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European Commission Adopts Recommendations Regarding Independence, Compensation of Directors
Washington, DC, October 26, 2004 - The European Union (EU) Commission recently adopted Recommendations on the Remuneration of Directors and the Role of Non-Executive or Supervisory Directors, a series of recommendations supported by the Institute that EU member states are encouraged to enforce in their jurisdictions.
Rather than impose European-level legislation, the EU Commission has recommended that listed companies:
- disclose their director compensation policy;
- have an appropriate balance of executive and nonexecutive directors to ensure that no individual or small group of individuals can dominate decisionmaking; and
- address potential conflicts of interest by electing a sufficient number of independent directors to company boards.
Member states are urged to take appropriate measures to ensure that listed companies with registered offices in their territory comply with the recommendations.
The EU Commission clarified that member states that wish to apply the recommendations to UCITS — European mutual funds that can be marketed in all EU countries — should take into account the corporate governance standards that already apply to UCITS under the UCITS Directive.
The recommendations are not binding, but member states are asked to notify the EU Commission of any measures taken in compliance with the recommendations by June 30, 2006, so that the Commission can assess the need for further measures.
In an August comment letter, the Institute expressed support for the proposed recommendations, noting that they would provide directors and companies in the European Union with useful tools to ensure the effectiveness of independent directors. As recommended by the Institute, the EU Commission included a recommendation that all listed companies include a majority of independent directors on their boards.
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