Good corporate governance can enhance long term thinking and growth prospects says ecoDa

In its response to the EU Green Paper on long term financing of the European economy, the European Confederation of Directors’ Associations (ecoDa) took the opportunity to highlight some areas where good corporate governance can enhance long term thinking and growth for companies.

A good governance track record (or rating) can facilitate access to external capital, whether equity capital or other types of corporate financing. Good governance lowers the risk profile and guarantees a focus on the corporate interest, leading to a better access to capital at a lower cost.

In the view of ecoDa, corporate governance could be promoted more actively as a necessary condition for facilitating SMEs to realise their growth ambitions in a professional and sustainable way. This is why, in 2010, we developed Guidance on Corporate Governance for unlisted companies with a dynamic phased approach.

In addition, ecoDa believes that the barriers to entry for listing as an SME could be decreased if the corporate governance framework were approached less from a formal compliance perspective and much more with a best fit in mind.

Comply or explain

More attention is needed to the tailoring of governance to the needs and challenges of the company, while emphasising less the formal compliance exercise (box ticking). ecoDa believes that the EU should give more attention to the flexibility offered by the comply-or-explain regime.

Best practices have often been defined by reference to the large blue chip companies. Those ‘standards’ are less adapted to the companies in the micro/small and even mid-cap markets, let alone the non-regulated segments of the capital markets. Best fit should be the ultimate objective, and not universal adoption of standard best practice for large companies.

Research into what constitutes valid explanations and alternatives might be very useful for those market segments. According to this philosophy, corporate governance structures and procedures should be compliant with the basic principles of good governance while leaving the company with the responsibility to prove to the outside world that its practical implementation and fine tuning fit the company’s strategy, ambitions, specific circumstances and challenges.

The starting point of a good governance framework is to make sure that the governance arrangements support the business model, as stated by Paul Moxey, from the Association of Chartered Certified Accountants in our past ecoDa conference. Only when we have reached this stage will European governance represent a key component of a competitive European business environment.

In its reply to the green paper, ecoDa also emphasised the need to promote further the use of enterprise risk management information to integrate the potential downside of short-term optimisation initiatives.
Beside other elements, ecoDa highlights also the importance of developing a more long-term view on corporate performance, measuring short-term as well as long-term performance (for example, the balanced score card), combined with a view on financial as well as non-financial performance.

Generally we believe that the issue of short termism does not pose the same challenges throughout Europe. Countries with a widely dispersed shareholding base and very active stock markets (like the US and the UK) are apparently more vulnerable to short-term thinking than the continental European countries, which rely to a much larger extent on stable block holders. This also proves that a ‘one size fits all’ approach is neither feasible nor relevant.

Van Den Berghe Lutgart

Van Den Berghe Lutgart

Richez-Baum Béatrice

Richez-Baum Béatrice


By Lutgart Van den Berghe, Chairwoman of the policy committee of the European Confederation of Directors’ Associations (ecoDA) and Béatrice Richez-Baum, ecoDA’s Secretary General.