The new Corporate Governance Code for Finnish listed companies (“2020 CG Code”) entered into force this January, and it will replace the previous CG Code applied since 2016 (“2015 CG Code”). While the number of recommendations in the 2020 CG Code has decreased, the 2020 CG Code introduces additional requirements on listed companies, in particular in relation to remuneration and related party transactions as required by the Shareholders’ Rights Directive and the national rules implementing the Directive.
The 2020 CG Code also introduces changes to the recommendation concerning the audit committee and clarifications to the recommendation concerning the assessment and disclosure of independence of board members.
In this legal alert, we provide a summary of the key changes and new recommendations. Some of the changes require actions from listed companies this spring, while others will be introduced over time.
Early steps behind the new Code
In 2018, the Finnish Securities Market Association’s board appointed a working group to update the CG Code to reflect the new regulations and the update needs to the 2015 CG Code development targets that had been identified over the years. Furthermore, the Shareholders’ Rights Directive was implemented into Finnish company law in 2019 it created a need to amend and update the recommendations provided in the 2015 CG Code.
The Finnish Securities Market Association’s board adopted the amended and updated CG Code in September 2019. As a result of which the new 2020 CG Code came into force in January 2020 replacing the previous Finnish CG Code.
Which companies must comply with the CG Code?
The Finnish CG Code is applicable to all companies that are listed on Nasdaq Helsinki Ltd (Helsinki Stock Exchange). According to the Rules of the Helsinki Stock Exchange, all issuers of shares that are traded on the official list must comply with the CG Code.
However, issuers of securities other than shares, as well as companies whose shares are listed, for example, on the Nasdaq First North Growth Market Finland (First North) marketplace, are not obliged to comply with the CG Code. Pursuant to the Securities Market Act, issuers of other securities traded on a regulated market, such as issuers of bonds, must include a CG statement in the management report or in a separate report. These and the companies traded on the First North marketplace may, of course, voluntarily apply the CG Code, either in full or partly.
The ‘Comply or Explain’ Principle
The ‘comply or explain’ principle applies to the CG Code. Thus, the starting point is that the company must comply with all recommendations set out in the CG Code.
The company may, however, depart from the specific recommendations, provided that it has good reasons for doing so. In these cases, the company must, in accordance with the ‘comply or explain’ principle, report which recommendations it is departing from and why, as well as how the decision to depart from the recommendations was made.
In other words, the company is deemed to comply with the CG Code even if it departs from individual recommendations, provided that the departures are reported and explained.
The company must provide information about its compliance with the CG Code and any departures from it, including reasons for them, on its website and in its annual CG Statement.
It should be noted, however, that as opposed to the recommendations of the CG Code, the requirements presented in the reporting section cannot be derogated from based on the ‘comply or explain’ principle.
Key changes to the 2015 CG Code
The key changes to the 2015 CG Code concern remuneration reporting and changes to the recommendations concerning related party transactions and the recommendation concerning the audit committee.
Remuneration reporting – remuneration policy and report for governing bodies
The structure of the remuneration section has been revised to correspond to the requirements of the Second Shareholder Rights Directive. For example, the company’s remuneration statement has been replaced by the remuneration policy for governing bodies (“remuneration policy”) and remuneration report for governing bodies (“remuneration report”), which are supplemented by information provided on the company’s website.
The “governing bodies” referred to in the CG Code refer to the governing bodies of the company regulated in the Finnish Limited Liability Companies Act, i.e. the company’s board of directors, supervisory board, if any, and the managing director and deputy managing director.
For this reason, the remuneration policy and report only concern the company’s board of directors, supervisory board, if any, and the managing director and deputy managing director. It is not recommended that the management team’s remuneration will be addressed in the remuneration policy or remuneration report.
However, Information on the remuneration of the rest of the management team will in future be provided on the company’s website (on an aggregate level). The remuneration reporting section of the CG Code also includes a checklist to clarify the reporting obligations.
By law, listed companies must present the new remuneration policy to the annual general meeting held after 1 January 2020, i.e. companies listed on the Helsinki Stock Exchange will need to prepare and present their first remuneration policy to the annual general meeting of 2020 and publish the proposal for a remuneration policy earlier in 2020 (see below).
Depending on the content of the charter, preparing the remuneration policy and report can be included in the duties of the boards’ remuneration committee (if such has been established).
Deadline for publishing the remuneration policy
It should be noted that although the 2020 CG Code came into force in January 2020, it is not mandatory for listed companies to disclose the remuneration policy from that date. The applicable remuneration policy shall be kept available on the company’s website once published (as part of the summons to the annual general meeting or separately) and addressed by the annual general meeting.
According to the 2020 CG Code the remuneration policy to be proposed to the annual general meeting must be published as an appendix to a stock exchange release no later than three (3) weeks prior to the general meeting dealing with the report, or at an earlier date, e.g. in connection with the publication of the summons to the general meeting.
Following the first annual general meeting following 1 January 2020 and the decision on the remuneration policy, the remuneration policy proposal will be presented to the annual general meeting every four years, or whenever material changes are proposed to it.
Companies must disclose the first new remuneration report for the financial year beginning on or after 1 January 2020, i.e. in practice the first report will be disclosed in 2021, no later than three weeks prior to the general meeting. The remuneration reports for the financial years preceding 1 January 2020 can elect to comply with the instructions for the remuneration statement contained in the 2015 CG Code.
A new element in the remuneration report is the requirement that the report should reflect the development of the remuneration during the past five financial years compared to the development of the average remuneration of the employees and the economic development of the group and the company during the same period.
The new remuneration report may, going forward, be published as an appendix to a stock exchange release at the same time and manner as the financial statements, management report and CG report. The current CG Code allows the remuneration report to be incorporated as part of the CG report.
Advisory decision by the general meeting on the remuneration policy and remuneration report
Under the amended Limited Liability Companies Act, the rules implementing the Shareholders’ Rights Directive, the decision by the general meeting concerning the remuneration policy and remuneration report is only advisory in nature. Consequently, shareholders are not allowed to propose changes to the policy or report presented by the board to the general meeting or introduce any alternative policy or report proposals, only to adopt or reject the board’s proposals.
However, as the CG Code and Limited Lability Companies Act’s provisions require that the general meeting will address the remuneration policy and report, the agenda of the annual general meeting should be updated to include the disclosure and advisory vote on the remuneration policy.
According to the preparatory works of the amended Limited Liability Companies Act’s provisions implementing the Shareholders’ Rights Directive, the company must take into consideration the decision by the general meeting on the previous remuneration policy as well as positions presented during the general meeting in respect of the remuneration report addressed at the general meeting. Consequently, material positions taken by shareholders should be recorded in the minutes to fulfil this requirement (when supported by a significant minority shareholder or if it gains wide support at the general meeting).
Proposal to elect board members and evaluation of the candidates’ independence (Recommendations 1 and 10)
The board of directors should evaluate the independence of the directors and report which of the directors are independent of the company and which are independent of the significant shareholders. The board of directors will re-evaluate the situation every year, and the evaluation will be included in the company’s CG statement.
As a new element, the evaluation must also indicate the rationale based on which a board member is found not to be independent (e.g. cross-ownership or familial relationship). An updated evaluation will be published on the company’s website if factors affecting the director’s independence change during the year.
If the proposal was made by a shareholder, the proposing shareholder’s assessment of independence must be provided to the company together with the proposal.
The board of directors can also carry out its evaluation on its own initiative, for example, if a proposal concerning a board member has been received from a shareholder.
The biographical details of all candidates must be presented on the company’s website. The publication of the candidates’ biographical details on the company’s website allows the shareholders to form an opinion on the proposed composition of the board of directors, especially with regard to new director candidates. In the same connection, information about the independence of the candidates must be provided.
Audit committee, Recommendation 16 (and Recommendation 8)
The recommendation concerning the audit committee and the rationale for it have been clarified to comply with existing legislation with respect to the requirement concerning the competence and expertise of members of the audit committee. The recommendation concerning the composition of the board of directors (Recommendation 8) has been updated to reflect that at least one member of the company’s audit committee must have the expertise required by law.
The audit committee must have sufficient expertise and experience to be able to challenge and evaluate the company’s internal accounting function and the company’s internal and external audit function. Due to the mandatory auditing duties, legislation also requires that at least one member of the audit committee must have expertise in accounting or auditing.
In addition, the mandatory duties of the audit committee, such as duties relating to auditing and other duties, have been clarified in the text of the rationale provided in this recommendation.
Other duties of the audit committee may include assessing the use and presentation of alternative key figures, defining principles for monitoring and assessing related party transactions and processing the account of non-financial reporting.
Related party transactions, Recommendation 27
One of the key changes to the Limited Liability Companies Act introduced by the implementation of the Shareholders’ Rights Directive in June 2019 included a special decision-making requirement for related party transactions.
The recommendation and its rationale have been revised in their entirety. In future, the recommendation requires that companies define and report their principles for monitoring and assessing related party transactions. The purpose of the principles is to ensure proper decision making in related party transactions in accordance with the new requirements of the Limited Liability Companies Act.
The board of directors should consider, in particular, how the company identifies related party transactions, who shall be the receiving party for related party transactions reports and how the procedure will be supervised.
A relevant “related party transaction” is defined as a transaction that is carried out outside the ordinary course of the company’s business or that is not carried out on normal business terms. To identify these transactions, the company must be able to identify its related parties and the transactions carried out by the company with the related parties.
The main features of the related party transactions principles will be disclosed in the company’s CG report. As a result of that, companies listed on the Helsinki Stock Exchange should without delay review and, if needed, update their related party transactions principles to enable them to fulfil the CG reporting requirements.
It should be noted that the CG report published by a listed company concerning the financial year 2019 must comply with the 2020 CG Code, i.e. there is no possibility to apply the 2015 Code to the CG report (unlike the remuneration report for the financial period 2019, which can be prepared in accordance with the 2015 CG Code).
Key amendments to the CG report under the 2020 CG Code
In addition to the disclosure requirement concerning the related party transactions policy, the CG report will include the corresponding information on the deputy managing director as on the managing director. The term ‘other executives’ has been replaced by the term ’rest of the management team’. In addition, the recommendation concerning board members’ independence and disclosure of the basis of the assessment may have an impact on the content of the CG report.
Management team, Recommendation 21
Recommendation 21, which concerned other executives, has been removed and replaced with instructions concerning the rest of the management team as part of the reporting section.
The term ‘other executives’ is no longer used in the CG Code in general, and has been replaced by the more accurate ‘rest of the management team’, which refers to the company’s management team with the exclusion of the managing director. Information on the remuneration of the rest of the management team is no longer part of the remuneration report, but it is provided on the company’s website.
Repealed recommendations and certain other changes
Recommendations 21 (Organisation of Other Executives) and 24 (Structure of Remuneration) of the 2015 Code have been removed.
The contents of these recommendations have, in practice, been transferred to the section dealing with remuneration reporting. In addition, the numbering of two recommendations has been changed: the recommendation concerning the nomination committee is numbered 18 (18a), and the recommendation concerning the shareholders’ nomination board is numbered 19 (18b).
The 2020 CG Code does not represent a complete overhaul of the previously applied recommendations. The new and amended recommendations do, however, introduce some new elements for listed companies, in particular as it relates to the content and role of the company’s remuneration policy as well as the mandatory policy concerning related party transactions. Listed companies will need to take actions to ensure compliance with the new recommendations and reporting requirements under the 2020 CG Code.
It is expected that market practise concerning remuneration and the elements thereof as well as the policies concerning related party transactions will develop starting from spring 2020. Currently the legislation and recommendations leave some room for companies to develop their own best practises.
Borenius’ lawyers are available to assist in addressing any questions you may have regarding these new recommendation.