despite its breadth, it is dubious that this effort will have a real impact on corporate governance around the European Union,24 not least because it will be implemented well after member states will have already taken steps to adjust to the post-Enron world, as the next subsections will show.

B. France

In light of the political pressures and business protests against the extraterritoriality of many provisions in the Sarbanes-Oxley Act, it is somewhat ironic to find that two prominent (and allegedly nowadays “anti-American”) European countries, France and Germany, are going to transplant most of Sarbanes-Oxley’s provisions into their legislation. On February 5, 2003, the French Government issued the “Projet de loi de sécurité financière” (Draft Law on Financial Security),25 which was finally adopted by the French Parliament on July 17, 2003 and contains a set of provisions in Articles 98 to 116 that very closely follow Sarbanes-Oxley. Once approved, a French version of the Public Company Accounting

22. Communication from the Commission to the Council and the European Parliament Modernising Company Law and Enhancing Corporate Governance in the European Union—A Plan to Move Forward, COM (2003) 284 (May 21, 2003), available at http://europa.eu.int/eur-lex/en/com/cnc/2003/com2003_ 0284en01.pdf. 23. Id. at 3-4. 24. See Gérard Hertig & Joe A. McCahery, Company and Takeover Law Reforms in Europe: Misguided Harmonization Efforts or Regulatory Competition? 14-20 (2003) (unpublished manuscript, on file with author). 25. Projet de loi de sécurité financière (adopted by the French Senate Mar. 20, 2003), available at http://www.senat.fr/leg/tas02-092.html.


Oversight Board will be introduced (Article 100).26 Auditors will not be allowed to provide non-audit services to their clients (Article 104)27 and will have to be selected by non-executive directors (Article 105).28 An annual corporate governance statement will have to be disclosed, specifying how the board functions and which internal control procedures are in place (Article 117).29 Finally, prompt disclosure of share dealings by top managers and directors shall be mandated (Article 122).30

In 2002, two Associations of French Industries promoted a working group, chaired by Société Générale Chairman Daniel Bouton, asking it to review corporate governance practices in French listed companies. The group’s report was issued in September and contains a number of recommendations aimed at improving French corporate governance.31 These recommendations echo similar practices recommended in other corporate governance codes around the globe, and a few warrant mention here. Non-executive directors should meet periodically in the absence of executive directors in order to evaluate the executive directors’ performance.32 At least half of the board members should be independent,33 and a more stringent notion of independence is provided than under the previous French Code. It is recommended that the audit committee should be composed exclusively of non-executive directors, two-thirds of whom should be independent,34 with the audit committee selecting any external auditor and monitoring any kind of compensation granted to the auditor so that the auditor’s

26. Compare with Sarbanes-Oxley Act of 2002, Pub. L. No. 107-204, Title I, 116 Stat. 750, 753-71 (creating the Public Company Accounting Oversight Board). 27. Compare with Sarbanes-Oxley Act § 201 (prohibiting public accounting firms from providing non-audit services to clients they audit). 28. Compare with Sarbanes-Oxley Act § 301 (requiring audit committee members be independent of the company, and giving the audit committee the power to appoint and oversee the company’s public accounting firm). 29. Compare with Sarbanes-Oxley Act § 404 (mandating that annual reports contain an internal control report stating the structure and procedures for financial reporting and an assessment of their effectiveness). 30. Compare with Sarbanes-Oxley Act § 403 (requiring directors and officers to disclose their trading of their company’s stock). 31. WORKING GROUP CHAIRED BY DANIEL BOUTON, CHAIRMAN OF THE SOCIÉTÉ

GÉNÉRAL, POUR UN MEILLEUR GOUVERNMENT DES ENTERPRISES COTÉES: RAPPORT

DU GROUPE DE TRAVAIL [FOR A BETTER CORPORATE GOVERNANCE OF LISTED

COMPANIES: WORKING GROUP REPORT] (September 23, 2002), available at http://www.medef.fr/staging/ medias /upload/336_FICHIER.pdf. 32. Id. at 11. 33. Id. at 9-10. 34. Id. at 12.


compensation does not affect that auditor’s independence.35

C. Germany

Quite similarly, on March 6, 2003, the German government unveiled a ten-point “catalogue of measures aimed at strengthening businesses’ integrity and investor protection,”36 a good chunk of which draws inspiration both from Sarbanes-Oxley and, more generally, from American corporate and securities law. First, the plan aims at facilitating derivative suits against directors and supervisory board members by giving action to any shareholder holding shares worth more than 100,000 euro (instead of one million euro, as under current law), while clarifying that the former are protected by the business judgment rule.37 Second, direct actions for damages following securities fraud would also be made easier.38 Third, more disclosure would be required for stock-based compensation for directors.39 Fourth, a prohibition on the provision to the client corporation of non-audit services by auditors would be introduced in order to strengthen auditors’ independence, while the public supervision of auditors would also be strengthened and criminal law provisions on securities fraud would be tightened.40

Germany has taken relevant action on corporate governance issues also in the last few years. In February 2002, a Government Commission appointed in 2001 adopted the German Corporate Governance Code.41 In the words of the Government Commission’s home page, “[t]he aim of the German Corporate Governance Code is to make Germany’s corporate governance rules transparent for both national and international investors, thus strengthening confidence in the management of German corporations.”42 In order to do so, “[t]he Code addresses all major criticisms—especially from the 35. Id. at 13. 36. MAßNAHMENKATALOG DER BUNDESREGIERUNG ZUR STÄRKUNG DER

UNTERNEHMENSINTEGRITÄT UND DES ANLEGERSCHUTZES [CATALOG OF MEASURES

AIMED AT STRENGTHENING BUSINESSES’ INTEGRITY AND INVESTOR PROTECTION], available at http://www.bundesfinanzministerium.de/Anlage17029/ Massnahmenkatalog-der-Bundesregierung-zur-Staerkung-von-Unternehmenintegritaet-und-Anlegerschutz.pdf. 37. Id. at § 1. 38. Id. at § 2. 39. Id. at § 3. 40. Id. at § 10. Compare this with Sarbanes-Oxley’s Title VIII. 41. Government Commission, German Corporate Governance Code (Feb. 26, 2002) (convenience translation), available at http://www.corporate-governance-code.de/eng/download/DCG_K_E200305.pdf. 42. Letter from Dr. Gerhard Cromme, Chairman of the Government Commission, introducing the German Corporate Governance Code (Feb. 26, 2002), at http://www.corporate-governance-code.de/index-e.html.


international community—leveled against German corporate governance,”43 with the obvious constraints stemming from mandatory rules on two-tiered board structures and on co-determination. These prevent the Code from truly aligning German corporate governance with prevailing corporate governance practices around the globe.44 The Code recommends that supervisory boards form an audit committee, with the task of handling “issues of accounting and risk management, the necessary independence required of the auditor, the issuing of the audit mandate to the auditor, the determination of auditing focal points and the fee agreement.”45 The only independence requirement, however, is that “[t]he Chairman of the Audit Committee should not be a former member of the Management Board of the company.”46 More generally, supervisory boards have to be stuffed with employee representatives who are often employees themselves. This means that there is nothing in the Code to ensure the supervisory board members’ independence, apart from the provision that “not more than two former members of the Management Board shall be members of the supervisory board and supervisory board members shall not exercise directorships or similar positions or advisory tasks for important competitors of the enterprise.”47

What is peculiar to the German Corporate Governance Code is that it relies upon a “comply or explain” disclosure provision mandated by a new provision in German company law.48 This contrasts with the experience of most countries in which a “comply or explain” duty is imposed by the relevant (usually self-regulatory) stock exchange’s listing rules.49 In other words, in Germany the

43. Id. 44. See KLAUS J. HOPT, MODERN COMPANY AND CAPITAL MARKET PROBLEMS: IMPROVING EUROPEAN CORPORATE GOVERNANCE AFTER ENRON 14, 16 (European Corp. Governance Inst., Working Paper No. 05/2002, Nov. 2002), available at http://papers.ssrn.com/sol3/papers.cfm?abstract_id=356102. 45. Government Commission, supra note 41, § 5.3.2. 46. Id. The convenience translation, however, may not be reliable on this point: according to Professor Hopt, the statement about the independence of the audit committee’s chairman “is only a suggestion, not a recommendation for which the comply-or-explain rule would be valid.” HOPT, supra note 44, at 14. 47. Government Commission, supra note 41, § 5.4.2. 48. Article 161 of the Stock Corporation Act was amended by Article 1, Item 16 of the Transparency and Disclosure Law. See Gesetz zur weiteren Reform des Aktien—und Bilanzrechts, zu Transparenz und Publizität (Transparenz—und Publizitätsgesetz) [Transparency and Disclosure Law], v. 19.7.2002 (BGB1. I S.2681). 49. This was originally the case in the United Kingdom, where the Listing Rules issued by the London Stock Exchange implemented the various corporate governance codes by imposing an annual “comply or explain” disclosure


choice has been to “harden” the self-regulatory approach originally shaped by the British in the 1990s50 by transposing it into state law. Interestingly, this move was almost simultaneous to the U.S. Congress’ decision to mandate a code of ethics on a comply or explain basis.51

D. Italy

In Italy, the view that U.S. corporate scandals imposed a reassessment of domestic corporate governance mechanisms soon became widely accepted. Unfortunately, however, the timing of the Enron scandal has not fit well with the Italian government’s agenda. At the end of September 2001, shortly before Enron collapsed, the Parliament authorized the government to issue a sweeping reform of Italian corporate law and corporate directors’ crimes.52 With regard to the former, the criteria which the government would have to follow were pretty vague and allowed for wide discretion, as opposed to criminal provisions, which were very well-defined and left little room for adaptation to the new post-Enron environment. These criteria were such that enforcement of false accounting charges, for listed as well as non-listed companies’ directors and officers, would become almost impossible due to a shortened statute of limitations period, a heavier burden of proof for the prosecutor, and an exemption for violations involving incorrect estimates below certain thresholds.53 Further, the law that made it a crime for a director to receive loans in any form from her corporation would have to be scrapped.54 The government, the Prime Minister of which was under trial for false accounting charges relating to his family’s non-listed

obligation to the issuers. Brian R. Cheffins, Current Trends in Corporate Governance: Going from London to Milan via Toronto, 10 DUKE J. COMP. & INT’L

L. 5, 20 (1999). To be sure, since 2000, the Listing Rules have been “publicized” and are now issued and administered by the Financial Services Authority. See, e.g., Paul Geradine, The FSA Listing Rules, in A PRACTITIONER’S GUIDE TO THE

FINANCIAL SERVICES AUTHORITY LISTING RULES 1, 1 (Maurice Button & Kate Hatchley eds., 2001). 50. See generally Brian R. Cheffins, Corporate Governance Reform: Britain As an Exporter, in CORPORATE GOVERNANCE AND THE REFORM OF COMPANY LAW

10 (Brian Main ed., 2000) (discussing the development of the self-regulatory process in Britain). 51. Sarbanes-Oxley Act of 2002, § 406, Pub. L. No. 107-204. 52. Law of 3 October 2001, No. 366 (G.U., Oct. 8, 2001, No. 234). 53. See BORSA 2003. RAPPORTO REF. SUL MERCATO AZIONARIO [STOCK

EXCHANGE 2003 REPORT ON EQUITY MARKETS] 143-44 (2003). 54. To be sure, this provision (former Article 2624, Civil Code (Italy)) had almost never been enforced. See LUCA ENRIQUES, IL CONFLITTO D’INTERESSI

DEGLI AMMINISTRATORI DI SOCIETÀ PER AZIONI [CORPORATE DIRECTORS’ CONFLICTS

OF INTEREST] 472 (2000).


holding company,55 hastened to translate the Parliament’s criteria into law.56 Hence, a few months before Congress approved Sarbanes-Oxley, Italy took exactly the opposite direction with regard to crimes relating to corporate disclosure and managerial integrity.57

Soon after de facto decriminalizing securities frauds involving false statements in annual accounts, the government, prompted perhaps by bad conscience, appointed a commission of experts with the task of “examining the capability of the Italian legal system to provide the market with a true and fair view of the financial and economic conditions of listed companies, such that crises can be promptly detected and avoided.”58 The heavy influence of Sarbanes-Oxley’s solutions can be detected in the final report of this commission. The experts commission has recommended that the government, inter alia, strengthen the existing supervisory powers of Consob, the Italian Securities and Exchange Commission, upon auditing firms;59 prohibit the provision of non-audit services to audited firms by auditing firms and impose disclosure of any compensation received from the audited company by the auditing firm;60 extend the prohibition for audited firms to hire auditing firms’ partners or employees for a certain period of time to all companies belonging to the same group as the audited firm;61 require prompt disclosure of stock option plans;62 provide detailed information on off-balance sheet entities;63 prohibit loans and other forms of credit to directors;64 increase corporate disclosure, with specific regard to related party transactions;65 and revise and increase sanctions, inter alia, for insider trading and violations of the duty to disclose promptly price sensitive information.66 Thus far,

55. See The Fruits of Office, THE ECONOMIST, Aug. 11, 2001, at 40-41. 56. Legislative Decree of April 11, 2002, No. 61 (G.U. Apr. 15, 2002, No. 88). 57. See, e.g., Alberto Crespi, Le False Comunicazioni Sociali: Una Riforma Faceta [False Corporate Statements: A Facetious Reform], 46 RIVISTA DELLE

SOCIETÀ.1345 (2001). 58. COMMISSIONE DI STUDIO, RELAZIONE FINALE [FINAL REPORT] 2 (September 27, 2002) (on file with the author). 59. Cf. Sarbanes-Oxley Act of 2002, Pub. L. No. 107-204, § 3, 116 Stat. 749-50 (“Commission Rules and Enforcement”). 60. Cf. Sarbanes Oxley Act § 201 (prohibiting auditors from providing non-audited services to companies they audit). 61. Cf. Sarbanes Oxley Act § 203. 62. Cf. Sarbanes Oxley Act § 403. 63. Cf. Sarbanes Oxley Act § 401. 64. Cf. Sarbanes Oxley Act § 402. 65. Cf. Sarbanes Oxley Act § 401. 66. Cf. Sarbanes Oxley Act Titles VIII, IX, & XI (strengthening civil and


however, nothing has been done to implement its proposals apart from some steps from the Consob in the direction outlined by the Government Commission.67

Recently, the Italian law on self-dealing and insider dealing transactions, two of the main problems with Italian corporate governance practices, has definitely become much tighter. In 2002, Consob issued new rules requiring prompt, on-going disclosure of related party transactions and of trading by companies controlling listed companies.68 The Italian Stock Exchange (Borsa Italiana) has imposed disclosure of insider trading above certain volumes by corporate directors and officers.69 Interestingly, many listed companies have adopted internal codes which are stricter than required by the Stock Exchange.70

In the summer of 2002, the Italian Corporate Governance Code was revised and improved under the auspices of the Italian Stock Exchange, the Listing Rules of which require companies to disclose annually whether they comply with the Code or explain why they do not. In the revised version, the Code contains a more precise definition of independent directors71 and provides that audit committees of listed companies controlled by other listed companies be composed solely of independent directors, while in other companies a majority of independent directors is sufficient with the rest chosen among non-executive ones.72 It also provides for more stringent provisions on related party transactions.

In January 2003, the Government approved an act reforming corporate law, which will come into force on January 1, 2004.73

criminal penalties for securities fraud). 67. See infra text accompanying notes 68. 68. Delibera Consob n. 13924, February 4, 2003 (modifying issuer’s Regulation), available at http://www.consob.it. Control is defined, in short, as dominant influence on a company, joint control being irrelevant for this purpose. See, e.g., Guido Mucciarelli, Commento sub art. 93 [Comment under Article 93] , in LA DISCIPLINA DELLE SOCIETÀ QUOTATE NEL TESTO UNICO DELLA

FINANZA, D. LGS. 24 FEBBRAIO 1998, N. 58. COMMENTARIO [THE REGULATION OF

LISTED COMPANIES IN THE CONSOLIDATED ACT ON FINANCE, LEGISLATIVE DECREE

OF FEB. 24, 1998, COMMENTARY NO. 58] 33, 60-62 (Piergaetano Marchetti & Luigi A. Bianchi eds., 1999). 69. See BORSA 2003, supra note 53, at 146. 70. Id. 71. COMITATO PER LA CORPORATE GOVERNANCE DELLE SOCIETÀ QUOTATE, CODICE DI AUTODISCIPLINA [SELF-REGULATION CODE] 6, translated in CORPORATE

GOVERNANCE CODE 6 (2002), available at http://www.borsaitalia.it/opsmedia/pdf/ 8077.pdf. 72. Id. at 6-7. 73. Legislative Decree of January 17, 2003, No. 6. (G.U. Jan. 22, 2003, No. 8/L).


Possibly influenced by recent corporate scandals around the globe, the reform tightens up the rules on conflict of interest transactions, providing that whenever a director has an interest in a transaction, she must fully disclose it to the board of directors and may not act on behalf of the corporation with regard to the transaction, which she was allowed to do under the prevailing construction of the previous law on the subject.74 An authorization by the board is needed instead, and the board’s decision to enter into the transaction has to be adequately motivated.75 Furthermore, the reform introduces a prohibition on the taking of corporate opportunities. Finally, the reform allows companies to choose among three board structures: the traditional Italian dual structure, in which the board of directors works side by side with a separate board of auditors (collegio sindacale), that has auditing functions; the German-style two-tier board, with no employee participation; and the Anglo-American one-tier board system, which, interestingly, mandates the presence of an audit committee entirely composed of independent directors.76

E. United Kingdom

Post-Enron corporate governance reform initiatives in the United Kingdom have thus far consisted mainly of one study on non-executive directors commissioned by the government,77 one study on audit committees by a group78 appointed by a government-funded organization,79 and some initiatives on audit and accounting issues.80

Derek Higgs’ review of the role and effectiveness of non-

74. See, e.g., Luca Enriques, The Law on Corporate Directors’ Self-Dealing: A Comparative Analysis, 2 INT’L & COMP. L.J. 297, 318 (2000). 75. Article 2391, Civil Code (Italy), as modified by Legislative Decree of January 17th, 2003 No. 6. 76. Cf. Sarbanes-Oxley Act of 2002, Pub. L. No. 107-204, § 301 (Public Company Audit Committees). 77. DEREK HIGGS, REVIEW OF THE ROLE AND EFFECTIVENESS OF NON-EXECUTIVE DIRECTORS (2003), available at http://www.dti.gov.uk/cld/non_exec_review/ index.htm. 78. AUDIT COMMITTEES COMBINED CODE GUIDANCE (2003), available at http://www.frc.org.uk/publications/content/ACReport.pdf. 79. The Financial Reporting Council is supported by the accountancy profession, the London Stock Exchange (acting in concert with the banking and investment community), and the U.K. government. See Financial Reporting Council webpage at http://www.frc.org.uk. 80. See FINAL REPORT OF THE CO-ORDINATING GROUP ON AUDIT AND

ACCOUNTING ISSUES (2003), available at http://www.dti.gov.uk/cld/cgaai-final.pdf; see also REPORT OF THE REVIEW OF THE REGULATORY REGIME OF THE

ACCOUNTANCY PROFESSION (2003), available at http://www.dti.gov.uk/cld/ accountancy-review.pdf.

https://www.researchgate.net/publication/228253239_The_Law_on_Company_Directors'_Self-Dealing_A_Comparative_Analysis?el=1_x_8&enrichId=rgreq-3e562bb9917a819133b6f1e0926e8002-XXX&enrichSource=Y292ZXJQYWdlOzIyODE0NjE0NTtBUzo5OTU1NjM2MDQ1ODI1OEAxNDAwNzQ3NDk1MDEz

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executive directors deserves some discussion here, as it contains very bold recommendations on corporate governance, which, if adopted,81 would confirm the U.K.’s leading role in corporate governance reform. In short, Mr. Higgs recommends that at least “half the members of the board should be independent non-executive directors,” while the chairman, whose role should be separated from that of the CEO (as is already the case in most U.K. companies),82 should meet the test of independence at the time of appointment.83 The definition of independence is particularly demanding, leaving it to the board to determine whether a director is independent “in character and judgment,” in the absence of “relationships or circumstances which could affect, or appear to affect, the director’s judgment.”84 A senior independent director should also be appointed, with the task of “be[ing] available to shareholders, if they have concerns that have not been resolved through the normal channels of contact with the chairman or chief executive.”85 The nomination committee should be composed by a majority of independent directors86 and great emphasis is given to the recommendation that “the pool of candidates for non-executive director appointments” be broadened, including candidates from the non-commercial sector, in order to increase board diversity.87 Audit committees should be composed entirely of independent directors.88 I shall come back to the Higgs Report in Part IV.

IV. INDEPENDENT DIRECTORS: MONITORS OR ÜBERMENSCHEN?

As Part III has shown, a popular view present not only in the United States, but also in Europe, holds that outside directors should be more independent, as reflected also in their selection and nomination process; more numerous and, at least according to Mr. 81. The Report and especially the new corporate governance code draft therein have met strong opposition by Britain’s industrialists. See Hating Higgs, ECONOMIST, Mar. 15, 2003, at 63. 82. HIGGS, supra note 77, at 23 (“Around 90 per cent of listed companies now split these roles.”). 83. Id. at 5, 23-24. 84. Id. at 37. Relationships which would exclude independence include former employment (until five years after the end of the relationship), direct or indirect material business relationships, receiving “additional remuneration from the company apart from the director’s fee,” participating in the company’s share option pay scheme, close family ties with directors, and having served on the board for more than ten years. Id. 85. Id. at 6, 31. 86. Id. at 40. 87. Id. at 6-7, 42-45. 88. Id. at 60; see also AUDIT COMMITTEES COMBINED CODE GUIDANCE, supra note 78, at 6.


Higgs, more diverse; more active and more in control of the board’s monitoring activity; and perhaps, in away, more than human.

A. More Independence

As is well known, no definition of independence will ever assure that an independent director will indeed act as such. The broader the definition, of course, the better. However, as Professor Barnard has noted, “no definition will cover every situation and . . . traditional measures of independence . . . cannot capture those situations where even those directors who appear to be independent may not be because of social ties, a desire to be a team player or simple passivity.”89 Enron has taught that outside directors’ independence can be compromised also by charitable contributions to institutions with which the director is affiliated, and other kinds of little visible “bribes.”90 More generally, as the Business Roundtable noticed back in 1997, “[d]irectors can satisfy the most demanding tests for independence, but if they do not have the personal stature and self-confidence to stand up to a non-performing CEO, the corporation may not be successful.”91

In order to ensure independence, emphasis has been given to the process of selecting and nominating independent directors, especially by the Higgs Report and, in the United States, by the newly approved NYSE Listing Rules.92 This is also reflected in legal scholarship: Professor Gordon has called for a change in “the nominating and compensation practices for what might be called ‘trustee’ directors in large public corporations,” proposing that audit committee members should “be ‘self-nominated,’ that is, the committee should have the power to designate the managerial nominees for directors who will be expected to serve on the audit committee.”93 According to Professor Bratton, what is needed is “an

89. Jayne W. Barnard, The Hampel Committee Report: A Transatlantic Critique, in 19 COMPANY LAW. 110, 114-15 (1998). 90. See, e.g., Jeffrey N. Gordon, What Enron Means for the Management and Control of the Modern Business Corporation: Some Initial Reflections, 69 U. CHI. L. REV. 1233, 1242 (2002). 91. THE BUSINESS ROUNDTABLE, STATEMENT ON CORPORATE GOVERNANCE 2

(1997) (emphasis added), available at http://www.brtable.org/pdf/11.pdf. 92. See CORPORATE GOVERNANCE RULE PROPOSALS REFLECTING

RECOMMENDATIONS FROM THE NYSE CORPORATE ACCOUNTABILITY AND LISTING

STANDARDS COMMITTEE AS APPROVED BY THE NYSE BOARD OF DIRECTORS AUGUST

1, 2002 (proposing a new Section 303A, par. 4, covering nominating committees, which would be composed entirely of independent directors and would have responsibility for selection of board nominees), available at http://www.nyse.com/pdfs/corp_gov_pro_b.pdf. 93. Gordon, supra note 90, at 1243.


independently-nominated outside director – an outside super monitor.”94

With regard to nomination processes aimed at ensuring independence, Italy has had a positive experience which is worth recalling here. A 1994 law on privatization has mandated minority shareholder representation in privatized firms’ boards.95 Hence, directors selected and elected with the votes of institutional investors sit in the board of some of the major Italian listed corporations,96 including ENI, Telecom Italia, and ENEL, respectively the first, second, and fourth Italian companies in terms of market capitalization.97

There is anecdotal evidence showing that independently nominated directors have been playing a definitively positive role within the boards of privatized companies.98 In one instance, independently-nominated directors put pressure on executive directors after a restructuring plan was very badly received by the market, prompting the executive directors to put the plan aside. In another instance, an independently-nominated director acted as a de facto whistle blower by resigning from the board after the audit committee on which he sat found out about some undisclosed personal interests of some directors in a merger. Other independently-nominated directors have been playing an important role in assuring that good corporate governance principles are in place at their companies. Recently, independently-nominated board members in a company still controlled by the government have sided with management in order to counter attempts by the government to interfere with the company’s business.

This positive experience could well provide a model for transitional and developing countries, where corporate governance

94. William W. Bratton, Enron and the Dark Side of Shareholder Value, 76 TUL. L. REV. 1275, 1337 (2002) (emphasis added). 95. See, e.g., Marcello Bianchi, Magda Bianco, & Luca Enriques, Pyramidal Groups and the Separation Between Ownership and Control in Italy, in THE

CONTROL OF CORPORATE EUROPE 154, 185 n.15 (Fabrizio Barca and Marco Becht eds., 2001). 96. See MARCELLO BIANCHI & LUCA ENRIQUES, CORPORATE GOVERNANCE IN

ITALY AFTER THE 1998 REFORM: WHAT ROLE FOR INSTITUTIONAL INVESTORS?, Quaderni di Finanza Consob No. 43, 38 (2001), available at http://papers.ssrn.com/sol3/papers.cfm?abstract_id=203112. The involvement of institutional investors (mutual funds) in the choice and election of minority directors is made possible in Italy by very loose definitions of control in order to trigger rules like the prohibition on insider trading and so on. Id. at 37. 97. Consob data at December 31, 2002 (on file with author). 98. The evidence to which I refer here is based upon my memories as a newspaper reader and upon conversations with some independently nominated directors.


practices seem to matter much more than in the United States or in the United Kingdom.99 This success has especially relied on the kind of people designated as nominees by mutual fund managers, who are usually selected from among the most well-reputed lawyers and the most prominent finance and business law professors. In other words, they are chosen from among people who have a strong concern for their reputation and are among the very few in Italy who may fear an exposé in the international financial press.100

B. Number and Variety

Recent proposals have stressed the importance of having a higher number (usually a majority) of independent directors on the board. For instance, Professor Hopt has suggested a “European principle according to which, first, the board as a monitoring body should be independent of management and, second, in the audit, remuneration, and appointment committees there should be at least a majority of members also independent from the company in the sense of the [U.K.] Combined Code.”101 In light of its co-determination laws, this is eventually as far as Germany could go.

Emphasis has been recently given also to the importance of putting together a diverse set of board directors. The Higgs Report, in particular, emphasizes that “[t]he interplay of varied and complementary perspectives amongst different members of the board can significantly benefit board performance.” The Report calls for a “commitment to equal opportunities” and a broadening of the pool of candidates for independent director positions. The Higgs Report suggests that directors be chosen among “suitable senior management just below board level,” and people serving in “roles such as human resources, change management and customer care,” where women are more strongly represented, and among foreigners and people in charitable or public sector bodies.102

If it is true that what prevents independent directors from

99. Compare Bernard S. Black, Does Corporate Governance Matter? A Crude Test Using Russian Data, 149 U. PA. L. REV. 2131 (2001), with Sanjai Bhagat & Bernard Black, The Relationship Between Board Composition and Firm Performance, in COMPARATIVE CORPORATE GOVERNANCE: THE STATE OF THE

ART AND EMERGING RESEARCH 281 (Klaus J. Hopt et al. eds., 1998). 100. See Barnard, supra note 89, at 111 (stating that improvements in U.S. corporate governance were prompted by “a fear of litigation or fear of an exposé in the Wall Street Journal”); David A. Skeel, Jr., Shaming in Corporate Law, 149 U. PA. L. REV. 1811, 1841-44 (2001) (highlighting the role of Fortune and Business Week as non-judicial enforcers making use of the “shaming technique”). 101. HOPT, supra note 44, at 16. 102. HIGGS, supra note 77, at 42-43.


acting as shareholder champions is, as Warren Buffett put it, an excessively cozy “boardroom atmosphere,”103 then a diverse set of independent directors may make it more likely that the tough questions are asked.104 As usual, however, one may wonder what the costs of this change in boardroom atmosphere will be, as well as the opportunity costs and other costs associated with lengthier meetings. A too-confrontational boardroom, in which it is more likely that the question of whether the CEO should be replaced will be raised, may well lessen the CEO’s incentive to provide sufficient and prompt information to the board in an attempt to try and save her chair.105

Intuitively, the optimal number and degree of diversity of independent directors will vary from industry to industry, from firm to firm, and from time to time. Any recommendation for a minimum number of independent directors and for a higher degree of diversity among directors is likely to be good for some corporations and bad for others.106 It is true that in most countries the recommendations on such issues are not binding, since listed corporations are free to decide whether to comply with them or to explain why they do not. Companies and their CEOs, however, may find it hard to explain convincingly why they have deviated from recommended behavior: Even the most shareholder-value minded board having legitimately decided that a uniform, insider-dominated board would be the best solution for the corporation, will find it hard to convince the market that this is not a self-serving choice.107 The cost in terms of lower investor confidence of such a move may be higher than the cost of following commonly-adopted corporate governance recommendations.

103. Letter from Warren Buffett, CEO of Berkshire Hathaway, to Berkshire Hathaway Shareholders (February 21, 2003), available at http://www.berkshirehathaway.com/message.html. 104. See Lynne L. Dallas, The New Managerialism and Diversity on Corporate Boards of Directors, 76 TUL. L. REV. 1363, 1400 (2002). 105. See COFFEE, supra note 2, at 42 (“[A]s the mechanisms of corporate accountability . . . have shortened management’s margin for error, the incentive to engage in earnings management and accounting irregularities is more widespread.”). 106. See Henry N. Butler, Boards of Directors, in 1 THE NEW PALGRAVE

DICTIONARY OF ECONOMICS AND THE LAW 165, 167 (Peter Newman ed., 1998). 107. Cf. Richard Donkin, A Big Prize Beckons in Boardroom Reform, FIN. TIMES (London), Mar. 14, 2003, at 11 (reporting the view of a boardroom advisory consultant worrying that “too many companies will not take advantage of the opportunity to explain a decision that might appear contrary to the spirit of the recommendations [contained in the Higgs Report]”).


C. Greater Role for Independent Directors

No corporation would spend a lot of directors’ time and corporate money (in consultation fees, etc.) in order to select the right people to sit on its board, only to keep them idle. Independent directors are supposed to become familiar with the business of the corporation and with its organization, to keep informed, to monitor managers, to raise the tough questions, to review their most important decisions, to keep an eye on the outside auditor, to determine the appropriate level of compensation for executive directors, and so on.108

It is easy to predict that the outcome of such hyperactivity will be that CEOs of public corporations will have much less freedom to serve their own interests (which is, of course, good), but also much less freedom (and less time) to make innovative and profit-generating business decisions (which is, of course, bad).109 The increased bureaucratization of business decision-making within public corporations may well be the most negative long-term consequence of Enron and its progeny of scandals,110 fostering going-private transactions and delaying plans to go public by existing private companies.111

D. Outside Directors or Übermenschen?

When one thinks about the qualities an independent director should have and the task given to her by corporate governance best practice codes, it is only too natural to wonder whether there are indeed enough human beings around who may qualify to serve as independent directors or whether, instead, such an independent director will have to be a sort of homo novus, created by capitalism in order to overcome its current crisis. The Higgs Report well illustrates this point. According to the Report,

Non-executive directors need to be sound in judgement and to have an inquiring mind. They should question intelligently,

108. See, e.g., HIGGS, supra note 77, at 27-29. 109. Brian Cheffins well highlights the trade-off between board’s increased monitoring and innovation. See BRIAN R. CHEFFINS, COMPANY LAW THEORY, STRUCTURE AND OPERATION 624-25 (1997). 110. To be sure, bureaucratization of board of directors had already taken place in the United States following Smith v. Van Gorkom, 488 A.2d 858 (Del. 1985). See Jonathan R. Macey, Smith v. Van Gorkom: Insights about C.E.O.s, Corporate Law Rules, and the Jurisdictional Competition for Corporate Charters, 96 NW. U.L. REV. 607, 621 (2002). 111. Cf. Stephen J. Redner, Thinking of Going Public? Think Twice, Then Read the Sarbanes-Oxley Act of 2002, 6 J. SMALL & EMERGING BUS. L. 521 (2002).


debate constructively, challenge rigorously and decide dispassionately. And they should listen sensitively to the views of others. . . . They must be well-informed about the business . . . and the issues it faces. This requires a knowledge of the markets in which the company operates as well as a full understanding of the company itself . . . . First and foremost, integrity, probity and high ethical standards are a prerequisite for all directors. . . . [A]ll non-executive directors must be able and willing to inquire and probe. They should have sufficient strength of character to seek and obtain full and satisfactory answers within the collegiate environment of the board . . . . [S]trong interpersonal skills are an essential characteristic of the effective non-executive director. Much of their effectiveness depends on exercising influence rather than giving orders and requires the establishment of high levels of trust. . . . Non-executive directors should be willing and able to acknowledge when their individual contribution is no longer fresh, and should make way for newcomers in an orderly and managed way.112

Perhaps this is just an exercise in rhetoric and no one will take these recommendations too seriously. As a matter of fact, anyone displaying this plethora of personal qualities would qualify for sainthood. And one may wonder how better corporate governance will become if we are to rely on non-executive directors’ sainthood in order to prevent executive directors’ sins.

V. ONE FINAL COMMENT: DIFFERENT OWNERSHIP STRUCTURES, SAME CORPORATE GOVERNANCE RULES?

This comment has speculated on why no public reaction to corporate scandals has taken place in Europe similar to that which occurred in the United States, although Europe has experienced scandals comparable to those in the United States in terms of the number and size of companies involved. A number of explanations for this were provided in Part II, including state aid to failing corporations, the absence of a European public opinion, and a higher degree of investor disenchantment regarding insiders’ behavior. Perhaps one could also add the fact that in no European corporate scandal has so much personal greed and corruption emerged as in the U.S. scandals.

Although little backlash is resulting from corporate scandals around Europe, politicians are banking on the American public’s reactions in order to push through reforms very similar to those

112. HIGGS, supra note 77, at 28-29 (emphasis added).


enacted by the U.S. Congress, as well as a general review of corporate governance practices.113 As underlined in Part IV, policymakers and self-regulatory bodies on both sides of the Atlantic are relying ever more upon independent directors, who should act, borrowing Professor Bratton’s words, as “super-monitors.”

As hinted in Part II, ownership structures in continental Europe are different from those in the United States and in the United Kingdom. Most continental European companies are controlled by block-holders.114 Often, especially in the case of major corporations, the degree of separation between ownership and control is not much lower than in the United States and in the United Kingdom, thanks to deviations from the one-share/one-vote principle in the form of dual class shares, pyramids, cross-holdings and other such devices.115 But, contrary to what is the case for publicly held corporations, control of such companies is under no threat of a hostile takeover.

In light of these strong differences in ownership structures, one may be surprised to find that the policymakers’ agenda in continental Europe is so similar to that in the United States and in the United Kingdom, i.e., that different ownership structures are not significantly taken into account when dealing with corporate governance issues.116 With regard to U.S. (and possibly U.K.) directors, one can agree that, “[t]oday, as the mechanisms of corporate accountability (e.g., takeovers, control contests, institutional activism, more aggressive boards) have shortened managements’ [sic] margin for error, the incentive to engage in earnings management and accounting irregularities is more widespread.”117 The same is not true for block-holder-dominated European companies, in which directors are faithful to block-holders, who in turn are little accountable to outside investors and face no threat of a hostile takeover. When no devices such as pyramids are used to separate ownership from control, the block-holder’s ownership stake in the company acts as a curb to her opportunism. While separation between ownership and control can be as complete as in a publicly-held U.S. company, when one or more of these devices are in place, dominant block-holders’ set of incentives will not be comparable to those of a CEO in a typical U.S. 113. See discussion supra Part III. 114. See, e.g., Marco Becht & Colin Mayer, Introduction, in THE CONTROL OF

CORPORATE EUROPE, supra note 95, at 1, 19. 115. Id. at 30-35. 116. One exception is in the Italian corporate governance code, which provides for more stringent requirements for companies controlled by other listed companies, i.e., for pyramids. See supra text accompanying note 70. 117. COFFEE, supra note 2, at 42.


corporation for two reasons. First, mechanisms of corporate accountability work much less effectively. Second, there is no short-term pressure to cheat or to take all the money and run.

Mechanisms of corporate accountability work less effectively for three reasons. First, as already stated, there can be no threat of a hostile takeover. Second, institutional investor activism is less effective when a company has a dominant shareholder holding uncontestable control. In fact, the usual threats institutional investors can make during negotiations with management cause little concern to the dominant shareholder: The threat of a loud “exit,” of dumping their stock on the market, is less relevant when a hostile takeover is impossible, and the threat of making a shareholder proposal or of starting a just-say-no campaign is meaningless to the block-holder, who normally has a majority of the votes.118 Third, boards themselves will normally be less aggressive in contrasting a bad block-holder than in contrasting a bad CEO for the very simple reason that a CEO can be displaced by the board, while a block-holder, far from having to fear removal, may replace the entire board at the next meeting.119

Block-holders have less incentive to cheat on the company’s accounts and to engage in short-term, big, one-shot expropriations, because they know they are there to stay.120 It is far better to engage in small-size, on-going looting of the company’s assets with little risk of being brought to court by shareholders or of being prosecuted than to bet all the company’s assets in some form of fraudulent high-risk, high-personal return strategy which may even drive the company into bankruptcy.

If a conclusion is to be drawn from this, it is that corporate governance rules in continental Europe are bound to be more relevant than in the United States and in the United Kingdom due to the lesser effectiveness of mechanisms of corporate accountability there. It is left to wonder, however, whether devices such as “more” independent and proactive directors can prove to be helpful in an environment which perceives block-holders instead of independent directors as what is possibly closest to an Übermensch.121

118. See BIANCHI & ENRIQUES, supra note 96, at 12-13. 119. See Guido Rossi, Do Corporate Governance Recommendations Change the Rules for the Board of Directors?, in CAPITAL MARKETS AND COMPANY LAW

493, 501 (Klaus J. Hopt and Eddy Wymeersch eds., 2003). 120. See BORSA 2003, supra note 69, at 135. 121. See Luca Enriques, Do Corporate Law Judges Matter? Some Evidence from Milan, 3 EUR. BUS. ORG. L. REV. 765, 811 (2002) (“Most Italians . . . have a deferential attitude toward the wealthy and powerful.”).

Bad Apples, Bad Oranges: A Comment from Old Europe on Post-Enron Corporate Governance Reforms

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