23/01/2020

New Corporate Governance Code for Listed Companies 2020: Some Observations

After a year of work, the Securities Market Association's new Corporate Governance Code has been completed. The new code entered into force on 1 January 2020. I chaired the committee that prepared the new code. Our primary task was to amend the code to line up with new legislation. We focused particularly on the EU's Second Shareholder Rights Directive and on the national legislative amendments based on it. The largest changes were to the section on remuneration reporting, which was completely rewritten. Of the actual recommendations, the ones concerning related party transactions and the audit committee changed the most.

Over the course of the year, we noted a few times that the directive addresses a problem that we don't really have in Finland. For example, it seems strange that the remuneration policy goes into detail on the fees of the board of directors, when the Finnish practice is that the general meeting resolves on remuneration each year. At worst, the remuneration policy could limit the decision-making power of the shareholders if it describes remuneration in too much detail.

We tried to leave room for common sense and flexibility in the new code. Fortunately we had a wide range of experience in the committee, and we were able to look at things from numerous perspectives. We’ll find out how well we did when new code is tested in real-world situations.

We have received numerous questions relating to the application of the code. I address a few of these questions below.

What Are Governing Bodies?

By law, the remuneration policy and report for governing bodies only concern the governing bodies referred to in the Limited Liability Companies Act, which are the board of directors, possible supervisory board, managing director and possible deputy managing director registered in the Trade Register. As a reminder of this, we put the words ‘governing bodies’ in the titles of the documents, even though it leads to them being quite a mouthful. 

In order to maintain the consistency of market practices, listed companies shouldn't include management team remuneration in either the remuneration policy or report. However, in order to maintain transparency, information on the remuneration of the management team must be published on the company's website along with current information on the remuneration of governing bodies. Otherwise, the current remuneration situation could remain unclear, as the report takes a historical perspective and the policy looks to the future.

When Do the New Remuneration Policy and Report Have to be Published?

The first new remuneration policy has to be presented to shareholders in the general meeting held during the spring of 2020. The first remuneration report then has to be published a year later during the spring of 2021. The report assesses how the remuneration policy has been applied in the company. Companies that want to get a head start are free to draft the remuneration report for 2019 according to the new rules.

Listed companies are already hard at work preparing new remuneration documentation. One question that has come up is whether the new remuneration policy has to be ready as soon as the code enters into force at the start of January. The answer is no. The remuneration policy is presented to the general meeting, which issues an advisory resolution on whether it supports the policy. Before this, the company must publish is proposal to the general meeting for a remuneration policy. The valid remuneration policy must be available to the public on the company's website, and the website must also state whether the general meeting has voted on the policy.  

During the reform and circulation for comments of the code, we discussed whether the policy should be ready to publish already in connection with the notice convening the general meeting or whether it is sufficient to publish it three weeks prior to the general meeting. Based on substantial feedback, we chose the latter alternative in order to leave enough time for drafting the policy.

We did not consider a situation in which the board of directors would approve the remuneration policy before deciding to convene the general meeting. I don’t imagine that this situation came up when the legislation was being drafted, either, as the provisions clearly point to the general meeting. The point of confusion here is that the general meeting only has an advisory role, which means that the board’s resolution is decisive with respect to approval. Even if the general meeting does not support the remuneration policy presented to it, the company continues to apply the policy. A new, amended policy is then presented to the shareholders no later than in the annual general meeting of the following year.

However, my interpretation of the legislation is that the policy does not have to be ready yet on 1 January 2020. The most clear and sensible approach would be for the board to approve and publish the remuneration policy at the same time as the notice convening the general meeting. After being discussed by the general meeting, the policy is also published on the company's website.

Why Does the Code Have Related Party Instructions?

The board of directors has to decide on related party transactions that are not part of the company's ordinary course of business or are not implemented under arms-length terms. Related party transactions are rare, but companies still need to be familiar with the processes related to them. The board won’t be able to fulfil its obligation unless it knows 1) who the company’s related parties are and 2) what business dealings the company has with them.

Companies have to compile information on their related parties in order to be able to identify related party transactions. Related parties are defined in the IAS 24 standard, which unfortunately is quite complex. It is worth collecting or reviewing this information at regular intervals and also to request that related parties notify your company of any changes themselves.

In order to fulfil its obligations, the board of directors must establish principles for monitoring and assessing related party transactions. The board must particularly consider how the company identifies related party transactions, who they are reported to and who supervises the procedure. When drafting these principles, the board needs to take a thorough look at how the company’s processes work.

Establishing these principles may feel like an extra burden, but defining and identifying related parties really shouldn’t be anything new, as related party transactions already have to be reported in IFRS financial statements. It is worth taking this opportunity to check that your companies processes work.

The Securities Market Association published a Q&A on its website in the near future, which provide answers to the most common questions. For now they are available only in Finnish. We are also eager to get more feedback on the new corporate governance code. Please contact Pauliina Tenhunen, pauliina.tenhunen@castren.fi.