New standards for the quality of corporate governance reporting
Under Austrian law all stock corporations whose shares are admitted for trading on a regulated market (as defined in the Austrian Stock Exchange Act) must prepare and publish a Corporate Governance Report. This requirement applies even if the company has not committed itself to the Austrian Corporate Governance Code (the 'Code'). For companies which have committed themselves to the Code, however, the following new developments are important:
In March 2014, the Austrian Financial Reporting and Auditing Committee (AFRAC) published a new recommendation with detailed guidelines on the structure and content of a Corporate Governance Report for Austrian companies. Recently, the Austrian Working Group on Corporate Governance has adopted a revision of the Code to implement AFRAC's recommendations. The new provisions of the Code will be applicable to business years starting after 31 December 2014. While neither AFRAC's recommendations nor the new provisions of the Code are legally binding, they can be considered as ‘good practice’ for future corporate governance reporting.
Companies must provide explanations in the Corporate Governance Report if they deviate from the Code’s 'comply or explain' rules (C-Rules). The revised Code contains new guidelines for such explanations. According to these new guidelines, the company should state the C-Rules it has deviated from and for each deviation from an individual rule
- explain in what manner the company has deviated from a C-Rule;
- describe the reasons for the deviation;
- describe how the decision to deviate from the C-Rule was taken within the company;
- where the deviation is limited in time, explain when the company envisages it will comply with a particular C-Rule;
- where applicable, describe the measure taken instead of compliance and explain how that measure achieves the underlying objective of the specific C-Rule or of the Code as a whole, or clarify how it contributes to good corporate governance of the company.
The information referred to above should be sufficiently clear, accurate and comprehensive to enable shareholders, investors and other stakeholders to assess the consequences arising from the deviation from a particular C-Rule. It should also refer to the specific characteristics and situation of the company, such as size, company structure or ownership or any other relevant features. Explanations for deviations should be clearly presented in the Corporate Governance Report in such a way that they are easy to find for shareholders, investors and other stakeholders.
The guidelines for explanations described above will obviously not be binding, but they will likely be considered as ‘good practice’ for future corporate governance reporting.
White Collar Criminal Law becoming increasingly relevant for managers
Increasing scrutiny of management decisions by criminal courts
Responsibilities and fiduciary duties of directors and officers seem to be experiencing rapidly changing ex ante as well as ex post assessment scales. Long established legal certainty is getting diluted, potential criminal liability of officers and directors is increasingly becoming a point to watch in day-to-day management decision making.
Recent jurisprudence – namely BAWAG, Styrian Spirit, Libro and Hypo Steiermark – have put management decision making under increased scrutiny and put the spotlight on the criminal liability of directors and officers with respect to management decisions. The public eye and the media have also played their part in contributing to an increase in criminal proceedings judging managerial behaviour.
In January 2014, the Austrian Supreme Court (OGH) confirmed a sentence holding the former management of Libro criminally liable for a breach of fiduciary duties (Untreue) for paying a special dividend to Libro’s (single) shareholder.
In another case (Hypo Steiermark), the management of an Austrian limited liability company was held criminally liable for entering into leasing agreements without sufficient information on the matter and without performing prior due diligence on it.
In the Styrian Spirit case the management was held liable and has been criminally convicted for granting a loan to a company regardless of its credit worthiness and its lack of strategic perspective.
The underlying basis of all these cases is a breach of fiduciary duties by the management according to the Austrian Criminal Code and its interaction with corporate law when it comes to decision making and exercising managerial discretion. Criminal liability has been put in the spotlight of management decision making.
Managerial discretion and fiduciary duties
Although neither the Austrian Commercial Code nor other provisions of Austrian law define managerial discretion, the business judgment rule applied by Austrian courts defines practical boundaries of managerial freedom. Generally, managerial decisions shall not be second guessed in courts as long as principals of fiduciary duties are not breached and the decisions were made with a prudent risk/return assumption and in the best interest of the company.
What to do in the future?
While sound business judgment and applying a prudent risk/return assessment is likely to remain outside the focus of the prosecutors' attention, neglecting fiduciary duties will not. In light of these recent criminal cases, establishing and adhering to clear and transparent internal governance and compliance mechanisms is becoming of vital importance for securing compliance with fiduciary duties and avoiding the risk of criminal liability. The purpose is not to limit the managerial freedom when making business decisions, but to minimize the risk of a breach of fiduciary duties, as criminal liability does not arise from negative business decisions, but from breaching fiduciary duties.