Just before the August holidays NSFM submitted a response to the EU Green Paper on corporate governance. In reflecting on the ambitions of the EU and the current state of corporate governance in Europe, NSFM pleaded for a more heterox approach. Corporate governance should not mainly focus on the relationship between shareholders and companies — there are many more agency issues in financial markets. For example, corporate governance regulation should take the characteristics of shareholders, e.g. pension funds, into account. The critical objective of corporate governance regulation should be long-term sustainable growth; therefore regulation should try to support long-term behavior.
To further develop corporate governance in Europe, NSFM suggested a number of steps the EU could take to address current challenges. One approach is for the EU to constitute an Expert Panel to consider the understanding of best practices in Europe, for example concerning fiduciary duty, and whether this is consistently understood across the region, let alone applied consistently throughout the investment chain.
The Expert Panel could also consider the relationships between asset owners, their fund managers, companies and other stakeholders, and particularly the difficult areas of conflicts of interest discussed above, as well as ways in which the nature of those relationships can be made more transparent.
Part of this process might be to review mandates between asset owners and asset managers and compare them with the Model Mandate Initiative of the International Corporate Governance Network, not least to get a benchmark to see how quickly change happens (or not). There could also be other best practices of which companies, investors and other stakeholders could benefit. Within this ‘learning process’, the long-term sustainable growth of companies should be the starting point.
NSFM welcomes the Kay Review in the UK and believes a similar, reflective approach is needed on a European level. We hope that there will be scope on the EU level to learn from this review and its conclusions and that it will be the start of a European discussion about how to organize the financial markets, a critical feature of the EU. However, discussion is not enough. Market participants expect a more fundamental perspective of the European Commission on the financial markets soon.
A number of research institutes and authors have identified ways in which tax laws could be modified to discourage short-term trading, reflecting the often un-recognised costs to society and risks to pension beneficiaries such trading creates. Changing financial and corporate governance incentives through these and other mechanisms may more effectively remedy the problem of an excessively short-term orientation in the capital markets than will voluntary best practice, although the difficulties of national responses to a global problem must be acknowledged.