MESSAGE FROM BOARD DIRECTORS TO THE EUROPEAN PARLIAMENT ELECTIONS AND THE WORK PROGRAM OF THE EUROPEAN COMMISSION
Board directors are concerned about the abundance of new legislation, so that companies and their boards do not become exhausted by new regulations and reporting obligations. That is why the Directors’ Institute Finland (DIF) issues a statement for the upcoming European Parliament elections and the future Commission’s work program.
DIF believes that companies and their boards must be given space to apply the new and forthcoming European legislation. Europe now needs a regulatory pause, and corporate boards must be allowed to focus on their main task, which is to steer companies to sustainable value creation in the long term. Legislation should not narrow down board work to reporting and oversight, nor take it in an operational direction by confusing the role of boards and executive management. Deciding on board compositions belongs to the shareholders, not to political decision-making.
”All new legislation must be prepared after a thorough impact assessment and the weighing of alternatives, and not based on political choices made in advance,” DIF Secretary General Leena Linnainmaa emphasizes.
The main task of the future European Parliament and the Commission should be to promote Europe’s competitiveness. The large amount of new European legislation in recent years demands much from companies and their boards, and new legislation is still coming.
”Now is the time to take a regulatory pause and give companies the opportunity to adopt and apply the new requirements,” Leena Linnainmaa says.
The new legislation involves reporting obligations to companies and their boards. Regulating further additional reporting can relegate the board’s main task – sustainable value creation in the long term – to a secondary role. A successful company has a board that does more than report and supervise.
”Deciding on board compositions belongs to the shareholders, so additional legislation regarding board compositions must be refrained from,” Linnainmaa states.
Shareholders, not politicians, bear the financial risk of the company’s success, so they have the greatest motivation to make good decisions about board compositions without political targets.
A key step in the preparation of any legislation is a thorough impact assessment and weighing of alternatives. The final outcome of the project should not be locked in on political grounds, but only after careful weighing of different options and impact assessment. One of the alternatives to be assessed must be that no new regulation is issued at all. Alternatively, that the most flexible and efficient way to guide the operations of listed companies is used, i.e. the Corporate Governance. In Finland, the Corporate Governance Code requires wide transparency already since 2003 and has contributed to the increase of women board members without legislated quotas.
The competitiveness of Europe is based on competitive companies
The funding of the Finnish and European welfare society is at risk. It is of primary importance to take care of the competitiveness of European companies because the financing of the welfare society is based on successful companies. Corporate boards play a key role in this success. European decision-makers must work to ensure that business activities, including research, product development and production, are not transferred to countries outside the EU, but that Europe is promoted as a good location for companies and their operations.
Europe needs a regulatory pause
In recent years, a large number of reporting and other obligations have been enacted for European companies. Now is the time to review the functionality and competitiveness of the new and coming demanding European legislation vis-à-vis the global community. European companies must be given enough time to get oriented into the new responsibilities, which can be especially challenging for SMEs participating in supply chains.
Continuous additional regulatory work without reviewing previous regulations is in no one’s interest. The impacts of the existing provisions must be assessed both from the point of view of the goals of the legislation and from the perspective of the costs and administrative burden for companies. The functionality of the legislation must also be examined in terms of Europe’s competitiveness. A proper review of legislation also includes amending the regulation when problems occur in practice. If necessary, legislation must be revoked if it does not achieve the goals that have been set for it or the it causes an unreasonable increase in the administrative burden for companies.
The strategic role of the boards of companies must be safeguarded
The increasing legislation of recent years has also targeted corporate boards. The background may partly be a misunderstanding of the board’s role in relation to the tasks of the company and its executive management. The main task of the board is to steer the company to sustainable value creation in the long term, in addition to its control role towards the executive management.
If the current trend of increasing the board’s operational tasks continues, there is a risk that long-term sustainable value creation will become a secondary part of the board’s work, while reporting obligations will take up too much of the board’s time. In addition, if board members were to be made directly personally responsible for operational activities, the internationally established and functional governance model of limited companies, where the board supervises the executive management and the company’s operational activities for the benefit of the shareholders, would be jeopardized.
It is up to shareholders to decide on the composition of the board
A particular concern is the legislator’s interest in regulating the composition of corporate boards. Shareholders closely monitor the success of companies. The board work of listed companies is already evaluated annually in accordance with the requirements of Corporate Governance Codes. Board compositions are planned, and board members are recruited very professionally these days, and board members are also replaced if necessary. European regulation is already targeting the gender distribution of boards, as well as financial competence and cyber security competence. In the future, the EU should refrain from additional regulation of board composition. It may be forgotten that in addition to the company’s own expertise, the board can always use external experts in the preparation and review of various issues. Therefore there is no need to require numerous specialists from narrow areas of expertise to be members of company boards.
Corporate Governance Codes are the most efficient and flexible way to develop good governance of listed companies
Since 2003 in Finland, the corporate governance code for listed companies has required extensive transparency and promoted good governance, for example in relation to the independence of board members and the representation of both genders on the boards of listed companies. The Code is part of the regulations of the Helsinki Stock Exchange and binds listed companies. The Code gets updated to meet international requirements for good governance and transparency. For example, the Code stipulated the transparency of CEO remuneration 15 years before the amendment of the shareholders rights directive (say-on-pay). Corporate Governance Codes are the most efficient and flexible way to develop good governance of listed companies, so the legislator should refrain from such regulatory work that can be managed with Corporate Governance Codes.
New legislation must be based on a high-quality impact assessment and a weighing of alternatives
High-quality legislative work involves thorough impact assessment and weighing different options at an early stage. The impact assessment must be done in such a way that there are genuinely different options to choose from, including the outcome that no new regulation is given. The usefulness of the impact assessment is narrowed down if the outcome of the regulatory project is decided politically first and then the impact assessment gets done to suit the chosen outcome. Furthermore, it is important not to incorporate major amendments to a legislative project at a late stage without thorough impact assessment. Unfortunately, in some legislative projects the outcome has been politically decided before impact assessment, which may cause unintended negative consequences as well as may endanger the objectives of the law.
Contact person:
Secretary General Leena Linnainmaa
+35850 356 1183
leena.linnainmaa(a)dif.fi