By Doru Frantescu, Director and co-founder of VoteWatch Europe
On 10 June, the EP plenary will vote on a proposal to reshape the EU company law (the Cofferati report). This analysis weights the odds that some of the hottest items in the proposal have to make it through the EP’s decision body, such as the extra rewards for long-term shareholders, shareholders’ say on directors’ pay, comply or explain principle versus binding regulation, greater involvement of employees in management decisions and the country-by-country reporting of profits by multi-national companies. The analysis takes into account the votes in the leading EP committee (JURI), the voting records of the political forces in previous occasions and the new balance of power resulted from the 2014 European elections.
Many businesses and stakeholders are taken by surprise when they see what kind of EU law has actually come out of the EP. However, the analysis of the position of each key player and the overall balance of power can provide highly valuable insights, forecasting the way in which the EP will shape key pieces of legislation (expected to be) put forward by the Commission. This analysis will discuss what is likely to happen to some of the key proposals aimed at reshaping EU corporate governance legislation, which have been initiated by EU Executive (Commission) in April 2014.
Granting binding extra rewards for long-term shareholders ? Unlikely.
In early May, the Legal Affairs (JURI) committee of the European Parliament has voted by a narrow majority a proposal to reward the long-term shareholders of European companies with extra votes in their GAs. The proposal is part of a larger overhaul of company law which aims at tackling “short-terminism” in stock markets. The proponents of this rule argue that the move is needed because short-term shareholders are less incentivized to hold company boards to account, which may lead to a more adventurous entrepreneurship and higher payments for the executive management. Rewards for long-term shareholders would have to be in the form of extra voting rights, tax incentives, loyalty dividends or loyalty shares.
The opponents argue that this rule is counter-productive as it is discriminatory and the national governments should not be forced by the EU, through a Directive, to interfere at this level of internal organisation of private companies. They say that each state should be allowed to decide for itself whether to apply such rule or not.
This measure was introduced in 2014 in France, where it is known as the “Florange double-vote law”. This law, passed by a socialist-dominated Parliament, automatically grants double voting rights from 2016 to shares registered for more than two years unless two-thirds of shareholders vote to overturn it. It was reported to receive the backing of one key company, Renault. The French media has reported that 60% of the shareholders of Renault voted against backing the rule, but since the law stated that only with a 66% majority could the shareholders’ oppose the entry into effect of he double-voting rule, this 60% became insufficient.
It seems that there is substantial resistance for complying with this principle among the industry, which will therefore lobby the decision-makers to reconsider it, being likely to find natural allies among the centre-right politicians.
The family of European socialists are now pushing for a similar law to be adopted at the EU level, which would therefore apply across the 28 member states. As shown by the vote in the JURI committee, the other left-of-center MEPs, the Greens and the radical-left / communists, have teamed-up with the socialists and also put their weight behind the proposal. On the other hand, the centre-right people’s party and conservative EU parliamentarians have voted against it, but did not rally enough votes to reject it: the proposal was pushed through by 13 votes in favour to 10 against. Interestingly, the two ALDE members present at the vote were split, while the Eurosceptic EFDD members voted alongside the centre-left. Here is how each MEP voted in committee:
|Result of the vote in JURI Committee|
|In favour – 13||Against – 10||Abstention – 0|
|MEPs||ALDE:Marinho e Pinto;||ALDE: Wikstrom;|
EP plenary likely to overturn committee’s decision
If we projected this picture at the level of the plenary, which is the deciding EP body and which will vote on it in June, the proposal would therefore pass. However, a more in-depth analysis shows a slightly different picture, which may result in the opposite outcome.
The proponents of the double-voting rule will be able to rely on the support of the radical-left / communists, the greens and most of the socialists. Some questions marks arise in the case of the British labour / socialist delegation, since none of its members were present to the vote in committee. The British labour MEPs are known to be the most free-market oriented within the S&D group, but they have taken a position in favour of measures for long-term shareholders. We may see some abstentions among these MEPs.
ALDE group was split 50-50 in the committee, but it is foreseeable that this will not be the case in the plenary, where a substantial majority (probably around 80-90%) of ALDE members will vote the free-market way. The remaining 10-20% percent might come from among the French, Spanish and Portuguese.
The two EFDD members voted for the proposal in the committee. However, none of them was from the pro free-market UKIP. In the plenary, UKIP is likely to vote against the proposal, while most of their EFDD colleagues, mainly the left-oriented 5 Star Movement, will vote in favour.
The remaining votes belong to the non-attached, mainly French Front National. Marine Le Pen’s party has had an ambiguous position vis-à-vis Florange law, stating that it does not solve the problem of the industry and the workers. However, it did not state clearly that the law in itself is bad. Consequently, their voting behavior is harder to predict at this stage, though I am inclined to think that most of the Front National MEPs will vote in favour.
On the other hand, it is unlikely that we will see any splits within EPP or ECR, who will vote in block against the proposal, regardless of the nationality of their members (these groups are usually highly cohesive when it comes to voting on legislation directly impacting on European businesses). As a result, the vote will be very tight, and the result might depend on which group mobilises more MEPs to actually turn out to vote. All in all, a narrow majority (a margin of between 15-30 votes) this time is likely to be on the ‘against’ side and overturn the result in the committee.
Moreover, even if the proposal is passed by the plenary of the European Parliament, the bill will then go in the Council (in fact, the bill is already discussed by the leading MEPs with the Council’s representatives, informally). Here, the majority of governments are center-right, and we could expect fierce opposition from the British government in particular. Consequently, it is likely that the Council would object to this proposal. If the proposal comes back to the EP for a second reading, the proponents of the double-vote rule will need a qualified majority to push it back, which they certainly do not have. This means that, despite the temporary success voiced in the committee, the rule does not stand too many chances of being imposed at EU level – unless it is integrated into a bigger horse-trading package, which might change the sign of the equation.
Nevertheless, the French government has an important say in the Council (where it was outvoted only twice in the last 5 years), and since it has recently implemented this rule at national level, it will oppose any regulation going in the opposite direction. Consequently, things seem to be heading towards a compromise in which an amendment by the EPP and/or its allies to allow each member state to decide for itself will reach a majority, and this provision will find its way into the final EU law.
Country-by-country reporting of profits: likely to be rejected; ALDE holds the key votes
An amendment inserted by centre-left MEPs requiring for large “undertakings and public-interest entities” to publish country-by-country reporting on profit or loss before tax, taxes on profit and public subsidies received, was also adopted. This provision was added in order to improve tax transparency in the light of the Lux Leaks and other similar tax-related arguments.
During the debate in the JURI Committee, MEPs from center-right groups clearly expressed their disapproval of the provision. Liberal MEPs argued that this mandatory requirement could have a negative impact on businesses and affect European competitiveness. The EPP and the ECR have also voiced their opposition to the amendment and explained that the public disclosure of sensitive information is not always an appropriate measure for businesses.
Beyond the official statements, it seems that the position of the ALDE is not so clear, and it will depend on the exact wording. At a vote in January 2015, ALDE voted in favour of a statement that supported country-by-country reporting. The exact paragraph said:
“Calls for an effective change in EU taxation policy and urges the Commission to fight tax fraud, tax evasion and tax avoidance and aggressive tax planning at the EU and global levels; welcomes the Commission’s intention to launch an action plan and expects bold and swift measures shortly; calls on the Commission to prepare additional proposals in key areas, including legislation on the application of country-by-country reporting for cross‑border companies in all sectors and in all countries in which they operate;”
Having ALDE on its side, on that occasion the ‘pro country-by-country reporting camp’ won.
It seems, therefore, that the key to the adoption / rejection of country-by-country requirements for companies lies in the position of the ALDE group.
Shareholders’ vote on directors’ pay: individual member states to decide
A large majority of MEPs supports extending the oversight of the shareholders on how much the executive directors are paid. However, the difference in views is whether this oversight should take the form of effectively voting on the remuneration report. The left-of-centre forces say ‘yes’, and that this should be made binding through an EU regulation which would apply to all 28 member states. On the other hand, the pro free-market camp would like this to be only a recommendation, allowing each member state to apply this policy or not, depending on its own situation. At this point, the camp supporting a softer approach (EPP+ECR+ALDE+UKIP), i.e. allowing, but not obliging member states to grant the shareholders the right to vote on company’s remuneration report seems to have the upper hand and is likely to win in the EP plenary.
“Comply or explain” or strict binding EU regulation ?
One important point of controversy in the EU reform of corporate governance is to what extent the state should be allowed to interfere in the life of private companies. This is not explicitly discussed in the Cofferati report, but in another proposal which is part of the same package proposed by the Commission.
On the one hand, the centre-left argues that the relationship between the shareholders and the executive management should be strictly regulated by law, as otherwise no change will occur. On the other hand, the centre-right believes that the private sectors needs flexibility, since the business environment is very complex and it evolves fast, reason for which one-size-fits-all regulation would hinder entrepreneurship.
This ideological fight is anything but new. Since similar debates and votes have taken place in the past, we own enough analytical material and therefore solid ground to predict the position of the key power players and hence forecast the shape of the legislation that will exit the EP.
The ‘pro binding regulation’ camp can rely on the support of radical-left, greens and the probably all of the socialist MEPs, including the British labour. The camp supporting flexibility, or the ‘comply or explain’ principle, can rely on the support of the EPP, ECR and most of the ALDE members (some French and Iberian MEPs might vote differently). The remaining group, the EFDD, will most likely be divided, with the British UKIP voting for free-market, and the Italian 5 Star Movement voting for binding regulations. From among the non-attached, the large delegation of the Front National, known for its protectionist stance, will most likely vote in favour of binding regulations, while some of their colleagues, such as PVV MEPs, though much fewer, will vote the other way.
All in all, this vote will be tight and hard to predict. The political groups are aware of this too, therefore they will try to find ways to ensure a majority before the plenary votes, by putting forward slightly differently-phrased / softened versions of these opposing principles. As a result, we will probably witness a narrow victory of the “comply or explain” principle, while the centre-of-left camp may grab some smaller victories on extending the supervisory power of shareholders.
Greater involvement of employees in management decisions: likely rejected
Based on a similar reasoning, the push from the socialists and their leftist allies to increase the involvement of the workers in the management decision is likely to be rejected. Despite being very vocal about it, the proponents of such a move simply lack the numbers to push it through the plenary, as the centre-right, including ALDE, fear that such measure would hinder the capacity of corporate decision-makers to make objective and sustainability-oriented decisions. Judging by their track record, it is unlikely that any of the MEPs in the EPP, ECR, ALDE would vote otherwise, thus the proposal will probably fail to reach a majority by a margin of around 30-45 votes (also depending on how the paragraphs / amendments are phrased).
(Binding) gender quotas in management boards: almost certain to pass
A recurring topic in the EP debates in the past few years has been the under-representation of women in the Boards of big companies. This issue is not included explicitly by the Commission in the corporate governance package, but it is likely that the EP will put it on the table. In fact, in the previous term, the EP has already voted a bill to make it binding for companies which are publicly-listed and have more than 200 employees to have at least 25% women in Boards. However, that proposal got stuck in the Council and has never made into law.
The centre-left, supported by some segments of the EPP, will use the opportunity of the corporate governance reform to put the matter again on the Council’s table. The ‘pro binding quotas’ camp is highly likely to reach a majority in the EP plenary. However, the key question here is whether it will reach a qualified majority (376 votes) which will allow it to stay strong in a potential second reading in the case of a rejection / watering down by the member states in the Council.
The proposed revision of the shareholders’ rights directive, presented by the Commission in April 2014 as part of a corporate governance package, includes provisions to ensure that listed companies can identify their shareholders and transparency rules for proxy advisors (who give voting recommendations), asset managers and institutional investors, such as pension funds and insurance companies. It also includes provisions to increase transparency and influence of shareholders on “related party” transactions (e.g. between a company and its management, directors, controlling shareholders or companies of the same group).
According to the European Commission, only 13 EU member states currently give shareholders “a say on pay”, either through a vote on directors’ remuneration policy and/or report. Only 15 require disclosure of the remuneration policy and 11 require disclosure of individual directors’ pay.
About the author:
Doru Frantescu is the Director of VoteWatch Europe, a Brussels-based organisation he co-founded in 2009. A political scientist and communication expert, he is the main author of numerous publications on voting behaviour in the European Parliament and the EU Council of Ministers. His analyses have been quoted by the media around the world (including the New York Times, Financial Times, the Economist, Wall Street Journal, Euronews) and specialised research institutes in over 20 countries.
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