The main governance principles set out in the current Corporate Governance Code will remain largely unchanged, but the new Code contains some changes to the wording, structure and specifications of individual recommendations. The new Code also introduces a few new recommendations (4, 7, 9, 18b, 28 and a separate reporting section).
Due to the amendments in the structure of the new Code, the number of recommendations has decreased from 54 to 28. While the recommendations are directed at companies complying with the Corporate Governance Code, a new general introductory chapter has been added to the Code to address different actors to the market as well.
The Securities Market Association has published a briefing setting out the timetable of each individual recommendation's entry into force. According to unofficial discussions, these shall be understood as authoritative guidelines regarding the implementation timetable. Entry into force is discussed at the end of this briefing note.
The Key Amendments to the Corporate Governance Code are as Follows:
Any Notice of the General Meeting (recommendation 1) dated after 1 January 2016 must include proposals concerning the composition and remuneration of the Board of Directors, plus a proposal for the election of auditors. Information must also be included on the possible specific procedures, if any, regarding appointment of the directors pursuant to Chapter 6, Section 9 of the Finnish Companies Act.
According to recommendation 2, the company must disclose on its website the date by which a shareholder must notify the company's Board of Directors that the shareholder demands that a matter be added to the agenda of the annual General Meeting. The recommendation has been amended to state that the date must be published no later than by the end of the financial period preceding the General Meeting. Such date may not be earlier than four weeks before the notice of the General Meeting is issued.
Recommendation 3 states that the attendance of all members of the Board of Directors, prospective directors, and the Managing Director is required at any General Meeting taking place after 1 January 2016. In addition, the auditor must be present at the Annual General Meeting. It is sufficient for the company to inform the General Meeting of any deviations pursuant to this recommendation 3. Thus, non-attendance is not required to be reported as a deviation in the corporate governance statement.
According to recommendation 4, the documents relating to the General Meeting must be kept available on the company's website for at least five years after General Meeting, instead of the current requirement of three months. The explanatory note for the Corporate Governance Code indicates documents disclosed during 2011-2015 should preferably be kept in such archive. However, this is not a binding recommendation.
Preparation of the Proposal for the Composition of the Board of Directors and Transparency
As of 1 January 2016, companies must disclose on their websites the procedure applied in thepreparation of the proposal for the composition of the Board of Directors. The proposal may be prepared, for example, by the Board of Directors, the nomination committee, the shareholders' nomination board, or the major shareholders (recommendation 7).
One option in this respect is the shareholders' nomination board (recommendation 18b), which may be established to prepare the appointment and remuneration of the Board of Directors. The shareholders’ nomination board shall consist of the company’s largest shareholders or persons appointed by the largest shareholders. However, board members may also be appointed to the shareholders’ nomination board.
As a consequence of the new recommendation 9, companies must define principles concerning the diversity of the Board of Directors during 2016. Such principles must be reported in the corporate governance statement issued for the financial year beginning on or after 1 January 2016. The company can decide the extent to which it wishes to disclose the principles concerning diversity. However, the information disclosed shall include at least the objectives relating to both genders being represented in the company’s board of directors, an account of the progress in achieving these objectives, and the means to achieve the objectives.
Evaluation of Independence
The main principles concerning the independence of directors (recommendation 10) will remain the same. However, the criteria have been updated and specified to increase transparency. For example, the duration of board membership as a non-executive director in the overall evaluation of independence of the company has been shortened from 12 years to ten.
Further, the requirements regarding the independence of the members of the audit committee have been relaxed, so that independence from the company is not required from all members. According to recommendation 16, in future it will be sufficient if the majority of the members can demonstrate independence.
Related Party Transactions
According to the new recommendation 28, companies must evaluate and monitor related-party transactions, take conflict of interests into account in the decision-making process, and keep a list of the related parties. Decision-making procedures applied in connection with related-party transactions that are material to the company and not in the ordinary course of business or that contain terms that deviate from market practices must be reported in the corporate government statement.
Instructions on reporting have been completely revised and have been divided into two separate sections:corporate governance reporting and remuneration reporting. Both sections include continuously updated information on the company's website and a report to be issued yearly. Companies must follow the reporting requirements. The aim of the new reporting section is to standardize reporting practices and increase transparency.
Entry Into Force
The new recommendations will enter into force as of 1 January 2016. Annual reporting should be conducted in accordance with the new Corporate Governance Code in the corporate governance statement issued for the financial year beginning on or after 1 January 2016 and published in 2017. The company may apply the new reporting rules fully or partly to the corporate governance statement issued for the financial period ending on 31 December 2015.
The Code offers no express transitional provisions regarding, for example, the information to be kept available on the company's websites. In principle these requirements should be applied as of 1 January 2016. We believe, however, that companies should evaluate each reporting requirement individually and attempt to update the information so that the objectives of the Corporate Governance Code are fulfilled. We understand based on unofficial discussions that compliance with the reporting obligations will not immediately be actively supervised and that companies are expected to update the information within a reasonable timeframe.
The new Corporate Governance Code and further information on the relevant changes are available on the Securities Market Association's website (www.cgfinland.fi).