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					      BAD APPLES, BAD ORANGES: A COMMENT FROM
        OLD EUROPE ON POST-ENRON CORPORATE
               GOVERNANCE REFORMS


                                    Luca Enriques*



       Corporate scandals have hit on both sides of the Atlantic, but
       the public’s reaction to them has been much stronger in the
       United States than in Europe. This comment first speculates
       on what accounts for this difference in the reaction on the two
       continents. Part III provides an account of recent corporate law
       reform initiatives within the European Union, highlighting the
       ways in which the Sarbanes-Oxley Act is often used as a model
       for reform. Part IV then reflects upon the increasing emphasis
       which reform initiatives place on independent directors,
       questioning whether it is realistic to expect so much from them
       in terms of improved governance and management of listed
       corporations. Part V concludes that the similarity of reform
       initiatives in Europe and in the United States appears to
       overlook the differences in corporate ownership between
       continental Europe on the one hand, and the United States and
       the United Kingdom on the other.




                               I.     INTRODUCTION
     Is it true that corporate scandals have hit the United States and
Europe on a different scale? If this is not true, at least in terms of
number of companies hit, then why has the reaction to the scandals
been less strong in Europe than in the United States? What
corporate governance reform initiatives are the European Union
(“E.U.”) and major E.U. Member States currently bringing forward?
Is it wise to rely so much on independent directors in order to
achieve better corporate governance arrangements? How relevant
are the differences in ownership structures between continental
Europe and the United States in shaping corporate governance
reforms, or should these differences be relevant at all?
     This comment tries to answer these questions. Part II compares

*
    Professor of Business Law in the Faculty of Law at the University of Bologna.


                                         911
912                WAKE FOREST LAW REVIEW                         [Vol. 38

American and European corporate scandals from the last two years
or so, and speculates as to why the political reaction has been so
much stronger in the United States than in Europe. Part III
provides an account of current corporate law reform initiatives
around Europe and briefly comments on the most recent
developments in the area of soft law (i.e., corporate governance
codes and reports) concerning corporate directors.           Part IV
comments on the greater role to be assigned to independent outside
directors according to most reform initiatives, while Part V is a final
reflection on how different ownership structures pose different
corporate governance problems and raise different concerns with
regard to corporate malfeasance.
      One caveat must be made beforehand: It is always difficult to
talk about “European” developments in this area of law. The
economic, legal, and cultural diversity among European states is
still much wider than within the United States so that any general
comment concerning “European companies” or “European corporate
law” and “European corporate governance” will risk either being
over-inclusive or providing an unfaithful picture of such a diverse
reality.

II. (CORPORATE) SCANDAL IS IN THE EYE OF THE BEHOLDER: WHY
HAS THE REACTION TO CORPORATE SCANDALS IN THE UNITED STATES
               AND IN EUROPE BEEN DIFFERENT?

    In Europe, it is still widely believed that nothing comparable to
corporate scandals such as Enron and the like has happened there.
Most European scholars’ and policymakers’ attitudes towards
American corporate scandals are commonly ones of Schadenfreude
and smugness. Comments like “Enron could have never happened
                          1
in Europe” are common. Academics on both sides of the ocean point
out that the well-known differences in the ownership structures
between United States companies and European ones provide an
explanation for the immunity of Europe from Enron-like corporate
scandals: Block-holders of European companies must have been
working as more effective monitors than boards and institutional
investors in the United States in order to prevent managers’
             2
malfeasance. And while politicians around Europe commissioned
studies and issued proposals on how to improve the corporate


    1. See, e.g., Ahold Out, THE ECONOMIST, Mar. 1, 2003, at 12.
    2. See JOHN C. COFFEE, JR., WHAT CAUSED ENRON?: A CAPSULE SOCIAL AND
ECONOMIC HISTORY OF THE 1990’S 45-46 (Columbia Law Sch. Ctr. for Law and
Econ. Studies, Working Paper No. 214, 2003), available at http://ssrn.com/
abstract_id=373581.
2003]               BAD APPLES, BAD ORANGES                               913

governance of European companies, the idea behind these initiatives
is mainly (albeit tacitly) that U.S. corporate scandals impose a
reflection on current European practices, because they might have
been tainted by U.S.-style corporate governance mechanisms like
stock options and by the shareholder value concept rather than a
                                                                  3
conviction that any serious corporate disease is already in place.
     To be sure, since Enron imploded quite a few companies have
experienced serious problems in Europe as well: Marconi (U.K.),
Elan (Ireland), EmTV (Germany), Vivendi (France), Swiss Life
(Switzerland), and Bipop (Italy), to mention but a few from different
          4
countries.    These companies have all suffered from corporate
governance failures. For various reasons, however, these failures
have led to bankruptcy proceedings in only exceptional
circumstances.
     On February 24, 2003, Royal Ahold, a Dutch company and the
world’s third-largest food retailer, admitted overstating earnings by
                                                                     5
at least $500 million in 2001 and 2002. The stock price fell by 63%.
The company’s Chief Executive Officer (“CEO”) and Chief Financial
Officer (“CFO”), who had cashed their share of stock options in the
previous years, resigned, leaving investors (a multitude of whom
had bought Ahold shares “with coupons and points earned by
                             6
shopping in Ahold stores” ) furious. After one month or so, it
appears that it was premature to call Ahold “Europe’s Enron,” as
The Economist did. Ahold does not look like the straw that broke
the camel’s back, or, in other words, as final evidence that European
corporate governance is no more immune to corporate disease than
                          7
that of the United States Whatever the long-term outcome in terms
of perceived severity of European corporate governance problems,
corporate scandals in the Old Continent thus far barely differ in
number and relevance from those which have taken place in the
               8
United States, but the public’s reaction to the series of scandals is

    3. As recently as March 2003, Frits Bolkenstein reportedly rejected a
proposal to cap auditor liability because it “would damage attempts by
regulators to restore investor confidence following corporate scandals in the
U.S.” Andrew Parker, Brussels Rejects Big Four’s Plea on Liability, FIN. TIMES
(London), Mar. 25, 2003, at 25 (emphasis added).
    4. Other examples include Freedomland and Cirio (Italy), KpnWest and
World Online (the Netherlands), MobilCom and ComRoad (Germany), ABB
(Sweden-U.K.), Lernout & Hauspie (Belgium), Bz Group (Switzerland), France
Telecom (France). See, e.g., Alessandro Penati, Le Inutili Enron d’Europa [The
Useless Enrons of Europe], CORRIERE DELLA SERA (Milan), Mar. 6, 2003, at 18.
    5. Ahold: Europe’s Enron, THE ECONOMIST, Mar. 1, 2003, at 55.
    6. Carol Matlack et al., The Year of Nasty Surprises, BUS. WK., Mar. 10,
2003, at 48, 49.
    7. See Ahold Out, supra note 1, at 12.
    8. Cf. Douglas M. Branson, ENRON—WHEN ALL SYSTEMS FAIL: CREATIVE
914               WAKE FOREST LAW REVIEW                       [Vol. 38

by no means comparable to the one in the United States.
     It is true, then, that “[s]o far, Europe hasn’t produced a
                                   9
bombshell to rival Enron Corp.” This means that Europe has not
experienced a scandal the size of Enron, and no European scandals
have uncovered as much greed as that displayed by Houston’s
Andrew Fastow and Kenneth Lay.
     There are good reasons, however, why neither a single corporate
scandal, however bad, nor all corporate scandals taken together,
have had, and possibly never will have, such an impact in corporate
Europe. First of all, one feature of the U.S. landscape is lacking in
Europe: the fact that the government lets big businesses fail. The
Bush administration raised no finger to help Enron out of its
problems. It is highly instructive to compare this stance with
European governments’ habit to step in and bail out distressed
companies, or at least help them out of trouble. In the last couple of
years, this has happened more or less directly with France Telecom,
MobilCom, Fiat, etc. Politicians intervene mainly to avoid massive
layoffs, but in doing so they clearly benefit investors and, even more,
managers and controlling shareholders.
     It is no wonder then that in Europe there has been no backlash
against corporate governance failures such as those experienced in
the United States. Intuitively, social rage against dishonest CEOs
is exponentially larger when their behavior leads to job losses and
losses in pension accounts (a form of saving which is still almost
absent in continental Europe). In a system in which bailouts by the
State are, so to speak, normal and no one but investors are harmed,
the media and the politicians will produce less information than
that provided in the United States on Enron and on other troubled
companies, and will search less for information on corporate
malfeasance elsewhere. There is simply less demand for it by public
opinion. In other words, if financial crises remain such and do not
have an impact on people’s lives and jobs, the odds are much lower
that all the rot will be uncovered.
     Another reason why European scandals have not, thus far,
received as much attention as U.S. scandals is connected with my
initial caveat about the danger of talking about Europe and
European corporate governance. Much in the same way as there is
no European corporate governance system, no common set of rules,
no stock exchange playing any role similar to that of the NYSE or


DESTRUCTION OR ROADMAP TO CORPORATE GOVERNANCE REFORM? 3 (noting that
corporate scandals in the United States have involved “approximately 20
companies out of the 16,200 which file periodic reports with the SEC”),
available at http://papers.ssrn.com/sol3/papers.cfm?abstract_id=366841.
    9. Matlack et al., supra note 6, at 48.
2003]                BAD APPLES, BAD ORANGES                                 915

NASDAQ, no European corporate law, and perhaps even more
importantly no European public opinion, there are no “European
corporate scandals” outside the restricted circle of the readers of the
international financial and business press. It may well be easy to
find common features to corporate scandals around Europe. But
Spanish people, for example, do not feel that the Ahold scandal calls
their own model of corporate governance into question. In a word,
European corporate scandals just do not add up as such within the
main national political arenas.
     Another reason for this distorted perception of European
scandals may also be that the public opinion in most European
countries is much more disenchanted than in the United States. At
least in some European countries, and certainly in the one from
which I come, most people have feelings of admired envy rather than
of outrage in the face of a CEO who cashes in a pile of stock options
before the market price of her company’s shares collapses, or even in
the face of insider trading violations.
     For an Italian, it was fascinating to observe, back in 2002, how
the United States media and politicians made a big fuss about
Martha Stewart’s alleged trading on the basis of a tip from a
        10
friend.     In the recent past, two prominent representatives of
corporate Italy, Carlo De Benedetti (once the controlling shareholder
of the main computer maker and now still at the head of a
conglomerate) and Emilio Gnutti (a financier who played a central
part in the takeover of Telecom Italia four years ago and who still
controls or jointly controls several listed companies) had been
                                        11
involved in insider trading trials.         After those trials, their
reputations have remained absolutely intact. In fact, the role of the
                                                        12
latter in Italian finance has actually become stronger.
     All this might help to understand why, in the presence of a
number of major corporate scandals in Europe, no legislation
comparable to the Sarbanes-Oxley Act has yet passed in Europe,
either at the European Community (“E.C.”) level or in individual


   10. See, e.g., Diane Brady et al., Sorting out the Martha Mess, BUS. WK.,
July 1, 2002, at 44.
   11. Carlo De Benedetti plea-bargained on an insider trading charge, while
Emilio Gnutti was convicted for insider trading by a first instance criminal
court. See Luca Enriques, I Giornali, il Mondo Politico e gli Scandali
Finanziari.     Perché l’Europa è Immune dall’ “Enronite” [Newspapers,
Politicians, and Corporate Scandals: Why Europe is Immune from “Enronitis”],
LA VOCE, Oct. 10, 2002, available at http://www.LaVoce.info/news/view.php?id=
14&cms_pk=147&from=index.
   12. Emilio Gnutti is now a partner with the Italian Prime Minister’s
holding company in a few ventures and still participates in the coalition jointly
controlling Telecom Italia, the main telecommunications company in Italy.
916                WAKE FOREST LAW REVIEW                          [Vol. 38

member states. This does not mean, of course, that legislative
proposals and reform initiatives are not under way. In Part III, I
account for these forthcoming developments.

  III.   POST-ENRON CORPORATE GOVERNANCE REFORM IN EUROPE
     This part provides an account of selected current or recent
corporate governance reform initiatives in Europe, focusing on those
more related to the role of the board of directors. It highlights that,
while little legislative reform on the lines of the Sarbanes-Oxley Act
(“SOA”) is to be predicted at the E.C. level, some of the main
member states are planning to transplant many of the SOA’s main
provisions into their own company laws. It also shows that some of
the SOA’s provisions and corporate governance reform proposals in
the United States have been inspired or at least are similar to pre-
existing soft or hard law provisions of some European countries’
legal systems. This part also provides an account of the ever-
increasing emphasis on independent directors by soft as well as
(projected) hard law.
     European politicians’ reactions to Enron have been ambivalent.
On the one hand, they have been keen to claim that corporate
governance in Europe works better than in the United States,
claiming their part of the credit for this. On the other hand, they
have seen U.S. corporate scandals as providing plenty of
justification for a review and possibly a reform of at least some areas
of corporate governance, especially the auditing function and the
role of the accounting profession. In other words, U.S. corporate
scandals have provided an occasion for “political activism” juicy
enough for any well-taught politician and bureaucrat willing to
               13
extract rents. This second reaction is of course gaining momentum
as more and more scandals are brought to light.

A.    European Union
     The first to move after Enron, perhaps reflecting the higher
“efficiency” of Brussels’ officials, was the E.C. In April 2002, taking
advantage of the existence of the High Level Group of Company Law
Experts (“the Group”), the European Council and the E.C.
Commission asked the Group to “review further corporate
                                                                      14
governance and auditing issues in the light of the Enron case.”


   13. See generally FRED S. MCCHESNEY, MONEY FOR NOTHING: POLITICIANS,
RENT EXTRACTION, AND POLITICAL EXTORTION 20-68 (1997).
   14. See REPORT OF THE HIGH LEVEL GROUP OF COMPANY LAW EXPERTS ON A
MODERN REGULATORY FRAMEWORK FOR COMPANY LAW IN EUROPE 129 (November
4, 2002), available at http://europa.eu.int/comm/internal_market/en/company/
company/modern/consult/report_en.pdf [hereinafter HIGH LEVEL GROUP].
2003]              BAD APPLES, BAD ORANGES                              917

The Group had originally been set up in September 2001 in order to
help the Commission prepare a new proposal for a takeover directive
and “to define new priorities for the broader future development of
                                         15
company law in the European Union.”
      The Group issued its report on corporate governance in
November 2002. The report covers most corporate governance topics
and, reflecting the fact that company law and corporate governance
practices widely differ from member state to member state, calls for
little, but significant legislative action by the E.C. The report
suggests that the E.C. should issue a set of recommendations on
corporate governance. Recommendations are non-binding acts by
                        16
the E.C. Commission, the effectiveness of which relies on moral
suasion and greatly varies from case to case. Although not
                                                                     17
infrequently completely disregarded by Member States,
recommendations are often used as a sort of warning to Member
States, explicitly or implicitly threatening hard law initiatives in
case Member States do not follow suit.
      With regard to director-related issues, the Group has
recommended the adoption of the following rules in the form of E.C.
directives (i.e., hard law): listed companies shall include in their
annual report a corporate governance statement providing
information, inter alia, about the operation of the board and its
committees, the role and qualifications of individual board members,
the system of risk management applied by the company, related
                                  18
party transactions, and so on.        The Group further recommended
that companies should be given a choice between a one-tier and a
                              19
two-tier board structure,           and responsibility for financial
statements and for statements on key non-financial data should be
attributed to all board members, consistent with a rule already in
                                 20
place in many Member States.
      Other than these directives, the Group suggested the
                                                                     21
Commission adopt its proposals in the form of recommendations.
Thus, the Commission should recommend that Member States have
in place rules, which, at least on a comply or explain basis, call for


   15. Id. at 128.
   16. See, e.g., BENGT BEUTLER ET AL., L’UNIONE EUROPEA: ISTITUZIONI,
ORDINAMENTO E POLITICHE [THE EUROPEAN UNION: INSTITUTIONS, LEGAL SYSTEM,
AND POLICIES] 259 (1998).
   17. See, e.g., NIAMH MOLONEY, EC SECURITIES REGULATION 19 (2002)
(reporting that a 1977 recommendation on insider trading was largely ignored
by Member States).
   18. HIGH LEVEL GROUP, supra note 14, at 46.
   19. Id. at 59.
   20. Id. at 67.
   21. Id. at 61.
918                 WAKE FOREST LAW REVIEW                           [Vol. 38

audit, remuneration, and nomination committees to be composed
exclusively of non-executive directors, the majority of whom should
be independent; provide a definition of independence and
recommend that Member States require companies to disclose
annually which of the directors they consider independent; define an
appropriate regulatory regime for listed companies’ directors’
remuneration, calling for thorough disclosure and for shareholders’
approval of schemes granting shares or share options; and define the
role and responsibilities of audit committees.
     On May 25, 2003, the European Commission issued a
Communication to the Council and the European Parliament setting
out its agenda to modernize European corporate law and to enhance
                                     22
corporate governance in the E.U.        The Communication plans to
issue a set of directive proposals covering a broad range of issues,
like corporate governance disclosure requirements, shareholder
communication and voting rights, minority shareholder rights, and
      23
so on. Despite its breadth, it is dubious that this effort will have a
                                                                     24
real impact on corporate governance around the European Union,
not least because it will be implemented well after member states
will have already taken steps to adjust to the post-Enron world, as
the next subsections will show.

B.    France
     In light of the political pressures and business protests against
the extraterritoriality of many provisions in the Sarbanes-Oxley Act,
it is somewhat ironic to find that two prominent (and allegedly
nowadays “anti-American”) European countries, France and
Germany, are going to transplant most of Sarbanes-Oxley’s
provisions into their legislation. On February 5, 2003, the French
Government issued the “Projet de loi de sécurité financière” (Draft
                                25
Law on Financial Security), which was finally adopted by the
French Parliament on July 17, 2003 and contains a set of provisions
in Articles 98 to 116 that very closely follow Sarbanes-Oxley. Once
approved, a French version of the Public Company Accounting


   22. Communication from the Commission to the Council and the European
Parliament Modernising Company Law and Enhancing Corporate Governance
in the European Union—A Plan to Move Forward, COM (2003) 284 (May 21,
2003), available at http://europa.eu.int/eur-lex/en/com/cnc/2003/com2003_
0284en01.pdf.
   23. Id. at 3-4.
   24. See Gérard Hertig & Joe A. McCahery, Company and Takeover Law
Reforms in Europe: Misguided Harmonization Efforts or Regulatory
Competition? 14-20 (2003) (unpublished manuscript, on file with author).
   25. Projet de loi de sécurité financière (adopted by the French Senate Mar.
20, 2003), available at http://www.senat.fr/leg/tas02-092.html.
2003]               BAD APPLES, BAD ORANGES                                919
                                                        26
Oversight Board will be introduced (Article 100). Auditors will not
be allowed to provide non-audit services to their clients (Article
     27
104) and will have to be selected by non-executive directors (Article
      28
105). An annual corporate governance statement will have to be
disclosed, specifying how the board functions and which internal
                                                29
control procedures are in place (Article 117).      Finally, prompt
disclosure of share dealings by top managers and directors shall be
                         30
mandated (Article 122).
     In 2002, two Associations of French Industries promoted a
working group, chaired by Société Générale Chairman Daniel
Bouton, asking it to review corporate governance practices in French
listed companies. The group’s report was issued in September and
contains a number of recommendations aimed at improving French
                        31
corporate governance.        These recommendations echo similar
practices recommended in other corporate governance codes around
the globe, and a few warrant mention here. Non-executive directors
should meet periodically in the absence of executive directors in
                                                         32
order to evaluate the executive directors’ performance.      At least
                                                     33
half of the board members should be independent, and a more
stringent notion of independence is provided than under the
previous French Code. It is recommended that the audit committee
should be composed exclusively of non-executive directors, two-
                                        34
thirds of whom should be independent, with the audit committee
selecting any external auditor and monitoring any kind of
compensation granted to the auditor so that the auditor’s


    26. Compare with Sarbanes-Oxley Act of 2002, Pub. L. No. 107-204, Title I,
116 Stat. 750, 753-71 (creating the Public Company Accounting Oversight
Board).
    27. Compare with Sarbanes-Oxley Act § 201 (prohibiting public accounting
firms from providing non-audit services to clients they audit).
    28. Compare with Sarbanes-Oxley Act § 301 (requiring audit committee
members be independent of the company, and giving the audit committee the
power to appoint and oversee the company’s public accounting firm).
    29. Compare with Sarbanes-Oxley Act § 404 (mandating that annual
reports contain an internal control report stating the structure and procedures
for financial reporting and an assessment of their effectiveness).
    30. Compare with Sarbanes-Oxley Act § 403 (requiring directors and
officers to disclose their trading of their company’s stock).
    31. WORKING GROUP CHAIRED BY DANIEL BOUTON, CHAIRMAN OF THE SOCIÉTÉ
GÉNÉRAL, POUR UN MEILLEUR GOUVERNMENT DES ENTERPRISES COTÉES: RAPPORT
DU GROUPE DE TRAVAIL [FOR A BETTER CORPORATE GOVERNANCE OF LISTED
COMPANIES: WORKING GROUP REPORT] (September 23, 2002), available at
http://www.medef.fr/staging/ medias /upload/336_FICHIER.pdf.
    32. Id. at 11.
    33. Id. at 9-10.
    34. Id. at 12.
920                 WAKE FOREST LAW REVIEW                            [Vol. 38
                                                                 35
compensation does not affect that auditor’s independence.

C.    Germany
     Quite similarly, on March 6, 2003, the German government
unveiled a ten-point “catalogue of measures aimed at strengthening
                                                   36
businesses’ integrity and investor protection,” a good chunk of
which draws inspiration both from Sarbanes-Oxley and, more
generally, from American corporate and securities law. First, the
plan aims at facilitating derivative suits against directors and
supervisory board members by giving action to any shareholder
holding shares worth more than 100,000 euro (instead of one million
euro, as under current law), while clarifying that the former are
                                          37
protected by the business judgment rule. Second, direct actions for
                                                                      38
damages following securities fraud would also be made easier.
Third, more disclosure would be required for stock-based
                            39
compensation for directors. Fourth, a prohibition on the provision
to the client corporation of non-audit services by auditors would be
introduced in order to strengthen auditors’ independence, while the
public supervision of auditors would also be strengthened and
                                                                  40
criminal law provisions on securities fraud would be tightened.
     Germany has taken relevant action on corporate governance
issues also in the last few years. In February 2002, a Government
Commission appointed in 2001 adopted the German Corporate
                   41
Governance Code. In the words of the Government Commission’s
home page, “[t]he aim of the German Corporate Governance Code is
to make Germany’s corporate governance rules transparent for both
national and international investors, thus strengthening confidence
                                                42
in the management of German corporations.”            In order to do so,
“[t]he Code addresses all major criticisms—especially from the

     35. Id. at 13.
     36. MAßNAHMENKATALOG       DER BUNDESREGIERUNG ZUR STÄRKUNG DER
UNTERNEHMENSINTEGRITÄT UND DES ANLEGERSCHUTZES [CATALOG OF MEASURES
AIMED AT STRENGTHENING BUSINESSES’ INTEGRITY AND INVESTOR PROTECTION],
available         at     http://www.bundesfinanzministerium.de/Anlage17029/
Massnahmenkatalog-der-Bundesregierung-zur-Staerkung-von-
Unternehmenintegritaet-und-Anlegerschutz.pdf.
   37. Id. at § 1.
   38. Id. at § 2.
   39. Id. at § 3.
   40. Id. at § 10. Compare this with Sarbanes-Oxley’s Title VIII.
   41. Government Commission, German Corporate Governance Code (Feb. 26,
2002) (convenience translation), available at http://www.corporate-governance-
code.de/eng/download/DCG_K_E200305.pdf.
   42. Letter from Dr. Gerhard Cromme, Chairman of the Government
Commission, introducing the German Corporate Governance Code (Feb. 26,
2002), at http://www.corporate-governance-code.de/index-e.html.
2003]               BAD APPLES, BAD ORANGES                                921

international community—leveled against German corporate
             43
governance,”     with the obvious constraints stemming from
mandatory rules on two-tiered board structures and on co-
determination. These prevent the Code from truly aligning German
corporate governance with prevailing corporate governance practices
                   44
around the globe. The Code recommends that supervisory boards
form an audit committee, with the task of handling “issues of
accounting and risk management, the necessary independence
required of the auditor, the issuing of the audit mandate to the
auditor, the determination of auditing focal points and the fee
            45
agreement.” The only independence requirement, however, is that
“[t]he Chairman of the Audit Committee should not be a former
                                                             46
member of the Management Board of the company.”                    More
generally, supervisory boards have to be stuffed with employee
representatives who are often employees themselves. This means
that there is nothing in the Code to ensure the supervisory board
members’ independence, apart from the provision that “not more
than two former members of the Management Board shall be
members of the supervisory board and supervisory board members
shall not exercise directorships or similar positions or advisory tasks
                                              47
for important competitors of the enterprise.”
     What is peculiar to the German Corporate Governance Code is
that it relies upon a “comply or explain” disclosure provision
                                                                48
mandated by a new provision in German company law.                 This
contrasts with the experience of most countries in which a “comply
or explain” duty is imposed by the relevant (usually self-regulatory)
                                49
stock exchange’s listing rules.     In other words, in Germany the


   43. Id.
   44. See KLAUS J. HOPT, MODERN COMPANY AND CAPITAL MARKET PROBLEMS:
IMPROVING EUROPEAN CORPORATE GOVERNANCE AFTER ENRON 14, 16 (European
Corp. Governance Inst., Working Paper No. 05/2002, Nov. 2002), available at
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=356102.
   45. Government Commission, supra note 41, § 5.3.2.
   46. Id. The convenience translation, however, may not be reliable on this
point: according to Professor Hopt, the statement about the independence of the
audit committee’s chairman “is only a suggestion, not a recommendation for
which the comply-or-explain rule would be valid.” HOPT, supra note 44, at 14.
   47. Government Commission, supra note 41, § 5.4.2.
   48. Article 161 of the Stock Corporation Act was amended by Article 1,
Item 16 of the Transparency and Disclosure Law. See Gesetz zur weiteren
Reform des Aktien—und Bilanzrechts, zu Transparenz und Publizität
(Transparenz—und Publizitätsgesetz) [Transparency and Disclosure Law], v.
19.7.2002 (BGB1. I S.2681).
   49. This was originally the case in the United Kingdom, where the Listing
Rules issued by the London Stock Exchange implemented the various corporate
governance codes by imposing an annual “comply or explain” disclosure
922                  WAKE FOREST LAW REVIEW                             [Vol. 38

choice has been to “harden” the self-regulatory approach originally
                                  50
shaped by the British in the 1990s by transposing it into state law.
Interestingly, this move was almost simultaneous to the U.S.
Congress’ decision to mandate a code of ethics on a comply or
               51
explain basis.

D.    Italy
     In Italy, the view that U.S. corporate scandals imposed a
reassessment of domestic corporate governance mechanisms soon
became widely accepted. Unfortunately, however, the timing of the
Enron scandal has not fit well with the Italian government’s agenda.
At the end of September 2001, shortly before Enron collapsed, the
Parliament authorized the government to issue a sweeping reform of
                                                      52
Italian corporate law and corporate directors’ crimes. With regard
to the former, the criteria which the government would have to
follow were pretty vague and allowed for wide discretion, as opposed
to criminal provisions, which were very well-defined and left little
room for adaptation to the new post-Enron environment. These
criteria were such that enforcement of false accounting charges, for
listed as well as non-listed companies’ directors and officers, would
become almost impossible due to a shortened statute of limitations
period, a heavier burden of proof for the prosecutor, and an
exemption for violations involving incorrect estimates below certain
              53
thresholds. Further, the law that made it a crime for a director to
receive loans in any form from her corporation would have to be
           54
scrapped. The government, the Prime Minister of which was under
trial for false accounting charges relating to his family’s non-listed


obligation to the issuers. Brian R. Cheffins, Current Trends in Corporate
Governance: Going from London to Milan via Toronto, 10 DUKE J. COMP. & INT’L
L. 5, 20 (1999). To be sure, since 2000, the Listing Rules have been “publicized”
and are now issued and administered by the Financial Services Authority. See,
e.g., Paul Geradine, The FSA Listing Rules, in A PRACTITIONER’S GUIDE TO THE
FINANCIAL SERVICES AUTHORITY LISTING RULES 1, 1 (Maurice Button & Kate
Hatchley eds., 2001).
    50. See generally Brian R. Cheffins, Corporate Governance Reform: Britain
As an Exporter, in CORPORATE GOVERNANCE AND THE REFORM OF COMPANY LAW
10 (Brian Main ed., 2000) (discussing the development of the self-regulatory
process in Britain).
    51. Sarbanes-Oxley Act of 2002, § 406, Pub. L. No. 107-204.
    52. Law of 3 October 2001, No. 366 (G.U., Oct. 8, 2001, No. 234).
    53. See BORSA 2003. RAPPORTO REF. SUL MERCATO AZIONARIO [STOCK
EXCHANGE 2003 REPORT ON EQUITY MARKETS] 143-44 (2003).
    54. To be sure, this provision (former Article 2624, Civil Code (Italy)) had
almost never been enforced. See LUCA ENRIQUES, IL CONFLITTO D’INTERESSI
DEGLI AMMINISTRATORI DI SOCIETÀ PER AZIONI [CORPORATE DIRECTORS’ CONFLICTS
OF INTEREST] 472 (2000).
2003]               BAD APPLES, BAD ORANGES                                923
                    55
holding company, hastened to translate the Parliament’s criteria
           56
into law.      Hence, a few months before Congress approved
Sarbanes-Oxley, Italy took exactly the opposite direction with
regard to crimes relating to corporate disclosure and managerial
          57
integrity.
     Soon after de facto decriminalizing securities frauds involving
false statements in annual accounts, the government, prompted
perhaps by bad conscience, appointed a commission of experts with
the task of “examining the capability of the Italian legal system to
provide the market with a true and fair view of the financial and
economic conditions of listed companies, such that crises can be
                                 58
promptly detected and avoided.” The heavy influence of Sarbanes-
Oxley’s solutions can be detected in the final report of this
commission. The experts commission has recommended that the
government, inter alia, strengthen the existing supervisory powers
of Consob, the Italian Securities and Exchange Commission, upon
                59
auditing firms; prohibit the provision of non-audit services to
audited firms by auditing firms and impose disclosure of any
compensation received from the audited company by the auditing
     60
firm; extend the prohibition for audited firms to hire auditing
firms’ partners or employees for a certain period of time to all
                                                                   61
companies belonging to the same group as the audited firm;
                                                    62
require prompt disclosure of stock option plans; provide detailed
                                           63
information on off-balance sheet entities; prohibit loans and other
                              64
forms of credit to directors; increase corporate disclosure, with
                                                   65
specific regard to related party transactions; and revise and
increase sanctions, inter alia, for insider trading and violations of
                                                          66
the duty to disclose promptly price sensitive information. Thus far,


   55. See The Fruits of Office, THE ECONOMIST, Aug. 11, 2001, at 40-41.
   56. Legislative Decree of April 11, 2002, No. 61 (G.U. Apr. 15, 2002, No.
88).
   57. See, e.g., Alberto Crespi, Le False Comunicazioni Sociali: Una Riforma
Faceta [False Corporate Statements: A Facetious Reform], 46 RIVISTA DELLE
SOCIETÀ.1345 (2001).
   58. COMMISSIONE DI STUDIO, RELAZIONE FINALE [FINAL REPORT] 2
(September 27, 2002) (on file with the author).
   59. Cf. Sarbanes-Oxley Act of 2002, Pub. L. No. 107-204, § 3, 116 Stat. 749-
50 (“Commission Rules and Enforcement”).
   60. Cf. Sarbanes Oxley Act § 201 (prohibiting auditors from providing non-
audited services to companies they audit).
   61. Cf. Sarbanes Oxley Act § 203.
   62. Cf. Sarbanes Oxley Act § 403.
   63. Cf. Sarbanes Oxley Act § 401.
   64. Cf. Sarbanes Oxley Act § 402.
   65. Cf. Sarbanes Oxley Act § 401.
   66. Cf. Sarbanes Oxley Act Titles VIII, IX, & XI (strengthening civil and
924                  WAKE FOREST LAW REVIEW                            [Vol. 38

however, nothing has been done to implement its proposals apart
from some steps from the Consob in the direction outlined by the
                          67
Government Commission.
     Recently, the Italian law on self-dealing and insider dealing
transactions, two of the main problems with Italian corporate
governance practices, has definitely become much tighter. In 2002,
Consob issued new rules requiring prompt, on-going disclosure of
related party transactions and of trading by companies controlling
                  68
listed companies. The Italian Stock Exchange (Borsa Italiana) has
imposed disclosure of insider trading above certain volumes by
                                    69
corporate directors and officers.          Interestingly, many listed
companies have adopted internal codes which are stricter than
                                 70
required by the Stock Exchange.
     In the summer of 2002, the Italian Corporate Governance Code
was revised and improved under the auspices of the Italian Stock
Exchange, the Listing Rules of which require companies to disclose
annually whether they comply with the Code or explain why they do
not. In the revised version, the Code contains a more precise
                                       71
definition of independent directors and provides that audit
committees of listed companies controlled by other listed companies
be composed solely of independent directors, while in other
companies a majority of independent directors is sufficient with the
                                          72
rest chosen among non-executive ones. It also provides for more
stringent provisions on related party transactions.
     In January 2003, the Government approved an act reforming
                                                                    73
corporate law, which will come into force on January 1, 2004.


criminal penalties for securities fraud).
   67. See infra text accompanying notes 68.
   68. Delibera Consob n. 13924, February 4, 2003 (modifying issuer’s
Regulation), available at http://www.consob.it. Control is defined, in short, as
dominant influence on a company, joint control being irrelevant for this
purpose. See, e.g., Guido Mucciarelli, Commento sub art. 93 [Comment under
Article 93] , in LA DISCIPLINA DELLE SOCIETÀ QUOTATE NEL TESTO UNICO DELLA
FINANZA, D. LGS. 24 FEBBRAIO 1998, N. 58. COMMENTARIO [THE REGULATION OF
LISTED COMPANIES IN THE CONSOLIDATED ACT ON FINANCE, LEGISLATIVE DECREE
OF FEB. 24, 1998, COMMENTARY NO. 58] 33, 60-62 (Piergaetano Marchetti & Luigi
A. Bianchi eds., 1999).
   69. See BORSA 2003, supra note 53, at 146.
   70. Id.
   71. COMITATO PER LA CORPORATE GOVERNANCE DELLE SOCIETÀ QUOTATE,
CODICE DI AUTODISCIPLINA [SELF-REGULATION CODE] 6, translated in CORPORATE
GOVERNANCE CODE 6 (2002), available at http://www.borsaitalia.it/opsmedia/pdf/
8077.pdf.
   72. Id. at 6-7.
   73. Legislative Decree of January 17, 2003, No. 6. (G.U. Jan. 22, 2003, No.
8/L).
2003]               BAD APPLES, BAD ORANGES                               925

Possibly influenced by recent corporate scandals around the globe,
the reform tightens up the rules on conflict of interest transactions,
providing that whenever a director has an interest in a transaction,
she must fully disclose it to the board of directors and may not act
on behalf of the corporation with regard to the transaction, which
she was allowed to do under the prevailing construction of the
                               74
previous law on the subject.      An authorization by the board is
needed instead, and the board’s decision to enter into the
                                                75
transaction has to be adequately motivated.         Furthermore, the
reform introduces a prohibition on the taking of corporate
opportunities. Finally, the reform allows companies to choose
among three board structures: the traditional Italian dual structure,
in which the board of directors works side by side with a separate
board of auditors (collegio sindacale), that has auditing functions;
the German-style two-tier board, with no employee participation;
and the Anglo-American one-tier board system, which, interestingly,
mandates the presence of an audit committee entirely composed of
                      76
independent directors.

E.   United Kingdom
    Post-Enron corporate governance reform initiatives in the
United Kingdom have thus far consisted mainly of one study on non-
                                                    77
executive directors commissioned by the government, one study on
                             78
audit committees by a group appointed by a government-funded
             79                                                    80
organization, and some initiatives on audit and accounting issues.
    Derek Higgs’ review of the role and effectiveness of non-


   74. See, e.g., Luca Enriques, The Law on Corporate Directors’ Self-Dealing:
A Comparative Analysis, 2 INT’L & COMP. L.J. 297, 318 (2000).
   75. Article 2391, Civil Code (Italy), as modified by Legislative Decree of
January 17th, 2003 No. 6.
   76. Cf. Sarbanes-Oxley Act of 2002, Pub. L. No. 107-204, § 301 (Public
Company Audit Committees).
   77. DEREK HIGGS, REVIEW OF THE ROLE AND EFFECTIVENESS OF NON-
EXECUTIVE            DIRECTORS            (2003),         available         at
http://www.dti.gov.uk/cld/non_exec_review/ index.htm.
   78. AUDIT COMMITTEES COMBINED CODE GUIDANCE (2003), available at
http://www.frc.org.uk/publications/content/ACReport.pdf.
   79. The Financial Reporting Council is supported by the accountancy
profession, the London Stock Exchange (acting in concert with the banking and
investment community), and the U.K. government. See Financial Reporting
Council webpage at http://www.frc.org.uk.
   80. See FINAL REPORT OF THE CO-ORDINATING GROUP ON AUDIT AND
ACCOUNTING ISSUES (2003), available at http://www.dti.gov.uk/cld/cgaai-
final.pdf; see also REPORT OF THE REVIEW OF THE REGULATORY REGIME OF THE
ACCOUNTANCY PROFESSION (2003), available at http://www.dti.gov.uk/cld/
accountancy-review.pdf.
926                  WAKE FOREST LAW REVIEW                             [Vol. 38

executive directors deserves some discussion here, as it contains
very bold recommendations on corporate governance, which, if
          81
adopted, would confirm the U.K.’s leading role in corporate
governance reform. In short, Mr. Higgs recommends that at least
“half the members of the board should be independent non-executive
directors,” while the chairman, whose role should be separated from
                                                                      82
that of the CEO (as is already the case in most U.K. companies),
                                                                      83
should meet the test of independence at the time of appointment.
The definition of independence is particularly demanding, leaving it
to the board to determine whether a director is independent “in
character and judgment,” in the absence of “relationships or
circumstances which could affect, or appear to affect, the director’s
             84
judgment.”       A senior independent director should also be
appointed, with the task of “be[ing] available to shareholders, if they
have concerns that have not been resolved through the normal
                                                               85
channels of contact with the chairman or chief executive.”          The
nomination committee should be composed by a majority of
                        86
independent directors and great emphasis is given to the
recommendation that “the pool of candidates for non-executive
director appointments” be broadened, including candidates from the
                                                             87
non-commercial sector, in order to increase board diversity. Audit
                                                                      88
committees should be composed entirely of independent directors.
I shall come back to the Higgs Report in Part IV.

   IV.   INDEPENDENT DIRECTORS: MONITORS OR ÜBERMENSCHEN?
    As Part III has shown, a popular view present not only in the
United States, but also in Europe, holds that outside directors
should be more independent, as reflected also in their selection and
nomination process; more numerous and, at least according to Mr.

   81. The Report and especially the new corporate governance code draft
therein have met strong opposition by Britain’s industrialists. See Hating
Higgs, ECONOMIST, Mar. 15, 2003, at 63.
   82. HIGGS, supra note 77, at 23 (“Around 90 per cent of listed companies
now split these roles.”).
   83. Id. at 5, 23-24.
   84. Id. at 37. Relationships which would exclude independence include
former employment (until five years after the end of the relationship), direct or
indirect material business relationships, receiving “additional remuneration
from the company apart from the director’s fee,” participating in the company’s
share option pay scheme, close family ties with directors, and having served on
the board for more than ten years. Id.
   85. Id. at 6, 31.
   86. Id. at 40.
   87. Id. at 6-7, 42-45.
   88. Id. at 60; see also AUDIT COMMITTEES COMBINED CODE GUIDANCE, supra
note 78, at 6.
2003]               BAD APPLES, BAD ORANGES                                927

Higgs, more diverse; more active and more in control of the board’s
monitoring activity; and perhaps, in away, more than human.

A.   More Independence
     As is well known, no definition of independence will ever assure
that an independent director will indeed act as such. The broader
the definition, of course, the better. However, as Professor Barnard
has noted, “no definition will cover every situation and . . .
traditional measures of independence . . . cannot capture those
situations where even those directors who appear to be independent
may not be because of social ties, a desire to be a team player or
                     89
simple passivity.”       Enron has taught that outside directors’
independence can be compromised also by charitable contributions
to institutions with which the director is affiliated, and other kinds
                             90
of little visible “bribes.”       More generally, as the Business
Roundtable noticed back in 1997, “[d]irectors can satisfy the most
demanding tests for independence, but if they do not have the
personal stature and self-confidence to stand up to a non-performing
                                               91
CEO, the corporation may not be successful.”
     In order to ensure independence, emphasis has been given to
the process of selecting and nominating independent directors,
especially by the Higgs Report and, in the United States, by the
                                        92
newly approved NYSE Listing Rules. This is also reflected in legal
scholarship: Professor Gordon has called for a change in “the
nominating and compensation practices for what might be called
‘trustee’ directors in large public corporations,” proposing that audit
committee members should “be ‘self-nominated,’ that is, the
committee should have the power to designate the managerial
nominees for directors who will be expected to serve on the audit
             93
committee.” According to Professor Bratton, what is needed is “an


    89. Jayne W. Barnard, The Hampel Committee Report: A Transatlantic
Critique, in 19 COMPANY LAW. 110, 114-15 (1998).
    90. See, e.g., Jeffrey N. Gordon, What Enron Means for the Management
and Control of the Modern Business Corporation: Some Initial Reflections, 69 U.
CHI. L. REV. 1233, 1242 (2002).
    91. THE BUSINESS ROUNDTABLE, STATEMENT ON CORPORATE GOVERNANCE 2
(1997) (emphasis added), available at http://www.brtable.org/pdf/11.pdf.
    92. See     CORPORATE GOVERNANCE RULE PROPOSALS REFLECTING
RECOMMENDATIONS FROM THE NYSE CORPORATE ACCOUNTABILITY AND LISTING
STANDARDS COMMITTEE AS APPROVED BY THE NYSE BOARD OF DIRECTORS AUGUST
1, 2002 (proposing a new Section 303A, par. 4, covering nominating committees,
which would be composed entirely of independent directors and would have
responsibility    for    selection  of    board    nominees),    available   at
http://www.nyse.com/pdfs/corp_gov_pro_b.pdf.
    93. Gordon, supra note 90, at 1243.
928                   WAKE FOREST LAW REVIEW                               [Vol. 38

independently-nominated outside director – an outside super
          94
monitor.”
     With regard to nomination processes aimed at ensuring
independence, Italy has had a positive experience which is worth
recalling here. A 1994 law on privatization has mandated minority
                                                           95
shareholder representation in privatized firms’ boards.        Hence,
directors selected and elected with the votes of institutional
investors sit in the board of some of the major Italian listed
              96
corporations,     including ENI, Telecom Italia, and ENEL,
respectively the first, second, and fourth Italian companies in terms
                          97
of market capitalization.
     There is anecdotal evidence showing that independently
nominated directors have been playing a definitively positive role
                                                 98
within the boards of privatized companies.           In one instance,
independently-nominated directors put pressure on executive
directors after a restructuring plan was very badly received by the
market, prompting the executive directors to put the plan aside. In
another instance, an independently-nominated director acted as a de
facto whistle blower by resigning from the board after the audit
committee on which he sat found out about some undisclosed
personal interests of some directors in a merger.               Other
independently-nominated directors have been playing an important
role in assuring that good corporate governance principles are in
place at their companies. Recently, independently-nominated board
members in a company still controlled by the government have sided
with management in order to counter attempts by the government
to interfere with the company’s business.
     This positive experience could well provide a model for
transitional and developing countries, where corporate governance


    94. William W. Bratton, Enron and the Dark Side of Shareholder Value, 76
TUL. L. REV. 1275, 1337 (2002) (emphasis added).
    95. See, e.g., Marcello Bianchi, Magda Bianco, & Luca Enriques, Pyramidal
Groups and the Separation Between Ownership and Control in Italy, in THE
CONTROL OF CORPORATE EUROPE 154, 185 n.15 (Fabrizio Barca and Marco Becht
eds., 2001).
    96. See MARCELLO BIANCHI & LUCA ENRIQUES, CORPORATE GOVERNANCE IN
ITALY AFTER THE 1998 REFORM: WHAT ROLE FOR INSTITUTIONAL INVESTORS?,
Quaderni di Finanza Consob No. 43, 38 (2001), available at
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=203112. The involvement of
institutional investors (mutual funds) in the choice and election of minority
directors is made possible in Italy by very loose definitions of control in order to
trigger rules like the prohibition on insider trading and so on. Id. at 37.
    97. Consob data at December 31, 2002 (on file with author).
    98. The evidence to which I refer here is based upon my memories as a
newspaper reader and upon conversations with some independently nominated
directors.
2003]               BAD APPLES, BAD ORANGES                                 929

practices seem to matter much more than in the United States or in
                      99
the United Kingdom. This success has especially relied on the kind
of people designated as nominees by mutual fund managers, who
are usually selected from among the most well-reputed lawyers and
the most prominent finance and business law professors. In other
words, they are chosen from among people who have a strong
concern for their reputation and are among the very few in Italy who
                                                        100
may fear an exposé in the international financial press.

B.   Number and Variety
     Recent proposals have stressed the importance of having a
higher number (usually a majority) of independent directors on the
board. For instance, Professor Hopt has suggested a “European
principle according to which, first, the board as a monitoring body
should be independent of management and, second, in the audit,
remuneration, and appointment committees there should be at least
a majority of members also independent from the company in the
                                           101
sense of the [U.K.] Combined Code.”               In light of its co-
determination laws, this is eventually as far as Germany could go.
     Emphasis has been recently given also to the importance of
putting together a diverse set of board directors. The Higgs Report,
in particular, emphasizes that “[t]he interplay of varied and
complementary perspectives amongst different members of the
board can significantly benefit board performance.” The Report calls
for a “commitment to equal opportunities” and a broadening of the
pool of candidates for independent director positions. The Higgs
Report suggests that directors be chosen among “suitable senior
management just below board level,” and people serving in “roles
such as human resources, change management and customer care,”
where women are more strongly represented, and among foreigners
                                                 102
and people in charitable or public sector bodies.
     If it is true that what prevents independent directors from


   99. Compare Bernard S. Black, Does Corporate Governance Matter? A
Crude Test Using Russian Data, 149 U. PA. L. REV. 2131 (2001), with Sanjai
Bhagat & Bernard Black, The Relationship Between Board Composition and
Firm Performance, in COMPARATIVE CORPORATE GOVERNANCE: THE STATE OF THE
ART AND EMERGING RESEARCH 281 (Klaus J. Hopt et al. eds., 1998).
  100. See Barnard, supra note 89, at 111 (stating that improvements in U.S.
corporate governance were prompted by “a fear of litigation or fear of an exposé
in the Wall Street Journal”); David A. Skeel, Jr., Shaming in Corporate Law,
149 U. PA. L. REV. 1811, 1841-44 (2001) (highlighting the role of Fortune and
Business Week as non-judicial enforcers making use of the “shaming
technique”).
  101. HOPT, supra note 44, at 16.
  102. HIGGS, supra note 77, at 42-43.
930                  WAKE FOREST LAW REVIEW                             [Vol. 38

acting as shareholder champions is, as Warren Buffett put it, an
                                               103
excessively cozy “boardroom atmosphere,” then a diverse set of
independent directors may make it more likely that the tough
                        104
questions are asked. As usual, however, one may wonder what the
costs of this change in boardroom atmosphere will be, as well as the
opportunity costs and other costs associated with lengthier
meetings. A too-confrontational boardroom, in which it is more
likely that the question of whether the CEO should be replaced will
be raised, may well lessen the CEO’s incentive to provide sufficient
and prompt information to the board in an attempt to try and save
           105
her chair.
     Intuitively, the optimal number and degree of diversity of
independent directors will vary from industry to industry, from firm
to firm, and from time to time. Any recommendation for a minimum
number of independent directors and for a higher degree of diversity
among directors is likely to be good for some corporations and bad
            106
for others.     It is true that in most countries the recommendations
on such issues are not binding, since listed corporations are free to
decide whether to comply with them or to explain why they do not.
Companies and their CEOs, however, may find it hard to explain
convincingly why they have deviated from recommended behavior:
Even the most shareholder-value minded board having legitimately
decided that a uniform, insider-dominated board would be the best
solution for the corporation, will find it hard to convince the market
                                         107
that this is not a self-serving choice.      The cost in terms of lower
investor confidence of such a move may be higher than the cost of
following         commonly-adopted           corporate      governance
recommendations.




  103. Letter from Warren Buffett, CEO of Berkshire Hathaway, to Berkshire
Hathaway       Shareholders       (February    21,    2003),     available     at
http://www.berkshirehathaway.com/message.html.
  104. See Lynne L. Dallas, The New Managerialism and Diversity on
Corporate Boards of Directors, 76 TUL. L. REV. 1363, 1400 (2002).
  105. See COFFEE, supra note 2, at 42 (“[A]s the mechanisms of corporate
accountability . . . have shortened management’s margin for error, the incentive
to engage in earnings management and accounting irregularities is more
widespread.”).
  106. See Henry N. Butler, Boards of Directors, in 1 THE NEW PALGRAVE
DICTIONARY OF ECONOMICS AND THE LAW 165, 167 (Peter Newman ed., 1998).
  107. Cf. Richard Donkin, A Big Prize Beckons in Boardroom Reform, FIN.
TIMES (London), Mar. 14, 2003, at 11 (reporting the view of a boardroom
advisory consultant worrying that “too many companies will not take advantage
of the opportunity to explain a decision that might appear contrary to the spirit
of the recommendations [contained in the Higgs Report]”).
2003]               BAD APPLES, BAD ORANGES                              931

C.   Greater Role for Independent Directors
    No corporation would spend a lot of directors’ time and
corporate money (in consultation fees, etc.) in order to select the
right people to sit on its board, only to keep them idle. Independent
directors are supposed to become familiar with the business of the
corporation and with its organization, to keep informed, to monitor
managers, to raise the tough questions, to review their most
important decisions, to keep an eye on the outside auditor, to
determine the appropriate level of compensation for executive
                      108
directors, and so on.
    It is easy to predict that the outcome of such hyperactivity will
be that CEOs of public corporations will have much less freedom to
serve their own interests (which is, of course, good), but also much
less freedom (and less time) to make innovative and profit-
                                                              109
generating business decisions (which is, of course, bad).         The
increased bureaucratization of business decision-making within
public corporations may well be the most negative long-term
                                                    110
consequence of Enron and its progeny of scandals, fostering going-
private transactions and delaying plans to go public by existing
                    111
private companies.

D.   Outside Directors or Übermenschen?
     When one thinks about the qualities an independent director
should have and the task given to her by corporate governance best
practice codes, it is only too natural to wonder whether there are
indeed enough human beings around who may qualify to serve as
independent directors or whether, instead, such an independent
director will have to be a sort of homo novus, created by capitalism
in order to overcome its current crisis. The Higgs Report well
illustrates this point. According to the Report,

     Non-executive directors need to be sound in judgement and to
     have an inquiring mind. They should question intelligently,


  108. See, e.g., HIGGS, supra note 77, at 27-29.
  109. Brian Cheffins well highlights the trade-off between board’s increased
monitoring and innovation. See BRIAN R. CHEFFINS, COMPANY LAW THEORY,
STRUCTURE AND OPERATION 624-25 (1997).
  110. To be sure, bureaucratization of board of directors had already taken
place in the United States following Smith v. Van Gorkom, 488 A.2d 858 (Del.
1985). See Jonathan R. Macey, Smith v. Van Gorkom: Insights about C.E.O.s,
Corporate Law Rules, and the Jurisdictional Competition for Corporate
Charters, 96 NW. U.L. REV. 607, 621 (2002).
  111. Cf. Stephen J. Redner, Thinking of Going Public? Think Twice, Then
Read the Sarbanes-Oxley Act of 2002, 6 J. SMALL & EMERGING BUS. L. 521
(2002).
932                  WAKE FOREST LAW REVIEW                          [Vol. 38

      debate constructively, challenge rigorously and decide
      dispassionately. And they should listen sensitively to the views
      of others. . . . They must be well-informed about the
      business . . . and the issues it faces. This requires a knowledge
      of the markets in which the company operates as well as a full
      understanding of the company itself . . . . First and foremost,
      integrity, probity and high ethical standards are a prerequisite
      for all directors. . . . [A]ll non-executive directors must be able
      and willing to inquire and probe. They should have sufficient
      strength of character to seek and obtain full and satisfactory
      answers within the collegiate environment of the board . . . .
      [S]trong interpersonal skills are an essential characteristic of
      the effective non-executive director.             Much of their
      effectiveness depends on exercising influence rather than
      giving orders and requires the establishment of high levels of
      trust. . . . Non-executive directors should be willing and able
      to acknowledge when their individual contribution is no longer
      fresh, and should make way for newcomers in an orderly and
                      112
      managed way.
     Perhaps this is just an exercise in rhetoric and no one will take
these recommendations too seriously. As a matter of fact, anyone
displaying this plethora of personal qualities would qualify for
sainthood. And one may wonder how better corporate governance
will become if we are to rely on non-executive directors’ sainthood in
order to prevent executive directors’ sins.

  V.    ONE FINAL COMMENT: DIFFERENT OWNERSHIP STRUCTURES,
               SAME CORPORATE GOVERNANCE RULES?

    This comment has speculated on why no public reaction to
corporate scandals has taken place in Europe similar to that which
occurred in the United States, although Europe has experienced
scandals comparable to those in the United States in terms of the
number and size of companies involved. A number of explanations
for this were provided in Part II, including state aid to failing
corporations, the absence of a European public opinion, and a higher
degree of investor disenchantment regarding insiders’ behavior.
Perhaps one could also add the fact that in no European corporate
scandal has so much personal greed and corruption emerged as in
the U.S. scandals.
    Although little backlash is resulting from corporate scandals
around Europe, politicians are banking on the American public’s
reactions in order to push through reforms very similar to those


 112. HIGGS, supra note 77, at 28-29 (emphasis added).
2003]               BAD APPLES, BAD ORANGES                              933

enacted by the U.S. Congress, as well as a general review of
                                     113
corporate governance practices.            As underlined in Part IV,
policymakers and self-regulatory bodies on both sides of the Atlantic
are relying ever more upon independent directors, who should act,
borrowing Professor Bratton’s words, as “super-monitors.”
     As hinted in Part II, ownership structures in continental
Europe are different from those in the United States and in the
United Kingdom.          Most continental European companies are
                               114
controlled by block-holders.       Often, especially in the case of major
corporations, the degree of separation between ownership and
control is not much lower than in the United States and in the
United Kingdom, thanks to deviations from the one-share/one-vote
principle in the form of dual class shares, pyramids, cross-holdings
                           115
and other such devices.          But, contrary to what is the case for
publicly held corporations, control of such companies is under no
threat of a hostile takeover.
     In light of these strong differences in ownership structures, one
may be surprised to find that the policymakers’ agenda in
continental Europe is so similar to that in the United States and in
the United Kingdom, i.e., that different ownership structures are
not significantly taken into account when dealing with corporate
                     116
governance issues.        With regard to U.S. (and possibly U.K.)
directors, one can agree that, “[t]oday, as the mechanisms of
corporate accountability (e.g., takeovers, control contests,
institutional activism, more aggressive boards) have shortened
managements’ [sic] margin for error, the incentive to engage in
earnings management and accounting irregularities is more
              117
widespread.”       The same is not true for block-holder-dominated
European companies, in which directors are faithful to block-
holders, who in turn are little accountable to outside investors and
face no threat of a hostile takeover. When no devices such as
pyramids are used to separate ownership from control, the block-
holder’s ownership stake in the company acts as a curb to her
opportunism. While separation between ownership and control can
be as complete as in a publicly-held U.S. company, when one or more
of these devices are in place, dominant block-holders’ set of
incentives will not be comparable to those of a CEO in a typical U.S.

   113. See discussion supra Part III.
   114. See, e.g., Marco Becht & Colin Mayer, Introduction, in THE CONTROL OF
CORPORATE EUROPE, supra note 95, at 1, 19.
   115. Id. at 30-35.
   116. One exception is in the Italian corporate governance code, which
provides for more stringent requirements for companies controlled by other
listed companies, i.e., for pyramids. See supra text accompanying note 70.
   117. COFFEE, supra note 2, at 42.
934                  WAKE FOREST LAW REVIEW                             [Vol. 38

corporation for two reasons.        First, mechanisms of corporate
accountability work much less effectively. Second, there is no short-
term pressure to cheat or to take all the money and run.
      Mechanisms of corporate accountability work less effectively for
three reasons. First, as already stated, there can be no threat of a
hostile takeover. Second, institutional investor activism is less
effective when a company has a dominant shareholder holding
uncontestable control. In fact, the usual threats institutional
investors can make during negotiations with management cause
little concern to the dominant shareholder: The threat of a loud
“exit,” of dumping their stock on the market, is less relevant when a
hostile takeover is impossible, and the threat of making a
shareholder proposal or of starting a just-say-no campaign is
meaningless to the block-holder, who normally has a majority of the
        118
votes.      Third, boards themselves will normally be less aggressive
in contrasting a bad block-holder than in contrasting a bad CEO for
the very simple reason that a CEO can be displaced by the board,
while a block-holder, far from having to fear removal, may replace
                                       119
the entire board at the next meeting.
      Block-holders have less incentive to cheat on the company’s
accounts and to engage in short-term, big, one-shot expropriations,
                                               120
because they know they are there to stay.          It is far better to
engage in small-size, on-going looting of the company’s assets with
little risk of being brought to court by shareholders or of being
prosecuted than to bet all the company’s assets in some form of
fraudulent high-risk, high-personal return strategy which may even
drive the company into bankruptcy.
      If a conclusion is to be drawn from this, it is that corporate
governance rules in continental Europe are bound to be more
relevant than in the United States and in the United Kingdom due
to the lesser effectiveness of mechanisms of corporate accountability
there. It is left to wonder, however, whether devices such as “more”
independent and proactive directors can prove to be helpful in an
environment which perceives block-holders instead of independent
                                                        121
directors as what is possibly closest to an Übermensch.




  118. See BIANCHI & ENRIQUES, supra note 96, at 12-13.
  119. See Guido Rossi, Do Corporate Governance Recommendations Change
the Rules for the Board of Directors?, in CAPITAL MARKETS AND COMPANY LAW
493, 501 (Klaus J. Hopt and Eddy Wymeersch eds., 2003).
  120. See BORSA 2003, supra note 69, at 135.
  121. See Luca Enriques, Do Corporate Law Judges Matter? Some Evidence
from Milan, 3 EUR. BUS. ORG. L. REV. 765, 811 (2002) (“Most Italians . . . have a
deferential attitude toward the wealthy and powerful.”).

				
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