Explanatory Memorandum to COM(2013)207 - Directive amending Council Directives 78/660/EEC and 83/349/EEC as regards disclosure of non-financial and diversity information by certain large companies and groups - Main contents
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| dossier | COM(2013)207 - Directive amending Council Directives 78/660/EEC and 83/349/EEC as regards disclosure of non-financial and diversity ... |
|---|---|
| source | COM(2013)207  |
| date | 16-04-2013 |
The Accounting Directives[1] (hereafter the 'Directives') deal with the preparation of annual and consolidated financial statements and related reports. In particular, Article 46 (1) (b) of the Fourth Directive provides that, where appropriate and to the extent necessary for an understanding of the company's development, performance or position, the annual report shall also contain non-financial information, including information relating to environment and employee matters.
In addition, Article 46a of this Directive sets rules for the content of the corporate governance statement to be prepared by listed companies.
The opportunity to improve the transparency of the social and environmental information provided by companies in all sectors, in order to ensure a level playing field, has been acknowledged by the Commission in the Single Market Act[2]. and was reiterated in the Communication "A renewed strategy 2011 – 2014 for Corporate Social Responsibility"[3]. This proposal delivers on one of the principal commitments of the renewed strategy.
The Communication defines CSR as “the responsibility of enterprises for their impact on society". It acknowledges that its development should be led by enterprises themselves, and that companies should have a process in place to integrate social and environmental concerns into their business operation and strategy. Non-financial transparency is therefore a key element of any CSR policy.
Enhanced transparency may help companies to better manage non-financial risks and opportunities, and thus improve their non-financial performance. At the same time, non-financial information is used by civil society organisations and local communities to assess the impact and risks related to the operations of a company. Moreover, it allows investors to take better account of sustainability considerations and long term performance.
However, consultations have shown that only a limited number of EU large companies regularly disclose non-financial information, and the quality of the information disclosed varies largely, making it difficult for investors and stakeholders to understand and compare companies’ position and performance.
This proposal sets therefore a requirement for certain large companies to disclose relevant non-financial and diversity information, ensuring a level playing field across the EU.
Nevertheless, it takes a flexible and non-intrusive approach. Companies may use existing national or international reporting frameworks and will retain their margin of manoeuvre to define the content of their policies, and flexibility to disclose information in a useful and relevant way. When companies consider that some policy areas are not relevant for them, they will be allowed to explain why this is the case, rather than being forced to produce a policy.
The European Parliament, in its two resolutions on respectively,“Corporate Social Responsibility: accountable, transparent and responsible business behaviour and sustainable growth”[4] and “Corporate Social Responsibility: promoting society’s interests and a route to sustainable and inclusive recovery”[5], acknowlegded the need to increase transparency in this field and called the Commission to bring forward a legislative proposal.
Against this background, this proposal pursues the following key objectives:
To increase the transparency of certain companies, and to increase the relevance, consistency, and comparability of the non-financial information currently disclosed, by strengthening and clarifying the existing requirements.
To increase diversity in the boards of companies through enhanced transparency in order to facilitate an effective oversight of the management and robust governance of the company.
To increase the company's accountability and performance, and the efficiency of the Single Market
The current approach to the disclosure of non-financial information in the Accounting Directives has not been sufficiently effective. A majority of stakeholders consulted considered that the obligation set by the Accounting Directives lacks clarity and may prejudice legal certainty.
Clearer requirements and stronger focus on topical issues important for the company's long-term success are therefore necessary. Some Member States have developed national legislation that goes beyond the requirements of the Accounting Directives. However, national requirements are significantly diverse, which adds to the lack of clarity for companies and investors who operate across the Internal Market.
Some Member States have privileged 'report or explain' models, where companies can choose between the actual reporting, or, alternatively, disclosing the reasons for not doing so. Others establish an outright legal requirement, which may be quite prescriptive. Some Member States target large companies, while others focus on certain listed companies or government-owned companies only. Some Member States refer to international guidelines (although often different ones), while others are developing their own national reporting guidelines. This varied pattern has led to a fragmentation of the legislative frameworks across the EU. That is why this proposal aims at ensuring a level playing field, at limiting costs for enterprises operating in more than one Member State, and ensuring easier and more widespread investors’ access to key, useful information
In addition, insufficient diversity in the boards may lead to a similarity of views of the members of the board of directors (the so-called phenomenon of 'group think') and more resistance to innovative ideas. This can lead to a negative impact on the challenge and oversight of the management by the board of directors and therefore on the performance of companies. Enhanced transparency on diversity policies could also make a considerable contribution to the promotion of equal treatment and to the fight against any discrimination in decision-making bodies of the companies concerned and beyond. Discrimination on grounds of religion or belief, disability, age or sexual orientation as regards employment or occupation is prohibited by Directive 2000/78/EC. Discrimination on grounds of sex is prohibited in employment and occupation according to Directive 2006/54/EC. Discrimination on grounds of racial or ethnic origin in employment is prohibited by Directive 2000/43/EC.
The identified problems may affect the overall performance of companies, their accountability, the ability of investors to assess and factor appropriately and timely all relevant information, and the efficiency of the EU financial markets. As a consequence, the Single Market potential for sustainable growth and employment may not always be fully exploited.
Contents
- RESULTS OF CONSULTATIONS WITH THE INTERESTED PARTIES AND IMPACT ASSESSMENTS
- LEGAL ELEMENTS OF THE PROPOSAL
- BUDGETARY IMPLICATION
- Consultation of stakeholders and interested parties
- Impact assessment
- Inadequate Transparency of Non-Financial Information
- Insufficient board diversity
- Proposed amendment of the Directives
- Legal basis, subsidiarity and proportionality
- Detailed Explanation of the Proposal
- Diversity
The Commission services have maintained regular and wide dialogues with stakeholders throughout the procedure leading to this proposal for amendment. The objective was to gather views from all interested parties, including preparers, users, non-governmental organisations, etc. The dialogue took place through:
– Two public consultations, respectively on 'Disclosure of non-Financial information by companies' and on the 'EU corporate governance framework. On non-financial information, an overall majority of stakeholders supported the need to improve the current legislative framework, as this could be beneficial for both preparers and users of information. On diversity most of the respondents to the consultation on the 'EU Corporate Governance Framework" showed a clear support for the disclosure of companies' diversity policies. They considered that enhanced transparency would enable investors to make more informed decisions and would help reducing the phenomenon of 'group think'.
– An ad hoc Experts' group composed of 16 members with diverse experience and background, and
– Several meetings with stakeholders and Member States' representatives
The impact assessment undertaken by the Commission services identified two main issues concerning (1) the inadequate transparency of non-financial information and (2) the lack of diversity in the boards of directors.
Certain companies have failed to adequately meet growing demand from stakeholders (including investors, shareholders, employees and civil society organisations) for non-financial transparency. Specific issues have been highlighted with regard to both quantity and quality of information.
– Quantity of information: it is estimated that only ~ 2500 out of the total ~ 42000 EU large companies formally disclose non-financial information on a yearly basis
– Quality of information: overall the information disclosed by companies does not adequately meet the needs of users.
The analysis carried out by the Commission services has identified both a market and regulatory failure as underlying causes of the problem. First, market incentives appear insufficient or uneven. Despite the increase in demand for non-financial information, the benefits related to non-financial disclosure are perceived by some stakeholders as long-term and difficult to quantify in a precise manner, while short-term costs are more apparent and easily measurable. Some companies, although conceptually acknowledging the benefits of non-financial reporting, may be less inclined to actively pursue policies in this field due to this perception.
Second, the regulatory responses, both at EU and at Member States' level, have not been effective enough in addressing this problem.
A number of options have been considered to improve the current situation, including strengthening the existing requirement, introducing new requirements for detailed reporting, or setting up an EU Standard. In light of the assessment of these policy options, it appeared that the preferred option would be strengthening the existing obligation, by requiring a non-financial statement within the Annual Report.
Company boards with members who have a similar educational and professional background, geographical origin, age or gender may be dominated by a narrow 'group think'. This can contribute to the failure of an effective challenge of the management decisions, as the lack of diverse views, values, and competences may lead to less debate, ideas and challenge in the boardroom. It can also lead to a harder acceptance of innovative ideas proposed by the management. The insufficient board diversity is linked above all to insufficient market incentives for companies to change the situation. In this respect, inadequate recruitment practices for board members drawing often on a too narrow pool of people contribute to perpetuating the selection of members with similar profiles. Another element reinforcing the problem is the inadequate transparency on board diversity, as the level of information and the extent to which this information is available to the public at large is often insufficient.
This insufficient board diversity and lack of transparency can therefore result in companies that are less well managed, less inclusive and less innovative, so they contribute less to growth. In the light of the EU 2020 objectives of inclusive and sustainable growth the Commission has therefore considered a number of options to address these problems. In the light of the assessment of these policy options, it appeared that the most appropriate option at this stage would be the disclosure of diversity policy. It is also the option that is preferred by most stakeholders compared to other options such as a compulsory diversity policy or to an action focusing only on recruitment policy.
Complementary to these provisions, the Commission has already proposed on 14 November 2012 legislation with the aim of attaining a 40% objective of the under-represented gender in non-executive board-member positions in publicly listed companies, with the exception of small and medium enterprises.[6]
The proposal takes the form of an amendment to Article 46 of the Fourth Directive and to Article 36 of the Seventh Directive dealing with disclosure of non-financial information. Concerning the new requirement on diversity in the boards, it is proposed to amend Article 46a of the Fourth Directive.
The Accounting Directives regulate the information provided in the financial statements of all limited liability companies which are incorporated under the law of a Member State or European Economic Area (EEA). As Article 4(5) of the Transparency Directive refers to Article 46 of the Fourth Directive and to Article 36 of the Seventh Directive, the amendements proposed to these provisions will also cover companies listed on EU regulated markets even if they are registered in a third country.
The proposal is based on Article 50(1) of the Treaty, which is the legal basis for adopting EU measures aimed at achieving an Internal Market in company law. The proposal provides that large companies should disclose non-financial information under a set of requirements devised to increasing transparency with the objective of strengthening the company's transparency and accountability, while limiting any undue administrative burden.
According to the principle of subsidiarity the EU should act only where it can provide better results than intervention at Member State level and action should be limited to what is necessary and proportionate in order to attain the objectives of the policy pursued. Several Member States have recently adopted legislation requiring additional disclosure in this field. However, national requirements appear significantly diverse, leading to difficulties to benchmark companies across the Internal Market. The objectives of this amendment are such that they cannot be fulfilled by unilateral action at the level of the Member States.
Futher transparency should not translate into undue administrative burden. Smaller companies face more difficulties to collect and analyse information. According to the 'think-small-first' principle, the disclosure requirements under this Directive should not apply to companies whose size is below a defined threshold.
As far as large companies are concerned, disclosure of non-financial information needs to be made more available, useful, and consistent at EU level, as the activities of these companies are often EU-wide and relevant to investors and other stakeholders throughout the internal market. Nevertheless, over and above a harmonised requirement of consistent information common across the Single Market, Member States should have a degree of flexibility as far as additional reporting requirements are concerned. To this end, an amendment to the Accounting Directives is the most appropriate legal instrument as it allows a certain flexibility for Member States. Amending the Directives also ensures that the content and form of the proposed EU action does not go beyond what is necessary and proportionate in order to achieve the regulatory objective.
Non-financial information
The current obligation set by Art 46 (1) (b) provides that large companies disclose non-financial information, including relating to environmental and employee matters. This measure is designed to deliver significant benefits for companies, investors and other stakeholders operating in the Single Market, and, therefore, contribute to inclusive and sustainable long-term growth and employment..
Article 1 (a) of the proposal will require certain large companies to disclose a statement in their Annual Report including material information relating to at least environmental, social, and employee-related matters, respect of human rights, anti-corruption and bribery aspects. Within these areas, the statement will include (i) a description of its policies, (ii) results and (iii) risk-related aspects.
In providing this information, without prejudice to possible more ambitious requirements set at Member States level, the company may rely on national, EU-based or international frameworks, such as the UN Global Compact, the Guiding Principles on Business and Human Rights implementing the UN “Protect, Respect and Remedy” Framework, the OECD Guidelines for Multinational Enterprises, ISO 26000, the ILO Tripartite Declaration of principles concerning multinational enterprises and social policy, and the Global Reporting Initiative, and disclose which framework they have relied upon. A company that does not apply a specific policy in one or more of these areas will be required to explain why this is the case.
As such, the measure targets business-relevant information, useful for decision-making purposes within the company as well as for investors and other stakeholders. The measure allows for significant flexibility and avoids unnecessary administrative burden on companies, in particular on the smallest ones, which are not subject to new disclosure requirements. Costs associated with the required disclosures for large companies are commensurate to the value and usefulness of the information and the size, impact and complexity of the undertakings.
In particular, as specified in Article 1 (a), the obligation will only apply to those companies whose average number of employees exceeds 500, and exceeds either a balance sheet total of 20 million euros or a net turnover of 40 million euros. This threshold, higher than the one currently applied within the Accounting Directives (i.e.: 250 employees) is balanced since it limits any undue administrative burden and ensures an appropriate scope of the non-financial reporting obligations. It is estimated that, on this basis, the new requirement would cover around 18.000 companies in the EU.
Moreover, as specified in Article 1 (b), those companies that prepare a report corresponding to the same financial year shall be exempted from the obligation to provide the non-financial statement, provided that the report: (i) covers the same topics and content required by Article 1 (a), (ii) relies on national, EU-based or international frameworks, and (iii) is annexed to the Annual Report.
Finally, Article 1 (c) will exempt subsidiaries companies from the obligation set out by paragraph 1 (a), provided that the exempted company and its subsidiaries are consolidated in annual report of another company, and that consolidated annual report fulfils the requirements set out under Article 1 (a).
The new paragraph 1(g) will require large listed companies to provide information on their diversity policy, including aspects concerning age, gender, geographical diversity, and educational and professional background. The information will be included in the corporate governance statement and will have to contain the objectives of such a policy, its implementation and the results obtained. Companies not having a diversity policy will only be obliged to explain why this is the case.
The proposal has no implications for the Community budget.