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TRACE UPDATES ITS KEY MANUAL ON HOW TO DEAL WITH FOREIGN AGENTS AND AVOID BRIBERY
The TRACE Due Diligence Guidebook: Doing Business with Intermediaries Internationally
TRACE stated: The original Guidebook, published in 2002 as the TRACE Standard, represented the first comprehensive benchmarking research of its kind. With this updated version, TRACE continues to provide multinational companies with practical, step-by-step advice on how to select intermediaries, how to assess categories of risk, what types of information to collect during the due diligence process, and how to manage third-party relationships.
Due Diligence Procedures
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Ethics Resource Center (ERC) – A Paper from the ERC Fellows
Too Big to Regulate – Preventing Misconduct in the Private Sector
Do (US public) officials recognize and give enough credit to sincere efforts by companies to foster ethical conduct among employees?
Could communication, and thus understanding, be improved between regulators and the regulated in a way that would add nuance to stereotypes on both sides?
Do judges make effective use of (US) Federal Sentencing Guidelines for Organizations and properly credit companies that have installed effective ethics programs and enable ethics officers to access top executives and the board?
No amount of regulation or enforcement resources will eliminate all wrongdoing, but there is little doubt that government and business share an interest in ethical conduct that gives investors confidence in the market’s inherent integrity. Despite natural tension between businesses and the government enforcement officers who prosecute corporate misconduct, partnership between government and private sector compliance officials can help build ethical cultures in the private sector and reduce errant behavior.
Ongoing dialogue between these sectors can provide government enforcement officers with a better understanding of how strong ethics programs can promote positive behavior in the private sector and discourage misconduct.
Better communication by government enforcers can help the private sector build compliance programs that will earn credit and respect from federal agencies and judges. For example, DOJ and the SEC could broaden training for prosecutors about ethics programs and ethical culture and their impact on corporate governance by arranging for participation of private sector ethics and compliance officers.
The enforcement agencies also might consider the formation of ethics and compliance advisory groups composed of academics, private sector ethics officers, and retired government enforcement officials. DOJ and the SEC might provide case studies and aggregate statistics that demonstrate the impact of corporate ethics and compliance programs on enforcement decisions. They also might provide additional guidance about what the department expects from business.
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the 10th principle of the United Nations Global Compact highlights corruption - companies need to comply with national laws, regulations and rules in the anti-corruptioin area. But, despite all the information available on the subvject, reporting by companies, both internall and externally on how they seek to comply in this area is broadly insufficient. Now, the UN Global Compact, working in particular with Transparency International and a number of leading firms has produced "Guidance" on anti-corruption reporting for business.
The Foreword to the New Report is by Huguette Labelle
Public reporting is a formalization of transparency and an essential link in the accountability chain. Through public reporting a company provides information in a structured way on matters important to stakeholders. Reporting enables companies to build public trust by meeting the growing expectations that companies adopt and implement robust anti-corruption measures.
However, research by Transparency International shows that many leading companies,
The introduction by the Global Compact of the Reporting Guidance to its thousands of signatories marks a significant step for anti-corruption. The Guidance sets a new benchmark and Transparency International recommends it to all companies as well as signatories of the Global Compact as an essential tool for reporting on anti-corruption. We look forward to working with the Global Compact in further promoting the Guidance and to seeing the results over time reflected in improved reporting not only in Communications on Progress but in companies’ overall performance.
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Research firm Audit Integrity Creates original Approach In battle Against fraud
Audit Integrity, with offices in New York and in Los Angeles, said its “Risk Profiler” application is about to be offered free to over 300 North American publicly traded firms rated “Very Aggressive,” the lowest rating of Audit Integrity’s flagship Accounting and Governance Rating (AGR), a widely accepted statistical measure of corporate integrity.
“The collapse of the economy has shown a clear need for better tools to diagnose risks," said Jack Zwingli, president and CEO of Audit Integrity. “Corporations and auditors are required to assess fraud related risks, but have had limited tools to do so. RiskProfiler provides a thorough diagnostic review of known fraud risks, and identifies the ‘red flags’ companies and auditors need to research and resolve.”
The company says the downloadable program is “a secure, reliable method for better assessing corporate accounting irregularities and identifying potential fraud or misrepresentation prior to regulatory filing. It is designed to ensure that corporations identify risks and provide transparent, accurate financials to investors and other stakeholders.”
The Audit Integrity RiskProfiler allows companies or auditors to enter confidential financial information, at the corporate or divisional/subsidiary level, and run the Audit Integrity analytics engine as an Excel add-in. Comparisons are made to prior financial statements and industry benchmarks to identify specific areas or risk. Once an assessment is complete, RiskProfiler generates a statistically driven summary of major risks, flagged metrics, and ratio tables that are used to identify and address areas of potential fraud-related risks.
"There needs to be a fresh approach to identifying corporate risks,” said Mr. Zwingli. “In difficult times, companies with weak risk controls and a culture of taking on too much risk will be the first to fail."
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Full FCPA Compliance Important
In a recent report Control Risks noted that the U.S. Department of Justice (DOJ) has sharply increased its investigations and prosecutions of Foreign Corrupt Practices Act violations in recent years, although companies that have effective compliance program in place have done well in negotiations with the DOJ (see compliance guidelines below).
The report stated that while DOJ is pursuing far more cases, the majority are resolved through plea agreements. Since 1990, DOJ prosecutions under the FCPA against 81 individual defendants and corporations have been resolved. Of those 81, 44 were resolved through plea agreements (in only 4 of these cases was there a conviction after trial). In cases where a plea was taken or a defendant was convicted, defendants were sentenced to terms in prison, fined, or both. Sentences have been imposed in 26 of those cases, and sentencing has been deferred in two others.
Increasingly US companies are banning facilitation payments, believing that such payments can too easily lead to violations, said Control Risks. It noted that the law firm Fulbright & Jaworski conducted a recent survey and found that as many as 80% of US companies had imposed this ban. The OECD has weighed in on this debate by encouraging the banning of facilitation payments, noting that such payments, while permissible under the FCPA, are generally illegal in the countries where they are paid.
“Meaningful Compliance Programs”
The report argued that too few companies have “meaningful compliance programs” and that a survey by KPMG is a wake up call to corporations. The survey found that most had compliance programs but an overwhelming majority of the respondents admitted their programs were lacking. They cited three key areas which were weak:
1) Undertaking effective due diligence on foreign agents/third parties
The Control Risks report concluded that it is almost certain that the DOJ wouldn’t give any of the executives who answered this survey a “pass” on prosecution. Those companies should be scrambling to toughen their programs and not just as “vaccination” against DOJ or SEC investigation. A robust program also protects the bottom line.
The standard for what constitutes an “effective” FCPA compliance program is found under “The Federal Sentencing Guidelines for Organizational Defendants.” At a minimum, the compliance program must include the following seven factors:
6. Using disciplinary mechanisms to consistently enforce standards and procedures.
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Improving Supply Chain Working Conditions:
PROGRAM ELEMENTS. Once the ideal program was created, the group put together an action plan to implement the ideas. The program model includes the following practices.
Full explanation available here.
SHORT-TERM RESULTS. The group was able to do some short-terms assessments of the program and got some positive results. The following are some highlights that speak to major emphases of the work:
LESSONS LEARNED. Based on the working group’s program, the report mentions several important lessons learned from the experience:
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A 2007 survey of global ethics and compliance programs shows the current trends in how multi-national companies are designing, implementing, and evaluating their programs in an international context. Language and Culture Worldwide (LCW) released the report in order to highlight the importance of international relationships in business and identify the challenges that arise from them. EthicsWorld has posted other reports highlighting the differences across cultures in the understanding of ethical behavior. A recent Conference Board report stated that companies have a long way to go in integrating third parties into their ethics and compliance programs. It is no surprise then, as companies become increasingly global, integrating their international stakeholders into their ethics and compliance programs is a significant challenge. This report is useful in order to identify current best practices and where there is still room for improvement.
The following is a summary of the key findings in the report. Please see the full LCW report for more in-depth analysis.
Strengths and Weaknesses
In the LCW survey, most companies are providing formal training for all employees, have local representatives to communicate ethics/compliance initiatives to international employees and implement helplines that use diverse tools for communicating. A fewer number of the respondents in 2007, compared with the 2005 survey, said their programs were “primarily values-driven,” rather than “primarily compliance-driven.” Overall, companies are not incorporating their international employees as well into the development of their programs or codes of conduct. It is less likely that companies are modifying their codes of conduct or training content to incorporate cultural differences, local policies and procedures, and local laws. It is also rare that ethical assessments are included in performance evaluations.
Primary Concerns of Implementing a Global Program
*out of 266 respondents total
How Companies Measure the Quality of Ethics/Compliance Programs
How Companies Benchmark with Other Programs
*out of 266 respondents total
Companies Have Diverse Modes of Communicating Ethics and Compliance Initiatives
All respondents confirmed they had a code of conduct and most had helplines and communications from senior management. Fewer had focus groups or pilot testing for their programs or had competitions/rewards programs.
Communicating Initiatives to Outside Stakeholders Still Low
Almost 70% of respondents said they formally communicated ethics initiatives or had training for domestic and international vendors, while less than 50% said they did this for domestic and international consultants. Only around 20% of companies communicated ethics initiatives to domestic and international consumers.
More Companies Adapting Codes of Conduct
More than half (59%) of respondents noted their code has been translated, adapted, and/or modified for international affiliates. Thirty-one percent of respondents described their code as a single code of conduct that is distributed, unmodified, to all employees. However, more organizations are modifying international code(s) to incorporate cultural differences, local laws, and local policies, compared to 2005.
Training Becoming Increasingly Electronic
The 2007 survey results showed an increase in training across the company (both senior and lower level employees). More than half of respondents confirmed they are delivering less face-to-face training and more e-training. When asked how international employees were involved, the two most common activities were: responding to a solicitation for comments and/or participating in pilot testing of the training program. A quarter of the respondents reported international employees were not involved in the development of international training materials.
Many respondents believed international training was worth the investment - 60% said it was “very much worth the investment.”
Local Representatives More Involved in Investigations
Over 80% of local ethics/compliance representatives work in their organizations’ legal department. Typical functional backgrounds for other local representatives include: human resources (65%), auditing and finance (64%), or country managers/head of a business unit (38%).
Compared to 2005 responses, 2007 results show that local representatives are more involved in investigating incidents and implementing disciplinary actions. They are less involved in reviewing audit results.
Views Differ on Why International Employees Report Less Frequently
When asked why misconduct may be underreported among international employees, 64% identified “cultural difference regarding what is considered misconduct” as a “definite” or “likely” cause of underreporting. Another likely cause that respondents reported was because international employees “don’t trust that the report will be kept confidential;” they “don’t believe employees would be held accountable for their actions;” and they “don’t know whom to contact.”
Most Companies Have Formally Reviewed Their Helpline
When asked to describe the usage of e-mail reporting processes by international employees, 31% described it as “limited or nonexistent.” When asked to describe helpline usage by international employees, 42% described it as “limited or nonexistent.”
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Newly-revised, U.S. federal regulation, which would require companies that hold contracts with the U.S. government to establish and maintain ethics programs and training for company employees, is expected to take effect later this year, according to Integrity Interactive Corporation, a consulting firm on compliance and risk assessment.
Amidst the growing number of investigations probing corruption involving U.S. contractors and the public sector, both within the United States and abroad (for example, see EthicsWorld coverage of public procurement), the U.S. government appears to be taking the issue of sound corporate governance more seriously.
The Federal Acquisition Regulation (FAR) was proposed in February 2007 and was followed by a comment period, which ended in May. The aim of the regulation is to streamline the policies already in place at the Departments of Defense, Veterans Affairs, and the Environmental Protection Agency which concern a contractor code of ethics and business conduct. The proposal also adds that the new rule should cooperate with the Department of Homeland Security in regards to contracts funded with disaster assistance funds.
When adopted, the new rule will apply to those companies who hold at least one contract with the U.S. government over $5 million in value. According to an article in Ethisphere Magazine, the new rule will require companies to:
The proposal outlines a very specific description of the internal control system. It outlines a control system that:
In instances of non-compliance, Ethisphere reports that the government can withhold contracting fees for the contracting period and cancel awards fees.
Integrity Interactive Corporation says “Well-founded and effective compliance programs will become ‘table stakes’ for winning federal contracts, keeping them, and actually getting paid.” It believes the new regulation will significantly change the bidding process and will have implications for thousands of companies - both public and private, foreign and domestic.
Companies will have to demonstrate that their ethics and compliance programs are legitimate. Integrity Interactive says federal contractors must prove “their compliance training programs and controls are adequately funded (in relation to the company’s overall size and procurement revenue), and actually effective in detecting and correcting compliance breaches.”
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Reprinted with permission of the authors and the Association of Corporate Counsel: Alexandra Wrage and Matthew Vega, "Small Bribes Buy Big Problems" ACC Docket 25, no. 7 (September 2007): 102-112.
Copyright © 2007, Alexandra Wrage, Matthew Vega, and the Association of Corporate Counsel.
Facilitating payments are not allowed under the FCPA and the OECD Convention. Wrage and Vega say the legal distinction between a bribe and a facilitating payment under the FCPA “is supposed to be whether the benefit bestowed was within the official’s discretion to grant or whether it was due to the payer as a matter of course.” The problem comes when companies have to explain to their employees that paying large bribes are prohibited, but small bribes are to be used at their discretion. This mixed message is really a slippery slope that can get companies into a lot of trouble. Wrage and Vega lay out many additional risks to those companies that still allow facilitating payments.
Companies risk the loss of the local community’s confidence, since a company that is viewed to buy its way though the business process is usually viewed negatively. Not only is there a “moral” risk, but bribing a government official is always illegal in at least one country. The legal landscape in each country is often complicated, giving companies more complications when they try to comply with international regulations. Companies interviewed at TRACE expressed concern that small bribes lead to costly legal complications.
Bad Business Practice
Facilitating payments also cause accounting problems, as accountants must choose between altering company records to conceal the payment, breaking US law, or recording the payment knowing it violated a local law. Despite bad legal practice, Wrage and Vega argue facilitating payments are simply bad for business. Companies at TRACE said “they amount to a hidden tax on business, they tend to proliferate, they buy an uncertain, unenforceable advantage and—the most common complaint—they are simply irritating.” Rather than making business run more smoothly and efficiently, as some business people have argued, World Bank researchers have actually found the opposite to be true. The World Bank reported “firms that pay more bribes are also likely to spend more, not less, management time with bureaucrats negotiating regulations and face higher, not lower, cost of capital.
Adopting a Better Business Policy
Wrage and Vega suggest the following steps to adopt a successful business policy that prohibits facilitating payments:
Decide and commit to…
Faulting leading U.S. companies (S&P 100 companies) for weak regulation of their political spending, a Center for Political Accountability report urges the adoption of a strong model code of conduct to protect companies and their shareholders.
The report, entitled Open Windows: How Company Codes of Conduct Regulate Political Spending and a Model Code to Protect Company Interests and Shareholder Value, found that the codes of conduct of most S&P 100 companies handled political spending in “a weak and cursory manner.” According to the study, none of the companies surveyed included comprehensive policies in their codes to ensure broad political transparency and accountability and ethical political behavior.
Based on an extensive survey of companies, the new report includes an 11-point model code to provide guidance to companies.
Corporate political spending exposes companies and shareholders to serious risks that are increasing as companies come under heightened pressure to contribute and as trade associations play a larger political role,” the report warned. “Corporate codes of conduct provide an opportunity to develop political spending policies that establish transparency and accountability that can help mitigate these risks.” Click here to read the full report.
CPA recommends that political contributions only be made through the company PAC, which should be restricted to receiving funds only from voluntary personal contributions. However, if the company chooses to give with corporate funds, the Center has developed the following model as a guide to help protect the company’s interests and shareholder value. In creating this model, the CPA has taken into consideration existing legal standards and has incorporated provisions from current company codes.
1 Political spending shall reflect the company’s interests and not those of its individual officers or directors.
2 The company will disclose publicly all expenditures of corporate funds on political activities. The disclosure will include regular reports on the company’s website.
3 The company will disclose dues and other payments made to trade associations and other tax-exempt organizations that are or that it anticipates will be used for political expenditures. The disclosures shall describe the political activities undertaken. In the case of trade association payments, the disclosures will involve some element of pro-rating of the company’s payments that are or will be used for political purposes.
4 Company disclosure of political expenditures shall include direct and indirect political contributions (including in-kind contributions) to candidates, political parties or political organizations; independent expenditures; electioneering communications on behalf of a federal, state or local candidate; and the use of company time and resources for political activity.
5 The board of directors or a committee of the board shall monitor the company’s political spending, receive regular reports from corporate officers responsible for the spending, supervise policies and procedures regulating the spending, and review the purpose and benefits of the expenditures.
6 All corporate political expenditures must receive prior written approval from the General Counsel or Legal Department, and the company shall identify all senior management officials responsible for approving corporate political expenditures.
7 In general, the company will follow a preferred policy of making its political expenditures directly rather than through third party groups. In the event that the company is unable to exercise direct control, the company will monitor the use of its dues or payments to other organizations for political purposes to assure consistency with the company’s stated policies, practices, values and long-term interests.
8 No contribution will be given in anticipation of, in recognition of, or in return for an official act.
9 Employees will not be reimbursed directly or through compensation increases for personal political contributions or expenses.
10 The company will not pressure or coerce employees to make any personal political expenditures or take any retaliatory action against employees who do not.
11 The company shall report annually on its website on its adherence to its code for corporate political spending.
Highlighting a key Blog (view it here.)
James Kroeker, the SEC's Deputy Chief Accountant, recently spoke on the topic of principles-based accounting.
He noted that principles-based accounting sounds odd in view of the fact that accountants in the U.S. are governed by Generally Accepted Accounting Principles -- not Rules. Although GAAP includes the word "Principles," it is very much a rules-based approach to accounting.
The Sarbanes-Oxley Act (section 108(d)) required the SEC to study adoption of a principles-based accounting system. The SEC staff coined the phrase "objectives-oriented" to distinguish GAAP from pure rules-based or principles-based standards. The use of the terminology focuses on the fact that bright-line tests must be used in some areas, while subjective judgment may be called for in other areas.
In the international arena, comparability will be difficult to achieve even where a rules-based approach is used. Kroeker notes that transactions will be structured in a very deliberate manner to fall on one side of the line to achieve a desired accounting treatment. Objectives-based standards, on the other hand, can be written to get at the economic substance of transactions. A focus on substance rather than legal form, will better educate investors regarding the company's transactions.
The task faced by the FASB and IASB to draft guidance that gets to economic substance of transactions will be difficult. In particular, where the guidance requires the application of professional judgement, comparability may be lost. I am skeptical about whether guidance can be drafted that will achieve the objectives of comparability and accounting treatment based on economic substance.
posted by Allison Garrett at Faulkner University on April 17, 2007.
As China's role in the global economy becomes more and more imporant, so too do its corporate governance structures, how they are regulated and where their weaknesses lie. In his paper, "The Trends of Transparency, Laws and Regulations on Chinese Corporate Governance," co-author Professor Chi Guotai of Dalian University provides an overview of the corporate governance system in China, recent trends, and where reforms are needed. The paper is divided into three sections, the third (which is posted below) explains the factors influencing and reasoning behind China's governance structure, the effects state owned enterprises have on corporate governance, and the main problems with current system.
To download the full paper, including endnotes and the first two sections which cover the general structure and development of Chinese corporate governance please follow this link.
Trends in Chinese Corporate Governance
by Chi Guotai, Yang Zhongyuan, Zhao Guangjun, Li Gang
Motivations for Changes in China-Based Corporate Governance
In China, corporate governance is structured for solving the inherent two basic problems within the firm. The first is the incentive problem, namely, how to motivate all participants of the firm to contribute to the firm's output, given that output is a collective outcome and individual contribution is hard to measure. The second is the management selection problem; which means, what kind of mechanism can ensure that only the most entrepreneurial people are employed to fill in the management position. Based on the benefit mechanism, what the reform of corporate governance has to reply is that, which type of enterprise system is most advantageous in guaranteeing investors to obtain the reasonable investment repayment” and protect their property in the listed companies. Or specifically, how to guarantee the exterior investor's legitimate rights and interests not to be infracted by the insider (Managers and the big stockholders who control the stockholder's rights).
The Effects of China State-Owned Enterprise Reform
Chinese state enterprise reform has been relatively successful in solving the short-term managerial incentive problem through both its formal, explicit incentive system and its informal, implicit incentive system. However, it still failed to solve the long-term managerial incentive problem and the management selection problem. An incumbent manager may have incentives to make short term profits, but at present there is no mechanism to ensure that only qualified people can be selected for management. The fundamental reason is that managers of SOEs are still selected by bureaucrats rather than capitalists. Since the bureaucrats have the authority to select managers but do not need bear the consequences for their selection, they do not have proper 6 incentives to find and appoint high ability people. Since good performance does not guarantee that the incumbent manager will stay long, and the manager does not have long-term incentive. To ensure that only high ability people will be professional managers, authority of selecting management should transferred from bureaucrats to capitalists. This calls for privatization of the state-owned enterprises.
The state-owned enterprise (SOE)’s reform has been quite successful in terms of improvement in total factor productivity (TFP). According to many studies, the annual increase of TFP has been 24% since 1979, much higher than in the pre-reform period. However, the reform has not been successful, at least in terms of profitability of SOEs. It is widely reported (and most people believe) that one third of SOEs make explicit losses, another one third make implicit losses, while only one third are slightly profitable.
Main Problems of Corporate Governance in China
- Stock structure is not reasonable, non-circulative stockholders take the holding position. The majority of these listed companies in China evolved from State-owned/ State-controlled enterprises. Due to restrictions in market capacity when offering shares to the public, the portion of shares available to the open market is relatively low. After the offering, more than half of the available shares are held by the promoters. This has enabled “control” of the company to remain with the promoters who are State-owned shareholders or State-controlled shareholders. Now, among all the Chinese listed companies, about 65% hold the state as their No.1 stockholder, which take over 40% stock share of each company, once the subsidiary successfully lists IPO, the parent company would take the listed company as money drawing machine. It will harm the assets of the listed company. This should kill listed companies, and violate the rights and interests of the middle and small stockholders.
- The percent of negotiable securities is relatively low. As discussed above, the promoters hold the majority stake. Based on existing regulations, State-owned shares and legal entity shares held by the promoters are not traded in the open market. As such, more than half of the shares are non-negotiable securities. In addition, for listed companies that went public in the earlier days, shares held by the public cannot be traded in the open market until three years after the company has been listed. This reduced the amount of negotiable securities.
- The number of individual shareholders is relatively high. The Chinese securities market is primarily made up of individual investors and institutional investors. These individual investors are segmented, segregated and the shareholding ratios are relatively low. In addition, other factors including geography, time-zone, etc., will further restrict individual investors’ participation in the management and significant-decision-making process in listed companies.
- The difference of company stock structure. Between the parent corporation and the subsidiary corporations, black-box transactions happen frequently. These hurt both listed corporations and the public investors. And the directors and managers of the corporations mainly come from the controlling shareholders’ companies or units. There is no effective managers’ market among Chinese listed corporations. Company manager capacity and experience is not their main employment factors.
- The regulation system is invalid. The board of directors and the general managers of the state proprietary stock companies are appointed by the State Department. Chairman of the board of director is often general manager at the same time. The function of decision making of the board of director could not separate from the executing function of the management. This directly results in the invalidation of the control system.
The European Commission has launched the second phase of its company law and corporate governance action plan by asking European stakeholders what needs to be done next. In a December 20, 2005 report in Accountancy Age, writer Paul Grant noted that the consultation, which runs until the end of March next year, intends to evaluate the overall aim and context of future priorities, the continued relevance of medium and long term measures and the value of modernizing and simplifying EU company law.The article quoted European Union Internal Market Commissioner Charlie McCreevy as saying: “The first implementation phase of the Action Plan has been a real success. Since May 2003, nearly all measures scheduled for implementation in the short term have been adopted or are in the process of adoption. But today's context is different from the one in which the action plan was adopted, and we need to make sure that it still provides the most efficient response to market needs. That is why we have launched this consultation. Expert input will be important in preparing the strategy for EU company law and corporate governance in the coming years. Our future action must ensure that EU businesses are properly run and competitive.'