Better Rules for Business?

The Commission has presented a “Responsible Business” policy package which it says will a) improve transparency among multinationals (in particular at mining and forestry companies) regarding  taxes, royalties and bonuses paid worldwide separate proposal; b) simplify accounting rules for SMEs; and c) reduce some reporting obligations for listed companies.

Those changes would come from the two legislative proposals in the package: proposals to amend the Transparency Directive and the Accounting Directives, respectively. The package also includes two non-legislative policy documents: an “Action Plan on Social Business” and “Strategy on Corporate Social Responsibility”. The public response to the Commission’s package has questioned whether these non-legislative initiatives will in fact clarify or simplify things for small business, or whether they will do the contrary. 

Here we provide a quick overview of each of the four parts of this package.

I. Proposal Amending the Transparency Directive

As part of the package, the Commission proposed amendments to the existing Directive on transparency requirements for listed companies (the Transparency Directive 2004/109/EC).

The Transparency Directive requires issuers of securities traded on regulated markets within the EU to ensure appropriate transparency through periodic financial information.

(1) Notification requirement

The main objective of the Commission proposal is to fill in a gap in the notification requirements, by introducing a requirement for disclosure of major holdings of all financial instruments that could be used to acquire economic interest in listed companies and had the same effect as holdings of equity.

(2) Broad definition of financial instruments

The definition of financial instrument would be broadened to cover all instruments of similar economic effect to holdings of shares and entitlements to acquire shares, whether giving right to a physical settlement or not. It would cover cash-settled derivatives, as well as other similar financial instruments not yet available on the markets but which could be the result of future financial innovation.

The general principle of notification of those instruments would be subject to exemptions in order to avoid providing the market with irrelevant information and spare notification costs for market players.

(3) Aggregation of voting rights holdings

The proposal would also harmonise the regime for the disclosure of major holdings of voting rights by requiring the aggregation of holdings of shares with those of financial instruments giving access to shares.

(4) Abolition of quarterly reports

The proposal also aims to allow for more flexibility regarding the frequency and timing of publication of periodical financial information, in particular for small and medium-sized issuers. Therefore, in order to reduce the administrative burden, the requirement for all listed companies to publish quarterly financial information will be abolished. 

(5) Sanctions

During the financial crisis in 2008 the lack of sufficient sanctions was identified as a major weakness. Therefore, the amended Transparency Directive would require Member States to adopt common minimum standards on the types of sanctions, the level of fines and the selection criteria.

(6) Storage of regulated information

In order to facilitate cross border access to regulated information, the current network of officially appointed storage mechanisms should be enhanced. It is proposed that the European Commission receives further delegated powers in this respect, in particular regarding the access to regulated information at the Union level.

The European Securities and Markets Authority should assist the European Commission by developing draft regulatory technical standards regarding access to regulated information at the Union level.

(7) Reporting of payments to governments

The Commission proposes to require the disclosure of payments to governments at the individual or consolidated level of a company.  More specifically, Member States should require issuers active in the extractive or logging of primary forest industries, a report on payments made to governments on an annual basis.

II. Proposal Revising the Accounting Directives

The Commission wants to update the EU rules concerning accounting for limited liability companies. To this end, it proposed a new Directive which aims to simplify the preparation of financial statements for small companies and to make them clearer and more easily understandable. The proposed Directive would replace the existing Directives which regulate the individual and consolidated financial statements.

(1) Balance sheet and profit and loss account

The proposed Directive provides for one balance sheet layout, removing formation expenses as a category of asset.  It also provides for two profit and loss account layouts, while previously four layouts were permitted.

(2) Notes to the financial statements

The proposed new rules set out the information to be provided by all enterprises in the notes to the financial statements, including: (1) accounting policies adopted; (2) the amount of any financial commitments and guarantees that are not included in the balance sheet; (3) the nature and business purpose not mentioned in the balance sheet; (4) events not appearing in the profit and loss account or balance sheet, because they occurred after the end of the year; (5) amounts that must be paid by the enterprises after 5 years.

(3) Consolidated financial statements

According to the proposal, consolidation will be required in cases where: (i) one enterprise exerts dominant influence or control over another one; or (ii) where enterprises are managed on a unified basis. Small groups are exempted from the requirement to prepare consolidated financial statements.

(4) Auditing

The new Directive allows small companies to not be audited and provides that public interest entities will be subject to a statutory audit, regardless of their size. The audit report must include the following information: (1) the financial statements that are the subject of the audit; (2) the scope of the statutory audit, including the auditing standards that were followed; (3) an opinion on the annual financial statements.

(5)  Report on payments to governments

Large companies and public interest entities operating in the extractive industry or in the logging of primary forests must provide information on an annual basis concerning the payments they make to governments in the financial year. In cases where payments have been made in order to support a project, these companies must also disclose the amount of money paid for each such project.

III. Action Plan on "Social Businesses"

As part of the proposed package, the Commission presented an action plan on social businesses entitled “The Responsible Business Initiative’’.

According to the definition provided by the Commission, social businesses are enterprises: (1) whose primary objective is to achieve social impact rather than making profits for owners and shareholders; (2) which operate in the market through the production of goods and services in an innovative way; (3) which use surpluses mainly to achieve these social goals and (4) which are managed by social entrepreneurs and involve workers, customers and stakeholders affected by their business activity.

Social businesses are considered to be important for the EU as they create jobs, improve the quality of healthcare and introduce efficient ways to reduce emissions and waste.

The action plan proposes a series of measures with the aim of (i) encouraging the funding for social businesses; (ii) improving information concerning them and (iii) setting out a simpler legal framework.

(1) Improving funding

In order to achieve this goal, the Commission proposes: (1) a European regulatory framework for social investment funds; (2) the development of microcredit in Europe; (3) a European financial instrument of €90 million to improve social businesses' access to funding and (4) an investment priority for social enterprises in the regulations ERDF (European Regional Development Fund) and ESF (European Social Fund), as proposed in the regulatory package on the Structural Funds 2014-2020.

(2) Promoting knowledge of social businesses

To this end, the following actions are envisaged: (1) Developing a map of social enterprises in Europe in order to identify good practices and models which can be reproduced ; (2) creating a public database of labels and certifications of social businesses in Europe ; (3) promoting mutual learning of national and regional administrations, especially via the Structural Funds; (4) creating a single, multilingual electronic data and exchange platform for social entrepreneurs, in order to better advertise and improve access to EU programmes which can support social entrepreneurs.

(3) Setting out simpler rules

The Commission proposes to: (1) simplify the Statute for a European Co-operative Society as well as a European Foundation Statute; (2) improve the quality in awarding contracts within the public procurement reform, especially in the case of social and health services; (3) promote state aid rules to social and local services that would benefit social businesses.

IV. EU strategy for Corporate Social Responsibility

The second Communication in the package is a renewed strategy for Corporate Social Responsibility for the period 2011-2014.

According to the new definition put forward by the Commission, Corporate Social Responsibility (CSR) designates the responsibility of enterprises for their impacts on society and it outlines what an enterprise should do to meet that responsibility.

The new Commission Strategy sets out how enterprises can benefit from CSR and help enterprises achieve their full potential in terms of creating wealth, jobs and innovative solutions.

Even if the CSR process remains informal, the Commission considers that enterprises should have a process in place to integrate social, environmental, ethical human rights and consumer concerns into their business operations and core strategy in close cooperation with their stakeholders. The aim would be to maximise the creation of shared value for their owners, stakeholders and society, as well as to identify, prevent and mitigate their possible adverse impacts.

The new CSR policy puts forward an action agenda for the period 2011-2014. The agenda contains commitments from the Commission and suggestions for enterprises, Member States and stakeholders.

(1) Enhancing the visibility of CSR and disseminating good practices

This includes the launch in 2012 of a European award, and the establishment of sector based platforms for enterprises and stakeholders to make commitments and jointly monitor progress.

(2) Improving and tracking levels of trust in business

The Commission intends to initiate a public debate on the role and potential of enterprises, and organize surveys on citizen trust in business.

(3) Improving self- and co-regulation processes

The Commission intends to launch a process in 2012 with enterprises and other stakeholders to develop a code of good practice to guide the development of future self- and co-regulation exercises.

(4) Enhancing market reward for CSR

This would include leveraging EU policies in the fields of consumption, investment and public procurement in order to promote market reward for responsible business conduct. The Commission intends to facilitate the better integration of social and environmental considerations into public procurement as part of the 2011 review of the Public Procurement Directives.

(5) Improving company disclosure of social and environmental information

The Commission intends to present a legislative proposal on the transparency of the social and environmental information provided by companies in all sectors.

(6) Further integrating CSR into education, training and research

The Commission intends to provide further support for education and training in the field of CSR, and launch an action in 2012 to raise the awareness of education professionals and enterprises

(7) Emphasizing the importance of national and sub-national CSR policies

The Commission invites EU Member States to present or update their own plans for the promotion of CSR by mid-2012 and create a peer review mechanism for national CSR policies.

(8) Better aligning European and global approaches to CSR 

The Commission invites all large enterprises to make a commitment that by 2014 they will take account of at least one internationally recognised CSR principles and guidelines (UN Global Compact, the OECD Guidelines for Multinational Enterprises, or the ISO 26000 Guidance Standard on Social Responsibility) and it intends to monitor those commitments. The Commission also intends to develop human rights guidance for some sectors.

Next Steps

The proposals to revise the Accounting Directives and the Transparency Directive will now follow the ordinary legislative procedure and will be sent to the European Parliament and to the Council for examination.

The Communications have also been forwarded to the European Parliament and the Council who may decide to respond to them.