Revised Corporate Governance Code
New act on personnel funds

Two major changes have recently been introduced to the reward systems of Finnish companies - the revised Corporate Governance Code entered into force on October 1 2010 and a new act on personnel funds will come into effect at the beginning of 2011.

Revised Corporate Governance Code

The Corporate Governance Code was published by the Securities Market Association for companies listed on the Nasdaq OMX Helsinki stock exchange. The principal changes introduced in the revised code result from the recommendation on directors' remuneration issued by the European Commission in April 2009, which has been adapted to Finnish circumstances. These changes, which became effective on October 1 2010, place an increased emphasis on the transparency of reward systems, as well as on the need to link rewarding to the long-term financial success of the company.

Increased transparency in rewarding
In order to increase transparency, a new recommendation states that companies must publish a statement regarding rewarding on their websites. This statement should provide an unambiguous and up-to-date description of remuneration within the company. Specific details - for example, financial benefits paid to the board and managing director as well as the main principles and decision-making process for remuneration - must be disclosed in a coherent manner. The aim is to enable investors to monitor better the remuneration practices of companies.

New recommendations on rewarding criteria
A new recommendation requires that remuneration schemes be based on predetermined and measurable performance and result criteria. The non-variable and variable components must be proportionate to each other. It may also be appropriate to set limits for the variable components of remuneration. Furthermore, long-term remuneration schemes may include a restriction period whereby the remuneration for the earning period becomes disposable only after the restriction period has ended.

In addition, the company may require that the shares (or part thereof) received as compensation are retained until the end of the board membership or managing directorship. Severance payments to managing directors should be limited to two years of non-variable salary.

'Comply or explain' principle
All recommendations set out in the code are subject to the 'comply or explain' principle. A company must state that it complies with the code or provide a clear and extensive explanation for non-compliance on its website, as well as in its annual corporate governance statement.

New act on personnel funds

Effective from January 1 2011, the new act on personnel funds allows for a wider scope of bonuses to be transferred to a staff fund. 'Staff funds' are defined as funds owned and managed by the personnel of a company, agency or government department. Their purpose is to manage profit bonuses and other assets paid into them by the employer. The fund membership comprises the entire staff, with the exception of senior management.

According to the current act, only such bonus items that are determined by the profitability of the company may be transferred to a staff fund. The companies' bonus schemes are, however, often based on criteria other than profit. Therefore, under the new act, performance-based bonuses may also be transferred to a staff fund.

The new act permits employees to withdraw their maximum annual share of 15% without the current five-year waiting period from the beginning of the membership. The act applies to companies that have at least 10 employees, instead of the previous requirement of 30 employees and, unlike the current act, also applies to the municipality sector.

For further information on this topic please contact Seppo Havia at Dittmar & Indrenius by telephone (+358 9 68 1700), fax (+358 9 65 2406) or email ([email protected]).