UEA's 3rd Annual Research Colloquium

Next Thursday I shall be presenting my work at UEA's research colloquium. A schedule of presentations can be found here.

I am to give an overview of my research highlighting key points relating to:

- existing literature

- elements of originality

- empirical aspects.

Last year's events where particularly interesting where I presented early findings of my papers on derivative claims. The day finished with a delightful meal at a tapas resteraunt.

UEA Centre of Competition Policy 7th Annual Conference

UEA is soon to hold its 7th Annual Conference on competition policy.

This is an international conference on 'Consumers in Competition Policy' taking place on the 16th and 17th June.

The conference looks at provide answers to some interesting questions including:

- How do firms respond to non-rational consumers?
- How do consumers respond to (perceived) behaviour by firms?
- What determines the proportion of consumers who need to be informed/active to exert discipline on the market?
- How should the relation between competition law and consumer law be designed?
- How should consumer interests be represented/organised?

For more information or how to attend see here and here.

Where have I been?

After a spate of blog posts it has all been a bit quiet!

So, I thought I would provide a brief update to keep my avid (if any) followers happy.

My theory chapter is nearing completion. The work has identified different elements of "optimum" board features in accordance with three different corporate governance theories - Agency, Stewardship and Resource Dependency Theory - The work has identified that since the board structures are just models it is important to understand how each theory views the others board features. This is presented to show how risk levels may rise depending on which theory the board is influenced by.

For example, a board may contain elements of agency but may want to increase its access to resources through additional directors. Additional directors means increased agency costs but there is the potential increase in firm value from access to increased resources. A board influenced by agency will need to understand how elements of resource dependency influence a board and design structures to ensure interests of the directors are aligned.

As well as writing this chapter I have also begun data collection from the FTSE 100 on multiple directorships over the past 5 years. Early indications show that multiple directorships are present in the UK and anecdotal evidence shows CEOs and CFOs generally have at least one other directorship. Early indications show that most firms also restrict additional directorships for their executive directors on the board.

Those who have done data collection before I have new found sympathy. A truly gruelling task this is proving to be working through 500 annual reports. I can see why people compare a thesis to a child. It is a long and painful task but once it is complete, it will all be worth it... I hope...

ESMA publishes data on approved and passported prospectuses

The ESMA have published data on the amount of approved, sent and received prospectuses throughout the EU between 1 Jul 10-31st Dec 10.

The last data (CESR/07-225) collected was between the period 1st July 05-30 June 06. However, to draw some analysis the data can be broken up in to the same time period as the new data.

The data shows a notable decrease in the amount of approved and passported prospectuses despite Bulgaria and Romania being included in the latest study. This is due to them not being members of CSER until 1st Jan 2007. Data was not fully available for the earlier study either so the decrease may be even higher than the figures show.

The causes attributable to the decrease can be speculated about. The financial crisis and economic uncertainty may attribute to the decline. This may also be caused by the 'mutual recognition regime' in place prior to 1st July 05 which saw an increase in passports notified from comparable data from 2004.

Countries like the UK, Ireland and Luxembourg, who contributed significantly to the total amount of approved prospectuses throughout the EU, have seen significant decreases in approved prospectuses. Countries like Germany and Italy however have seen themselves move closer to the former countries in terms of approved prospectuses. Germany did however also suffer a decrease but Italy showed a notable increase from 88 prospectuses in 2005 to 332 in 2010. 

Total number of prospectuses approved:

UK: 2005 = 845; 2010 = 509

Luxembourg: 2005 = 493; 2010 = 314 

Ireland: 2005 = 788; 2010 = 241

Germany: 2005 = 301; 2010 = 291 

Total across EU: 2005 = 3328; 2010 = 2511

Article Publication Released

A bit later than expected due to inadequacies in the postal service but my gratis copy of my article has been received and here it is!

Citation: (2011) 32(3) Company Lawyer 76

EC Green Paper on Corporate Governance

Ready for more of the same? The Green Paper published by the Commission on corporate governance for European Companies was published yesterday.
This paper aims to address three key issues... (stop me if you have heard this before)

1. Board of directors - Non-executives are needed with more skills, diversity and experience and invest sufficient time in the board
2. Shareholder monitoring - Apparently, evidence shows the majority of shareholders are apathetic and focused on short-term goals. The review wants to try and get more shareholders involved and promote long-term returns and sustainability
3. How to apply 'comply or explain' - Companies are not providing sufficient explanations for diverging from the Code

Well, point 3 is perhaps an area which needs looking at. The Combined Code in the UK has increasingly seen more and more adherence to it - see for example Grant Thornton's Corporate Governance Review -, even leading up to the crash in 2008. Despite no "one size fits all" approach there seems to be evidence of firms converging to the same model. A deeper understanding is needed of why do people adhere to the Combined Code or generally corporate governance codes around the EU? One would hypothesise that it is because it attracts investors; but is that really enough to blindly walk in to complying with the Code? I am of no doubt that there is a stronger thought process before deciding on internal governance but a review is needed.

As to boards of directors this could potentially be interesting. The first point may be for at least UK companies is that non-executives are generally experienced and knowledgeable according to a 2009 review by Grant Thornton.

With non-executives becoming more involved does this change the structure of the board and does it affect our understanding of the firm?

It would seem points one and two of the Green Paper go hand in hand. Monitoring is difficult for shareholders and so boards become a market-induced body to monitor executive management. However, if non-executives become more involved then this may incur problems at least from an agency theory perspective. Shareholders will then have to monitor the boards more rigourously and in truth are likely to incur higher agency costs to ensure they do not incur conflicts of interest or shirk responsibilities.

However, I like many others, are not a strong believer of agency theory. For one agency theory often makes the common mistake of seeing the firm as a nexus of contracts. Law however, makes it clear this is not the case. A corporation is its own legal entity with objectives generally decided by the directors.

With the board becoming more involved we seem to be converging away from agency theory, closer to stewardship theory and resource dependency theory. It seems the biggest and boldest move would be to confirm the status of the company and the board as the principal according to agency theory with executive management as the agents.

Shareholders are not well placed to monitor who generally spread risk by having a diverse portfolio of investments and are not concerned enough to monitor any one individual firm. Instead of getting shareholders more involved we should be looking for ways to keep them investing whilst removing levels of direct involvement. This could be done through higher shareholder representation on the board for example.

One issue that needs to be rigorously addressed will be fiduciary law no matter what changes take place. Fiduciary law itself can be explained by agency theory and thus may be problematic if different economic theory such as stewardship can explain the firm.

With non-executives increasing their involvement how will this impact on their liability? Will it be necessary to have clearly defined duties depending on the type of director you are? Increased liability of course, is met with significant opposition and their resistance is usually enough to deter any significant changes.

Non-executives themselves are often executives of other companies. With suggestions of increased time commitment this may have an impact on the people capable of taking directorships. It may also cause stronger friction in multiple directorships or more severe or common breaches of the duty of care with directors spreading themselves too thin.

However, fiduciary law is flexible and based on fundamental principles of loyalty and care by the agent to the principal. As long as the director adheres to these principles owed to the company there should not be a pressing issue, more so for executive members of the board at least.

It seems safe to say the EC needs to think long and hard about the implications of involving shareholders and non-executives more in the company. Under the current structure non-executives should not become more involved without some sort of increased monitoring of them, which is a cost shareholders are unlikely willing to bare. But if directors and the company can be seen as the principal then it may go a long way to improving corporate governance as directors are more attached to the company, capable of understanding the company's needs, and objectives.

Conference on "European Company Law: the way forward" and employee participation in an SE

The European Commission announced that there will be a conference in Brussels 16-17th May.

This two day conference will cover areas including:
1) Corporate mobility and European company law
2) A European Model Company Act
3) Workers' participation
4) Tax and company law
5) Groups of companies
6) Services and company law

All areas are of particular interest within the field of regulatory competition.

Workers' participation is something of particular interest in the European Union with countries like Germany and co-determination or the UK with no employee participation

When companies in the European Union decide to form a "European Company" otherwise known as a Societas Europaea or "SE" they can do so in four ways: 1) Merger of 2 plcs from different Member States; 2) Transformation by turning your own company in to an SE as long as you have a subsidiary in another Member State for more than 2 years; 3-4) Joint holding or joint subsidiary meaning the founding companies will still exist as well. The latter may be appropriate when two companies wish to pursue a specific venture but not combine all their business.

When an SE does form however, there are employee participation rights under the SE Regulation 2157/2001, and Employee Participation Directive 2001/86

Article 12(2) of the Regulation states no SE shall be registered unless
1) There has been an agreement on employee participation
2) The employees have waived their rights to participate
3) The Standard Rules have been triggered

The first two are fairly self-explanatory. However, Standard Rules under the SE require a little more elaboration.

The Standard Rules make clear that where two companies where the Member States require no participation, then under the Standard Rules there will be no employee participation.

If both Member States of the founding companies require participation then the "highest standard" applies. This does not require some subjective analysis. It is merely an arithmetical one. If one Member State requires 20% employee participation on the board and the other 21% then the latter is the higher standard.

However, it may become more confusing when employees have different rights that are not synonymous with one another. i.e. one Member State may allow employees to vote one third of the members on to the board whereas another may be able to recommend half the member's of the board.

There will also be the situation where one Member State requires participation but the other does not.

Here we can apply the no-escape and no-export principles. The no-escape principle works with "highest standard". The fact that one Member State requires participation will mean that under the Standard Rules that is the highest standard. The company cannot "escape" employee participation by merging with a company that does not require employee participation.

On the other hand there is the no-export principle which attempts to counter-balance the no-escape principle. The Directive provides that when the total of the workforce - that is the employees of all companies merging - covered by employee participation is less than 25% then the Standard Rules will not automatically apply.

However, in such a situation the employees may unilaterally decide to apply the Standard Rules, which they presumably would do if they cannot negotiate anything better.

One other exception does allow for the parties to decide that the Standard Rules will not apply but if such a decision is reached there must be an agreement on participation or the employees waive their rights to participate.

This in theory is likely to leave two positions under the Standard Rules. Either the SE will not have employee participation because neither company requires it; or at least one company does require it and so there will be employee participation to the highest standard.

It will be interesting to see how the discussions on employee participation in Europe goes and what suggestions are put forward. - Unfortunately for me I am likely to have to keep my eyes posted rather than attend due to prior commitments.