Corporate Governance: The United States of America Vs. The European Union

Introduction

The following paper will compare and contrast corporate governance in the U.S. and European Union. Because corporate governance regulations are not yet uniform across all EU countries, we have chosen to examine Poland in particular. We will first present U.S. corporate governance and the Sarbanes-Oxley Act of 2002, and then examine how Poland’s corporate governance regulations compare. Finally, since we have already learned about Corporate Social Responsibility for U.S. companies, we have examined Corporate Social Responsibility in Poland, looking specifically at the largest airline in Poland, LOT.

U.S. Corporate Governance

Due to several U.S. corporations violating the public trust and federal laws, the Securities and Exchange Commission established laws that all public corporations must follow in order to restore investor and public confidence as well as create uniform corporate guidelines, called the Sarbanes-Oxley Act of 2002. The New York Stock Exchange also adopted these rules, which are required of any company that wishes to be listed in their index. The NYSE rules parallel Sarbanes-Oxley and we will examine these thirteen rules in order to see how the U.S. compares to Poland.

The first rule is listed companies must have a majority of independent directors (NYSE, 4). This is to insure that the board of directors in not completely comprised of people who work for or previously worked for the company, which could create an abuse of power. The requirement of independent directors gives the board an outside perspective, “increases the quality of board oversight, and the possibility of damaging conflicts of interest” (NYSE, 4).

Rule number two refers to the independent directors and qualification of being independent. It requires that in order to be independent, the director must have no material relationship with the listed company, which includes stipulations such as working for the company in the last three years, an immediate family member was an executive officer, they or a family member has received more then $100,000 in direct compensation in the last three years, and the company must identify which directors are independent (NYSE, 5). These rules were created to make sure the director is independent from the company and would be working in the company’s best interest rather then their own best interest. If the director is not independent and has a stake in the company it is conceivable that the director may try illegal or unethical activity in order to profit.

The third rule also relates to the independent directors, stating that in order to empower non-management to serve as more effective checks on management, the independent directors must meet regularly without management (NYSE, 7). The purpose of this rule is to give the independent directors the opportunity to meet and not be influenced by management or anyone connected with the company; it gives them a better opportunity in a less persuasive environment to be more objective.

Rules number four and five relate to the nominating and corporate governance committees as well as the compensation committee. These rules state that the committees must be composed entirely of independent directors (NYSE, 8 & 9). These committees deal with nominating potential board members, oversight of company activities, and executive compensation, so in order to work effectively they must not be influenced by those with ties to the company or those directly affected by the decisions.

Rule six and seven relate to the audit committee and the requirements of Rule 10A-3 under the Exchange Act (NYSE, 10). The audit committee must be composed entirely of independent directors, with a minimum of three members. The committee must oversee the financial statement reporting, the integrity of that reporting, and the auditor’s independence (NYSE, 11). Like other committees, the audit committee must also meet regularly without management to discuss its responsibilities and the audit functions; they must also meet with management to discuss problems, meet with the auditor concerning management difficulties and responses, and regularly report to the board of directors. The audit committee may have the most responsibility, the most ethical influence, and the most influence on to the company and the stakeholders, because they oversee all financial information and reporting.

The eighth rule’s aim is to increase shareholder control over equity-compensation plans, by ensuring that shareholders are given the opportunity to vote on all equity-compensation plans, except inducements options, plans relating to mergers or acquisitions, and tax qualified and excess benefit plans (*NYSE, 13). Recently, equity-based rewards have been a very important component to employee compensation.