Company law as another beggar-my-neighbour policy?

Jan Cremers:  Since the introduction of the European internal market, company law has been increasingly judged in terms of its impact on ‘competitiveness’.  This has led to some worrying developments.

Competitiveness at European and national levels

Since the late 1990s the objectives of strengthening shareholders’ rights and third parties’ protection have been combined with the aim that company law ‘should provide for a flexible framework for competitive business’ (High Level Group of Company Law Experts, 2002a and b). 

The main messages over the past decade have been ‘smart regulation’ and, especially since 2008, ‘strategic action plans to reduce the administrative burden’. The competitiveness of the European economy has been the central concern. The European Commission has long believed that regulatory frameworks in the EU are too unwieldy and complex. This is seen a major handicap on EU competitiveness, crippling European companies in relation not just to their US partners but also to emerging competitors (China, India).

Meanwhile in the Member States’ national company law agendas the main worries are not related to the US or emerging competitors. Apart from the presence of skilled labour, logistics and infrastructure, all of which are seen as key factors determining business location decisions, companies weigh up a number of drivers when deciding in which country their registered office and/or head office should be located: national company law for the purpose of group restructuring or rationalising and harmonising the corporate structure of the cross-border group; the possibility of freely transferring the registered office; and above all, tax minimisation possibilities.

Changes in national company law

The history of national and European company law-making and regulation is marked by a growing diversity of interests and concerns. As a consequence, a hybrid and partially contradictory package of company rules has been developed. National changes range from the regulation necessary for disclosure and control to deregulation in order to improve the ‘business environment’.

A plea for the strengthening of auditing principles and disclosure (after the crisis) can go together with the creation of substantial exemption mechanisms for SMEs. Adequate registration is crucial for transparency and for control and enforcement of existing rules or the fight against ‘letterbox companies’, but – according to the employers’ side – may obstruct or hinder the smooth functioning of business. Lowering the threshold of capital requirements is seen as a stimulus for innovative entrepreneurs, but also creates possibilities for the establishment of fake businesses.

A few crucial items of concern can be listed: 

(a) In general terms, the balance of power and interaction in the triangle of labour, capital and management has been modified in recent years in favour of the shareholders (in listed companies). The legal position and responsibilities of directors have been reformulated with management being portrayed as having a first duty to protect shareholder value. 

(b) Better disclosure of corporate governance structures and practices, including remuneration of board members were already mentioned in the reports of the High Level Group inspired by the US regulatory response to scandals (the ENRON case). 

(c) Corporate governance issues have been on the agenda since the late 1990s. However, the most prominent proponents on the business side keep stressing the voluntary character and the importance of market participants’ views has always been emphasised by the European Commission.  The result has been non-binding recommendations and voluntary Corporate Governance Codes in the different national forms. 

(d) The main EU initiatives made no reference to the profile of the board’s composition from the gender or stakeholder perspective. Annual corporate governance statements are only required to state why individual non-executive or supervisory directors are qualified to serve on the board.

Attractiveness and competitiveness

Since the early 1990s, European countries have sought to attract and keep companies by lowering corporation tax rates, resulting in substantially lower tax levels. The question is whether a similar process has taken place in the field of company law.

Two major developments in terms of company establishment are visible in almost all countries: the lowering of capital requirements and the simplification of the registration procedure. The fast track actions to ease disclosure, registration and translation requirements were explicitly mentioned as key parts of the Action Programme on reducing administrative burdens in the EU.1 The reasoning is simple: companies will benefit from reduced procedural requirements, as well as simplified and harmonised rules for accreditation, verification and registration. In addition, SMEs will benefit from reduced verification and reporting obligations and lower registration fees.

The lowering of requirements in order to boost one’s position in the competitive rivalry between countries can be called into question. Lessons can be learned from the above mentioned beggar-thy-neighbour tax competition. 

Minimising costs to businesses on the basis of calculations of an alleged ‘administrative burden’ that takes no account of benefits for other stakeholders or the qualitative dimension of fundamental rights and provisions risks upsetting the traditional balance in European welfare states.

Company law as beggar-my-neighbour policy

A well-governed company should be accountable and transparent to its employees, its shareholders and other stakeholders. If competitiveness and attractiveness become the key messages of the agenda for company lawmaking, this risks promoting a beggar-my-neighbour policy in the EU. It will guide Member States towards reforms of their national legislation which promote rent-seeking at other countries’ expense. Domestic company law reform could then easily lead to a patchy process of transnational legal pluralism. 

The outcome is predictable: less specific protection of various stakeholders (minority shareholders, creditors and so on), dilution of workers’ participation, fewer requirements with regard to registration, no capital requirements and more and more exemptions from the legislation in force.

Analyses that label workers’ rights as burdensome and press for administrative cost reductions to enable companies to achieve the same production level with less manpower are not of much help. First, they fail to see that these rights are fundamental rights, enshrined in the various Treaties. Second, they are already biased in their wording: which stakeholder’s perspective is used to calculate social costs? Third, the narrow focus on labour costs ignores other costs that are seen as ‘normal’ in an organisation. The question of whose interests a business corporation is intended to serve should be at the heart of the corporate policy.

References
High Level Group of Company Law Experts (2002a) A Modern Regulatory Framework for Company Law in Europe: A Consultative Document of the High Level Group of Company Law Experts, Brussels
High Level Group of Company Law Experts (2002b) A Modern Regulatory Framework for Company Law in Europe – Report, November 2002, Brussels

Jan Cremers will be speaking at the TASC-DISCUSSION ‘Shareholders or Stakeholders?’ on 23 March 2017.   He is associated with the Amsterdam Institute of Advanced Labour Studies (AIAS) and the Law School of the Tilburg University. He has been a European trade union leader and a Member of the European Parliament.  This blog is based on ‘From harmonisation to regulatory competition’, chapter 4 of the book European company law and the Sustainable Company: a stakeholder approach, Volume III, ETUI, 201