The Regimes of European Integration: Constructing Governance of the Single Market

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THE REGIMES OF EUROPEAN INTEGRATION

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The Regimes of European Integration Constructing Governance of the Single Market

SHAWN DONNELLY

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Great Clarendon Street, Oxford ox2 6dp Oxford University Press is a department of the University of Oxford. It furthers the University’s objective of excellence in research, scholarship, and education by publishing worldwide in Oxford New York Auckland Cape Town Dar es Salaam Hong Kong Karachi Kuala Lumpur Madrid Melbourne Mexico City Nairobi New Delhi Shanghai Taipei Toronto With ofﬁces in Argentina Austria Brazil Chile Czech Republic France Greece Guatemala Hungary Italy Japan Poland Portugal Singapore South Korea Switzerland Thailand Turkey Ukraine Vietnam Oxford is a registered trade mark of Oxford University Press in the UK and in certain other countries Published in the United States by Oxford University Press Inc., New York # Shawn Donnelly 2010 The moral rights of the author have been asserted Database right Oxford University Press (maker) First published 2010 All rights reserved. No part of this publication may be reproduced, stored in a retrieval system, or transmitted, in any form or by any means, without the prior permission in writing of Oxford University Press, or as expressly permitted by law, or under terms agreed with the appropriate reprographics rights organization. Enquiries concerning reproduction outside the scope of the above should be sent to the Rights Department, Oxford University Press, at the address above You must not circulate this book in any other binding or cover and you must impose the same condition on any acquirer British Library Cataloguing in Publication Data Data available Library of Congress Cataloging in Publication Data Data available Typeset by SPI Publisher Services, Pondicherry, India Printed in Great Britain on acid-free paper by MPG Books Group, Bodmin and King’s Lynn ISBN 978–0–19–957940–2 1 3 5 7 9 10 8 6 4 2

Contents Acknowledgements List of Tables Abbreviations

vi vii viii

1 2 3 4 5 6 7 8 9 10 11

1 21 37 62 90 117 146 172 194 222 240

Introduction Constructing Regimes of European Integration National Norms, Convergence, and Divergence International Relations Theory and Integration German Regulation Regulation in the United Kingdom European Pre-regime Regulation The Company Law Regime The European Financial Market Regulation Regime The Accounting Standards Regime Conclusions

Bibliography Index

250 271

Acknowledgements A number of people have helped me along the way, directly or indirectly, in making this book possible. I ﬁrst began researching corporate governance at the Political Economy Research Centre in Shefﬁeld, where I learned and practised the classical method of political research after a North Americanstyle education. The focus on ideas coupled with agency has stuck with me and I am still grateful for the inﬂuence of that group, particularly Andrew Gamble, for introducing me to it and inspiring me to do more. A number of other colleagues have read portions or the entire text at various stages in its development over the years and given detailed commentary, for which I am thankful: Ingeborg To¨mmel, Frank Nullmeier, Ulrike Liebert, the late Detlev Albers, and an anonymous reviewer from Oxford University Press. Special thanks go to Antje Wiener, a dear friend and colleague who has supported me strongly in both this academic endeavour and others. Special thanks also go to Dick Ruiter, who always took time to talk with me about legal theory and philosophy, and to whom I also owe a great debt. The mistakes are, of course, my own. On a personal note, I would like to thank Wendy Stockentree, who has supported and given me strength within and outside the ofﬁce and exhibited great understanding whilst I completed this book and reminded me to have fun.

List of Tables Table 2.1 Table 2.2 Table 3.1 Table 4.1

EU Company Law Directives EU Securities Directives State–Business Relation Types Effect of Norms and Public Sensitivity on Regime Development Table 5.1 German Constitutive Norms Table 6.1 Constitutive Norms of the UK Regulatory State Table 9.1 Expert and Operational Groups Within Committee of European Securities Regulators (CESR)

24 29 42 74 91 119 216

Abbreviations AGM ASB BaFin BDA BDI BilReG CBI CESR CFO CIB CLR COREPER DAI DCT DGB DRSC DSR DSW DTI ECJ ECS EEC EFRAG EMAC EP EPD ESC ETUC EU EUCDA EWC FASB FDP FESCO FRC FSAP GAAP HGB

Annual General Meetings Accounting Standards Board Federal Financial Services Authority (Bundesanstalt fu¨r Finanzdienstleistungsaufsicht) Bundesvereinigung der deutschen Arbeitgeberverba¨nde Bundesverband der Deutschen Industrie Accounting Law Reform Act Confederation of British Industry Committee of European Securities Regulators Chief Financial Ofﬁcer Companies Investigation Branch Company Law Review Committee of Permanent Representatives Deutsches Aktieninstitut Draft Constitutional Treaty Deutscher Gewerkschaftsbund German Accounting Standards Committee German Accounting Standards Board Deutsche Schutzvereinigung fu¨r Wertpapierbesitz Department of Trade and Industry European Court of Justice European Company Statute European Economic Community European Financial Reporting Advisory Group Economic and Monetary Affairs Committee European Parliament Employee Participation Directive European Securities Committee European Trade Union Confederation European Union European Christian Democratic Employees Association European Works Councils Financial Accounting Standards Board Free Democratic Party Federation of European Securities Exchange Commissions Financial Reporting Council Financial Services Action Plan Generally Accepted Accounting Practices Handelsgesetzbuch

Abbreviations HLG I&C IAS IASB IASC IFI IFRIC IFRS IIMG IOSCO KAGG MAD MEP NED OECD OFR OMC POB SAC SCE SE SEBG SISE SPD TEC TEU UCITS UMAG WPK

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High-Level Group of Company Law Experts Information and Consultation International Accounting Standards International Accounting Standards Board International Accounting Standards Committee Institutional Financial Investor International Financial Reporting Interpretations Committee International Financial Reporting Standards Inter-Institutional Monitoring Group International Organisation of Securities Commissions Mutual Funds Law Market Abuse Directive Member of the Pariliament Non-executive Director Organization for Economic Cooperation and Development Operating and Financial Review Open Method of Coordination Professional Oversight Board Standards Advisory Council Subcommittee on Enforcement Societas Europaea SE Codetermination Act Subcommittee on International Standards Endorsement Social Democratic Party of Germany (Sozialdemokratische Partei Deutschlands) Treaty of the European Communities Maastricht Treaty on European Union Undertakings for Collective Investment in Transferable Securities Company Integrity and Lawsuit Modernization Act Wirtschaftspru¨ferkammer

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1 Introduction THE REGIMES OF EUROPEAN INTEGRATION The governance of the Single European Market has undergone signiﬁcant changes over the last decade. Out of the plethora of directives and regulations that apply to ﬁnancial markets and companies, regimes have formed to give direction to the way the European Union (EU) and its member states work together to regulate them. These regimes in turn have made it easier for the EU to pass new legislation and to coordinate regulation effectively across national jurisdictions within the single market. They have also changed Europe’s business environment by making it possible for companies to do business throughout the single market with greater legal and regulatory certainty. The substance of this book is about that regime development. In creating the regimes discussed in this book, EU leaders contributed to the ongoing constitutionalization of Europe. Each of the regimes required an explicit deﬁnition of the vertical relationship between the EU and the member states, and of the horizontal relationship amongst the member states. It deﬁned the kind of regulatory state that would be required, the mix of European and national bodies involved, and the procedures they were to follow in carrying out their functions. It also deﬁned what kinds of national variation in related economic and social policy would be regarded as legitimate. As they made these agreements, European leaders simultaneously articulated what it meant to be a member state in the single market, and what it meant to delegate responsibilities to the EU. This constitutionalized these ideals by sorting out the issues of EU and national responsibilities in a powerfully authoritative way. The theory of this book is about demonstrating the normative foundations of these constitutional agreements and showing how they had to be built on the shoulders of national ones. Precisely because the EU’s member states are highly institutionalized and possess deeply set convictions about public policy, EU policy must ﬁt national normative constraints where they exist. What makes both the regimes and the theoretical challenge intriguing is that the regimes transformed European governance and their constitutionalization

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varied by policy area, despite having similar constellations of interest groups, political hues of government, and being in policy areas that were very tightly intertwined. This reﬂects a compartmentalization of disparate, sometimes conﬂicting visions about what the (member) state legitimately does in a modern economy from one policy area to another and for the EU as well. The reason for these disparities lies within the changing and fragmented nature of capitalism and regulation in the member states themselves. Previously thought of as national models of capitalism and regulation, we now see them as hybrids, combining market-driven and lightly regulated sectors with others that are restricted and regulated in the public interest and yet others that impose market-like behaviour on reluctant actors. Since the cost of integration declines as national policies converge, hybridization means disparate logics of European integration. Supranational delegation was possible in EU stock market regulation because of prior economic and regulatory convergence at the national level that involved a particular view of the state and market. Member states agreed unanimously on an intricate intergovernmental regime to continue imposing social and public interest demands on companies, including and especially those listed on the stock market. Instead of a single regime, separate regimes were created to handle the regulation of companies on the one hand, and the trading of their shares on the other. A third regime to handle their ﬁnancial reports was constructed on a third set of distinct principles. European rules were designed to ﬁt national variation in how the state intended to intervene in the economy. Where national prerogatives prevailed, so did the desire to protect a way of doing things that was tied up with national identity. This view of constitutional norms at the national and European levels is therefore thick and embedded. It requires the norms of European governance to respect national understandings of the state–market relationship that are developed in regular legislation and corresponding social practices. They can be said to have constitutional force to the extent that they can be shown to have a structural inﬂuence on the behaviour and thinking of actors, particularly of government and parliamentary leaders responsible for taking authoritative decisions. European norms, if they are agreed on, need to resonate with these national norms, either by duplicating the normative imperatives or giving them the space to continue under national control, even whilst ensuring tight cross-border regulatory cooperation. If a constellation of highly similar national norms exists, European regimes based on a high degree of delegation and harmonization are possible. If the national norms are disparate, then any attempt to supranationalize or harmonize national policy will prove not only futile but counterproductive and generate backlash (Majone 2005). In both cases, agreement on corresponding European regimes is

Introduction

3

possible, but must be made explicit through negotiated codiﬁcation. In other words, regimes, as a form of European constitutionalization, must themselves be explicit, socially embedded down to the national level, and resonate with national polities to have any chance of success. The difference is that European constitutional norms must include EU–member state relations as well as state–market relations. European leaders ignore this imperative at their peril. This view of regimes and constitutional norm developments cannot guarantee what European leaders will agree on, but it can predict with reasonable certainty that when proposed European norms clash with national ones, they are unlikely to be adopted and ratiﬁed. Once the constellation of national norms is known, the ‘no-go areas’ for harmonization and supranational delegation are fairly easy to identify. This approach is therefore an alternative to teleological and neofunctionalist accounts of European integration and constitutionalization. The theoretical goal of this book is therefore to demonstrate that prior agreement of EU leaders on key constitutional norms was a prerequisite for regime development, and that this agreement had to support the thick constellation of national, socially embedded norms.

UNDERSTANDING DEVELOPMENTS IN GOVERNANCE This book seeks to understand why EU member states choose the balance they do between national and European responsibilities for regulation and broader economic policy. It posits that national governments rely on, cultivate, and construct norms of state identity and interaction with the marketplace that deﬁne and shape their roles in regulating the national economy and then seek norms, if they feel compelled to, to govern the European economy that will support them. This is so because national governments, who are responsible for making key decisions about the future course of integration and regulation, rely and occasionally reﬂect on their understanding of their role in regulating their economies, and seek to avoid dissonance at the European level. Although vested economic interests tell us something about the goals that governments pursue, normative factors are an additional, important consideration that helps us to understand when governments are willing to ‘let go’ and when they are not. A focus on norms may help us to understand parts of the puzzle that other approaches leave untouched. Three broad approaches are widely used in predicting or understanding why we get the extent and kind of integration

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we do: neofunctionalism, liberal intergovernmentalism, and constructivism. Neofunctional explanations of European integration expect spillover-driven integration up until the point where public resistance becomes strong enough to generate backlash against further Europeanization. Yet, at what point does the backlash that a neofunctionalist expects become likely? Liberal intergovernmentalists, including principal–agent theorists, expect member states to approve governance beyond the state as a rational calculation of beneﬁt to societal coalitions. Yet, on what basis would policy areas with very similar interest group constellations act to generate diverse and disparate national interests for an intergovernmentalist? Constructivists, beyond the soft constructivism of policy learning and epistemic communities, expect values, norms, and identities at the national level to determine perceptions of interest and thereby behaviour, even when interest constellations are quite similar. From these assumptions, one can argue that conceptions of statehood, the market, and relations between them play a key role in setting the preferences of national governments when they negotiate any form of international or supranational governance and in determining the likely outcome. If the norms were constitutional, as I suggest, why was it possible to create and ratify regime-speciﬁc norms governing EU–member state relations whilst grander constitutionalist visions failed? The answer lies in the bottom-up nature of constructed regime norms and the top-down nature of overt claims to an EU constitution. The fate of the Draft Constitutional Treaty (DCT) of 2004 gave neofunctionalists and especially federalists pause for thought on questions of EU constitutional development and about the nature and power of impulses that drive the integration process. The DCT began as a project launched by the member states for institutional reform, one that would simplify the EU’s decision-making procedures. It ended as a project shaped by the Convention on the Future of Europe that intended to raise public awareness, support, and identiﬁcation with the EU as a shared political and social community. The Convention assumed that latent public support for the EU, always weak, would become explicit and stronger if voters and governments had political symbols with which they could identify. Alternatively, those EU symbols would socialize Europeans into greater EU support. The symbolic trappings of a political union—an ofﬁcially recognized ﬂag, anthem, and written constitution—would therefore provide a singular focal point for the allegiance of voters to focus on, generating increased legitimacy for the EU and its institutions. Its failure led to the renewed leadership of the member states in determining treaty contents and more importantly, respect for national diversity, symbolized by the removal of political symbols. The

Introduction

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dominant belief in the aftermath of the DCT’s failure was that these symbols had proved counterproductive: confronting national symbols and generating resistance rather than establishing a new source of shared loyalty and identiﬁcation. The Convention’s ﬁrst key oversight was denying that the existing complex of treaties, with their complicated decision-making procedures and divisions of responsibility already constituted a constitution, or a constitutional arrangement for the EU and its constituent member states. As Christiansen and Reh (2009) argue, constitutionalization of the EU is a gradual and ongoing process rather than a discrete event at a particular point in time. There are treaties that identify the actors, their rights, and responsibilities, in all areas of public and foreign policy. There are trends in legislation that accord varying degrees of delegation to European bodies or discretion to the member states. There are directives that do the same. Not every element of every treaty or piece of legislation provides the steering and orientation to an entire political system that we associate with constitutional norms. Nevertheless, the European constitution is there, more implicit than explicit, real but not yet named a constitution. The DCT’s failure was more than likely precisely because it collided with impulses, norms, and values contained in the existing constitution it failed to recognize. It collided with existing constitutional principles, some of them implicit. The second key oversight was denying that the norms behind national constitutional arrangements, and especially behind the grand compromises of social and economic policy outside the written constitution, are an important component of constitutional understanding, with implications for the EU’s development as well. The grand questions of who owns the economy, whether employees have a meaningful role in its governance, and whether the state is understood to have powers to intervene in it for the greater public good had been answered in disparate ways in the various member states, creating a dense normative and institutional structure with which European constitutionalism and governance norms must contend. In other words, normative structures found within the member states condition what is feasible at the European level rather than the other way around. As in all compound political systems, the task is therefore to understand how national and supranational norms work together, rather than examining the supranational in an isolated fashion. I posit therefore that European constitutionalization incorporates norms of governance that deﬁne the member states, their ability to regulate the private sector, European institutions, and the relationships between all of them simultaneously, providing for social embeddedness regardless of the degree of integration. Successfully articulated European norms preserve and

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reinforce national ones, or they will not come about. This is despite functional or interest-based incentives to do so. Attempts to push against these structures generate backlash. The EU can therefore constitutionalize a particular policy area in a distinctive way (spanning as many directives as are needed or wanted to govern it) without resorting to treaty-based changes. The regime simultaneously gives structure to European cooperation, coordination, and delegation, and allows, through the use of more than one regime, disparate visions of delegation to exist side by side when it is considered politically expedient. When this happens, it is more than just the product of pluralist or intergovernmental bargaining over the degree of delegation involved in a particular policy. It is bound up with a set of normative instructions about the nature of the state that determine the appropriateness of transcending national sovereignty to handle affairs at another level despite similar or identical interest group coalitions. The same applies to the appropriateness of extending public power into the private realm of economic and social affairs through regulation at the national level. It is precisely these divergent normative structures that make it possible and necessary to differentiate closely related areas of public policy and treat them differently in a reliable way. In doing so, the EU deﬁnes what the circumstances are that make the policy area distinct, so that expectations can converge on how to go about legislating further in that area. This makes governance easier, as a template for each area is so deﬁned. There is nothing about these propositions that assumes any automaticity in the development of constitutionalized relationships between the various national and European actors responsible for regulating a particular policy area. I assume however that the primary default, when there is no recognized norm, is anarchy in the European sense—the lack of authoritative decisionmaking beyond the jurisdiction of the member state. Although EU rules may insist on certain corporate and individual rights, such as the four freedoms of goods, services, people, and capital, this is not the same as sorting out norms of national and European responsibility for regulating these four elements in the public interest. Regulation of goods, services, people, and capital in the single market brings national governments and EU institutions into competition with one another over appropriate jurisdiction. To the extent that the member states cooperate with European institutions in creating norms of legitimate responsibility, and of interaction between the responsible parties, they push themselves beyond the rules imposed on them by the treaties and the European Court of Justice (ECJ) and add a measure of reliable cooperation amongst themselves, rather than simply complying individually with concrete ECJ rulings or passing ad hoc directives. The nature and

Introduction

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quality of EU governance is therefore dependent on the extent and nature of constitutional norms about the member state, the EU itself, and the way they try to regulate.

E X P L I C I T V E R S U S I M P L I C I T C ON S T I T U T I O NA L I S M AND NATIONAL POLITICAL ECONOMIES Constitutionalization in the EU, of which regimes are one example, involves the use of both explicit and implicit norms. Regimes require speciﬁc, normative, constitutional commitments about the nature of the Union, its members, and the form of their interaction. These explicit European norms draw on and are shaped by a broader variety of norms found primarily at the national level, and that also include normative understandings of international politics in the absence of any explicit European agreement. Regardless of the degree of delegation to supranational levels that occurs, articulated norms of governance are necessary components of a successfully negotiated policy structure we call a regime. Whether the agreement involves delegation to the EU, multilevel collaboration, or soft coordination (Scha¨fer 2005), norms will deﬁne the actors and how they interact. Whilst much research on governance has been descriptive and outcome-focused (Kohler-Koch 1999, Grande 2003, Schmidt 2007, To¨mmel 2007), relatively little attention has been paid to how norms of statehood and integration lay at the root of these developments. Why did we get more integration in one area and not another? We are still at the point where we are observing what we have. This normative approach to constitutionalization insists that whatever the outcome, there will be strongly held opinions among the member states about the division of responsibilities that will speak to the governance of speciﬁc policy areas. They may not be explicit, however, and the linkages between constitutional and public policy issues may remain hidden until constitutional principles are addressed. In other words, when negotiations reach the level of sorting out responsibilities in Europe, norms will reach a greater degree of explicitness at the EU level and visibility at the national level. Those European norms, if they can be established, will rest on existing norms about national responsibilities that may by highly implicit in nature, but that will be forced into the open when policy responsibilities are problematized. Where they are shared by the member states, they will have a strong impact on the direction and limits of European integration, whether supranational, intergovernmental, or mixed. Constitutionalism therefore involves agreement on rich norma-

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tive constellations, in which norms have validity all the way down, or allow norms at the level of basic economic and social policy to survive undisturbed (as in the new modes of governance) (Knill and Lenschow 2003). National governments will elect where they can to ensure that public policy remains socially embedded, and that European norms respect and support it. This remains true even in those cases where delegation to the European level is agreed. National conceptions of what is legitimate fodder for policy delegation within Europe will be highly conditioned by the economic, social, and political constitutional norms of the country, and in the context of whether these norms are shared by other states, or whether there is conﬂict. Where these national norms diverge, there should be common recognition of that fact and mutual agreement and support for retaining national control over policy and regulation and European governance. If this principle is challenged, the mutual incentive of the member states to explicitly protect their prerogatives grows. Where these norms converge, considering delegation and harmonization should be much more conceivable. Only at this point can promising negotiations over the development of European norms that deﬁne and order delegation be developed. In adopting a thick view of relevant norms and EU governance, I ﬁnd myself closest to those legal experts who see the EU’s constitutional development embedded in a wide variety of social institutions (Wiener 2003). The reference to economic, social, and political constitutional norms of a society reﬂects the belief that at the national level as well as the European level there are certain norms so fundamental to the functioning of law and regulation and the balancing of social and economic imperatives that compromising them with international commitments is unthinkable. In other words, there are societally held conceptions of appropriateness that are found in economic and social law that have a strong normative impact with implications for public policy that are so strong that they can be rightfully said to have a constitutional inﬂuence by virtue of deﬁning what the state is and is not, both in constraint and in prescription, on governments and all public policy, including policy on European integration and other international commitments. Within sociology and political economy, this claim is reﬂected in the widely accepted depiction of varieties of capitalism, especially that branch that focuses on the political values that underpin disparate answers to key questions of political economy, including worker rights, shareholder rights, the deﬁnition and obligations of ownership, and the right of the state to intervene with regulation to ensure the public good. It is through these norms of regulation that economic activity is socially embedded (Hollingsworth et al. 1997).

Introduction

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I NS T I T U T I ONA L HY B R I D I Z AT I ON A N D N O R M AT I V E D I S S O NA N C E There are two potential difﬁculties with using a normative approach to understand national political economies and their connection to European regimes. The ﬁrst is that whilst comparative political economists recognize the importance of these political imperatives, many downplay them and focus on institutional conﬁgurations. The consequence is focusing on goodness of ﬁt (Bo¨rzel 2002) which underplays cases where national autonomy is highly valued despite a good ﬁt. The second is that we need a clear sense of how norms, which are usually thought to have a universal, compelling logic across policy issues might be fragmented and still have a constitutional impact on government behaviour. I propose that this can be accounted for by stressing the dual nature of norms, contestation over them in political arenas that leads to policy-speciﬁc fragmentation, and paying attention to how speciﬁc strands of thought about constitutive norms, that is, norms that deﬁne the state, are able to survive outside the institutional matrix of a country in policy discourse, available for use in future policy debates after even long periods of dormancy. This section deals with these issues. Varieties of capitalism literature claimed early on that a single dominant logic of economic relations could be detected in national economies, with the effect of coordinating actors speciﬁcally or leaving them to free competition. Mixing these two would not only be inefﬁcient, but be politically difﬁcult. The same potential conﬂicts between liberal and coordinated (or social) market economies would apply to European proposals for harmonized rules or supranational delegation. The normative element and its international implications remained implicit, however. Part of that implicit nature of the claim can be attributed to the normative message of some writers, who were more interested in lobbying public opinion and decision-makers to adopt more extensive restrictions on business in the pursuit of public interest goals (Albert 1993). Part of the implicit nature came from the disinterest in norms showed by the rational institutionalist programme looking at varieties of capitalism, coupled with the focus on economic pay-offs, without an investigation of how this affects the European Single Market (Hall and Soskice 2000). A ﬁnal reason why any claims remained implicit is that the original varieties of capitalism literature was rightly criticized for failing to recognize the diversity of capitalist forms within individual countries. Sorting out this situation and its meaning has been a very recent endeavour (Jackson 2000;

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Crouch 2005; Hancke et al. 2007), and even then, has not returned to the original political norms underlying the national policies, but focused on new forms of institutional choice. If the organizing logics behind the institutions diverged, then there appeared little point in pursuing questions of normative foundations. The theoretical problem was therefore that the overarching logic of regulation and public policy that was considered to be monolithic, applicable to all policy areas within a single country, was indeed not. This was a useful rhetorical and analytical tool in the sense that it stressed what was particular and distinctive about particular groups of political economies, but it nurtured the illusion that norms that are strong enough to have a constitutional(izing) nature must apply to the entire political economy. If we assume that there is an overarching central intelligence in the economy that looks for inconsistencies from one policy to another and ruthlessly ‘takes things to their natural conclusion’ by subjugating everything to the same logic, then that would certainly be the case. It appears that this all-or-nothing assumption was applied by the normative school of comparative political economy (CPE), leading to a depicted polarization between the neoliberal world of market capitalism and the world of social market economy. This was paralleled by the rational choice focus on all-or-nothing models resting on institutional complementarity. Crouch’s treatise (2005) on institutional choice, Streeck and Thelen approach (2005) to liberalization via ad hoc layering, displacement, and so on, and Hancke et al.’s acceptance of hybridization (2007) focus mostly on the weakening of non-market regulations without returning to the question of whether and how the normative questions underlying these choices are sorted out. But what we can say is that they are inconsistent with the expectation that a country must always pursue the same principles in every area of public policy. Here I concur with the now numerous observations that this consistency has been overstated, even reiﬁed in the past. A key difference of the approach used here from the existing normative CPE is that the economic, social, and political constitutionalization at the national level that means so much in both domestic and international politics is not monolithic but fragmented (i.e. may differ from one policy area to another) and is not limited to the written (or unwritten) constitution, but contained in the economic and social regulations that developed as part of great historic social contracts or state interventions responding to great social need or economic catastrophe. I also consider it possible and normal for norms to compete with one another, to contradict one another, without a single authority in place to assert the dominance of one over another. Indeed, it lies in the nature of politics, in the way that the policy crises demanding reaction touch on some speciﬁc policies but not others at speciﬁc points in

Introduction

11

time, for a differing imperative, a differing understanding of the public interest and of the state’s need to regulate in that public interest, for the formulation of norms to differ from policy area to policy area. These disparities can and should be seen as both product and source of a natural process of contestation over norms, in which norms only achieve dominance through the political process piece by piece, institution by institution, perhaps achieving consistency, but never entirely. In the same vein, while some normative demands achieve dominance, other competing ones live on until a time and place where they have an opportunity to be asserted by lawmakers, pushed for by advocacy coalitions of the day. Strands of thought rise and fall in importance without ever really going away. Sometimes recessive norms, those that embody principles which contradict the dominant ones, are able to live on in particular policy areas or economic sectors where lawmakers permit it. There is therefore nothing about norms used in this sense that denies the hurly-burly of politics. Rather, norms are both the product of those ﬁghts and a powerful consideration in future ones. Normative constitutions are therefore thicker, more complicated, and less rational than traditional political economy literature allows for. This has an important role in understanding why the norms surrounding one policy are highly conducive to harmonization and integration at the European level and others are not, even when the issues are highly related and the constellation of organized interest groups and coalition partners is the same. There has been a reluctance to consider that conﬂicting normative principles can coexist within the same country because there is a sense that the cognitive dissonance that results would be unbearable, or that the political actors that are responsible for shaping and ushering in new norms would necessarily be able and interested in ushering in new norms for all relevant policy areas. The result has been to stay away from looking at norms and instead to assume that the results are more consistent with normal pluralism, which easily explains inconsistencies from one area to another. And yet there is no need for this to be so. There are already precedents in the political economy literature that recognize the importance of norms but show how they can be consciously managed in divergent ways, or that norm construction that is consciously robust in one area can be consciously negligent in challenging alternative norms in others, with wide-ranging and long-lasting consequences. Work on the attitudes of the UK’s Labour Party towards company law reform (Clift et al 2001) and Ho¨pner’s (Clift et al 2001) work on the German Social Democratic Party’s attitude towards employee codetermination as constitutionalization of economic and social law are important examples that deserve closer attention for their broader theoretical and practical implications, here in the context of deciding what national positions

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will be on the prospect of European integration, governance, and regime creation. The registered company, whether listed or private, has been such an object of political, economic, and social debate in all countries that it has been developed together with a series of now deep-seated norms about what appropriate state intervention looks like. The same is true for ﬁnancial markets, but because the company is the place where most citizens work for a living, because it has such an impact on the communities in which they are situated, the legislation regulating them (or leaving them alone in a laissezfaire fashion) has necessarily involved debate about the fundamental principles about what a company is, who the owners are, whether they have obligations, and to whom. The debate to permit legal incorporation less than 200 years ago, which means the right of a company to exist provided it meets certain minimum criteria, now taken for granted by politicians, lawyers, and many political economists, started with the question: when should a company be allowed to exist, and what obligations to the public interest and to social partners, if any, must it respect in balancing out the welfare of various groups? In answering that question, politicians deﬁned both state and business. In looking at regulation in this way, by returning to the assumptions that pervade legislation and regulation, we come a step closer to recapturing norms as a key social structure, built up piecemeal and changeable but nevertheless having a real impact in shaping the decisions of governments over time. The process of legislating takes sometimes implicit expectations on which decision-makers draw and translates them into explicit norms on which negotiators in an EU context then draw in assessing a proposal for European legislation, harmonization, and so on. An initial European proposal need not, in my opinion, make an explicit claim to one constitutional norm or another. But if it does not, it will necessarily make an implicit claim that will be assessed and questioned if it appears to create dissonance with imperatives and impulses found at the national level. This should lead to the development of an explicit norm, if agreement on one can be made. There is no automaticity to the expectation of norm development, but I do claim that without an explicit EU set of norms, there will be no EU regime. At most, an individual piece of legislation is possible that does not threaten national jurisdiction any more than existing norms provide for. Normative dissonance on a policy level does not necessarily negate the possibility of an EU regime in that area, but dissonance about the social and economic norms is very likely to result in effort to establish political norms in Europe that reinforce national responsibility, in turn to protect national norms. I have distinctly different expectations for simple national legal rules and the principled norms that underlie them and that are

Introduction

13

always found in the preamble of relevant regulation. Individual rules may be changed without disproving my point, whereas key norms should have an important effect on government behaviour, or my expectations will be disproven. The link between comparative political economy and the constitutionalization of European governance lies therefore in visions of the state at the national level. Explicit norms at the EU require resonance with national norms, be they implicit or explicit. Implicit norms about the nature of the state and market can be seen in fairly explicit legislation about regulation of the market, if not in the justiﬁcations given for them. These norms can be shown to have an impact on which proposals succeed and which fail.

N O R M S A ND A RC H E T Y PA L NAR R AT I V E S O F S TAT E A N D M A R K E T Norms are socially deﬁned expectations of what is appropriate. They deﬁne at the national level what the state legitimately does and at the European level what both European and national actors legitimately do and how they do it. In the ﬁeld of regulation, deﬁning these expectations deﬁnes the state, the EU, and their relationship with each other, but also their relationship with those they regulate. Norms are constructs that we are capable of inheriting, recognizing, and modifying, if attention and agreement is sufﬁciently broad to allow a collective alteration. This is the dual nature of norms, which allows agents to change the structure they live in. These narratives about regulatory norms can be broken down analytically into narratives about the market and about the state itself. These individual narratives are both logically prior to the establishment of a norm of public policy and essential to the process of contestation over regulatory norms. Systematic research on norms can therefore be improved by looking at norms in this way. These components of norms can be thought of as archetypal narratives. The archetypal narratives I am interested in here are depictions of the state, or of business or labour movements, as the objects of regulation (or the source of demands for regulation). They are social constructions that, once created through social agreement, remain in the foreground or the background of thought about public policy as a resource on which people can draw in their discussions. The images of a nightwatchman state and even a nanny state are archetypal narratives because they create a clear vision of what

14

The Regimes of European Integration

the state is there to do. The same can be said for the actors they are intending to regulate or not. Is business best conceived of as an honest builder (beneﬁcial), a gambler (opportunistic), or a trickster (which the state can legitimately restrict)? These understandings are at the foundation of economic law and regulation of all countries and they generate divergent drives to regulate. They provide interpretation and direction, whether or not the archetypes are directly named or not. Yet they can be detected by referring to the unique logics and roles in which they place the state and societal actors. Unlike the more structural versions of economic sociology, I view these narratives, and thereby the regulatory norms that are built from them, as malleable by political, economic, and social agents and therefore capable of change over a relatively short period, even if they tend to remain intact over longer periods of time. Every government, every system of laws and regulations, necessarily contains a collection of norms that are in turn made up of archetypal narratives bundled together in various ways. Part of searching for evidence that the norms exist and analysing their impact is looking not only at how they are articulated and adopted, but also in seeing how they are bundled together, and how issues of dissonance tend to be dealt with in a particular time, place, and issue area. These norms deal with key questions about state intervention, under what conditions and for what purpose. Archetypal narratives tell us something more interesting than the question of whether markets or public interest considerations prevail in national norms. They distinguish the reasons why this is so and are capable of shedding light on differences within what we recognize as varieties of capitalism. They do this by establishing an identity for the state and for market participants that carries within it the justiﬁcation for regulating or not. It is the reason that business pays such close attention to the image they have in public discourse and to the image of their competitors in regulatory debates. This view of norms also allows us to consider cases where regulation increases or transforms based on new understandings of state and market rather than liberalizing. This is particularly important in the current resurgence of regulation following the onset of the ﬁnancial crisis in 2008. Although I do not assume that narratives must be formed in terms of oppositions as Wiener (2009, 80) does, it is illustrative and useful, so that I employ them here as well as they reﬂect alternatives in public policy. Key archetypal narratives of the state and of business can be perceived in the following areas. On the issue of state intervention in the national political economy, we can discern narratives that legitimate the state as valuing structure, dependability, and durability on the one hand, and innovation and open-endedness on the other. The ﬁrst sees the state as a protector of the public interest that it plays a role in deﬁning on an ongoing basis. The

Introduction

15

second views private actors as the key innovators and source of public welfare (through their private activity) and identiﬁes the state as the key source of risk to that innovation. This view necessarily accepts unpredictability and volatility as acceptable side effects of innovation, unlike the narrative of the state as legitimate provider of structure. Narratives also ﬁnd their expression in the question of whether the state is there to synthesize social and economic conﬂict for the greater public good or whether it accepts conﬂict and competition as natural and beneﬁcial. In the ﬁrst instance, the state insists on some sort of corporatist or contractual relationship between parties that it needs to cooperate for the greater public good. This might be between companies and employees, but it might also be between managers and shareholders within a company. There is no assumption within this narrative about who the relevant parties are. The identiﬁcation of those parties depends on further archetypal narratives deﬁning the nature and importance of the actors being regulated. The key is that the state is seen to have a legitimate interest in telling these actors to sort out their interests in an institutionalized setting for which the state provides minimum standards and possible procedural rules. The state may in fact identify actors that are disadvantaged in social and economic relationships and act as a patron on their behalf. In the second instance, the actors being regulated are left to open conﬂict and competition without the state attempting to synthesize them. This view more readily accepts winners and losers and restricts the state to material neutrality and ensuring that contracts made are respected. The character of socio-economic actors can also be detected through archetypal narratives, which emphasize one side of their personality at the expense of other sides. Business as a whole or just managers or shareholders may be seen principally as innovators, as generators of welfare through economic and employment growth, all of which speaks to them being given the beneﬁt of the doubt in questions of whether to regulate or not. They may alternatively be seen as duplicitous, opportunistic, or insufﬁciently motivated by concern for the negative impact they have on others, thereby carrying within the archetype the legitimation for state intervention or synthesis of some kind. The same oppositions may be used to analyse the character of key stakeholders, real or potential, such as unions and environmental lobbies. The changing narrative of unions in the United Kingdom over the last ﬁfty years from being an honest representation of worker interests to a problematic inﬂuence on business and the Labour Party is a good example. Finally, archetypal narratives identifying the legitimate owners and controllers of companies plays a key role in determining on whose behalf the state should intervene or not. Are shareholders elevated to the sole owners of the company, with corresponding claims to control that the state might protect

16

The Regimes of European Integration

with its patronage? Are employees, unions, or other stakeholders considered intrinsically legitimate participants in corporate decision-making? These claims are by no means natural states of affairs. They are constructed based on these narratives, which vary signiﬁcantly by time and place. Reality may precede the archetype or it may follow it. Statehood, in the sense of the sovereign nation state, was a reality before it was universally recognized (again) as a norm in the Peace of Westphalia of 1648. It also existed previously in the Western world through the sovereignty of the Greek city states and had predecessors in Asia. But Westphalia was signiﬁcant because it rediscovered the sovereign state archetype and re-legitimized it as the basis for an international system that distinguished itself from its predecessor through the principles it upheld. English School theory talks about this respect for legal sovereignty and the various accepted means of engaging in international politics as (socially constructed and accepted) institutions of the international system (Buzan 2004). These institutions are the constitutionalization of a particular kind of international politics and they rely on particular visions of what the state may rightly do. It is also possible that agents may propose the development or (re)adoption of a new archetype (or the renewed adoption of an old one that is no longer dominant). The archetype does not come into play for the purposes of law, regulation, and governance, however, until it becomes collectively accepted and articulated politically or legally and adopted authoritatively. The DCT, for example, drew on a view of governance beyond the state that was distinctively federal in nature, even if the details were unique to the EU. The idea of a federal system beyond the state, one with authoritative legal and regulatory power, was enhanced by adopting the entire symbolism of a (nation) state, precisely because that was the goal of the federalists, and was, amongst other things, something that was not accepted, and was ﬁnally rejected outright by the member states who subsequently removed all indications that we were dealing with a European state. This is an archetype that exists in principle, because it is articulated, but one that lacks the authoritative support to steer the behaviour of national governments and European institutions at the end of the day.

NORMATIVE CONSONANCE, DISSONANCE, C O N T E S TAT I O N, AN D C H A NG E The norms I describe here are structures, but they allow for change through agency. None of this denies the hurly-burly of politics, but it does point to

Introduction

17

reasons why policy change might be less than entirely radical across all policy areas, and why the policy styles and priorities that re-emerge in different countries are disparate, even though they respond to similar challenges. Whilst Hall refers to governments acting differently due to the distinct institutional resources they possess, I posit that the ideational resources they possess are equally important in determining why, at a new point in time, it is more likely that a particular response is chosen. In response to banking crises in Europe in 2009, for example, nationalization was chosen over regulation in the United Kingdom with relative ease in part because there is a policy tradition in that country that justiﬁes this course of action. It becomes readily thinkable and translatable into concrete action. At the same time, regulation of banks and ﬁnancial services companies did not ensue, despite what the banks saw as government ‘demonization’ of the sector. This contrasts starkly to strong calls for regulation in continental Europe, where the state is seen as a natural regulator with a role to fulﬁl, one that had not been stressed or implemented strongly in the preceding decade. The return of these protective measures despite the overwhelming resource dominance of the ﬁnancial services sector further reinforces the message that policy ideas, not just interest-based coalitions, determine outcomes. These policy-speciﬁc norms come into force through the prior reference to archetypal narratives about the state and about the market participants. They come to force through the regular political process, but one in which the symbolic nature of the state, of economy, and of society is emphasized. Ideas are not simply orientation points for interests as they are for Gourevitch (1986), or weapons as they are for Blyth (2002), or a smoke screen for naked interests as they are for Weber and his followers (Streeck et al.). The power of the archetypal norms lies in the inﬂuence they wield on subsequent policymaking for a particular period of time. The same process that brings them into being also decides on the way that they are bundled together. Archetypal narratives are therefore an important political resource in political battles over the high ground of decisions on regulation, deﬁning logics of appropriateness. The consistency of the outcome is not guaranteed, however, even if we assume that actors strive for it and that there is a stronger incentive for exceptional norms to suffer at the expense of more dominant ones at times of economic policy crisis. This focus on archetypal narratives as a precursor to ideal types of state allows us to consider the points of commonality and discord across countries as well, and see the points of contention that play a role in the construction of European regimes. Where there is discord, common governance on common priorities across states should prove unworkable, unless there is a loose form of governance that allows these discordant approaches to coexist, for the

18

The Regimes of European Integration

purpose of attaining some greater good. But I assume that the archetypal narratives at the national level themselves are non-negotiable and that they have a strong impact on state decisions on international cooperation that cannot be simply bargained away (Risse 2000).

T E S TI N G TH E IM PAC T O F N OR M S In essence, the book is claiming that two kinds of normative realities play an important role in deciding what sort of public policy actions are probable at the national level and at the European level: constitutive norms (which deﬁne the entities and actors that are legitimately involved in whatever is being governed) and regulative norms (which deﬁne how they go about interacting with one another in the act of governing). Regulative norms reafﬁrm commitment to constitutive norms through social practice. There are constitutive and regulative norms at the national and at the European level. I am interested most in the constitutive and regulative norms that develop at the European level and argue that national constitutive and regulative norms have a great impact on whether European governance (and integration) is supranational, intergovernmental, mixed (multilevel), or non-existent. I therefore argue that the constellation of national norms play an important role in explaining outcomes that we cannot access solely by looking at the process through the lens of other theories of European integration. Abstractly, I need to demonstrate at the least that the factors seen as sufﬁcient by other theories are not sufﬁcient. Concretely, this provides us with the following hypotheses. The reasons for choosing them will be developed in Chapters 2 and 3 that deal with comparative and international politics, respectively: 1. Norms deﬁne the nature of actors, including the public authority (constitutive norms) and their relationship to one another (regulative norms). 2. Constitutive norms themselves are comprised of archetypal narratives that give actors an identity and provide a rationale for particular claims to power over other actors in the name of a public or private good. 3. Norms are therefore a key element of legitimating policy systems at the level of the country’s general approach to regulation within a policy area. They arise through the process of politicizing and discussing policy choices and have force beyond. They provide policy direction and coherence, by the act of deﬁning what the state is (in a broader sense than the product of individual pluralistic compromises) and what it does in relation to the economy. The norms are visible by political reference to archetypal narra-

Introduction

19

tives of state and market by political parties and interest groups that are detailed in Chapter 3. (a) If this hypothesis is true, then the same view of the state–business relationship should pervade regulation and legislation in the policy area without exception. (b) If the hypothesis is true, then the existence of a norm should facilitate the passage of other legislation in the same policy area, by providing a blueprint for the division of rights and responsibilities. If these remain contested on principle, then a norm cannot be said to have been brought back to life through political agreement. 4. Norms are likewise a key element of legitimating policy regimes at the EU level. (a) If this is true, agreement on the goals of a policy area and the necessity of making it happen is not sufﬁcient to establish a policy regime. Any attempted agreements will fail without a principled agreement on the constitutive nature of the EU in that policy area and the regulative norms detailing the interaction. Blockages will otherwise be the result. Three general outcomes are likely: collusion (commitment to delegation or harmonization), coexistence (commitment to national responsibilities and cooperation), and collision (the absence of an agreement). (b) Falsiﬁcation would be found by the establishment of a regime without such attempts to really deﬁne what the member states and the EU are as entities with relation to one another. 5. Norms are constructed. They must be clearly articulated in an identiﬁable way in order to have force and to be detected. They are constructed at the national level regarding state, economy, and their relationship, identiﬁable in archetypes and articulated in law-making, policy-making, and lobbying. (a) If this hypothesis is true, then we will have to show speciﬁc claims to certain rights for the state, or business, or both that fulﬁl the status of norms in hypothesis 1. These claims can be found either via direct reference to the constitutive norm itself or through derivative claims and rules that are constructed as the norm is given concrete shape in social practice, often through law-making and policy-making. These are explicit and inferred means of identifying norms. (b) The archetypal narratives on which norms are built may be explicit, but they are just as likely implicit and can be detected by the consistency with which the implications are applied to law-making and policy-making. 6. Norms are contested. Due to the downstream impact they have on legislation and regulation within that policy area, political actors ﬁght for the interpretative high ground of what is appropriate and what is not. In many

20

The Regimes of European Integration

cases, norms are only contested at key points in time when old attachments have dissolved. (a) If this hypothesis is true, then we should see a great deal of debate about fundamental issues of the state and its relationship to the economy at periodic intervals. Legislative projects will refer to existing legitimating norms or attempt to establish and argue for new ones. (b) If a radical departure from the state–business relationship is possible without such a politicized dealing with norms, then their impact and contestation will be nulliﬁed. 7. Norms have a dual nature. They both shape the perception of actors’ interests and are shaped by actor agency. (a) If this hypothesis is true, then we should see corresponding critical reﬂection on existing norms in the event of reform and the ability to modify the norms by directly challenging them. All these points are taken up and discussed in more detail in Chapters 3 and 4. The next chapter outlines the empirical investigation on company and ﬁnancial market law in Europe, which sets out the legal basis for a European corporate economy and provides the framework for regulating it in the public interest.

S T RUC T UR E O F TH E B O O K The book is organized as follows. Chapter 2 outlines the three regimes that were established in 2001. Chapters 3 and 4 outline comparative and international relations theory, respectively, to justify and build the normative approach. Chapters 5 and 6 demonstrate the development of national norms in Germany and the United Kingdom, respectively, to illustrate both their distinctiveness and the changes that occurred shortly before 2001 that made the regimes possible in their current form. Chapter 7 outlines EU policy in the three areas before the establishment of the regimes. Chapters 8–10 test the propositions above on the development of the company regulation regime, the securities regulation regime, and the accounting standards regime, respectively. Chapter 11 brings the ﬁndings together, assesses the implications, and suggests further research.

2 Constructing Regimes of European Integration Between 2001 and 2005, the European Union (EU) created three regulatory regimes providing the legal and regulatory infrastructure to open and regulate a single European corporate and ﬁnancial market economy. Their creation after thirty years of Commission lobbying meant a dramatic improvement in cross-border transactions and regulation, but with disparate degrees of legal harmonization and degrees of delegation from the member states to supranational bodies. There is a company law regime that embodies intergovernmental principles of regulatory cooperation regarding the crossborder activities of companies in the single market, a securities regulation regime that grants supranational powers to the Commission (with the cooperation of national authorities in a multilevel system) on setting stock market regulations, and an accounting standards regime that grants supranational standard-setting powers to a private, non-EU, international association. All three areas overlap and are necessary to complete the EU’s single market in capital. Why then does the EU approach the issue of delegation so differently? This chapter outlines the three regimes, illuminating the actors, the relationship between them, and the main points of European legislation attached to the regimes focusing on their functions within the regime and their reﬂection of archetypal narratives. It aims to show the existence of both constitutive and regulative norms, in which archetypal narratives of state and market are contained. It also aims to show, by sequencing, how norms are necessary to regime creation, building both EU-speciﬁc norms and norms that legitimate the role of the member states in the regimes through patterns of collusion or coexistence. It aims to present, again by sequencing, how norms channel further agreement and forms of governance, both legislative and nonlegislative. Together, this description provides us with a reference point for the questions this book seeks to answer: why were the principles used in these regimes so different? What transformation of national level regulation do they imply? What was necessary to create them?

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The Regimes of European Integration

The subject material of the regimes is admittedly complex, particularly for those without knowledge of what they regulate and how the European rules might differ meaningfully from existing rules at the national level. This makes it doubly important to portray the regimes brieﬂy in this chapter; including the general purpose of the regime, the main actors, and the functions fulﬁlled through new European legislation. This provides an overview of how extensive the regimes are in the breadth and depth of their impact and helps to make clear the stakes involved for decision-makers in choosing one set of rules over another.

C O NS T RUC TI NG I NTE RG OVE RNMENTALISM: THE EUROPEAN C OMPANY LAW R EGIME The company law regime is the antithesis of a European regulatory state in that it explicitly rejects the transfer of regulatory responsibilities away from the member states and allows the latter to regulate cross-border company activity through trans-governmental networks. It provides the legal infrastructure for regulating cross-border mergers and takeovers (involving two or more companies) and company migrations (of headquarters from one country to another within the single market) in a way that provides legal certainty to companies for the ﬁrst time. In exchange for their cooperation in opening up the single market, the regime entrenched the right of national governments to protect politically sensitive institutions and companies from being affected by such actions. For some countries like the United Kingdom, this meant company law based on a beneﬁcial view of enterprise and a supportive role for the state in enforcing contracts with few reasons to impose on business. For others like Germany, this meant company law based on an opportunistic view of enterprise that must be regulated to ensure that excesses are balanced through joint action with stakeholders. The constitutive principles of the European company law regime, that is, the principles of intergovernmentalism, were established in 2001 in a landmark compromise between the European Commission (EC) and the member states that recognizes the primacy of national law and governments in regulating companies in return for opening up the single market in company ownership. Intergovernmental cooperation in turn requires regulative norms to horizontally coordinate the use of national laws and to assign and coordinate the activity of national regulators in cross-border transactions such as takeovers, mergers, and migration of company headquarters. The principles

Constructing Regimes of European Integration

23

were developed in two directives passed in 2001: the European Company Statute (ECS) and the Employee Participation Directive (EPD), both of which ensured that politically sensitive social institutions would remain in the hands of elected national governments. Regulative rules built on these norms after 2001 conﬁrm normative impact. The regime signiﬁcantly opens the single market and changes governance of this policy area. Before the Company Law Regime had been established, companies could be forced to establish separate subsidiaries conforming to the local company law in each of the EU countries. National regulators effectively forbade their citizens under any circumstances to open up companies in other member states while continuing to do business in the home market,1 prevented them from moving from one national jurisdiction to another,2 and preserved a number of measures intended to make it difﬁcult for foreign companies to take over or merge with domestic companies. Although not all problems have been dealt with, the regime has greatly enhanced the rights and legal certainty of companies in Europe engaged in cross-border activity. The regulative rules were developed to ensure national control of regime function in practice. Each member state became responsible for assigning responsibility to regulators responsible for registering companies (the public registrar’s ofﬁce), for overseeing the conduct of mergers and takeovers (the securities trading regulator), and for giving ﬁnal approval to a change in ownership across national borders (competition regulators and tax authorities). The directives also speciﬁed which regulator and which national law would be used in an international transaction. Table 2.1 presents the Company Law directives that deﬁne the regulative norms of the company law regime, along with the organizing principles involved. Some notes below explain the purpose of the directives.

European Company Statute (ECS) The ECS (European Union 2001a) creates a legal corporate entity called the Societas Europaea (SE). The ECS allows the SE to incorporate at the European

1

Even if this was illegal under the terms of the Single European Act 1986 and the Treaty on European Union 1992, such obstructions persisted in practice. 2 By forcing the company to wind up (close) and pay tax on all of its assets before moving. The ECS stipulates that a change of ofﬁce from one country to another must be possible without the major transaction cost obstacles of winding up the company (which would lead to the taxation of all assets) or creating a new legal person (Article 8, Paragraph 1). However, national regulatory authorities are given the right to block such a change (Article 8, Paragraph 14; Article 19).

24

The Regimes of European Integration

Table 2.1 EU Company Law Directives Legislation

Purpose

Organizing Principle

Interaction of National, EU Regulators

European Company Statute (2001)

Legal requirements of the European Company

Regulator jurisdiction assigned on ‘real seat’ principle: country of headquarters

Board of trade/ administrative courts in real seat enforce national law on companies

Employee Participation (2001)

Procedure for changing employee participation in merged companies

Principle of retained employee codetermination, changes blocked under thresholds

National labour standards regulators ensure numerical thresholds, procedural correctness on employee codetermination. Lead taken in country of real seat

Cross-Border Takeover (2004)

Shareholder protection standards in takeovers and exemptions

Horizontal coordination, use of takeover law from company making offer

Securities trading regulators apply takeover rules according to directive. Competition regulators scrutinize impact

Cross-Border Merger (2004)

Procedure for voting and registering merger

As for Cross-Border Takeover

As for Cross-Border Takeover

Cross-Border Migration (2005)

Procedure for re-registering a company in another member state

Framework for national regulators: tax authority

None: tax authority and company regulator in country of origin communicates approval to destination country regulator

level and operate anywhere in the single market, but imposes the requirements of national company law of the member state in which it is headquartered.3 It therefore denies companies the right to pick and choose the most attractive regulatory standards and employee co-determination requirements from 3 The Preamble states that the ECS is written from a ‘real seat’ perspective. This means substantively that where there are disputes over the degree of internal regulation of the company (e.g. works councils), real seat theory countries have the upper hand (Paragraph 27). Real seat theory is used to protect the national system of company law and regulation against immunities from outside companies, with the argument that national public interest provisions would be undermined without such measures. Accordingly, the registered ofﬁce and head ofﬁce must be located in the same member state (Article 7). Real seat theory is the opposite of incorporation theory, which means that national governments allow foreign companies to operate in their jurisdictions, whereby the company laws and of the country of origin apply. In international political economy, this is referred to as ‘home country control’.

Constructing Regimes of European Integration

25

anywhere in the EU.4 It also protects any other principles entrenched in national company law. The primacy of national law and regulation are constitutive principles of the regime and imbue all subsequent legislation of the regime. The ECS therefore generates not one but twenty-seven sorts of SE regulated by the country in which they have their real operative headquarters.

Employee Participation Directive (EPD) The EPD (European Union 2001b) exists to protect employee participation in existing SE management boards and to promote it in new SEs.5 It applies to companies with employees in at least two member states, and is speciﬁcally designed to ensure that the stronger of two or more employee participation rules are adopted and retained. The EPD mandates that when an SE is formed, a special negotiating body of employee representatives is to be formed that bargains with management on consultation and co-determination rights. It cannot reduce participation rights without a two-thirds majority and support from at least two different countries.6 These rules kick in when at least 25 per cent of SE employees enjoy participation rights, or 50 per cent of employees in the subsidiaries of a holding company. This makes it difﬁcult to circumvent participation with restructuring. The EPD has also been made a condition for all other regime directives, underlining its core importance in protecting national practice.

Takeover Directive and Cross-Border Merger Directive7 The Takeover Directive (European Union 2004a) and the Cross-Border Merger Directive provide a legal framework for cross-border takeovers and mergers. Takeovers occur when one company purchases enough shares in another company to control it and replace its management and change its internal structure; mergers when two companies fuse together voluntarily. 4 Articles 12, 23, and 37 ensure that rolling back employee participation is difﬁcult, with reference to the Employee Participation Directive below. Article 29 ensures that terms of employment, both legal and contractual, retain their validity after creating the SE (Article 29, Paragraph 4). 5 Recital, Paragraph 3: to prevent the ‘disappearance or reduction of practices of employee involvement existing within companies participating in the establishment of an SE’. 6 Article 3, paragraph 4. 7 Not to be confused with the Council Regulation on the Control of Concentrations between Undertakings ‘EC Merger Regulation’. That Regulation sorts out the regulatory roles of the Commission and the Member States with regard to the impact of mergers on market competition, either across or within EU countries.

26

The Regimes of European Integration

The Takeover Directive limits the use of defensive measures by the management of a company targeted for takeover or by a national government seeking to prevent foreign ownership. It provides important rights for individual shareholders (rather than corporate insiders) that were previously not guaranteed and coordinates the application of national takeover laws by national securities trading regulators. Takeover bids are regulated primarily by the country in which the company making the offer is located. The regulator of the target company oversees how management and shareholders respond according to their national laws. A so-called breakthrough rule sets aside artiﬁcial barriers to takeovers once a single shareholder controls at least 75 per cent of the voting shares. There are many barriers embedded in national practice that resisted harmonization, so that the breakthrough rule allows takeovers without legal harmonization. Nevertheless, the directive allows national governments to protect existing barriers to takeover that they deemed in the public interest, so that the rule is unreliable. The directives therefore retain a strong role for national law and regulators, compulsory interaction between national regulators in the event of a takeover bid or merger, and the ability of national authorities, once aware of a takeover bid, to prevent a takeover when they view it in conﬂict with the public or national interest.8 The provisions of the EPD apply in takeover cases as well.

Cross-Border Migration Directive The Cross-Border Migration Directive provides the legal infrastructure allowing a company to move its headquarters from one EU country to another without forcing it to wind up, liquidate its assets, and have them taxed in full by its country of origin, as was previously the case in Europe in many EU member states. These measures effectively prohibited migration in the past. The directive frees companies from such taxation as long as the requirements imposed by the ECS and the EPD are fulﬁlled. These in turn allow national governments to assert their control over companies that are headquartered in their jurisdictions. A national government may insist that a company not leave to another jurisdiction unless it also moves its headquarters and its main production facilities. 8

See, for example, the intention of the French government to protect key economic sectors from takeover. This affected Sanoﬁ-Aventis and Alstom in 2005, and Gaz de France’s purchase of Suez in 2006 to prevent a takeover by the Italian energy company Enel. On the last case, see AFP (2006) ‘Gaz de France takeover of Suez raises free-market hackles,’ 28 February.

Constructing Regimes of European Integration

27

The directive provides that the tax authorities of the company’s country of origin must certify that the company has met its obligations before the country of destination can register the company to do business there. Tax authorities are authoritative specialists in determining where a company is ‘seated’, as this determines where it is obligated to pay tax. This controlling power of the tax ofﬁce is one that all countries guard closely, even those that do not otherwise ascribe to real seat theory. It is the basis on which the CrossBorder Migration Directive operates, using tax authorities as gatekeepers to company mobility in the single market. The company law regime builds on national company law, which affects the rights and responsibilities of a very large number of people: employees, managers, investors, and the state itself. These rights, responsibilities, and political norms are also the most diverse and contested across EU countries. The primacy of national governments and regulators in performing the regulatory functions of the regime and supplying much of the legal detail is the feature that makes the regime distinctive and that allows diversity to persist despite the opening up of the single market in company regulation. The company law regime was formed in the context of a ruling by the European Court of Justice (ECJ) that challenged this primacy in favour of negative integration and regulatory competition, with the Court enforcing the freedom of capital movements, that is, the near absence of regulation. The regime reafﬁrms the role of the states, elevating their predominance to a constitutive principle, and provides for the coordination of networks made up of designated national authorities through new regulative rules. It equally rejects the combination of positive integration and hierarchical governance with the Commission as a supranational regulator. It is therefore an example of deliberately constructed constitutional principles and regulative norms that are limited to company regulation. This contrasts with the ease of multilevel commitments in the ﬁnancial market regulation regime.

CONSTRUCTING MULTILEVEL GOVERNANCE: T H E E U RO P E A N F I NAN C IA L MA R K E T REGULATION REGIME The ﬁnancial market regulation regime is the closest the EU comes to the development of a European regulatory state. It was developed starting in 2001 to simultaneously reduce barriers to the creation of a single European capital market and to regulate ﬁnancial markets to provide investor protection,

28

The Regimes of European Integration

something also referred to as ensuring market integrity. This means ensuring the equal treatment of investors, and policing and prosecuting criminal activity on the part of managers and ﬁnancial market participants dealing in company shares. The ﬁnancial market regulation regime involves a revolutionary delegation of regulatory competence, or at least the rule-making and monitoring aspects of it, from the member states to the European Commission. The latter is empowered to create new directives and to monitor the implementation, enforcement, and improvement of the legal infrastructure as it reacts to the behaviour of ﬁnancial service providers. In delegating to the Commission, the member states built on a prior convergence of public policy at the national level, both in the content of laws and in the delegation of regulatory responsibility from the legislative and executive branches of government to independent regulators. This provided a framework of constitutive and regulative norms at the national level that was highly compatible with Commission attempts to promote its own role as an independent regulator for Europe, as long as national regulators were allowed to participate. The constitutive and regulative rules setting out these relationships were articulated in the Lamfalussy Report of 2001. In order to support the EU’s activities, the Commission established the European Securities Committee (ESC), staffed by regulatory and legal experts of the Member States (European Commission 2001a), and the Committee of European Securities Regulators (CESR). This body ensures that the regulatory capacity of the EU and of the member states grows together. The Commission describes the pattern of regulation as follows: The new approach for securities markets regulation comprises four levels: namely broad framework principles included in legislation adopted by the European Parliament and Council (Level 1), measures implementing those Directives and adopted by the Commission after advice from the Committee of European Securities Regulators (CESR) and the agreement of the European Securities Committee, consisting of high-level representatives of the Member States (Level 2), co-operation among regulators (Level 3) and enforcement (Level 4). (European Commission 2004a)

This model provides greater coherence of regulating actors and coordination among them than is the case for the company law regime. The uniform constitutive and regulative rules are a prerequisite for the smooth delegation of law-making powers to the Commission, which can then regularly update minimum standards without new directives. Table 2.2 provides an overview of the securities directives attached to this regime.

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Table 2.2 EU Securities Directives Legislation

Purpose

Organizing Principle

Interaction of National, EU Regulators

Listing (2001)

Single set of rules for listing companies on all EU stock exchanges

Country of ﬁrst listing sets standard plus EU minimum standard

Commission proposes, ESC supervises, CESR advises and implements

Prospectus (2003)

Single set of rules for prospectuses of listed companies on all EU stock exchanges

Country of ﬁrst listing sets standard plus EU minimum standard

Commission proposes, ESC supervises, CESR advises and implements

Market Abuse (2003)

Criminalizes disinformation to manipulate stock prices

EU Regulation

Commission proposes, ESC supervises, CESR advises and implements

Transparency (2004)

Minimum standards for company reports

EU Regulation

Commission proposes, ESC supervises, CESR advises and implements

Statutory Audit (2005)

Minimum standards for company audits, auditor quality

EU Regulation

Commission proposes, ESC supervises, CESR advises and implements

Listing Directive (2001/34/EC)9 Listing rules are the requirements imposed on companies that wish to offer their shares for ofﬁcial trading on stock exchanges. The rules typically require the company to provide a certain standard of information to investors about the company and its senior management, and to conform with certain expectations about the company’s structure intended to weed out the least serious entrepreneurs. Until the development of the Listing Directive, companies wishing to offer their shares for trading in the EU’s various stock exchanges faced multiple and possibly contradictory requirements that deterred multiple listings. The bar was set to be raised in the 2000s as listing authorities reviewed their listing rules in response to investor concerns about good corporate governance. The Listing Directive allows companies to list on all EU stock exchanges and seeks minimum standards of investor protection through a long list of provisions on listing rules centred on information to the market, supervised and enforced by competent national authorities. It also provides for the company to be subject to the authority of the regulatory body in which its

9

Consolidates previous directives 79/279/EEC, 80/390/EEC, 82/121/EEC, 88/627/EEC.

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The Regimes of European Integration

head ofﬁce is registered, thereby ruling out the possibility of jurisdictional conﬂicts (Article 37). The directive sets out requirements for companies to regularly disclose their procedural arrangements, a true and fair assessment of their ﬁnancial situation, major changes of ownership structure, and provide open access to audit reports. It also requires the assignment of a statutory body to serve as the listing authority, a feature which required changes in the United Kingdom. The directive delegates rule-making authority to the European Commission, acting in conjunction with the ESC, and the CESR, which also ensure the harmonization of national law and practice with European decisions.

Prospectus Directive (2003/71/EC) The prospectus is the document that a company prepares for potential investors. The company has an interest in portraying itself in the most attractive manner possible. Public authorities are naturally concerned about the verity and usefulness of the information it contains, so that investors have conﬁdence that they are not being misled. The prospectus is naturally of interest to the listing authority and investors, but it is also of interest to regulatory bodies tasked with ensuring that investors are not misled, and that they know whom to hold accountable if they have a claim to make against the company. As with listing standards, prospectus standards and the liability for false information varied within the EU before 2004. The Prospectus Directive provides for minimum standards through Commission regulations and ongoing cooperation of the member states in updating initial information provided by companies to potential investors, and sets the legal framework for those prospectuses to be mutually recognized by the listing authorities of other member states regulating their part of the European single market. The key regulator approving the prospectus is deemed to be situated in the country where the company is headquartered. The ESC started assisting the Commission in ﬂeshing out the legislation beginning in July 2005.

Market Abuse Directive (2003/6/EC) Market abuse is the general term used to describe activity by companies, investment houses, accountancy ﬁrms, and ﬁnancial analysts that intentionally misleads shareholders about the company’s ﬁnances for ﬁnancial gain. These phenomena have been around for centuries, and they have been frowned upon for two reasons beyond the obvious one of fraud. First, market abuse plays a role in dramatic ﬁnancial crises that threaten economic prosperity generally. All

Constructing Regimes of European Integration

31

countries have had their own experiences with ﬁnancial bubbles, fuelled by dubious company information and support from ﬁnancial services that burst when the truth became known, causing a crash on the stock markets and a general, lasting decline in investor conﬁdence. Market abuse countermeasures therefore play a key role in ensuring the stability of ﬁnancial markets. A goal of market abuse regulation is to provide for stability through market integrity, by which I mean ensuring that investors have conﬁdence in the accuracy and comprehensiveness of information on companies, rather than severely restricting stock market activity altogether.10 This role plays an important part in the goals of the Market Abuse Directive, with support from all the member states. Second, the contemporary understanding of market abuse underlines that investors are treated unfairly if some have access to privileged information. This notion serves the interest of the outside shareholders who suffer a ﬁnancial loss when they are left holding shares they otherwise would have sold, or when others bought shares more cheaply to take advantage of rosy prospects unknown to the general public. This motivation also plays a key role in the European deﬁnition of market abuse today, perhaps with less enthusiasm in Germany than in the United Kingdom, but a key role nevertheless. The Market Abuse Directive (on insider dealing and market manipulation) of 28 January 2003 built on a 1989 ban on insider trading11 to criminalize more aggressive forms of market deceit and manipulation.12 The Commission stressed investor protection and the safety of ﬁnancial markets through a Europe-wide regime of statutory control based upon the regulatory power, minimum standards of enforcement capacity of regulatory bodies in the member states, and institutionalized cooperation among those regulators. Parliament lengthened the list to include greater transparency in director dealing, potential company insiders, and rules pertaining to journalists. The Council adopted these provisions without any further debate.13

Transparency Directive (2004/109/EC) The Transparency Directive sets minimum standards for disclosure of company ﬁnancial accounts and interim management reports to ﬁnancial

10 Historically, politicians responded with the elimination of public companies altogether, as in the United Kingdom after the bursting of the South Sea Bubble in 1720, or by severely restricting stock market ﬁnancing, as in Germany after the bursting of the Foundation Bubble in 1873. 11 Buying or selling shares on the basis of privileged information. 12 Proposal found in COM (2001) 281 ﬁnal—Ofﬁcial Journal C 240 E, 28.08.2001. 13 See C/02/361 Brussels, 3 December 2002, 14368/02.

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The Regimes of European Integration

markets, known as ad hoc reporting, on a daily basis for the beneﬁt of outside shareholders. A further deﬁnition of the rules is undertaken by the member states, but coordinated through the CESR. The directive therefore focuses on regularly published information after the prospectus.

Statutory Audit Directive (2005) Another weak spot that the Commission and the heads of government saw in market integrity focused on the quality of company audits and the independence of the auditors from company inﬂuence. They also considered the prospect of a long-standing business relationship between company and auditor to be inﬂuence enough, and included measures to distance this relationship into the directive. The Statutory Audit Directive requires the member states to assign statutory regulators for the auditing profession, which are also responsible for taking rules formed at the European level, transposing them into national regulatory law, and applying them within their jurisdictions. The proposed directive therefore buttresses the information requirements of the securities directives by ensuring that they are reviewed on a regular basis. The ﬁnancial market regulation regime involves signiﬁcant delegation to the supranational level. This was made possible at ﬁrst glance solely by the agreement on regulative rules: on the Lamfalussy Plan that assigned roles to the Commission, the member states, and the mode of governance that binds them together. However, we cannot explain the development without reference to the constitutional and policy convergence of the member states before the delegation was seriously considered. Financial market regulation is not simply an issue of introducing capital-friendly public policy, as a theory of commercial interests might conclude, but involves normative decisions on regulating the economy and on the balance of regulatory efﬁciency and democratic control. These issues, which cannot be decided with reference to economic interests, but are instead formulated in political discourse, remain central and require an understanding of national-level factors as much as that of the company law regime.

CONSTRUCTING SUPRANAT IONALISM: THE EUROPEAN ACCOUNTING STANDARDS REGIME The Commission justiﬁed its agenda to promote the harmonization of accounting standards through the New Accounting Strategy of 1995 and in the

Constructing Regimes of European Integration

33

more comprehensive Financial Services Action Plan, but it was not possible to secure the kind of delegation that is characteristic of the ﬁnancial market regulation regime. The consequence is a deliberately distinct strategy with consequences for the development of European rules and their impact on the member states. I call this a parallel regime, in which international, harmonized standards are used for information purposes, and national standards are retained for other purposes. The accounting rules delegate important standard-setting powers to a private international body, incorporating the input of national and EU actors through committee structures. The extent to which harmonized rules are transposed into national law is limited, however, to prevent undesired impacts on tax law in continental European countries. The accounting standards regime is made possible by a single directive and ongoing management by secondary legislation. It is also made possible by constructing the constitutive nature of international standard setting and national standard setting in a way that allows for coexistence of the two. There are legislated barriers to the regime going farther than this in questions of delegation.

International Accounting Standards (IAS) Regulation (1606/2002, amended 2238/2004) After winning approval for the launch of the Financial Services Action Plan, the Commission brought the Council and the Parliament to harmonize accounting standards by adopting International Accounting Standards (IAS) and International Financial Reporting Standards (IFRS) as set by the International Accounting Standards Board (IASB) in London. The Commission cited ensuring the transparency of information for investors, furthering the integration of ﬁnancial markets in the EU, and improving access of EU companies to ﬁnance as its main reasons. IFRS seeks to provide a clear view of the current market value of all assets and liabilities that the company has, and often differs from generally accepted accounting practices (GAAP) in national jurisdictions, which prescribe differing degrees of transparency and averaging the value of assets and liabilities for reporting, dividend calculation, and taxation purposes. Directive 2001/65/EC amended the Fourth and Seventh Directives to permit the practice of ‘fair value accounting’.14 It also won limited support for implementing IFRS. The regulation set up an Accounting Regulatory Committee to aid the Commission in the assessment of accounting standards, but IFRS enforcement remained in national jurisdiction. At the 14

European Union (2001) Ofﬁcial Journal L 283, 27.09.2001. See also COM (2001) 80.

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The Regimes of European Integration

international level the Commission has an advisory seat on the IASB’s Standards Advisory Council alongside accounting experts from around the world in an attempt to exert some inﬂuence. Member state support for IAS reﬂected a demand for increased information for European ﬁnancial markets, both for normal investment and criminal investigation purposes.15 It required more of an expansion of national accounting law rather than an overhaul. The new standards were used for information only, rather than creating adjustment pressure on dividend practices or on national taxation systems, and affected only the largest companies. The requirement that member states set up accounting standards boards, where they did not already exist, and to endow them with the statutory mandate to read accounting standards and represent that member state within the IASB in the future development of IFRS constitute the structural changes that bind national and international networks together in a multilevel system of governance centred on a private standard-setting body.

THE DISPARAT E REGIMES OF EUROPEAN INTEGRATION The regimes laid out above meet rigorous regime deﬁnitions. Krasner provides the broadest deﬁnition possible of regimes as ‘. . . principles, norms, rules and decision-making procedures around which actors’ expectations converge in a given area of international relations’ (Young 2000, 495). Haggard and Simmons, drawing on Young, insist on a more restrictive deﬁnition of regimes as ‘multilateral agreements among states which aim to regulate national actions within an issue-area’ (ibid). Young himself uses the most demanding deﬁnition of all, where the key to identifying a regime is ‘the conjunction of convergent expectations and patterns of behaviour or practice’ (ibid). The proof in his view is not just in the structure of the regime, but also in the behaviour of the participants, in the process that takes place within the structure. Young’s reference to behaviour can only be ﬂeetingly investigated in this book as the regimes are so fresh. However, the EU has established a collection of regulatory regimes that open the door to a reorganization of the European corporate economy through mergers, takeovers, and cross-border migration. They also harmonize ﬁnancial reporting and minimum standards to regulate trading in company shares. These regimes represent positive integration, but 15

Chapter 10.

Constructing Regimes of European Integration

35

not all involve delegation. This contrasts with the assertion that the EU has developed into a regulatory state (Majone 1996), and squares better with the assertion that European countries are increasingly embedded in regimes of their own creation (Jessop 2002) that sometimes support intergovernmental and sometimes multilevel forms of governance, leading to policy-speciﬁc disaggregation of national sovereignty (Slaughter 2004). The principles embedded in these regimes construct differing roles for member states and supranational actors that imply policy-speciﬁc forms of sovereignty guaranteed by disparate kinds of governing and legitimating mechanisms. They allow for differing degrees of harmonization of public interest conceptions and for different constellations of European and national regulatory actors. Regardless of the degree of delegation, national governments continue to develop their own institutions to ensure that they, and in many cases, domestic interest groups, have a continuing say in the rules that affect them. The difference lies in the nature of their involvement. The most politically sensitive remain the most cautiously protected areas of national responsibility where political attachment to disparate archetypes of state and economy prevail. The European developments therefore create postnational regulatory regimes that are distinct from the unitary notion of a regulatory state.

Next Steps: Theoretical Challenges One key question is whether it is possible to explain the timing of regimes and regime type without reference to regulative and constitutive norms. It is possible to describe the bargaining over new institutional rules on the basis of given domestic interests and constellations of interests and bargaining power. It is not possible to answer the question of why these constellations promote certain kinds of regime development, and whether regime development will gravitate towards the model used in the ﬁnancial market regime without an understanding of the sources and nature of national-level demands, to determine whether they indeed constitute structural constraints on government thinking. This is the purpose of Chapter 3. At this point it is only possible to claim that there is reason to believe that hypothesis four may indeed be correct, that legitimating norms are necessary to hold EU regimes together. They appear consistent and distinct in each of the regimes. The regime-speciﬁc chapters will investigate the extent of their necessity to the outcome, as well as hypotheses ﬁve, six, and seven on their constructed, contested, and dual nature.

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The Regimes of European Integration

These empirical observations have several theoretical implications, which Chapters 3 and 4 explore in more detail. We need to disaggregate the EU along policy areas and distance ourselves from the idea of a regulatory state (Majone 1996) operating on one mode of governance whilst recognizing that regime structures are more institutionalized and formal than mere transnational networks (Slaughter 2004, Eberlein and Grande 2005). In addition to the concept of a regulatory regime, the notion of regulatory politics within that regime will need to be advanced to outline expectations of how the rights and responsibilities of the actors involved and the notions of legitimacy attached to their actions develop. We require this understanding to predict the direction in which rules, values, and norms in the regime are likely to develop at the European and national levels. There are broader theoretical implications for our understanding of the driving and restraining forces on regional integration. The development of a European regulatory regime rather than other forms of integration is determined by the will of member states to preserve their central role as the principal regulators of the European market, if the hypotheses are correct. At the same time, the ECJ plays a signiﬁcant role in forcing the member states into action, by challenging their right to decide the rules of the European regime. The member states play too strong a role to ﬁt a neofunctional account of integration; their lack of exclusive control over the integration process clashes with intergovernmental accounts; and the divergent normative and value-based understandings of legitimate governance among the member states clashes with existing interpretations of liberal intergovernmental and principal–agent theory. These questions are discussed in Chapter 4.

3 National Norms, Convergence, and Divergence NORM CONVERGENCE AND CONFLICT A N D T HE NATURE OF TH E STATE Chapter 1 argues that national political economies are infused with normative structures both constitutive and regulative that give both state and market an identity and deﬁne the means and logic by which they interact respectively. These norms may generate policy decisions that existing institutional or economic interests fail to predict. The idea of regulation in the public interest is normatively infused in all cases, even if those supporting a particular mode of regulation can generate economic beneﬁt from it. Normative ideas championed by political parties tell us more about how government responds to conﬂicting interests and policy challenges than any other factor, particularly in the case of regulation. Government may override private sector interests in the pursuit of the public interest or face an unclear constellation of those private interests. Political parties play a key role in aggregating, articulating, and framing these positions (or the lack thereof) on public policy. A public interest so deﬁned becomes a norm and a point of orientation for both the public and politicians in subsequent debate and reﬂection. This allows political actors to change the norms periodically rather than adopt existing ones uncritically. These constructed norms show how political elites view the state in relation to its domestic society and to the outside world. We can therefore compare and contrast disparate visions of statehood, applied to discourse over the regulation of speciﬁc policy areas, which is more common than philosophical discussions of the state. This approach builds therefore on an approach to critical social theory represented by Wittgenstein and the Cambridge School that focuses on the structural, ontological impact that speech acts have on the behaviour of public ofﬁcials and private interests and individuals. This takes us beyond the static description of disparate institutional conﬁgurations in political economies to focus on the reasons why policy entrepreneurs shape

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The Regimes of European Integration

institutions as they do. The view of the state may not be directly articulated as a single statement of ‘how we see the state’ but as an accumulation of normative decisions taken with regard to discrete policy areas. Just as the state does not have to be seen as a monolithic entity, normative conceptions of statehood may also be fragmented. This allows us to consider that norms of statehood attached to regulation might converge across countries in ﬁnancial market and accounting regulation, but continue to diverge in company regulation, which itself reinforces the attachment to sovereignty. Just as capitalism can reshape itself and move closer together without fully converging, states can bridge some divides and retain others with consequences for European Union (EU) governance. This chapter sets up a typology of public policy logics that deﬁne the relationship between state institutions and the economic actors they regulate. This is the basis for identifying the existence of horizontal norm convergence or divergence across the member states of the EU, and of its impact on EU rules that apply to them all. The prevailing attitudes of public decisionmakers to market competition and public interest regulation play a central role in identifying key characteristics of political economies. The second task is to develop and justify a working hypothesis on the relationship between interests, institutions, and ideas that can be used empirically. Following Crouch (2005), Blyth (2002), Hay (1995), Sabatier (1988), and Gourevitch (1986), I place greatest importance on normative commitments held by key political actors to explain patterns of convergence and divergence. Public policy is embedded in discourse about the appropriate strategy for responding to speciﬁc challenges. In the cases studied here, these are questions about how to understand and respond to company failure, to stock market crashes, and to industrial strife, and whether the private sector has public responsibilities even in the absence of such problems. These discourses become embedded in institutions, but are changeable. Group interests only affect them when they manage to bring about an overall rethinking about the prevailing public policy approach. This applies at two levels in the domestic arena: that of the general need to promote or intervene to correct markets; and that of the state’s need to directly mandate the public interest. I do not claim that social norms inﬂuence outcomes regardless of institutional and interest constellations. Rather, the social, intersubjectively constructed norms propagated by parties and interest groups on regulative, institutional, and constitutive issues are ontologically separate from the constitutive and regulative norms that they inherit and just as capable of generating change in structural norms. I expect that prevailing public policy ideas held by government, whether they advocate stability or change of

National Norms, Convergence, and Divergence

39

existing institutional arrangements, require a permissive interest-based political environment if they are to have a chance at making a real impact on the stability or change of institutionalized norms. In this context, political decision-makers often possess sufﬁcient autonomy from interest groups to be considered as more than an extension of civil society. Norms may lead them to initiate a course of action in the absence of certainty about proper policy, they may prevent action by public ofﬁcials and private interest groups alike by placing certain options beyond serious discussion, or they may legitimate new action and institutional arrangements supported by powerful interest groups. In other words, the manner in which normative ideas matter may vary, but they play an important part of the story of normative and institutional development at the national and international levels. The section below on making sense of norm conﬂicts and convergence discusses the relationship between these factors in more detail. The third task is to propose that the conﬁgurations of regulatory logics at the national level contribute to the development of even more general ideational understandings of statehood. I am talking here about meta-understandings of the nature of the state that have direct implications for the willingness of national governments to delegate areas of competence to supranational bodies or circumscribe national policy autonomy through obligatory commitments to transnational cooperation. The fourth task is to show the advantages of this approach over simple interest-based approaches. These are the endogenization of interests and the focus on social ontologies instead of ad hoc interests and path dependency.

STAT E–BUSINESS RELATIONS Varieties of capitalism literature argues that the most strongly opposed attitudes towards regulation should be found in Anglo-American countries on one hand and in continental and East Asian countries on the other, based on disparate patterns of state intervention and in shaping of the market economy, which itself took on differing forms across countries. The corresponding focus on contrasting German and British political economy has a strong enough tradition to justify and require testing the assumptions and hypotheses developed below using the British and German cases. Both countries also played key roles in the success or failure of European attempts to create regulatory regimes and therefore merit attention. At the same time, I adopt observations that these political economies change over time, evolving into hybrids with both liberal and non-liberal

40

The Regimes of European Integration

market features (Crouch 2005). Thus, whilst there has been convergence in stock market regulation, there remains diversity in company regulation, between and even within states, despite broad similarities across third way social democratic parties (Whyman 2006) through an interest in adapting to attract international investors. Another of the concrete ﬁndings I argue can be seen is that the speed and extent of convergence on norms and rules that political parties propagate depends on the political salience of the policy area. The larger the number of people affected by a shift in normative values and regulatory rules, the weaker the incentives for political parties to promote large-scale change. Convergence has been strongest in the ﬁeld of ﬁnancial markets, where the number of people affected by the introduction of statutory regulation has been small and the public interest beneﬁts deemed to be large. Conversely, convergence has been weakest in the area of company regulation, where the number of people affected by change is very large, and where public interest arguments are also deemed to be important. In ﬁnancial reporting regulation, there are more strongly competing impulses in countries which use legislated commercial codes as accounting standards as the basis of convergence than there is in countries where accountants set their own standards traditionally. This ﬁnding corroborates Crouch’s conclusion about the development of compound forms of governance, in which each policy area can be reconﬁgured without being held back by other policy areas. Here, though, I aim to explain the changes through domestic politics. Analytically, we can improve on the idea of regulating or not, which is implicit in varieties of capitalism, by focusing on the archetypal narratives contained in political cleavages. Norms concretize political cleavages as actors choose archetypal narratives and delineate the practical implications. Disagreement over options is found in political cleavages. I have suggested elsewhere (Donnelly 2000) that two cleavages based on political ideas play a great role in shaping the kind of relationship that prevails between state and business in political economies. These cleavages are often tied to historical experience and the lessons following from them (Hix and Lord 1999, 27). The ﬁrst assertion is that the position of political parties, interest groups, and governments in support of or critical of liberal market forces makes a fundamental difference in the character of the political economy. This does not mean an institutionally informed distinction between market economies and planned economies, but rather whether decision-makers, opinion makers, and interest groups believe that an economy based on market transactions poses fundamental problems requiring redress or provides the best possible means of generating income and structuring the economy. There is bound to be diversity in the views that groups hold within any country, but it is also

National Norms, Convergence, and Divergence

41

possible to identify dominant modes of thinking in particular countries at particular points in time that crowd out the others, at least within speciﬁc policy spheres. The second cleavage of political ideas regards the attitude of decisionmakers, political parties, and interest groups about whether there is a public interest in setting up statutory regulation to ensure public policy goals, or whether private regulation or self-regulation should be allowed to rule economic relationships (Kohler-Koch 1999). The willingness of public authorities to play an active and ongoing role in demanding things of business in the public interest varies across countries, but varies also with regard to its relationship with the notion of the market. Whilst regulation may be used to attack what are perceived to be fundamental problems of market capitalism by mitigating competition among companies and within them, it may also be used to enhance market competition and ‘good behaviour’ by private actors where it is perceived to be underdeveloped. A strong state in the Hayekian sense (Gamble 1988) may therefore involve regulation to combat collusion among companies to ﬁx prices, prevent competitors from entering the market, or to protect investors from fraud by companies and ﬁnancial market actors, all of which require a supporting intention to support the market with strong regulation in these areas. An interventionist state motivated by a critical view of markets and the public interest will make correspondingly different demands on business. In both cases, however, it is possible to identify empirical situations where no signiﬁcant public interest in regulation exists, separate from the issue of whether markets are considered a desirable or problematic state of affairs. The norms contained in these political cleavages can best be thought of as paths, as trajectories of thought rather than a complete and coherent view of how markets work. I therefore use them differently than ideal types of political economy. They cannot say how radically or mildly policy-makers and interest groups go down any one of the paths. They can say, however, whether two or more countries have differences that are sufﬁciently fundamental to render unthinkable the adoption of similar or shared regulatory rules and institutions. Where national differences are evident, national responsibility for rule maintenance is likely to be tacitly or explicitly conﬁrmed and proposals for harmonization or delegation of rule-making rejected. The trajectories therefore tell us something key about the nature of political economies and the kinds of relations conceivable between them beyond national borders without falling prey to the artiﬁcial constraints of a fully built ideal type. Table 3.1 presents a typology of political economy trajectories based on these two political cleavages. Although one could try to use the cells to describe

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The Regimes of European Integration

country types in a general fashion, I believe that it is more sensible and accurate to apply them to discrete policy areas, which may be handled differently for a variety of reasons. This more accurate accounting for the public or private regulation of policy areas then provides us with more interesting observations about how patterns of regulation and market orientation cluster together, as we would expect from the varieties of capitalism literature, or how they differ across policy areas, as they increasingly do. This provides us with the basis for more interesting questions about how and why this may come about. Having said this, I expect that it is more difﬁcult for actors to cross the ideational divide between a liberal approach to markets and the nonliberal approach due to the ideological attachments involved among political parties and societal actors. A discussion of the theoretical background that led me to choose an ideational approach follows in the next section.

Table 3.1 State–Business Relation Types

Liberal market critique

Liberal market acceptance

Public interests dominant

Private interests dominant

Stakeholder economy Activist state counters market forces by forcing synthesis of competing interests directly (codetermination) or by proxy (statism)

Cartelized economy Passive state condones private organization of the market, patterns of domination over small ﬁrms, employees, consumers

Legal provisions sanction or mandate constitutionalized business relationships with other businesses and employees

Legal provisions sanction constitutionalized business relationships with other businesses

Insulation of corporate insider networks from capital market pressure (investor, labour, and perhaps government insiders)

Insulation of corporate insider networks from capital market pressure (investors only)

Regulated market economy Legal provisions and regulation mandate and police relationship between company managers and investors

Self-regulated market economy Private institutions and codes of conduct manage relationship between company managers and investors

Exposure of managers to pressure by dispersed shareholders

Exposure of managers to pressure by dispersed shareholders muted by effectiveness of private regulation

External regulation of public interest issues involving noninvestors

External regulation of public interest issues involving noninvestors

National Norms, Convergence, and Divergence

43

STAKEHOLDER ECONOMY A stakeholder economy prevails where public policy sees markets and market actors as harbouring fundamental problems in need of correction, but views stakeholders, of which the state is just one, as important participants in company decisions. There are two variants of a stakeholder economy that differ according to the degree of state intervention. We recognize the political manipulation of company decisions, the political allocation of credit and the key importance of public enterprise to the traditional statist model (previously) found in France and newly industrializing countries of East Asia. State intervention is designed to provide a strategic boost to economic development and competitiveness, and takes place at the discretion of political elites. Codiﬁed conditions and independent statutory regulation would undermine this discretion and are therefore incompatible. Stakeholders are not deﬁned and represented directly in a statist system, but through the proxy of the state, which aggregates and articulates what it feels is in the best public interest. We also recognize in Germany the widespread existence of contractual relationships between companies and three so-called stakeholders of the business: investors (banks), employees, and other companies that do business with the ﬁrm. Jackson (2000) refers to a constitutionalized company that regulates these relationships and forces cooperation in the context of legal demands on the internal structure of the company, but we should also take notice that close relationships between companies were promoted before 1956 by permissive court rulings and since then by permissive clauses in competition law (Donnelly 2000). These arrangements were also developed in Germany as part of a plan to industrialize quickly and, more so than in the French case, provide for social peace through the constitutionalization of the ﬁrm’s internal workings. In contrast to France, stakeholders represent themselves directly to company management in a supporting legal environment that provides few details and external regulation. These are to be negotiated. As long as this state of affairs is maintained, public authorities would have difﬁculty accepting extensive codiﬁcation or external regulation that would interfere with the ability of the designated actors to deﬁne the public interest. In other words, they should have little interest in cooperating on the development of a regulated market economy. In turn, the identity of stakeholders with participation rights makes it difﬁcult to take these rights away without their approval. Empirically, this type of behaviour is reﬂected not only by the German government, regardless of political persuasion and labour unions, but also by German business associations. This is despite the decreasing coverage of the

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German model of stakeholder governance in the east of the country, and in media and high technology sectors.

RENT-SEEKING ECONOMY A rent-seeking economy prevails where there is a weak state and an acceptance of private actors as the main actors steering the economy. The state retains a legal structure that allows companies and banks to privately cultivate close, interlocked relationships as a national model of capitalism, but lacks legitimacy for any developmental or social policy intentions that could be interpreted as the public interest. European regulation that would criminalize the close relationships that underpin the economy would be unacceptable. Similarly, internal regulation of the ﬁrm would contradict the emphasis on private responsibility for companies’ internal affairs, as would stringent takeover laws, as they would break up existing ties between businesses. This kind of capitalism is often referred to as family-based capitalism, as found in countries like Italy and Portugal. It is also a key part of stakeholder and laissez-faire economies. The ﬁrst type promotes rent-seeking to keep stakeholders together whilst the laissez-faire state condones collusive activity as essentially private activity that public intervention would not improve.

S E L F- R E G U L AT I N G E C O N O M Y Here, as in the United Kingdom before 2000, the private sector is successful at retaining its independence from statutory regulation by meeting crises with promises of private corrective activity, largely from the City in London. Periodic calls for regulation have been countered with arguments that state regulations lack the ﬂexibility to handle situations in all sorts of companies, and otherwise do not provide beneﬁts that would outweigh the costs. Measures found in the other systems of governance would be unacceptable to the extent that they do not allow the private sector to provide functionally equivalent means of reaching common goals. Business itself is seen as unreservedly unproblematic. For this reason, I expect the government only to block measures that would interfere with private pre-emption of important corporate governance goals (meaning a rejection of statutory regulatory bodies) as in regulated shareholder governance, providing that these goals do not force the introduction of stakeholder governance.

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REGUL ATED MARKET ECONOMY Here, as in the United States, the state imposes a legal structure and regulatory bodies on the marketplace in order to improve its performance. Regulators supervise the activities of companies and investors to ensure equal and fair treatment of shareholders, particularly through transparency of ﬁnance and management activity, voting rights, and the possibility of takeover by another company. Empirically, there is no country within the EU where this model can be said to be fully in force as an ideal type. However, the Blair government in the United Kingdom did, with the upgrading of the UK Competition Authority and the establishment of the Financial Services Authority, take on a supervisory function over director activity that was not previously present. All major political parties in Germany have also converged on statutory regulation of companies and especially in the regulation of ﬁnancial markets as well. This convergence of thought makes common European rules more likely.

CLE AVAGES AND POLICY ISSUE S Prevailing domestic norms based on archetypal narratives can vary by policy area because each is deﬁned by a particular recurrent problem or question that faces all governments and publics. Actors must decide how to react to (a) corporate collapses, (b) stock market collapses (and bubbles in advance of collapses), and (c) issues of valuation and transparency (accounting standards) that are attached to both company and ﬁnancial market regulation. The principles adopted are much more important and real than the actual institutional conﬁgurations that are built on them. They are logically and politically prior to their creation, showing points of political consensus within a country, if such consensus exists. Germany and the United Kingdom handle corporate collapse differently. The prevalent UK approach was and is based on laissez-faire, which accepts collapse as natural and beyond the ability of the state to prevent. The prevalent German approach views corporate collapse as preventable and a result of mismanagement to be countered by the internal constitutionalization of the company, with a historically ﬂuctuating group of stakeholders that is drawn into the supervision of company management. The two countries also traditionally handle stock market collapses in similarly different ways.

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UK policy viewed bubbles and collapses as natural events that state intervention could not prevent. In recent years, the United Kingdom has adopted statutory regulation to prevent some of the worst excesses. German policy viewed bubbles as a particular evil to be prevented by stringent ﬁnancial market restrictions. Similar logics still pervade the question of whether the state should deﬁne or regulate accounting standards. The result is that in the United Kingdom the state is conceptualized predominantly as a minimalist entity with a hands-off approach to regulating the economy. This is part of a constitutive norm deﬁning a laissez-faire state that not only pervades domestic public policy but also UK attitudes towards EU-level proposals. Notice, however, that this has changed with regard to ﬁnancial markets, where statutory regulation has taken hold, allowing a subsequent approval of EU institutions. A parallel pattern prevails in Germany, where the state is part patron of stakeholder groups that co-manage the company and part restrictive regulator of ﬁnancial markets (again moving to statutory regulation from direct state control) and accounting standards. This deﬁnes a state with strong responsibilities for company regulation, ﬁnancial market regulation, and warding off the evils of rampant economic openness for the public good that lie at the core of its purpose and being. They cannot be given away in EU talks, due to the critical political consequences for the state itself. Yet, changes occurred in the mid-1990s that made some domestic changes possible (and so subsequent EU agreements). How are these to be understood? The country chapters will use these three policy questions as a reference point for analysing constitutive norms of the state and the regulative (institutional) arrangements involved.

Ideas, Interests, Institutions, and Change Under what conditions can we expect convergence across national political economies? Under what conditions should we expect differences to persist? How do political ideas relate to interests and institutions? The approach used here works from the premise that governments make decisions on institutional reform based on a variety of impulses, but mostly based on their understanding of the nature of the challenges they face (international environment and domestic events) and of the best available approach to tackle the problem that is politically feasible. Two central components of the government’s understanding of a problem’s nature in market regulation questions are whether or not there is a legitimate interest in steering against markets and whether the state should be involved or only private actors. Institutional arrangements are not uprooted and thrown out unless they are considered

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inconsistent with these understandings by the government and its constituents. Institutions are developed and changed where the system is thought to be falling down, especially falling down in principle, requiring an entirely new orientation. These moments of institutional reform and conﬁrmation require an ideational focal point to which political actors orient themselves. I draw here on Hay’s view that decision-making in a structured, institutional environment is imbued with meaning inherited from past decisions about policy problems on which decision-makers reﬂect as well as act. These actors are inﬂuenced by existing norms but periodically reafﬁrm and alter them. This extends to an evaluation of the policy problem and the institutional environment in which it takes place, so that he calls his approach constructivist-institutionalist (Hay 1995). The lasting effects are therefore more forceful than policy learning. The norms that I am dealing with are socially constructed answers to questions that governments and other actors are forced to deal with, including company failure and stock market collapse. The norms involve deﬁnitions of the nature of the policy challenge and the nature of the polity required to deal with it. The nature of the polity includes not only speciﬁc policy tools (involving regulative norms) but also the overall philosophy of state–market relations, which has a constitutive nature. Drawing on Wight, these constitutive norms may also have regulative elements (and indeed, in political economy questions they must) (Wight 2006, 148). The deﬁning regulatory logics under discussion here do not drop from the sky but are the products of explicit debate. They are sometimes propagated for a considerable time by think tanks and political parties before they have the opportunity to make a serious impact on public policy. Eventually they require adoption by political parties before they can entrench themselves. When they have reached acceptance by most of mainstream politics, they can be said to reﬂect a dominating regulatory logic with a structural impact on public policy. This can be seen in Gamble’s analysis of the Hayekian-inspired commitment of Thatcherism to the free market (Gamble 1988, 1996). Faith in the benign nature of market forces explains not only the policy innovations of Thatcherite Britain, but also constituted a structural normative constraint on the Labour Party’s approach to government and the market even before it assumed ofﬁce in 1997. The spread of Thatcherite ideals to the public makes this so. This is made clear by the transformation of the Labour Party’s constitution, electoral programme, and union relations in the face of repeated defeat at the polls to accept natural restraints on government as part of pursuing a political mandate from the broad centre of the electorate. Dominant logics may become embedded (or re-embedded), allowing more agency. This is a different presumption than the more historical approach

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taken by studies of social systems of production (Hollingsworth and Boyer, 1997). Regulatory logics may also rise and fall in favour as competing answers to policy challenges that have been around for a long period of time. The United Kingdom has debated the issue of stock market crashes, globalization, and the role of the state in regulation since the bursting of the South Sea Bubble in 1720. Germany has faced similar debates since the Gru¨nderkrise in 1873. There has not been a single trajectory or continuity, but rather the rise and fall of dominant approaches. This means that in the attempt to promote one regulatory logic over another, political agents draw on a considerable legacy of debate and experiment about appropriate policy that constitutes a set of orientation points for contemporary debate. This is by no means deterministic. Understanding some of the ideational history of regulatory logics provides us with a useful context in which to understand country-speciﬁc debates. This approach can be used to better understand why the varieties of capitalism approach has been able to slot Germany and the United Kingdom into categories that did not always apply. It provides us with counterfactuals to the notion in the varieties of capitalism literature that the United Kingdom, for example, has for a very long time corresponded to an ideal type of liberal market economy. It draws our attention to the ideational roots of neo-liberal thinking that literally renewed classical liberalism in the Conservative Party, replacing policy ideas of a planned and coordinated economy that both the Labour Party and the Conservative Party under Heath and Macmillan had adopted after 1945. It also draws our attention to reservoirs of British market liberalism that made Thatcher’s liberal revival easier than it would have otherwise been. Constructivist accounts by Ireland (2000) and Tickell and Peck (2003) highlight the deliberate project of neo-liberal think tanks and lobby groups to discredit the class-based consensus on the mixed economy and cooperative market and industrial relations after 1945, and to promote an investor-oriented, self-regulating market economy. This private-centred approach downplays the intellectual life of the parties and of the leaders themselves, however. For this reason, and because I am looking at discrepancies between national positions as a starting point to explain international phenomena, I choose to focus on prevalent policy ideas at the national level, in the expectation that they will be the result of a number of inﬂuences, including the internal contest among party leaders and thinkers over the party platform, in which pleas by interest groups, think tanks, and resonance from public opinion may play roles. Part of the commitment to the power of ideas and the discourse that generates and cultivates them is that institutional form does not simply follow

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function (demand). It also does not simply reproduce its own form (where path dependence is thought to inﬂuence ideas, interests, and therefore actors as well). Instead, form follows politically informed demand, so that the political decision-makers and the parties that put them in ofﬁce play a key role in institutional development and become the most interesting subjects of study. The inﬂuence of party politics and the electoral mechanism ensure that there is a relationship between civil society and elected government, but one that is largely indirect and focused on the main policy cleavages discussed above.

RATIONAL APPROACHES Rational treatments of policy choice dominate explanatory approaches to the development of comparative capitalism. For the Cologne School of institutional change (Streeck, Thelen et al.), ideas have little causal importance on their own as they and the institutions that embody them are the product and reﬂection of organized interests. They see an ongoing competition between existing institutionalized norms (the historical element of their institutionalism) and the activity of private actors that try to pursue competing principles through various strategies. Rather than expecting radical change that results from a frontal assault on existing institutions familiar from models of punctuated equilibrium and structuration theory (Krasner 1984; Giddens 1985; Gourevitch 1986), they research liberalization in non-liberal political economies through indirect and ostensibly apolitical strategies. Uncertainty about rules and policy options are less an invitation to allow policy ideas to take over an explanatory role as an invitation for various groups to exploit opportunities to choose as they see ﬁt (Streeck and Thelen 2005, 14–16) and to justify the changes after the fact. This focuses on an important aspect of challenges to existing normative and institutional orders, but just as the interest groups refrain from direct attacks on institutionalized rules, norms, and values, the approach circumvents public policy debates that are crucial to institutional development. There may be something to this, but it does not help us understand the evolution of formal institutional rules. The same is true for the other dominant rational choice approach to economic regulation. The varieties of capitalism literature sees convergence of national capitalism into two main types under conditions of globalization based on the rational reactions of private and public actors to institutional conﬁgurations. Liberal market economies based on stock market ﬁnancing, arm’s-length business, and employment relationships are expected to reinforce their own policies in pursuit of economic competitiveness that comple-

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ments, not replaces, coordinated market economies in which companies, employees, and investors reinforce highly structured business and employment relationships and weak shareholder power for the same reasons (Hall and Soskice 2000). The most widely held criticisms of this approach are that it overstates the degree to which countries must ﬁt one of the two ideal types in order to compete in the global economy, that as a static theory, that is, it has no means to endogenously explain institutional change, and that it is historically inaccurate (Blyth 2003, Goodin 2003). Watson has also shown that the trade specialization that should follow cannot be empirically veriﬁed (Watson 2003). All of these criticisms are valid, leading to renewed questions about explaining policy change. This is doubly true if the government of a liberal market economy imposes structural commitments on business or vice versa. Others argue that veto players slow the transformation. Roe explains continuing divergence as the reaction of investors to existing institutions for labour market inclusion in corporate governance. Where job protection is high, investors will organize in blocs to protect their interests and resist dispersed ownership and supporting rules (Roe 2003, 1–4). If this is so, however, we could not explain investment law changes that precede labour law changes. Gourevitch and Shinn try to explain choice through shifting coalitions of managers, investors, and employees over corporate governance and legal rules (Gourevitch and Shinn 2005, 62–7). The strength of these actors is affected both through exogenous economic changes to interest calculations and socioeconomic institutions directly applicable to corporate governance, so that labour participation can slow the change. They view broad similarities across countries as driven by the rise of investor power since 1974 through free ﬁnancial ﬂows, pension fund, and personal savings demanding investorfriendly corporate governance (ibid., 279–81). They bracket broader public arguments, however, even if they recognize them, and acknowledge that incentives do not guarantee policy choice (ibid., 93). There remains considerable room for explanation, therefore. Neo-Marxist analysts (Overbeek 2005; Apeldoorn 2005) see a transnational capitalist class as the dominant social group exerting inﬂuence on national government, promoting neo-liberal policy convergence over the objection of opposed national interest groups. This self-aware class forms the link between a new international superstructure exporting liberal market values to the world and national transformation (Gill 1990; Pijl 1998). More than Gourevitch and Shinn, this approach has difﬁculty in reconciling the convergence that is thought to occur across countries in pursuing the interests of the capitalist class with the actual diversity of institutional arrangements and normative imperatives found across countries. More importantly, the shaping

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potential that political parties, labour interests, and sectoral cleavages within business have on institutional and normative arrangements is discounted. It is difﬁcult to apply rational principles to the convergence and divergence of regulatory logics described above. If we take a group of liberal market countries in which markets are considered to be unproblematic and contrast those that actively regulate to promote competition with those that adopt a laissez-faire approach, then it is not clear why societal groups that support the market in principle sometimes support and sometimes reject regulation (Busch 2004). This is particularly so for determining the interests of institutional ﬁnancial investors (IFIs). Regulation of the corporate economy may improve the security of their investments and the ﬂow of information about them, but IFIs appear equally content to support a hands-off approach to the economy by the state. This is also true where business can rely on the shadow of hierarchy (Abbott 1976). There have also been changes in union and social democratic thinking over time, all of it critical of the market, about whether it is better to use state rules to mandate social partnership within the ﬁrm or to prevent it. These regulatory choices cannot be derived from the objective economic interests of the actors involved. Furthermore, we need a way to understand the resurgence of regulation in the wake of the ﬁnancial crisis despite the weak resources of stakeholders balancing business claims. An analysis therefore requires an emphasis on the policy norms of the key actors. I take this to mean the political parties and, where applicable, the key social actors affected by policy.

IDEA-CENTRED APPROACHES The use of policy ideas in comparative political economy takes several different forms with differing implications for their impact. Checkel treats ideas as the product of policy learning, an approach that Verdun has applied to macroeconomic policy and monetary union in Europe (Verdun 2000). A realignment of understanding regarding a public policy problem and the state’s role in solving it takes place in this approach. We should expect policy convergence where learning spreads and a willingness to create supranational institutions to supersede national ones. This reﬂects the outcomes of ﬁnancial market regulation in Europe, but little else. Hall (1989) and Goldstein and Keohane et al. (1993) treat policy paradigms as points of policy orientation for decision-makers during periods of uncertainty or disorientation. These ideas are typically thought to have an impact across national boundaries, to contribute to convergent policy beliefs and

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often, but not always, to ﬂow from epistemic communities. Radical changes beneﬁt from the failure of existing practice, but the new choice is more experiment than reasoned design informed by policy learning. Since the early 1980s, the most common direction has been towards neo-liberalism, involving more restraint of government intervention in the marketplace across all developed economies. This raises the question of whether we are looking at uniform policy learning of structural inﬂuences on policy-making or still national responses to common problems and pressures. With the exception of Checkel, the international context in which these approaches to policy ideas take hold plays an implicit role in explaining an increasing market orientation of national governments since the 1980s. This can be treated more explicitly to better illuminate why change happens and why the authors expect similarity. The international context is used above all to underline similarities across countries at particular periods of time. Indeed, a great deal of materialist/functionalist and ideational literature on the rise and decline of the interventionist welfare state from the 1930s to the 1970s share this focus. Jessop (2002) and Strange (1998a) best exemplify the materialist argument that the ambition of establishing an interventionist national welfare state was made possible by restrictions on the mobility of international capital in the 1940s that had ceased to be effective from the 1970s onwards. Cerny (1995) stresses the ineffectiveness of the state where transnational business dominates. Strange underlines, however, that this created much confusion and disagreement among proponents of different policy responses (Strange 1998b). In these arguments, the restrictions on capital freedom typical of Fordism made these differences possible until a new mode of accumulation, post-Fordism, rendered public policy goals untenable. Ruggie (1982) is most closely associated with the constructivist counterpart to this argument, which emphasizes the constitutive and regulative elements of an international political agreement underpinning the legitimacy of state intervention and control of the market after 1945. The idea of embedded liberalism became a constituting principle of the international economic order of which the Bretton Woods institutions became the regulative tools. The embedded liberal principle disappeared with the ideational turn to neo-liberal, that is, market-friendly policies, underlining the impact of normative commitments. As Helleiner (1994) underlines, however, the broad willingness of governments to make broad political commitments to new policy principles was logically and empirically prior to the mobility and inﬂuence of international ﬁnance on political actors. Historical comparisons of centre-left parties’ thinking about public policy by Whyman (2006) and Prabhakar (2003) underline the fundamental belief in the constraints of globalization on public policy as more decisive in explaining public policy than the real

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constraints, the latter point echoed by Mosley (2005). Thus, the mobility of international investment capital may pressure governments to pursue capitalfriendly policies, but there is evidence that changes to the constitutive norms of the state in the international economy preceded policy changes (Tickell and Peck 2003). Political ideas can also be shown to push politics in different national trajectories by emphasizing the domestic context of public policy. Shonﬁeld’s classic analysis of capitalist systems drew attention to the existence of an activist state in continental Europe made possible by ideological critiques of the market. This allowed the development of public authority to tame the market, and provide social welfare, training, and long-term economic planning in a way that was impossible for the United Kingdom or the United States to copy (Shonﬁeld 1965). Similar ideological commitments to public power to tame markets are central to Wade’s study (1990) of the developmental state and Weiss’ analysis (1998) of robust state control of the economy in several East Asian countries after the rise of international capital mobility. These approaches identify and explain national diversity as the product of political choices. This is compatible as well with Ruggie’s argument that embedded liberalism not only made the welfare state possible, but that it was forced by national-level demands for interventionist states that would counter market forces. Embedded liberalism could be interpreted then as a product of common social pressure across developed economies, but there was signiﬁcant diversity across countries based on differing philosophies and political principles about the legitimate nature of state intervention in the economy within the general demand for national policy autonomy, as EspingAndersen (1990) and Goodin et al. (1999) show. Signiﬁcant differences appear to persist after the advent of post-Fordism. Policy ideas central to questions of political economy have also been treated as nationally speciﬁc narratives of key political-economic questions, following what is sometimes called the classical method, by others the Cambridge School (Bell 2001) and, more recently, as discourse analysis. Gamble traces how the Labour Party and the Conservative Party in the United Kingdom attempted to deal with British decline through the socialist ‘enterprise state’ and then the neo-liberal programme of Thatcherism respectively. Gamble’s approach provides us with a contrast to the functional approach of the regulation theorists like Jessop, particularly because he does not guarantee the development of a new, successful mode of accumulation. This is particularly evident if one reads an earlier version of Britain in Decline, before Thatcher’s reforms had begun to take hold (Gamble 1981, 231–6). This approach has been taken up by other critical analyses of social democracy and economic strategy more generally in a neo-liberal environment (Rhodes

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2000; Perraton and Clift 2004; Parkinson et al. 2000; Wilks 1999) and where applicable, its relationship to the EU (Daniels 1998). It has the advantage of allowing us to identify strands of thought that play a structural role in the development of national constitutive regulatory logics and to see fundamental compatibilities or incompatibilities across countries that make international cooperation more or less likely. These strengths still require a more explicit claim about the relationship of ideas to institutions and organized interests. I presume along with Hay (1995) and Crouch (2005) that political entrepreneurs enjoy a degree of policy autonomy from interest groups and inherited institutions that grants them signiﬁcant, but not limitless, capacity to introduce innovations. I expect them to take into account the existing parameters of political opinion within the country more heavily than inherited institutional values. This sets me apart from Douglass North et al.’s approach to new institutionalism, and Steinmo and Pierson’s approach to historical institutionalism, which places more emphasis on inherited values than on new ones (North et al. 1991). Policymakers can introduce major changes if they garner at least a permissive consensus and ideally robust societal support for their policy positions. In this sense, the capacity of governments to use policy ideas to bring about change (or indeed, its determination to stick to existing institutions) depends less on the ex ante institutional structure and more on the structure of societal opinion in which policy entrepreneurs operate. I draw on Gourevitch, Blyth, Sabatier, and others in expecting a resonance between successful policy ideas and coalitions of political support when norms are successfully constructed or reproduced. This involves greater expectations of volatility in policy options than historical institutionalism as a consequence. Gourevitch grants policy ideas a key role in providing ideological and policy orientation for politicians and the general public in time of uncertainty during economic crises. Policy ideas on foreign economic policy cannot exist without a supporting coalition with which the policy resonates, but he does conclude that policy ideas are crucial to determining choice. This relationship generates what Gourevitch refers to as the ‘social basis of state autonomy’ in economic policy (Gourevitch 1986, 66). Blyth goes further than this to argue that policy ideas are used as political weapons to contest and consolidate policy outcomes. This sets him apart from the more functional use of ideas under uncertainty discussed above (Blyth 2002, 36–44), emphasizing the political element of choice between differing alternatives and opening up the possibility of contested arguing (Risse 2000). He seeks not only to explain institutional change from one time period with another as Polanyi does, but to explain what decision-makers were thinking when they made the changes. Ideas therefore take on a prominent role in tandem with political entre-

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preneurship. They do not survive on their own, however, but depend on their political viability. It is, as Bogamil, Jaan, and Nullmeier suggest, important to consider the normative foundations of state organizations and strategy and their resonance with the public (Bogamil et al. 2006, 15). This provides us with a valuable sense of which ideas are politically viable and which are non-negotiable and later play a key role in EU negotiations. It is this non-negotiability that creates a social fact, what Wight refers to as a social ontology (Wight 2006, xx), although I retain Hay’s view that these facts change over time with interpretation. We can be more selective about the size of the relevant public however. Gourevitch and Blyth look solely at society as generally important, though its impact might be variable. The impact of broad societal opinion becomes more important with the breadth of general public interest in a speciﬁc policy issue. By this I mean whether the public sees itself as directly affected. The relevant public is likely to be large when employment regulation principles come under discussion, for example, and much smaller when accounting principles are under review. Not many understand or have an interest in this. The number of interested parties is the basis on which some norms may become stickier than others, resistant to change and involving complex political bargains, and expectations of national responsibility and authority to protect them strongest. Radical changes to ﬁnancial market regulation in Germany and the United Kingdom during the 1990s are incompatible with a merely structural view of ontological norms and more consistent with a view that sees them as continually regenerated socially. There is nevertheless no direct correspondence to regulation and interest group demands, so that the correspondence of coalitions and policy is loose. The policy ideas of political decision-makers had room to initiate regulation that business did not prefer. At the same time, the revolution has been limited to this ﬁeld and institutional variety in company regulation has continued as before. This means that whilst I accept the likelihood of sweeping changes to institutions typical of punctuated equilibrium models, I search for policy-speciﬁc, societally supported ideational reasons guiding them and do not expect that all policy areas will be swept along in the same logic. This strengthens my expectation that the size of the relevant publics affecting the viability of political ideas varies across policy areas. This contrasts with another approach that tries to combine ideas and public legitimacy. Discursive institutionalism as developed by Schmidt (2002) combines the study of political ideas with the study of decisionmaking institutions as an intervening variable to determine where successful institutional change is likely. She argues that policy change is most likely when domestic logics of appropriateness legitimate external pressures for policy

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change, and that this legitimation is strongest where communication is most direct between government and voter (Schmidt 2002). The direction of change is a given and works through European and global inﬂuences in a top-down manner. This approach restricts the agency of governments, fails to consider that parties may generate new answers to old problems, and fails to recognize that national policy changes often precede and are necessary for European commitments and pressure to exist in the ﬁrst place. I do not share her assumption that strong communication promotes institutional adaptation. Instead, when outside pressure for institutional change draws the attention of larger publics with competing interests, backlash may also result (Majone 2005). Company law deals with all companies in the market and all employees, and has a correspondingly large group of interested parties. More attention must be paid to securing a permissive political context to any changes that are proposed. Financial markets and accounting standards, on the other hand, have much smaller publics, particularly in countries like Germany where even proponents of a ‘shareholder culture’ admit that it does not exist there. So, similar pressures may result in divergent outcomes precisely because of communication between government and the public. Likewise, similar outcomes might emerge from different lines of political argument across countries, as it did in the case of ﬁnancial market regulation. As in the Cambridge School approach, we require context to know the reasons. This differs from Schmidt’s assumption that top-down adaptation to Europeanization pressures are the main driving force behind capitalist development in Europe, a point she changed later (Schmidt and Radaelli 2004) to allow more agency. We need an approach that captures the national differences of political discourse and institutionalization of regulation. The key changes taking place in the direction of statutory regulation (both countries), market principles (Germany), or stakeholder balancing of shareholder primacy (United Kingdom) (Prabhakar 2003) were brought about by political parties with a speciﬁc agenda for change. There is therefore a political element to the reforms undertaken, but it is the receptiveness of the party to particular ideas that is important. I do accept that state actors seek to ensure the attractiveness of the national economy to international investors and its international competitiveness (Cerny 1995), but more so in ﬁnancial regulation and reporting standards than in company regulation proper. The regulatory decisions taken by state actors and political parties are a signal of commitment to good governance and an internal agenda for competitiveness that wins at least a permissive consensus from domestic political actors. The need to comply with accepted norms places limits on adaptation, creating uneven policy changes.

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This resonates with Hay (2004) and Crouch’s observations (2005) that national governments have disparate strategies for dealing with economic and political challenges in differing policy areas. This approach, which Hay dubs ‘contingent convergence’ and Crouch dubs ‘recombinant capitalism’, contrasts with both the ‘hyperglobalization’ approach that foresees national convergence towards a single model and with the varieties of capitalism approach that foresees national convergence towards one of two specialized models based on differing national institutional arrangements. Hay shows that national decision-makers are subject to a uniform set of international pressures, so that the national ideational and institutional differences that react to them generate more than one kind of convergence. The answers to globalization are political and incorporate differences of opinion (Hay 2004, 243). I intend to build on this by focusing on the politically informed regulatory logics of decision-makers at the national level. The institutionalized rules, the dominant policy discourses contained within them, and the constellation of policy reform discourses propagated by government, opposition, and civil society are contingent to the policy area and not to the national economy as a whole. This is the challenge that Crouch has proposed as we move past unsatisfactory varieties of capitalism explanations of domestic interests (Crouch 2005). As he does, I distance my approach from any assumption that regulatory logics across related areas must be bundled in very speciﬁc ways. I accept that governments orient themselves to enhancing economic competitiveness and attracting investment, but do not assume that it implies adopting Anglo-American forms of economic organization across the board. Indeed, this has been a long-standing concern not speciﬁc just to the present age. I also accept that a non-liberal political economy can liberalize one part of its economy without assuming that it will force other aspects to collapse. I also expect transformed varieties of capitalism that are quite distinct and transcend the old and increasingly useless labels of liberal and non-liberal. At this point we might ask the added value of a normative over a pluralistic, interest-based approach. Moravcsik’s liberal intergovernmentalist approach believes that the results of pluralistic bargaining, coupled with institutional arrangements are sufﬁcient to explain outcomes. This argument is attractive in its parsimony, but has difﬁculty explaining why outcomes are so different in policy areas that are highly connected and involve the same constellation of inﬂuential lobby groups. In such situations, the interpretations and narratives of the nature of the state and market and of the relationship between them that dominate political responses to economic crises and challenges add value to understanding the national political economy, and to explaining disparate

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outcomes at the EU level. Beyond this, political parties have the opportunity to prescribe public interest motivations for greater intervention or preventive regulation in one area but not another, despite a similar interest group constellation. Thus, I expect not only political lobbying, but legitimation and state interests that help form legitimate national norms to play a central role in explaining the development of European norms and governance regimes. The added value of the normative factor at the national level is not an explanation of the outcome, but rather a demonstration that the normative factors are real products on top of politics to be taken seriously. We can look for outcomes that deviate from the expectations derived from the dominant constellation of lobby groups (and in my opinion, I think I actually do this) that point to another normative factor that has to be included. Furthermore, one can see the impact of national norms, if they exist, on the entire spectrum of public policy to which they purport to speak. So, for example, if a norm is a norm and has power over how a country goes about managing company law and regulation, we should see the principles reﬂected in all legislation and regulation developed. If it is not, then the existence or power of the norm is falsiﬁed. The other possibility, if we ﬁnd the power of norms exists but is circumscribed, is that the norms that ﬁrst appear to be an anomaly actually belong to a separate policy area that is thought about in a different way. Although it is often important, I do not assume that the dominant source of change is an exogenous shock that forces policy-makers to rethink their basic principles. There is no logical reason why the change in thinking cannot be due to endogenous reasons such as corporate collapse. The literature on decline in the United Kingdom also shows change without an exogenous shock. Exogenous shock sets the stage for change but determines neither its success nor direction. That is why I emphasize public discourse that cannot be reduced to prior economic factors. Policy ideas can differ from those that dominated in the past because agency is favoured over structure. I also presume that national governments have the capacity to act as constituting agents that redeﬁne themselves in relation to both domestic actors of society and the economy in the process of making new policy and in relation to the outside world (in this case the European level). This is done through speech acts in legislation as much as other policy statements about the nature of the state per se and of the market. The distinct regulatory logics outlined above require at least a tacit understanding at the national level of whether the state sees itself as competent to actively shape business relationships within its jurisdiction. From time to time, however, these questions arise and are discussed more explicitly.

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The typology of logics presented in the ﬁrst section of this chapter provides the ingredients for speciﬁc ideational understandings of statehood, as they reﬂect broad understandings about the relationship between state and society. The distinct policy questions that stand alongside these options tell where disparities of state conceptions within a single country might arise. Whilst it is not uncommon to speak today about the dominance of a competition state bent on international economic competitiveness under neo-liberal global market conditions, the notion that the state is there to promote economic welfare at home and in the world economy has existed for much longer. Katzenstein’s approach to political understanding of the state allows for more nuanced, country-speciﬁc understandings that ﬁt the intent of the typology above. He argues that we can distinguish between regulative norms within the institutions of the state, which ‘help coordinate political conﬂicts’ and constitutive norms, which he describes as the source of ‘political conﬂicts over identity’ (Katzenstein 1996, ix, 206). Civil society actors engage in alliances over the long term, and not just at critical junctures to shape these understandings, as rationalists believe (ibid., 203–4). This is an excellent departure point to engage in a study of how domestic politics shape the state and its understanding of itself. I propose to take this further in using the constellation of self-reﬂective views of the state as the building block of international regimes in chapter 4. It has to be stressed here that at the national level, the key goal is to show that there is something being created that extends beyond a rationally agreed or pluralistically bargained compromise. The national chapters are less about explaining domestic normative change, and more about showing that it has taken place. It is therefore inductive in nature at this stage of the book. This is done by asking: did the actors, in the course of establishing new policies and institutions, or in choosing to retain the existing ones, legitimate their actions by articulating an agreement on what the state should and should not do? If they did, then we have a key indication that norms may be said to exist. The constitutive norms, in order to be valid, must deﬁne what the state is in its relationship to the market. Is it an actor with a legitimate role to protect and regulate? The regulative norms, in order to be valid, must justify the dominant mode of supervision, implementation, and enforcement of regulation. If these norms can be shown to have a subsequent impact on outcomes that follow their establishment (for example, at the European level), then their existence will be further conﬁrmed. The recent nature of the changed norms at the national level makes this kind of conﬁrmation much more feasible than a time series analysis (as this would require going into the future). All of this is essential if the book is to be successful in critiquing the parsimony of the rationalist accounts of integration theory by showing an

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additional, hitherto unaccounted-for factor that can be found at the national level. If the norms are not found according to these criteria, by surpassing the parsimonious content of rational bargains, then they have not been found and the hypotheses are nulliﬁed. The hypotheses will be tested in this manner. If the norms are found and they are different across policy sectors, then we have a conﬁrmation that they can be constructed differently for different (closely linked) policy areas. If they are not found, in this pattern, then the expectation that normative constructs can be disaggregated from one another will be falsiﬁed. If all countries are driven to act as constituting agents about the nature of their own statehood, then we must be able to imagine the possibility that the member states of the EU might reach an intersubjective agreement on the nature of the state that allows them to collectively consolidate their claims on national authority or to collectively endorse the delegation of responsibility to the European or other international level. These outcomes of normatively anchored coexistence or collusion would need to be built on national norms, which may differ, reﬂecting the social contexts in which they are constructed. This circumvents the all-or-nothing debates about the nature of the Union and the future of the member states within it that pervades backlash against the DCT. Intersubjective understandings among the member states and European institutions make it possible to transcend the simpliﬁed debate about a federal or intergovernmental Europe and construct instead a differentiated European polity. This is the subject of Chapter 4 on international theory and policy regimes in Europe. The operational deﬁnitions of the constitutive norms attached to different kinds of state–society relationships are deﬁned above (state–business relations). Articulated conceptualizations of the state can be found in discussions on the cleavage between liberal and non-liberal conceptions of the state–economy relationship. In the comparative work to be done in this book, these conceptualizations are to be compared and contrasted in the United Kingdom and in Germany in the three policy areas of interest—company, stock market, and accounting regulation—before and after 2001 to determine changes. These normative commitments will then be set alongside EU governance norms to demonstrate the relationship between the European and national norms.

C O NC LU S I ON In sum, I direct attention to the constitutive norms that deﬁne what a state is there to do in relation to the economy and society it regulates. I search for

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evidence of these, which are reﬂected in hypotheses 1 and 3 by looking for consistent patterns of use in legitimating regulation patterns. Archetypal narratives of state and market are hypothesized to be the foundations on which these norms are built and typically arise in response to issues of corporate or ﬁnancial market collapse. The evidence for this will likewise be sought in the legitimating arguments used in legislative debates on regulation. They provide orientation, are used as political weapons in contestation, but also are the red lines that states observe in negotiations with others over possible international commitments. If these norms exist, they can be observed both in claims about the nature of state and economy, and in the regulative norms developed to implement the claims that ﬂow from constitutive norms. By observing whether the state accepts liberal markets or not (particularly how it views managers, shareholders, and other stakeholders) and how it evaluates concrete legal rules, coupled with whether the state intervenes, we can collect evidence on normative importance. Where a dependable pattern emerges, the hypothesis should be conﬁrmed. Hypotheses 5, 6, and 7, that norms are constructed, contested, and of a dual nature are reﬂected in the question of whether norms, should they be identiﬁed, are critically reﬂected upon rather than accepted as part of the country’s institutional inheritance in a path-dependent fashion. The constellation of these national norms is then the basis on which collusion (supranationalism), coexistence (an intergovernmental regime), or collision (the lack of agreement on norms and institutions) can result.

4 International Relations Theory and Integration Chapter 2 outlined three European Union (EU) policy regimes that govern the regulation of markets in company shares, ﬁnancial markets, and accounting standards respectively, each distinguishable by the degree of delegation of regulatory authority from the member states to supranational institutions. I argued that norm conﬂict and convergence over the substance of national legal provisions determined the degree of conceivable delegation. The purpose of this chapter is to develop the international components of my approach to explaining regime development, incorporating the insights into domestic constitutive and regulative norms made in Chapter 3. It argues that negotiated regime construction is a daunting task because it must reconcile international and domestic norms, both constitutive and regulative to succeed. Attempts to impose regimes with international constitutive norms that collide with national norms create an incentive for national backlash and the establishment of alternative regimes (in addition to the default position of political deadlock).

R E G I ME F O R MAT I ON AN D FA ILU R E : N OR M ATI V E COLLUSION, COEXISTENCE, AND COLLISION This section builds up a bottom-up constructivist approach to the topic. It sees national decision-makers as the key to ensuring the goodness of ﬁt between national constitutive and regulative norms and European ones. It therefore links national and international politics. The new EU regimes involve agreement on both institutional rules (regulative norms) and constitutive norms (nature of the EU and the member states). It is impossible for talks to isolate one from the other or to isolate international from domestic norms as regulative norms are the concretization, the implications of constitutive norms. It is possible, however, to conceptually separate

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them to achieve a clearer picture. This means that EU regime development takes place in a normatively structured and contested environment. These norms are centred partly in the Treaties and centred partly in the institutionalized norms of the member states. Universally accepted EU norms may be absent, but then so will there be no regime, as views and demands collide. Competing claims to EU norms may be malleable and subject to change through collective pressure of the various EU actors, including the member states. These situations provide exceptionally fruitful opportunities for constitutive norms to be established, as they do not involve replacing established, institutionalized principles. In practice, this means that rulings by the European Court of Justice (ECJ) or claims by the Commission may alert the member states to dormant normative conﬂicts that need to be rectiﬁed from their point of view, either by more explicitly articulated norms of collusion or of coexistence that preserves national autonomy and diversity. ECJ or Commission claims may be to either constitutive or regulative norms but touching on one will activate the other and spark contestation. As with the national level, the constitutive norms of the regime deﬁne the nature and status of the participating actors and deﬁne the basic claims that they can make on each other. These claims determine the kind of coordination that is necessary at the level of regulative norms, of coordinating institutional rules. To borrow language from English School thinking, constitutive norms are the primary institutions of international relations that make sensible negotiations about secondary institutions possible, that is, about regulative coordination rules for the regime. Constitutive norms determine whether the kind of coordination required for the member states and EU-level institutions will be of a vertical or a horizontal nature and whether it will have a formal structure or an informal, network-based structure. This normative view of regime construction demands that we look closely at the reasons that are offered for promoting delegation in some areas and not in others. These come out of the competing international normative claims and their relationship to national-level norms that go beyond interest group politics. The constitutive norms of the regime are analytically separate from the constitutive norms propagated internally by the politicians of the member states about their own statehood, even though they refer to one another. I hypothesize that regime norms must build on national norms if the member states are to accept them. This leads to three broad possible outcomes: collusion, in which member states accept the higher authority of EU institutions in some way; coexistence, in which regime norms reinforce the autonomy of the member states within commonly agreed parameters of governance;

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and collision, in which no normative agreement is made. Regulative norms then build on the understanding contained in constitutive norms. To test this empirically, we can analyse the linkage between the international and national levels of analysis in three sequential steps. First, we can compare and contrast the roles that national governments have in regulating their societies and economies, and their understanding of this role to identify the spectrum of national normative structures that play a role in European politics. These form what other theorists might call the national interest. Chapter 3 outlined the variety of regulative and constitutive logics that form the basis of how political actors see the state and its socio-economic role at the national level and how they see the market itself. These understandings about the rightful role of the state in governance and its demands on society play a key role in determining the constellation of positions in debates over European politics. Second, we can identify the constellation of national understandings that results from this collection of national norms and determine whether it favours (a) agreement on regime norms or (b) agreement on certain kinds of regime norms stressing collusion or coexistence over others. Below, I develop a typology of probabilities about regime development based on the constellation of national understandings and the pattern of convergent or disparate international norms. Convergence on international norms will reﬂect the kind of coordination that is compatible with national constitutive norms. Greater convergence on the policy-speciﬁc elements of national norms will make delegation to the international level possible, but not inevitable, whereas poor convergence would only be compatible with international norms that reinforce horizontal coordination and reject vertical delegation. Agreement on constitutive norms at the EU level could be based on national convergence on the notion that the market ought to be regulated, even at the European level, but falter on regulative questions such as whether statutory regulators with lawmaking or policing powers ought to take charge or not. This demonstrates the interconnectedness of constitutive and regulatory norms and their embeddedness in concretized social practice. Regime development requires a third stage, an explicit institutionalization or articulation of common understandings into commonly accepted normative principles that then channel the behaviour of member states and international institutional bodies alike (in this case, the European Commission, Parliament, and Court). This provides both the constitutive foundation of the regime including the deﬁnition of the actors and the form and structure of interaction. Bogdandy underlines the importance of working out this ideational infrastructure at the heart of the legislative negotiating process (Bogdandy 2003), whilst Wiener (2009) underlines the linkage that norms

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have with concrete social practice that are the acid test that give them validity. Regulative norms to manage transnational transactions must then be developed on the basis of this understanding before a regime can be considered to exist. This is by no means an easy task, as it requires prior agreement on the nature of the state and its relation to institutions beyond it like the EU or other institutions of global governance. These three sorts of norms can be observed in social practices, particularly in the establishment of new legal instruments, as at the national level.1 In this case, I focus on the expectation that the politics of regulation at the national level, and observations about the constellation of normative structures among the states provide the foundation for building international norms that have a structural impact on state behaviour. More precisely, the distinctive national and international norms have to be used in sequence, in a particular way and in a particular temporal order, in order to test the hypothesis that the constellation of national norms plays an indispensible role in understanding which European norms can be constructed and which cannot. National norms must be identiﬁable prior to their impact on regime conclusion at the latest during contestation over regime norms. Patterns of national change may have the expected impact in hypothesis four if they precede regime development by making it more likely, especially the expected form, rather than following regime change. Alternative regime theories rarely focus on the conceptual preconditions for actors to generate a working institutional structure. This is partly a result of the convergence of rationalist international relations theory on measurable interests and power resources as sufﬁcient explanations for institutional development and persistence. It also results from the focus of constructivists and a group of English School theorists on top-down views of international society as a structural inﬂuence on national governments (Bull 1977), on the impact of international institutions on state policy learning (Finnemore 1996), and on the issue of identity as a determinant of general patterns of relations between states in the international system (Wendt 1999). These approaches either limit themselves to describing contextual systemic conditions that are more or less conducive to cooperation or putting the agency of states in the background. With these approaches, the interests driving regime creation are external to the models, so that the literature focuses either on the effect that regimes have on behaviour and expectations after their creation (Krasner 1983a, 1983b; Keohane and Nye 1984) or on the more fundamental assertion that regimes are nothing more than a one-to-one reﬂection of power 1 Colin Wight (2006, 50). Wight’s three-tier approach is common to other critical social theorists such as Bhaskar, on whom he draws, and Habermas. See Nigel Pleasants (1999, 8).

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politics (Strange 1983). I expect here, however, that regimes follow the convergence of expectations (on constitutive and regulative levels that serve as the basis for identifying the actors and their relationships) at the point of establishment, rather than driving them. In as much as they channel behaviour, expectations, and thinking into the future, regimes serve the interests of their creators. In this context, I presume that domestic politics and in particular discourse about speciﬁc policy questions generate disparate, policy-speciﬁc views of the state with normative character and as a result, differing combinations of norm conﬂict and norm convergence among governments across policy areas. Conﬂict and convergence may take place with regard to constitutive and regulative norms. Chapter 3 concluded that differences across countries were ultimately dependent on domestic political coalitions propagating speciﬁc narratives of legitimate policy. These norms of state autonomy and power were anchored into archetypal narratives about how the state should deal with business and with international economic openness. This agency made them capable of supporting change as well as continuity. The liberal reference underlines, as it does in the case of liberal intergovernmental theory (Moravcsik 1998), that domestic actors have choice and agency within the country. I am less concerned with the direct impact of interest group pressure on material government policies, however, and more on the understanding that governments (and international institutional actors) have of themselves and their proper relationship to potential institutions at the international level (their constitutive norms). This is important for EU politics in particular, but can be applied to other international negotiations due to the key role that national governments have in negotiating outcomes. In this sense, domestic politics is aggregated and ﬁltered through political parties and state institutions in a way that differs from Checkel’s direct attention to the socialization of civil society groups in deﬁning national identity (Checkel 1999). This tells us much more about the issues at stake that are governed by the regimes and that obtain across the individual EU directives, which affect interest groups in different ways. Those issues are broader than simply options for constitutionalizing the relations between the member states and the EU. Those options must contend not only with formal constitutional norms but also the socio-economic ‘constitutions’ of the member states. This approach requires a thicker treatment of the normative element underpinning domestic politics than other constructivist or idea-centred approaches to explaining foreign policy and international outcomes. The thinnest treatments focus on the simple impact of policy ideas on government decision-making. Epistemic communities may propagate economic policy ideas to government decision-makers (Hall 1989), a garbage can model of

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decision-making (Olsen 2001) may allow ideas about integration to take hold during periods of uncertainty (Parsons 2006), or simple policy learning leading to convergence may be held important (Checkel 2001). In all these models, decision-makers must be isolated from domestic inﬂuences (Katzenstein 1978). Precisely because these situations bracket domestic politics as a source of direction for governments, and therefore the question of why some epistemic communities have better cards than others, thin treatments of ideas do not help us greatly in generating good understandings of when regimes are created and why. They also stop at the barrier of foreign policy and can only explain simple constellations of policy-speciﬁc convergence or divergence. This assumes away any inﬂuence of constitutive considerations on international outcomes. In the context of regimes following expectations, I also presume that international norms are signiﬁcantly shaped by the national-level and international-level actors involved in establishing and maintaining them as meaningful parts of the international institutional landscape. In other words, states as agents help shape the structures in which they operate and exist (Risse 2004; Reus-Smit 2009, 221; Wiener 2009). They are not simply subject to a preexisting ontology of themselves, of the international system, and of the institutions found within it. It is rather the collectively created ontology that sometimes emerges from the constellation of constituting norms and their explicit legitimation through collective action and communication that is the outcome we are studying. Given the dominance of nationally centred norms as explanatory factors, this is not a Wendtian (1999) argument about international socialization of national actors through their position in the international system or a Checkelian (1999) argument about the diffusion of norms through that system to national governments, though polities are likely to draw on available norms found there. It instead takes nationally based structures (Katzenstein 1996) as the most interesting and important starting points in determining patterns of collision, collusion, and coexistence as possible outcomes. The social aspects of the international system and of the EU system are thin, and socialization is less important than normative choice. States are free to choose those norms selectively for their own domestic purposes. To do so, they must concur on commonly held principles and codify them. A bottom-up approach necessarily underlines the agency of states, and in some cases, of transnational actors. This draws on a tradition dating back to the 1980s that saw governments and national-level political actors trying to create an international system based on principles that would support their own domestic political preferences. Ruggie’s concept of embedded liberalism as the ideational and policy product of a greater respect for working class

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interests in the post- 1945 capitalist countries developed a general reference to domestic politics and very broad regime principles (Ruggie 1984, 1988). Within the English School, Donnelly (1999, 94) examines the key role of democratic, constitutionalized countries promoting the development of a broad international regime promoting respect for human rights and democratic norms. These examples show domestically generated norms ﬁltering up to the international level and being institutionalized, thereby changing the structure of the international system with the help of state agency. The same claim can be made for regional subsystems like the EU. I add to this tradition and argue that within the same geographic area and at the same geographic time, disparate normative constructions are possible and probable due to the different constellations of domestic politics. This speaks for a slow, gradual, and variable progression of international cooperation and regime development, and the preservation of some policy areas from normative convergence beyond agreement on the independence of the national level of government. This means that in some cases, it will be necessary to build international regimes on respect for national autonomy rather than regime supremacy. Ultimately, as Gamble (2003) suggests, we will not be able to understand the choices available to Europe without understanding how those choices are dealt with by national political classes. It also means that revolutionary ideas of a federal European state, as called for by Joschka Fischer (2000) and Ju¨rgen Habermas (2005), are less likely to obtain than policy-speciﬁc integration because of the conﬂict with national norms that they pre-programme. The robustness of nationally cultivated norms as intervening variables in the face of international pressure to conform has already been investigated by Schmidt and Busch. Busch (2004) focuses on national institutional legacies as a ﬁlter of international pressures to adopt investor-friendly regulation. Schmidt (2002) focuses on national discourse on policy change as a key determinant of policy change or stagnation under functional pressures for adaptation. She suggests that adaptation of national polities to new policies and cooperation in the context of European integration is facilitated by strong political communication between government and the public. As I hope to demonstrate in the following chapters, I believe the reverse is true. Intense political communication can exist where an issue is highly politicized and therefore reserved for national policy competence, generating backlash against EU initiatives that collide. This can be demonstrated by examining the intense political discussion in both the United Kingdom and Germany over company regulation, which was not delegated, somewhat weaker discussion over ﬁnancial market regulation, for which a multilevel regime was created, and least of all for accounting standards, which were delegated to a private institution.

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By building on domestic norms and the agency of the member states, I turn the expectations of top-down approaches to regimes as providers of state expectations on their heads to require this prior understanding among the actors for regimes to be established. Within the context of the EU, regimes are only possible where the main actors, the member states, Commission, Court, and Parliament, are able to agree on basic principles. Without such understanding, individual rule development may be possible, but regime development, with the road map of governance and the simpliﬁcation of future cooperation it brings with it, will not be possible.

AGENCY OVE R STRUCTURE The way that national governments see themselves, their priorities, and their prospective roles in a policy regime therefore plays a key role in whether a regime comes about and what form it might take. In the case of the EU, the way that key European decision-making institutions see themselves, the member states, and the relationship between them is also vital to an arrangement. In some cases, the Commission is the only other key EU institution. Increasingly, the Parliament is also important. The Court plays a different role on the sidelines, sometimes generating incentives for policy innovation, sometimes providing indications of which policy results are acceptable and which not, but it does not play a regime-generating role in the narrower sense of creating and sanctioning new constitutive and regulative rules that enjoy support and stability. The constructivist aspect of regime creation focuses therefore both on the nature of the member state in the European policy realm and on how the states relate to one another and to European institutions in the context of European policy regimes. Wiener emphasizes the improved understanding gained by taking seriously the construction of fundamental and other ordering norms to the development of legitimate transnational institutions like the EU (Wiener 2007) and by insisting on the compatibility of international and domestic politics for successful international institutionalization. With particular reference to enlargement and negotiations on a European constitution, she argues that the logic of creating new rules in the constitution brings domestic politics to the centre of foreign policy and international negotiations in a way that compliance with existing institutions does not: practices of both enlargement and the ﬁnality debate are constitutive towards transnational institution building. Considered from this analytical angle, the hermeneutic limits of a ‘behaviourist approach to

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This negotiation not only generates compliance with supranational norms, but ‘[t]he litmus test of the bargain’s success lies in the degree to which the agreed constitutional norms on the supranational level resonate within the domestic contexts’ (ibid., 31). Wiener’s methodological implications support an extensive investigation of the thinking behind the national position: it is necessary to take a long-term perspective, instead of a snap-shot approach to constitutional bargaining. Only thus, can crucial information about the socio-cultural trajectories of norms be gathered. For work on the EU’s constitutional debate this implies a need to back away from staking out constitutional positions according to national interests, and to reconstruct the emergence of constitutional norms according to different, if at times overlapping, socio-cultural trajectories instead. (ibid.)

Later (2009), she focuses on accessing these norms via direct and indirect references found in keywords that reﬂect the norm. My own approach builds on this and hopes to contribute to the ﬁeld by identifying the archetypal narratives of state, managers, shareholders, and stakeholders in regulation as part of the dominant national constitutive norms which are necessarily thick. The same can be applied to EU regimes, ﬁnding patterns of compatibility or conﬂict, favouring agreement or not. In adopting this ‘thick’ approach to the impact of national politics on international relations, I hope to add to a strand of constructivist work that embeds socially constructed international norms in the domestic politics of individual countries, according agency to the latter. Constructivist work on international political economy has only recently focused squarely on this aspect of the constructivist puzzle. Duina’s work (2006) on the social construction of free trade agreements is the main existing work in this area and is useful for supporting the notion that ideas and interests are not mutually exclusive as explanatory factors. He demonstrates that the dominant ideational characteristics of the EU, NAFTA, and MERCOSUR treaties can be traced back to the dominant political issues imposed on the bodies by domestic politics, as long as they are shared by the countries participating in the regional body. The research conducted here comes to slightly different conclusions, however. Whereas Duina sees certain issues penetrating all policy covered by the

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EU, North American Free Trade Agreement (NAFTA), and Mercado Comun del Cono Sur (Southern common market, MERCOSUR) as a result of these national-level inﬂuences, I explain situations in which national-level norms determine (a) the likelihood of regime development, (b) the type of horizontal and vertical governance involved, and (c) differing degrees of delegation by policy area. This seems awkward at ﬁrst glance, but the notion that the traditional nation state could retain its coherency and decision-making authority in some policy areas and voluntarily relinquish it in others is consistent with recent research ﬁndings into the transformation of the state (Grande and Pauly 2005; Leibfried and Zu¨rn 2005).

Regime Types, Norm Constellations, and Public Sensitivity Starting from the positions discussed above, we can now move to the implications of the hypotheses set out in Chapter 1 about the likely impact of the constellation of norms on regime development and its structure. This is the basis for explaining under what conditions disparate logics of integration and regime development are likely to prevail. The most likely international regime or institutional constructions in a given situation can be traced back to two international constellations of domestic political norms. First, convergence or conﬂict of national constitutive norms and regulatory priorities along the lines of the typology in Chapter 2 sets the structural context in which international talks about regime development take place. This includes above all the set of constitutive norms, driven by a cleavage on the question of whether markets are benign or best balanced, and by the constitutional question of whether the state should actively intervene in the market to support or control it. These are above all constructed answers to fundamental policy questions. The second structural context is the degree of public sensitivity of the policy issue under question. This is the mechanism by which the strength of national constitutive norms is established. Where there is a small, more homogenous interested public, new answers to old questions are more easily established than where the interested public is large and diverse. The speciﬁc impacts on regime development are outlined below. The factors norm convergence/divergence and high/low public sensitivity of the policy area are not sufﬁcient to generate regime development, but they indicate from which direction the demand for a regime is likely to come and what the outcome will be if the actors are successful at constructing a regime. There are two premises about international constitutive and regulative norms attached to the structural situations that arise out of these combinations. First, regimes are only possible when Commission, Parliament, and

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member states, where they have decision-making powers, agree on both constitutive and regulative norms (hypothesis 4). If not, a default situation obtains. This may be a deadlock between competing norms that prevents a regime from being established, or in the case of ECJ judgements, an alternative regime based on negative integration and home country regulation of all matters. If this is true, then we should not see regime formation if only one of these conditions is satisﬁed. Second, the international norms build on domestic norms. This means that we should not observe any pressure for reform of national constitutive norms emanating from the EU at the point of regime formation. As with the ECJ case, an alternative pressure on the member states might be present, but the regime chosen should resonate and strengthen national normative structures. This includes long-standing norms and recently changed norms. Since I expect national governments to show particular attachment to national autonomy in cases of strong political salience, by which I mean at least informal constitutionalization, I do not expect to see cases of governments promoting supranationalism or multilevel governance to engineer sensitive issues out of political life in accordance with Wolf ’s new reason of the state (2000). On the contrary, I expect to see them retain control as much as possible. The results should be a constitutionalization of governance within the EU where agreement is possible and a variety of governance structures within the policy-speciﬁc regimes. The formalization of governance means that the EU goes beyond informal networks. The contrast between informal governance and regime governance is clearest, as the former represents a default situation in which member states act outside of formal structures, either because agreement on structures is not possible (Puetter 2006) or because national commitments to common European policies and decision-making institutions is unwanted (Scha¨fer 2005). Eberlein and Grande (2005) argue on the other hand that these networks constitute functional, policy-oriented regimes that secure joined-up governance among cooperative states in response to the horizontal and vertical transfer of authority away from national government that is typical for globalization, so that they are not defaults but the norm. The regimes proposed here are more formal than this. Regime formation involves a stronger formalization of interaction that has thus far not been considered in the literature. To¨mmel, however, notes that there are now new varieties of governance that formally distribute governance authority in different ways, whereby the horizontal coordination of national governments with vertical powers of government takes on a key importance (To¨mmel 2007), a ﬁnding reinforced by Nullmeier and Klenk (2006). The regime rules described below allow in some cases for the delegation of

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authority to supranational institutions, often with the participation of national institutions. In other cases, they arrange for the decentralized coordination of the member state governments, who themselves have vertical control over implementation in their own jurisdictions. In other cases, they arrange for the parallel authority of national and supranational institutions. In all cases, however, they distribute authority to speciﬁc regulatory bodies within the member states and, where appropriate, at the European level to ensure effective coordination. This transforms the state through international commitments on regulative institutional norms, even where the state is accorded the strongest protection. We now turn to the regimes attached to speciﬁc normative situations, followed by an assessment of how this approach explains more than its alternatives. Table 4.1 presents a typology of four regime types based on the constellation of convergence or divergence in national regulatory norms and the public sensitivity of the policy issue. Combination 1: Intergovernmental regimes are developed to retain and allow the strengthening of speciﬁc (public and private) institutional arrangements within the member states, and to prevent any moves to delegate responsibility outside the national sphere. There is no need to assume that national institutional arrangements remain the same in addition to retaining national-level competence. An intergovernmental regime is more than the predominance of intergovernmental politics. The latter might exist without a regime in place, and cooperation might take place with no more institutionalization than ad hoc commitments. A deeper ownership of the policies by the member states that would drive further legislation would be lacking. These ad hoc commitments can be found before the development of the regimes in the three policy areas investigated in this book. Each proposal for new rules had to be negotiated from scratch without any assumption of delegation of rule-making competence outside the national sphere. Intergovernmental regimes, in contrast, require the member states to designate the national bodies responsible for managing the policy issue, to establish rules governing the jurisdiction of national bodies in cases of transnational activity subject to regulation, and to set out how those national bodies are supposed to interact. These points deﬁne the actors, structure, and form of interaction within the policy system created by the regime. Norm divergence on the policy area and high public sensitivity reinforce the view at the national level that national-level responsibilities should dominate policy development and implementation, and as exclusively as possible. To the extent that a regime is developed on the principles of national responsibility for regulating in accordance with its own wishes and practices, it will be based on a defence of

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Table 4.1 Effect of Norms and Public Sensitivity on Regime Development High sensitivity

Low sensitivity

Norm divergence Regime type

Intergovernmental regime Coexistence: States have an incentive to create rules that protect national regulation schemes (sovereignty) from detailed supranational rulings

International incentives

High sensitivity makes full delegation impossible and the assertion of national responsibilities with the greatest discretion possible central to any regime Results in minimum standards and rules for managing interstate coordination (Company law regime)

Parallel regime Collusion: States have an incentive to create rules that protect national regulation schemes (sovereignty) from detailed supranational rulings (e.g. accounting rules) Low sensitivity makes it possible for expert groups to discuss long-term convergence

Effect of sensitivity

Norm convergence Regime type

International incentives

Effect of sensitivity

Multilevel regime Collusion with reservations: States can easily react ‘functionally’ to coordinate, pool sovereignty in the pursuit of regulation High sensitivity makes full delegation of rule-making less likely than local regulatory infrastructure and minor interpretative discretion Results in far more detailed and ambitious rule commitments than minimum standards (Aspects of ﬁnancial regulation regime)

Results in minimum standards allowing for interpretation, process-based scheme for discussing room for voluntary convergence (Accounting standards regime) Supranational institution Collusion: States can easily react ‘functionally’ to coordinate, pool, or delegate sovereignty in the pursuit of regulation Low sensitivity makes full delegation more likely in the pursuit of efﬁciency and policy inﬂuence by experts (perhaps also by insiders seeking capture) Results in far more detailed and ambitious rule commitments than minimum standards (Aspects of ﬁnancial regulation regime, eventual goal of accounting regime by IASB)

national prerogatives against usurpation or interference from the supranational level. Thus, the context of deliberations over regime development is important. We should expect more regime development where national governments feel the need to assert a claim to regulatory primacy where it is being challenged, particularly by claims for regulation from a supranational body. This kind of regime development defends national regulatory primacy from lobbying across national jurisdictions to reform regulation. It corresponds to internationally accepted codes of best practice that governments

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adopt in principle, but which place few concrete requirements forcing changes to national law that could generate backlash. This is the case with the Organization for Economic Cooperation and Development (OECD)’s Corporate Governance Code of Best Practice, which encourages member states to develop standards that meet the OECD’s criteria. EU member states retain control over company law and regulation, but it is not clear that this can be attributed to clear commercial interests, nor is it clear that this logic extends to other policy areas. Rather, the extensive reach of potential European rules on the highly institutionalized and norm-infused rules regulating businesses and employees at the national level would have created enormous need for national-level adjustment that would have automatically brought in wide-ranging and sensitive domestic political considerations into the picture for member states. This could not only have affected the positions of business and labour, but of the state as well and its role in promoting economic development and management. The politicized nature of company law and regulation in the member states that follows from this explains why the member states preferred to legislate an international regime rather than accept full freedom of establishment and rights to undertake mergers and takeovers for companies in the single market and regulatory competition as prescribed by the ECJ. This kind of regime is unlikely to develop unless there is some pressure on the governments to consider some sort of alternative rule structure and unless the governments (and in the case of the EU, the EU-level legislative actors) agree to legitimate this kind of regime. Without this kind of legitimation, no regime would develop at all, even if ad hoc cooperation on minimum standards occurs. The alternative would then be simple intergovernmental politics without a regime. Combination 2: Parallel regimes can develop when there is a tension between strongly institutionalized differences across countries in a particular policy area and a desire of policy-makers to adapt common rules for mutual advantage. The resulting rules require rule conformity at the international level and must allow rule diversity at the national level. This allows cooperation across countries to take place through the development of new sorts of activity without directly imposing a reform of the entire domestic regulatory regime, thereby avoiding political backlash and minimizing unintended impacts on sensitive social and economic policies. A supranational body staffed by an expert policy community taking decisions for the entire set of countries subject to its jurisdiction is the one half of the parallel regime. National counterparts dealing with national rules and practices, and dealing with the question of how extensively the supranational standards ought to be adopted for national purposes, constitute the other. The individuals involved in these

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two levels may overlap in some respect, but there is no reason to insist that this will happen. This sounds counter-intuitive, but the regime setting accounting standards for company ﬁnancial reports in the single market does this. A single set of standards for informing investors in a transparent way throughout the single market is mandatory. At the same time, national reporting standards continue to be used alongside the new international ones, often because the reporting standards are used to calculate corporate taxes and support economic and social policy through tax rules. Harmonizing tax codes would therefore intrude into the politically negotiated bargains over economic and social policy at the heart of political economies, and are therefore not foreseen, whilst common reporting standards for ﬁnancial investors are made possible. The parallel regimes provide information and transparency and are costly due to the use of dual standards. Internationally oriented ﬁrms beneﬁt disproportionately from the introduction of parallel regimes, which may explain why small- and medium-sized enterprises are not subject to the regime in Europe. Parallel regimes generate a deliberate gap between international commitments and domestic norms that is not a problem of compliance and implementation. They are therefore a novel form of governance that has not yet garnered attention in EU governance literature. Although the problems of poor implementation and compliance certainly exist and have received particular attention in EU studies (Bo¨rzel 2002; Schmidt 2002), the development of a parallel regime is a method of avoiding conﬂict over deeply institutionalized differences when the desire to move towards common rules is great. It is therefore a method of avoiding deadlock in the pursuit of common gains under conditions of diversity. It can therefore be added to Heritier’s extensive list of strategies (1999) for reaching agreement despite disparate preference. It is also different from her conception of parallel arrangements, which draws on the vision of a multi-speed Europe of differing projects in which some EU member states do not participate (ibid., 91) such as the Schengen agreement on visa and immigration policy. Governance based on the open method of coordination (OMC) is similar to this in that the members make general policy commitments. OMC is weaker, however, as it formulates less detailed policy commitments and seeks to move towards more common understandings through a process of mutual exchange of ideas and policy learning (Heritier 2002). The pressure on divergent national systems to converge is weaker due the fact that it does not create a single speciﬁc benchmark against which national rules can be measured. Parallel regimes, on the other hand, create speciﬁc rules at the international level that are expensive to implement and maintain as long as national and international rules differ signiﬁcantly. The incentive for harmo-

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nization over the long term is clear in a way that is not apparent in OMC. Parallel regimes are therefore a phenomenon not yet investigated in studies of EU integration and governance, as they generate both binding rules of use to the entire system and preserve the continued existence of divergent national arrangements. Parallel regimes are therefore a strategy, and not a purely functional outcome, for engaging in cooperation despite the potential for a dimly lit area of public policy to attract the attention of a broader public that might subsequently resist supranationalism. It draws attention to the role of agency in ensuring that the conditions most favourable to constructing institutions in a functionalist manner are assured. This view means that we must also expand our attention to strategy in functionalist theory from a focus on collective action problems and veto players to strategies that prevent potential veto players from becoming involved in discussions over proper policy. Parallel regimes are a way of achieving this without giving up the pursuit of common standards, as OMC does. Traditional international theory approaches to regimes are applicable to only some kinds of regime development because they bracket the conceptual foundations of international order. Most rationalist writing on regimes focuses on how power relations (Krasner 1993) or patterns of sensitivity and vulnerability (Keohane and Nye 1977) shape them, on the relative importance of attention to relative and absolute gains to their development (Keohane 1982; Grieco 1990), on the likelihood of their persistence in the absence of an enforcing power (Strange 1983; Keohane and Nye 1984), and on the ability of regimes to uphold international cooperation by generating convergent expectations among national governments (Stein 1983). In the time since then, attention has shifted to discerning what forms of global governance have been created since the 1990s and on what impact they might have on countries and on the ability of states to govern in their jurisdictions (Hirst and Thompson 1996). The construction of the institutions is in some cases treated as a functional response to opportunities for commercial gain, by private as well as state actors. Combination 3: Multilevel regimes can develop in policy areas where there is a high degree of norm convergence across national jurisdictions, but where a signiﬁcant impact on domestic institutions makes a division of labour between the national and supranational levels of government politically preferable to outright delegation. Governments move in the same direction when they introduce new policies and institutions, and have no substantive, policy-related reasons to oppose the development of supranational rules and policy processes. At the same time, the strong interest of domestic constituents in the policy issue provides a policy incentive for governments to ensure

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that their interests are not overwhelmed by supranational rule-setting. The development of rules and institutions is promoted both at the national level and beyond the national level. In these cases, there is a strong attachment to the idea of a state that regulates in the public interest. Multilevel regimes are deﬁned by a genuine mix of supranational and national institutions joined together by networks of ofﬁcials representing the respective bodies involved in governing the policy issue at hand. As in the case with intergovernmental regimes, a fundamental understanding and institutional agreement designating the main actors, their rights and responsibilities, and the mode of interaction between them is critical to distinguishing such a regime from multilevel governance, which might exist in the absence of a regime without the same degree of structure. Multilevel regimes provide the institutional infrastructure within which networks of policy specialists can operate towards commonly deﬁned goals. They therefore provide an opportunity for a type of network governance to develop that is more highly structured than the informally organized networks portrayed by Slaughter (2004). Rather than resulting as a functional, informal response to interdependence across national jurisdictions that takes place in an ad hoc fashion, the structures set up by multilevel regimes are politically designed to mandate and regularize interaction, with a recognizable intent to generate a capacity to act both at the national and supranational levels. The national level serves to exert a signiﬁcant degree of control over the policy deﬁnition and implementation phases, whereas the supranational level serves to efﬁciently generate common rule principles independently of the preferences of individual national-level actors. This provides a means for limiting future policy divergence and for reducing existing policy divergence. Combination 4: Supranational regimes and institutions are the polar opposites of intergovernmental regimes, involving the complete transfer of policymaking authority to the supranational level. This means not only general policy, but the substantive policy decisions and actions required to implement and enforce policy for the member states. This qualiﬁcation is important to distinguish the degree to which a transfer of policy-making authority from the national level has taken place. Many new innovations are multilevel (above) rather than supranational when one takes the degree of transfer into account. Supranational regimes and institutions can develop in policy ﬁelds where international agreement exists on the need for internationally based rules and the general content of regulation. It is the substantive agreement among a group of states on the kind of rules that the new institution will generate that is central to its creation, in addition to any potential beneﬁts to be gained. Any perceived policy deviations from existing national preferences or the risk of

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signiﬁcant deviations are likely to be perceived as costs, and must be fully considered. None of the regimes investigated in this book deal with a purely supranational institution or regime, although there are parallels in the logic of why a multilevel regime with strong supranational components should be established at the European level, and even more strongly in the logic of the parallel regime to adopt a single set of accounting standards for the EU. The EU ﬁnancial market regulation regime was justiﬁed in great part by the desire to produce a level playing ﬁeld for investment ﬁrms from all member states and basic standards of consumer protection in the single market. The single accounting standards were adopted to provide universal information to markets and consumers alike. In neither of these cases was the impact of domestic politics so small as to allow an unproblematic development of supranational institutions or regimes. Nevertheless, the close nature of these two regimes requires a discussion of the theoretical tools available for explaining their development.

A LTERNAT IVES IN INTERNATIONAL T HEORY The principal weakness associated with the most basic theoretical approaches to integration is that they expect only one set of principles to dominate the outcomes and the processes leading to them. Broadly speaking, there are rational, institutional, and normative explanations. This section shows the beneﬁts and shortcomings of each and the particular added value of the approach developed above. The main challenge in the European context is that integration has not always taken place on a steady basis, so that an explanation is required. In the last decade, attention has been paid to more sophisticated models that attempt to explain the conditions under which integration does and does not obtain. One strength of the normative approach developed here is that it endogenizes concrete expectations of when one regime is likely to be chosen over another. A second is that it separates constitutive norms from institutional rules (regulative norms) to specify the necessary and sufﬁcient terms of regime creation.

Rationalist Approaches The most prominent of these has been functional or neoliberal institutionalist writing on regime development, speciﬁcally with reference to suprana-

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tional institutions. The development of supranational regimes reﬂects two theories: one of international relations and another of European integration, which is speciﬁc to the circumstances of the EU. Neoliberal institutionalist theory, also referred to as functionalism in international relations literature (Keohane 1982), predicts that national governments develop international institutions to capture perceived gains where the beneﬁts exceed the costs. The nature of the gains and the costs are not investigated, however, and bracket those highly sensitive areas to which governments might assign a high potential cost for reasons that are not easily measured. In the process of distinguishing neoliberal institutionalism from realist theory, Keohane and Nye contended that the special nature of ‘high politics’ that rendered cooperation unlikely due to the high perceived security threat of surrendering independence had been rendered irrelevant in the developed West, making cooperation possible. Beyond this, economic and social interdependence across national borders would create a demand for governance beyond individual countries as national governments found themselves unable to govern transnational activity individually (Keohane and Nye 1977). They therefore recognize that speciﬁc norms affect the willingness to constrain national sovereignty. Zangl and Zu¨rn (2004, 20–2) see legalisation as foundational for global governance, demonstrated by its demands on secondary rules for the purpose of managing processes. In this case, the demand for such institutions follows from the desire of national governments to regain control of economic and social activity that has become transnational and therefore beyond the control of any one government, as Grande (2003) suggests. The approach does not expect economic and social policy norms to constitute the obstacles to cooperation that they prove to be in real life, however.2 At the least, this approach would have to distinguish the prospects for international cooperation under conditions of high and weak political salience that does not rely on the traditional split between security and other issues. This point can be seen in the development of parallel regimes. Parallel regimes focused on information correspond closest to a functional theory of international institutional creation. International commitments are designed to achieve an identiﬁable goal that generates beneﬁts for all of the contracting parties. In the case of the EU, the delegation of accounting standards to an international body served the goals of investor protection and promoting capital mobility. This solution provided superior beneﬁts to investors than the mutual recognition of various national ﬁnancial reporting standards and

2

A more nuanced approach is found in Zangl (1999).

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made it possible for the EU to prevent regulatory competition and standard deterioration more generally, as has happened in the United States.3 The missing requirement to fully harmonize all accounting standards reduces the cost to companies and governments, permitting a net positive beneﬁt of introducing the regime. Functionalism also assumes that the decision to construct a supranational institution is insulated from political considerations of symbolism or distribution that could lead to politically motivated backlash. This means that broad agreement on the purposes and on the content of policy is assumed to be present. It is precisely for this reason of avoiding political backlash that Mitrany placed emphasis on a functional approach to supranational European integration that avoided politically sensitive areas. It is therefore not the case that a policy is functional by its very nature, despite the small policy community and little public attention to it. It was necessary to choose a strategy that would ensure that it remained that way by engineering international commitments in such a way as to ensure low politicization and hence transaction costs. Nevertheless, parallel regimes capture the reality that national norms and the constitutive understanding of the state continue to live on to the degree they wish it. There is a strong substitutability in the United Kingdom, but not in continental Europe, for example. Further development of rational choice in the EU context generated (liberal) intergovernmental theory. Intergovernmental theory works from the premise that national governments are determined to protect their inherited prerogatives over policy formation and implementation from any irrevocable delegation to supranational institutions. The inability of a traditional statist approach to intergovernmentalism to reconcile its predictions with the delegation of national policy to the European level (with the exception of Pedersen 1998) was the principle reason for the increasing dominance after the mid-1990s of Moravcsik’s liberal intergovernmental approach. He equated national interests on questions of integration with national-level commercial interests. National commercial interests in expanding trade and investment in the single market explain, in his view, why the EU has integrated much more strongly in that policy area than in the realms of foreign policy and criminal law (Moravcsik 1988). Moravcsik improved our understanding of where national interests might originate in national

3 This is the so-called Delaware effect in which regulatory standards in the United States race to the bottom as state governments seek to attract business to their jurisdictions in the absence of nationally recognized minimum standards. Before Delaware removed almost all controls on the corporate economy in the 1970s and attracted 90 per cent of large corporations, New Jersey had enjoyed the beneﬁts of the popularity of its own low standards.

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economic interests, but precisely because national constitutional norms tell politicians whether they should value the interests of one economic actor over another it follows that norms based on archetypal narratives provide the structural direction important for government choice in the European arena. Moravcsik (1998, 40, 50) recognized that coalitions could vary by policy area and postulated that economic interests of producers contended with regulatory interests on issues of EU regulatory harmonization. I differ in that I view the freedom of economic actors from regulatory logics as the result of normative decisions that can grant this status or revoke it at the national level. I also differ in that I do not see ideas as the product of incentives for delegation to the EU level (ibid., 61), but as a key prerequisite. Pollack employs principle–agent (PA) theory to illustrate member-state control despite delegation, which they seek to access expertise and as Moravcsik suggests, make credible commitments. This sees national governments, as the principals for whom the policy is designed to serve, struggle to retain control over the decisions of European institutions that have been tasked with running the single market, above all the European Commission and the ECJ (Pollack 2003). Principal–agent theory dates back to Berle and Means’ investigation of situational conﬂicts of interest (1932) between a group of individuals and the people they hire to serve them. The agents they hire have incentives to pursue their own interests more diligently than those of their clients, so that the principals must consider agent rents as a cost of delegation, must devise accountability mechanisms to ensure oversight and control over agents, or dispense with delegation as too costly and uncontrollable. Pollack portrays the EU member states as the principals and European institutions as agents. In this context, neither delegation nor the occasional deviation of European institutions from the wishes of the member states disproves the preeminence of an intergovernmental logic. That could only be proved if the member states were to relinquish their efforts for ultimate control, which he maintains they have not. The PA approach is best used for designing and predicting the development of regulative institutions and their control mechanisms above all. There are two different situations foreseen in this approach that assign different roles to the EU and the member states and mandate a different relationship. If the member states consider delegation for efﬁciency reasons only, then the EU is considered a pure agent that is expected to closely reﬂect the wishes of the principals. The best institutions in this case hold international institutions on a very short leash and allow strong member state control. If the member states consider delegation in order to strengthen their own commitments to a particular policy that is otherwise difﬁcult to maintain, then EU institutions take on the character of a trustee, whose

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responsibilities are to ensure that previously agreed goals are implemented. The agent is accorded independence from strict control to make this happen, subject only to transparency of operations. A key example is the European Central Bank’s mission to secure price stability in the euro zone. There is nothing about the principal–agent approach that can tell us about the concrete political context in which decisions about EU integration take place. It is unable to explain politically motivated situations of backlash and deadlock. Pollack notes that the insights of sociological institutionalism are based on a general sense of logics of appropriateness, but sees this as underspeciﬁed. The answer, I hope to show, can be found in specifying the conditions for various outcomes.

Institutionalist Approaches Early neofunctional theory raised even stronger expectations from the ﬁeld of European integration that supranational institutions will grow in number over time than is the case for neoliberal institutionalism or functionalism. It expects this as a result of political pressure from groups and organizations to increase the scope and depth of collective policy through the EU and its key institutions. The existing European institutions themselves, the Commission and the Court in particular, were expected to play a key role in concert with these groups in facilitating and prodding the member states to expand their commitments at the European level (Ross 1995; Alter 2002; Stone Sweet 2004). In contrast to the functional view of integration, which expected a technocratic logic of policy spillover across policy areas to determine how extensive the construction of supranational institutions would become, early neofunctionalism emphasized the political activity of groups and individuals making claims to rights and beneﬁts through the integration process, which could lead to greater supranationalism (Haas 1958) as long as the member states did not dissent with a ‘constraining dissensus’ (Hix and Lord 1999; Marks and Steenbergen 2002; Olsen 2002; Hooghe and Marks 2005). In the speciﬁc context of the EU, this explained the persistent expansion of multilevel governance through a combination of existing European institutions and unexpected consequences of their creation beyond the control of the member states. The ECJ in particular is thought to play a key role in Europeanizing European governance through the imposition of treaty principles on the member states (Alter 2002), especially through mutual recognition (Schmidt 2007). However, it brings about market development through negative integration, not by bringing the institutions of multilevel governance into being. These are established by a combination of EU and member state

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actors in networks to which private actors may or may not be invited to participate, and which serve to sort out differences of opinion and interest as well as coordinate. The literature on multilevel systems tends to focus instead on the modes of governance within them more than on the issues discussed in them or the politics of their creation. Kohler-Koch describes governance within the multilevel system in Europe as network governance. If network governance as she describes it becomes the key form of policy-making, deliberation, and implementation (KohlerKoch 1999), then it would be the beginning of a self-perpetuating system promoting greater reliance on multilevel solutions to public policy problems rather than purely national approaches (or supranational ones, for that matter). The incentive to move from these networks to regimes lies, I believe, in precisely the lack of institutionalized constitutive norms about the member states and the Union in speciﬁc policy areas. EU institutions and the member states make explicit or implicit claims about constitutive norms and may wish to contest and make them explicit, especially if they collide. Where normative contestation of these principles takes place, the incentive to replace voluntary network governance with more formal, binding regime rules rises, assuming a ﬁnal agreement on principles can be reached. This approach also allows us to deal with the issue of resurgent intergovernmentalism when it occurs, which network governance cannot. Neofunctional theory on its own leads to indeterminate results for two reasons. First, neofunctionalism has no real sense of whether integration will lead to truly supranational institutions, multilevel institutions, or even less binding ones (Knill and Lenschow 2003), even though this distinction has great consequences for the politicization of integration that lies at the heart of the neofunctional approach. As Hooghe and Marks (2005) note, the question of whether the EU ought to develop into a fully federal system or protect the prerogatives of the member states is a principal cleavage in European politics and backlash against the vision of a federal Europe is seen as a key reason for choosing alternatives to supranational institutions (Majone 2005). Specifying choices therefore demands linking speciﬁc normative constellations to specific institutional outcomes. This, in turn, involves a deliberation of the rights and responsibilities involved in the degree of delegation being proposed. At the same time, if it were to hold on to its claim to explain integration and its setbacks better than its competitors, then it should also be able to explain the drive of politicized actors towards regimes and institutions with differing degrees of policy commitment. This applies equally for the new enthusiasm in the EU for informal governance and the OMC (Scha¨fer 2005; Puetter 2006) in addition to the distinction between supranational and multilevel institutional bargains.

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Second, neofunctionalism appears to be better at explaining ex post facto why there has been more integration or more resistance and less good at explaining why the conditions are necessary and sufﬁcient. We can add to the understanding of neofunctionalism that a political backlash generates little integration and that political support generates more of it by striving to be more systematic about the conditions under which we should expect to see backlash or support, and for what. The introduction of norm convergence and divergence, and of high or low political salience provides a more structured framework for understanding these dynamics and ﬁtting them to the fate of speciﬁc institutional projects with particular degrees of delegation. We can see these lacunae and some of the solutions in the increasing attention paid to the role of the ECJ in shaping the integration process, particularly through negative integration (Alter 2002) and the reaction of member states to rulings by the ECJ. The ECJ has been rightly identiﬁed as a medium of negative integration through its application of EU treaties to the domestic policies of the member states, but the reaction of the member states and of the Commission and Parliament to the policy challenges need to be considered as well, focusing on backlash, among other things. A broader understanding of constitutional norms at the national level helps unlock the meaning behind this reaction. Schmitter developed the theory further into neo-neofunctionalism to explain the reluctance of countries to integrate on some issues, particularly at key points in time, without discarding the higher expectations of integration that neofunctional theory is known for. He acknowledges that integration sometimes stalls or even generates a political backlash against European institutions, including the Court of Justice, a process he calls ‘spillback’. He also acknowledges that the heads of government in the European Council play a much larger role in shaping the European response to policy challenges, which implies that intergovernmental constructions will play a stronger role than neofunctional theory expected (Schmitter 2004). This still leaves open the question under what conditions European governments would prefer to shield themselves from further integration rather than pressing on with it. Neo-neofunctionalism foresees political actors seeking to develop regional institutions as a response to external shocks, but also a low willingness to integrate on difﬁcult issues. Issues might become difﬁcult to manage, he writes, due to a long list of factors affecting the functional utility of integration. One of these factors is ‘elite value complementarity’, which expects integration only where government leaders see policy priorities the same way. This approach corresponds strongly to Haas’ evocation of ‘soft rationalism’ as a means of determining the chances for integration or cooperation on a policy issue, whereby decision-makers are expected not only to have similar

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policy priorities, but also a common understanding of why they do (Haas 1992). I view things differently in three ways. First, the convergence of elite opinions is external to Schmitter’s model, so that we only recognize convergence after the fact, whereas I endogenize them. Second, he brackets out the impact of domestic political inﬂuences on government decision-making that might conﬂict with policy ideas held by a small core of individuals. This generates more optimistic expectations of agreement through the power of ideas held by small epistemic communities that I do not assume as normative structures are assumed stronger here. Third, the approach outlined here may be able to explain situations in which EU member states cooperate on the basis of a shared constitutive commitment to their own sovereignty precisely because they have disparate national-level norms (including institutions and prevailing public expectations) that they wish to preserve, which neo-neofunctionalism does not explicitly expect. Idea convergence among government leaders and the Commission was reached, not at the level of public policy where Schmitter looks for it, but at a meta level about the nature of the Union, of the member states, and the means by which they together legitimately govern public policy. This distinction underlines the importance of idea convergence on constitutive norms on Europe in addition to regulative, operational norms (Katzenstein 1996, 18–22; Wiener 2007).

C O NC LU S I ON Chapter 1 suggested that regimes have constitutive and regulative norms (hypothesis four) that build on those of the member states and must be agreed by the relevant political actors. Those are not just the member states, but normally the Commission and often the Parliament. These norms are made explicit at some point, constructed by those actors, and may be contested (hypothesis six). That process of construction takes place in a prestructured environment in which actors have a choice of accepting inherited norms or shaping them through their own agency (hypothesis seven). The claim I make is that these norms deﬁne the nature of the actors and the relationship between them (hypothesis one) in ways that ascribe identities to the main actors through archetypal narratives. These tell us their legitimate claims and what they are there to do. As with the domestic level, the principal task of the chapters investigating the negotiation of regimes is to show whether norms as described above can be shown to exist in the legislative proposals and policy evaluations of the

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main decision-makers, whether the archetypal narratives can be identiﬁed with regard to the actors, and whether the norms found at the national level can be shown to exist separately from and prior to the regime norms developed at the EU level. The latter are important to control for whether EU agreements lead governments to change or the other way around. Where national norms on regulation changed, as in the case of ﬁnancial market regulation, the sequencing of national, then international change is crucial to testing the assumption that international constitutive and regulative norms are built on national ones, preserving their integrity, effectively shaped by the normative structures they bring to the negotiating arena. This means that the constitutive norms of the EU itself either must adopt the thicker sense of constitutive and regulative norms, including archetypal narratives about state and societal actors, including business, if it elects for collusion and supranationalism or a multilevel regime, or must adopt a set of regime norms that respects these differences and entrenches coexistence. This means that there is no dichotomization of producer/business and regulatory interests as in liberal intergovernmentalism, but a normative background to all actors that shapes how government decides whether there are problematic considerations to be taken into account or not. I hope to show that this approach has the decisive advantage of explaining how key actors view their own interests in the EU system and why they favour some institutional forms of governance over others. As tempting as it is to focus only on preset interests and institutional change, normative conceptions of statehood and of proper public policy priorities play a strong role in explaining the behaviour of member states in particular, and in ways that are not substitutable and cannot be reduced to commercial interests, functional incentives, or institutional strategies. This has always been recognized as an anomaly for the United Kingdom, with its inherited attachment to national symbols, but normative attachments have a far wider importance across EU countries and across EU policy areas in determining the form of integration and governance. It is time to incorporate the normative anomaly and undertake an investigation of how the politics of norms shape politics and policy regimes. The legal and regulatory developments surrounding company law and corporate governance, ﬁnancial market regulation, and accounting standards are the objects of study at the national level, with a view to making comparisons and contrasts for Germany and the United Kingdom. These two cases are highly dissimilar in their political-economic background and provide an archetypal test of institutionalized norm conﬂict among political and social actors. The two countries also happened to be two of the most involved actors in sorting out the rules of the policy regimes that are examined in this book.

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The political judgements attached to the cleavages described in Chapter 3 (the benign or problematic nature of capitalism and the relationship between state and business reﬂected in the private or public priorities of public policy) are to be evaluated through public policy statements made by political parties and interest groups in cases where the integrity of corporate governance/company regulation or of ﬁnancial markets and their regulation are concerned. This approach requires the examination of national legislation and regulatory programmes in the three policy areas corresponding to the three EU policy regimes: in company law and corporate governance, in ﬁnancial market regulation (dealing with trade in company shares and use and misuse of company information), and in accounting standards, respectively. In the period between 1996 and 2006, we ﬁnd ample legislation or discussion and preparation of legislation in both countries that allows us to assess how these three policy areas are seen by governments, political parties, and interest groups. I am looking for degrees of partisan or bipartisan agreement (reﬂecting the degree of ideological polarization) on legislation, in addition to qualitative differences and similarities in attitudes to markets and regulation, as reﬂected in the system typology discussed above. In order to judge the degree of novelty or continuity of these arrangements (to see to what extent we are dealing with new conﬁgurations of state regulatory norms), it is useful to examine the historical development of such norms in these countries and in the EU. Space does not allow extensive historical national coverage, but references can be made to existing works. This will allow us to formulate conclusions about the self-awareness of the member states through policy discourse and how they differed before and after the regimes were established. If national normative changes precede European ones, we will have found an important variable that explains EU regime development. Following Schmidt and Radaelli’s suggestions for setting up the strongest case to prove a causal relationship, this gives us the opportunity to explain the timing of European institutional development, the sequencing with regard to national policy developments, and the extent of institutional development given the contextual factors (Schmidt and Radaelli 2004). The reform away from self-regulating capitalism in the United Kingdom and from stakeholder capitalism in Germany and towards a regulated market economy in both cases runs from the late 1990s until the present day. The legislative process necessary to enact these changes provides us with a wealth of information about the motivations and demands of the various political and societal actors, ranging from discussion papers issued by the political and bureaucratic branches of government, records of parliamentary debate, and position papers of the political parties and lobby groups. Interviews were used

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for corroboration and to ﬁll holes in public documents, but my intent is to rely as much as possible on evidence that is easily accessible to all members of the scientiﬁc community. Where an interview has generated a suggestion of where a publicly available document could be found to support a comment made, I rely for this reason exclusively on the latter. In company law, I expect we will see the importance of substantive changes, rather than the institutional continuity so often expected of the varieties of capitalism literature. We see in the German case far stronger formal institutional continuity than substantive continuity within the realm of supervisory boards and works councils (who is present, what issues are dealt with, and how great is the coverage nationwide), which is far more volatile, reﬂecting economic, social, and political developments, and currently in a state of liberalization away from the social democratic era of the twentieth century. We see in the British case also a strong formal institutional continuity in the internal structure of the ﬁrm, but more volatile external requirements involving employees. Furthermore, I argue that the two countries can be shown to have developed in ways that are remarkably different, even in response to challenges that are very similar. In ﬁnancial market regulation, I expect we will see the importance of institutional changes, coupled with substantive changes in both of the countries in the period of EU regime development, supplanting inherited institutional and normative arrangements that were much less volatile than those found in company law. In the regulation of accounting standards, I expect a similar pattern to develop. These differences and similarities, and particularly the awareness of national government negotiators at the EU level, are to be tested through records of parliamentary debate, position papers of government departments, and selected interviews with appropriate individuals. In many cases, the individuals negotiating the European rules are based in the national capitals rather than in the Committee of Permanent Representatives (COREPER), as they are often specialists tasked with making demands that reﬂect national priorities and judging proposals from others on the same basis.

5 German Regulation Chapter 1 proposed that the existence of norms could be demonstrated through the detection of speech acts in written and interview data. Table 5.1 outlines constitutive and regulative norms of the state, market actors, stakeholders, and the relationship between them preceding 1998, articulated as archetypal narratives. Space prohibits analysing them fully here, but an attempt is made to show their stability or change as norms were debated in the late 1990s and onwards. The purpose of this chapter is to test the ﬁrst hypothesis that norms are consistent within discrete policy areas. In the German case, there is remarkable consistency in formal norms, but especially archetypal understandings of state, business, and labour in the area of company law despite the factual erosion of the voluntary aspects of worker representation. Signiﬁcant changes to allow new ﬁnancial instruments and ﬁnancial service providers on the other hand reﬂect a switch to viewing shareholders and ﬁnanciers as much more positive actors than in the past, particularly when compared to the universal banks and corporate insiders that traditionally control German ﬁrms. This led to a focus on the German state serving as the patron of both shareholders and labour stakeholders through strong regulation that eroded the privileges of universal banks in German corporate governance. All of this was designed to generate both improved economic performance and better corporate governance. As managers had acquired such a poor reputation, state intervention was deemed necessary in the public as well as these private interests. German political norms about the nature of the state and its relationship to the economy changed around 1998. In the corporate economy, the state transformed itself from a patron of co-determination between management, employees, and various other private stakeholders to a direct regulator of the corporate economy and a defender of stakeholder governance in the European legal and economic system. In ﬁnancial markets, the state continued a decadelong process of liberalizing restrictions on ﬁnancial markets, but built up a statutory regulator to oversee the new activity. In accounting standards, it retained control over domestic standards but permitted the use of internationally recognized forms of reporting. The German state’s transformation starting in 1998 set the stage for convergence-based supranationalism in ﬁnancial

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Table 5.1 German Constitutive Norms Pre-1998

1998–

Company regulation

State as patron that enables, protects constitutionalized stakeholding on corporate governance

State demands synthesizing constitutionalization as investor protection, means of boosting competitiveness, creates stronger state regulation for investor protection

Financial market regulation

State as gatekeeper for companies listing, access to hedge funds, restraint on access to stock markets and use of ﬁnancial derivatives

State retains control of stock markets, gradually allows use of ﬁnancial derivatives, introduces statutory regulation

Accounting

State as deﬁner of standards

State allows choice between state and international standards (1989–)

market and accounting regulation combined with the assertion of national sovereignty and protection of national practices in company regulation. German capitalism and the conception of the state that goes with it before the regime innovations of 2001 developed in response to corporate collapse, stock market collapse, and to a desire to attract foreign investment capital.1 Table 5.1 encapsulates the roles that the state played in response to these issues before 1998 and after. The German state and public policy after 1998 shifted in three important ways. The ﬁrst and most dramatic is the intensiﬁed shift towards a regulated market form of capitalism in ﬁnancial markets that was completed by the Social Democratic Party of Germany (Sozialdemokratische Partei Deutschlands—SPD). The second is the removal of some of the last vestiges of the rules protecting rent-seeking capitalism in the supervisory board. The third is the strengthening of the stakeholder elements of corporate governance, with a stronger state regulatory role than was previously the case. Under these domestic conditions, harmonization of ﬁnancial market regulation in Europe was possible, but of company regulation was not. Responsibility for the former could be delegated but not for the latter. RE GULATION AND C ODES ON TH E EXECUTIVE AND SUPERVISORY B OA RDS There is a prodigious literature on the institutional features of the German variety of capitalism and its historical development that can be reviewed 1 It also developed in response to German problems with competing in international trade, which will not be handled here.

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elsewhere. Only the most important features are discussed here as manifestations of norms of legitimate state intervention in the marketplace. The German system of corporate governance regulation involves the mandatory constitutionalization of the company, that is, the insistence of the state that managers be forced to deal with shareholders, creditors, major business partners, and their employees in a supervisory board which approves executive appointments and strategic decision-making (Jackson 2000). Works councils represent employees additionally on workplace matters. This patron role for the state reﬂects a negative attitude towards unregulated manager behaviour dating back to the stock market crash of 1873 and a belief that dispersed shareholders in ﬁnancial markets do not practise effective oversight. The patron state therefore rejects laissez-faire restraint from regulation as irresponsible abdication of the public interest to market participants. The Control and Transparency Act (Kontrolle- und Transparenzgesetz (KonTraG)) 1998 conﬁrmed this for the Liberal/Christian Democrat coalition after a series of corporate collapses by showing that consensus reigned among German political parties in favour of using a more robust constitutionalized company to improve supervision and control of managers. This can be seen in the SPD/Green coalition’s continuous reform of company law in the same vein until 2005 and the Grand Coalition’s continuity until 2009. Nevertheless, the Schro¨der governments (SPD/Green) aggressively expanded state regulation of the German corporate economy to shape the behaviour of managers, shareholders, and employees within the existing two-tier system. This rejected a UK-style voluntary commitment of managers to a code of corporate governance. It also responded to the waning interest of German universal banks in overseeing the activities of managers through the supervisory board with state-deﬁned legal obligations on management and the supervisory board. This was probably necessary, as large German banks turned away from investments in the corporate economy in the mid-1990s to pursue more proﬁtable ventures in mergers, acquisitions, and other forms of investment banking. Finding new investors meant ﬁnding new actors to breathe life into the two-tier system of corporate governance. The second point of interest is that German lawmakers now pay increased attention to the outcomes of corporate decision-making rather than to the structure of the company. Speciﬁc duties are now being added to shape behaviour within those institutional arrangements. This can be seen in the efforts to establish the infrastructure for developing state-sanctioned standards for corporate governance and accounting (discussed below).

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As a result, the response of the Schro¨der government could not be more different than that taken by the Blair government in the United Kingdom, despite the fact that the challenge of poor corporate governance leading to collapse and fraud was virtually the same. These driving forces for domestic legislation would have existed with or without European pressure. The Schro¨der government appointed two ofﬁcial committees studying legal options (Baums Committee) and voluntary code development (Cromme Committee) as viable options and the relationship between the two in 2000. For the government, this provided a means of sorting out the choices to be made about the relationship between voluntary and regulatory measures. In contrast to the United Kingdom, the legal option and the legal committee had far greater inﬂuence than its private counterpart. The government’s cognizance of these differences plays a later role in explaining national attachment to member state sovereignty over company regulation.

T H E BAU M S C O M MI T T E E In May 2000, the government established the Government Committee on Governance, Supervision and Modernisation of Company Law under the leadership of Theodor Baums, a professor of company law and an expert on corporate governance at the University of Frankfurt. Special reference was made to the collapse of the Holzmann construction company due to reckless management, the impact on Germany’s capacity to attract international capital, and comparison with the United Kingdom’s Company Law Review (Baums Committee 2001, 4–5). The Committee adopted a broad mandate to address the relationship between voluntary measures, such as a code of best practice, legal obligations, and statutory regulation in ensuring improved corporate governance. It recommended a second committee to develop a German corporate governance code and it required public listed companies to declare each year their compliance or explain why they have not done, as in the United Kingdom (ibid., 5–16). In doing so, the Committee brought Germany in line with an Organization for Economic Cooperation and Development (OECD)-sponsored initiative to develop such codes at the national level. Unlike the United Kingdom, which preferred a voluntary code that could pre-empt hard regulation, the Committee preferred a voluntary code that would not interfere with hard regulation. The Committee ultimately promoted supervisory boards and stronger state regulation supporting shareholders and stakeholders over voluntary

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codes of conduct. It saw company reports on compliance with a recognized German Code as a useful information resource for companies to proﬁle themselves to international investors. It supported a comply-and-explain approach not only to provide ﬂexibility for companies and code developers, but also to ensure that the primacy of company law and the role of the supervisory board in checking executive board behaviour could not be questioned. Supporting these traditional institutions would also ensure that a distributional ﬁght over corporate governance would not ensue: unions would not be pushed out of corporate governance in Germany as they feared (ibid., 28–33). The Baums Committee made the legal improvement of the supervisory board’s capacity to act to ensure good corporate governance a central point of its report. It proposed more explicit rules on the timely and full delivery of information on the company and its subsidiaries to the supervisory board and their right to hire auditors to assist them in their review (ibid., 21–7). It sought to enhance the independence and effectiveness of the supervisory board by ensuring that the Code limits the number of board mandates that any individual may hold to ﬁve, by ensuring that cross-directorships with competing companies are prohibited, by prohibiting the transfer of executive board members into the supervisory board, and by changing the Aktiengesetz to require regular reports to the supervisory board by its committees and to require it to meet twice yearly (ibid., 52–7). The Committee also recommended legal changes to increase the control of shareholders over managers, especially over their use of company capital, which could affect the price of shares. The report foresaw mandatory management reports and shareholder approval before share options could be given to the management (ibid., 45, 204–5, 223–4), before shares from a subsidiary could be offered to the public (ibid., 165), or before shares could be offered as loan collateral (ibid., 211). It recommended mandatory rules to force companies to provide key investor information such as quarterly ﬁnancial ﬁgures (ibid., 144), a list of institutional investors representing shareholders by proxy vote in annual general meetings (AGMs) by electronic means (ibid., 124–5), and requiring shareholders, not the supervisory board, to approve the auditor contract (ibid., 307–8). Finally, in return for the introduction of a Business Judgement Rule granting management responsibility for operating the company (ibid., 70), the Committee proposed the introduction of class action lawsuits (ibid., 188–90) as a means of shareholder control over management if they represented one per cent of the company’s capital. These recommendations incited and justiﬁed legal innovations in 2002 to strengthen regulation, discussed below.

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T H E C RO M ME C OMMI T TE E A ND TH E COR P OR ATE GOVERNANCE CODE As the Baums Committee suggested, the committee for corporate governance affairs was a creature of the German government and deferred to government initiatives. The latter appointed a corporate governance code committee in September 2001 under the leadership of Gerhard Cromme, head of the supervisory board for ThyssenKrupp AG. The Committee gave the ministry the lead in deciding the degree to which code and law would regulate the affairs of German companies, refusing to consider issues covered by legislation. The Code in Germany is therefore a means of raising issues for lawmakers and not a means of pre-empting them as in the United Kingdom. The approved Code of 26 February 2002 focused on improving company transparency, supervisory board oversight, and external oversight through auditors (Cromme Committee 2002). In contrast to the United Kingdom, changes to the Code are made in consultation with the Justice Ministry under the procedures stipulated under }161 of the Aktiengesetz (BMJ 2003a) and are then published in the Federal Register (Bundesanzeiger). Company reports were required on a comply-or-explain basis in the Transparency and Publicity Act 2002. This functionally replicated the British approach of requiring listed companies to comply or explain their deviation from the British code, but through law and not the listing rules of stock exchanges.

SECURITIES AND TAKE OVER ACT 2001 2 The Securities and Takeover Act is the most explicit show of protecting national interests through state legislation of the time. It facilitated takeovers in a corporate environment ferociously hostile to them, one which had failed to respect its own voluntary takeover code of 1995. The Act instituted a statemandated set of rules governing takeovers and touching on aspects of company law that affect the ease with which takeovers can be carried out. These include the two-tier board, worker co-determination, and the proxy voting rights of banks. In addition, it lifted prohibitions on ﬁnancial instruments and practices, such as the prohibition on leveraged buyouts, which beneﬁted international investors seeking more attractive rules (Hirte and von Bu¨low 2

¨ bernahmegesetz, WpU ¨ G. Wertpapier und U

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2003, 17–19). This represented a dramatic shift on the part of the SPD and Greens away from demonizing corporate takeovers, long a taboo topic in German capitalism. The most controversial part of the Act proved to be the provision for company managers to take defensive action against a takeover bid if threequarters of shareholders had passed a resolution in the general meeting authorizing such an action. This was a concession to the business community, which had dragged its feet on implementation of the code, and to politicians concerned about level playing ﬁelds for takeovers in the European Union (EU), who saw a need for German companies to retain certain weapons in the event of a battle for corporate control.3 The main business lobbies (Bundesverband der Deutschen Industrie (BDI), Bundesvereinigung der deutschen Arbeitgeberverba¨nde (BDA), Deutsche Industrie- und Handelskammertag (DIHK)) felt that the bill did not do enough to allow German businesses to protect themselves from hostile takeovers, in particular because it did not specify which kinds of manager activities might be considered defensive during a takeover bid. This would expose them to prosecution and litigation. The Deutsches Aktieninstitut (DAI) took the friendliest position on the bill of the business lobbies, generally viewing shareholder-approved defensive measures as ineffective. The Committee of Wise Men on Company Law and the investment lobby, the German Investment and Asset Management Group4 rejected defensive measures as impediments to investment in the German economy and ﬁnancial services (Deutscher Bundestag, Finanzausschuss 2001b), as did the Free Democratic Party (FDP) (Deutscher Bundestag 2001). This opposition had no impact on the government or the Christian Democrats who voted for the Act, underlining the indeterminacy of lobby pressure. The government designed the bill to provide rules for equal and fair treatment of shareholders, open information, and communication by both sides, including a statement on the impact for employees. The parliamentary committee rejected a CDU/CSU proposal to incorporate even stronger defensive measures, including resolutions valid for thirty-six months instead of eighteen, including voting thresholds below 75 per cent, and an automatic mandatory bid from 30 per cent of shares (CDU/CSU Fraction 2001a), and a PDS motion giving works councils and employee representatives in the supervisory board a veto on takeovers. It was passed by the government and CDU/CSU over the objection of the FDP and PDS (Deutscher Bundestag, Finanzausschuss 2001a). 3 ¨ G was being discussed, an intense battle was being waged at the European At the time WpU level over the level playing ﬁeld issue. See Chapter 9 for a full discussion of this. 4 Deutscher Investment- und Vermo¨gensverwaltungsgesellschaften.

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During discussions at the European level to pass a Takeover Directive, the Schro¨der government saw itself doubly challenged to pass a national law that would occupy the policy space in advance of EU talks and ensure rules reﬂecting German priorities. The concrete event that pushed forward legislation was the takeover of Mannesmann by Vodaphone in 2000. The Act therefore preserves policy autonomy for the German state at the same time it builds it up in relation to corporations.

TRANSPARENCY AND P UBLICITY AC T 2 002 5 The ﬁrst Schro¨der government focused its activities on legally mandating transparency and stronger supervisory board powers as means of controlling opportunistic managers. This constituted stronger state intrusion in company affairs. The Corporate Governance Code was the ﬁrst step. The second was the Transparency and Publicity Act 2002. The bill’s explanatory notes underlined the continuity of regulatory philosophy inherited from the opposition Liberals and Christian Democrats. As with KonTraG 1998, TransPuG was intended to improve the supervisory board’s oversight of company executives, including nomination and director pay, and to require formal, written reports to the supervisory board and to investors as a means of disciplining management (BMJ 2002a, 33–4). It further speciﬁed the structural and procedural features of the audit process and demanded that the supervisory board avoid relying blindly on (sub)committees when taking decisions. The government underlined that these measures had great urgency and could not be delayed whilst European legislation on the same topic was being negotiated. TransPuG also changes the Mutual Funds Law (KAGG) to make mutual funds powerful entities in shareholder meetings alongside universal banks. They would be able to represent their customers by proxy vote on a regular basis for the ﬁrst time (ibid., 76–7). This takes place in a context of more stringent reporting to shareholders in which the executive and supervisory boards for the ﬁrst time must make joint statements detailing actions taken on corporate governance, ﬁnancial management, and major risks to company proﬁtability (ibid., 50–1, 71–2), and in which auditors must give detailed assessments of those reports including any suspicions they might have that the reports are faulty (ibid., 63). This replaced the practice of issuing so-called negative statements in which these parties declared that there was nothing worth reporting. TransPuG therefore rejected the Baums Committee’s 5

Transparenz- und Publizita¨tsgesetz, TransPUG.

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suggestion that such problems be put in a separate report. It accepted the Committee’s proposal, however, that the Code would ask companies to report on the salaries of individual directors, rather than anchoring it in the bill. The Schro¨der government added reporting on co-determination to investment reports in a departure from KonTraG. The Act underlines that codetermination extends beyond EU and national legal requirements to touch fundamental questions of business strategy and risk management and corporate governance code compliance. This required employers to share conﬁdential information with employees in the supervisory board more openly (ibid., 39–43). This underlines the state’s patronage of stakeholder interests. Da¨ubler-Gmelin, the SPD Justice Minister, underlined the government’s intent to wield ultimate statutory control over the Code with reference to spectacular scandals at home and abroad since KonTraG (Deutscher Bundestag 2002c). The government’s bill was passed with opposition support and only minor changes. In parliamentary debate, all parties welcomed the legislative efforts to improve the state of corporate governance in Germany. The SPD underlined adherence to the German two-tier model as one worth keeping (Deutscher Bundestag 2002a, 23051–2), but also coordinating with European initiatives (ibid., 23056). The CDU asked why the government wasn’t working even faster (ibid., 23052). The FDP greeted the continuation of the work set out in the KonTraG, but not the stakeholder focus (ibid., 23053). The DAI supported the Act’s demands for transparency and electronic communication between shareholders and proxy holders (Rosen 2002) and had only objections on procedural issues (DAI 2002a). The Legal Committee of the Bundestag voted unanimously in favour of the bill, with minor changes (Deutscher Bundestag 2002b). The 2002 election that returned Schro¨der to ofﬁce was fought in part on the company regulation issue, creating a mandate to regulate corporate governance more strongly, to protect the role of employees in co-determination and to ﬁnally regulate corporate takeovers for the ﬁrst time. This last issue had been made apparent to the Schro¨der government by the Vodaphone takeover of Mannesmann in 2000, which came as a complete shock to the public, to unions, and to government, and was as publicly explosive an issue as corporate governance failures themselves. TransPuG represented important claims to a stronger shaping role for government on internal company affairs, but also depicting managers as strongly opportunistic. Increased reporting and supervision, beneﬁting both shareholders and stakeholders as legitimate and unproblematic partners in corporate governance was the result. During the 2002 election that followed, these themes would be brought out even more strongly.

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THE TEN-POINT PROGRAMME TO IMPROVE CORPORATE GOVERNANCE The SPD released a ten-point programme to control unrestrained manager power during the election campaign of 2002, using state power to empower dispersed shareholders and employees. It envisaged replacing universal banks as the guarantors of good corporate governance with a system relying on active shareholders, auditors, and employees complying with formal, legal, and regulatory criteria. The ten-point programme included 1. Personal liability of the executive and supervisory board members to the company, including a facilitation of litigation against them. 2. Personal liability of executive and supervisory board members for intentional or grossly negligent communication of false information to investors and establishment of the right of groups to sue collectively. 3. The further development of the German Corporate Governance Codex to improve the transparency of stock options for senior management and supervisory board members. 4. The adoption of international accounting standards (IAS) for company group reports, in accordance with EU law, and the ongoing adaptation of generally accepted accounting practices in Germany to international standards. 5. Measures to increase the importance of the auditor. 6. Measures to ensure the independent oversight and audit of company reports. 7. The further development of stock market regulation and law reform. 8. The improvement of investor protection through regulation of ‘grey markets’. 9. Measures to ensure the reliability of reports through ﬁnancial analysts and rating agencies. 10. Harder criminal penalties for capital market crimes. The government implemented most of the programme with the support of the opposition, but increasingly over the resistance of the business community. The laws passed rejected voluntary corporate governance codes in favour of legislated responsibilities for company directors, far more than most European governments would consider. It therefore sought to preserve a distinctively German approach to dealing with corporate governance scandals. This can be seen in the debates on the laws, as described below.

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The Company Integrity and Lawsuit Modernisation Act (UMAG) was written jointly by the Justice and Finance ministries to improve investor conﬁdence in the integrity of the German stock market and corporate economy, with the state acting as the patron of shareholders. The government referred to company scandals which had hurt investor conﬁdence and focused attention on (a) addressing the quality of information available to investors about the company, about the reliability of rating agencies, and other ﬁnancial analysts; and (b) on penalizing managers who ran afoul of the law to promote a culture of individual responsibility among senior managers. This was to be strengthened by shareholder rights to sue managers provided in separate legislation (below). Other key features of UMAG were designed to facilitate collective action by shareholders in advance of general meetings, to encourage them to vote and to encourage foreign investors to participate as well. Shareholders would also beneﬁt from a new electronic shareholders’ forum (www.aktionaersforum.de) operated by the Federal Register (Bundesanzeiger) in Berlin to overcome the anonymity and dispersion of shareholders that makes collective electronic communication and action difﬁcult (BMJ 2003c, 31–5). The Deutscher Gewerkschaftsbund (DGB) supported the bill’s intent to widen the opportunities for shareholders to sue management so that not even large banks and mutual funds could hold management accountable (DGB 2004, 4). In contrast, the country’s business and ﬁnancial lobbies attacked the UMAG bill as a bundle of potential threats to the ability of managers to act, and to the company’s ﬁnances as a result. They therefore called for the legislated business judgement rule to underline maximal discretion to avoid potential lawsuits (BDI et al. 2004a, 1–2). The country’s banking community opposed everything else in the bill, arguing that shareholder rights would hamper manager rights. They only approved of proposals to limit AGM speeches to ten minutes (ibid., 13, 20–21). The opposition and the government found broad agreement about the bill, as can be seen in the quick and consensual approval of the bill by all parties in the legal affairs committee of the Bundestag (Deutscher Bundestag 2005a) and in the unanimous agreement of all parties to pass the legislation in the plenum (Deutscher Bundestag 2005b). 6

Gesetz zur Unternehmensintegrita¨t und Modernisierung des Anfechtungsrechts.

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I N V E S TO R M O D E L C A S E AC T 7 The Investor Model Case Act (KapMusG) made it possible for individual shareholders to collectively sue a company for damages incurred through market abuse, insider trading, or unfulﬁlled commitments made during a takeover. Ten or more shareholders may take collective legal action against majority decisions taken in the general meeting, which is then announced in the Federal Register. This new right provides a theoretical deterrent to managers making inside deals with large shareholders (banks) at the expense of the company’s value. It therefore uses state power to ensure the rights of dispersed market shareholders and raise pressure on company managers to exercise good corporate governance. Shareholders previously had to sue individually, the high costs of gathering evidence, having a legal report prepared, and having the case heard constituting a deterrent to investor self protection, which deterred their pressure on management. Parliamentary parties passed the second and third readings of the bill unanimously, without any debate (Deutscher Bundestag 2005b). This was not a sign of low interest in the Act, but rather of overwhelming agreement that the state should provide stronger tools to empower shareholders against managers without the intermediation of institutional investors. The business community was split on the bill. The DAI supported the bill on the grounds that it would streamline complaints against management (DAI 2004a, 7). The traditional business lobbies, BDI, DIHK, and GDV argued that the publication of information in the federal register would encourage more lawsuits against companies and strangle the free ﬂow of information from managers and supervisory board members to shareholders (BDI et al. 2004b).

EXECUTIVE PAY RE PORTING ACT 2005 8 The Executive Pay Reporting Act reacted to the failure of companies to divulge information on executive remuneration on a voluntary basis, as demanded by the Code on Corporate Governance. The Act demands an individualized and itemized listing of salary and other beneﬁts for members 7 8

Kapitalanleger-Musterverfahrensgesetz (KapMusG). Vorstandsvergu¨tungsoffenlegungsgesetz (VorstOG).

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of the management board, including stock options and bonuses. The reasons for granting options are to be listed in addition to their value. The measures extended existing provisions of }87 Joint Stock Corporations Act, which requires senior management and supervisory board salaries to respect ‘appropriateness’ (Deutscher Bundestag 2004a, 5). The information is to accompany the company’s ﬁnancial statements, and stimulate debate among investors. The supervisory board delivers its judgement in the remuneration report, including why it feels the pay is appropriate (ibid., 12).

BILL TO IMPROV E LIABILITY FOR INCORRECT FINANCIAL MARKET INFORMATION (KAPINHAG) 9 KapInHaG was designed to hold company directors and supervisory board members personally liable for stock price collapses caused by market manipulation. It likewise applied to anyone who participated in the process, including investment banks responsible for selling initial share offerings, and ﬁnancial analysts making recommendations to investors to buy or sell. The bill underlined the new recognition that market abuse had shaken investor conﬁdence in the German economy, particularly through the issue of false ﬁnancial reports to the investing community, both domestic and international (Deutscher Bundestag 2004b). The investor rights lobby Deutsche Schutzvereinigung fu¨r Wertpapierbesitz (DSW) supported the initiative (DSW 2004b, 5). The bill was introduced in October 2004 but died in the face of strong FDP and business lobby arguments that personal liability for information would exceed rules in other countries and deter managers from releasing information on corporate governance (ZKA 2004, 4–5).

Co-determination Employee co-determination continued to enjoy political support from both the left and the centre right parties into the early twenty-ﬁrst century, whilst other reforms were undertaken to company law. The Schro¨der governments protected and promoted the practice using state patronage of stakeholders. They paid speciﬁc attention to protecting this in the face of foreign takeovers

9

Gesetz zur Verbesserung der Haftung fu¨r falsche Kapitalmarktinformationen (KapInHaG).

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and of structural change out of coal and steel industries that could reduce the power of employee representatives. The Christian Democrats had some proponents of reducing the practice, but the party supported it under the leadership of Angela Merkel (Merkel 2006), who led a grand coalition with the SPD starting in 2005. This means continued political consensus on the state protecting and promoting co-determination. This was despite periodic demands by the business lobbies BDI and BDA to limit employee representatives to one-third of the supervisory board in the name of making German companies attractive on the European merger and takeover market (Go¨hner and Braunig 2004). This would have effectively ended supervisory board parity in companies with 2,000 employees and more. The trade union federation DGB was satisﬁed with political commitments to retain co-determination. The ﬁrst Schro¨der government introduced measures into a new Works Councils Act 2001 (Deutsche Bundesregierung 2001) that would protect codetermination after cross-border mergers and takeovers by allowing works councils and management to make agreements that the new management would have to respect if they assumed control of the company (Kastner et al. 2002, 74, 80). The Schro¨der government made concessions on co-determination in the Societas Europaea (SE) law (Deutscher Bundestag 2004c) and the SE Codetermination Act (SEBG), however. These required management and employees to negotiate the ratio of employee and shareholder directors, with the existing ratios as a default after six months of talks, and allowed German AGs to choose a smaller supervisory board, which many companies favoured for reasons of decision-making efﬁciency. For example, Allianz AG reduced the size from twenty to twelve members when it became Allianz SE in 2006. The parity of the two groups of directors was retained by agreement, although it could have theoretically changed to one-third in connection with the minimum standards of the Drittelbeteiligungsgesetz. The main change in the balance between employee and employer directors is that the special role of the leading employee representative (Leitender Angestellter), capable of breaking ties during the absence of the chairman of the board since the 1976 codetermination law, is no longer foreseen in the SEBG.

B I E DE NKOPF C OMMI S S I ON Just before the 2005 general elections, the second Schro¨der government tasked the Biedenkopf Commission with making recommendations for how to

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protect and promote co-determination in the context of the European single market. It also reacted to the above-mentioned BDI/BDA initiative to reduce employee representation. Kurt Biedenkopf of the CDU, who had chaired the committee to plan the 1976 Codetermination Act, was appointed again. Two participants were policy experts: sociology professor Wolfgang Streeck, and labour court judge Helmut Wißmann. The other participants represented the social partners. These included the presidents of the BDA and the BDI, and the former chief ﬁnancial ofﬁcer (CFO) of Daimler-Chrysler on the employer side, and the unions IG Metall and DGB, and the works council at the German energy group RWE. Although the grand coalition government under Merkel (2005–2009) committed itself to protecting co-determination, the Committee failed to reach a common position (Frese 2006), ensuring the status quo.

NORMS AND COMPANY REGULATION The Schro¨der governments inherited and promoted intense public interest in corporate governance, driven by spectacular company collapses and scandals that rocked public conﬁdence in the corporate economy. The response broke with the state’s role as a simple patron of private co-determination and transformed it into a direct regulator after 2002. The new orientation to formal, legally deﬁned responsibilities for managers and rights for shareholders emphasizes the ﬂow of information to shareholders, enhanced responsibilities of the supervisory board on their behalf, and measures to protect the position of employee board representatives. This model remoulds the German state into the guarantor of employee and (global, dispersed) shareholder rights against opportunistic managers whilst rejecting the primacy of private voluntarism that dominates the United Kingdom’s laissez-faire state. Business lobbies especially were split, which robbed them of inﬂuence. Industrial lobbies (BDI, DIHK) rejected state regulation in favour of UKstyle voluntarism, whilst the ﬁnancial market lobby supported it as a conﬁdence-building measure for outside investors, seeing insiders as a problem and not a beneﬁt to corporate governance. German accountants, whilst ﬁnding an increased role for themselves in corporate governance through a new German Accounting Standards Board (DSR) good in principle, hated nearly everything else the government had to say as an infringement on their traditional self-regulation. This had mostly to do with their new subjection to formal rules on the independence of auditors and ﬁnancial advisors, and liability for their actions. They wanted none of it, but were as unsuccessful

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as managers or proponents of ending co-determination in securing their demands. The public attention paid to these reforms and the issue of corporate governance in the media, the prominent place they assumed in election promises and even in the coalition agreement of the grand coalition underline how sensitive this bundle of issues, and the German approach to dealing with them, is. All political parties demonstrated a strong sense of national responsibility and of the state as a key actor in making things happen. The determination to pursue a distinctively German approach was seen as compatible with a sense of making Germany’s corporate economy competitive and an attractive place to invest.

German Regulation of Financial Markets In ﬁnancial markets, a controlling role for the state prevailed from the 1880s to the mid-1990s. The 1873 crash was blamed on speculative ﬁnanciers and on fraudulent management. This led to state ownership of stock exchanges, state-sanctioned listing rules, and restrictions on innovative ﬁnancial products (like derivatives) or investment vehicles (like hedge funds). The state therefore directly regulated ﬁnancial markets (including accounting standards). Following Shonﬁeld (1965) and Albert (1993), this reﬂects a commitment of Germany’s political classes to ensuring a strong state that identiﬁes unregulated markets as inherently dangerous and tries to control them. Although acceptance of ﬁnancial markets grew in the 1990s, self-regulated ﬁnancial markets were not envisaged. As with company law, the most striking transformation in ﬁnancial law in the decade beginning in 1994 is the shift towards laws that accept ﬁnancial markets (especially stock markets) as a natural and desirable part of the overall economy, with the interests of dispersed shareholders protected by a statutory regulator. This pattern replaces insider relationships dominated by universal banks which required no special rules and eschewed equal treatment of investors. The Schro¨der governments built on a trend that their predecessors had begun in 1989 to attract investment through stock markets (BMJ 2003c). The pro-market FDP introduced the ﬁrst conceptual changes towards favouring dispersed shareholders over insiders in 1989. The FDP-Christian Democrat (CDU/CSU) government supported an Insider Trading Directive for the EU that put the insider links within German supervisory boards under scrutiny and criminalized share trading based on privileged knowledge gained there. This implied new state regulation to promote a more

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liberal market economy with share price created on stock exchanges rather than in back rooms. Christian Democrats initially opposed these changes but accepted them as part of their commitment to complete the Single European Market by 1992. The FDP’s use of the single market programme to promote German economic liberalization cannot be seen as simple pressure from the EU or policy desperation after reuniﬁcation. The Financial Market Promotion Acts of 1989, 1993, and 1997 developed the rules and infrastructure needed to make investing in Germany attractive for dispersed shareholders. The state encouraged this by introducing easier listing, prospectus, and information liability rules for companies and ﬁnancial analysts and allowing companies to use international or American accounting standards in company reporting. It legalized secondary debt markets and ﬁnancial derivatives to enhance the size of capital markets and established the Federal Securities Exchange Authority (Bundesaufsichtsamt fu¨r Wertpapierhandel) in 1994, an independent statutory regulator to ensure investor protection. These steps were designed to bring the German corporate economy closer to the worlds of ﬁnancial markets and globally oriented outside institutional investors, emphasising the interests of dispersed shareholders, and further away from the close network of relationships across companies and between companies and banks, which were seen as problematic. The changes and the demands did not target the constitutional nature of the company nor the relationship between companies and their employees. These remained intact, supported across party lines. This indicates the degree of norm commitment to a change in the state’s restrictions on ﬁnancial markets and continuity in demands on corporate governance. The two SPD/Green governments under Gerhard Schro¨der (1998–2002, 2002–2005) followed the same vision as their predecessors. They liberalized ﬁnancial markets further and strengthened statutory regulation as core components of economic competitiveness. Initiative Finanzstandort Deutschland was designed to enhance Germany’s attractiveness as an international ﬁnancial centre, and to increase Germany’s weight in European decisionmaking on regulation (Koch-Weser 2004). Political parties began promoting capital market investment in the mid-1990s in response to an investment strike by the country’s universal banks that led to ﬂat economic growth. These were issues on which all mainstream political parties agreed. In contrast, the same divisions between industrial lobbies and the stock market lobby seen with regard to company regulation were repeated with regard to stock market liberalization and regulation. This facilitated the political redeﬁnition of the state and its relationship as a patron of ﬁnancial markets through regulation.

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I NV E S T M E N T M O DE R N I S AT I ON AC T 2 0 0 3 10 The Investment Modernisation Act legalized hedge funds for the ﬁrst time. There were limitations, but the opening was signiﬁcant because it broke with the hostility to ‘hot’ ﬁnancial capital that had dominated the thinking of the German political class since 1873. The DAI supported the Act, but criticized that German restrictions on hedge funds remained more stringent than elsewhere in Europe. It particularly opposed state capacity to ban short selling and leveraged buying, which are core hedge funds activities, and liability of companies for incomplete information in the abbreviated prospectus (DAI 2003).

F O U RT H F I NA N C I A L M A R K E T P RO M OT I O N AC T ( 4. FMFG) 2002 The Fourth FMFG created the Federal Financial Services Authority (Bundesanstalt fu¨r Finanzdienstleistungsaufsicht, or BaFin) as the all-ﬁnance regulator for banks, insurance companies, and buyers and sellers of securities. It implements rules on insider trading, ad hoc publicity, director dealings, market price manipulation, important shareholdings, prospectuses, behaviour (advising clients properly), corporate reorganizations (separating divisions of business with conﬂicts of interest), and regulation of investment funds (BaFin 2004). Bipartisan acceptance of ﬁnancial markets and statutory regulation led to cross-party political support for the law. The DAI saw a statutory response to white collar crime by company managers as foreseen in the Act as indispensable to restoring investor conﬁdence in the German ﬁnancial market in the wake of a number of corporate scandals. Above all it supported information on potential conﬂicts of interest for directors and the criminalization of actively misleading statements to investors (DAI 2002b, 10–11).

AUDITO R EXAMINATION REFORM AC T 2 003 11 The Auditor Examination Reform Act provides for stricter supervision and certiﬁcation of auditors and accountants. It retains La¨nder responsibility for 10 11

Investmentmodernisierungsgesetz. Wirtschaftspru¨fungsexamens- Reformgesetz.

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supervision, testing, and certiﬁcation of auditors but transfers responsibility for accreditation to a new National Chamber of Auditors (Wirtschaftspru¨ferkammer (WPK)), which would assume greater responsibility for disciplining its members (Deutscher Bundestag 2003a, 1–2). Rules for the Chamber’s advisory board were designed to increase quality, as were shareholder rights to demand the auditors’ resignation (Deutscher Bundestag, Ausschuss fu¨r Wirtschaft und Arbeit 2003a, 2003b, 41–4). Courts and attorneys general gained the right to enforce standards as well. For government, the idea of an ‘activating state’ that sets the parameters for self-regulation was a signiﬁcant factor motivating the ministry (Deutscher Bundestag 2003d). All parties voted for the law with no substantial changes except the FDP, which defended the liberal status of the auditing profession (Deutscher Bundestag 2003d).

I N V E S TOR P ROT E C T I O N I M P ROVE M E N T AC T 20 0 4 12 The Investor Protection Improvement Act implemented the Market Abuse Directive (MAD) 2003/6/EC of 28 January and related implementing directives.13 It deﬁnes insider trading, insider information and manipulation of markets, and regulatory roles for BaFin in cooperation with a Securities Council (regulatory representatives of the La¨nder). It also provides for ﬁnes, criminal punishments, and for civil damages to be paid by insider traders. It requires companies to list all persons who come into question for insider information (}15b) and their ﬁnancial transactions in company shares. The regulation therefore demands the active involvement of companies. BaFin updates the regulations independently as a statutory regulator. There was broad agreement among the political parties in the Bundestag that the legislation was both appropriate and necessary to promote ﬁnancial markets and for implementing the government’s ten-point programme in this regard. References to the MAD come after national imperatives for the SPD, whereas the CDU/CSU and the FDP criticized the SPD for going beyond the terms of the MAD. They felt it unfair that ﬁnancial service providers would have to report mere suspicion of market abuse. They agreed, however, that investor protection was a real concern warranting some regulation (Deutscher Bundestag 2004d, 49–50). 12

Anlegerschutzverbesserungsgesetz. Related implementing directives: 2003/124/EC on deﬁning and publicizing insider information; 2003/125/EC on the proper publication of investment recommendations; and 2004/72/ EC on setting up insider lists and reporting suspicious activity. 13

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This went further than business could accept. The banking lobby saw the regulatory burden as too high, exceeding EU standards, and the rules too vague, especially for ﬁnancial analysts. It criticized the conﬂict of interest reporting requirements as too vague, legal liability of auditors for their reports as unreasonable, and BaFin powers to deﬁne terms more stringently than European rules. It also criticized what it saw as a ban on market transactions to support share price or ward off a takeover, or cultivate ﬁxed price business relationships with retail clients, all associated with corporate insiders but against outside shareholders (ZKA and BVI 2004, 3, 6, 12, 34–6). The BDA and BDI concurred and issued a joint critique that the Act lacked sufﬁcient legal clarity on what behaviour would and would not be sanctioned (a signiﬁcant number of shares; a signiﬁcant change of share price), as well as going further than the EU legislation required (BDA and BDI 2004, 4).

I N V E S T ME N T MO D E R N I Z AT IO N AC T 2 0 0 3 14 The Investment Modernisation Act 2003 is a broad-ranging regulatory reform act that updated existing rules on the reporting duties of companies, liability for prospectuses, rules for non-bank depot businesses, and hedge funds. It is most interesting because the parliamentary debate developed into an explicit discussion of how German political parties saw the market and regulation in general terms, with consequences for the state-business relationship. Striking is (a) the degree of consensus on allowing liberalized ﬁnancial markets combined with statutory regulation, (b) the degree of consensus on retaining certain protections against foreign takeovers of German companies, and (c) cross-party consensus on using IAS, all as part of promoting the increased location of ﬁnancial markets in Germany. Nina Hauer of the SPD gave the government credit for establishing BaFin to regulate ﬁnancial markets, for giving it powers of investor protection, and for creating new opportunities for stock exchanges to do business in the fourth FMFG. New legal requirements for transparency and investor information about the nature of ﬁnancial instruments and the risks associated with them played a key role in promoting investor conﬁdence and protection, even in the area of newly legalized hedge funds. Director accountability for decisions had also been targeted by regulation.15 Whilst Hauer underlined the importance of having BaFin as an independent statutory regulator in the 14 15

Investmentmodernisierungsgesetz. Ibid., 3571–3.

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context of European securities regulation through the Committee of European Securities Regulators (CESR), Lothar Binding (SPD) further stressed that ﬁnancial regulation reform, the Corporate Governance Code, and company law reform to improve corporate governance were designed to support the government’s goal of embracing a pan-European market in ﬁnancial services and Germany’s attractiveness for investment capital within it. This demanded regulation and a new central prosecutor to ensure that businesspeople, managers, directors, supervisory council members, ﬁnancial analysts, and economic journalists who play a role in the system’s integrity are held accountable.16 Dr. Barbara Hendricks (SPD) of the Finance Ministry summed up the government’s rationale for reversing the ban on hedge funds in Germany, albeit under strict controls, again as a consequence of attracting capital to Germany, a point supported by the conservative CSU (Deutscher Bundestag 2003e) and the left-libertarian Greens.17 The latter portrayed this as a return to positive elements of Germany’s pre-1914 past, when there had been more publicly listed companies in Germany than in the United States, as an opportunity for companies to secure funding directly, and pointed to the 12 million small shareholders in Germany that need to be protected by regulation. Furthermore, the development of law and a single German regulator would also help the government negotiate in Brussels with other countries over European securities regulation for the single market.18 Members of the CDU/CSU/FDP coalition also supported the government’s programme for investor protection, ﬁnancial market promotion, and the use of IAS, goals which they had themselves promoted whilst in ofﬁce. Hermann Otto Solms of the FDP stressed the goals of competition among global ﬁnancial centres, of increasing the control and punishment of economic crime through strong statutory regulation, at a level higher than that in the United States.19 Stefan Mu¨ller of the Bavarian CSU was the lone supporting voice of the unreconstructed traditional ‘German model’. He rejected the view that ﬁnancial markets were necessary to secure investment for German business and blamed international ﬁnancial markets for drawing cash away from German companies.20 Nevertheless he eventually supported the development of capital market law to prevent ﬁnancial service innovation such as hedge funds from taking place in neighbouring countries rather than Germany (ibid.). Overall, the legal developments and political discussions show a great deal of agreement across German political parties over promoting ﬁnancial services and international investment, over the need for prudential, independent, 16 19

Ibid., 3579–80. Ibid., 3573.

20

17 Ibid., 3575. Ibid., 3576–7.

18

Ibid., 3575–6.

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statutory regulation to protect shareholders against the dangers of company managers and universal banks, and over the need to embed the German strategy in the European Financial Services Action Plan (FSAP). The only exception to this was the democratic socialist party PDS, which opposes ﬁnancial markets in principle. There were points of contention, however, between the other parties. For the Christian Democrats and the FDP, regulation was necessary and good, but harmful if it went farther than regulation standards set out in European directives. Social Democrats and Greens saw more room for regulating businesses, investment houses, and all ﬁnancial services professionals in the public interest, and a need to do so in light of the decision to assist in the development of robust stock markets. Calls of ‘gold plating’ on the part of the opposition were not uncommon, but this marginal criticism cannot be compared to more principled objections against the shift towards regulated market capitalism per se. These developments towards a new regulatory state with the goal of ensuring competition and fair play in German ﬁnancial markets and the broad party consensus behind it demonstrated a key shift in both the regulative mechanisms of the state and in the constitutive norms underlying the shift of control of ﬁnancial transactions from the private rooms of supervisory councils and the quasi-state ofﬁces of German exchanges to the independent hand of BaFin.

Accounting Reform Accounting standards in Germany became increasingly intermeshed and determined by collective decisions taken at the European and international levels. A striking feature of the German system is the political decision to shift from accounting standards set by German lawmakers to standards set by an international private body with German membership. The Baums Committee wanted accounting standards aligned with a European standard. It recommended that the government support European Commission proposals to require accounting by IAS standards by 2005, with the eventual goal of harmonizing IAS and US-GAAP standards (Baums Committee 2001, 261). The responsibility of the state to determine accounting standards would remain, however, which is a distinct difference from the more dominant role played by UK accountants in relation to the state, which maintains only formal oversight. The new orientation to IAS should therefore not be confused or conﬂated with a diminished sense of the public interest in Germany, where the Commercial Code allowed this to be institutionalized over a very long period of time. The regulation of the

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accountancy professions make this and its contrast to reforms in the United Kingdom perfectly clear.

GERMAN AC COUNTING STANDARDS COMMIT TEE A ND G E R MA N ACC OU N T IN G S TA N DA R D S B OAR D 21 In September 1998, the Justice Ministry provided for the establishment of the German Accounting Standards Committee (DRSC) and the German Accounting Standards Board (DSR), which is nested within the DSRC. They are responsible for setting ofﬁcially recognized accounting standards in Germany. The creation of these two bodies delegated standard-setting from the lawmaker, which until then had directly set standards in the German Commercial Code (Handelsgesetzbuch, or HGB). From the beginning, these bodies were intended to represent Germany in European and international forums where the DSRC and the DSR draw attention to the role they play in reconciling German accounting standards with European legislation and participating in the construction of the IAS on which European legislation is based (Donnelly 2007).

ACC O UN T I N G L AW R E F O R M AC T 2 0 0 3 22 The Schro¨der government tabled the bill for the Accounting Law Reform Act (Bilanzrechtsreformgesetz, or BilReG) in 2003. Its stated purpose is to ensure the integrity of companies in protecting shareholders (ibid.). Its concrete aims are to ensure wider use of IAS, to improve the quality of ﬁnancial reporting by companies and to improve the quality of audits through the independence of auditing companies. Companies would have to note for the ﬁrst time whether the auditors also provide consulting services to the company which could prevent them from uncovering uncomfortable facts, and they would have to rotate auditors to ensure a fresh look at the books (BMJ 2003d, 1–2). BaFin was granted the right to investigate the integrity of auditing ﬁrms through independent agencies commissioned for that purpose, either on the concrete suspicion of wrongdoing, or on the basis of random tests. The Act applies four 21 Deutsche Rechnungslegungsstandards Committee (DSRC) and Deutscher Standardisierungsrat (DSR). 22 Bilanzrechtsreformgesetz (BilReG).

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EU directives: the Fair Value Directive of 27 September 2001; the IAS Directive of 19 July 2002; the Modernisation Directive of 18 June 2003; and the Threshold Value Directive 2003. The Act therefore compels listed companies to use IAS from 2005 onwards. The DAI supported BilReG as a means of ensuring ﬁnancial reporting integrity, but argued that the government needed to go even further in light of the company failures of Parmalat in Italy and Swiss Air in Switzerland, both of which occurred under the supervision of independent auditors. It supported the Act’s provision allowing the state to prevent auditors from providing other services where it felt a conﬂict of interest would arise, following US and EU proposals. Whilst the lobby of the country’s large investment banks, the Bundesverband deutscher Banken (BdB), fully supported the Act (DAI 2004b), industrial lobbies (BDA, BDI, DIHT, BdB, and GVK) called for IAS standards and independent auditing to apply for large, internationally oriented companies only (WPK 2004a). The Chamber of Accountants (Wirtschaftspru¨ferkammer, or WPK) opposed the Act in most of its entirety as imposing ineffective and unreasonable restrictions on their business practices (WPK 2004b, 7).

F I NA N C I A L S TAT E M E NT S C O NT RO L AC T 2 0 0 4 23 In February 2003, the German ministries of Justice and Finance released the BilKoG bill as part of the ten-point programme to ‘increase the integrity of companies and investor protection’ (BMJ 2003e). A statutory standard to hold companies accountable for ﬁnancial reports would replace supervision by insiders. This responded to accounting scandals that had hurt companies and shareholders. The law allows the government to delegate the responsibility for auditing company accounts to registered private auditing agencies. Standards are accepted by the DRSC and audits undertaken as random spot checks, in cases where there is a suspicion that rule violations have taken place, or on the recommendation of BaFin, which BaFin investigates and polices directly when companies are uncooperative (ibid.). All parties in the Bundestag supported the bill, and stressed the importance of ensuring that the DRSC be adequately funded to ensure the quality of its personnel (Deutscher Bundestag 2004e). The DAI not only supported the establishment of the DSRC to respond to accounting scandals at home and abroad, but had called for the enforcement 23

Bilanzkontrollgesetz (BilKoG).

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cooperation with BaFin that the Act introduced (DAI 2004c). The Chamber of Accountants approved of the establishment of an independent private body with a publicly deﬁned mission to carry out audits either on grounds of suspicion of problematic records, or on a random basis. It vehemently opposed any self-disclosure of information on conﬂict of interests on the basis of a constitutional right not to incriminate oneself (WPK 2004c).

CONCLUSIONS German reform of public policy and the regulatory state was already in the making when the Schro¨der government took ofﬁce in 1998, particularly in the realm of ﬁnancial markets, but it took on an even faster pace and more revolutionary scope between then and 2005. The FDP and the CDU started the move away from a state that legally restricted (international) ﬁnancial market activity as suspicious and dangerous, and towards a state that embraced it and managed the residual risk of problems through a statutory regulatory agency with rule-making and enforcement powers. The SPD and Greens simply moved forward with this dual logic of state regulation and ﬁnancial market opening with a vengeance. This put Germany, one of the later converts in the OECD world to ﬁnancial market liberalization, in a much closer position with respect to other EU countries and the European Commission in contemplating this combination of markets and regulation. Although statutory regulation of ﬁnancial markets is no real answer to the old questions of whether stock market ﬁnancing produces bubbles and crashes, the structural power of older concerns that the risk of bubbles outweighed the ﬁnancial advantages has disappeared from the German political economy. It is not a laissez-faire response, but one in where political decision-makers try to balance markets and regulation. The SPD/Green government also adopted its predecessors’ views that the constitutionalized company was not only not outdated, but the best possible response to corporate mismanagement and collapse. Whereas universal banks and other stakeholders were previously supposed to play the greatest role in holding managers to account (and the state limited itself to enforcing these participatory rights), the new model was based on a problematized archetypal view of universal banks as insider guarantors of good corporate governance, on a continued view of managers as opportunists, and foresaw instead stateimposed regulatory rules as the benchmark of manager propriety. The state placed itself in a more powerful position to insist on rules cultivated nationally. This necessitates a self-awareness of the state as a protector both of

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various stakeholder and shareholder interests, but also of protecting German practices against outside erosion. The result is a lasting shift in public policy, in the regulatory instruments of the state, and in the constitutive norms underpinning the new relationship between the state, business, investors, and consumers. The days when insider relationships were condoned are gone. Instead a new set of laws and an independent regulator are designed to bring new actors into the market. These new actors will have to deal with traditional German concerns about the dark side of ﬁnancial markets, lessons that go back to 1873. That is the reason why ﬁnancial liberalization without regulation, as happened in the United Kingdom in 1986, was unthinkable in Germany, and why the German regulator is in some ways armed with a more impressive set of rules and a higher degree of formality in its relationship to business than its UK counterpart, the Financial Services Authority (FSA). The result is far less rent-seeking and a combination of stakeholding regulation in company law and regulated market capitalism in ﬁnancial market and accounting law. This is very different than the developments in the United Kingdom, so that normative divergence continues, despite great changes motivated by similar circumstances. The German political class has also come to the recognition that poor corporate governance is a serious problem that can no longer be left to the insider mechanisms of the supervisory board, proxy voting by banks, and supervisory board membership by employees. Instead, the stakeholder model, whilst not discredited as an idea entirely, was found not to guarantee good corporate governance without stronger legal interference in the internal affairs of the company. The traditional willingness of the German state and political parties to interfere was strengthened considerably under the Schro¨der government. Their predecessors on the political right did not undertake such measures whilst they were in ofﬁce, but they supported the red–green government, at least until proposals for direct personal ﬁnancial liability and vocational disqualiﬁcation for business professionals dented the remaining bastion of self-regulation and employment by company managers. This at no time, however, translated into a UK-style conception anywhere, even with the Liberals, that the listed company was a private association with no public obligations and a right to internal autonomy. This is seen as well in the protection of employee co-determination by all mainstream political parties except the FDP, even if there is internal discussion within the CDU over whether this should be loosened. The result is that Germany retained and built on highly particular traditions and institutions in the area of corporate governance and strengthened the external regulatory component. The right of the state to determine in the

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ﬁnal instance, the insistence on the two-tier system as the norm of German company law, and of the use of co-determination are all aspects that required autonomy from EU provisions that might force some sort of change. Minor changes were eventually introduced to the SE in Germany, which allows a single-tier system, but which the German business community largely ignores and changes nothing about other demands that the state makes on the company. Financial market regulation was undertaken for internal reasons, but intertwined with European initiatives that were very similar, reﬂecting a broad, prior convergence of public policy in Europe, and a reassessment of shareholders from being a danger to being the most likely guarantor of good governance, if the state were to act as a patron, guaranteeing rights vis-a`-vis managers. The reorganization of accountancy is also an innovation, but one that retains the traditional prerogatives of the German state to determine how taxes are organized and how German accounting standards in the Commercial Code continue to develop. These changes have come with a stronger German state. It demands more of companies, accountants, and ﬁnancial markets than ever before.

6 Regulation in the United Kingdom The UK political economy went through the same norm-generating experiences of corporate failure and stock market collapse that Germany did, but much earlier and with very different results. Britain’s state restricted registrations and stock market activity heavily after the South Sea Bubble collapse of 1720 and adopted the more familiar laissez-faire approach only gradually from the mid-1840s onwards. The view of private companies contributing to welfare, employment, and national greatness in the second industrial revolution and Imperial Britain became established. Despite being overshadowed by corporatism and state ownership from the 1920s to the 1970s, the principle of self-regulation of the private sector remained strong enough to become a resurgent legal paradigm under Thatcher and Major, to be slightly modiﬁed under Blair after 1997 in the area of stock market and accounting standard regulation. This laissez-faire preference proved an insurmountable stumbling block to a UK commitment to harmonized regulation where it persisted (Donnelly et al. 2001). As companies were not problematized, the Companies Act placed few demands on the internal structure of companies from 1844 onwards, nor did it spell out who should have ultimate control of the company or how this control should be exercised or secured. These were considered to be private affairs and private property to be regulated by private means, with the exception that criminal activity such as fraud or theft could be prosecuted by the courts. A studied and principled attempt by government to identify structural problems within the company and to assign rights and responsibilities through statute (to shareholders or employees or to others) did not occur as it did in Germany. Company law reviews over 150 years generated little rule reform and therefore a high degree of continuity of the freedom from obligations of British companies, a point supported by all three political parties—Conservative (Blake 1972, 19–25, 88, 97–103), Liberal (Lowe 1998, 331), and Labour (Gamble and Kelly 2001, 170)—and the country’s union movement (Clift 1999, 15–18). The Liberal interpretation of independence from regulation as British business’ greatest advantage at home and in competition globally dominated non-Labour politics from the 1860s onwards.

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The Conservative Party’s acceptance of self-regulating capitalism during the Liberal Century, and its defence of this principle during its own dominance of twentieth-century politics contributed to the longevity of self-regulation and club regulation as central principles of company regulation. These principles contributed in their own way to ensure that the ambitions and apparatus of the state to regulate business remained modest at best. The Labour Party retained its commitment to syndicalist union independence from institutionalized cooperation with management until the mid-1980s. By the time they began to support the idea of German-style co-determination in principle, pro-market forces had constructed ideas of shareholder democracy that had diffused to the point that their robustness was successfully able to resist any notion of stakeholder governance that would interfere with the control of the company by managers and shareholders. Public policy goals, including the same impulses behind stakeholder politics in Germany, were met outside the ﬁrm by external legal requirements applied with a light hand (Moran 2003), or by public sector enterprises (from the 1930s to the 1970s), or by the general provisions of the welfare state and Keynesian demand management for the beneﬁt of working-class people (Charmley 1996, 113–16). Within the private corporate economy, this focus away from the internal affairs of the company served to protect the autonomy of its managers in running the business. The agreement of parties and lobby groups on a laissez-faire state therefore occurred for different reasons, but constructed a powerful norm of statehood and regulation nevertheless. Although the Companies Act 1985 permitted companies to include other stakeholder interests in corporate strategy, these goals were understood to be of secondary importance. In the face of numerous corporate collapses in the early 1990s,1 the Major government rejected any measures stronger (Penrose 2004) than to support two private-sector initiatives to improve the internal procedures of corporate governance and forestall regulation: the Cadbury Code (1992) on the ﬁnancial aspects of corporate governance and the Greenbury Code (1995) on director pay, both later condensed into a Combined Code in 1998. It equally rejected EU regulations to address actuarial (long-term) reporting standards at the heart of ﬁnancial management (ibid., 53–5). Combined, this leads to a system of voluntarism typical of company law and corporate governance in the United Kingdom and encapsulates quintessentially British understandings of the market, of the state (as an enforcer of contracts through the courts, but not a regulator), and of the constitutional

1 Including Polly Peck, BCCI, Maxwell Publishing, Barings, Morgan Grenfell, Lloyds, and Equitable Life.

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Table 6.1 Constitutive Norms of the UK Regulatory State

Company law

Pre-1997

Post-1997

State provision of contract law

Laissez-faire plus reporting

Financial market regulation

State acceptance of selfregulation until 1997

Statutory regulation over self-regulatory organizations (SROs), investor conﬁdence, and protection

Accounting regulation

State acceptance of selfregulation until 2004

Statutory regulation over SROs

principles regulating the relationship between them. Under these circumstances, it is inconceivable that the United Kingdom would have ever entered a European project to harmonize company law and regulation. The attitudes towards European legislation under Thatcher and Major reﬂected voluntarism at home, and a rejection of any measures not already provided for under British law. Very modest minimum standards in company law, ﬁnancial market regulation, and accounting standards at the European level were the result. Attempts by Blairites to change these views were prevented from making radical headway in the mid-2000s due to inﬁghting over the key assumptions about business and the state. Table 6.1 shows constitutive norms of the UK regulatory state before and after 1997.

C OM PA N Y L AW R E F OR M A ND TH E C O R P OR AT E GOVERNANCE CODES In the area of company law, concerns in Britain about poor corporate governance that had marked the entire decade of the 1990s continued after the adoption of the Hampel and Higgs Codes of Corporate Governance in 1998 and 2003, respectively. Scandals, including Hollinger,2 and Marks and Spencer,3 dealt renewed blows to conﬁdence in the integrity of executive 2 Hollinger International: CEO Conrad Black misdirected more than $400 from his media conglomerate. 3 In June 2004, the FSA opened investigations into insider trading at one of the country’s most traditional retailers, Marks and Spencer, related to the announced hostile takeover by retail investor Philip Green, owner of Revival. The CEO of Marks and Spencer, Stuart Rose, bought 100,000 shares of his own company after receiving a telephone call from Green.

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managers. New Labour was split between Blairites favouring a radical new stakeholder model based on legal mandates for managers to cooperate with employees, suppliers, customers, and the community on the one hand and Brownites favouring a continued ‘light touch’, essentially a laissez-faire approach to company legislation. The latter effectively won the contest for inﬂuence by delaying legislation and pressuring Blair to leave ofﬁce. The Blairites won new legal rights for employees to be informed and consulted by management through new European legislation, but were stopped in their attempts to introduce wider-ranging stakeholder elements into British company law. This internal battle over British regulative and constitutive norms was both intense and long-lasting precisely due to the high political sensitivity of norms lying at the centre of the British state and its relationship with the economy. The City’s Hampel Committee released the ﬁrst Combined Code of Corporate Governance in 1998. The New Labour government publicly denounced it as excessively voluntary and threatened an overhaul of the Companies Act if changes were not forthcoming. The Higgs Committee’s revised Combined Code (2003) required companies to further increase the transparency of the company’s affairs to its shareholders, to make use of non-executive directors (NEDs) to oversee or take control of key personnel and remuneration decisions, again in the interests of shareholders, and to increase the opportunity for shareholders to hold their directors to account in the general meeting. It stressed, however, that risks and challenges are individual to companies and inappropriate topics for legislation or even strict regulation in a Code (Higgs 2003, 2). The Code expects that companies structure their activities to increase specialization between oversight and executive functions and that they clarify this relationship. Boards should have a chairman who is not the CEO, should be assigned clear responsibilities for supervision, and have rights to information from the company’s executives. Independent, trained NEDs should have no business relationship with the company, not be paid in stock options, or serve for longer than nine years. They would contribute to good corporate governance by forming the majority of the company’s nominations committee (responsible for nominating senior management), all of the members of the remuneration committee (responsible for reviewing executive pay), and play a signiﬁcant role in the audit committee. The latter reviews ‘all material controls, including ﬁnancial, operational and compliance controls and risk management systems . . . and non-audit services by the external audit ﬁrm’ (ibid., 15–16) (meaning accounting and audit services provided by the same company), and informing the shareholders about how objectivity and independence is to be maintained.

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The Code retains self-regulation. The statutory regulator, the UK listing authority (the Financial Services Authority, FSA), refuses to make compliance a listing requirement, effectively accepting business arguments that regulatory rules must remain ﬂexible and business commitments be genuine rather than formal ‘box ticking’. Listed companies continue to comply or explain. The government also saw no reason to task the Financial Reporting Council (FRC, discussed below with accounting standards), originally a private institution of the City and now a designated independent regulator of company reporting, with enforcing the Code. The FRC sees itself as the guardian of the Code’s rules, not the guarantor of its implementation, a task it best sees reserved for shareholders, strengthened by takeover bids from other companies to replace bad management (Nicholson 2005, 4–5). It also issues guidelines for the interpretation of the Code in a process of public consultation (FRC 2005a). This reinforces its view of the company as a private association, a view condoned by the Treasury under Gordon Brown but not the Trade and Industry Department under several secretaries of state. It also reinforces the view that the state itself is problematic and harmful when it tries to regulate companies.

The Labour Party and Company Law In his 1996 Singapore speech, Tony Blair argued for the introduction of stakeholder-oriented corporate governance. Although prominent critiques of the British economy called for employee co-determination, Labour had not yet speciﬁed this (Hutton 1995). This opened up room for various groups within the party to contest the deﬁnition of stakeholder capitalism and the nature of the regulatory state, which they did during the company law review from 1998 to 2001 (discussed later). The stakeholder approach and the Third Way agenda found critics on both the Conservative right and the Old Labour left, as evidenced by attacks on the speech by both Michael Portillo and Ken Livingstone on the lines outlined above. Rajiv Prabhakar asserts that New Labour’s ‘Third Way’ thinking (Anthony Giddens and Peter Mandelson) had a real conception of stakeholderism that broke with the minimalist state conception held by the left and right of the country’s political spectrum. He argues that the stakeholder ethic expected businesses and individuals to jointly engage in a bottom-up process of economic and social reform that incorporates individualist (typical of free market approaches) and collectivist (typical of social democratic approaches) elements (Prabhakar 2003, 12). An accepted necessity to promote economic competitiveness in a competitive global environment would constrain social democratic approaches to social, political, and economic progress and simultaneously

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attack the excesses of irresponsible managerial behaviour seen to be the cause of problems in the economy. The new market-making orientation of the party had been prepared by Neil Kinnock from 1984 onwards, but it was Tony Blair and Gordon Brown who turned the Party around ten years later by winning approval to change Clause 4 of the Party’s constitution from advocating the nationalization of industry to advocating a competitive market economy. Prabhakar (2003, 20–1) and Whyman (2006) see this balance between social and business goals as a distinct hallmark of the New Labour approach, even after the government replaced stakeholder with vaguer Third Way references (Hutton 1999, 274–6; Huntington and Bale 2002, 44–50). Both authors demonstrate that the policy prescriptions in a broad range of policy areas foresaw the state balancing the demands of economic competitiveness and the demands of social improvement in ways that remained ideationally distinct from both social democracy and Hayekian market liberalism. The contest over the relationship between the state and business proved to be more controversial than the regulation of ﬁnancial services or accounting standards. One could say that the Third Way state had the promise of becoming a patron state in stakeholder issues as in Germany, but that this promise was weakly realized.

Company Law Review The Company Law Review (CLR) that followed raised expectations among Labour supporters that stakeholder capitalism would remedy corporate collapses and scandals. However, both the manner in which the CLR was announced and the make-up of its steering committee sent the message that the government intended to force some sort of better behaviour on British companies, but not necessarily to insist on a pluralist form of company law that would constitute a German-style model of stakeholder governance. The implications for the British state and British companies, managers, and stakeholders remained open. Margaret Beckett (Department of Trade and Industry, DTI) launched the CLR in 1998 after the Higgs Code defended voluntarist corporate governance. Beckett represented the more activist, Blairite wing of the Labour Party on the question of reforming company law, and although she was succeeded by two more moderate ministers, Mandelson and Byers, another activist, Patricia Hewitt, took over the DTI in 2001 by the time the review had been completed and inserted stronger stakeholder claims in the Companies Act.4 The CLR 4 Succeeded Stephen Byers until 6 May 2005, succeeded by Alan Johnson until 5 May 2006, and then by Alistair Darling.

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Report outlined what would be termed by John Parkinson, one of the more radical members of the CLR Steering Group, as ‘enlightened shareholder governance’. Business interests would remain central and dominant to the thinking of company law, but management ought to consider and report on long-term development and the interests of diverse stakeholders in the company. The company would remain a legally private association, but one that might be forced to communicate with the broader public about the impact of company activity on their interests. Managers were seen as opportunistic but capable of learning. The CLR report released in July 2001 saw the British corporate economy as already too strongly regulated and risk-averse to sustain a vibrant, competitive economy, which is what the CLR saw as its principle goal (Steering Group 2001, ix). Community interests were to be supplied through the wealth and employment the company would bring. It states in the preface to its report: ‘Our law should provide the maximum possible freedom combined with the transparency necessary to ensure the responsible and accountable use of that freedom’ (ibid., xi). The tone of the report demanded innovations, but none that would question the private nature of the British enterprise. This preserved the traditional archetypes of state and business. The CLR’s recommendations dealt with the typical roster of stakeholder issues, however. Chapters 3–6 recommended that a new Companies Act make a clear statement as to what directors’ duties are, stress that long-term company performance is important alongside short-term performance, and that these include relations with employees, customers, suppliers, and other stakeholders (ibid., xvii). It recommended features to enhance information on directors. On shareholders and institutional investors, the CLR recommended that companies be compelled to provide better and timelier documentation to small shareholders before the annual general meetings (AGM), that they reveal the relationships of the company with institutional investors, including their voting patterns (ibid., xviii), and that they clarify minority shareholder rights. The enlightened shareholder approach was the Steering Group’s way of dealing with contending claims to corporate control. Those who favoured shareholders retaining their status as sole owners with voting rights stressed that they would be unable to hold managers accountable if a balance of shareholder and other interests were to be legally mandated. This would collide with precedents in case law underlining the sole responsibility of managers to shareholders and would make it impossible for courts to enforce clear standards against delinquent managers. The CLR squared the circle through reporting requirements. It recommended the publication of an Operating and Financial Review (OFR) in

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addition to the ﬁnancial accounts to reﬂect both shareholder and stakeholder interests. The OFR would require an assessment of future business strategy, risks, and prospects, and outline policy on relations with employees, customers, suppliers, and impacts on the community and the environment, where these might be considered to be relevant, subsequent to audit review (ibid., xix). The CLR recommended closer cooperation between state and private bodies on reporting standards on which these were to be based, whereby the need for ﬂexibility and continual updates would require only the lightest legal codiﬁcation. It proposed institutional innovations to increase (private) oversight through the City, but reporting to DTI, which is friendlier to regulation than the Treasury. It also proposed institutional changes that would reﬂect the shift from ﬁnancial to stakeholder reporting (none of which the government implemented) in company law, accounting standards, and overseeing the implementation of reporting codes. The CLR did not recommend a regulatory state to replace the existing scheme for sanctions, however. It recommended a renewed, if modernized, reliance on criminal prosecution in the case of violations, covering dishonesty, which encompasses fraudulent trading, making false statements, and destroying records (ibid., xx–xxiii, 306–8). The unwillingness to introduce statutory regulators shows that the dominant role for the state remained minimalist.

Companies (Audit, Investigations, and Community Enterprise) Act 2004 The ﬁrst legislative product of the CLR was the Companies (Audit, Investigations, and Community Enterprise) Act 2004, known in Whitehall as the ‘small Companies Act’. It was passed before the end of Labour’s second term in ofﬁce and contained modest but nevertheless the most extensive concessions to the promotion of stakeholder governance that the Blair government would generate before the 2005 elections. In July 2002, the Blair government released its White Paper (DTI 2002a) on the plan for a new Companies Act whilst largerscale changes were being planned. The White Paper resurrects the link between the grant of limited liability to companies in the 1850s and the accountability of company management and other responsibilities. The government’s aim was to clarify and modernize the rules and responsibilities in order to promote enterprise and greater productivity in the British economy. The White Paper distinguishes between the rules applicable to small- and medium-sized enterprises, and those that apply to the large corporations. It still largely simpliﬁes compliance for the former and raises the bar for

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the latter. What is discussed here deals with the rules applicable to large companies. The Act stresses transparency and shareholder control in the company. Companies are required to have a single constitutional document, release their ﬁnancial reports within four months on the company’s website, and hold the general meeting within six months of the company’s ﬁnancial year end (ibid., 7–9). The Act also demands more from institutional shareholders as active parties in corporate governance, particularly by representing their investing clients by proxy in general meetings. This represents a demand for institutional investors to exercise more voice and less exit (selling stock) to inﬂuence company behaviour, much in the way that German banks do. Envisaged rights would include asking questions, taking part in simple votes by show of hands, and demanding formal poll votes (ibid., 7–8, 20). The Bill promoted not only a clear set of director responsibilities as proposed by the CLR, but also endorsed a decision that the ﬁduciary duties of directors should be to serve the interests of shareholders rather than stakeholders more broadly. This supported claims that dividing the responsibilities of managers between shareholders and stakeholders would make them unaccountable to clear standards and alienate the interests of the ‘owners’, who were assumed to be the registered shareholders (ibid., 24–25), despite numerous questions from the stakeholder camp about the validity of their claim that they own the company through their purchase of company shares (Kelly 2004). There is a tension reﬂected in the explanatory notes to the Bill between a felt need to improve the clarity of director duties and an aversion to ‘excessive’ regulation and legislation. On the one hand, the White Paper referred to widespread uncertainty among directors about what their duties are, especially due to the extensive body of case law on which these duties are based. Improvement was foreseen through legislated duties, as recommended by the CLR. In particular, the duty in paragraph 2 of the Schedule to the draft Bill makes clear that directors must consider both the short and long term consequences of their actions, where relevant, and take into account where practicable relevant matters such as their relationships with employees and the impact of the business on the community and on the environment.(DTI 2002a, 27)

The Bill’s explanatory notes devolved rule-making and enforcement to expert regulatory panels to avoid the possibility of rigid rules associated with setting ﬁrm rules in primary legislation. Financial and business interests would be considered legitimate stakeholders with a right to be consulted (but not determine rules) in the regulatory process, reﬂecting the DTI-centred

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approach, but not traditional stakeholders, reﬂecting the Treasury’s more City-oriented approach (ibid., 44–7).5 Ultimately, the Act’s main contribution is that it sets the parameters for greater reporting and auditing of company reports in the pursuit of transparency about the ﬁnancial affairs of the company. The issue of director remuneration is entrenched in an annual remuneration report based on the Code’s voluntary standards. Transparency as an aid to shareholder control of directors found its expression partly in new rules on company audits. In September 2004, the DTI announced that the government would introduce enhanced guidelines for audit committee reports to shareholders (including an explanation of judgements). In addition, the new Auditing Practices Board would consider new measures to ensure auditor independence, a new Audit Inspection Unit would review audit performance of the four largest audit ﬁrms, the Professional Oversight Board (POB) for Accountancy and a new Accountancy Investigation and Discipline Board would assume responsibility for oversight of the auditing profession under the umbrella of the FRC. All of this was envisaged to upgrade British standards on company procedures for providing internal risk control against mismanagement (DTI 2004a). In addition, the Act increased the oversight capacity of the DTI through the Companies Investigation Branch (CIB). The CIB handles cases of fraud and misconduct, poor information to shareholders, and where it otherwise considers an investigation to be in the public interest (DTI 2004b, 124). The government believed that these rules would pay for themselves by reducing the risk of lawsuits against British company directors by third parties. The greatest step of the Companies Act 2004 towards making the company deal with stakeholder issues was the OFR. The narrative, forward-looking approach would also support analysis of corporate social responsibility and sustainable development. Government wanted to study standards of when an issue is material, and therefore required reporting (ibid.). The DTI released a consultative document for the introduction of an OFR and the Director’s Report in May 2004. The foreword by Patricia Hewitt declares the interests of various stakeholders to be not only compatible with the interests of shareholders, but necessary to the long-run proﬁtability of the ﬁrm. Her own explanation of the approach: The OFR is a narrative report by quoted companies that will be made annually to shareholders, setting out the principal drivers of a company’s

5 This applies particularly to the (Accounting) Standards Board (ASB), whose name the Bill originally intended to change, reﬂecting the expansion of reporting standards beyond ﬁnancial matters. This proposed change was not introduced in the ﬁnal version.

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performance both in the past and in the future. It will cover the issues traditionally seen as key to a company’s performance—an account of its business, objectives and strategy, a review of developments over the past year, and a description of the main risks. But it will also cover prospects for the future and, where necessary, information about the environment, employees, customers or social and community issues where that information is important for an assessment of the company. The OFR will give shareholders information in an accessible form allowing them to make a full assessment of their company. It builds on best practice followed by a number of our larger companies, and follows the recommendations of the independent Company Law Review. It does not constrain companies’ freedom of action. It simply demands that directors explain their stewardship to their shareholders. (DTI 2004c, 5–6)

The OFR was intended to address stakeholder-based critiques of British corporate governance, including a stronger long-term focus on the business’ affairs. The OFR recommended continuous reporting for the company’s business strategy and risks facing the business, including ﬁnancial, health, safety, and environmental risks and the costs associated with them (ibid., 25). These fully reﬂect the main issue areas spoken to by promoters of pluralist corporate governance in which corporate governance reﬂects the interest of multiple interested parties/stakeholders (Hutton 1995; Parkinson and Kelly 1999, 101–7), although not the demand for stakeholders to have a say in corporate decisions. Consensus between the CLR and the government was found on the issue of auditing and enforcing the OFR: both wanted to see auditors, rather than the government, review the process of the OFR ﬁrst and foremost, to ensure that the directors had prepared with after ‘due and careful inquiry’, and leave substantial questions to speciﬁcally accepted standards. It also endowed the Financial Reporting Review Panel (FRRP) and the Secretary of State for Trade and Industry (SSTI) with powers to demand revised accounts for defective reports, to apply to the courts for ﬁnes and imprisonment, and to draw on enforcement powers already found in the Companies Act 1985 (DTI 2004c, 29–30, 35). The draft regulations require an auditor not only to review the OFR, but also to state so if it appears that the report has not been prepared with due care (ibid., 57). The Accounting Standards Board (ASB) saw added value for the OFR in its long-term business prognosis for the company’s ‘members’, that is, shareholders. This information may then ‘be of interest to users other than members, for example other investors, potential investors, creditors, customers, suppliers, employees and society more widely’ (ASB 2006, 9), but not generated with them in mind. The ASB’s implementing guidelines include some stakeholder issues, including environmental pollution, employee health,

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safety, training, and morale, and, in theory, community issues (deﬁned as social risks, mostly applicable outside the United Kingdom, e.g., child labour) (ibid., 41–50). The Confederation of British Industry (CBI) opposed the OFR in principle and any auditing of reports (CBI 2004a, 2–9), preferring a laissezfaire approach to company reporting and auditing. HM Treasury retroactively supported the CBI’s views of the British state’s proper place. Gordon Brown announced on 28 November 2005 in a speech to the CBI that the government would dispense with the statutory requirement for the OFR. The repeal was made ofﬁcial by regulation the next month. Internal documentation of the Treasury at that time shows that it wanted to bolster the economy by reducing statutory regulation, recognizing it would have to convince a sceptical DTI within government and the Trades Union Congress (TUC) and the Corporate Social Responsibility community of the need for the change (HM Treasury 2005a). Brown made no attempt at this, however. With the OFR ofﬁcially dead, the Accounting Standards Board (ASB) chose to release its OFR Reporting Standards as recommendations for best practice in reporting in January 2006. The ASB’s implementation guidelines focus on informing shareholders and other stakeholders about the ‘development, performance, and position’ of the company in the past, present, and future (ASB 2006, 7). With the requirement dropped, however, it is unlikely to have any real impact. The move, coupled with Gordon Brown’s rise to the leadership of the Labour Party in 2007, underlined that Brown had successfully undermined the distinctive, Third Way stakeholder approach to corporate governance reporting developed by Blairites and other activists, preferring instead to promote employee interests the traditional way, through macroeconomic policy (Peston 2005; Brown 2006). This collection of attitudes places Brown’s policy on corporate regulation in line with traditional Labour policies and not those of New Labour, and like its predecessors, makes a return to neoliberal policies under a future Conservative government much easier to undertake. The TUC, which had seen the reporting measures as its best hope for promoting stakeholder interests, demonstrated its displeasure quickly at Brown’s ‘present to the CBI’ at the time of the announcement (TUC 2005), but otherwise spent little time dwelling on the issue. The TUC had decided as early as the CLR not to pursue a plural (i.e. stakeholder) form of company law out of fear of not being taken seriously and had already internalized shareholder dominance in legal matters. Instead, its focus continued to be on partnership with business, particularly on the issue of training and skill development.

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In 2006, however, the ﬁnal version of the Companies Act would include mandatory, revolutionary measures for stakeholder reporting without the OFR. This meant that the Blairites within the government managed to carry the day in insisting that the state had the right and was right in forcing British companies to at least communicate with the stakeholder community in the public interest.

Company Law Reform Bill/Companies Act 2006 The ‘big’ Companies Act 2006 was large and complex, dealing with aspects of company law and ﬁnancial market regulation and taking into account domestic developments and the European directives that had been passed in the meantime. Two broad introductory observations can be made about the Act. First, it turned away from the traditional laissez-faire state norm, adding speciﬁc stakeholder requirements and regulatory powers to the roster of government tools to pursue stakeholder goals. Whilst the most rabid defenders of laissez-faire in the business sector lobbied to reduce the size and impact of the Bill after its introduction, the ﬁnal Act grew 50 per cent in length to encompass 1,300 clauses and 760 pages by its ﬁnal passage. The Blairite wing of Labour resisted business pressure, mixing stakeholder and shareholder-oriented regulation. Second, the government held to the traditional constitutional and legal mechanism of regulating companies through the SSTI. This restricts the executive branch’s ability to issue secondary legislation, known in the United Kingdom as statutory instruments, to those which are directly backed by ministerial responsibility. It therefore refuses to regulate through independent agencies as it does with regard to ﬁnancial market regulation. Whilst the shift to use the power of the state to promote stakeholder issues is a constitutive change (the right of the state to regulate these issues), the retention of ministerial responsibility covers important regulative norms governing the relationship between government and parliament (in rule-setting and enforcement). The government published its ﬁrst plan for the Company Law Review Bill (CLRB) in 2002, entitled Modernising Company Law, and the draft of the CLRB in 2005. The stakeholder elements found in the OFR were also reﬂected in the Bill. The explanatory notes to the Bill and the ﬁnal legal text support this conclusion. Clauses 170–81, dealing with the duties of directors, are the most telling:

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The Regimes of European Integration 172 Duty to promote the success of the company (1) A director of a company must act in the way he considers, in good faith, would be most likely to promote the success of the company for the beneﬁt of its members as a whole, and in doing so have regard (amongst other matters) to— (a) the likely consequences of any decision in the long term, (b) the interests of the company’s employees, (c) the need to foster the company’s business relationships with suppliers, customers and others, (d) the impact of the company’s operations on the community and the environment, (e) the desirability of the company maintaining a reputation for high standards of business conduct, and (f) the need to act fairly as between members of the company.

This formulation therefore not only allows directors to consider the best interests of stakeholders, as in the 1985 Act, but requires them to do so. This requirement would be more revolutionary if the law did not leave it up solely to the directors’ discretion to decide ‘in good faith’ what the proper means of serving stakeholder interests look like. Instead, the formulation is reminiscent of a business judgement rule on stakeholder matters, emphasizing leeway. Reporting remains a signiﬁcant responsibility of directors. They must release three reports: the annual accounts, which represent the ﬁnancial situation of the company over the last year; the remuneration report, which reﬂects and justiﬁes director pay; and the directors’ report, which is closest to the OFR, (Clause 447) focusing not only on the past year but looking forward to risks and opportunities for the business and those involved in it. An auditor’s report on these reports is also required. The directors’ report’s requirements include a business review with inbuilt stakeholder reporting requirements. The Blair government supported similar measure at the EU level in the EU Accounts Modernisation Directive, entrenching them in UK reporting. At the same time, the wording of the directors’ report reﬂects the status quo practice of ‘report or explain’. The main difference is that they must also explain on stakeholder issues rather than just the ﬁnancial aspects of corporate governance, under the Combined Code. Enforcement is ensured by the SSTI in his/her capacity as a personal regulator, assisted by an Auditor General. Elements of EU legislation were incorporated into the act, including the Transparency Directive’s rules on reporting (Clauses 1265–8), Market Abuse and misleading statements and cooperation with securities trading regulators of other countries (Clauses 1270–1), and, most importantly, the right of the SSTI to implement any corporate governance rules decided at the EU level (Clause 1273).

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Other changes implement legal agreements made at the EU level. As the Takeover Directive required a statutory mandate for takeover and merger regulators, the Act recognizes the Takeover Panel, until then a purely private institution of the City, as the regulatory body dealing with mergers, divisions, and takeovers in cooperation with the FSA and foreign authorities. The Act also implements the Statutory Audit Directive, the Market Abuse Directive, and the Transparency Directive, all of which reﬂect the government’s emphasis on investor protection with formal requirements for directors, enforceable through the courts or with the help of the SSTI. As with the small Companies Act, the CBI attacked parts of the Bill that departed from traditional laissez-faire principles and increased regulation of the company. These included company consideration of stakeholder interests, which was later retracted. The CBI also demanded that government refrain from interfering with directors’ prerogatives in setting company strategy (CBI 2006a), and unsuccessfully criticized requirements to document director tasks, to have them audited (CBI 2006b, 2–5), and to report how institutional shareholders had voted in general meetings. The CBI decried a conﬂict with the self-proclaimed aim of the bill to reduce regulation (ibid., 5–7), arguing for continued ‘business and shareholder ownership of corporate governance issues’, by which it meant self-regulation through codes. In this vein, the CBI further called for the FRC (as a self-regulatory organization, SRO) to deal with ﬁnancial reporting standards rather than the FSA, as the latter could issue binding statutory instruments and the former could not. It also opposed the development of a European Corporate Governance Forum proposed by the Commission, especially if it were to have any contact with the Committee of European Securities Regulators (CESR; CBI 2003a, 2–4). Directives would, in its view, destroy the ﬂexible combination of Codes and the Companies Act that had been cultivated in the United Kingdom until then instead of allowing the UK business community to develop recommendations and principles on their own. Any corporate governance forum should, further, exclude academics (who already have the European Corporate Governance Institute, ECGI) and the Commission (to retain business independence), and explicitly limit cooperation to exchanging best practice. This reﬂects the observer role of the FRC over Code development in the United Kingdom (ibid., 12). The CBI’s appeals to retain a traditional laissez-faire relationship between state and business went largely unheeded. Remarkable in the Companies Act is that industrial relations (between the company and its employees) are not a subject of concern. The company is only obligated to report on the relationship. Any other obligations are derived from national legislation and practice, which continue to be among to the

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most laissez-faire in Europe, and from European legislation, speciﬁcally information and consultation obligations for transnational companies through the European Works Council Directive 1994 (adopted by the Blair government after taking ofﬁce) and for British companies through the Information and Consultation Directive 2002. These rules generate obligations for the business to speak with employees about matters affecting their employment. They do not, however, require businesses to allow employees to participate in decision-making in any formal or authoritative way. This forces dialogue between the two ‘social partners’ but otherwise retains the core of the UK view of the company as an inherently private association owned by shareholders and run in their interest. The CLR had already made a clear suggestion against introducing anything reminiscent of co-determination into the new Act and the TUC had not viewed such a demand as politically feasible then (Donnelly et al. 2001). Co-determination would have challenged the supremacy of property rights within the company, and mandatory co-determination would have challenged the private nature of the ﬁrm and the accompanying notion that the state had little business interfering in private affairs. More than this, however, New Labour was far more critical of unions as factors in the economy and as an inﬂuence on the Labour Party itself than party traditionalists. Although Brown and Blair promised to correct the antiunion attitudes of the Thatcher and Major governments, they successfully reduced the voting power of unions within the party and refused to roll back the anti-union legislation passed from 1981 onwards that had weakened organized labour so badly. In this context, it is not surprising that the more radical calls for pluralist corporate governance and German-style codetermination were never really discussed as a point of law. The TUC showed, however, that the country’s union movement favoured German-style industrial relations on a voluntary basis. In the 1990s, the TUC switched from rejecting cooperative relationships with business to promoting them under the generic label of ‘partnership’. Instead of being hailed as a principled control of business by employees as in Germany, however, partnership is presented as a practical means by which unions and employees can work together with business to secure speciﬁc goals together, particularly in long-term training and skill development. Clough (2004) sees these arrangements as informal partnerships promoted by the national Training and Education Council, which coordinates the local Councils. The Blair government’s legacy is an evolutionary modernization of company law. The company remains a private association, but with enhanced responsibility to be transparent and communicative on a broader spectrum of issues. Shareholders must rely on the courts for enforcing rights rather than state

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regulators. The government’s enhanced powers of regulation are largely limited to reporting issues and applied to individual companies. Other changes are in the new statutory nature of self-regulating organizations like the Takeover Panel, which makes the state ultimately responsible for their activity, and which removes some of the discretion that these bodies might have exercised in the past. These changes were made purely in the context of constructing agreements at the EU level to manage takeovers, mergers, and other company transactions for the company law regime. In practice, it changes little and is not intended to do so by UK authorities. The only hard change affecting companies is found in the assignment of the FSA to be a statutory regulator and state listing authority for the ﬁrst time in UK history. That, however, because it deals with the trading of ﬁnancial markets and not the internal workings of the company, is thought of as a different policy area where different rules and challenges apply: to ﬁnancial markets. That is the subject of the next section.

FINANCIAL REGULATION REFORM Until 1997, laissez-faire attitudes applied to the operation and regulation of ﬁnancial markets, speciﬁcally the London Stock Exchange and investment banks (and to accounting standards until 2004). Moran (2003) underlines that pre-1986 ‘regulation’ relied on the threat of exclusion from social networks in the City of London and various private associations typical of gentlemanly capitalism, reinforced by personalised oversight by the Treasury and the Bank of England. Labour meanwhile refused to regulate the Exchange or the banks.6 The Thatcher government’s Financial Services Act 1986 required ﬁnancial service providers to obtain membership in an SRO, which would set standards for members and be certiﬁed by a new government agency, the FSA. The SRO approach was a laissez-faire alternative to statutory regulation, relying on benchmarks, peer pressure, and accredited self-regulation until the FSA became a statutory regulator under Labour in 1998. Statutory regulation of ﬁnancial market transactions was one of the earliest and most central regulatory and constitutional changes made by the Blair government affecting trade in company shares. The changes constituted a small revolution in the governance of ﬁnancial markets in the United 6 The exceptions being the nationalization of the Bank of England and separating domestic from international banking.

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Kingdom due to the statutory regulatory approach that replaced the voluntary, self-regulatory approach that had prevailed beforehand. The changes were introduced through the Financial Services and Markets Act (FSMA) 2000. The FSMA created a statutory ﬁnancial services regulator, the FSA. The government saw this step as necessary to counter several consequences of market failure, including incompetent or fraudulent management, and information asymmetries that undermine conﬁdence in ﬁnancial markets. The FSA would have the power of investigation, and served as a single stop for investors to register complaints and ﬁle claims for compensation (FSA 2003a). The FSMA concentrates regulation of all ﬁnancial services, including insurance, banking, consultancy, and securities trading in the hands of the FSA, where it previously had been fragmented among the FSA (Securities and Investments Board), Bank of England Supervision and Surveillance Branch, and the Securities and Futures Authority (HM Treasury 2000). The Act’s explanatory notes set out the objectives of market conﬁdence, consumer protection, ﬁghting ﬁnancial crime, and public awareness as its main goals. It licenses practitioners, regulates listing rules and prospectus rules in its capacity as the UK Listing Authority, and investigates and disciplines cases of market abuse and other violations of the Act. The FSA is the regulatory centrepiece of the ﬁnancial markets regulatory regime in the United Kingdom. The Treasury remains responsible for primary legislation within which the FSA acts. The Bank of England has responsibility for the overall stability of ﬁnancial system, and therefore has an oversight over what strategy is required to manage systemic ﬁnancial risks within the context of the law and of new developments that might not be covered by the Act. The FSA is responsible for direct regulatory aspects, which are extensive (HM Treasury et al. 2000). In the context of European legislation, it is responsible for implementation of the Listing, Prospectus, Market Abuse Transparency and Statutory Audit Directives (Evans 2004), and for cooperating with other securities regulators through the CESR body in Paris (FSA 2006, 2). These responsibilities mean that the FSA has an impact on the internal workings of the company in the United Kingdom. In addition to meeting the requirements of the Act on various kinds of reporting and external audit (Evans 2004, 8), FSA rules state which decisions must be made with shareholder approval, and which can be made by management followed by a publication for shareholders (HM Treasury 2002a, 59). It is also responsible for enforcement, ranging from ﬁnes to director disqualiﬁcation in the most serious cases. It also incorporated application of the Combined Code as part of the Listing Rules starting 1 March 2004 (ibid., 10–12), and foresees a greater expansion of its activity. In 2004, it proposed the development of

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Listing Principles alongside Listing Rules to bridge regulatory gaps in the listing rules (Evans 2004, 11). This can be thought of as insisting that the corporate community follow the spirit (principles) of the law and not just the letter (rules). The FSMA requires the FSA to issue guidelines to business on, among other things, deﬁning market abuse (FSA 2004, 2). The FSA focuses on behaviour and the role of information in guiding it. It distinguishes between investors using and issuing legitimate information in the public realm, and deﬁnes misleading information, dissemination, and distortion as offences undermining investor conﬁdence in regulated markets (ibid., 10, 18). Another argument adopted by the Bank of England, the Treasury, and Parliament in favour of developing independent powers for the FSA was the need to ensure suitable powers for intervening in the economy in an emergency, and in cooperation with other national securities regulators. The Bank of England stressed that the UK ﬁnancial market’s high degree of interconnectedness with international ﬁnancial markets made it necessary for UK regulatory and statutory standards to be in line with standards elsewhere, and to promote coordination and cooperation internationally to ensure market conﬁdence and security alongside consumer protection and combating ﬁnancial crime (Large 2003, 9). As a result, it regulates a wide range of activity, levies penalties where necessary, and can bring persistent violators before the courts. Although its main functions are oracular—providing guidance in advance of behaviour—and supervisory in accordance with the tenor of the Act, these provisions provide the FSA as well with the teeth to impose itself through demands for information, on-site investigations, and court actions on unwilling market participants (ibid., 119–30, 165–9, 381). In addition to relying on transparency through reports to the Treasury, the FSA must follow procedural rules requiring a written explanation and consultation of proposed new statutory instruments (ibid., 155). It is also held accountable for its actions after the fact by the Financial Services and Markets Tribunal, which adjudicates complaints, and ultimately the Lord Chancellor in his capacity of the Chief Justice of the United Kingdom (ibid., 132). The Act did not replace the SROs under its supervision entirely as rulemakers, a concession to the lobby work of the private sector. However, the FSA gained control over whether to recognize new SROs (ibid., 325–47), and SROs must respect FSA rules on investor protection. There is therefore a transfer of authority from the private to the public realm. Although the FSA prefers to adopt a behind-the-scenes approach to correcting company behaviour before using ‘its teeth’ to enforce rules (FSA 2003a, 5) and although deregulatory reforms were introduced by the government in 2002 following a two-year review (HM Treasury 2002b), the FSA’s transformation into a

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statutory regulator is an unmistakable and decisive shift away from the laissez-faire approach taken through SROs in the 1986 Act. The FSMA underwent great public discussion and parliamentary scrutiny, not least due to its consequences for the constitutional thinking of the United Kingdom. A joint committee of Lords and Commons, the Burns Committee, reported in April and June 1999 (House of Lords 1999a, 1999b). Parliamentary demands for accountability were decided through annual reports to HM Treasury, which reported to Parliament (House of Lords 2000). The key body considering the constitutional and constitutive issues involved in delegation is the Delegated Powers and Deregulation Committee (Lords). The Committee notes that this applies particularly to the use of statutory instruments by the executive branch to change laws (known as Henry VIII powers), and skeleton bills (which have no other substance than a delegation of authority to the government to pass statutory instruments) (House of Lords 2005, 4). This conﬁrms that the government was engaging in a constitutional innovation by endowing the FSA with such sweeping powers, with consequences for the way that the state and its legitimate chain of accountability were envisaged. Howell Jackson (2005, 10–14) conﬁrms that the Labour Party had a free hand in Parliament, supported by public concern about ﬁnancial scandals like Barings and Maxwell, to push through its plan for a statutory regulator. He concluded that the government and the FSA’s internal organizational culture seek to avoid excessive regulation and promote competitiveness of the UK economy within the principles of efﬁciency, economy, proportionality, and promoting management responsibility and innovation, with a focus on market conﬁdence its unique position as a central service provider in global ﬁnancial markets (ibid., 21, 28). Consumer protection and ﬁghting ﬁnancial crime were to be pursued with a less formal approach than American regulators. The FSMA and the development of statutory regulation reﬂect Labour Party activism in the ﬁeld of promoting market development in the United Kingdom. The liberal, pro-market bent favoured by both Blair and Brown is evident in the market-making tone of the Act. The regulatory principle emphasizing fairness among investors breaks with the traditional laissezfaire conception of self-regulating gentlemanly capitalism that the Thatcher and Major governments continued to cultivate, even though the ﬁnancial market changes of the 1980s and the corporate scandals of the 1990s had demonstrated that this ideal was far from effective. Rather than rail against the notion of shareholder capitalism, as the Labour Party would have done before rescinding Clause 4 of its constitution in the 1990s (which called for nationalizing the commanding heights of industry), and as proponents of

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stakeholder corporate governance would have liked to see, New Labour carried it forward as a key legitimating principle for a more equal shareholder economy among all investor groups. The damage to the laissez-faire principle is evident, however, in strongly worded business sector complaints that the government had not listened to their concerns about over-regulation and the negative side effects of mandated transparency. The CBI made this complaint in advance of negotiations at the European level, as it saw itself shut out of the consultation process for the Financial Services Action Plan (FSAP), speciﬁc directives like transparency and prospect directives, and strongly opposed transparency (CBI 2003a, 2). This intent to regulate and to promote markets as level-playing ﬁelds closely parallels the approach of the German government under Schro¨der. This new kind of similarity would have been unthinkable ﬁve years earlier, but made agreement on European norms possible.

ACCOUNTING AND THE ACCOUNTING PROFESSION The accounting and auditing professions, meanwhile, still regulate themselves and emphasize the independence of their liberal profession from statutory regulation. Accounting standards regulation also works through an SRO, avoiding direct regulation. The industry created the Accounting Standards Committee (ASC) following a 1967 accounting scandal to offer ‘authoritative but not mandatory guidance to the profession’ (Myddleton 2004, 56). The Thatcher government mandated an ASB as an SRO in 1989 following renewed accounting scandals. A chair and deputy would be appointed by the SSTI. The state would cooperate with users, preparers, and auditors (ibid., 57) though the Bank of England and the DTI to oversee the Board’s work from the new FRC (ibid., 49). A new FRRP would supervise the application by listed companies. The FRRP continues to seek to put informal pressure on companies and to eschew seeking court orders for correction, which it could (CGAAI 2003, 94). These innovations were in line with 1989 responsibilities of all EU member states to register the relevant SROs (Institutes and Chartered Accountants) under the Eighth Company Law Directive (Flower 2002, 99). The treatment of accountants and accounting standards belong together, but the issues that involve them in the United Kingdom are much more strongly interwoven with the corporate governance items. The same is true about how the government and other actors think about handling the question of regulation, particularly the question of choosing between statutory and self-regulation. The development of public debate about the need to do something to improve the ﬁnancial aspects of corporate governance and

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the sensitive issue of how to balance the statutory and self-regulating elements of regulation of companies and accountants meant that more attention was paid to basic questions of regulating accountants and their interaction with company management than in Germany, where the right of the state to regulate accountants was imposed over protests, but never seriously challenged. The British debate therefore has consequences both for the regulative and constitutive norms of the state in its relationship with the private sector. Until 2004, the accounting profession in the United Kingdom was entirely self-regulating. The Blair government had inherited the system from the Conservatives in which the three British Institutes of Chartered Accountants—ICAEW, ICAS, ICAI—and an organization for auditors, ACCA, that represent accountants in the United Kingdom, regulated their members privately and together in an SRO known as the Accountancy Foundation to provide collective oversight under the terms of the Companies Act 1989.

Accountant Failure, Corporate Governance, and the Penrose Enquiry Conﬁdence in the soundness of the self-regulatory system was shaken yet again by the near-collapse of the Equitable Life company. It dealt partly with corporate governance mechanisms but also with the oversight of accountants and actuaries. The Treasury commissioned the Penrose Enquiry in 2001 to investigate the collapse of Equitable Life and the state of corporate governance in the life insurance industry generally. Penrose reported in March 2004 with conclusions applicable to the broader corporate governance debate and to the question of what mandatory regulation ought to be imposed, with a particular focus on accounting, actuarial, and audit procedures, which were seen as the reasons for Equitable’s collapse. The report heavily criticized not only business, but the practices and thinking of Parliament, of the Conservative government under John Major (1990–97), and of the DTI at the time on the basis of emphasizing deregulation at the expense of the public interest in good corporate governance (Penrose 2004, para 49, 53–5). Regulation was at that time ofﬁcially in the hands of the DTI, moving to the FSA, and transiting through the Treasury. Regulators reported the government’s emphasis on a ‘light touch’ to regulation, and a corresponding allocation of resources. Ministers rejected statutory regulation, pointing to only one failure in the last twenty years. The DTI made up for its weaknesses in oversight by relying on company ratings by private agencies (Penrose 2004, 711–12, 726).

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In the wake of Equitable’s collapse, the Treasury came out strongly in favour of increasing the oversight of ﬁnancial reporting by the FSA, but also of ﬁghting poor corporate governance more actively (Kelly 2004). It saw in the company a ‘culture of manipulation and concealment’ in which management, including the chief actuary, hid information about the company’s ﬁnancial position from NEDs, policyholders, and regulators. NEDs were dependent on information from this person. Management also failed to communicate with policyholders. This constituted reason enough to move away from a system of self-regulation for the accounting, auditing, and actuarial professions, and towards a system of independent regulation. The Penrose Report pointed out that those within Equitable who were supposed to oversee the audit did not possess the knowledge to do so, so that corporate governance failed despite structural features designed to help. Equitable’s risk management committees operated diligently, but on nonactuarial affairs only (i.e. they did not handle the actual ﬁnancial products). The NEDs had no actuarial skills which would have allowed them to review these matters and claimed that it was ‘absurd’ to expect them to have such knowledge, so that two successive CEOs could drive the company into bankruptcy and lie about it to the Board and to regulators unnoticed (Penrose 2004, 697–9). This also appeared to be the case for the regulators. Penrose rejected claims by the Government Actuaries Department and the FSA that they were unaware of the reports presented by Equitable, and argued that the regulators did not have the necessary skills to read and deal with them critically. This was demonstrated in Equitable’s refusal to set aside reserves for future liabilities that were not listed as such in the company’s books, and the lack of reaction by regulators at the time (ibid., 714–20). The FSA’s subsequent attention to accounting standards was therefore to be welcomed. The Penrose Report concluded that the system of surveillance and control inherited from the Conservatives that formed the context of this failure was ﬂawed. Shareholders relied on the personal reputation of an appointed actuary to monitor the long-term ﬁnancial forecasts of the ﬁrm, and this separately from the company’s year-to-year accounting reports, prepared by a separate accountant. The actuaries had actively resisted any prescribed rules by which their work could be independently judged, or the establishment of an ofﬁcially recognized professional regulatory body, in contrast to accountants. All of this made it possible to sustain a widely accepted corporate culture that neglected proper governance of company ﬁnances. Penrose noted that many of the Directors of Equitable protested that it was ‘grotesquely unfair’ to criticize their conduct without comparing this with the behaviour of other

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institutions and individuals, on the grounds that ‘Everybody was doing it!’ (ibid., viii). Penrose’s own recommendations supported the prospect of tighter regulation of auditing and accounting. He recommended that the ASB work on actuarial and auditing standards, that an oversight body be brought into being, possibly with the involvement of the FSA, and that accountants, actuaries, and auditors be held serially and collectively responsible for their reporting on company ﬁnances: Allowing one professional, the auditor, to express a view about the assets and peripheral liabilities, but excluding him for the long-term liabilities, while allowing another professional, the actuary, independently to certify the liabilities is like commissioning the two legs of a pair of trousers from separate tailors. (ibid., 737–9)

In this context, Penrose was pleased to announce that Sir Derek Morris from the City would take up the task of undertaking the review of professional regulation (ibid., para 74–7). Ultimately, Penrose saw the central problem that the government had to tackle as the lack of policyholder power over ‘unbalanced or ineffective boards’. Whereas the FSMA 2000 had given the FSA the power to deal with individual directors running foul of the law, it had no provisions for dealing with company boards that lacked the skills and independence to ensure good governance, preventing the CEO from also acting as the chief actuarial ofﬁcer, or insisting on auditing and actuarial committees that would perform their functions well (ibid., 739). This change would make a strong break from the traditional British regulatory approach focusing on criminal investigation and punishment of wrongdoing by individuals, and would constitute a more invasive demand on the part of regulators into the internal workings of the company.

Response on Professional Oversight Patricia Hewitt, in charge of the DTI, tasked a new Coordinating Group on Accounting and Audit (CGAA) with making recommendations on the appropriate balance of self-regulation and statutory regulation in the wake of the Enron and WorldCom scandals. The government and the Group concurred that it would be necessary to introduce independent regulation on accounting standards and the standards of the accounting profession in order to maintain the United Kingdom’s prominent position as an international ﬁnancial centre and to boost domestic conﬁdence in ﬁnancial reporting (CGAAI 2003, 34). The CGAA recognized that the EU and the International Organisation

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of Securities Commissions (IOSCO), advocated improved regulation of accounting and auditing standards but argued that there would still be a need emanating from the national level if these incentives to act did not exist (ibid., 27). A domestic rethinking of regulating accountants was therefore driving the move to increase state control, allowing government to consider more sweeping changes in the standards themselves, something that could only be accomplished through legal and regulatory interference. The CGAA concluded in this respect that accounting scandals showed that a ‘wider ethical agenda’ might have to be considered along with questions of technical regulation (ibid., 30–1). The CGAA reported in 2003 with the recommendation that the FRC be made an independent regulator of the accounting and auditing professions, with the help of a new Auditing Practices Board, a new POB endowed with powers delegated by the SSTI within the Companies Act, and a new Investigation and Discipline Board as an independent body within the POB, with powers of sanction and disqualiﬁcation for auditors. The FRC would set, monitor, and enforce accounting standards, and oversee the professional oversight bodies, with particular emphasis on reporting standards (ibid., 6, 7, 18). The Group’s recommendations foresaw that the government would disregard a 1998 agreement with the private sector for the Institutes of Chartered Accountants for England and Wales (ICAEW), Scotland (ICAS), and Northern Ireland to introduce a common investigation and disciplinary board, as the private sector had not followed through on their commitment. The government had criticized the Institutes’ Joint Disciplinary Scheme as woefully inadequate (ibid., 38–40). The Group also argued that the appointment procedure for the chair and deputy of the FRC be changed to emphasize merit and transparency for the ﬁrst time, and that internal codes of governance be developed and made public (ibid., 21). Whilst the majority of comments to the Review supported the upgrading of the FRC to the status of an independent regulator, the private sector was more reserved both on standard setting and professional standards. Most strongly, the private accounting associations resisted standard setting from being taken out of their hands, whilst report users supported government proposals for regulation. On professional standards, the ICAEW favoured a fusion of its own SROs and the FRC as an independent regulator, while the Institute of Directors and the Actuarial Association (ACCA) opposed any introduction or independent regulation (ibid., 17, 28, 33). The Big Four accountancy companies (but not the accounting institutes) were willing to support the introduction of such powers to cover auditing, but not in accounting standards themselves, and only if investigations of auditing were limited to exceptionally large and suspicious cases (ibid., 47–8).

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The ﬁnal model chosen by the government provided a small concession to the private sector through the requirement of an ASB and an Auditing Practices Board with private-sector participation, but the FRC’s status as an independent regulator and provisions for investigation and discipline of the profession at the level of decisions taken by accountants and auditors were introduced in 2004 by the Companies (AICE) Act 2004. The introduction of investigation and disciplinary powers in a public regulator made it necessary to have a statutory basis and an independent regulator (ibid., 44).

Reporting Standards Having said this, the FRC, which has up to thirty members from various backgrounds and is funded by the UK government, the accounting profession, and listed companies, has not developed into the kind of independent regulator that the FSA became, although it is formally an independent regulator. This is mostly a consequence of the FRCs view of its own role in UK regulation and, of course, a willingness on the part of the government to accept this. The FRC sees its mission to promote quality reporting and internal corporate governance practices, but also to promote convergence of United Kingdom and international accounting and auditing standards, to promote adoption of international standards by the EU, and to advise the UK government on EU negotiations over these standards (FRC 2004a, 9–10). In these capacities, the FRC is a technical adviser to the FSA in its role in the CESR Subcommittee on enforcement of reporting standards, and takes part in EU Enforcer Coordination Sessions (FRC 2004b, 6, 7). It recognizes that European and international organizations play a role in determining rules and works to make its inﬂuence felt in those bodies. This extends to the development of IAS and IFRS (FRC 2004a, 7). It, along with the FRRP or the ‘The Panel’, has the best overview of how accounting and corporate governance reporting standards are applied in the United Kingdom. The FRRP does not offer advice on the application of accounting standards, but reviews compliance with them. The Panel may request a company to explain divergence from standards, or to set forth a revised set of accounts, and may pursue a court order in cases where management remains intransigent (FRC 2005b). It is therefore the main centre of application oversight in the system, looking for deviant behaviour. The ASB provides both standards and guidance for accountants and UK companies. It is the body of experts that interacts on detailed points in cooperation with the International Accounting Standards Board (IASB), European institutions, and the European Financial Reporting Advisory

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Group (EFRAG), ‘To ensure high quality in IASB standards and their adoption in the EU’ (FRC 2004a, 10). The government supports the ASB’s intention to align UK accounting standards as closely as possible. The DTI notes that the government’s intention is to align UK-GAAP as closely as possible with IAS, to minimize the cost of complying with both. This was the intention of the Modernisation Directive and the Fair Value Directive at the EU level (DTI 2004b, 123). In 2004, the Companies Act 1985 (International Accounting Standards and Other Accounting Amendments) Regulations 2004 (SI 2004/2947) was formally introduced to provide a legal basis for the adoption of this goal in national and European law. The government’s plans for reporting standards generated little in the way of opposition. As noted above, the big accounting ﬁrms favoured as laissez-faire a model of setting accounting standards as possible. Although they oppose the ASB developing hard standards, they favour the guidelines that the ASB issues, as these provide it with non-compulsory direction.

C ON C LU S IO N The prevailing view of the state and of its relationship to society and the business community in particular underwent signiﬁcant changes after the Blair government came to power. The public support that made the shift possible followed in part a lack of public conﬁdence in the ability of business to regulate itself using the SRO-centred techniques developed or reﬁned under Thatcher. Another important reason why the changes could take place was that the Blair–Brown strategy of accepting and embracing the market, but improving on it with a helping public hand reassured mainstream voters that the capitalist system would not be challenged in principle as the Labour Party had done until 1994. The change of Clause 4 of the Party’s constitution from a promise to nationalize industry to the pledge to promote the economy, and the distancing of the party from the TUC were important signals to mainstream voters that the Labour Party harboured a view of the state that would continue to promote the capitalist system that served them so well, but prevent some of the worst excesses and failures that the selfregulatory system had perpetrated. Shareholders, employees, and pensioners above all had felt the results of laissez-faire most directly. This was the basis for a shift towards a regulated market economy for ﬁnancial markets and a mixed form of laissez-faire (self-regulation) and modest forms of independent regulation in company and accounting regulation.

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The British process of legislating was slow and deliberative and often put business in a reactionary role to government proposals, attempting to preserve what bits of laissez-faire self-regulation they could. The Conservative Party supported business where it was able, but the Party was in such internal disarray between 1997 and 2007 that its contribution to the debate on regulation was weak and disappointing beyond the contributions of individuals to consultation proceedings initiated by the government, particularly the CLR. Fortunately for accountants and corporate directors, the Treasury under Gordon Brown proved more inclined than Blairites to promote a light-handed form of regulation for them, even whilst it pushed forward with a regulatory state for securities trading. This placed self-regulating organizations for companies and accountants under statutory oversight rather than replacing them altogether. Accountants working for the Standards Board would continue to play a role in developing UK accounting standards in a manner relatively free from government interference, but with the understanding that the ASB would work towards the goal of converging with IAS that the government shared. What makes the treatment of corporate governance different from the treatment of accountants and accounting standards is therefore not so much the ultimate form of independent oversight (both are ultimately controlled now by the FRC), but the determination of government to align accounting standard issues to the norms of an international body. This provides the accountancy profession with much less leeway and the rules governing them much less particularity than is the case for corporate governance and regulation. These remain highly typical to the United Kingdom, shielded as strongly as possible from interference from the regulatory requirements of the EU. It is tricky and probably pointless to argue whether general attitudes to the EU by the political parties affected or were affected by the debates that are discussed here. They are patently both. It is useful, however, to add some brief observations here on where the parties stood on Europe in the midst of these reform measures. Butler and Westlake report on the election campaigns of the Labour and Conservative Parties in the 2004 European Parliamentary elections, where the issue of integration was particularly strong. The Conservative Party’s slogan was ‘Putting Britain First’. It opposed the EU constitution, the Euro, tax harmonization, and the delegation of a host of other policies. It argued that the European Parliament should have the right to repeal legislation, national parliaments the right to propose legislation, and sought to base the EU on strong national parliaments with variable cooperation. Most interesting is its equation of the people of Europe with European business and its hostility to regulation of any kind, quoted here: ‘The European Union is failing many of its people. European business is over-regulated and over-taxed, thanks in large part to the European Union’ (Butler and Westlake 2005, 108).

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The Labour Party’s slogan emphasized its economic competence, connected it with European-inspired regulation, and reminded voters of how discredited Conservative policies had become. Turning around the 1979 Conservative campaign slogan ‘Britain isn’t working’, the 2004 campaign was fought under the slogan ‘Britain is Working—don’t let the Tories wreck it again . . . . The 1.9 million new jobs created since 1997 have been helped by Britain’s EU membership. We have come too far to put this jobs record at risk with the Conservatives.’ The alternative offered by Labour was the continued opening of markets for UK businesses and, reﬂecting a critical campaign against British retail pricing (‘rip-off Britain’), prospects for better competition and consumer prices at home. Interestingly, though, the Labour campaign in the 2004 European Parliamentary election, where the Conservatives had better chances than in national elections, equally bore the stamp of Gordon Brown and his lighter touch to regulation. This is the source of pledges to work hard to end the ‘gold plating’ of regulations and directives for the single market issued by the Commission and applied in the United Kingdom (ibid., 109). The Liberal Democrats, close to the Labour Party and supportive of its regulatory reforms for the most part, but still in parliamentary opposition, was equally, if not more enthusiastic about Europe. Other than its slogans ‘Making Europe Work for You’ and ‘European Unity is good for Britain’, there were few details, however (ibid., 110). By that time the Blair government had begun speaking about stakeholder governance, and a new consensus across the political parties favouring the interests of British business had been established and made most famous by Peter Mandelson’s comment that we are all Thatcherites now. In the wake of the 1997 election victory, Blair’s vague commitment to the introduction of stakeholder governance was reduced in its ambition to be compatible with the broader interest of British business. What it insisted on changing at the end was the introduction of statutory regulation forcing companies to become more transparent, to publish more information for the general public as well as shareholders, and to establish a new public listing authority to oversee the application of these demands. This shows that the British political economy has developed features of the regulated market economy rather than a selfregulated market economy. On ﬁnancial markets and accounting standards, New Labour was able to use public interest arguments to build an independent regulatory state, which was both a constitutional and regulatory innovation based on new views of the state that were compatible with European projects to delegate governance and cooperate closely with European counterparts.

7 European Pre-Regime Regulation The politics of regulating the corporate economy in Europe were markedly different before and after 2001. Before then, European corporate and ﬁnancial legislation was limited to a handful of directives with limited impact on the substantive regulation and operation of companies, ﬁnancial markets, and accountants. These directives were then implemented on a national basis with great discretion despite a broad commitment in the EEC Treaty to harmonize company regulation in Europe, but between 1970 and 2000 the Commission repeatedly failed to secure Council agreement for a set of directives that would establish a true European body of law for the corporate economy. The gap between the Commission’s preferences for harmonization and delegation and the member states’ reluctance to support these goals in practice reﬂects both the persistence of robust national constitutive norms supporting the member states’ responsibility for law, regulation, and enforcement within their jurisdictions and a correspondingly weak conception of the European Economic Community (EEC)/European Community (EC)/European Union (EU) as a legitimate source of detailed legislative commitments. Given the minimal regulatory nature of European legislation, there is no empirical basis in the three policy areas from which to argue that supranationalism or multilevel governance had developed. The Commission could summon support for directives on an ad hoc basis, however. During the 1990s, the Commission successfully moved the Council to respond to serious and repeated company failures and ﬁnancial scandals with updated directives on the ﬁnancial aspects of corporate governance. The pressing and concrete challenge to conﬁdence in national regulation made passage of new directives in all three policy areas uncontroversial for the member states, but the directives did not generate ongoing EU-level responsibilities to formulate, review, and update policy and the member states retained control over any new measures. At the same time, the more controversial elements of company law and corporate governance, such as who should participate in decision-making, remained as insulated from common European decision-making as they could possibly be. The single exception to this pattern was the introduction of European Works Councils in 1994. This fulﬁlled a commitment in the 1992 Maastricht

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Treaty and can be seen as a peace offering to unions in return for the restrictive economic rules of Economic and Monetary Union, which forms the centrepiece of the Treaty. However, European Works Councils would ﬁrst become interesting on a broad scale when companies could more freely migrate and restructure across national boundaries. This would be impeded until the construction of a regime between 2001 and 2004.

PRE-REGIME EUROPEAN COMPANY LAW The EEC Treaty of 1958 treated companies as natural persons with a right of establishment in all member states (Article 58, now 48). The Treaty’s chapter on the right of establishment further committed the member states to coordinating to the necessary extent the safeguards which, for the protection of the interests of members and others, are required by Member States of companies or ﬁrms . . . with a view to making such safeguards equivalent throughout the Community. (Article 54, now 44, paragraph 2(g))

The reference to safeguards meant that a wide range of mechanisms could be employed to ensure good corporate governance standards. As a consequence, the Treaty foresaw the increasing approximation of company law and regulation (of a public or a private nature). This formula promotes the functional equivalence of national provisions, not its full harmonization. This did not discourage the Commission in its pursuit of common substantive rules and procedures, but its success remained limited to framework commitments on corporate governance regulations. The Council saw gradual approximation of company law by goals and minimum standards as legitimate, but the harmonization of company law with uniform rules as beyond the desired scope of Community responsibilities. Under these conditions, it was not conceivable that a regime for company regulation in Europe could develop with universally accepted actors and patterns of interaction. The directives constituted general commitments, which the member states were responsible for implementing on their own terms. Since 1968, European company law has been developed in a series of company law directives that set common goals for national company law standards, which in turn were designed to ensure that national governments ensured the basic provisions for acceptable norms of corporate governance. During the entire pre-regime period, European legislation targeted the standards of national law and practice. Although the Commission proposed directives to establish European companies and to regulate cross-border

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mergers and takeovers, its efforts were blocked in the Council, with one exception. From 1968 until 1995, the company law directives aimed to provide for investor protection through the national level. The First Company Directive of 1968 required all limited liability companies to disclose basic information on the ﬁrm that would normally be available in any member state: the articles of association, basic ﬁnancial reports of proﬁt and loss, the names of managers and directors responsible for administering and representing the company, and any changes to the company’s legal status. The Second Company Directive of 1976 was addressed to public limited liability companies, and can be understood as a framework for investor protection. It built on the disclosure requirements introduced in the ﬁrst directive, requiring companies to disclose the amount and kind of capital invested in the company and the means by which the capital is valued. The bulk of the directive set out minimum standards for increasing, decreasing, or otherwise changing the capital structure of the ﬁrm. This would mean buying, selling, and issuing shares or otherwise affecting the voting rights and other rights of shareholders and other creditors. It requires shareholder meetings to approve these changes. The Fourth Company Directive of 1978 was the ﬁrst to deal speciﬁcally with reporting standards for limited companies. National authorities remained responsible for setting accounting standards and recognizing the professional qualiﬁcations of accountants and auditors, but the directive mandated that certain categories of information be made available to investors. A balance sheet based on one of the two broad models, a statement of proﬁts and losses, and explanatory notes were made mandatory, as was the requirement to have the statements audited annually by an authorized individual or a ﬁrm. The requirements for the annual report to investors, however, and the details of the reporting received minimal attention. Accounts had to be presented in a consistent, ‘prudent’ fashion that could still be interpreted broadly by accountants. The directive made reference to accounting for all liabilities and presenting a fair view of the company’s position, but it would take until the 1990s before this switch to investor-friendly fair-value reporting would begin, so the impact was minimal. Article 60 foresaw the creation of the Seventh Company Directive, which in 1983 created parallel rules on accounting for the consolidated accounts of company groups. The Eighth Company Law Directive of 1984 addressed minimum standards for auditors. It required auditors to be certiﬁed by an ofﬁcially sanctioned body, to have taken part in theoretical and practical instruction, and to have completed secondary education (qualiﬁcation for university level). The Eleventh Company Law Directive of 1989 set minimum disclosure standards for branch plants operating in other member states. This information is minimal, covering the identiﬁcation of the company’s address, its directors, and the

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nature of its business. Indeed, the directive compels companies to release less information than in their home country under the ﬁrst directive. The Commission made proposals for other directives that would have introduced a policy regime for cross-border transactions, but was unsuccessful in securing agreement from the Council as collisions over national rules had not been overcome. The Commission proposed the Tenth Company Law Directive on cross-border mergers and a Thirteenth Company Law Directive on cross-border takeovers in the 1970s and periodically after that. Neither won the approval of the member states. The same fate occurred to Commission proposals to give some substance to the eighth directive on statutory auditors. The Commission saw the auditor both as a necessary part of good corporate governance and the plethora of national rules surrounding the auditor as an impediment to transparency and equal treatment in the European market. The Commission released a Green Paper on 24 July 1996 to address this issue by proposing to upgrade the directive (European Commission 1996). The Commission sought to harmonize a number of standards rather than coordinating them. It viewed the absence of common professional and training standards for auditors in Europe as an obstacle to improving deﬁcits in the quality control of corporate governance. At the same time, however, the Commission wanted to do away with national provisions in this area under the Eighth Company Law Directive that allowed national standards to be stricter than commonly deﬁned standards at the European level. This was needed, it said, to meet its self-set goal of creating a single market in auditing services that would respect the freedom of establishment and service provision. Common standards would be required if mutual recognition of auditing services throughout the single market were to be obtained. This ensured, however, disagreement over appropriate standards based on national perceptions of auditors and the need to regulate through the state. The Commission also suggested that the EU deﬁne accepted standards of independence for auditors performing services for their client companies. It raised the issue of whether differences in civil liability of auditors require action on the part of the EU, where this action would be a harmonization of civil codes and litigation practice. These issues would eventually be taken up, but in a much weaker form, and as part of the later regime for company regulation.

Proposed Takeover Directive The European Commission began looking for ways to have a Takeover Directive legislated in 1974, without much success. The Pennington proposal

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used the United Kingdom’s City Code as a model for a voluntary European code on takeovers (Hirte and von Bu¨low 2003, 25). The Commission wrote measures for this into its 1985 White Book on completing the single market before 1992. It became a concrete issue in the 1989 ‘Battle for Belgium’ between the Italian company Olivetti and a Belgian bank and became the proposed Thirteenth Company Law Directive in 1989. The Council rejected the measure in June 1991, arguing that it saw no need to harmonize national takeover laws and noting wide differences in takeover standards. The Germans criticized the provision for a mandatory offer, for example, which it argued was incompatible with German conglomerate law (ibid., 26). The initial proposal of 1989/1990 saw the Commission and the Parliament propose uniform rules for the single market based on UK practice. By 1993, the Council had succeeded in bringing the Commission to pursue a framework directive that would allow greater respect for the individual arrangements of the member states. Between February 1996 and December 1997, the Commission distributed and amended a new proposal, attempting to balance the interests of Parliament and the Council.1 The least controversial provisions of the draft directive would have required each member state to designate a public or private supervisory authority, and ensure an open exchange of information between the offerer company (the company launching a takeover bid) and the takeover candidate. Offerer companies would have had to submit information about themselves and how their takeover would affect shareholders and employees in their takeover bid. The board of the target company would have then had to provide its assessment of this bid. These provisions were agreed easily because they reﬂected existing practices. They did not interfere with existing ownership rights, methods of corporate control, or methods of regulating the change of corporate ownership that is central to a takeover. The requirement for the board to comment on employment effects was new, but imposed no right of employees to co-determine the decision on a bid. Proposals for other minimum standards on takeover rules were far more controversial because they inevitably touched on ownership rights, decisionmaking rights in corporate governance, special claims by the member states to an overarching public interest in the national ownership of certain companies, and in some cases, special claims on the part of organized labour to a right of co-determination alongside shareholders during takeover bids. In other words, they sometimes collided with norms entrenched in the social practice of company law and in raising the question of national ownership, 1 The European Commission made the proposal in 1996 (OJ C 162, 6.6.1996, p. 5). It was amended after EP’s ﬁrst reading in 1997 (OJ C 378, 13.12.1997, p. 10).

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also awakened state claims to protecting the economy from foreign attack and conquest (in Germany). Overall, the Commission sought to introduce takeover rules that would allow dispersed shareholders to have the strongest voice in deciding on bids for corporate ownership. These shareholders would necessarily gain to beneﬁt at the expense of corporate insiders protected by impediments to takeovers. The key losers would be company managers and universal banks in Germany, and the key winners individual shareholders and investment funds.2 More controversial was the provision for a mandatory bid and the demand that the board take no defensive measures without prior shareholder approval rules (Council of Ministers 1999a, Articles 5, 8). The Commission later amended the mandatory bid proposal to allow member states to block takeovers if up to 60 per cent of voting shares were acquired in a bid. Beyond this, there were special provisions that allowed national supervisory authorities to grant derogations from the rules (ibid., Article 4(4)). The UK delegation placed great importance on member states having the right to decide who the responsible authorities would be, to decide what sorts of disputes would be justiciable in the case of a dispute, and for national courts to retain the right to refuse to hear suits against a takeover (Council of Ministers 1999b, Annex 1, Article 4(5)). These demands would allow the Takeover Panel to continue its supervision of takeovers in the United Kingdom as a private body and for takeovers to be carried out without the interference of minority shareholders suing to stop the process in the courts. This would preserve not only the panel system, but also the emphasis on a speedy offer process that prevails in British law. In other words, norms about the state–market relationship would be vigorously defended. This generated a stalemate of colliding expectations. The proposal languished at the ﬁrst reading stage until after 1999. In 1998, DG Internal Market changed tack to argue that the proposed directive was part of its plan to produce a single European capital market, where negotiations with the member states were beginning to bear more fruit than in the company law realm. By 2000, discussion on a Takeover Directive found its way on to the agenda of the Council and the Parliament. However, the possibility and potential impact of cross-border takeovers on co-determination in Europe remained an insurmountable hurdle, and takeovers were treated as part of the development of a company law regime and not of ﬁnancial market regulation. 2

Investment funds are expected to act like individual shareholders by virtue of their tendency to react to poor corporate governance by exit (selling shares, whether or not in the context of a takeover bid), rather than voice, which would involve discussions with management, and be associated with a signiﬁcant investment stake in the company.

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The eventual breakthrough that allowed such a directive to be passed in 2004 is so explicitly linked to the solution found in the European company statute, however, that a Takeover Directive could not have succeeded without the passage of the European Company Statute (ECS) and the political agreements that made it possible. The norms established in the company law regime reﬂected the needs of the member states with regard to preserving domestic norms. Those could not be met by the norms of the securities regime as the Commission wished, so that the member states effectively controlled the policy scope of the regimes.

Attempts at a European Company Statute Alongside the company law directives, the Commission attempted periodically from 1970 onwards to move the Council to accept an ECS, but without success. The Commission’s proposal followed the general commitment of the member states to economic union in a communique´ issued following the 1969 summit in the Hague. On 30 June 1970, the Commission tabled its ﬁrst plan, citing a need to create a legal framework for companies operating throughout the EEC. This in turn would further integration and economic activity. Aside from the content of the plan, this proposal was notable for two reasons. First, the Commission’s goals for a European Company and an independent body of European company law were far more ambitious than the coordination and approximation goals of the company law directives. Second, it was clear from the example of the United States, in which companies of national and international stature exist without the provision of a federal company statute, that there must have been more to this ambition than simply paving the way for the integration of the European marketplace. The Commission’s proposal encompassed both a company statute and uniform standards for employee involvement in the company. The European Company would be incorporated at the European level, would enjoy the right to operate throughout the Economic Community, and would be subject exclusively to European laws. These features revealed a twofold agenda on the part of the Commission. Not only did it wish to create a European company under its own supervision, it wanted to establish a German-style system of co-determination as the standard for European companies, and as the centrepiece of a European model of capitalism. The EP’s ofﬁcial account is that the Council was deeply split over the Commission’s proposal to include employee co-determination in the text. Some countries demanded it and others declared it unacceptable. The Commission reacted ﬁrst by separating its legislative proposals for a European

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Company and co-determination, which were not passed as they did not resolve the fundamental dispute among the member states (EP 2006a). The proposal languished despite the Commission’s revision of the draft in 1975. Although Heath was PM from 1970 until 1974, and considered a ‘man of the Rhine’ by the French government (Dinan 1999, 72), he wanted to get membership ﬁrst and ‘sort out any differences’ later, so that co-determination was less of an issue than the overall beneﬁts of membership for economy and industry (ibid., 65). More importantly, neither his successor Wilson nor his party nor the Trades Union Congress was fond of European membership or of institutionalized co-determination. None of this spoke to the United Kingdom weighing in to favour accepting co-determination, even at this most opportune window that British politics would open on the issue. EU co-determination would have collided with British norms rejecting it, this time supported by the left. The ECS returned to the political agenda in 1985 as part of creating a single European market. The Commission placed the ECS on the European Council’s agenda at the 1985 Milan summit, but the Council only committed itself in the communique´ to freedom of establishment for the professions. Statements of national leaders underlined that the constraint of unanimous agreement and the Luxembourg Compromise led to disappointing results (European Council 1985, 4–6). The Commission nevertheless received a political commitment from the Council to go ahead with a proposal at the 1987 Brussels summit (though the communique´ only mentions a need to make ‘adjustments to company law’) (European Council 1987) and it tabled a bill in 1989. In 1991, it tabled a related bill on employee involvement in the company, following review by the Council (29 January 1990) and the Parliament (24 January 1991). By 1990, the member states made it clear later once again that they opposed the transfer of authority to the European level on principle. They also opposed it independently of any disagreements among themselves about the structure of a proposed European company, underlining the constitutive responsibility of the member states for company law and regulation. The opinion of the Council Legal Service of 29 January 1990 on both the Societas Europaea (SE) and employee involvement proposals focused on the legal basis of the Commission’s proposal and not on the content. It rejected the Commission’s view that legislation on establishing a European company or employee involvement could be decided by qualiﬁed majority voting on the basis of Articles 44 and 48 of the Treaties. These articles cover decisions made for the purpose of approximating the standards of member states. Instead, the Commission’s proposal dealt with the establishment of a legal person at the European level, subject to European law, to pursue the ‘broader goals’ of the European Community. The Council argued that the Commission’s

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proposals fell under the category of ‘other goals of the EU’, as set out in Article 308, requiring unanimous agreement of the member states (Council Legal Service 1999). After the failures of 1990 and again in 1993, the Commission moved towards separating the issues of a European Company and co-determination, even if it and the Parliament held ﬁrm to the goal of linking them together (EP 2006b). The hope was that the normative commitment of the member states to owning the company law portfolio was not fundamental but a reﬂection of disagreement on co-determination. The interactions of the Council and the Commission show that the Commission consistently attempted to argue that the Council had made a concrete commitment to support the development of an ECS (and other company legislation related to it), whilst the Council remained uninterested and preoccupied with other goals until the Strasbourg summit of 1989 (European Council 1989, 3). Not only was there no agreement on the substance of company regulation that went beyond ad hoc minimum standards, there was a fundamental normative disagreement about the legitimacy of supranational legislation that would weaken the position of the member states. This is also demonstrated in the development of industrial relations rules at the European level. In June 1995, a new Competitiveness Advisory Committee under the leadership of Carlo Ciampi released its ﬁrst recommendations (known as the Ciampi Report) to improve the competitiveness of the EU economy. It placed pressure on the Union to make progress on an ECS to achieve this goal. It noted that European companies were already trying to take advantage of economies of scale in the European market, but were being hindered by the economic and administrative costs of setting up multiple subsidiaries in the various member states. The group estimated that in addition to decreased international competitiveness and employment, these barriers to the completion of the internal market generated unnecessary costs in the magnitude of 30 billion ecus (Competitiveness Advisory Group 1995, 14–15). The European Company should succeed on its own merit. The Davignon Report on industrial relations would tackle the co-determination issue.

Industrial Relations Law The basis for industrial relations law in the EU is found in the Treaties, Articles 136–145 (previously 117–122). The provisions for industrial relations found in Article 137 prescribe unanimity in the Council for issues of employee representation and co-determination, and explicitly rule out Community

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responsibility for rules on pay, strikes, lockouts, and the right of association. The social protocol of the Maastricht Treaty, upgraded to the Social Chapter in the Amsterdam Treaty of 1997, further entrenched the EU’s legal basis for promoting the interests of employees within the ﬁrm, but not a right to usurp the dominance of the member states. That agreement made it an objective of the signatories to promote cooperation between companies and their employees, and set the legal framework for the Council to create directives to this effect setting minimum standards in industrial relations. Pre-Maastricht regulations on the company consisted of employer obligations to consult with employees and honour existing agreements. The ﬁrst directive on industrial relations is the Collective Redundancies Directive of 1975.3 It requires employers to consult with employee representatives over the possible need for layoffs and possible alternatives at least thirty days before any layoffs take effect. The directive leaves the modalities of these consultations up to the member states and underlines in the recital that the member states are very diverse in their practices. The directive was updated in 1998 (98/59/EC). The revised directive required employers to notify public authorities of impending layoffs, and speciﬁed more strongly the information required of employers, including the reasons for the action, the number of persons affected, the time frame, the formula used to calculate who would be laid off, and to calculate compensation. The Transfer of Undertakings Directive 1977 (77/187/EEC) requires employers to inform workers about the reasons for moving operations abroad (amended 98/70/EC). The Merger Directive 1978 ensures that employees in a merger have the same protected work relationship with the new management as with the old. Whilst none of these early directives gave workers substantial rights, the Collective Redundancies Directive (98/70/EC) of 1998 required employers to negotiate with workers in mass redundancy cases for the ﬁrst time, not just inform and consult, without any further obligations to retain workers. Early EU legislation therefore put few concrete barriers on management discretion in industrial relations. The European Works Councils Directive 1994 (94/45/EC, hereafter EWC Directive) was the ﬁrst and only pre-regime instrument to interfere in the internal structure of the company, and only in large companies operating in two or more member states. Further intrusion on the structure of the company to all companies would not be on the negotiating table until after basic political questions had been sorted out in late 2001. The Information and Consultation Directive 2002 is therefore dealt with in Chapter 8 on regimes.

3

Council Directive 75/129/EEC.

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The EWC Directive provides for the establishment of works councils in companies with at least 1,000 employees, and in which 150 employees from two or more member states apply for its establishment. Those work councils become the principal interlocutors with management, and enjoy a right to be informed and consulted about aspects of the company’s business that have a transnational nature and affect the employees (Article 6), particularly various forms of restructuring, such as mergers, takeovers, joint ventures, expansions, and concentrations (recital). The directive is explicitly targeted at companies forming the apex of company groups, so that employees of subsidiary and branch operations are considered employees of the main organization. The directive is a voluntary measure, in the sense that it does not compel employees to seek its introduction. A special negotiating body is set up to represent the employees, and either an agreement is reached with management, or default rules apply. The directive applies to member states that were signatories to the Social Protocol of the Maastricht Treaty. It took force in the United Kingdom in 2000, after the Blair government became a member of the Social Chapter in 1997. It therefore respects diverse normative interpretation of the company and of regulatory authority. The directive takes pains to respect the existing prerogatives of the member states to determine whether employee representatives and the companies in question are covered by the law (Article 4). It also grants the member states, subject to certain minimum standards set out in the annex of the directive, the right to decide the terms of a standard default agreement between works councils and companies situated in their jurisdictions if the negotiations between those parties fail to produce an agreement (Article 6). It also lacks prescriptions on the kind of information that the company is required to share with its employees, and it makes no provisions that members should be entitled to training in carrying out their responsibilities (DTI 2003a, 16). For organized labour, the provisions of the directive did not go nearly far enough in ensuring viable works councils. Union concerns were particularly high in the aftermath of an automobile plant closure in Belgium by Renault in violation of legal consultation requirements. The directive’s approach to works councils contains some potentially revolutionary provisions, however. For countries like Germany where works councils have strong rights extending into co-determination on issues of workplace environment, the directive adds nothing new to its own rules. The only possible effect is that other European companies move closer to the German norm, and that it becomes easier to convince employees in a transnational company to establish a common works council with a German partner ﬁrm. For countries without a history of employee participation in workplace management, even the right of consultation

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and information is new. Beyond this, however, countries with a history of syndicalist labour movements, in which unions and management decline cooperation in favour of mutual independence and conﬂictual relations, are bound to ﬁnd the terms of the works council so different that the parties involved may be disinclined to participate. The most important factor here is that management and works council members are required to interact ‘in a spirit of cooperation with due regard to their reciprocal rights and obligations’ (Article 9). In 2003, both the European Trade Union Confederation (ETUC) and the EP still found these obligations weak and favoured improvements to worker rights on information and consultation during major restructurings, including an update of representation on the works council (ibid., 22).

The Davignon Report Industrial relations moved to the centre of the European corporate regulation agenda in 1996, when the EU commissioned a report on employee participation and its future place in the development of a European Company. The Davignon Committee, which reported in 1997, had been tasked with examining the differences in national systems of employee participation in company management. Its goal was to make recommendations on whether and how these discrepancies could be reconciled in the setting up of a European Company. In doing so, it was being asked to suggest a path out of the deadlock on employee involvement that had stood in the way of an ECS, and of the proposed merger and takeover directives. The report begins with background information that favours the development of an ECS in a way that secures a ‘special place for European industry’ in a globalized economy based on ‘an improvement in product quality’ as the basis of economic competitiveness (Davignon Group of Experts 1997, paragraphs 19 and 20). While the negotiated system of industrial relations associated in the literature on varieties of capitalism with coordinated market economies such as Germany is not explicitly mentioned, the outcome desired by the group clearly chooses this path. The report favoured employee participation in the management of the company based on rules negotiated between management and employee representatives but structured by minimum requirements. The report explicitly ruled out the possibility that companies could be exempted from negotiating employee participation if the participating companies were based in member states where employee participation was not mandated. This would, the group argued, produce no improvement over the existing deadlock preventing the passage of an ECS (ibid., paragraph 78). Furthermore, the group

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decided that it would not be acceptable for employees with participation rights to be asked to give these up if negotiating a merger with a company without employee co-determination. Instead, there should be one general model for European Companies incorporating employee participation to which the member states should contribute through changes to industrial relations law (ibid., paragraph 82), and in which employees should have voting rights alongside management, rather than merely an advisory role (ibid., paragraph 88). Insurmountable differences on this issue could then only be accommodated by incorporating a company at the national level, either as a stand-alone company, or as a subsidiary of an SE (ibid., paragraph 40). The Davignon Report therefore sided largely with the German view of employee participation in the company, and rejected the option that the member states later settled on: negotiated employee involvement only when it already existed. It could therefore do nothing to alleviate the fundamental disagreement among the member states and between them and the Commission over the legitimacy of claims to union power over management in European rules on industrial relations. Summing up, pre-regime company law in the EU was a collection of framework and minimum standard directives that set goals for national governments to achieve whilst respecting differences in legal and administrative provisions from one country to another. This resulted from persistent normative clashes between the member states and between the Commission and the member states that prevented a regime from forming. These clashes were not only about formal sovereignty but about protecting social and economic practices with constitutional implications. Some countries were extremely liberal in their willingness to permit countries incorporated elsewhere in the EU to operate within their jurisdictions, but this went beyond common practice in the EU. Other countries in continental Europe continued to take the view that a company could only do business in a country if it were registered there and subject to national company law and regulation. Eventually, it was inevitable that this standpoint would be seen to conﬂict with the right of establishment entrenched in the Maastricht Treaty on European Union (TEU). Until such a challenge was made valid, the policy pattern of mutual respect exercised by the member states prevailed.

PRE-REGIME FINANCIAL LAW The European Commission had demanded ﬁnancial market regulation since the 1970s based on its broad mission to promote the development of the single

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market, as prescribed by the Treaties of Rome. This interest has taken the form of promoting a single European capital market, both for the purpose of ensuring ﬁrst-rate access to capital for European ﬁrms, but also to allow capital to restructure the European corporate economy into bigger and more powerful competitors to American multinational corporations. It considered both aspects of developing a European capital market with greater depth and liquidity necessary for enhancing European competitiveness. The Commission was successful in getting the member states to promote the development of ﬁnancial market development and liberalization, coupled with delegation through the Financial Services Action Plan (FSAP), which it ﬁrst proposed in 1995 and which the member states approved in principle in 1998 (European Commission 1999). As Chapter 9 shows, this agreement in principle on a new EU constitutive norm did not sufﬁce to allow agreement on how the EU could go about promoting the development of the ﬁnancial market and ensuring prudent rules of regulation on which the Commission and the member states could agree. This means that regulative norm agreement had to be sorted out before delegation could be agreed. Nevertheless, Europe was successful in developing three kinds of ﬁnancial regulations directives before the development of the ﬁnancial regulation regime: the listing rules directives, directives on ﬁnancial reporting, and a directive on insider trading. All were passed between 1979 and 1989. All focused on the provision of minimum standards, as did the company law directives, without a mandated regime for governance involving coordinated European and member state institutions.

Listing Rules Directives Listing rules are the rules that companies must comply with in order to be listed on a stock exchange, where their shares can be issued, bought, and sold. Five directives on listing rules were passed between 1979 and 1989. They are outlined below. Four of those directives aim to coordinate national minimum standards applied by regulators governing the informational and other demands made on companies. They neither harmonize these standards, nor do they envisage the kind of interaction that would take place with the creation of a ﬁnancial market regulation regime after 2001. They would build, however, on the ﬁrst steps taken after 1979. The First Listing Rules Directive 79/279/EEC (5 March 1979) sets out as its goals the approximation of listing requirements in the EEC, with the intent of making it easier for companies to be listed on more than one exchange, and with the further intent of supporting the eventual development of a European market in securities. It requires the member states to designate a stock market

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regulator and for regulators to demand information from companies at the initial public offering and annual accounts or reports. The directive leaves it up to the national regulator whether or not it intends to demand ad hoc reporting of information important to share price, a practice which at the time was not widespread in Europe but central to the British system. The directive also sets multiple listings of a single company on different member state exchanges as a goal, whereby the onus is on the company to fulﬁl reporting requirements. The Second Listing Rules Directive 80/390/EEC was designed to coordinate more closely the substantive aspects of listing rules and the requirements for regulators. The recital argues that different listing requirements in the member states still prevent the cross-border ﬁnancing of companies in Europe by making it difﬁcult for them to list on more than one exchange. It rejects harmonization, however, in favour of coordination. The member states are required to ensure that the listing authority has the power and resources to supervise company compliance with reporting requirements on company accounts and annual reports (Article 18), the capacity to review audits (Article 19), and to ensure that it publicizes its rules and amendments in a timely fashion (Articles 20–23). The directive’s annex incorporates requirements for listing authorities to require companies to report on information that broadly corresponds to the First Company Law Directive.4 The Third Listing Rules Directive 82/121/EEC expanded reporting requirements to the publication of half-yearly ﬁnancial reports, and it requires that auditor reports be made available if they exist (Article 8). Investor protection advanced to an equally important goal alongside the development of the European capital market in this directive. The Fourth Listing Rules Directive 88/627/EEC expanded information requirements for capital markets from companies to investors even further by requiring public notiﬁcation within seven calendar days of major purchases or sales of company shares.5 While this would not have sufﬁced to promote investor protection by hindering insider trading, it aimed to reveal complicated structures of control by major shareholders to the broader investment community. However, the Fifth Listing Rules Directive of 1989 was the ﬁrst to introduce the principle of mutual recognition in securities markets. Council Directive 89/ 4

This covered information about the nature of the shares being listed, the company’s business activities, the ﬁnancial position and outlook of the company (assets and liabilities, proﬁts and losses), shareholdings exceeding 10 per cent, and senior management (including remuneration, ﬁnancial interests, and share options). Information on the administration and management of the company was limited, however, to identifying senior management. 5 The reporting requirement takes effect when a shareholder’s possession of voting shares exceeds speciﬁc thresholds, set at 10, 20, 33, 50, and 66 per cent of the total.

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298/EEC provided for the publishing and the mutual recognition (Article 21) of securities prospectuses. Companies seeking to list in a second member state would be permitted to do so after contacting the responsible authorities there and showing approval from the home authority. This directive demonstrated that previous ambitions to create a single capital market had not yet materialized. It also proved to be a landmark in decentralized coordination of European regulators based on mutual recognition that stood alone at this point in time, even if there were no formalized rules for regulator interaction. The breakthrough of the Fifth Listing Rules Directive demonstrated the much earlier and more substantial agreement of the member states on this aspect of ﬁnancial market regulation. It would lay the groundwork for the ﬁnancial markets regulation regime, which began with a new Listing Rules Directive in 2001, discussed in Chapter 9.

Investor Protection By 1989, the Commission and the Council were able to unite to generate additional minimum standards on ﬁnancial market regulation for the purpose of protecting investors, rather than simply fostering their importance in the single market. The Insider Trading Directive (89/592/EEC) was the ﬁrst attempt at regulating secondary trading in company shares, focusing on the ‘smooth operation of markets’ and investor conﬁdence. It deﬁnes insider information for the ﬁrst time: as price-sensitive information not known to the general public. It prohibits the transmission of such information on a privileged basis unless in the course of duty. The directive requires the member states to appoint a competent authority (Article 8) with the resources to supervise and enforce (Article 10). This directive was a new development for many member states, particularly in continental Europe, which until then had not known insider trading to be a crime. It therefore was only made possible by a parallel development in the member states that accepted the prohibition of such practices for dispersed shareholders as legitimate. This required no change in the United Kingdom, but a new prohibition in Germany. This was the ﬁrst time that EU rules began to truly conform to the British archetypal narrative of the state as protector of shareholder interests. It therefore built on prior national normative developments. The directive lacked details and did not deal with the activity of other ﬁnancial service actors, which was followed up in 1993. The Investment Services Directive (1993/26/EEC) was introduced to require national regulators to ensure that credit institutions, insurance, and investment companies had adequate resources, integrity, and ‘suitable persons’ to run the operations

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without taking unreasonable risks for investors. It was followed up by two amendments designed to ﬁll regulatory gaps, such as poor communication between the regulatory bodies (95/26/EC) and poor exchange of conﬁdential information (2000/64), and by a third which required the development of an investor compensation scheme with mandatory company participation (97/9/ EC) (SCAD-Plus 2006a, 2006b).

Financial Services Action Plan In 1998, the Commission set up a committee, with expert members nominated by member states, to discuss how to proceed with implementation (European Commission 1998). In December 1998, the European Council gave the Commission the green light to begin with the development of an FSAP, in cooperation with a newly formed Financial Services Policy Group, ‘composed of personal representatives of the ﬁnance ministers and the European Central Bank’ (SCAD-Plus 2002a). Following the 2000 Lisbon summit, the European Commission reported on the FSAP that the Lisbon summit recognized the ‘central role of efﬁcient ﬁnancial markets for long term European competitiveness . . .’ and therefore of completing the internal market in ﬁnancial services. This not only includes the single passport for investment service providers to act throughout the market, but rendering corporate ﬁnancial statements comparable, providing joined-up supervision of takeovers, and ensuring regulatory cooperation of ﬁnancial markets across member state borders (European Commission 2002a, 2). The FSAP would eventually develop into the most extensive programme in company regulation at the European level. It is discussed in detail in Chapter 9. It was a plan to take harmonization to a whole new level, but it went nowhere without agreement on a suitable regime. This shows that agreements on archetypal narratives are necessary but not sufﬁcient to secure agreement on concrete norms of governance within the EU.

P R E - R E GI ME AC C OU NTI NG DI R ECTIVES The term ‘accounting directives’ creates some confusion in Brussels as the Commission uses it in the broader sense of ﬁnancial reporting. This includes not only accounting standards themselves and the regulation of accountants, which is what I mean here, but also the rules governing the audit of company ﬁnances. The latter have been dealt with as a matter of corporate regulation in

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this book because the Commission and the member states deal with it that way. Actors are free to deﬁne the relevant policy regime scope as they wish. Accounting directives, like legislation in the other two areas, began far before the creation of a full regime and revolved around modest minimum standards that began to accumulate over time. These directives in no way resembled substantive accounting standards. Three of the accounting directives passed before the International Accounting Standards (IAS) regime were instituted in 2001 and are also listed as company law directives on reporting standards: the Fourth (78/660/EC), Seventh (83/349/EEC), and Eleventh (89/ 666/EC) Council Directives on annual accounts for companies, consolidated accounts for company groups, and disclosure rules for branches operating outside of the home member state. The other accounting directives are speciﬁc to accounting practices for ﬁnancial services industries and not the corporate economy at large. The presentation of annual accounts for banks, credit, and ﬁnancial institutions is dealt with by council directives 86/635/ EEC and 89/117/EEC.6 Special rules for insurance companies were added by directive 91/674/EEC. The Commission, however, yearned for more substantive accounting rules. This became the subject of the New Accounting Strategy from 1995 onwards.

New Accounting Strategy The Commission released a communique´ on 14 November 1995 promoting the idea of accounting standards harmonization on the basis of standards set by the International Accounting Standards Board (IASB) (European Commission 1995). The initiative was designed to upgrade the requirements of the Fourth and Seventh Company Law Directives. These directives require annual accounts for all limited liability companies and all company groups respectively with the exception of banks and insurance companies, allowing companies to choose from one of two models of accounting practices. In this sense, the directives provided for minimum standards rather than harmonization of company regulation. Substantively, the directives imposed few constraints on national practices and attracted criticism on a number of points. First, requirements on companies to disclose information continued to vary greatly from country to country, making it difﬁcult for investors to compare and contrast companies in the single market. Second, the Commission sought to upgrade the overall 6 These were later amended by the Fair Value Directive 2001 (2001/65/EC), as discussed in Chapter 8.

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level of corporate governance by upgrading mandatory reporting requirements to include speciﬁc, internationally recognized standards (ibid.). These were claims that the EU should become a protector of shareholder interests. The Commission’s New Accounting Strategy, as this approach came to be known, was the forerunner to a broader strategy for promoting more extensive development of ﬁnancial services and greater access to investment capital in Europe under the FSAP (below) and the Lisbon Strategy (Chapter 9) (European Commission 2000b). Chapter 10 tells how this led to the adoption of the IASB’s standards in 2001.

THE CONSTITUTIVE CHALLENGE OF THE CE NTROS CASE TO NATIONAL AND EU NORMS Whereas European company law was controlled by the Council and the member states until 1999, the European Court of Justice (ECJ) played a key role in changing these premises. The Court applied treaty provisions on the right of establishment to strike down political and legal agreements reached in and defended by the Council. The Council legislated rules in the wake of the ECJ’s ruling in a way that partially restricted the impact of the Court’s ruling. In the ﬁrst four years of the 2000s, the ECJ would rule twice more during the legislative process to reassert its view on the right of establishment. Implementing legislation at the European and the national levels remains the last arena of conﬂict between the Court and the Council. The Court’s ruling ended the modus operandi in which the member states refused to implement the terms of the 1958 Treaty on the right of establishment (lack of regime, but also lack of decentralized acceptance of general treaty principle). The result would be a thorough thinking of how to sort out regulatory responsibilities. This would result in the creation of regimes with different structures and organizing principles, reﬂecting differing kinds of legitimation through the member states and European institutions.

The Centros Case The ECJ delivered its ﬁrst landmark case challenging the jurisdiction and discretion of the member states in European company policy in the Centros case of 9 March 1999. That case was remarkable because the Court interpreted the Treaty’s right of establishment so that it strikes down state restrictions on recognizing a foreign company’s right to do business. This affected states

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adhering in whole or in part to real seat theory, which restricted recognition at the time. The advocate-general assigned to the case, La Pergola, recommended to the court on 16 July 1998 that it strike down the real seat-based restrictions on the Danish government on these grounds: The contested measure of the Companies Board is contrary to Community law precisely because it was adopted on the implicit but clear assumption that business activities conducted by Danish nationals and directed essentially at the Danish market must inevitably be carried on through their principal establishment in Danish territory. . . . But the fact that binding local rules may apply must never mean that the Community company is prevented from exercising its right of establishment. (Paragraph 20)

The central issue in the Centros case was whether a company incorporated in an EU member state had the right to do business and set up branch operations anywhere in the Union. The owners of the Centros company, who fought for this right, claimed that the member states were bound to respect the principle of mutual recognition of national legislation regulating standards (in this case, the standards required to register a company in a member state) if the treaty-based right to free trade in services was to be made possible. Furthermore, they argued that the right of establishment coupled with mutual recognition protected them from the requirement of having to comply with Danish company law provisions regarding its statutes of incorporation, and in particular, Danish minimum capital requirements. The argument joins two treaty-based provisions. The ﬁrst is that member states are to be bound by the principle of mutual recognition in standards regulation. This principle had been entrenched in European case law for trade in goods since the Cassis de Dijon case. Since the passage of the TEU in 1992, it has also applied to trade in services, at least in theory, meaning that a company has a right to offer services for sale, based upon the qualifying professional and industry standards of the country in which it is based. Finally, the right of establishment, which grants companies and individuals from other member states the right to establish business operations in other EU countries, was added to the list of demands to be fulﬁlled. Centros claimed that it had the right to be incorporated in the United Kingdom under English company law and open up ofﬁces in Denmark to do business in that country without being forced to comply with the registration requirements of Danish company law. This demanded the full application of incorporation theory, which accepts mutual recognition of company incorporation and the right of establishment, thereby circumscribing the claims of the state on jurisdiction and discretion. It thereby challenged any application of full seat theory, which rejects mutual recognition, and demands that companies abide by

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the requirements of the country in which they do business. This normative demand is coupled with claims about public interest goals that the state insists on protecting and promoting. If applied, this would mean that a European company wishing to do business in all twenty-ﬁve states of the EU would have to have up to twenty-ﬁve different forms of company rules, effectively destroying any incentive to develop as an EU-wide entity. Centros was a hard test for mutual recognition because the mix of incorporation and real seat theories used by Denmark became important. Whilst the Danish legal system applies incorporation theory where it is clear that the company in question also carries on the same sort of business in its country of incorporation, it applies real seat theory where it does not. Therefore, the Centros case was a very tough look at whether real seat theory could be made compatible with the treaties and EU legislation. The Court ruled again later to force the member states to recognize companies from within the single market coming into their jurisdictions. Although the subsequent cases took place after regime construction had begun, it is appropriate to mention them now because they are closely related to Centros and bring out the lasting meaning of that case more starkly. In ¨ berseering case to further strength2002, the Court passed judgement in the U en the right of establishment for European companies. The Court underlined the right of a company to be recognized as such in a new jurisdiction within the single market. A Dutch company had transferred its seat (main operations) to Germany, remaining incorporated in the Netherlands. When the company was sued in a civil case, the German courts had ruled that the company had no legal personality, and therefore no right to appear in court. It did not establish the freedom to emigrate (Wymeersch 2004, 19–22). ¨ berseering as supporting neither incorporation nor real Wymeersch sees U seat theory, but a new concept he calls Community formation theory: member states cannot deny recognition of a company as a legal person within their jurisdictions if the company is registered and operating in another member state. It does not set aside national company laws, but refers to the Treaty as a higher-order priority (ibid., 24). The Court developed the reference to incorporation within the single market rather than incorporation anywhere following the Spanish government’s argument against the recognition of offshore mailbox companies outside of the EU. ¨ berseering forbids a member state from demanding that a company be U wound up and reincorporated before it is recognized. It cannot demand changes to its internal structure without referring to the ‘general good’ (ibid., 26, 28). It must also limit the extent of its intervention to a reasonable level warranted by the case at hand, so that intervention remains extraordinary, and is not abused by government to restrict rights arbitrarily. The limits

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are expressed in three principles: proportionality, non-discrimination, and meeting the stated objective.

Inspire Art In September 2003, the Court ruled (again) in the Inspire Art case that the right of establishment compelled national governments to accept companies established in any EU member state to operate on their territories on the basis of the law prevailing in the country of incorporation, regardless of where the company in fact does business. This ruling reconﬁrmed Centros and reopened the door to company choice in incorporation countries that the ECS had effectively restricted (see C167/01). Substantively, Inspire Art tested whether the Dutch authorities could require a company owned and operated by a Dutch national doing business in the Netherlands, but incorporated in the United Kingdom, to declare itself to be a ‘pseudo-foreign company’. If Inspire Art had been forced to do so it would have had to pay a minimum capital amount equal to that paid by Dutch companies before it could operate under limited liability. These costs would have signiﬁcantly exceeded the much lower capital requirements under English incorporation. The Court ruled that the disclosure requirements of the Eleventh Company Law Directive, which enumerates the kind of information that a company must advertise in order to do business in another member state, was exhaustive, rather than just a suggestive list. Therefore, the government of the Netherlands could not add its own conditions to the list in the Eleventh Directive (Kerting and Schindler Clemens 2004). The authority of the member states was thereby curtailed. The Court referred back to its previous rulings to underline that the member states must respect the freedom of establishment as a fundamental and prior right, and that they have no right to refuse recognition of a company formed by one of its residents in another country, unless there were clear reasons to believe that the incorporation was attached to criminal intent. The duty of member states to recognize companies incorporated elsewhere by their own residents as legal entities with limited liability held even if it was clear that the resident was simply taking advantage of more liberal company law and regulatory requirements. The Court rejected further arguments of the Dutch government, ﬁrst, that it had a pressing public interest in protecting creditors through the mechanism of minimum capital, second, that it had a pressing public interest to ensure fairness in business dealings, and third, that tax inspections could not be carried out easily without the minimum capital rules (ibid.).

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Kerting and Schindler Clemens underline that the collective effect of the ¨ berseering, and Inspire Art cases tied the hands of member states Centros, U with regard to incoming ﬁrms, but not yet with regard to outgoing companies. That means that member states still have rights to block the move of a company registered there to another member state if they wish. The terms of the ECS and the Cross-Border Migration Directive in the companies regime provide a legal framework on how these decisions might be taken (ibid., 1283). The Court’s decisions left open the decisive question, however, of what happens when a company leaves a country. This allowed the member states to legislate a regime for EU company law rather than accept the unadulterated imposition of the right of establishment by the ECJ. This is the subject of Chapter 8.

CONCLUSIONS This chapter has outlined the development of company law and related aspects of ﬁnancial, industrial, and takeover law in the EU, starting with the guiding principles laid out in the Rome Treaty of 1958 and ending with the Centros judgement of the ECJ in 1999. In this forty-year period, the Commission proposed and the Council passed many directives to approximate national provisions for company law and corporate governance standards. Most of the provisions were directives that structured the relationship between companies and investors within the member states. They did this by stipulating the minimum requirements of information that a company must provide to the investment community and by mandating that this information be made accessible to the public in an increasingly regular fashion. In the 1970s, company law directives were designed to make national rules on information from individual companies more similar. In the 1980s, company law directives were designed to set comparable rules applicable to the multi-divisional conglomerates and holding companies that organized much of the European corporate economy. By 1989, directives had started addressing the issue of ensuring that this information ﬂowed as well across national borders within the single market as it did within the individual member states. During the 1990s, the focus of attention shifted to directives designed to shed light on and improve the overall quality of corporate governance in the EU. There were few directives, however. Rather than a period of legislation, the Commission found itself back in the position of conducting studies and

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lobbying governments to support new measures. After 2001, it would again have success, but a principle stumbling block discussed in the next chapter was uncertainty and the unwillingness among the member states to create an even denser network of rules applicable to corporate entities. For the moment, it sufﬁces to note that the proposals put forth by the Commission in the 1990s took a view to harmonization rather than coordination, to common rules, rather than rules about national arrangements. For this reason, the directives post-2000 are best described as a regime for company law and corporate governance in Europe. The rules contained in them are rules about rules, accompanied by strategic goals and overarching principles. They show respect for differing national arrangements to fulﬁl these goals, such as the responsibility of public regulators or private bodies for supervision and enforcement, and differing standards of accounting or professional certiﬁcation for auditors. They also show deference to different provisions of national company law regarding the structure of the ﬁrm and the nature of safeguards for good corporate governance. Where Commission proposals respected the right of national authorities to provide the substantive infrastructure of company law and regulation, it was successful in attaining Council approval to create further parts of the company law regime. Where Commission proposals would have instead created singularly European rules and institutions, such as the European Company, compromise proved impossible and legislation failed. Not all European company law took a view to structuring the relationship between companies and investors. Some provisions were made to structure the relationship between companies and their employees. The collective redundancies directives provided the right of employees to information and consultation with employers thirty days before layoffs could take effect. However, implementation was weak, and the directive respected the prerogative of national authorities and, where applicable, social partners to regulate the question of job protection and dismissal, in general, and the modalities of choosing and prioritizing layoff candidates. Nothing in the collective redundancies directives challenged the core rules governing the employer–employee relationship in the member states. It simply set a minimum standard for companies in the European economy, and a rather modest one at that. The Works Councils Directive breaks with the overall pattern of a regime at ﬁrst sight, but conforms more closely to it on closer inspection. The most impressive harmonizing aspect of the directive is that it provides the legal parameters to install works councils in European transnational companies, even where management opposes this. Yet the directive reserves for the member states the role of deﬁning the default agreements that apply in the event that management and employee representatives fail to see eye to eye on

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the terms of an acceptable agreement. In view of this, the Works Councils Directive remains a regime with signiﬁcant member state input reﬂecting its own balance of priorities. Generally, the Commission’s ambition to move the member states beyond this very modest set of directives and towards a single set of rules governing employee participation in the workplace was a non-starter. It played a central role as well in preventing agreement among the member states on the creation of an ECS, as will be discussed in Chapter 9. The only true challenge to this policy system came at the end of the 1990s, imposed by the ECJ. It tore down one of the most important power resources wielded by the member states in deciding the rules of the company law regime: the power to recognize or refuse to recognize the legal standing of companies operating within their jurisdictions. The meta-rule of real seat theory, ascribed to by some of the member states including Germany, allowed the governments that adhered to it to demand that European rules governing corporate governance and regulation be constructed by way of intergovernmental negotiation and characterized by the continued centrality of national rule-makers in setting substantive rules and regulatory arrangements. The ECJ’s ruling in the Centros case, and in similar cases that later widened its scope, eviscerated the legal standing of real seat theory under the treaties and set in its place the freedom of establishment, known in company law circles as incorporation theory. From this point onwards, companies across Europe could shop for the least expensive and troublesome country in which to incorporate. Based on the American experience of the so-called Delaware effect, the politics of European company law would focus on free competition between jurisdictions, and an attendant drift of regulatory standards to the lowest common denominator (Bebchuk and Farrell 1999). The same ﬂocking of European companies to jurisdictions based on corporate tax rates (see Ireland and the new member states of Central Europe and the Baltic states) would happen on a massive scale, away from countries like Germany and towards countries like the United Kingdom. As Chapter 8 shows, the regime-oriented politics of company law and regulation in Europe proved extremely resilient, and was not swept aside by regulatory competition. While observers of the American experience focused solely on the economic gains to be realized by countries with low costs and regulatory requirements through attracting (tax-paying) corporate entities, they ignored several factors, some of which could be observed in the period before the Centros case. First, the modalities of moving a business from one country to another provided opportunities for member states to exploit legal uncertainties about completing such a transfer. Second, the regime method provided signiﬁcant beneﬁts to all member states, including those with a

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preference for minimal regulation. If the regime method provided a means for regulation-friendly states to demand certain provisions, it provided a means for light regulation states to fulﬁl common objectives with a minimum of European interference. This interest grows even further if such a country has an interest in pursuing public policy goals, such as trying to prevent monumental corporate collapses. Therefore, a negotiated regime, allowing continued competition among national company law regimes, without an exclusive development towards lowest-common-denominator competition, as found in the United States. (There, the only remaining bulwark has been national regulators like the SEC. A different model developed in the EU, based on the Committee of European Securities Regulators (CESR) and the European Securities Committee as centres of gravity in new policy and regulatory networks.)

8 The Company Law Regime Chapter 1 argued that regimes are built on national norms, resulting in patterns of collusion (involving delegation and harmonization) or coexistence, provided that collision can be overcome. Coexistence was predicted for company law since the norms of social and economic policy are disparate in the member states. This should reinforce already existing normative attachments of the member states to their continued existence as independent policy-makers, using regimes to protect against erosion. Regime creation constitutionalizes this relationship at the European Union (EU) level. The company law regime achieved this to displace the alternative of mutual recognition, which would have eroded member state capacity in this regard. After the Centros case there were major changes in the politics of the European Company and in the decision-making regime in which it became embedded. The normative situation moved from collision to preserving coexistence. The EU member states legislated with great deliberation a regulatory regime for companies in which national governments, legal frameworks, and regulatory bodies continue to play a signiﬁcant role in rule making and rule enforcement in the longer term. In doing so, they have promoted a new form of legal-regulatory regime that protects national institutional arrangements from harmonization (promoted by the Commission) and uncontrolled regulatory competition (jurisdiction shopping by companies for the lowest regulatory standards as the Centros case implied), and which cultivates new and clearer patterns of interaction between government actors and market participants. The nature of this regime reinforces the conclusion that it is not a regulatory state. The member states commit themselves to cooperation but remain in charge of regulating their home markets and managing the regulation of cross-border transactions. This means that European institutions and rules do not play a signiﬁcant role outside of the coordinating rules of the regime. It also subjects market actors and social partners to clearly deﬁned rules for the ﬁrst time in the single market. This chapter follows the development of ﬁve pieces of European legislation that embody the regulative rules of the company law regime: the

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European Company Statute (ECS); the Employee Participation Directive (EPD); the Cross-Border Takeover Directive; the Cross-Border Merger Directive; and the Cross-Border Migration Directive. These directives were necessary for the regime to function and had failed to materialize in negotiations dating back to 1970. It demonstrates that it was necessary for the member states, the Commission, and the Parliament to discuss and agree on the constitutive nature of European integration and its regulative norms as it applied to company law and regulation. In 2001, the member states secured their ﬁrst victory by bringing the Commission to accept their vision of intergovernmental cooperation in this ﬁeld. Afterwards, the Parliament grudgingly accepted an intergovernmental regime. This constitutive principle of the regime, describing the relationship between the EU and the member states, that pervades all legislation within it and that shapes new legislation, in turn strengthens the intergovernmental principle in the area of company law and regulation. The European Court of Justice’s (ECJ) Centros ruling incited the member states to act by destroying the status quo: the European Economic Community (EEC) Treaty had granted companies the right of establishment throughout the single market, but many member states dragged their feet on allowing companies to operate in their jurisdictions. This cultivated a view of the state that retained control over its national market and allowed governments to agree to disagree about the basic requirements a company had to fulﬁl in order to do business. It was an informal but powerful norm of EU governance that the Court destroyed. The ECJ’s insistence on the right of establishment signalled a threat to established practices in some member states that could not be upset without generating a domestic political backlash. The regime’s development reasserted the individual (status quo) and joint (new) responsibility of the member states for regulating companies and made demands on them to create the institutional infrastructure necessary to do so. It also required special rules for handling co-determination in cases of takeovers, mergers, and company migration to meet the minimum demands of freedom of incorporation as the Court had laid out. This was the thorniest source of normative collision that the member states had to deal with. Member states without this feature granted concessions on employee participation, as part of a package deal that underlined national responsibility, and respect for diversity of national arrangements in the ﬁeld of company regulation. That contrasts strongly with the convergence on ﬁnancial market regulation. The intent of the member states to protect their own reserved powers in the context of Centros thus drove them to select a regime-based path to creating a single market for European companies. This required not only arrangements for the transfer of operations from one member state to another (cross-border

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migration) but also creating the legal basis for the voluntary merging of companies across borders, and for the hostile takeover of companies in one member state by companies in another. These are discussed below.

THE EUROPEAN COMPANY STATUTE AND T H E EM P LOY E E PA RT I C I PATI O N D I R E C T I V E The Centros ruling was followed speedily by a renewed Commission proposal for an ECS. The proposal drew on the Commission’s previous submission from 1990. Rather than accept the ruling of the Court that the companies of member states could develop themselves into Europe-wide entities without European legislation, the Commission drew on the comments of the advocate general in the Centros case that underlined for European politicians the viability of a legislated alternative. The Commission’s proposal sought to build on existing company law directives to provide a comprehensive set of corporate governance rules for European companies. It preferred a single set of rules to regulatory competition among the member states and accordingly preferred EU legislation to a pan-European right of establishment for companies based on national legislation. The Commission preferred a regulatory state. It foresaw a European Company incorporated under European law, competing with its national counterparts and adopting German-style co-determination to balance the interests of shareholders. Given the claims until then, it saw itself as a protector of both shareholder and stakeholder rights and deﬁned the member states as a problem that had to be controlled. This pre-programmed normative collision. The ﬁrst conﬂict between the Commission and the Council was on whether the ECS would be handled by the Community method or by unanimity. The Commission saw the development of the European Company as a core element of the single market and it argued that the legislative procedure should be based on the Community method. This would have allowed the Council to pass the bill with a qualiﬁed majority vote, and required the European Parliament to give its assent. The Council insisted on decision-making by unanimity, and on formally separating the ECS from the ﬁrst pillar of Community issues. The Council Legal Service formulated this position on 10 May 1999, reafﬁrming the Council’s position from 1990 that there was no legal basis in the treaties to support the Commission’s demands for legislation establishing a European

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Company. The Legal Service further insisted that European institutions and legislation must respect the primacy of the member states in deciding the form and substance of company law requirements: As the purpose is not the approximation of national provisions (Articles 94 and 95) (previously 100 and 100a), nor is it to coordinate national provisions to end restrictions on the freedom of establishment of nationals of the Member States and national companies (‘companies or ﬁrms formed in accordance with the law of a Member State’) (Articles 44 and 48) (previously 54 and 58) . . . the Legal Service conﬁrms its opinion that the Treaty does not provide for the powers of action necessary to set up an SE as envisaged in the proposal. As what is involved is the achievement of one of the ‘objectives of the Community’ and if the Council considers that ‘action by the Community’ should prove ‘necessary’ for that purpose (it proposes a margin of discretion in such matters), the proposed Act should be based on Article 308 (former Article 235) of the Treaty. (Emphasis in original; Council Legal Service, 1999)

The Legal Service also threw cold water on the Commission’s proposal to set rules for employee participation in a complementary legislative proposal. It maintained that Article 137 of the Amsterdam Treaty, which allows the member states to set minimum standards in employer-employee relations, did not apply, since the proposed directive did ‘not contain minimum requirements but lays down mandatory rules, which relate strictly and solely to SEs . . .’ (ibid., paragraph 11a). In other words, there was no normative agreement on the Commission as the principle regulator of the single market. European laws would have to respect national laws and prerogatives. The Council nevertheless agreed at the Nice summit (7–9 December 2000) to a package deal on legislation for a European Company and rules on employee involvement in company management. The European Company, henceforth known as the Societas Europaea (SE) would be incorporated at the European level and therefore entitled to undertake operations throughout the EU. However, it would be tied to a national form of company law and incorporate procedural protections against the reduction of employee codetermination. This formula largely preserved the dominance of national rules on company regulation and employee participation and became the guiding norm for all legislation in the company regulation regime. Member states thus remained the principal protectors and deﬁners of rights and standards, not the EU. With this watershed deal in place, it would take only two further weeks for the Council to produce the ﬁnal text of the ECS bill. With this trade in effect, the Council shifted its attention to striking a balance between the right of companies to freedom of establishment, and

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their responsibilities to national regulators when establishing or moving their headquarters. The Council’s Working Party on Social Questions produced structural provisions and minimum standards for the internal governance of the SE that were loose enough to encompass existing national arrangements and met with general approval. The SE could have a single or two-tier structure, had to hold quarterly board meetings with majority voting principles, and had to guarantee minimal information and procedural rights to directors and shareholders, such as the right for 10 per cent of the voting shares to demand agenda items at general meetings (European Council 2000a). There were still tensions early on over restrictions on free incorporation, establishment, and movement, however. The Netherlands and Luxembourg wanted to allow the SE to incorporate in any EU country regardless of where its headquarters was located, following the ECJ’s judgement in Centros. The other member states agreed that real seat theory would be applied, so that a company would have to be registered where its main operations take place. This placed national law and regulatory power at the centre of a regime (ibid., articles 7, 9, 11). Barriers to movement were also built into the legislation. German demands to protect existing national rights of employees to information and consultation and transfer them to the SE were reﬂected in Article 11, which demanded negotiations over employee co-determination where employees had been subject to this before (ibid., 1–8). The German Social Democratic Party placed great importance on the protection of co-determination in the ECS. Klaus Brandner, speaker for the Economics and Labour section of the parliamentary party, stressed this at the passage of the implementing legislation in the German parliament. The goal was to ensure the negotiation of a solution that respects the corporate cultures of companies with different employee involvement schemes (SPD, AG Wirtschaft und Arbeit 2004). The party also saw this as the model to be used in formulating the parallel laws (SPD and DGB 2004). Provisions to require the approval of regulatory authorities and shareholders before moving the company from one member state to another were extended to requirements to inform and consult employees on the reasons for and impact of the proposed move (ibid., 21). Spain opposed these provisions as impediments to company mobility (to Spain), particularly on co-determination. The rest of the Council accepted the rule as a means of avoiding conﬂict on a sensitive issue. Companies without co-determination could only be compelled to accept it if they acquired a company subject to cooperative management, and co-determined companies would remain that way.

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Spain also rejected provisions for national regulatory authorities to issue a document of approval before a company could legally move from one country to another, for example by merger.1 Nevertheless, the majority supported the right of national regulatory authorities to block the formation of an SE by merger on the grounds of the public interest and to declare the change of country (European Council 2000a, 23). The company law attache´s of the member states agreed on 14 and 15 December 2000 to the amendments, maintained the reservations taken by the working party on social questions, and passed the text on to the Committee of Permanent Representatives (COREPER). After COREPER had ﬁnished negotiating on 19 December and a side-deal made on an unrelated issue concerning Gibraltar, the Spanish reservations had been dropped, leaving the reservations of the Netherlands and Luxembourg, opposed by the rest of the member states (ibid.). The details of moving from one country to another would be sorted out in separate directives. Spain may have objected to empowering national authorities to place conditions on mergers and transfers, but it supported the principle of placing national company law at the centre of the company regulation regime. The United Kingdom supported the legislative compromise rather than the full freedom of incorporation demanded by the Court and by the Dutch and Luxembourg delegations, robbing their position of any reasonable chance of success, despite the United Kingdom’s similar policy towards foreign companies. Although the United Kingdom stood to gain in the market for incorporation in Europe, another consideration outweighed the incentive to support the ECJ’s path: securing regulative norms on cross-border transfer of ownership. ¨ berseering, and Inspire Art cases forced countries governed The Centros, U by real seat theory2 to grant foreign companies the right to enter and operate in their jurisdictions, but member states could still stop companies from leaving for another country, so that legal uncertainty prevailed for businesses wishing to move. These remaining legal uncertainties for companies would inhibit some companies from moving to the United Kingdom. The United Kingdom supported a legislated regime to provide the legal infrastructure and certainty required to manage such moves. The Takeover 1 Ibid., 14. This would ensure that companies fulﬁl tax obligations to the member state from which it is emigrating. The Court upheld this right in the 1988 Daily Mail case, which made the company’s migration to the Netherlands contingent on paying the UK Treasury. See Wymeersch (2004, 9). 2 These included Austria, Denmark, Finland, Germany, Greece, Ireland, the Netherlands, and Sweden. Economist (2004) ‘Merger Muddle’, 2 December.

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Directive, the Merger Directive, and the Cross-Border Migration Directive appeared suboptimal but necessary instruments to reduce the legal uncertainties for European corporate actors considering basing their operations in the United Kingdom. The UK government therefore supported the development of a company law regime as the best practicable means of ensuring that foreign companies would really be able to move to the United Kingdom as the Court had ruled. Once this decision had been made, the regime form had an added advantage to the British government over a harmonized directive, as it protected British institutions and laissez-faire practices from Commission pressure for harmonization.3 Without support, the Netherlands and Luxembourg dropped their demands by 20 December. Whereas the positions of the member states in the Council reached agreement on a regime based on national law and regulation, the European Parliament insisted on EU-level laws and regulations modelled on Commission proposals from 1991, 1993, and 1999 and on the harmonization of national laws (European Council 2000, recital 7a). In order to reduce the incentives for companies to move from one jurisdiction to another the European Parliament (EP) demanded robust European rules to protect and expand employee participation rights (ibid., recital 22) and harmonized tax rates in the single market (ibid., recital 21) that would level the competitive playing ﬁeld. Parliament’s demands would have established a European regulatory state as a key component of the European Social Model as the Commission had long envisioned. As an organizing principle, it would also have steered clear of the intergovernmental regime-oriented method of reaching agreement on contentious issues used in the Council. The Council strengthened its opposition to this position by insisting that the Parliament had only a right of consultation, which the Commission accepted after the Nice summit in 2000. The Commission subsequently abandoned its old position and turned its back on the Parliament, supporting the Council’s political agreement as the basis for a regulatory regime (European Council 2001). With the Commission and Council in agreement, the European Company Statute Regulation and the EPD were legislated on 8 October 2001. In sum, the ECS regulation creates twenty-seven types of SE grounded in the corporate governance and company law systems of the member states in which they are incorporated. It constitutes a regime for company law in Europe that secures a special place for national company law and regulatory authorities, although the regulatory details had to be worked out in

3

Interviews with British government ofﬁcials.

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subsequent directives. The organizing principles for the regime had been set, however, as had the nature of the member states and their relation to the EU in this policy area. National provisions were protected from European harmonization, preventing conﬂicts over sensitive economic and social practices and rights. The fact that the Council had found a means to respect national differences while constructing a framework of rules was an achievement so important in advancing the development of a legal framework for the single market that it convinced the Commission to abandon its previous stances on the ECS and support the Council’s collective compromise. The ECS Regulation and the EPD would be the last pieces of company legislation passed without the need for approval of the Parliament. This made the passage of the rest of the regime more procedurally difﬁcult, but the organizing principles of the regime were never successfully challenged, which otherwise facilitated passage. The SE left important challenges unanswered on implementation of cross-border changes of ownership and ensuring good corporate governance with regard to investor protection. These efforts would soon become systematized as part of a plan to improve the regulation of companies and ﬁnancial markets, discussed below as the Lamfalussy Plan, and the Financial Services Action Plan (FSAP) that it foresaw. This is dealt with in Chapter 9.

THE TAKEOVER DIRECTIVE (2004/25/EC) The Council and Parliament passed the Takeover Directive in April 2004, 15 years after the Commission ﬁrst proposed the Thirteenth Company Law Directive to the Council. The Commission aimed to make shareholders the ultimate decision-makers in a takeover bid and proposed the development of European regulation that would supplant national rules. It achieved the ﬁrst of these goals in principle, but at the price of signiﬁcant omissions at the insistence of the member states, which in turn insisted on their special role as guardians of the public interest and speciﬁc stakeholders in their own jurisdictions. This standpoint ruled out a delegation of authority to the European level and made an intergovernmental regime the only possible solution. The Takeover Directive is an important part of Europe’s regime on company regulation. It provides a legal framework for the transfer of ownership between member states and makes it possible to restructure the European corporate economy. The proposed directive ran into opposition before 2004 not only due to its redistributive effects, but also due to divergent conceptions of the ideal relationship between the company and shareholders and stakeholders,

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and due to the direct challenge to member state involvement in national economies. Favouring shareholders in EU legislation meant challenging special claims over the ownership of the company and the voting and information rights of shareholders that could prevent shareholders from deciding the outcome of a takeover bid. The main text of the directive favours shareholders, but it also allows the member states to lift these provisions and permit company management to hinder a takeover. There are three historical periods to consider in the construction of an agreement on the Takeover Directive. Between 1989 and 1999 the member states resisted Commission proposals as an infringement on their policy prerogatives. Between 2000 and 2002, the Commission successfully steered a compromise directive through the Council that was then defeated in Parliament on the grounds of unequal impact on the member states. Between 2002 and 2004, the Council and the Parliament passed a directive based on national oversight and greater powers for national regulators to block takeovers. Between 1989 and 2004, the Takeover Directive was transformed from a proposed delegation of power from the member states to the Commission to a reafﬁrmation of the special responsibility of the member states in questions of corporate governance. This solution used the principles set out in the ECS and EPD legislation to conﬁrm the Takeover Directive as part of the company law regime and not part of the ﬁnancial market regulation regime as the Commission had preferred. This refusal to harmonize or delegate set out radically different roles for the Council, Parliament, Commission, and Committees in managing cross-border takeovers in Europe than the Commission had envisaged and reinforced the preferences of the member states, who rightfully viewed the issue as politically explosive. Because these rules were politically sensitive, it was necessary to provide a continuing role for the member states as the ultimate guarantors of the system’s legitimacy. This has the effect that European shareholders are not guaranteed the ﬁnal say in the control of the European corporate economy, despite a directive that otherwise has this intent. This proposition is examined on the basis of the evidence presented below. The timing of the change underlines the impact of the freshly minted company law regime principles of 2001 on the handling of the directive. Crucially, the Commission had attempted to commit the member states to support the Takeover Directive as part of the FSAP (1998) which delegated powers to that body and preserved fewer prerogatives for member states. The new principles of the companies’ regime made the alternative clear. The Commission’s draft directive of 1999 would have ensured shareholder control of decision-making during takeover bids by subjecting the board of

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the target company to a UK-style neutrality commandment. That is, it would be prohibited from taking any defensive measures against the bid that would reduce the company’s value4 or block a new majority owner from exercising its votes to replace the company’s management. Germany fought this proposal on the grounds that it barred only certain kinds of protectionism, but found itself isolated. For the UK government, the principle of neutrality was a step in the right direction. Germany’s negotiators ceased resistance on 19 June 2000, allowing the draft to be sent to the Parliament in September 2000 for a second reading (European Council 2000a). The Parliament proved more hostile to takeovers than either the Commission or the Council, focusing on stakeholder protection and a level playing ﬁeld. It demanded that the neutrality commandment be dropped, that national regulators be allowed to authorize defensive measures (European Council 2000b, 11), and that the impact of a takeover on employees and business partners play a central role in both the takeover bid and the response of the target company. The latter included impacts on labour standards and co-determination. Its proposals on the ﬁnancial aspects of a takeover bid reﬂected a mix of German and British concerns. Amendment 12 demanded a legal framework for squeeze-outs, so that a purchasing company that had bought 95 per cent of the target company shares would have the right to buy the remaining 5 per cent. This would facilitate the formation of vertically integrated company groups typical of Germany. A related amendment demanded the establishment of an equitable price for shares purchased in such a transaction based on the highest price that the offerer had paid for shares within the last 12 months, and that the offerer should have to offer cash for the shares (instead of shares in the acquiring company) if it had paid for at least 5 per cent of the shares in cash (ibid., 6–8). These rules came much closer to British practice, which treats cash offers and equitable prices as important shareholder rights. As a package, however, the Parliament’s most dramatic proposals strengthened the interests of stakeholders (employees and corporate customers) rather than shareholders. The Council rejected the Parliament’s proposals to expand the directive on 13 February 2001 with the backing of the Commission, which argued that the Council’s internal agreement was too politically sensitive to be altered. The Council was willing to require companies making offers to comment on the general implications for employees, but not to allow target companies to take defensive measures in their name. Financial aspects of the bid were just as problematic. The Council was split on the cash offer proposal and suggested 4 Unlike British rules, the Commission’s proposal would have allowed defensive measures if shareholders had voted to allow them.

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that cash be made an option, not a requirement. France, Greece, and Denmark were not even ready to support cash offers as an option (ibid., 2–4). The Conciliation Committee of the Parliament and Council did not move the draft directive in the Parliament’s direction when it reported on 6 June 2001. Klaus-Heiner Lehne, the German rapporteur for the EP, recommended that the Parliament support the text but underlined his immense dissatisfaction on the issue of defensive measures (European Parliament 2001, 6–7). His own countrymen were then largely responsible for the directive’s failure. Parliament failed to pass the directive on a hung vote of 273 to 273 (4 July 2001). Callaghan and Ho¨pner (2005) show that EP Members (MEPs) were largely split by their country of origin, rather than their parliamentary party. More than 90 per cent of all German MEPs voted against the directive, while more than 90 per cent of all British MEPs voted in favour, demonstrating nationally based norm collision. This result raised the pressure on Council and Commission both to satisfy the Parliament more fully, and to deal with business unresolved in the Council. The Parliament’s strongest criticism was focused on the neutrality commandment, echoing German reservations on the draft directive in the Council. Lehne saw the rule preventing a level playing ﬁeld in takeover battles between companies from different member states as it disregarded forms of takeover protection beyond defensive actions by managers not covered by the proposed directive, including golden shares,5 and shares with multiple voting rights.6 This would mean that German companies would be subject to takeover from companies in other member states but not vice versa. He therefore demanded European legislation to eliminate these imbalances, to set more detailed guidelines for setting a reasonable price and to better protect employees in the case of a takeover. He ignored the commonly cited fact that employee co-determination is often seen as an impediment to takeover unique to Germany.7 The Commission reacted to this defeat by tasking a High Level Group of Experts on Company Law under the leadership of Jaap de Winter with ﬁnding a workable solution for a Takeover Directive which the conciliation committee greeted (Winter et al. 2002, 5). The group reported on 10 January 2002, proposing that the Parliament’s general concern for a level playing ﬁeld be 5

Golden shares refer to shares held by government that give them the right to intervene in corporate governance matters and to effectively prevent a change in management, even if majority ownership of shares has changed hands. 6 Commonly used in Nordic countries to protect the control of companies by insiders (often the founding family) from takeovers in the interest of dispersed shareholders. 7 Until the Vodaphone takeover of Mannesmann in 2000, which increased German fear of foreigners buying up the corporate sector.

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reﬂected in a way that strengthened shareholder protection by providing more details on mandatory offers to existing shareholders by acquiring companies, by providing guidelines on equitable prices for outstanding shares, and by providing for a harmonized squeeze-out procedure. Beyond this, the report was more radical than either the Parliament or the Council in aligning takeover rules with British principles. Not only did it argue that the decision of rejecting or accepting an offer should lie exclusively with the shareholders, but that shareholders should not be permitted to endow management with prior authority to undertake defensive action in a takeover bid. Any rules deviating from the one share one vote principle should be done away with so that insiders could not manipulate decisionmaking at the expense of dispersed shareholders. They also argued that offerers should be allowed to make offers conditional on reaching this controlling majority. The group’s most notable and inﬂuential proposal left national company law features that might block a takeover intact but introduced a breakthrough rule that would set aside impediments to takeover in the event of a bid if the offerer acquired 75 per cent of voting shares in the target company. These proposals were helped out by two court cases against golden shares in France and Portugal, which the Court ruled violated the freedom of capital movement (ibid., 29). The Commission tabled a new proposal in 2002. As before, it justiﬁed the directive through the FSAP to establish integrated European ﬁnancial markets and protection for shareholders. Where the demands of the Parliament and the High-Level Group of Company Law Experts (HLG) were in agreement (the level playing ﬁeld), the Commission adopted the measures in its new proposal. The new text continued to allow defensive measures with prior approval of the shareholders, but it also included breakthrough rules as proposed by the HLG. The defensive measures on the condition of prior shareholder authorization were ostensibly retained in order to respond to the Parliament’s complaint that American companies may use defensive measures, and that European companies should have access to the same options. The proposal’s provisions on shareholder protection included not only a more closely deﬁned squeeze-out, but for the ﬁrst time sell-out rights and the deﬁnition of an equitable price in a mandatory bid. The last two elements were designed to upgrade the beneﬁts for individual shareholders in a takeover bid. The provisions on employee rights were written in to the proposal as information rights. It made reference to consultation rights, but only where they already existed in acquis communautaire covering employees affected by a takeover bid (European Commission 2002b, paragraph 5.1).

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The Council reached a political agreement on a Takeover Directive in November 2003 on an initiative of the Italian Presidency. Under the proposal, countries could opt out of two requirements intended to make takeovers easier to achieve. These affected the requirement of managers to obtain permission from shareholders before taking any defensive action against a hostile bid, and a ban on the application of voting caps in a general meeting of shareholders after a takeover had been executed. Competition Commissioner Bolkenstein criticized this solution as a step backwards produced by an ‘unholy alliance’ in the Council that was ‘not worth the paper it’s written on’ (Fischer zu Cramberg 2004, 8–9), but accepted the result as the best agreement that could be reached (European Commission 2003b). The compromise effectively categorizes listed companies into two groups: capital market oriented (A) and conservative (B), where the former fully applies Articles 9 and 11 on defensive measures and voting caps. If a company from group B launches a takeover bid for an A company, the A company may make use of defensive measures approved by shareholders up to 18 months in advance, if the laws of the member state so allow. The British delegation (Huhne) pushed unsuccessfully for B companies to be explicitly listed as such (ibid.). Bolkenstein initially refused to support COREPER’s internal compromise. The Council had to choose between conﬁrming its agreement by unanimity, or accepting the Commission’s version of the draft directive. The Council surprised the Commission by winning the approval of the Swedish and Finish governments, and convincing the Spanish government to abstain. Parliament’s report of 8 December 2003 from the Legal Affairs and Internal Market Committee accepted the Commission’s new proposals on the level playing ﬁeld, but again with some important amendments that would have made more difﬁcult takeovers the rule rather than the exception. These included special rights to protect golden shares from the breakthrough rule and member state rights to allow companies to defend against takeover bids from companies in countries where barriers exist (European Parliament 2003, 6–8). This was considered part of setting a level playing ﬁeld with American ﬁrms (ibid., 81, 92). It suggested that the Group’s recommendation for restrictions on multiple voting rights be accepted under the breakthrough rule, but argued that other existing rules violating the one share one vote principle be grandfathered in spite of it (ibid., 23). This would have protected the Volkswagen Law’s restrictions on voting rights, for example. As before, the Parliament demanded not only information for employees, but consultation with management based on the SE provisions and on the Collective Redundancy Directive, and extending to co-determination (ibid., 8–9, 25, 64).

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Amendment 21 would have granted national supervisory authorities the right to be notiﬁed of such takeovers and grant them the right to permit defensive actions (ibid., 24). The Committee on Employment and Social Affairs underlined that the involvement of employees was not strong enough (ibid., 64). It also wanted to make breakthrough rules optional rather than mandatory rules (ibid., 77), so as to ensure that takeovers could be prevented where this was wanted. This shows the social purpose behind member state responsibility in takeover questions.

The British Position The Takeover Directive was a disappointment to the British government, to the Confederation of British Industry (CBI), and to the City but considered by all of them as ‘better than nothing’ in opening up the European corporate economy to takeovers (House of Lords 2003a, 18). This would beneﬁt both British companies, with high rates of market capitalization, and British investment banks ﬁnancing takeovers. The British government accepted that it could not move other member states to introduce rules as shareholderoriented as in the United Kingdom, but insisted on certain features as crucial or non-negotiable if it were to support the directive. These features deal with shareholder protection in a takeover bid. Furthermore, it was important to both government and business groups that the directive focus on minimum standards, so that British standards would remain unaffected, and that the directive would not open up the door to secondary legislation. Sir Brian Nicholson of the Financial Reporting Committee welcomed the commitment of both Bolkenstein and McCreevy to not pursuing a European code of corporate governance, and argued in favour of mutual recognition of European codes (Nicholson 2005).

Mandatory bid The provision for a mandatory bid with a minimum threshold in takeovers was a core demand of the British government in its pursuit of shareholder protection. This was considered necessary to allow shareholders of a target company to exit the company if they disapproved of the new owners. The provision for determining an equitable price to be paid for those shares was also considered vital, along with a minimum standard for this procedure. These were agreed in the directive. The British government was unsuccessful, however, in requiring that offerer companies offer shareholders cash rather

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than its own shares in a takeover bid, a sell-out, or a squeeze-out operation. Its main gain in the ﬁnal result was to ensure that the directive allows member states to demand the cash option for takeovers falling under its jurisdiction. These features include the mandatory bid after a threshold set individually by the member states, the level playing ﬁeld (disclosure, the ban on defensive measures unless approved by shareholders, the breakthrough rule) and the generous deﬁnition of an equitable price in the case of a squeeze-out or a sellout claim. Melanie Johnson from the Department of Trade and Industry (DTI) underlined in 2003 that the Department would oppose a Takeover Directive that did not advance the cause of strong shareholder protection. Making a bid mandatory was a key issue for the government (House of Lords 2003a, question 64), as was the Directive’s provision for some member states to require a cash alternative in the purchase of shares (ibid., 67, 70). This was a signiﬁcant factor in the beneﬁt side of the equation for the British government in approving the directive (ibid., paragraph 40). These features still are not as favourable to shareholders as are provisions in the United Kingdom. There, there is a complete ban on defensive measures and a mandatory bid in any takeover attempt. There was continued parliamentary concern that these measures insufﬁciently protected shareholders. The government saw two key advances: the mandatory bid and the restriction of defensive measures, and as a result, greater opportunities to promote cross-border takeover activity in the single market and in the context of opening up opportunities for ﬁnancial services used to fund takeovers (ibid., 10, 18). The CBI was not ecstatic about the mandatory bid provisions, but saw them as ‘better than nothing’ (ibid., 29). The DTI worked from the premise that the provisions for the mandatory bid needed to include a minimum standard threshold at which an offerer would be required to bid for all shares in a company, to ensure that shareholders had a right of exit. The Takeover Panel also wanted the DTI to ensure a cash consideration for shares sold in a mandatory bid rather than shares in the acquiring company. The government was willing to accept the cash offer as an option required by member states because the Minister did not believe that a mandatory cash offer was achievable in the Council (ibid., paragraph 42–45). Shareholder control of the takeover process (Article 9) was of vital importance to all British groups and institutions consulted on the government’s stance. The Takeover Panel and the CBI viewed the ban on defensive measures without prior shareholder approval as an unconditional requirement of the directive (ibid., 48). The House of Lords raised particular concern that the government might drop its demand for Article 9 in the face of resistance if the Council could not agree to the breakthrough rules also designed to protect shareholders (ibid., 49). The Takeover Panel suspected that the German delegation would suggest that both Articles 9 and 11 be removed

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from the directive (ibid., 64). Article 11 itself proved to be a difﬁcult agreement on the issue of multiple voting rights. These primarily affect the Nordic members of the EU. The objection to including multiple voting rights in the breakthrough clause was that it violated property rights of dispersed shareholders, protected in the Treaty of the European Communities (TEC) (Article 44 (2) (g) (ibid., 64–7). Although the DTI saw defensive structures in the British corporate economy as rare after long-term pressure by institutional investors, it welcomed transparency as a ﬁrst step in continental Europe for dealing with this issue. The draft directive provided for greater transparency of corporate governance mechanisms and ownership structures that could hinder the successful completion of a takeover, and provided the breakthrough rule to ensure the possibility of takeovers in the single market, both of which were improvements on the status quo.

State transformation: a statutory shell for laissez-faire A change that drew the attention of lawmakers was the requirement for a statutory regulator of takeover bids. This touched on transforming the idea of the state itself but could be acceptable if statutory regulation remained a shell for self-regulation. The House of Lords expected, however, that this would not require the replacement of the City’s Takeover Panel. Instead, the Panel would be required to operate within the context of a statutory mandate rather than a private one (ibid., 1–8, 10). Another key concern of the DTI during negotiations was that moving the mandate of the Takeover Panel from the City Code on Takeovers to a statutory instrument would encourage tactical litigation in takeover battles that would deter bids in the ﬁrst place and rob dispersed shareholders of a vital instrument for replacing management. It secured measures in Article 4(6) to its satisfaction and that of the Takeover Panel that would allow member states to prevent such litigation in the courts (ibid., 35). The most sceptical of the Lords, Lord Neill of Bladen, saw more litigation as a result of putting the Takeover Panel on a statutory footing, but that the government is willing to pay that cost for any other beneﬁts to be gained from the Directive. Melanie Johnson conﬁrmed this (ibid., 99). The CBI and the Panel were satisﬁed with the directive’s requirement for informing employees on the planned merger, as it reinforced existing national rights, but did not extend them to consultation with employees, which would have gone too far. The key issue of concern was the timing of information to employee representatives on the bid, particularly because the Information and

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Consultation (I&C) Directive could require transmission of plans for a bid before it was made, which would affect share price or facilitate defences. The Minister saw concerns about information leaks covered by the secrecy provisions of the I&C Directive (ibid., 70–71). Lord Neill found that there was no need for a directive per se, but supported the idea of promoting ﬁnancial market services. Mandatory bid, equitable price, and promoting good corporate governance were beneﬁcial features (ibid., 95). The choice of delegation to the Commission came up in British discussions about the Takeover Directive indirectly through the issue of whether the European Securities Committee should have responsibility for takeovers. It was opposed in the House of Lords, by the CBI and by the Takeover Panel itself. The Panel and the CBI argued that a minimum standards directive required no comitology committee and that the existing structure of a contact committee assisting the normal legislators (Council, Commission, Parliament) in adjusting rules should be preserved (ibid., 73–4). Mike Edbury of the DTI elaborated that the Commission and several other governments insisted on the comitology arrangement mostly because they see takeovers as a central part of ﬁnancial market law, where further rule development is accepted, and not of company law, where there is no demand for such provisions (ibid., 77). He noted, however, that the government would deﬁnitely push to remove the proposal (ibid., 74, 91), which is what happened. The German position was critical on the issue of the level playing ﬁeld, legitimating strong state protection of company rights to protect against takeover bids. In October 2002 Gerhard Schroder complained to Romano Prodi that the Commission’s plans for the Takeover Directive were unbalanced. It would force German companies to lower their defences against takeovers, without requiring the same of companies from other member states. The same applied to bids from the United States or Japan (Uhl 2005). In 2002, the German government passed the country’s ﬁrst takeover law, which included provisions for protective measures, including poison pills and authorization for defensive measures by shareholders to balance golden shares and multiple voting rights in other countries (Pfeifer 2002). Germany therefore wanted defensive measures approved by shareholders for general use by the directors. The Italian proposal, which was adopted, allows both companies in member states to decide whether they are covered by the neutrality principal, or whether they will rely on national provisions that are more restrictive (Institut fu¨r Deutsches und Internationales Bank- und Kapitalmarktrecht 2005). The opposition CDU supported the level playing ﬁeld mantra as well. German protective measures would be traded against foreign protective

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measures. These included multiple voting rights, foundation certiﬁcates, and private golden shares (Deutscher Bundestag 2000, 2003), a position also shared by the labour union IG Metall (DGB 2001).

THE CRO SS-B ORDER MERGERS DIRECTIVE 8 The ﬁrst proposal for the Tenth Company Law Directive was made in 1985 as part of the single market programme. The ECS provides in general for the formation of SEs by merger, but the demand for explicit legislation was written into the statute. Section 2, Article 16 notes that the Commission and the Council agree to handle the details in further legislation. The demand for a merger directive would follow from the need to coordinate the legal requirements applicable to companies merging in more than one national jurisdiction. The Commission proposed a directive on 18 November 2003. The proposal foresaw mergers carried out based on the requirements of domestic mergers (without details of conﬂicts). The Commission saw the directive as necessary to promoting the reorganization of the European corporate economy, thereby promoting economic efﬁciency and competitiveness. The impending start of the SE in October 2004 was one impetus for legislation, as was the foreseeable enlargement of the EU in May 2004. The Commission saw the legislation as essential to European companies seeking to reorganize across national boundaries, whether or not they adopt the SE legal form (European Commission 2003a). The mergers directive would provide legal certainty about which rules apply and which regulatory authorities are responsible. As with the ECS, the proposed mergers directive was constructed as a merger control regime relying on the legal and regulatory infrastructure of the member states. Whereas the Commission had sided against employee co-determination in the case of a Takeover Directive, Bolkenstein stated that companies should not be allowed to circumvent employee participation through a merger. Where one of the companies has employee participation, the negotiation mechanism developed for the SE applies (ibid., 2). This was the stumbling block on previous attempts to pass a Tenth Directive (ibid., 2–4).9 Indeed, the rules on co-determination proposed by the Commission were borrowed from the 8 Not to be confused with existing provisions for Merger Regulations—last changed in 1990 and 2003. These are designed to deal with concentrations of power within the single market. 9 Deadlock on the 1985 proposed directive was caused by fears in Germany that companies would use mergers to free themselves from co-determination. The negotiation rules created with the ECS agreement allowed a breakthrough on this conﬂict.

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ECS agreement, so that negotiations come ﬁrst, and the default arrangements kick in only after negotiations had failed to produce a result. The new parent company also inherits all of the work relationships and contracts that existed before, and must respect both the directives on co-determination bargaining, European works councils, and the consultation directive (discussed below). The Council reached a political agreement on the directive on 25 November 2004. The Economist reported that rules on worker co-determination in merged companies proved to be the toughest impediment to passing the directive as elsewhere. In Germany, the SPD claimed credit for ensuring that mergers would not diminish co-determination in German ﬁrms. MP Uhl stressed the importance of retaining the corporate culture of co-determination, and a European social model (Uhl 2005). The German government’s refusal to approve a directive without provisions to retain co-determination in merged companies led to a rule that co-determination would be introduced for the newly merged company if one-third of the employees are German. The Economist cited Jan Wulfetange of the German industrial lobby Bundesverband der Deutschen Industrie (BDI) in his explanation that this was a key reason why the BDI now called for the elimination of co-determination. The United Kingdom supported the directive to gain support for a different directive supporting the rights of temporary workers. France supported the directive in exchange for agricultural price supports (The Economist 2004). German business associations were critical of the government’s position. They predicted that because the default provisions in the case of failed negotiations would export co-determination to companies in countries without any such provisions, companies with co-determination would become pariahs in the European corporate economy for mergers and acquisitions (BDA et al. 2004a). They argued that the default rules for worker participation should only take effect if at least 50 per cent of the employees are covered by such an agreement, rather than one-third of the employees, as the draft directive proposed. Following the same line of logic they demanded that all decisions about co-determination be decided by a simple majority vote of all the employees concerned in the newly merged company. Further, they demanded that the maximum codetermination ratio be limited to one-third of the board, with reference to the Davignon Report and the solution found in the ECS. They also opposed measures which would retain co-determination for three years or longer as an unwarranted restriction on company business strategy (BDA et al. 2004b). The European Christian Democratic Employees Association (EUCDA), effectively a German organization, also demanded that the Merger Directive use the formula created for the ECS in determining co-determination in a merged company. This would foresee the use of the strongest co-determination regime among the participating companies if negotiations did not produce

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an alternative arrangement. However, it also insisted that under no circumstances would it be acceptable for existing co-determination rights to be given up (including, apparently, by negotiations) (Europa¨ische Union Christlich Demokratischer Arbeitnehmer 2005). The Deutscher Gewerkschaftsbund (DGB) likewise complained that co-determination would not come automatically but be imposed if one-third of the employees had been covered by such arrangements. Nevertheless it recognized that it could have been worse, as the German government in the European Trades Union Congress had been able to prevent the threshold being set at 50 per cent of all employees of a company, as demanded by the government of Italy, or the 50 per cent quorum from the opening discussions, as demanded by the government of the Netherlands (Hans-Bo¨ckler Stiftung 2005).

THE CROSS-B ORDER MIG RATION DIRECTIVE The Commission began the consultation process on a proposed directive on cross-border transfer of registered ofﬁce on 26 February 2004. This provides the legal framework for such transfers. The company moving its operations would have to comply with rules and regulations in the new home state, and the company would have to negotiate with its employees if they already participate in company management. Demand for the directive derived from Commission consultations in 1997 and 2002 showing that companies wish to move without liquidating the company. The Commission underlined that companies may incorporate wherever they wish, regardless of where they do business, as a result of the Centros case. It also refers to the recommendations of the High Level Group on 4 November 2002 to pass such a directive (European Commission 2004a, 3). As norms on co-determination and member state authority based on real seat claims had been established, only tax compliance remained to be regulated, which it was in this directive. Nevertheless, the DGB opposed any measures in the Migration Directive that would diminish co-determination in German companies and demanded more European co-determination as an extra security (Hans-Bo¨ckler Stiftung 2005).

CONCLUSIONS This chapter has set out the regime-based nature of legislation on the SE, a regime with national laws and regulators at its centre. It is a regime that works

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towards ensuring the ability of companies to operate throughout the single market with fewer restrictions than before, despite continuing varieties of company law and regulation, and concerns in some countries about the impact of free establishment. This chapter asserted three propositions about the nature of the regime model developed by the Council. The ﬁrst is that this system was deliberately constructed to prevent the tearing down of national competence by lawyers through EU institutions. The Council thereby ensured a continuing variety of capitalism within the single market. Another proposition is that this arrangement provides the opportunity for taking stakeholder interests seriously and building them into the regime at the national level. How this is accomplished is part of the broader search for good corporate governance, and discussed at the European level in the context of modernizing company law and ensuring the integrity of European ﬁnancial markets. This is the subject of Chapter 9. A ﬁnal proposition is that the involvement of the European Parliament has made it more difﬁcult to build up this regime structure. In comparing the ECS and the EPD with the takeover, merger, and migration directives, it is clear that agreement was far more difﬁcult where the Parliament had a veto on the outcome. One of the key reasons is that both the Council and the Commission have come to a settlement on the regime model of legislation that the Parliament cannot as yet accept. As Chapter 9 shows, under certain circumstances, this has made it difﬁcult to move forward projects on the modernization of company law and to ensure the integrity of ﬁnancial markets. The Parliament continues to emphasize common standards and rules that the Council has rejected in the course of its political agreements on company law, hampering further regime development. The norms constructed preserved the constitutive norms of the member states, in turn protecting distinct archetypal narratives about the state, managers, shareholders, and stakeholders. The regime constructs norms of coexistence in the face of business freedom as an alternative, preserving both policy-speciﬁc and state constitutional norms by demanding corresponding constitutive and regulative EU rules. This shows that only decision-makers in the EU need to agree on norms. The Parliament was shut out at an early, decisive stage so that the norms could be reached without it. The ﬁndings presented here provide us with evidence about the regulative and constitutive norms that form the instruments and conceptual foundation of the regime respectively. A regime must provide a clear set of understandings and expectations: understandings of how independent the participating actors are, whether they be national governments or international institutions, and their fundamental relationship with one another; and regulative

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rules that set expectations of how the actors will interact concretely in carrying out their responsibilities and exercising their rights under the rules of the regime. The regulative rules are both shaped by the understandings of constitutive rules and central to conﬁrming (and possibly altering) them. The regime for company law is intergovernmental in nature. It explicitly forced the member states, the Commission, and the Parliament to assume a normative position on the reserved powers of the member states and the powers of delegation to the Commission and/or the legislative process. The winning formula was found in 2001 and accepted by all of the legislative actors and incorporated into the ﬁrst directives, the ﬁrst regulative features of the regime. But this formula had to be reasserted between then and 2004, when the Commission argued that takeovers should be handled by the ﬁnancial regulation regime with collusion-based norms of delegation. The Council’s activity was crucial in not only deﬁning the constitutive and regulative norms based on intergovernmental principles, but deﬁning which policy areas belong to which set of norms. This has enormous consequences for the member states, and given the national norms in Germany and the United Kingdom on company law and regulation rooted in archetypal roles for state and market, it is hardly any wonder that they defended their prerogatives so strongly. We must remind ourselves that nearly all countries supported both sets of norms, despite the fact that other solutions might have rewarded them better economically. It was simply important to defend autonomy as much as possible and to construct supporting norms for Europe that would prevent either the free market norms and state disempowerment favoured by the Court or the social market norms favoured by the European Commission. The outcome created a Third Way that places the member states in competition with one another, and coordinates their activities to the beneﬁt of European companies, allowing legal certainty for the European market and legal diversity to coexist. The pattern taken for ﬁnancial market regulation and accounting standards will develop extremely different norms, as we will see starting in Chapter 9.

9 The European Financial Market Regulation Regime Chapter 8 demonstrated the regime-based pattern for company law development. It provided some of the basic corporate governance structures related to overarching questions of who should be deciding the company’s affairs. More speciﬁc measures to ensure good corporate governance and the integrity of ﬁnancial markets, by which I mean conﬁdence of investors that they will be treated fairly and equally through good company behaviour, required greater intrusion into the minutiae of company and ﬁnancial market law. That was ﬁrst made possible by the development of a plan in 2001 that sorted out the various rights and responsibilities of national governments and regulators, European Union (EU) institutions, and market participants in the regulation process. This plan was important because it set the right of participation in the decision-making process. This appears to be a plan that the Commission, the Council, national regulators, and market participants view as legitimate. More questionable is whether the European Parliament (EP) and stakeholders in corporate governance view regulation the same way. This chapter begins with a discussion of the Lamfalussy Plan of 2001, which proposed this structure, thereby setting up the foundation of an even more extensive regime than that pursued in the passage of the European Company Statute (ECS) and its implementing legislation. It then discusses the EU’s plan for the modernization of company law, which illustrates both the importance of the Lamfalussy method and the amount of legislation left untouched by the four instruments discussed in Chapter 8. It will become apparent in this chapter more than elsewhere that the European Commission in particular treats many aspects of company law as elements of ﬁnancial market law, laying claim to assume the same role in both areas. In fact, these two realms overlap signiﬁcantly. There are two reasons for this. One is that company shares constitute a form of money and a signiﬁcant form that is traded vigorously in ﬁnancial markets. The larger a company and more widely distributed its shares, the greater the importance of sound corporate management and fair treatment of all its investors for the growth,

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development, and stability of ﬁnancial markets. It is no wonder, therefore, that ﬁnancial market regulation makes great demands on company law and regulation. The second reason is that in Europe, there is an intrinsic link between the goal to complete the single ﬁnancial market and the market in corporate ownership through shares. Finally, the development of such markets raises the question of how good corporate governance and ﬁnancial market integrity can be best assured. Originally, the Commission foresaw its own role or that of a European regulatory agency as central, as only a European body could regulate a truly European market. The member states insisted on retaining their own input and implementation of ﬁnancial market regulation alongside signiﬁcant delegation of rule-making power to the Commission in which common rules and standards are worked out in discussion with market participants.

The Financial Services Action Plan The Financial Services Action Plan (FSAP) seeks to develop a deep, liquid capital market in the wholesale and retail sectors with high levels of conﬁdence in the quality and supervision of company information. This is relevant for the development of European company law and the Societas Europaea (SE) because it directly affects the way that companies present their ﬁnancial and annual operating reports to investors, how they are audited, and a long list of other measures on corporate governance found in the directives outlined below. Corporate governance and the promotion of ﬁnancial markets and services are therefore intricately interlinked. Despite this, the Commission was far more successful at promoting a multilevel regime for regulation rather than an intergovernmental model, as in the case for company law. The European Commission issued the FSAP in May 1999. It set out the main goals for ﬁnancial market completion and regulation. The FSAP was an ambitious programme. What is covered here deals mostly with trading in securities, leaving out other aspects, for example, banking regulation, which more strongly resembles company regulation without the regime. The report expressed frustration in the Commission that the completion of the single market in ﬁnancial services had not made signiﬁcant progress despite the introduction of the euro as a single currency having removed a key barrier to cross-border ﬁnancial service provision. The Commission and the Financial Services Policy Group that supported the drafting of the FSAP referred to ‘protracted political deadlock’ over several ﬁnancial service projects, including the ECS and the Takeover Directive (European Commission 1999, 4), which

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were later not handled as part of the ﬁnancial market regulation regime due to the domestic resistance against harmonization or delegation. The FSAP placed great importance on ensuring the development of a single set of rules for regulatory supervision. The Investment Services Directives 1989, for example, failed to relieve the fragmentation of the market due to differing national rules and regulations. Particular goals are common prospectus rules to permit EU capital raising, as multiple prospectus rules created obstacles through the member states despite the 1989 Public Offer Prospective Directive; common standards for ﬁnancial reporting to put an end to poor comparability across member states, alleviated by an orientation to international standards, with International Accounting Standards (IAS) screened by the Commission for the EU and national deviations from IAS accepted (ibid., 5–7). The FSAP equally emphasized its potential role as guarantor of market integrity as a common good as more ﬁnancial services were offered across borders and separated by sector. This included a need to incorporate corporate governance factors as different rules prevent ﬁnancial market integration and pose market integrity challenges. A corporate governance programme review was therefore called for. It emphasized the need for EU law to keep up with the fast pace of market innovations by accelerating the legislative process (ibid., 14–17, 31) which implied delegation of responsibilities to the European Commission. The Commission in turn would rely on close cooperation with the Federation of European Securities Exchange Commissions (FESCO), the Federation of European Securities Regulators, and a new regulatory committee of the Council, the European Securities Committee (ESC) (ibid., 22, 30). The FSAP enjoyed strong support from member states, which we can see reﬂected in the responses of the UK and German governments, and which also reﬂect previous normative convergence on the policy goals: protecting market integrity for dispersed shareholders through statutory regulation by independent agencies. The United Kingdom Treasury, the Bank of England, and the FSA fully supported the FSAP. It saw an opportunity to ensure the effective, consistent and proportionate implementation and enforcement of EU legislation on ﬁnancial services . . . to improve cooperation between supervisors . . . to ensure that the supply and sharing of data to, and between, ﬁnancial supervisory authorities is efﬁcient and effective . . . to ensure that ﬁnancial supervisory authorities, along with central banks and ﬁnance ministries, are able to work together to manage ﬁnancial crises . . . to continue to develop trust between market participants and supervisors and between supervisors themselves. (HM Treasury, Financial Services Authority, Bank of England 2005, 7)

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In Germany, the ﬁnancial sector also welcomed the gains of the FSAP but remained disappointed with it, calling for even more changes than their UK counterparts. The fragmentation of the European ﬁnancial markets was a key concern. Key concerns from the private sector were a harmonization of contract law and company law and corporate governance (Deutsche Bank Research 2004), which were inconceivable for the public sector. The FSAP on its own proved capable only of putting issues on the agenda for the Council to consider. Passing legislation ﬂoundered over basic questions of rights and responsibilities of the actors involved in the regulatory process before substantive questions of regulatory standards could be dealt with. For this reason, implementation of the FSAP failed to materialize until regime principles could be sorted out, deﬁning more closely the roles of the Commission and member states in a constitutive fashion and the relationship between them through regulative norms. This challenge was taken up by the Lamfalussy Group, which had been tasked with setting out the fundamental structure of the relationship between the Union and the member states, the corresponding organizing principle of the legislation, and the means by which ongoing regulatory innovations would be undertaken. The Council’s acceptance of its report in 2001 laid the foundation for agreements on the EU’s implementation of the FSAP. This is discussed in a separate section below.

REGIME B O UNDARIE S AND CORPORATE GOVERNANCE One of the more interesting stories about the ﬁnancial services regulation regime is the deﬁnition of policy areas that belong to it or are handled in other regimes. These had to be argued and negotiated among the parties involved. The Commission preferred that all three policy areas: company, securities, and accounting regulation be handled in a single regime in which harmonization and delegation would be key regulative principles supporting a constituted Commission identity as protector of investor rights and promoter of the single market in capital. The attempt to do this for company law failed due to the insistence of the member states, despite the persistent attempts of the Commission and its commissioned expert group to deﬁne the issue in the Commission’s favour. The main argument was that corporate governance rules affect the ﬂow of investment in the single market and affect investor rights. The inability to deal with corporate governance issues through the securities regime lead to Commission recommendations without any formal

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legislation, even less than the open method of coordination (OMC), which uses objective benchmarks and peer pressure in addition to simple admonition. The Commission called the High-Level Group of Company Law Experts (HLG) into being in September 2001 to ﬁnd a way out of the deadlock over the Takeover Directive. The Group extended its mission to promote the harmonization of listed company and ﬁnancial market regulation to promote competitiveness and shareholder/consumer/creditor protection. The Group placed importance on disclosure requirements for listed companies as more efﬁcient and ﬂexible and easier to apply than other regulatory provisions. This underlines the Group’s focus on legal areas in which company law and ﬁnancial market law overlap to provide for good corporate governance and the quality of ﬁnancial markets, but also its mission to seek ways to set aside hindrances to transnational company restructuring (High-Level Group on Company Law 2002, 4–5). Furthermore, the Group underlined that measures to ensure good corporate governance should not interfere with the company’s ability to manage their general affairs. The Group’s ﬁrst order of business was to make recommendations about the regulative norms: optimal relationships between the EU and member states as legislators and regulators. Although it recognized the differences between company and ﬁnancial market law, the Group deﬁned its own remit in ways that covered aspects of law that fall into both areas, such as takeover and merger law, and rules of disclosure and transparency of company data in ﬁnancial markets. Within the realm of company law, it favoured an increased reliance in the EU on secondary legislation to fulﬁl the tasks of standard-setting, monitoring, and information disclosure. The Group also wanted to minimize the regulatory burden facing companies at the same time. In this context, it favoured a distinction between large public listed companies, which would require the full attention of regulators, and medium-sized and private companies, which it thought should be subject to less restrictive rules and surveillance. Its argument that issues related to ﬁnance be handled outside of company law was based on the argument that the governance of companies should not be hampered unduly by regulation (ibid., 5–6). The Group’s second order of business was to make recommendations about how to ensure good corporate governance standards in Europe, which envisaged the EU championing the rights of dispersed shareholders. In doing so, it considered several problems. First, it was concerned about the declining attendance of shareholders at general meetings, where they had the opportunity to pose questions to directors and take key decisions, leading to a decline in the effectiveness of shareholder control over management. Second, it was

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concerned about the lack of opportunities for shareholders residing in other member states to inform themselves and attend the general meeting. Third, it considered the issue of whether institutional investors should be compelled to cast votes in those meetings. Finally, it needed to and did respect some dominant responsibility of the member states for areas in which they had staked their claims in the companies regime. In all of these cases, the group stressed disclosure and transparency as common requirements to be demanded of companies or encouraged. In the ﬁrst two cases, the group proposed that companies rely more heavily on electronic communication before general meetings, but did not insist that these provisions should be mandatory. In the case of institutional investors, the group argued that they should be forced to publish their voting policies, but not compelled to vote their shares (ibid., section 3). Transparency and disclosure also played an important role in the Group’s recommendations in other areas. It proposed that listed companies should be required to describe their corporate governance arrangements in their annual reports and company web sites (where available) and that they inform shareholders about their rights. It recommended that the member states be required to incorporate comply-or-explain rules in their national company law and corporate governance codes to ensure a good performance and nomination in the directive pay, auditing, and accounting, and on the role of non-executive and supervisory directors and the company. It also remained recommended that listed companies should be required to disclose the crossappointments of their directors. The group argued that the ﬁnancial statements of the company should list the individual pay of all directors, and that it publish the remuneration policy of the company (ibid., 10–12). Not all of the group’s suggestions on shareholder inﬂuence rested on improved information rights. The group endorsed some minimum standards for European companies including the right for shareholders to vote at general meetings in absentia, and that shareholders be given the right to demand a special investigation into the affairs and the company, provided that at least 5 to 10 per cent of the share capital demanded such an investigation. The Group also urged that management should be made collectively responsible for the company’s ﬁnancial statements, and that the audit team should be supervised by a committee staffed by a majority of independent persons. It also supported European legislation on wrongful trading and misleading disclosure (ibid., 9–11). The Group also dealt with the corporate governance issues in company groups, again stressing disclosure and transparency towards the investment community. It consequently encouraged the Commission to review its regulations issued under the Seventh Company Law Directive, covering

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international accounting standards. It recommended that the parent company be required to provide information on cross-holdings, a clear view of the company group structure, and a clear view of the ﬁnancial accounts of its subsidiaries (ibid., 18). The Group’s truly revolutionary proposals were made in the areas of company mergers and migration, because they directly challenged the solution found by the member states. The system proposed would have centred around European rules rather than a regime of member state cooperation and coordination. The Group’s 2002 consultation paper suggested that the EU proceed with legislation on the Tenth and Fourteenth Company Law Directives with limits on member state restrictions on business mergers and migration. This meant no obstructions to mergers in migration when both countries involved use incorporation theory. Where the company moves from one real seat country to another, government intervention should be limited to cases based on ‘principles of the legitimate general interest, proportionality, minimum intervention, and discrimination and transparency’. Movements between real seat and incorporation countries should be handled in the basis of reciprocity. The group suggested that outstanding questions about employee rights and creditor protection be pursued at the EU level, based on the Second Company Law Directive (ibid., 20–1). Another potentially explosive recommendation was the elimination of legal capital requirements in national company law, which was a key requirement of real seat countries. This proposal went to the heart of national differences stressing the relative rights of shareholders versus other creditors (banks and other bondholders) in the case of insolvency. Unsurprisingly, the Group’s consultation with the market sector found support for either modest simpliﬁcations to existing arrangements or eliminating the idea of legal capital coupled with stronger shareholder rights. The group justiﬁed its advice to eliminate legal capital on the basis that it is hardly effective for the purpose it is designed to fulﬁl (ibid., 13–16). The Group supported the retention of national company laws and corporate governance arrangements in a European framework, arguing that harmonized legislation would lead to a rigid rule environment, incapable of reacting quickly to new circumstances. Instead, member states should continue to be responsible for codes of corporate governance, and appropriate sanctions, including misleading ﬁnancial statements and market manipulation. The vast majority of respondents to its consultation rejected the idea of a European Code. The Group argued instead that the Commission should coordinate national initiatives (ibid., 9, 12). The Group also steered clear of advice that would touch on the issue of single- or dual-tier company systems. Instead, the Group’s report underlined

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the functional equivalence of non-executive directors in single-tier systems and supervisory directors in dual-tier systems. Instead, it saw ﬁt only to counsel that non-executive and supervisory directors would have a particularly important role to play in protecting minority shareholders where there is a controlling shareholder. In such cases, such directors might be particularly important in ensuring good corporate governance in the nomination of directors, their remuneration, and in the supervision of the audit and accounting of the company’s ﬁnancial reports (ibid., 8). The High-Level Group therefore proposed the establishment of a European regulatory system that was closer to the idea of a regulatory state (Majone 1996), in which the member states and the parliament would set the legal principles and basic minimum standards, and in which national regulators and market participants would be active in setting out detailed implementation through secondary legislation. The High-Level Group kept its distance from hard, singular rules and enforcement, preferring instead to promote the development of model laws as standards of corporate behaviour, promoting corporate compliance through comply-or-explain provisions, and relying on the disclosure of information as a means of improving transparency and accountability of managers to shareholders (ibid., 5). In sum, the High-Level Group argued that the modernization of the European company law regime required the shift from an intergovernmental arrangement to a multilevel one. While this would have shifted responsibility for rule-making away from the member states in the areas of mergers and migration, the Group steered clear of promoting the harmonization of national measures dealing with corporate governance standards, the structure of the ﬁrm, or even the role of non-executive directors and supervisory board members. This shows that the primary harmonization message of the Group lay in promoting changes in ownership, rather than corporate governance per se where it respected the new companies regime. In this context, the Group’s reliance on disclosure and transparency and minimizing regulatory burdens is striking. The Group therefore positioned itself between the claims of the member states and the old Commission stance.

The Commission’s Response The Commission responded to the report of the High-Level Group by launching its programme Modernizing Company Law and Enhancing Corporate Governance in the EU on 21 May 2003. In addition to outstanding issues in company law directives that continued to complicate cross-border

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mergers and migrations of companies in the single market,1 Commissioner Bolkenstein saw corporate governance at the heart of the political agenda in Europe and America, as shareholders, employees, and the public had been hurt by fraud-induced collapses like Enron. In addition to the outstanding goals of a mergers (revised tenth company law) directive and a cross-border migration (fourteenth) directive, Bolkenstein therefore viewed corporate governance projects like a Statutory Audit Directive as imperative, and voluntary and self-regulatory measures as insufﬁcient (European Commission 2003c, 2–3). However, he was willing to accept a ‘more ﬂexible approach to harmonization’ based on ‘more political deference to national law’, as had been exercised in constructing the regime on company law, allowing for a compromise between harmonization of national provisions and ﬂexibility. Although it wished to promote coordination of corporate governance codes, it accepted that this would remain an area of national responsibility in accordance with the views of the HLG and the 2002 Orviedo Council. Its highest priorities for harmonization remained company law, followed by ﬁnancial market law (ibid., 8, 11–12). Nevertheless, the Commission announced the establishment of a Corporate Governance Forum of experts from member states to prevent any further drift in national codes and promote greater harmonization in the future (ibid., 17). The Commission’s position stressed the importance of introducing strong principles with ﬂexible application oriented both to shareholder and creditor protection. It set as goals a mandatory corporate governance statement, minimum explain or comply requirements, measures to aid shareholder rights, especially across borders, non-executive directors, and minimum standards on remuneration and audit committees. Transparency played a key role in its strategy. The Commission’s report argued for the legislation of mandatory reporting requirements on the steering mechanisms of the company, ﬁnancial performance, any major shareholdings that could bestow speciﬁc actors with strong powers of control, and any strategic partnerships with other companies anchored via cross-holdings or cross-directorships. The Commission also proposed that companies be required to provide information on their risk management system, and that they inform investors of which corporate governance code they observe. This was the basis for the Transparency Directive. In addition, 1 Contrary to its general support for measures designed to facilitate mergers, it rejected two key recommendations of the HLG: that SE corporations be permitted to choose a one-tier or two-tier structure anywhere in the single market (thereby holding to the compromise reached in the company law regime) and that the requirement of minimum capital, not present in all member states, be scrapped. Retaining this would continue to complicate mergers and migration for small- and medium-sized companies primarily.

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the Commission also took up the issue of binding institutional investors into corporate governance in Europe. It recommended that they be required to disclose their voting policies to investors, in the hopes of somehow improving the quality of their involvement with company management, but that they not be actually required to vote (ibid., 13). Ideally, the Commission favoured a more comprehensive set of legislated requirements covering shareholder rights, with a view to shareholder democracy, including better rights to vote in abstentia and to participate in general meetings, rights to participate online, and the removal of executive directors from decisions where management has a conﬂict of interest, such as nomination, remuneration, and audit. It also supported HLG recommendations on remuneration: publishing remuneration and policy, prior shareholder approval of share options, and their proper reﬂection in company ﬁnancial accounts (ibid., 14–15). It also supported HLG recommendations on European rules for collective responsibility of the board for ﬁnancial statements; a special investigation rule, whereby shareholders could ask a court or other body to investigate the ﬁnancial affairs of the company; a wrongful trading rule, whereby directors could be held personally accountable for failing to take action protecting investors if the company becomes insolvent; and director disqualiﬁcation, which would bar directors who have committed offences from acting in this capacity (ibid., 16). In the area of promoting better corporate governance, the Commission accepted by 2004 that the treaties provided no basis for issuing directives or regulations and made recommendations to the member states instead. These were the Recommendation on Independent Directors and the Recommendation on Directors’ Pay. Bolkenstein saw independent directors as referees between the different interests in the ﬁrm (managers, small and large shareholders, but not other stakeholders). Without the constitutive norms required to back the Commission as instigator of regulation, the Recommendation on Independent Directors therefore called for minimum standards for such directors, features designed to prevent domination by any individual or small group, including committees on audit, remuneration, and nomination (European Commission 2004b). The Recommendation on Directors’ Pay called on the member states to ensure that companies publish their remuneration policies, that they publish the salaries of individual directors, and that they give shareholders the opportunity to vote on such arrangements, including shares and share options (European Commission 2004c). The regime therefore does not guarantee Commission dominance in all areas but makes it possible. It could not break through the competing norms in company regulation.

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Proposal for a Shareholders Rights Directive The European Commission released a consultation document in September 2004 to ensure that shareholders had the power to make decisions in the company and to receive full and timely information, particularly over borders, through chains of intermediaries and by electronic means. A proposal was made on 6 January 2006 after initial consultations but had not yet been passed at the time of writing. The Commission’s role in modernizing company law and regulation follows a pattern that is familiar to students of European integration. Where possible, it used the recommendations of the High-Level Group to legitimate proposed legislation covering not only the requirements of cross-border restructuring, but also spilling over into the area of corporate governance itself. The justiﬁcation for this activity is provided not only by the prospect of improving shareholder involvement in company affairs across member state jurisdictions, but also of promoting harmonized or common rules on corporate governance per se—in the public interest, to protect investors and in reaction to the general crisis of conﬁdence in corporate governance worldwide. In the area of corporate governance codes in particular, although there has been great similarity in the approaches taken by Organization for Economic Cooperation and Development (OECD) countries, the Commission is concerned that member state responses to concerns about corporate governance could diverge in the future if the EU were not to actively promote the development of network-based exchange among national experts. It is fortuitous for the Commission, therefore, that it has a mandate to promote regulation of ﬁnancial markets in the EU, where many aspects overlap directly with corporate governance issues. The timing of the FSAP and the New Accounting Strategy shows that the Commission, the Council, and the Parliament had begun developing legislation on the ﬁnancial aspects of corporate governance before negotiations on the European Company as such had been completed. This was possible due to quicker agreement on the relevant norms through the Lamfalussy Plan and the setting of boundaries between the two regimes.

T H E L A M FA LU S S Y P L A N The Lamfalussy Plan sets out a framework for regulating ﬁnancial markets in Europe. It sets out a division of labour between primary legislation and regulation on the basis of secondary legislation, assigns roles to the political

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decision-makers and to market participants in deﬁning European rules, and provides for the use of national rules and regulatory procedures in the pursuit of common European objectives. It is a structure that leaves it to the actors involved to determine minimum standards, and to decide what other common rules they wish to commit to. The Lamfalussy Plan is therefore the map for a regime in ﬁnancial market law and one of great importance at that. Not only does it pave the way for the ongoing interaction of the EU’s political decision-makers in regulating ﬁnancial markets and related aspects of corporate governance, it strikes a path for interaction that establishes a delegation-based regime method over other alternatives. The Lamfalussy Plan was produced in the context of agreements by the Commission and Council to encourage the integration and growth of ﬁnancial markets in Europe, coupled with deadlock over the proper method for regulating it. The Lisbon Council (24 March 2000) committed the EU to integrated ﬁnancial markets by 2005. The Commission reported 30 May 2000 with a plan to proceed, and the Economic and Financial Affairs Council (ECOFIN) set the terms of reference for the Lamfalussy Group on 17 July 2000. The group was tasked to sort out regulatory measures, respecting the role of national regulatory bodies and the EU institutional balance. The group reported in 2001, outlining both programmatic priorities in speciﬁc regulation and the regulatory strategy. The centrepiece of the Lamfalussy Plan is a four-level division of labour that sets out the relationship between primary legislation passed by the Council and Parliament, which sets out the agreed goals, and secondary legislation issued by the Commission in consultation with two newly formed committees, which provides for concrete implementation. It also sets out procedures to cover the processes of feedback, evaluation, and revision. Quoting the European Commission: The new approach for securities markets regulation comprises four-levels: namely broad framework principles included in legislation adopted by the European Parliament and Council (Level 1), measures implementing those Directives and adopted by the Commission after advice from the Committee of European Securities Regulators (CESR) and the agreement of the European Securities Committee, consisting of high-level representatives of the Member States (Level 2), co-operation among regulators (Level 3) and enforcement (Level 4). (European Commission 2004a, 3)

The Lamfalussy Group report in 2001 outlined both programmatic priorities in speciﬁc regulation and the regulatory strategy, ensuring transparency of markets. This was followed by political support from the Stockholm Council (23–4 March 2001), which set the goal of reaching integrated securities markets by 2003. In order to support the EU’s activities, the Commission

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established the ESC (Decision 2001/528/EC) and the Committee of European Securities Regulators (CESR). In November 2004, after much of the ﬁnancial market regulation outlined below had been legislated, the Council underlined the importance of the Lamfalussy model for accelerating the legislation, implementation, and enforcement phases of the policy process: The Council ﬁnds that experience, while still limited to date, shows the introduction of the Lamfalussy framework to have been successful, meeting its key objectives. The application of the framework has generated additional momentum to, and increased the ﬂexibility of the legislative process in allowing it to respond to technological change and market developments, by adopting implementing rules on a faster and more ﬂexible basis. It has also paved the way for more effective supervisory co-operation and convergence. (Economic and Financial Affairs Council 2004, 15)

The Council stressed that the Lamfalussy model’s assignment of rights and responsibilities in the rule-making process and considerable ‘ﬂexibility in the way that ﬁnancial markets are regulated [in the member states]’ were the keystone to ensuring political support for the programme as a whole (ibid.). It thus deﬁned both the EU bodies and the member states as key providers of shareholder protection, conﬁrming these through the regulative rules of the model. The Lamfalussy Plan was signiﬁcant because it set the future rules for creating ﬁnancial market law in Europe. In a sense, the ECS had already set out the precedent that became institutionalized in the plan, in that it dealt with the most difﬁcult areas of company regulation in a separate regime. This made it distinct from the complete lack of rules to allow the creation of the European corporate economy, as had existed during the period of stalemate, and distinct as well from the preferences of the European Commission in the HLG.

Parliament-Induced Changes The Plan approved by the Commission and the Council proved to be too oriented to these two actors for the EP, which argued for changes before it would accept the Plan. It expressed concern that the Lamfalussy Plan would isolate it from decision-making and prevent effective oversight and that the interested and affected public would have no effective input into the process of generating secondary legislation in stages two through four. The EP’s Economic and Monetary Affairs Committee (EMAC), headed by RandzioPlath (Party of European Socialists (PES)—Germany), demanded full

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Internet access to all information and minutes of comitology meetings, and the establishment of a standing market participants group (Bolkenstein 2001). Above all, EMAC was concerned that Commission activities might collide with prevailing norms of regulation or integration, thus setting precedents in the principles of these areas without the involvement of the public. Commissioner Bolkenstein responded in October 2001 offering concessions. Proposed regulations would be transmitted to Parliament with ﬁfteen days for EMAC to comment, Commission documents sent to the ESC and ESC opinions would be sent to EMAC, as would CESR’s formal opinions. Summaries of the main issues discussed in the ESC, but not minutes, would be sent. Information on proposed regulations and ESC opinions would be posted on the Commission’s web site, inviting comments by market participants and consumer groups. He proposed a structured set of regular meetings between the Internal Market and Services Directorate General (DG MARKT) and EMAC: a monthly meeting between the DG and the EMAC secretariat, a quarterly meeting between EMAC rapporteurs and DG staff on current implementation issues, and a quarterly meeting on long-term strategy questions (measures at least a year away). He took note of the demand for a four-year sunset clause on delegating legislation, but referred to the upcoming review of the Lamfalussy process in 2004, and the Commission’s 2001 response to the Lamfalussy report, which argued that Article 202 of the Treaties, which grant only the Council oversight of the Commission in particular areas, should be brought in line with the shift in legislative rights under the co-decision procedure that includes the Parliament as a key actor with enhanced legislative rights (ibid.). The Commission promised to take account of the Parliament’s positions, but did not promise to accept Parliament’s right to wield a veto over objections it might have to principles of regulation and integration as proposed in EMAC’s letters to Bolkenstein. He promised, however, that in the event that the Commission rejected the demands of Parliament, the former would write an explanation of why this was so. In other words, the Commission had no intention of altering the nature of the EU decision-making process to accommodate Parliament in a way that instilled rights. In 2002, the EP responded with an internal agreement to promote so-called sunset clauses in ﬁnancial market directives, meaning that the directives would expire after four years if not renewed. The EP supported rapporteur von Wogau’s call to use sunset clauses to retain parliamentary accountability and enhance consultation in the Lamfalussy process. Other measures to ensure transparency were a commitment to inform Parliament of plans for new secondary legislation at least three months ahead the expected date of the regulations taking effect and a commitment to introduce procedural rules requiring a public consultation for all but the most urgent proposals (EP

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2002). In addition, all major parties supported stronger participation guarantees in the legislative process for market participants (the regulated). All of these latter proposals were accepted by the Commission and Council. These demands were also linked to a similar confrontation between Parliament and the other bodies over the terms of the Draft Constitutional Treaty (DCT), which underlines the constitutionalization of the EU by policy area through the regime. Parliament linked demands for giving up sunset clauses to the terms of the Constitutional Treaty, especially Article 36, which granted the Parliament call-back powers on framework laws under the TEC as a general principle. Wogau’s speech in the EP debate explicitly referred to the Constitutional Committee and their help in making this connection (ibid.). The problem was, of course, that the non-ratiﬁcation of the Treaty eviscerated the prospect that Parliament would be able to control secondary legislation through anything but the sunset clauses. As this remained unattractive to the Commission and Council, which wanted to delegate without the restrictions, the incentive was created to reach a compromise. The comitology reform agreement was a constitutional change to the EU involving a constitutive shift in thinking about the role of Parliament in the Union. It was reached with the Commission and Council in June 2006 and ratiﬁed in July 2006. The key feature allowed Parliament to block level-2 and level-3 committee decisions in policy areas covered by the co-decision procedure in the same way that a Council regulatory or managerial committee might do. This is done by an absolute majority of MEPs (EP 2006c). In return, the Parliament forsakes any claim to the right to incorporate sunset clauses into level-1 legislation. The Commission must submit information in all ofﬁcial languages rather than one to three. This required the approval of Parliament’s Constitutional Affairs Committee. Corbett called the compromise a ‘huge breakthrough in parliamentary control over EU legislation’, furthering transparency and accountability. Winkler (Austria), speaking for the Council, supported the deal as a positive correction of institutional imbalance and progress for democratic accountability. The only internal opposition from the EP argued that the new threshold to block regulations was too high (EP 2006d). The Commission signed on to the agreement on 22 June 2006. Not only does the Lamfalussy Plan provide a distinct alternative to the outcome preferred by the Commission in the high-level group of experts, it also provides a distinct alternative to the solution found in the United States to create a single corporate economy. In that country, a single corporate economy had been created with the help of the court system and the absence of federal legislation. If the European Court of Justice (ECJ)’s rulings had been accepted without countervailing action on the part of the member states and the Commission, the European company law regime would have been

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ECJ-centred in nature. By this I mean that the member states, the Commission, and the Parliament would have been forced to work under the full structural constraint of the freedom of establishment for businesses. Without the central legislative responsibility of the EU’s political decision-makers anchored into the framework of the Lamfalussy Plan, the member states would not have been in a position to incorporate their own legal and regulatory provisions into the European company law regime. Instead, they would have, as in the cases of the United States and Canada, been forced to choose between creating federal law and regulatory institutions (Canada) or allowing companies to operate under national basis without national law and regulations applicable to them, as in the United States (Bebchuck and Farrell 1999). We can most clearly see the preference of the member states for a regime over a purely supranational solution in the gap between the measures it passed and the continuing proposals of European-level actors for a unitary or harmonized system of corporate governance and regulation. The most prominent of these proposals came from a newly formed group of company law experts tasked with the modernization of European company law, and the completion of the single European corporate economy. It is instructive that the Commission effectively contested the treatment of its action plan on improving corporate governance as part of the regime for company law and tried to have it considered as part of the regime for ﬁnancial market regulation instead. It was not successful, precisely because it would have meant that the member states would have had to delegate rule-making authority on company law to the Commission, which they were not prepared to do. The process demonstrates again, however, how the policy areas have to be deﬁned in relation to speciﬁc constitutive and regulative norms. Corporate governance issues have extremely close connections to ﬁnancial market regulation, but the national constitutive norms of the member states made it impossible to consider treating it like other ﬁnancial regulatory issues.

FINANCIAL MARKET LAW Financial market law and regulation were developed both in the service of creating a single European capital market and in pursuing improved standards of ﬁnancial reporting and control in the corporate economy. The ﬁrst of these motivations existed far before the 1990s, as Chapter 6 illustrates. The second motivation was noticeable by the mid-1990s at the latest, in the wake of spectacular corporate collapses fuelled by poor corporate governance, invisible to shareholders and hidden by management. All of the directives

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described here were passed with sunset clauses which effectively lapse under the inter-institutional agreement of 2006.

FSAP Regulation with Corporate Governance Aspects Together, the directives discussed below are known to the Brussels policy community as the security directives, as they deal with the behaviour of the company and those close to it who affect the price of company shares, and the ability of market investors to assess the ﬁnancial fortunes of the company. The Listing Directive, the Prospectus Directive, and the Transparency Directive are three related pieces of legislation devoted to both minimum standards on structural requirements of listed companies, and ongoing information disclosure to the investing public. The Commission’s DG Internal Market, Financial Markets Division, works with the ESC on level-1 legislation, whilst CESR is the most prevalent regulator starting with level 2 (implementation).

Listing Directive (2001/34/EC)2 The point of the Listing Directive is to make it possible for companies to list on stock exchanges in other countries, and at the same time, to ensure a certain degree of investor protection. That protection was to be provided through the provision of information by companies to investors in conformity with ofﬁcially sanctioned listing rules, supervised and enforced by competent national authorities. Because this directive set up the minimum standards for investor information and supervision, it is a fairly lengthy directive ensuring that the member states have assigned a listing authority with speciﬁc powers, and covering the sort of information that must be published by companies in annual reports. It also agrees that the company must be subject to the authority of the regulatory body in which its head ofﬁce is registered, thereby ruling out the possibility of jurisdictional conﬂicts (Article 37), and recognized by the other member states (Articles 38–40). The directive also expects that companies must provide information at least twice a year on how they treat shareholders, any new issue of shares or debt, and any change pending to the articles of association, as well as annual accounts and reports providing a true and fair assessment of proﬁts and losses, and assets and liabilities (Title IV), including audit reports of the 2

EEC.

Consolidates previous legislation: 79/279/EEC, 80/390/EEC, 82/121/EEC, and 88/627/

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management’s statement. It must also provide information when certain thresholds of ownership have been breached (Article 89). Passage of the Listing Directive was not complicated by dissent either in the Parliament or the Council. The Commission proposed the directive on 20 July 2000. The EP approved it without amendment in a ﬁrst reading on 14 March 2001, and the ECOFIN Council adopted it without discussion on 7 May (Council of Ministers (ECOFIN) 2001). Speciﬁc reference was made to the FSAP, and the importance of ongoing coordination through the committee process was explicitly supported. The Directive was updated regularly thereafter, for example by Directives 2003/71/EC and 2004/71/EC on information harmonization (SCAD-Plus 2005).

Prospectus Directive (2003/71/EC) The Prospectus Directive sets the legal framework for the mutual recognition of prospectuses in listing the particulars of the member states, with a particular emphasis on providing information to investors through the prospectus and ad hoc publicity. It built on Council Directive 89/298/EEC (the ﬁrst Prospective Directive). It provides for minimum standards through secondary legislation and ongoing cooperation of the member states in updating those standards relating to the publication of prospectuses and annual accounts and sets the legal framework for those prospectuses to be mutually recognized by the listing authorities of other member states regulating their part of the European single market. Standards on investor protection and market openness therefore go together. The International Organization of Securities Commissions (IOSCO) was identiﬁed as the main benchmark for national listing authorities. This foundation for the single passport prospectus was scheduled to be implemented by 1 July 2005. The ESC would be responsible for assisting the Commission in ﬂeshing out the legislation. At the same time, there were details left open by the directive regarding ﬁnancial reporting in a full and regular manner. The Commission generated its ﬁrst regulation under the directive on 29 April 2004 for implementation, including minimum reporting requirements and cross-referencing to other documents (European Commission 2004d).

Transparency Directive (2004/109/EC) The Transparency Directive, proposed on 26 March 2003 and passed 15 December 2004 (European Commission 2004h), allows the Commission to

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set minimum standards for disclosure of company ﬁnancial accounts and interim management reports to ﬁnancial markets, for the beneﬁt of shareholders. The standards applied for quarterly ﬁnancial reports, annual reports, and interim management reports, largely in line with requirements increasingly found in OECD countries. A further deﬁnition of the rules is undertaken by the member states, but coordinated through CESR. Whilst the Prospectus Directive provides for minimum standards at the initial point of investment, the Transparency Directive focuses more squarely on providing information to current investors at regular intervals. This in turn contrasts with the emphasis of the Market Abuse Directive, which includes a focus on immediate publication of information on the company within days of developments.

Market Abuse Directive (2003/6/EC) The Directive on Insider Trading and Market Manipulation (Market Abuse) 2003 is an ambitious piece of legislation that builds upon previous attempts to criminalize insider trading (buying or selling shares on the basis of privileged information) and other, more active forms of market manipulation (SCADPlus 2002b). The purpose of the directive, proposed on 1 June 2001, was to provide for investor protection and the safety of ﬁnancial markets, by ensuring equally effective rules and enforcement procedures in all the member states. The Commission’s proposal emphasized the need to establish a Europe-wide regime of statutory control based upon the regulatory power, minimum standards of enforcement capacity of regulatory bodies in the member states, and institutionalized cooperation among those regulators. The Commission itself would issue secondary legislation on minimum standards. Passage through the Parliament and the Council was unproblematic, slightly expanding the scope of the regulations covered. Parliament approved of Commission proposals on 14 March before the Barcelona Council in 2002, focusing more strongly on the transparency of the stock dealings and the behaviour of individual directors, explicitly banning the practice of front running on commodity derivative markets, and explicitly giving the CESR a mandate to make rules pertaining to journalists. These positions were adapted by the Council without any further debate (Council of Ministers 2002). This paved the way for the Commission to issue its ﬁrst set of implementing regulations in December 2003 and on 29 April 2004, before the implementation deadline of 12 October 2004. It covers deﬁnitions of accepted market practice and insider trading, listing of company insiders, and procedures for notiﬁcation of regulators (European Commission 2004a, 2).

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Statutory Audit Directive (2006/43/EC) On 15 November 2000, the Commission ﬁrst proposed that the EU pass a minimum requirements directive for statutory audit in the EU. It built on Directive 84/253/EC, which required companies to indicate who audited the reports but required nothing about process or independence. The new legislation was an attempt to push forward with audit standards and (self-)regulation, capitalizing on an agreement at the Lisbon Council to incorporate standards for auditing into the EU’s economic strategy (European Commission 2000b, 2–3). The Commission’s agenda sought more extensive rules on the statutory audit than existed at that time, including: reinforcing at Community level public oversight of the audit profession; imposing the use of International Standards on Auditing (ISAs) for statutory audits in the European Union as of 2005; improving the systems of disciplinary sanctions; establishing the transparency of audit ﬁrms and networks of such ﬁrms; as regards corporate governance, reinforcing audit committees and internal control, strengthening audit on independence and introducing a code of ethics; facilitating the establishment of audit ﬁrms and examining auditor liability. (European Commission 2003d)

The Commission proposed a directive on 16 March 2004, with speciﬁc references to the accounting fraud cases of Parmalat and Ahold. Beyond the use of international accounting standards, the Commission foresaw the creation of an Audit Regulatory Committee. The directive ensures the creation of audit committees, with direct communication between independent committee members and external auditors. Quality assurance reviews and transparency reports of audit ﬁrms would become mandatory. Audit would be the responsibility of the registered home country, and the system based on home country control (European Commission 2004e). The proposed Statutory Audit Directive would effectively buttress the information requirements of the securities directives by demanding thorough, independent oversight of company information. Under the Directive, the registry of ‘Cabinets d’audit’ now includes the size of the auditing company and the names of the people involved, including the company’s main ofﬁcers. The auditors must be independent, conform to a quality assessment review, and have a broad knowledge base, including company law, tax law, and social law. Professional standards are set by the International Auditing and Assurance Standards Board and the International Federation of Accountants Code of Ethics. The Commission was successful in securing agreement on a directive that imposed fairly robust requirements on member state rules, supervision, and intervention on the auditing profession and on the companies that use their services.

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The member states have the principle responsibility for implementing the regulatory rules. They are required to assign a single regulator with public responsibility for local standards, quality control, mandatory ongoing training, investigations of offences, and levying penalties against offenders, and for coordinating with the Commission and other member state regulators on cross-border and EU standard issues (Articles 32, 33). Though ambitious, the Statutory Audit Directive is somewhere in between the company law directives and the security directives, reﬂecting its dual nature as a piece of corporate governance legislation and a key point of interest for ﬁnancial investors. The Commission is responsible for adopting International Auditing Standards through a screening process in the same way that it adopts IAS (Article 48), assisted by a Council committee on the issue. The member states commit themselves to fully adopting these standards by 2010 (Article 23), but the Directive also sets out that it allows the member states to adopt more stringent rules (Article 52). Coordination takes place through a combination of home country control and mutual recognition (Article 34). The ﬁnancial markets regulation regime has an ambitious regulatory programme attached to it. The approach of delegation had efﬁciency advantages, but also opened up the issue of reﬁning the methods of cooperation and coordination. As early as 2002, discussions between the various actors involved in policy creation began to turn to an ongoing focus on improving the working of the regime. The Commission created the Inter-Institutional Monitoring Group (IIMG) in 2002 to oversee the cooperation of the various institutions implementing the FSAP. They recommended that the EU focus on implementation and enforcement, not new legislation. In addition, the Council’s Financial Services Committee released the Asmussen Report on the interface between business and regulators in 2003, which recommended a guarded approach to regulation. It promoted better law-making through regulatory impact assessments, ensuring that lawmakers consider possible arguments for not regulating, through co-regulating with business cooperation and through measures to streamline regulation (promoted both by the Commission and FSA). It also paid tribute to ensuring better enforcement of regulations (level 4) and using competition policy to completing the internal market before resorting to new legislation.

Comitology: European Securities Trading Regulators The ESC plays several roles in the governance process of ﬁnancial market regulation. It consults as a whole at the European level with the European

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Commission and votes on regulations proposed by the Commission to ﬂesh out the securities directives. As ofﬁcials from the Finance or Treasury ministries of the member states, the members also act as a transmission belt between the Commission and national governments, permitting national demands to be made at the EU level, and permitting national administrations to remain abreast of changes in the pipeline that may require adjustments to national legislation. The CESR is the centrepiece of the regime’s operation after directives belonging to the regime have been passed. In accordance with the Lamfalussy process, all of the directives set out the main policy commitments of the member states, their designated regulators, and the Commission. CESR as an ofﬁcial committee in 2001, takes over from FESCO, founded in 1997 in Paris. It operated under the comitology procedures found in Council Decision 1999/468/EC until these were superseded in 2006. The agenda for CESR’s work is provided primarily by the securities directives. These raise issues of rule formulation, implementation, and enforcement that CESR has a central role in deﬁning and coordinating according to the Lamfalussy process. The same process ensures that the legislation passed is of a framework nature, and that there remains room for ﬂeshing out details. CESR’s role is twofold. It advises the Commission on what changes to EU rules ought to be made, and provides a means for national regulatory authorities to coordinate their activities. To the extent that they enjoy the authority to pass secondary legislation within their home jurisdictions, CESR also allows its members to share information among themselves about the transposition of EU into national rules. This leaves questions about the degree of discretion left to national regulators, national legislators, the transposition of European directives, and the overall impact on the quality and diversity of ﬁnancial market regulation. Although the regime provides for the Commission to pass increasingly detailed regulations, these must still be transposed into national legislation (or regulations) and implemented by national regulatory authorities. If a member state were to not respect the minimum standards set through the Lamfalussy process, then it would be in breach of EU law. On the other hand, there is nothing to prevent a member state from ‘gold plating’ the directives, that is, legislating even more restrictive rules on ﬁnancial markets than is required by EU legislation. Between 2001 and 2005, the German government did this repeatedly, often but not always with the blessing of the opposition, whilst the British government did not. In that country, the Financial Services Authority is targeted to become responsible for implementing the EU legislation, but the Blair government bundled most of its commitments to the securities directives in an omnibus Company Law Reform Bill tabled in

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May 2006. CESR thus provides a way to ensure that Commission regulations continue to be built on national norms. CESR’s committee and working group structure gives the best indication of the body’s activities in regulating European ﬁnancial markets. Table 9.1 lists CESR’s expert groups and operational groups. Those relevant to the directives discussed above are dealt with below. CESR’s working group on prospectus rules completed its ﬁrst round of level-2 consultations in October 2005, which concentrate on creating rules of concrete implementation for the framework of the Prospectus Directive, and has since moved on to discussing level-3 issues, which concentrate on coordination of the appropriate ﬁnancial services regulators of the member states, focusing on developing different minimum requirements for speciﬁc investments (HM Treasury and FSA 2004, 17). The working group on transparency Table 9.1 Expert and Operational Groups Within Committee of European Securities Regulators (CESR) Group

Tasks

Legislative basis

Prospectus

Details of levels 2 (complete), level 3

Prospectus Directive

Transparency

Rules on data storage, ﬁling, ease of access

Transparency Directive; Market Abuse Directive

CESR-POL (political relations)

Market abuse regulation consultations completed May 2005; discussion of accepted market practices

Market Abuse Directive

CESR-FIN (ﬁnancial)

SCE: Regulatory supervision of listed companies

SCE: several

Subcommittee Enforcement (SCE) Subcommittee Endorsement (SISE) Audit Task Force Equivalence Group

SISE: Alternative standards on ﬁnancial (performance) information Audit monitors modernization of statutory audit regulation

SISE: Transparency Directive

Equivalence compares IAS and national generally accepted accounting practice

IAS Directive

Mediation Task Force

Mediates between national regulators with conﬂicting claims of jurisdiction

Credit Rating Agencies MIFID (Market in New Financial Instruments)

Application of IOSCO Code Level 2 details on Market transparency Intermediaries (organizational requirements, conﬂict of interest rules, client order handling rules) Cooperation and Enforcement

Financial Instruments Markets Directive 2004; Market Abuse Directive

Investment Management

Rules applying to regulation of investment trusts

UCITS (investment trusts) Directive

Statutory Audit Directive

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has the most responsibilities with regard to the securities directives, covering the Transparency Directive and the Market Abuse Directive (MAD)’s requirements on company information disclosure to the public. The Market Abuse Directive proved to be less than easy to deal with, and so CESR’s political group (CESR-POL) was formed between October 2004 and May 2005 to sort out what sort of activities are acceptable and which are not. In particular, implementing the directive required discussions about what constitutes accepted market practices by company management and the ﬁnancial services industry, that are also acceptable to the regulators and the ﬁnance ministries. This was effectively an advisory group on future regulative norms. Another operational group, CESR-FIN, was created with three subcommittees to deal with issues of enforcement (level 4), reporting standards, auditing procedures, and accounting standards. The Subcommittee on Enforcement (SCE) is focused on the supervision of companies listed on stock exchanges in the single market, and therefore serves to allow national regulators to exchange views and mutually monitor the efﬁcacy of their activities. The Subcommittee on Endorsement (Subcommittee on International Standards Endorsement, SISE) is focused on standards for reporting on company performance with ‘alternative’ means. This is not as yet very well deﬁned, but could conceivably encompass directors’ reports that comment on issues of importance to stakeholders (like employees or the community in which the company does business) rather than shareholders. The Audit Task Force, also within CESR-FIN, is responsible for providing advice to the Commission on the modernization of the statutory audit, and its application, by the auditing chambers in the member states. Finally, the Equivalence group is focused on the development and use of IAS by the EU. As has been mentioned, accounting standards have a regime of their own, but CESR plays a role in observing developments and providing advice from the point of view of its impact on ﬁnancial market regulation in its areas of jurisdiction. Accounting standards have strong effects on transparency and are applicable to the MAD, as one might imagine. Finally, CESR has set itself a Mediation Task Force to internally sort out jurisdictional conﬂicts among the national regulators. Despite the directives’ provisions for assigning jurisdiction, disputes apparently do arise, and CESR provides both a coordination and an informal adjudication function in this regard. This is not a formal procedure, and there are no formal rights that the national regulators could demand before the ECJ, and it is not something that CESR provides open information on. CESR’s work is not simply intergovernmental. Its committees and groups invite market participants (i.e. interested lobby and corporate actors) to take

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part in its consultation process, and the business sector takes advantage of this opportunity to have their say before recommendations are made to the Commission. CESR’s reports take great note of the responses when formulating the reports. This raises the question of whether there may be capture of CESR by ﬁnancial sector interests, as a standard question of regulation. CESR appears to place value on using the consultation process to try to avoid unnecessary regulation or unintended consequences of their decisions. How far business lobbies are able to push back regulatory recommendations of CESR is unclear at present, but it is notable that the consultation process focuses on market participants and not on actors, even institutionalized lobbies, with strong opinions on the matter, such as shareholder rights lobbies. This gives the impression of a rather one-sided consultation process. Another aspect of CESR’s work within the context of European ﬁnancial market regulation is its close interaction with other bodies active in the policy ﬁeld. CESR has observer status in all of the regulatory and management committees staffed by national civil servants responsible for regulations attached to the securities directives. These are the Financial Services Committee, the ESC, the Accounting Regulatory Committee, the Undertakings for Collective Investment in Transferable Securities (UCITS) Committee, responsible for regulating unit trusts, and the European Financial Reporting Advisory Group (EFRAG), the private European professional association of accounting and auditing experts, which also advises the Commission on the adoption of new IAS. CESR keeps a close watch on all stages of the rulemaking process. In sum, we see the strong and quick development of a regulatory regime in Europe for ﬁnancial services between 2001 and 2005. These cover the ﬁnancial services sector dealing in company shares, unit trusts, and new ﬁnancial instruments. The regime is based on an elaborate set of principles that require the member states of the EU to develop strong regulatory capacity, to coordinate their activities through CESR, and to delegate ongoing authority to create new regulations to the European Commission with CESR making recommendations and the European Securities Community in a position to supervise and intervene in the process on the part of national executives acting collectively. The regime is therefore truly multilevel in nature, in which European and national actors work together. The timing of changes to ﬁnancial market law and regulation made in two sample member states, Germany and the United Kingdom, shows that national-level changes were at least as quick if not faster than developments at the European level. This demonstrates that in contrast to the case with company law directives, the member states had already undergone convergent internal transformations before agreeing to the establishment of a policy

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regime in 2001. This conﬁrms that there were no strong public concerns about negative policy implications of delegating rule-making authority to the European level. On the contrary, ﬁnancial market regulation at the European level allowed the approximation of regulation across the member states, and just as importantly, helped regulators deal with cross-border transactions as well as in-country issues. It built on national policy norms, both constitutive (shareholder protection and market integrity) and regulative (statutory regulation). ECOFIN asked the Financial Services Committee, staffed by ﬁnance ministry ofﬁcials, to report on the state of ﬁnancial integration by April 2004, focusing on whether the measures taken were so far ﬁt for purpose. The Commission noted that there were still points of friction on what should and should not be covered in the regime: both the FSAP expert groups and the FSC lay great emphasis on better prioritisation, improved justiﬁcation and effective targeting of EU ﬁnancial services initiatives. EU measures should only be introduced where there is a real expectation that they can materially improve the conditions and prospects for cross-border business. (European Commission 2004f )

In addition, the Commission called a committee of twelve consumer protection experts, FIN-USE, into being to allow ongoing input in the name of balanced stakeholding.

Other Positions on Regime Development Within the German private sector, there was, as in domestic regulation, a clear divide between the ﬁnancial services sector and the rest of the economy. The industry lobby BDI complained about the level, cost, and utility of forcing business to comply with regulations and document their activities. Instead, it argued for a light touch, allowing business to make use of best practice and voluntary codes, using regulation ‘only where absolutely necessary’, and using EU rules to prevent member states from adopting even more stringent rules. It complained that the entire process of being involved in consultations is burdensome, complicated, and time consuming, due to the huge amount of legislation and the steps involved in the Lamfalussy process. At the same time, they wanted more business involvement. The BDI also complained that the Commission’s process did not give due respect to large organizations that should have more clout and objected that ideas from individual experts could have as much inﬂuence as individual lobbies (BDI 2006). This demonstrates the rather tenuous relationship between the regulators and the regulated.

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Deutsche Bank, representing the ﬁnancial community in Germany to the Commission, and a member of the European Financial Services Roundtable, favoured the further development of the European legislative agenda and the further construction of the ﬁnancial market regulation regime to help complete the single market in ﬁnancial market services. Pointing to the Kok Report on the Lisbon Agenda on competitiveness, it noted that although thirty-nine of forty-two initiatives had been passed, they were not enough and had not been fully implemented at the national level. It called in particular for the establishment of a European System of Financial Supervisory Authorities, a project supported by other ﬁnancial service providers modelled on the European Central Bank, that would establish a one-stop regulatory service for the largest trans-border ﬁnancial transactions, a European Financial Services Authority, and a more streamlined system of establishing a lead regulator among the national regulators for smaller transactions. It agreed that consumer protection and system stability should be the main regulatory goals shared in Europe, but that efﬁciency should be promoted by standardizing national differences and limiting the scope of regulation (Deutsche Bank Research 2005, 5–6, 13–14). This proposal was ﬁrst taken up in the wake of the ﬁnancial crisis in 2009.

CONCLUSIONS The development of EU securities directives and the plan to modernize company law show the distinctiveness of differing, though related policy regimes. The Commission was successful in winning support for a fairly large number of securities directives, often winning the delegation of regulatory decision-making authority and the construction of comitology procedures from the member states based on common constitutive and regulative understandings that built on prior convergence within the member states. This led to the remarkable development of a multilevel governance system for securities considering the continued resistance of the member states to installing a similarly ordered system for company law. The support for delegation and harmonization propagated by the HLG did nothing to change this, so that the determining factors of their preferences were anchored in domestic considerations. The regime for company law directives remains emphatically intergovernmental in its structuring principles, actors, and assignment of responsibilities. For ﬁnancial market regulation, the goals of consumer protection, efﬁciency, competitiveness and, for some, limited regulation were shared by national and European actors, public and private alike.

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The regime for ﬁnancial market regulation was made possible in its existing form not only by the less controversial nature of the policy proposals made, but also by prior and unanimous agreement by the member states and the Commission on the terms of future rule-making, as laid out in the Lamfalussy Plan. This Plan set out constitutive and regulative norms about the independent regulatory agencies at the national level and their role in commonly establishing regulatory rules with the European Commission. The Commission has the rule-making power, but CESR has the expertise, which gives it great inﬂuence. This means that a convergence of policy decision-makers on a policy paradigm is not enough to bring about a regime, particularly a complex one. A sense of urgency for policy change and the appropriateness of the general policy implementation approach is also insufﬁcient. The debate in 2009 about a European System of Financial Supervisors, not concluded by the time of writing, conﬁrms this. This requires the construction of clear regime principles. The ﬁndings laid out above suggest that it is entirely possible for both intergovernmental and multilevel policy regimes to coexist, even when they directly impact one another. Not only are normative elements important in setting the probability that a government will consider changing national arrangements to suit new circumstances, but also in constructing alternative principles of cooperation to the intergovernmental default. Another interesting ﬁnding emerges from a comparison of the form of multilevel cooperation taking place in the context of the securities directives and in the regime for accounting standards. Both are multilevel in that they delegate authoritative responsibility for rule-making to bodies beyond the state at the national level, under the supervision of the member states through committees specially created for the process. In the case of the securities directives, this outside body is the Commission itself, so that one could describe the system of governance as a public multilevel system. Accounting standards, on the other hand, are being increasingly set by a private body beyond the state. Public authorities, the Commission, and the member states alike, have bought into the system by ensuring the participatory rights of their own standard-setting bodies, sometimes created speciﬁcally for the purpose. Limits on the application of its standards to companies remain, but the sheer existence of a privately dominated multilevel system of governance as a contrast to publicly dominated systems adds another facet to the transformation of regulation and governance of the European corporate economy. Finally, although the multilevel regimes certainly provide more impetus for harmonization of national rules, the public multilevel regime for securities directives still provides for member state input and interpretation, even if it is less absolute than the rights they enjoy in the company law regime.

10 The Accounting Standards Regime A N EW R EG I M E The EU’s accounting standards regime is remarkable because it delegates standard-setting to a private international organization with hierarchical governance structures. Both the member states and the European Commission continue to be involved in the process of formally adopting these standards, but national-level actors are no longer the central actors in standard-setting, as they were before 2005. Instead, the International Accounting Standards Board (IASB) became responsible for setting these standards. The EU’s adoption of International Accounting Standards (IAS) played a signiﬁcant role in the Board’s introduction of structural changes in 2005 that transformed it from a collegial association of accountants, with inﬂuence limited to the English-speaking world to a hierarchical, technocratic global standard setter. This was a constitutive change of the Board itself preceded by movements within the European member states to adopt IAS. The EU’s decision to adopt IAS was formalized in 2001 with a corresponding directive. Since then, this decision has been built up steadily through the EU’s adoption of further rulings by the IASB.

C O MM I SS I O N A ND ME MB E R S TAT E M OT I VAT I ON S The European Commission promoted the idea of adopting IAS as a means to help complete the single market through the use of universally transparent accounting standards. National governments were moved more by internal reasons that made the adoption look attractive: attracting investment capital and responding to corporate governance scandals that brought attention to the quality of information reported. The ﬁrst of these motives proved more important than the second in their adoption of IAS. This was the case because both countries sought to deal with corporate governance failures according to

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their own strategies, including policies that dealt with company law and securities regulation rather than accounting practices. Providing information to the investment community holds the promise of attracting further investment to the country, but it comes at a price. IAS led to a greater emphasis on ﬁnancial information useful to outside shareholders and institutional investors and short-term speculative interests. The shift from historical-value accounting in Britain and from commercial codebased standards in Germany to fair-value accounting, a practice that will be discussed in this chapter in more detail, provides outside investors with information about the current value of the ﬁrm’s net income and assets at the expense of a long-term perspective on the company’s long-term ﬁnancial prospects. The British political economy has absorbed these changes quickly as part of its own efforts to render British ﬁnancial reporting attractive to London capital market interests. Continental political economies, far less accustomed to opening company books to the scrutiny of ﬁnancial markets and reporting earnings in a way that reﬂects their speculative interests, stand to come under greater pressure from ﬁnancial markets to improve the value of their ﬁrms from quarter to quarter.

S UB J E C T TO T H E A P P ROVA L O F T H E E U T H RO U G H T H E I A S C O M M I T T E E Theoretically, IAS have a direct effect on the companies of countries that have adopted them. In the EU, a special Accounting Regulatory Committee was created to discuss new standards issued by the IASB and to decide whether they will be adopted into the EU’s IAS reporting requirements. This breaks the direct effect of IAS for the single market. The EU seldom makes use of this instrument, but it has done where it considers the issue to be of great importance. This is discussed below in the case of IAS covering the treatment of ﬁnancial derivatives, where a European solution outside the Board’s rule system was created. The impact of the IASB is, therefore, almost complete, but not quite.

I MP L E ME NT E D AT T H E NAT I O NA L L EV E L The European adoption of IAS is a ﬁrm requirement for listed companies under the 2001 EU directive, but national standards continue to be used

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parallel to the international standards in many cases, and private actors continue to be involved in the standard-setting process, despite the requirement for member states to have a statutory basis for accounting standards. This degree of slack provided a means by which points of conﬂict between international and national standards could be avoided and, therefore, potential political opposition to the adoption of IAS. Therefore, it ensured that potential conﬂicts at the national level over the consequences of adopting IAS could be contained and managed in line with the strategy of national decision-makers. For this reason, we cannot treat the use of IAS at the national level in terms of compliance in the sense that deviations from IAS would constitute a violation of national commitments to implement them. Rather, the interesting point of comparison is whether and to what extent decisionmakers at the national level align their national standards with international ones and whether they attempt to exert inﬂuence on the formation of standards.

PRESSURES FOR I NCREASED EUROPEAN INPUT National delegations are already represented in an advisory body of the Board, but there is pressure to increase the clout of European actors on the Board, both public and private. The European Commission has made a claim that it ought to have ofﬁcial status on the advisory Board and a special relationship with the Board itself. The private sector has made a claim that their own European organization be given ofﬁcial standing to work with the Board as well. These claims are justiﬁed principally by the call for a balance of Anglo-American and European voices in standard-setting, and by the observation that as IAS’ most important standard-taker, Europe ought to have a signiﬁcant say in how those standards are set. All of this amounts to the delegation of standard principles to the IAS, a hierarchical private sector organization, but no unconditional application.

European Accounting Policy The European Commission’s preference on EU accounting policy was for harmonization of rules based on the model developed for the ﬁnancial market regulation regime. The Commission had articulated a New Accounting Strategy as early as 1995 as part of a broader strategy to attract investors to the single market. Comitology procedures and Commission responsibilities were

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foreseen, but with the involvement of an outside body of experts. These procedural goals were attained, but limits were placed on harmonization. Instead, a parallel regime based on harmonized standards alongside national standards was instituted with a complex pattern of participation of nationallevel advisory groups and decision-makers in EU-level and international-level decision-making. In the course of generating these procedures, the EU’s accounting policy deﬁned the parameters of the fundamental relationship between European governance forums and the member states and the international body. This makes it the most complex regime of all. After winning approval for the launch of the Financial Services Action Plan (FSAP) in 1998, the Commission brought the Council and the Parliament to bring accounting standards closer in line with those of the international community. In this case, international standard was interpreted to be the IAS and the International Financial Reporting Standards (IFRS) as set by the IASB in London. The thrust of IFRS was, and is, to provide a clearer view of the current market value of all assets and liabilities that the company has. This constitutes a different approach from that of the generally accepted accounting practices (GAAP) in national jurisdictions, which prescribe differing degrees of transparency and averaging the value of assets and liabilities for reporting, dividend calculation, and taxation purposes.

E U RO P E A N L E G I S L AT I O N European accounting legislation is considerably shaped by two pieces of legislation passed in the early 2000s. The ﬁrst is a directive to change the principles on which ﬁnancial reporting is based. The second is a directive to adopt IAS and to sort out the participation of the member states and the European Commission in the adoption process. On principles, Directive 2001/65/EC amended the Fourth and Seventh Directives to permit the practice of ‘fair-value accounting’. The meaning and reasoning of the Commission are given as (the ‘fair value’ usually being the current market value of a ﬁnancial instrument, as opposed to its historical cost). European companies, banks and ﬁnancial institutions will thus be able to compile ﬁnancial statements which are understood and accepted worldwide. (SCAD-Plus 2003a).

In principle, this represented an important change in reporting practices. By emphasizing the current market value of a company’s assets, liabilities, and

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cash ﬂow, fair value provided information for investors interested in the value of company stock, in assessing the appropriate level of dividends for shareholders, and for institutional investors and other companies interested in launching a takeover bid. By replacing the use of historical values, fair value lifted the veil of uncertainty surrounding the ﬁnancial performance of the company’s management. This degree of transparency comes at the cost of higher volatility in the net worth of a company, one of the arguments unsuccessfully used by company managers to fend off fair value’s introduction. The 2001 directive represented a gain for investor interests with the assistance of the EU and one that national governments had undertaken prior to the EU as a part of their policies to attract international investment capital. It reﬂects a prior shift in the member states toward this principle as part of a general shift toward attracting investment that is found in the FSAP.

I A S R E G UL ATI O N ( 1 60 6 / 20 0 2, AM E N DE D 2 23 8 / 20 0 4 ) On 13 June 2000, the Commission proposed that all European companies, not just Societas Europaea (SE), be required to publish their ﬁnancial reports using a uniform set of accounting standards. The standards proposed were to be taken from the rules set down by the IASB, a private body based in London. The reasons cited by the Commission were ensuring the transparency of information for investors, furthering the integration of ﬁnancial markets in the EU, and improving the access of EU companies to ﬁnance. On 19 July 2002, ﬁnal approval was given to a corresponding regulation (EU 2002), but it did not apply to companies offering ﬁnancial services, such as banks and insurance companies. This omission was corrected in June 2003 with Directive 2003/51/EC (SCAD-Plus 2003b). Another difference in the ﬁnal draft was that IAS would apply to company groups, rather than all companies. This meant that the largest companies are subject to it, whilst subsidiaries are not. In addition to the Commission’s stated desire to improve accounting standards in Europe, it also expressed the desire to increase European clout within the IASB in the further development of IAS, and to encourage the United States to move closer to a common position with Europe on IFRS. For this purpose, the EU wanted to have its own seat on the Board’s Standards Advisory Council, alongside the delegations from the member states. The regulation set up an Accounting Regulatory Committee to aid the Commission in the assessment of accounting standards (Article 9), but enforcement of IAS standards remained in the jurisdiction of the member states.

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Ratiﬁcation of the directive was unproblematic, given the breakthrough already made on promoting shareholder interests in the FSAP. The European Parliament (EP) gave its approval on 12 March 2002, and in April 2002, the ECOFIN Council in Oviedo agreed to shorten the transition period for the introduction of harmonized reporting according to IAS standards, from 2007 to 2005. This was part of a ﬁve-point plan to combat ﬁnancial crime by managers, auditors, and ﬁnancial analysts (Deutscher Bundestag 2002a, 23767). The collective decision of EU member states to adopt the New Accounting Strategy and the IAS regulation reﬂected a functional response to a common need for increased information to bridge European ﬁnancial markets, both for normal investing purposes, and to address concerns about fraud and mismanagement by directors. It required adjustment by the member states, involving great changes to accounting law, but not to such a depth that it would have many knock-on effects in other sensitive areas. Only the largest companies were affected, and the new standards were used for information only, rather than creating adjustment pressure on dividend practices or on national taxation systems. Therefore, it created little reason for backlash in the member states. At the same time, it required the member states to set up accounting standards boards, where they did not already exist, and to endow them with the statutory mandate to read accounting standards and represent that member state within the IASB in the future development of IFRS. Therefore, it imposed costs, but fruitful opportunities for ongoing inﬂuence in the future. The move won quick approval from the member states, including the German and British governments, as IAS standards had been allowed for domestic ﬁrms for at least six years when the Commission tabled the proposal. The fact that the two countries had differing ways of dealing with discrepancies between national GAAP and IAS is, in this context, irrelevant. The important point is that the import of IAS as an accounting standard in some form was already accepted and standard practice, so that concerns about the role of the state in setting standards (in Germany) or allowing national accountants’ chambers to set them (in the United Kingdom) had already been dealt with. As the national chapters discussed, each country had different regulative norms on this (the private sector playing a much larger role in deﬁning national and IAS rules and choosing which one to apply in the United Kingdom; the opening of standard-setting consultation to the private sector in Germany, coupled with a choice of international or German standards), and different constitutive principles (a state legal structure that restricted itself to setting principles of good accounting in company law in the United Kingdom, and one that provided the entire structure in Germany)

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that were, nevertheless, adapted to allow for the informative use of internationally set standards. The key here in the regulative debate at the national level is the informative use of IAS, which does not otherwise challenge reserve powers of the public hand, whether robust (in Germany) or minimal, almost laissez faire (in the United Kingdom). The most recent change to this decision-making structure has been to bring the private sector into the policy deliberation process. Speciﬁcally, accountants from many member states had organized themselves since March 2001 into a pan-European organization called the European Financial Reporting Advisory Group (EFRAG), the purposes of which were to create a voice for the private sector on the European adoption of IAS and to advise on the impact that IAS adoption would have on the accounting standards of the EU member countries. In the words of the EU, EFRAG provides opinions on whether the standard or interpretation to be endorsed complies with the Community law and, in particular, the requirements of Regulation (EC) No 1606/2002 as regards understandability, relevance, reliability and comparability as well as the true and fair principle as set out in Council Directives 78/660/EEC (2) and 83/349/ EEC (3). (European Commission 2006, preamble)

The Commission remained cautious about consulting with EFRAG but eventually agreed to consider an institutionalized form of interaction. The Commission never questioned the institutionalization on the basis of accounting expertise, but rather on its intentions with regard to accounting standards. In other words, accountants would not be entirely accepted as honest professionals but seen through the archetypal lens of potential opportunism and, therefore, in need of regulation to pursue public interest. In 2006, it set up a panel to advise it on EFRAG’s objectivity and neutrality, called the Standards Advisory Review Group. The Commission made it clear that it valued the independence of the organization from capture and a balance of backgrounds in the organization’s personnel alongside expertise in technical matters. These were designed, as is normally the case for corporatist involvement of lobby groups in the Commission’s consultation process, to ensure that the organization represents what it claims to on a Europe-wide basis (ibid.).

IASB AND E UROPE Delegation of standard-setting to the IASB takes place indirectly. Nevertheless, delegation does occur and implies not only the introduction of changes

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in accounting standards, but structural changes to the governance of accounting standard-setting at the national level. There have been changes to the European level as well. This section looks at the IASB’s development, its own perceived relationship to the EU and the member states, and the manner in which the latter two groups have acted to shape the relationship in turn.

The IASB The IASB ﬁrst came into existence in 1973 as an association of accountants from the English-speaking world with the intent of developing internationally recognized principles of accounting practice, at that time under the name of the International Accounting Standards Committee (IASC). These principles were by no means speciﬁc rules, but reference points against which the accounting and auditing community could develop GAAP in its respective national contexts. The Board issues and manages three types of standards: IAS, IFRS, and Interpretations. IAS are the forty-two International Accounting Standards that set out general principles of sound ﬁnancial reporting. IFRS are the seven International Financial Reporting Standards that have been issued to provide more detail about the intended application of IAS, and to expand on issues not covered by the IASC before it handed over rule-making authority to the Board in 2000. Interpretations are detailed rulings of the International Financial Reporting Interpretation Committee, which had generated eight rulings as of late 2006. During the 1990s, pressure built from a number of directions to upgrade the Board from a collegial association to an authoritative international standard setter. The 1990s was a decade in which the problem of large-scale corporate collapse put ﬁnancial reporting on to the political agenda of most political economies. Britain was hit in 1989 with concerns about the ability of ﬁnancial fraud and mismanagement to undermine the solvency of large companies, but corporate collapses elsewhere in the developed world put accounting standards on to the public agenda. Then in 1997, the South East Asian ﬁnancial crisis that then spread to Russia and Latin America with disastrous consequences made the concern with ﬁnancial reporting global. One of the key reactions to this demand for action came through the International Organization of Securities Commissions (IOSCO), which also represents European ﬁnancial market regulators and ofﬁcially demanded that the IASC increase its international inﬂuence and the size of its rule book in order to develop consistent standards for use everywhere. The IASC reacted by turning itself into a foundation (IASC Foundation, IASCF) responsible for

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oversight and recruitment of members of the new IASB in 2000. IOSCO greeted this move, but deemed it insufﬁcient and demanded more changes so that the Board would work efﬁciently and authoritatively to establish internationally recognized standards. The response was a new constitution in 2005,1 which has since proved controversial among private and public actors, precisely because of the Board’s new powers. The IASCF has twenty-two trustees, six respectively from Europe, North America and Asia, with another four trustees at large constituting the remainder. All of the members are accountants and chief ﬁnancial ofﬁcers who replace themselves by appointment within the policy community. They select the fourteen members of the IASB from a pool of similar candidates, with the difference that expertise in various aspects of the accounting business is the key stated qualiﬁcation. The constitution of the IASB identiﬁes these groups as preparers (chief ﬁnancial ofﬁcers [CFOs] of companies), auditors (who review the reports of the CFO), and users (investors, in this case, institutional investors with the size to be representative of investor interests). In practice, however, the ﬁrst two groups are effectively the only ones represented. Geographical distribution and various stakeholder interests in company reporting, such as unions, are not written into the Board’s talent pool. The Board is responsible for issuing new standards and approving interpretations by the International Financial Reporting Interpretations Committee (IFRIC) for general use. Therefore, it has sole authority over standardsetting, regardless of the advice taken elsewhere. This directly affects the work of IFRIC, and another larger body, the Standards Advisory Council (SAC). IFRIC has twelve members appointed by the Board and drawn from the auditing and accountancy professions, despite the constitution’s stated desire to attract candidates from a broader pool than the Board itself. This puts the Board in the position of balancing the demand of IOSCO to generate more rules and the demand of the accounting profession and auditing ﬁrms to refrain from rule-making whenever possible. As with the Board, there are no special provisions for European members or any other geographical group to have a given number of seats. Deemed expertise plays the most signiﬁcant role in recruitment. The nature of its work makes its results important to a slightly different group of users, including ﬁnancial market regulators and tax authorities affected by these rulings in a way that would not be the case if principle-based standards were being issued.

1

The discussion here is based on the constitution of 2005.

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As its name suggests, the Board consults the SAC on the impact of proposed standards. The SAC is required by the constitution to have at least thirty members, and has well over forty at any given time. It is more geographically diverse than the other bodies, and although it is still dominated by representatives from developed countries, other members are also present, particularly from newly industrialized countries. Beyond this geographical component, however, it does not reﬂect a much more diverse range of interests in reporting standards than the Board or IFRIC. It is strongly dominated by accountants and auditors. The one key difference is that traditional international organizations with an interest in accounting standards, that is, those collectively representing national governments, have seats as well, either as direct members or with observer status. The IMF, the World Bank, UNCTAD, the Basel Committee, and IOSCO, are members of the SAC. The European Commission has observer status, which prevents it from taking a more prominent role in discussing standards before they are released. The EU tries to make up for this deﬁcit by pursuing direct institutionalized links with the Board. The American standard setter, the Financial Accounting Standards Board (FASB), has a contractually agreed special relationship with the Board that gives it inﬂuence in setting IAS and IFRS beyond the presence of ﬁve American trustees. Board activity on standard development is carried out in working groups, normally in explicit cooperation with the FASB, and occasionally in cooperation with the Japanese counterpart. Given the prominence of the New York capital market in the global economy, the IASB endeavours to ensure that standards can be brought together as closely as possible. The FASB also appears interested in minimizing the gaps between FAS and IAS, which would minimize deterrents to foreign businesses from listing in New York, and simplifying the accounting work of US-based multinational corporations. In 2002, in the context of the Norwalk Agreement that outlined the special relationship between the two bodies, the IASB and the FASB launched the Short-Term Convergence Program. This research program is designed to seek all means of minimizing the gaps between the two standards, and is led by the Canadian Accounting Standards Board. Canadian regulators see in long-term convergence the opportunity to reconcile what they see as superior accounting standards in IAS with the reality that Canadian businesses seeking to raise capital by listing on the New York stock exchange must issue their accounts in FAS. This relationship has attracted the criticism of European actors and some global ones in the private and public sectors on the basis of unequal access to the decision-making process, and also because the United States has no intention of adopting IAS. It only recognizes its own standards (FAS) for use in the American market.

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Constitutional Reform and National Standard Setters The IASB’s constitutional reforms in 2000 and 2005 stress its independence, the private heritage of the standard-setting experts, and the direct effect (in principle) of its standards. The IASB made its ﬁrst run at constitutional reform in 2000, around the time the Commission made its ﬁrst proposal that IAS be adopted for Europe. That reform was criticized for not going far enough. IOSCO, in particular, demanded a more robust capacity for the Board to take authoritative decisions based on the expertise of the private sector that would produce standards that could be directly applied. The constitutional reform of 2005, therefore, dealt with two issues of direct interest to the EU’s accounting standards system. First, it laid out a more explicitly hierarchical relationship between the Board as the generator of standards and the national standard setters as bodies to adopt and implement them. Second, it strengthened expectations that the Board would generate detailed and binding accounting rules through enhanced reliance on IFRIC. The relationship that the Board saw between itself and the national standard setters generated controversy, particularly in continental Europe, where the state had traditionally set accounting standards through the commercial code. In 2005, the Board’s policy statements made it clear that it expected national standard setters ﬁrst and foremost to apply standards established in London and communicate these standards to any public ofﬁcials that might have an interest in the standards and their implications. Communicating these standards to private actors, that is, companies and investors, was implied by this model as well. Neither Germany nor the United Kingdom raised substantial objections to this model, largely because they had already accepted the use of IAS in some form before the Commission had proposed extending its use for the EU as a whole. They had different ways of dealing with the implications of decisions taken by the Board, however. The UK standard setter, the Accounting Standards Board (ASB), effectively decided to align British standards to IAS. This decision was facilitated by the similar background of the ASB and the IASB members. Both were drawn from the accounting profession and from practitioners in private industry, with a considerable number of IASB members having a British background. The decision to align British and international standards was also facilitated by the supportive attitude of the Treasury under Gordon Brown, which retained ultimate responsibility for the oversight of standard-setting in the United Kingdom. The Treasury took the governance of reporting standards seriously as a public policy issue, both for promoting the attractiveness of

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the UK ﬁnancial market for investors, and for providing some measure of consumer protection. At the same time, however, it sought to minimize the regulatory burden on businesses. The alignment of United Kingdom and IAS standards made this possible. The German response was more complex. In 1994, the CDU/CSU/FDP government had legalized the use of company accounts using IAS or American standards for company reporting. As in the United Kingdom, the use of IAS was designed to make German companies more attractive to international investors, whilst the use of American standards was designed to reduce the transaction costs for the few ﬁrms listing their shares in New York. At no time, however, did German legislators intend or support the displacement of German standards as set out in the Commercial Code, which is used for tax purposes. The standards would continue to exist side by side, and the German state would continue to set German standards as before. The difference is that the government would have a context of private sector discussion around German and international standards in which future discussions of German standards would take place, so that an approximation of standards over the longer term would become easier and more likely. The adoption of IAS through the EU’s directive changed nothing about this arrangement, meaning that there were neither distributive consequences nor implications for the competence of the German government to continue to set the rules ‘that matter’. What the adoption of IAS changed for the German system was the establishment of two private standard-setting boards for the purpose of interacting between the IASB and the German government. The German Accounting Standards Board (Deutsche Rechnungslegungsstandardskommittee, DRSC) was established in 2003 to represent the opinion of the German accounting profession to the IASB. The German Standardization Council (Deutscher Standardisierungsrat, DSR) was established in 2003 to advise the German government on the implementation of new and existing international standards. The creation of these bodies ensured that a German voice would continue to be heard within the IASB, but with a distinct private sector accent, rather than the public one emanating from the economics and ﬁnance ministries responsible for legislating changes to standards in the Commercial Code. The most vocal opponent of this model in continental Europe was not Germany, but France. The French standard setter and the Ministry of Finance that oversees it insisted that the national standard setters would have to have input into the standard-setting process at the Board level if the latter’s decisions were to be seen as legitimate. The French did not demand an advisory role through the Standards Advisory Council but rather direct links between the Board and the national standard setters that would allow demands to ﬂow upward as well as downward.

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European Commission–Board Relations The European Commission made its own constitutional demands on the IASB that clashed with the demands made by IOSCO, which also represents the securities regulators of the member states. It found itself compelled to stake a position on the relationship between the IASB, the member states, and the EU as a whole. It took a similar view to that of the French government in demanding the right to more input into the Board’s decision-making process. Its position was different from that taken in Paris, however, in that the Commission foresaw its own role as a collective actor representing all of the EU member states taking precedence over the latter. It speciﬁcally demanded a special relationship with the Board on consultation and convergence of standards equivalent to that enjoyed by both the American and Japanese Accounting Standard Boards. Similarly, the Commission would not accept the direct application of IAS for use in the single market, but argued and won approval for a European IAS Directive that would allow it to approve standards for use in conjunction with the EU Accounting Standards Committee, created for this purpose. The Committee would incorporate public ofﬁcials from the member states responsible for overseeing accounting standards, hoping to channel and aggregate their demands in this way.2

Private Sector Involvement The private sector soon demanded ofﬁcial representation on the EU’s Accounting Standards Committee, legitimized by their expertise as practitioners, preparers, users, and auditors of company reports. Accounting companies began to argue that EFRAG should be integrated into the process of decision-making at the European level. This did not prevent EFRAG from arguing to the IASB that it should be ‘the body that expresses European positions on matters related to its standard-setting and that EFRAG should be given a status commensurate therewith’ (EFRAG 2004, 3). The private sector therefore argued for a degree of pre-eminence over the Commission that it did not achieve, even if the latter agreed in 2006 to formalize its consultations with it.

2 That is, both on the issue of whether adopting an IAS standard is acceptable, and on what demands should be made on the Board.

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Interpretations Controversy Even more than the status of the Board itself, the role of IFRIC and expectations that it would generate detailed and binding accounting rules have been generally controversial. Speciﬁcally, the Board intended to set up a hierarchical relationship between IFRIC standards and national standards and standard setters that generated resistance. One of the aspects of IAS and IFRS that makes their acceptance so easy for national standard setters is that they are based on principles. This means that they are compatible with a considerable range of speciﬁc accounting practices and rules. The IASB is well aware of this and seeks to promote the adoption of its standards by contrasting them with the more restrictive rules found in Commercial Code countries and in the United States. On the other hand, the real consequence of IOSCO’s demand for more and more detailed rules points to the enhanced use of IFRIC Interpretations. IFRIC Interpretations are, by their very nature, more detailed than IAS and IFRS, to the point where they no longer constitute principles but concrete rules that national standard setters and the EU would have to implement. This made the stakes apparent for those concerned about the room for manoeuvre in local accounting standards that Interpretation development would permit. The fundamental strategy for choosing between the hierarchy of the Board and the ﬂexibility of standard development and application is still under development. The main debate in the international community appears to have taken place outside the conﬁnes of the EU. Most national standard setters in the Organization for Economic Cooperation and Development (OECD) world, including those of Germany and the United Kingdom, support the Board’s position that (a) Interpretations should be issued sparingly, and (b) national standard setters be barred from issuing their own ‘local interpretations’ of IAS. Developing countries and Italy had pleaded for local interpretations to allow for what are broadly considered eccentric and opaque accounting techniques, but found little support in the broader accounting community on the grounds that it would hopelessly fragment international standards and undermine the universal informative function they were designed to fulﬁl in the ﬁrst place. Instead, the majority argued for sparing use of Interpretations to avoid the development of binding rules that would require strong adjustment. The Big Four accountancy companies supported standard setters in this position, arguing only for the Board to develop guidelines, which would strengthen the bargaining position of standard setters and auditors vis-a`-vis corporate chief ﬁnancial ofﬁcers, but which would not constitute rules that could restrain ﬂexibility. The German, British, and European Commission responses to IFRIC are coordinated rather than simply individual. Like IAS and IFRS, IFRIC

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Interpretations are subject to EU screening and adoption before they take force in the single market. Therefore, the Accounting Standards Committee has an opportunity to discuss and screen the impact of these standards. In doing so, they can call on the technical advice of EFRAG. This group consists of private actors and associations that view IFRIC Interpretations with some scepticism, but it is precisely for this reason that the IASB issues so few interpretations (Donnelly 2007). When the EU wishes to make a petition to the IFRIC Committee, it relies as well on a round table of experts, in which the German and British standard setters are also represented. The European Commission created a round table of accounting experts in 2006 to serve as a listening post for accounting issues that could be of interest to all members. Its purpose is particularly to avoid drift in national standards. It could then identify and group together those issues where it is felt there is a real risk of divergence and recommend which of those should be taken up by IFRIC as a matter of urgency. It wanted to include stakeholders, but as few as possible. In particular, it stated that ‘representatives from IASB, CESR, EFRAG, FEE, UNICE, audit ﬁrms, National Standard Setters, preparers and the Commission should therefore all be present’. Above all, the round table would complement the work of the EU Accounting Standards Committee (which deals with the application of IAS) by helping to draft technical papers for submission to IFRIC if European accounting standards experts have a ‘common concern’. The national standard setters of the United Kingdom, France, and Germany were made standing members of the round table due to their intense involvement with IAS, and standard setters from other EU member states on an ad hoc basis from time to time.3

S TA N DA R D S There are three useful insights to be gained from looking at the standards themselves. The ﬁrst is the breadth of material that is covered by them, so that we have a sense of how extensive the commitment is that the EU and its member states have entered into. The second is that some principles of IAS tell us how much change from pre-existing national standards is implied. The third is a case in which the EU negotiated a special European treatment for a particularly important kind of ﬁnancial instrument that was at the heart of the FSAP and which constitutes a speciﬁcally European kind of thinking 3 European Commission, Internal Market and Services DG (undated) Memo: Consistent IFRS application: Roundtable, 1–3.

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about the ﬁnancial market per se and the need to restrain and regulate accounting practices. The European solution is somewhat more restrictive than that found in IAS.

Fair-Value Implications The changes in accounting standard principles toward fair-value accounting described above stress information that is useful to investors and above all, prospective investors, as it stresses the current market value of assets, liabilities, and income. This means that other goals, including the building and management of ﬁnancial reserves to smooth income ﬂuctuations or crosssubsidize social and economic goals within the company, are exposed for what they are. Management is then, theoretically, more exposed to investor pressure to pay out dividends with cash or assets in reserve or to investor criticism when particular assets drop in value. Fair value therefore strengthens the logic of market decision-making between the ﬁrm and the market, rather than strengthening the interaction between management and its internal partners (such as block-holding investors or employees). It moves away from stakeholding and rent-seeking arrangements that are mandated or tolerated and forces compliance with a pro-market norm.

Outstanding Issues The ability of the EU to insist on its own approach to dealing with IAS was demonstrated in a dispute that was essentially over the choice between a laissez faire system and one of regulated market capitalism. A key dispute within the EU and between the EU and the IASB was how extensively fair value should be used. The EU directive, building on earlier accounting directives, instituted the principle that fair value, like other IAS provisions, does not have a direct effect in all areas of accounting, but only applies to those areas for which the EU has agreed its adoption (European Commission 2005, 2–3). In the future, this means that the member states through the ASB, the accountancy profession through EFRAG, and the Commission, all have a role in deciding how extensively fair value will be applied. This was a particularly sensitive issue in the use of accounting standards for derivative ﬁnancial instruments. Due to their complexity and invisibility on accounting sheets in the United States, the accounting of hedging with derivatives played a key role in American corporate collapses and, therefore, was a key regulatory issue internationally. The IASB demanded fair value and

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transparency of all derivatives off the balance sheet (where they were not visible until then), placing these items in a version of IAS 39 that was revised in 2003. The EU supported this move toward mandated transparency generally, signalling a movement away from laissez faire and toward regulatory capitalism. At the same time, lobby work by the European Banking Federation eventually moved the EU to prevent application for their own sector (European Commission 2004g, 3). This is now referred to as a special ‘carve out’ of IAS 39 that allows application for normal companies, but continued exemptions for the banking sector. All of this means that the EU has built on a previous shift in thinking at the national level toward accepting and even promoting the use of IAS as a means of attracting international investors. There is also a shift toward mandatory exposure of the company’s ﬁnances that is different from the past. IAS may one day be used entirely in the EU, but for the moment, they are used parallel to national standards. Whether IAS actually replaces national standards is up to the member state in question. For the moment, this is not the case, even if the parallel system encourages delegation to reduce transaction costs for business.

C O NC LU S I ON The accounting standards regime amounts to a signiﬁcant, yet limited delegation of authority for setting accounting standards from the member states or their national accounting associations to the IASB. This delegation formed a key component of the European Commission’s broader FSAP, as it provided a means by which transparency for investors in the single market could be achieved. A single accounting standard would make company reports comparable for the ﬁrst time, replacing the patchwork of private practices and public commercial codes traditionally used for presenting accounts. We can see that the regime for IAS is handled differently than ﬁnancial market regulation when we look at the limited detail of international standards, the successful resistance of national governments, the European Commission, and private industry to IASB plans to introduce a more rule-based system of standards, and the layering of international standards on top of national ones, rather than displacement. As a result, the regime for accounting standards is a regime for information ﬁrst and foremost. Any further changes will take much longer to materialize. This means that the constitutive norm consequences for the member states are different depending on how strongly and exclusively they orient their own remaining national standards to EU-sanctioned IAS. The regulative norms that layer IAS allow for this. The

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public–private element of the state’s constitutive norms also varies, as it does between the United Kingdom and Germany, preserving difference in state attitudes toward the accountancy profession at the same time that commitments to employ IAS and place accountants under independent regulatory supervision (under EU law) are made. There is, in each case, a constitutive moment for a national regulator but these are different in the United Kingdom and Germany, so that state or private dominance is accommodated in the EU. The main issues were regulative at the EU level, sorting out the roles of the various actors. One mechanism by which future changes are likely to occur is the collection of national accounting standard setters that the EU member states have established as part of their involvement with the IASB and with the Accounting Standards Committee of the EU. Particularly in countries with a tradition of using the commercial code as a set of accounting standards, the active involvement of accounting professionals from a variety of backgrounds is bound to produce demands for different outcomes than would have occurred if only legislators and industrial lobby groups had been involved. Furthermore, the more transnational interaction of these expert groups through their interaction with the Board, with EFRAG, and with the EU’s Accounting Standards Committee means that the agenda for harmonization is likely to grow. At some time in the future it is conceivable that national-level change will sow the seeds for further delegation and harmonization of national rules, but that time has not yet come.

11 Conclusions Europe established three new policy regimes in the early years of the twentyﬁrst century that transform European governance and the member states that play a key role in their governance. They constitutionalize European governance in new and divergent ways, assign new roles and identities to the participating actors, create horizontal and vertical modes of interaction between them, deﬁne their rights and responsibilities, and commit the participants to governing the policy area according to the rules of the speciﬁc regime. This is more than network or informal governance; it surpasses our existing notions that the European Union’s (EU) three policy pillars and primary legislation are necessarily the most important rule-making procedures, and it allows the EU to greatly increase its regulatory capacity, building on that of the member states. The regimes in themselves are remarkable. They are all the more so because the policy areas are closely intertwined and are highly similar on the surface and all related to the single market and yet, fundamentally different. This outcome raises a number of questions. How do we explain the timing of regime development? What factors were necessary and sufﬁcient to generate a policy-speciﬁc regime in Europe? The impetus to create a regime may be endogenous to the EU system of governance or exogenous. Traditionally, we expect the Commission to push the member states to agree to new legislation and new treaty commitments. We also expect the European Court of Justice (ECJ) to exercise judicial activism when asked to interpret the Treaties. The ECJ, above all, in conjunction with lawsuits from the Commission or from private plaintiffs, can destroy the existing balance of interests between the member states and the Union by superimposing treaty norms on national governments. These are pressures endogenous to the EU system, and sufﬁcient evidence has been gathered in this book to conﬁrm hypotheses ﬁve, six, and seven on the constructed, contested, and dual nature of the norms fought over. Outcomes, therefore, remained underdetermined until there was agreement on them. In company, ﬁnancial market, and accountancy regulation, there were pressures at the national level to transform the political economy and the regulatory state that had nothing to do with EU politics. These factors were exogenous to

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the EU system. The changing structures within national politics (hypothesis three) were reﬂected in EU agreements or collisions that followed from them or were built on them. Regime timing is determined by no single actor alone. Rather, the actors required to pass European legislation founding the regime must all accept the principles of the regime. There is no requirement that the Commission, Parliament, and member states converge on their ﬁrst preferences. They negotiate and compromise. None of the three regimes was created without a sweeping agreement on both regulative and constitutive principles, a ﬁnding which conﬁrms hypotheses one and four and the theoretical utility of the liberal constructivist approach to constitutionalizing the EU laid out in Chapter 3. There is no reason to believe that a working regime will come into existence without this agreement. This also applies to cases in which the ECJ strikes down member state claims to exclusive jurisdiction, challenging norms that protect them. Various strategies of non-compliance, coupled with member state efforts to convince Commission and Parliament of an alternative regime to simple negative integration, are a potent source of regime construction when fundamental norms about the nature of the EU member states and the nature of the Union collide. In this context, the ECJ has the greatest power of any of the EU actors to force a contest over the dominant norms constituting the rights and responsibilities of the EU and the member states. This diminishes the member states, who may then insist on an alternative if the Commission agrees. This proved easy in the case of ﬁnancial market regulation, where the Commission was able to constitute itself as a statutory regulator with the mission of protecting shareholders. The member states had already converged on these means and the mission of regulating. It was difﬁcult in company regulation where the member states insisted on no delegation to preserve national prerogatives and through them, national constitutional differences in the broader socio-economic policy sense. The Court is the most important EU-endogenous force for change, but only deﬁnes the end regime if the other actors fail to generate an alternative. In all three policy areas, they did just that. An agreement on regulative principles is also found in each of the regimes. This convergence at the EU level on organizing principles and the scope of regime legitimacy depended, in turn, on cross-party norms, on broad deﬁnitions of national interest in European negotiations at the national level about the appropriate forms of company law, ﬁnancial market regulation, and accounting standards. At the national level, in turn, constitutive norms about the nature of the state and what it is there to do, impacted the regulative norms concerning statutory, direct, or indirect regulation of the economy. By nature I mean whether public discourse justiﬁes the regulation of business in

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public interest or insists that private enterprise should be granted maximum leeway to manage its own affairs without public intrusion. In the modern reform period since 1997/8, a principal question that was posed was whether the relationship between the state and the regulated should be decided by elected politicians or by independent regulatory commissions exercising legislative and police powers delegated to them by their national governments and parliaments. Historically, there have been other modes with a much broader spectrum, ranging from state ownership of business to self-regulation under laissez-faire principles. These regulative principles, along with the partial constitutive convergence on promoting shareholder interests, formed part of the context in which European negotiations over acceptable regime principles were undertaken. Attention needs to be paid to the way that coalitions support these norms initially through common reference to archetypal narratives about the state, shareholders, stakeholders, managers, and accountants, and then when and whether norms cross party boundaries to establish themselves as political facts. Enormous changes have happened in ﬁnancial market regulation, ﬁrst in domestic regulation, then in the willingness to act collectively and harmonize at the EU level. Great continuity persists in company regulation, coupled with the reintroduction of national prerogatives into the EU’s economic constitution. At the national level, constitutive principles are found reﬂected partly in national regulative principles about the concrete relationship between regulators and the regulated, and partly in the conception of the state in relation to markets more generally. If the market is seen to be inherently problematic and in need of correction, there will be consequences in public thinking about whether a liberal or non-liberal public policy is required, which will naturally ﬂow in to more concrete deﬁnitions of the regulative relationship and help deﬁne what sort of state the country has. We are, therefore, ﬁrst able to fully describe the constitutive principles of the state at the national level when these two elements are considered together. As outlined in Chapter 3, the state has many faces and can develop itself differently in different policy areas, so that the state is less a monolith, but a collection of institutions that may present more than one constitutive vision of the state. Each of the four trajectories of thought presented in Chapter 3 encompasses more than one speciﬁc kind of state-business relationship, but draws important boundaries distinguishing fundamental cleavages in public policy. This is the basis on which recombinant forms of regulation and recombinant forms of capitalism (Crouch 2005) are developed and the basis on which norm convergence and norm divergence across countries, and between the proposals of the member states and the Commission, can be assessed in the context of European negotiations.

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Internal norm convergence among states and national capitalisms is higher today than ever before, but not uniform. In company affairs, there is a stronger sense that the state ought to regulate companies more than it has done in the past. At the same time, the methods used to deal with company failure are greatly different from country to country and rest on distinct constitutive norms governing the relationship between state and economy. The national governments are highly aware of this and place supreme importance on retaining the right to retain these differences. It is a combination of the degree of difference across countries and the high political salience of regulating the workplace and the source of economic competitiveness that contributes to the strong constitutive attachment to reserved powers for national governments and a preference for horizontal coordination over any other form. The degree of support for shareholders or market criticism has no effect whatever on this determination. The company regime, as complicated as it is, builds on this insistence on the part of the member states. In ﬁnancial market affairs, there is a stronger sense across governments that ﬁnancial markets should both be promoted for economic gain and regulated independently to ensure a level playing ﬁeld for all investors. The degree of prior norm convergence across European countries in the late 1990s rendered it conceivable to further harmonize and delegate rule-making responsibilities to a European authority. The high degree of policy and institutional convergence meant that national policies and European proposals were highly interchangeable, particularly if national regulators would be granted implementation roles and a consultative voice in rule development, alongside the regulated. A similar story can be told about the use of accounting standards for information. Full convergence through national commercial codes is a long way coming, however, so that the parallel regime is the optimal solution and will be with us for some time. These normative developments, in turn, depend on turns in thinking about public policy and speciﬁc challenges foremost by the political parties of the countries involved. Company regulation remains different because Liberal and other pro-business parties’ conceptions of promoting good corporate governance vary from country to country. They have moved together most closely on ﬁnancial market policy and are somewhere in the middle on accounting standards. There is no reason why norm convergence or divergence must rest on corresponding similar or different reasons. Ideas about the company, about stakeholders, and the state’s role in that relationship are different despite very similar circumstances, yet ideas about promoting and regulating ﬁnancial markets coincide for different reasons in the thinking of those discussing the issues within the parties. What matters most, however, is the authoritative expression of such judgements in legislation

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and institutional development and the argumentative debates that take place to construct them. At the national level, we are, therefore, witnessing a change of capitalisms and political economies that drives and is reinforced by the institutional developments at the European level. The companies regime allows national corporate governance arrangements, which are the basis of normative rules governing the relationship between managers, investors, and employees, and the public sector, to persist and thrive according to the identities they are ascribed in public debate through archetypal narratives that underlie commonly constructed norms of regulation, even in the context of the Societas Europaea, of which there are twenty-seven national varieties. This is the core of the protective environment for national-level actors to pursue their respective strategies in distinctive ways. The ﬁnancial services regime, together with the mandatory use of standardized ﬁnancial reporting standards, will put in place an increasingly harmonized context in which these strategies are played out. These developments provide us with a better understanding of how norms are built and work, and how they shape political battles over public policy. Most important is that norms are not monolithic entities, but are composed of multiple strands of thought about the identities of the main actors and through their degree of legitimacy, the limits of the res publica in regulatory questions. The way in which these strands are developed, cultivated, combined, and recombined plays a central role in the construction and transformative reconstruction of the political economy. Some combinations of these strands are more compatible, more symbiotic than others. Rent-seeking, in particular, is compatible with both pro-market, laissez-faire norms of self-regulation and market-critical stakeholder norms. They are, in fact, the private beneﬁts that interest groups pursue in the context of public policy debates over regulation. They are, therefore, analytically separate from stakeholding and laissez-faire. This means ﬁrst, that it is wrong to conﬂate the rent-seeking interests of private actors with public interest arguments. Second, it means that there is a good explanation of how private actors can cultivate a strong interest in supporting speciﬁc kinds of norms, thereby supporting the institutional status quo until competing interests are either accommodated or force a change in the system. The one sort of interest that can tip such a system is the ideal type of regulated market capitalism, which seeks to eliminate rents and ensure the equal treatment of all market participants and consumers. The shift to regulated market capitalism in ﬁnancial markets, in a way that includes consumer protection, is, therefore, a monumental change in the regulation of economies in Europe. This book has also shown that we can gain insight into the nature of the state and the way that it is perceived by practitioners by investigating legal

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developments and the arguments surrounding them at the national level and institutional development at the international level. Both of these arenas have the great advantage that they are highly publicized and documented processes, so that a transparent and veriﬁable documentation of discussions about the public interest, private interests, the state, the market, and the EU, can be undertaken. We can show how strongly or how weakly public policy is shaped by private interests and normative principles that all actors compete to establish. Contrary to the expectations of interest group-based theories, these continue to play a signiﬁcant role in holding coalitions together. It is difﬁcult to explain the return of robust state intervention favouring working people in the wake of the ﬁnancial crisis, for example, at a time when union strength is at its lowest point in seventy years. Yet, the ideational resource of older interventionist identities for the state that are there to intervene to the beneﬁt of groups assigned a favourable identity and to the detriment of those assigned a negative one, is powerful in understanding the ‘return of the state’ in 2009. Indeed, this approach can be used to analyse any other public policy area and the prospects for constitutionalizing the EU member state relationship, together with its form (collusion, coexistence, or collision) and purpose. At the EU level, regulative principles concerned the degree and mode of delegation to EU bodies and the role that national-level ofﬁces would play. The vertical, horizontal, or mixed relationship between the European Commission and the member states had to be sorted out, so that the rights and responsibilities of the actors in ongoing interaction could be deﬁned beforehand. In the case of the company regime, this resulted in no vertical delegation of regulatory authority from the national level to the EU level, but a commitment among the member states to horizontal coordination of their activity through explicitly designated national ofﬁces and with clearly deﬁned roles, rights, and responsibilities. In the case of the accounting regime, this resulted in a vertical delegation of regulatory authority for information standards away from the national level to a private international organization, and an obligation to use these standards, though not exclusively. In addition, this delegation came with new EU institutions and procedures that guarantee robust oversight and discussion among experts from the Commission, the ﬁnance ministries of the member states, and from the accountancy profession about applying the standards in the single market and regulating their implementation. In the case of the ﬁnancial markets regime, the sorting out of rights and responsibilities resulted in the delegation of rule-making authority to the Commission, but with the expert input of a committee of independent national securities regulators and under the oversight of experts from national ﬁnance ministries. To this maximum degree of delegation, was added a new right for Parliament to block secondary legislation from the

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Commission. This constitutional innovation was unexpected but understandable given parliamentary rights to decide on legislation and in the light of the constitutive dimension of EU politics, in line with consistent parliamentary claims to a different kind of union. One could argue that the deﬁnition of rights and responsibilities was required to avoid uncertain outcomes, as principal–agent theory suggests, but it was more important that the regulative principles build on common conceptions of constitutive principles for the EU bodies and the member states. These were more important than detailed contracts. This turns the rationalist argument on its head. Uncertainty about outcomes and the desire to reduce transaction costs may indeed create incentives to create further agreements and engage in iterated cooperation, but without fundamental agreements on the rules of the game and its impact on the countries involved, the incentives cannot sufﬁce to bring an international agreement to fruition. The concrete policy relationship between the member states and the EU is regulative, but the result of constitutive principles that are hammered out by the decision-makers is ascribed at the national and EU levels, and is regulative. The constitutive principles are more fundamental than this and are the constructed yet real and primary institutions of EU politics on which the regulatory structures are erected. This means that functional accounts of governance beyond the state (including liberal intergovernmentalism), transnational interest group pressure, and neofunctionalism, cannot explain the patterns of institution-building at the national or the international levels, or the linkages between the two, as well as the normative approach does. The normative emphasis not only recognizes backlash, as do Majone and Schmitter, but it tells us, through archetypal narratives, the concrete reasons for it. It, therefore, captures the reasons for differing strategies and endogenizes them in a way that principal– agent theory does not. It also provides us with a more nuanced range of international regimes, with differing kinds of governance beyond the state, and differing understandings of how those forms of governance should affect the state and its relation to the public, as a result. There is no reason to believe that the state allows itself to be hollowed out, nor that it exploits international cooperation to withdraw from various forms of accountability to voters and their representatives. The cases show that governments are capable of managing this when they choose to do so. The normative approach provides a solid foundation for the analysis of these phenomena that allows us to return to substantive issues. This allows us to deal with the real reasons why public policy develops disparately in different policy areas, even with similar interest group constellations. It also allows a better treatment of states as agents in international talks, which they

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continue to be. This has important theoretical implications, as interest-based and institution-based approaches to domestic and international policy develop models without substantive issues. The endogenous, normative approach demands further research on the contestation of legal arguments underpinning state institutions, including constitutional principles, and the international obligations into which governments enter. Fortunately for social science, modern life is rich in the documentation of opinions, positions, and norms of both a constitutive and regulative nature at all levels of government.

OT H ER I MP L IC AT IO N S The development of regimes provides a means by which member states can exert some control over the social embeddedness of their economies. They can ensure that the areas of economic and social policy that they want to see liberalized are given the legal framework to do so, whilst the areas that they want to remain embedded in a deeper complex of institutional commitments, remain so as well. This is neither fully-ﬂedged neoliberalism nor social protection, but a form of managed liberalization, as much a hybrid as the political economies of the member states. This provides hope for those who see a danger in the continued disembedding of national societies from the normative imperatives and institutional structures that sustain and support them. It slows down the drive to complete the single market and insists on asking at what cost. There is no guarantee of European agreement to these questions, but rather of debate over the normative imperatives that underlie the state and its relationship to the economy and society. European integration, like all forms of governance beyond the state, is constructed in large part by the states that take part in it. In contemplating the delegation of regulatory responsibilities to the European level or the creation of obligations that come with an intergovernmental regime, the member states consider what it means for them and for their societies. This is not just a question of legal obligations. In taking this step, they will never be entirely the same as they once were, and there will be consequences for social and economic actors. They shed some part of themselves and adopt a new persona, one that is nested in rules that have a constitutional quality in the broader sense. They reconstitute themselves as something new, both together as a group of states within the EU and as individual member states within that union. As a group of states, they are joined together not only by rules and

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policies, but by a common set of understandings about what the community of states is and does. In deﬁning these understandings, they not only constitute the Union anew, they constitute themselves anew. They become working parts of something bigger in which they play a role that they themselves have deﬁned. In doing so, they build on what they already have and deﬁne to be right. The EU is not so far transformed that it conceives of itself as a nation, or as a people, in the singular, collective sense. This is one of the most important reasons why identiﬁcation with common European collectivity has not led to public support for a big-c constitution. It is simply not strong enough, if it can be said to exist at all, that the political symbols reminiscent of a nation state, including the name constitution, could resonate sufﬁciently with those who must legitimate such a move. However, smaller, practical, policy-speciﬁc attempts can succeed where big-c constitutionalism fails at deﬁning the collectivity, the member states, and the legitimate economic and social practices that continue to live on in the context of the new rules. There is no reason to expect any automaticity in this process. Nor is there any reason to expect that national differences on the norms that constitute the EU and member states in particular policy areas will remain in place indeﬁnitely or even prevent an intergovernmental regime from forming. There is only reason to expect that integrative agreements like regimes that transform the state require support from the member states, and that the member states will reﬂect on what it means to be one, and what the consequences will be for the things they hold most dearly. These things are the norms of statehood, including the constitution, but extending both into unwritten understandings of the rights and responsibilities of states who are members in good standing within the common collectivity, and into the key political understandings domestically of what the country, as its own collectivity, stands for. This includes central doctrines of economic and social policy that underlie the country’s key policies and institutions. Though they may not be written into the structure of a written constitution, they are, nonetheless, structures that have constitutional impact precisely because they constitute and deﬁne what the member state is at a particular point in time. The governments of the member states not only can, but will consider these implications and negotiate accordingly, or suffer backlash at the hands of local politics. The task then, if European leaders wish to establish regimes, is ﬁnding a way to do so in ways that respects this thicker understanding of national constitutional, of constitutive norms. If they succeed, they will transform the scope of possible governance arrangements beyond the state by constituting new understandings of the European collectivity that respect their most closely held domestic norms.

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In this sense, the old lessons of the functionalist fathers of the European Economic Community have been proven right: politically sensitive issues of federalism touching on sovereignty have a far weaker chance of ﬁnding resonance in domestic politics than attempts at cooperation in practical policy areas. But the functionalists also missed something. Issues of sovereignty are never absent. The member states are always cognizant of them and negotiate accordingly. Where they are able to square the circle of pursuing collective action, complete with delegation, without giving up the essence of what they are there to do, to guarantee, they may very well do so. The transformation they undergo in terms of transferring responsibilities to the European level may be very great, but it will only be in those cases where there is a high degree of convergence already over the priorities and methods of public policy on a normative level. Where convergence is weak, they may still collaborate to preserve their differences from intrusion, either by overt means or by stealth, from the indeterminacies of European integration (such as ECJ rulings). Whatever the degree of convergence, the member state is unlikely to ever cede to pure supranationalism. As the member states consider their role in both their own societies and within the Union as a whole, they are likely to remain self-aware, seeking to ensure their continued existence and their legitimated role within the common European framework. This speaks to a preference for multilevel, not supranational forms of governance as the highest form of European integration, whether in delegation or a regime. This helps us to understand the continued relevance of national institutions in even the most supranationalized areas of EU policy—the national central banks within the European System of Central Banks and the national competition authorities alongside Directorate General Competition—as the consequence of self-aware governments deﬁning and constituting their continued role within Europe.

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Index Accountants 227–31, 239, 242 Chamber of Accountants (Germany) 113–114 Institute of Chartered Accountants 137–8, 141 International Federation of Accountants 213 Accounting Standards Board 13–19, 40, 45, 61, 66, 70, 82, 86–8, 90, 104, 112, 162, 192, 231, 234 Archetypal narratives Archetypes Auditors 32, 94–99, 104–5, 107–9, 112–113, 127, 137, 138–42, 148, 169, 173 Bank of England 133–5, 137, 196 Baums 93–5, 97 Biedenkopf, Kurt 103–4 Blair, Tony 117, 120, 132, 136, 145 Breakthrough rule 26, 183–7 Brown, Gordon 121–2, 128, 132, 136, 143–5, 232 Bundesvereinigung der Deutschen Industrie 96, 100–105, 109, 113, 190, 219 Bundesvereingigung der Deutschen Arbeitgeberverba¨nde 96, 103–104, 109, 113, 190 Cadbury Report 118 Cambridge School 37, 53, 56 CDU 96, 98, 105, 108, 110, 114–5, 188 Centros 164–8, 170, 172–4, 176–7, 191 Committee of European Securities Regulators 28–30, 32, 110, 131, 134, 142, 171, 205–7, 210–13, 215–8, 221, 236

Company Law Review 93, 121–4, 127–30, 132, 144 Competition authorities 45, 249 Competitiveness Advisory Committee 154 Confederation of British Industry 128–9, 131–2, 137, 185–8 Conservative Party 48, 53, 117–8, 121, 138–9, 144–5 Constitutionalization 1, 3, 5, 7–13, 16, 43, 45, 72, 91–2 Constitutional norms 2–3, 5, 7–8, 66, 70, 80, 85, 192 Constructivists 4, 47–8, 52, 65–6, 69–70, 241 Coordination 6–7, 24, 27–8, 63–4, 72–4, 76, 135, 152, 160–1, 169, 198, 200, 202, 211, 214–7 Cromme 93–5 Davignon Committee 154, 157–8 Department of Trade and Industry 122, 124–8, 137–8, 140, 143, 156, 186–8 Deutscher Gewerkschaftsbund 100, 103–4, 176, 189, 191–2 Deutsche Rechnungslegungsstandardscomittee 112–113, 233 Draft Constitutional Treaty 4–5, 60, 208 Deutscher Standardisierungsrat 112, 233 Deutsches Aktieninstitut 96, 98, 101, 107, 113 Dissonance 3, 9, 11–12, 14, 16–17 Economic sociology 14 European Financial Reporting Advisory Group 143, 218, 228, 234–9 English School 16, 63, 65–8

272

Index

European Company Statute 23–5, 152, 173–9, 194 European Participation Directive 23–5, 173 European Securities Committee 188, 196, 205 European Works Councils 132, 146–7, 155, 190

Lamfalussy Plan 28, 32, 179, 194, 197, 204–9, 215, 219, 221 Level playing ﬁeld 79, 96, 137, 181–6, 188 Liberal intergovernmentalism 4, 36, 57, 66, 81–3, 87 Listing authority 30, 121, 123, 134, 145, 160, 210 Listing Directive 29–30, 210–11

Frei Demokratische Partei 96, 98, 102, 104, 106, 108, 110–112, 114–115 Financial Reporting Council 121, 126, 131, 137, 141–4 Financial Reporting Review Panel 127, 137, 142 Financial Services Authority 119, 121, 131, 133–40 Fraud 41, 93, 105, 117, 124, 126, 134, 202, 213 Functionalism 80–83 Neofunctionalism 4, 83–6, 246

Market Abuse 29–31, 101–2, 134–5 Market Abuse Directive 30–1, 108, 130–1, 212, 216–7 Merger Directive 25–6, 155, 173, 178, 189–91 Migration Directive 26–7, 168, 173, 178, 191–2 Minimum standards 15, 28–31, 34, 74–5, 103, 147–8, 150, 154–6, 159, 161, 163, 175–6, 185, 188, 199, 201–3, 205, 210–12, 215 Mismanagement 45, 114, 126, 227, 229 Moravcsik, Andrew 57, 66, 81–2 Multiple voting rights 182, 184, 187–9

Golden shares 182–4, 188–9 Greenbury Committee 118 Hampel Committee 119–20 Hewitt, Patricia 112, 126, 140 Higgs Report 119–122 HM Treasury 121, 124, 126, 128, 133–6, 138–9, 144, 196 Hybrid/ization 2, 9–10, 39, 247 Insiders 26, 42, 74, 90, 104–5, 109, 113–115, 151, 182–3 Insider trading 31, 101, 107–8, 119, 160–1, 212 Insider Trading Directive 105, 159, 161 Inspire Art 167–8 International Accounting Standards Board 33–4, 74, 142–3, 163–4, 222–39 Labour Party 11, 47–8, 53, 117–22, 128–9, 132–3, 136–7, 143–6

Operating and Financial Review 123–4, 126–30 Ownership 8, 22–30, 50, 105, 150–1, 177–80, 187, 195, 201, 211 Penrose Enquiry 118, 138–40 Pollack, Mark 82–3 Principal-agent theory 4, 36, 82, 246 Prospectus Directive 30, 210–12, 216 Public interest 2, 6, 9–12, 14, 20, 24, 26, 35–8, 40–44, 55, 58, 78, 92, 111, 126, 129, 138, 145, 150, 166–7, 177–9, 204 Registration 165 Regulatory state 1, 22, 27, 35–6, 111, 114, 119, 121, 124, 144–5, 174, 178, 201, 240 Self-regulatory organizations 119, 131, 133, 135–8, 141, 143

Index Sozialdemokratische Partei Deutschlands 91–2, 96–99, 103, 106–110, 114, 176, 190 Statehood 4, 7, 16, 37–9, 59–60, 63, 87, 118, 248 Statutory Audit Directive 32, 131, 134, 202, 213–4, 216 Takeover Directive 25–6, 97, 131, 149–52, 157, 173, 179–87, 195, 198 Tax authorities 23, 27, 230 Trades Union Congress 128, 153

273

Transparency Directive 31–2, 130–1, 202, 210–12, 216–7 ¨ berseering 166–8, 177 U Unions 15–16, 43, 47, 51, 94, 98, 103–4, 117–8, 128, 132, 147, 156–8, 189, 230, 245 Varieties of capitalism 8–10, 14, 39–42, 48–9, 57, 89, 157 Winter Report 182 Wiener, Antje 14, 64, 69–70