Legal Alert – The Securities Market Association Introduces the Updated Finnish Corporate Governance Code
On Wednesday 28 October 2015, the Securities Market Association (the “SMA”) held a launch event to present changes introduced in the updated Finnish Corporate Governance Code (the “2015 Code”). The 2015 Code will enter into force as from 1 January 2016. English and Swedish language versions of the 2015 Code will be published by the SMA during November 2015. The Finnish language version of the 2015 Code and related documentation are available from the SMA’s website (www.cgfinland.fi).
The 2015 Code will enter into force as from 1 January 2016 and will replace the current Corporate Governance Code that was approved by the board of the SMA on 1 October 2010 (the “2010 Code”).
The 2015 Code will apply to all companies listed on the Helsinki Stock Exchange maintained by Nasdaq OMX Helsinki Oy (name change to Nasdaq Helsinki Oy expected to be implemented as from 1 December 2015). Companies listed on e.g. the Helsinki First North marketplace may also elect to apply the code in part or fully.
The main changes introduced by the 2015 Code relate to the layout and structure of the Code. The purpose of the new structure is to clarify the relationship between obligations based on legal regulation, recommendations that may be deviated from, provided the deviation is explained and voluntary policies that can be deviated from without explanation.
As a welcome clarification, the reporting obligations are collated in a separate chapter of the 2015 Code. The reporting chapter is preceded by chapters containing the introductory texts and the recommendations of the 2015 Code. The number of individual recommendations has been reduced to 28, compared to the 54 recommendations included in the 2010 Code.
Companies that apply the 2015 Code will need to report and explain possible deviations from the 2015 Code for the first time in their Corporate Governance Statements (“CG Statements”) concerning financial periods starting 1 January 2016 or later, i.e. in the beginning of 2017.
While the majority of the recommendations of the 2015 Code correspond to the recommendations of the 2010 Code, the 2015 Code introduces four new recommendations.
The new recommendations introduced in the 2015 Code relate to (1) transparency in preparing member nominations to the board of directors and auditors, (2) an obligation for the company to define of diversity principles and (3) a recommendation relating to related party transactions as well as (4) a new recommendation concerning nomination committees established by shareholders.
Companies have to take certain recommendations of the 2015 Code into account already as from 1 January 2016 when, e.g. issuing their summons to the General Meeting, in connection with establishing new committees and electing new board members in connection with the General Meeting held in 2016.
Certain obligations also need to be addressed during 2016 if the company seeks to avoid explaining deviations from the 2015 Code in the CG Statement published 2017:
- Information on the composition and proposed compensation payable to the nominated board members has to be included in summons to the General Meeting. (New recommendation)
- The Company must, before the end of the financial period, publish a deadline date for shareholders to propose matters to be addressed by the General Meeting held in the following financial period. The recommendation will be applied in the financial period ending 2016.
- All board members, board member nominees and auditor(s) shall be present at the General Meeting. I should be noted, however, that companies that deviate from the rule do not need to explain the fact as a deviation from the 2015 Code, provided the matter is addressed at the General Meeting.
- The obligation to maintain minutes and other relevant documentation relating to the General Meetings available on the website of the Company is extended to five years.
- If the board (or part thereof) is appointed in a manner that deviates from the recommendation that the General Meeting appoints the board, the deviation shall be noted in the summons to the General Meeting.
- The company shall publish on its website the process for preparing nominations to the board (e.g. by the board/ by a nomination committee/ by the major shareholders or similar).
- Principles relating to diversity applied in the company shall be defined during 2016 and reported in the Corporate Governance Statement concerning the financial year 2016 (to be published in 2017). It should be noted that the 2015 Code does not prescribe who is responsible for preparing and approving the diversity principles, but as a general recommendation, the body responsible for preparing the nominations would be best placed to prepare and be responsible for the diversity principles of the company. (New recommendation)
- The 2015 Code seeks to clarify and simplify the criteria for assessing the independence of the members of the board of director. It should be noted that the criteria apply already to the independence assessment carried out in relation to the new or re-elected board members elected by the General Meeting held in 2016.
- The company shall ensure newly elected board members shall be presented with sufficient information concerning the company, its operations, finances and business area. It should be noted that the requirement applies already to new board members elected by the General Meeting held in 2016.
- The majority of the members of the audit committee shall be independent from the company, and at least one member shall be independent from the major owners. The 2010 Code required that all committee members are to be independent from the company and hence the update code provides more flexibility in this respect.
- The members of a nomination committee established by the shareholders shall be nominated by the shareholders. (New recommendation)
- The company must assess and monitor transactions with related parties and maintain a register of related parties and explain the decision making process applied in relation to related party transactions that are material and deviate from the normal business of the company or are not on made on market terms. It should be noted that the requirement applies to companies and related party transactions already as from 1 January 2016. (New recommendation)
Companies may as from 1 January 2016 also voluntarily apply the 2015 Code in respect of the Corporate Governance Statement concerning the financial period ending 31 December 2015 and report possible deviations to the 2015 Code in the statement published 2016.
The Corporate Advisory team of Borenius has actively contributed to the preparation of the 2015 Code through suggestions and input in response to the SMA’s requests for comments to various drafts of the chapters of the 2015 Code.
The new recommendations and various amendments to the recommendations of the 2015 Code will require listed companies to review the practices applied in the reporting and annual CG statements as well as the need to consider the impact of the 2015 Code recommendations on the company as from 1 January 2016.
The Corporate Advisory team of Borenius regularly advices listed and unlisted companies in governance related matters and matters relating to the application of the Helsinki Corporate Governance Code.