EU accesssion: Governance reaches new frontiers

The enlargement of the European Union on 1 May meant different things to different people. For the tabloids it was largely a matter of immigration, while for the prime minister it has brought into focus the issue of the EU constitution.

And for historians it should be the cause for celebration, as countries that have spent large parts of the past 2,000 years fighting each other come together in a unique way. It might be something slightly more prosaic for accountants – corporate governance.

Beyond the macro picture of 10 new countries signing up to supra-nationalism and more than 70 million people becoming EU members there are more than enough concerns for how the now 25-country strong union will conduct its business on a micro day-to-day level.

One of the fears emerging is that the economies of Poland, Latvia, Malta and their fellow accession states do not yet have the corporate governance structures in place to reassure potential foreign investors and shareholders.

Concerns span everything from boardroom structures, the regulation of markets and auditing and accounting standards.

In a world where Enron, WorldCom, Parmalat and even Shell have knocked confidence in recent years, the enlargement of the EU to incorporate some countries that were communist little more than a decade ago may only add to the worries in some people’s minds. Certainly that message is now being voiced publicly.

Last week Eric Anstee, the chief executive of the Institute of Chartered Accountants in England & Wales (ICAEW), took his plea to a meeting of the World Economic Forum that the need for corporate governance is not something needed within borders but across them as well.

His message was simple: ‘In order for the 10 accession countries to really punch their weight in the new Europe, it is vital that all citizens and foreign investors have confidence in the operation of legal systems and the capital markets. Those organisations that drive the economies of these countries need to quickly demonstrate that they have the right corporate governance structures in place to help establish such confidence.’

Undoubtedly, it is something that is easier said than done. In Britain, corporate governance has been a long process that started a decade ago with the Cadbury Report. Higgs, Turnbull and Nolan have subsequently entered the lexicon as the need for governance has stretched from the private to the public sectors. Now the search may be on for their European counterparts, and Anstee sees problems ahead.

At board level, there is the unfamiliarity in several countries with the concept of the senior non-executive director and how these can provide a check and balance on senior management. The Forum also heard that governments could do more to train individuals who sit on boards.

More focus might be needed in the area of privatisation where the process seems to have stopped in some countries, says Anstee. Poland for example, has not privatised any state operations since 1999.

But there are fears among some in central and eastern Europe that any national companies that go public could easily be swallowed up by richer Western counterparts.

‘Take the best and forget the rest’ was the motto given to the accession countries from those already within the EU. And penalties may have to be rigorously enforced on those that go beyond the rules.

Within the spheres of accountancy and auditing though, Anstee is hopeful that standards are generally high.

‘I think that everybody accepts the concept of international accounting standards,’ says Anstee. ‘I think that is encouraging.’

He admits that some areas need addressing – this includes solvency, and whether or not some businesses would actually be in the black if they were subjected to a rigorous audit.

But Anstee believes there could be a role for the adoption of corporate governance standards on an EU-wide basis. This would involve the institutions in this country and their counterparts in 24 others working together to adopt similar rules, but this process is already beginning.

David Devlin, the president of the European Federation of Accountants, is already thought to be looking into finding an international standard that can be used by all the countries of the European Union.

‘Creating a set of principles in each area we can then see some strengthening taking place (of corporate governance benchmarks),’ said Anstee. ‘I don’t think it should take too long.’

Until then it is realistic to expect that the new countries will approach the notion of corporate governance at various speeds. Some, such as the Czech Republic, Cyprus, Poland and Hungary may be in the vanguard, while others will follow at a later date.

Although some accession countries may question how tough corporate governance has actually been in the West in recent years if the well-known scandals have been allowed to develop.

It is not only the accession states that must get their houses in order, a point made by a new member at the meeting of the World Economic Forum, which Anstee conceded.

And certainly there is enough confidence within the marketplace already to encourage investment in the ‘New Europe’. Slovakia has enticed Volkswagen to switch production from Germany and others are likely to follow, not least because countries may be jostling for position to be first in line when, or if, Russia becomes a member of the European Union.

Much work has been done but more will be needed. Those who thought that the notion of corporate governance might have ended with Higgs are in for a rude shock.