An extract from The Corporate Governance Review, 11th Edition
Corporate leadershipi Board structure and practices
Listed companies usually take the form of a limited company (NV/SA).4 Companies with other corporate forms can be listed if their shares are freely transferable.
The basic governance structure of an NV/SA is a one-tier model, whereby the board of directors holds all powers except those specifically reserved by law or the articles of association to the general meeting of shareholders. Limitations on the powers of the board of directors set out in the articles of association are not enforceable against third parties and have internal effect only. The board of directors should be composed of at least three members (or two if there are only two shareholders in the company and the articles of association do not provide for a higher number).
The CCA allows the board of directors to delegate daily management of the company, and external representation of the company for daily management matters, to another person, who may also be a director. Limitations on the powers of the daily management matters, either set out in the articles of association or adopted by the board of directors, are not enforceable against third parties and have internal effect only. This person is generally known as the chief executive officer (CEO), managing director or general manager. The board of directors still has authority to make decisions with respect to the delegated powers.
The CCA allows companies to adopt a two-tier governance model if their articles of association provide for this possibility. This model existed under the old Belgian Company Code, whereby the board of directors delegated (some of) its powers to a management committee, except those reserved to it by law and general corporate policy.
Under the new rules, however, the intention is to create a more clearly delineated two-tier system using two newly introduced bodies: the management board and the supervisory board.
The supervisory board is responsible for general corporate policy, overall strategy and supervision of the management board. It holds the same powers as the board of directors under the one-tier model, provided the powers are reserved to it pursuant to the CCA. The supervisory board must have at least three members, who make decisions jointly (i.e., by majority vote). Its members are appointed and dismissed by the general meeting.
The management board exercises all management powers, provided these have not been reserved to the supervisory board in accordance with the CCA. Like the supervisory board, the management board is a collegial body consisting of at least three members. The supervisory board is responsible for appointing and removing the members of the management board.
The aim of the two-tier model is to entrust exclusive powers to the aforementioned bodies through the articles of association and by law. In this regard, membership of both boards is prohibited. The CEO, for instance, cannot be a member of the supervisory board. Very few listed companies have adopted a two-tier governance structure.
The CCA has also introduced the possibility of a having sole director. This means that the company is no longer managed by a board. Instead, all powers are held by a single director, which can be either a natural person or a legal entity. For listed companies, however, only an NV/SA with a board is eligible to serve as a sole director.5
The most common governance structure in listed companies is the one-tier model, whereby the board of directors delegates daily management to the CEO, who is assisted by a number of executive managers (who may or may not be directors), for example, the chief operating officer, the chief financial officer and the chief legal officer. Together, these individuals form the company's executive management. The powers of the executive managers, other than the CEO, to represent the company for the purposes of certain acts, derive from a special authorisation granted by the board of directors or the CEO.
In addition to representation by the CEO (for daily management matters) and other executive managers (within the limits of their specific powers), the company can be represented externally by a majority of its directors acting jointly, or by one or more directors pursuant to a provision to this effect in its articles of association. The company will be bound by any acts performed or obligations incurred by these directors, even if the internal decision was not made by the competent corporate body (unless the counterparty acted in bad faith). Quantitative limitations (e.g., representation for transactions with a value of up to €100,000) on the external representation powers of the CEO or the persons appointed in the articles of association to represent the company are not enforceable against third parties (acting in good faith) and have internal effect only, even if published in the Annexes to the Belgian Official Gazette (Moniteur belge/Belgisch Staatsblad).
In this model, the board of directors still holds all powers to manage the company, but daily management is mostly handled by executive management. The board of directors, in actuality, mainly supervises the management of the company. The 2020 Code indicates that the board of directors is responsible for determining the company's values and strategy, its risk appetite and key policies. The board of directors should ensure that the necessary leadership and human and financial resources are available for the company to meet its objectives. In translating values and strategies into key policies, the board should pay attention to corporate social responsibility, gender diversity and diversity in general. In addition to general corporate policy, the board of directors should, at least, in the context of its supervisory role:
- review the performance of executive management and the realisation of the company's strategy;
- approve the framework of internal control and risk management proposed by the executive management and review the implementation of this framework;
- take all necessary measures to ensure the integrity and timely disclosure of the company's financial statements and other material financial and non-financial information in accordance with applicable law;
- ensure that the company presents an integrated view of its performance in its annual report and that the report contains sufficient information on issues of societal concern and relevant environmental and social indicators;
- ensure that there is a process in place to monitor the company's compliance with laws and other regulations, and the application of internal guidelines relating thereto; and
- approve a code of conduct (or several activity-specific codes of conduct), setting out the expectations for the company's leadership and employees in terms of responsible and ethical behaviour. The board should verify compliance with the code of conduct at least once a year.
The 2020 Code states that the board of directors should reach decisions in close consultation with the CEO regarding the structure of executive management and should determine the powers and duties of the executive managers. A mention to this effect should be included in the terms of reference of both the board and executive management. The board should ensure that executive management is able to perform its responsibilities and duties. In view of the company's values, risk appetite and key policies, executive management should have sufficient latitude to propose and implement corporate strategy. Executive management should, as a minimum:
- be entrusted with the running of the company;
- put internal controls in place (i.e., systems to identify, assess, manage and monitor financial and other risks) without prejudice to the board's supervisory role that are based on a framework approved by the board of directors;
- present to the board complete, timely, reliable and accurate financial statements, in accordance with the applicable accounting standards and company policies;
- prepare the company's required disclosure of the financial statements and other material financial and non-financial information;
- present the board with a balanced and understandable assessment of the company's financial situation;
- provide the board of directors with all information necessary in a timely fashion for the board of directors to carry out its duties; and
- be responsible and accountable to the board for the discharge of its responsibilities.
The 2020 Code states that the board of directors should be composed of both non-executive directors, who do not participate in the company's daily activities, and executive directors, who belong to executive management and thus participate in the company's daily activities. A majority of the board should be made up of non-executive directors, at least three of whom are independent based on the criteria set out in Clause 3.5 of the 2020 Code. Article 7:87 of the CCA defines 'independent' as not having a relationship with the company and not being an 'important' shareholder. The board's composition should ensure that decisions are made in the company's interest and should reflect gender diversity and diversity in general, as well as complementary skills, experience and knowledge. No individual or group of directors should dominate the board's decision-making process, and no individual should wield excessive decision-making powers. In January 2011, the Corporate Governance Committee, which drafted the 2020 Code, issued an additional recommendation stating that, within seven years, at least 30 per cent of board members should be women.
Article 7:86 of the CCA stipulates that at least one-third (rounded to the nearest whole number) of the directors of companies whose securities are listed on a regulated market should be of a different gender than the other members. If the required number of directors of the less-represented gender is not met, the next appointed director should be of that gender. If not, the appointment shall be deemed null and void. The same holds true if an appointment would cause the number of directors of the less-represented gender to drop below the statutory minimum.
For companies whose securities are admitted to trading on a regulated market for the first time, this requirement should be met as from the first day of the sixth financial year following the admission to trading.6
If the required quota is not met, a board that meets the quota should be composed at the next general meeting. Otherwise, any financial or other benefit to which the directors are entitled by virtue of their office will be suspended. These benefits will be reintroduced once the board meets the gender diversity requirement.
The 2020 Code assigns a clear role to the chair of the board of directors. The chair and the CEO should not be the same individual and there should be a clear division between duties that concern the running of the board (chair) and the management of the company's business (CEO). This division of responsibilities should be clearly established, set out in writing and ratified by the board. The chair should cultivate a close relationship with the CEO, providing support and advice while fully respecting the CEO's executive responsibilities. As a guideline, the chair should stimulate effective interaction between the board and executive management. The chair is responsible for leading the board of directors and can be entrusted by the board with specific responsibilities. The chair should take the necessary measures to foster a climate of trust within the board, contribute to open discussion, allow constructive dissent and ensure support for the board's decisions. Once decisions are made, all board members should be supportive of their execution. The chair7 determines the agenda for board meetings, after consultation with the CEO and the company secretary, and ensures that procedures relating to preparations for board meetings, deliberations, the adoption of resolutions and the implementation of decisions are properly followed. The chair (or, as the case may be, the chair and the CEO) is responsible for ensuring that the directors receive accurate, timely and clear information prior to meetings and, where necessary, between meetings. All directors should receive the same information.
The CCA obliges companies8 whose shares are listed on a regulated market to set up a remuneration committee composed of non-executive directors, a majority of whom should be independent.9 The members of the remuneration committee must possess the requisite level of expertise in the area of remuneration policy. The chair of the board of directors or another non-executive director should head the remuneration committee. The remuneration committee should meet at least twice a year and whenever it deems necessary to carry out its duties. The remuneration committee should report regularly to the board of directors on the exercise of its duties. The CEO should attend meetings of the remuneration committee when the committee is discussing the remuneration of executive management. The remuneration committee should submit proposals to the board of directors on the company's remuneration policy and on the individual remuneration of directors and executive managers and, where appropriate, on proposals to be submitted by the board of directors to the general meeting of shareholders (i.e., proposals on the remuneration of directors). The remuneration committee also prepares the remuneration report that forms part of the annual report and provides explanations on this report at the annual general meeting of shareholders.
The 2020 Code provides for practically the same requirements with respect to the remuneration committee. The 2020 Code further specifies, however, that the remuneration committee should have at least three members and should advise the board on the adoption of a remuneration policy. In addition to a remuneration committee, the CCA obliges companies whose securities are listed on a regulated market10 to set up an audit and risk committee composed of non-executive directors. At least one member should be independent,11 and at least one member must possess the requisite level of expertise in the field of accountancy and auditing. The audit and risk committee should report regularly to the board of directors on the exercise of its duties and, in any case, when the board draws up the financial statements, consolidated financial statements and short-form financial statements (intended for publication). The audit and risk committee should:
- monitor the financial reporting process;
- monitor the effectiveness of the company's internal control and risk management systems;
- monitor the internal audit (if any) and its effectiveness;
- monitor the audit of the annual and consolidated financial statements, including the follow-up of any questions and recommendations by the statutory auditor; and
- review and monitor the independence of the statutory auditor, in particular with respect to the provision of additional services to the company.
The statutory auditor should report to the audit and risk committee on key matters arising from the audit of the financial statements, in particular on material deficiencies in internal control of the financial reporting process. The statutory auditor shall confirm to the audit and risk committee annually, in writing, its independence from the company, inform the audit committee annually of any additional services provided to the company, and examine, together with the audit committee, the risks to its independence and the safeguards to be implemented to minimise these risks. The audit committee should make a proposal on the appointment or reappointment of the statutory auditor or external auditor, which should be placed on the agenda of the annual general meeting.
The audit and risk committee meets whenever it deems it necessary to perform its duties properly and at least four times a year. The audit and risk committee reports regularly to the board of directors on the performance of its duties, and in any case when the board of directors prepares the financial statements, the consolidated financial statements and, where appropriate, the short-form financial statements intended for publication.
The 2020 Code provides that the audit and risk committee should review the specific arrangements for raising concerns – in confidence – about possible improprieties in financial reporting or other matters. The audit committee should agree on arrangements whereby staff may inform the chair of the audit committee directly. If deemed necessary, arrangements should be made for the proportionate and independent investigation of these matters and for the appropriate follow-up actions.
The 2020 Code also calls for the establishment of an independent internal audit function with resources and skills adapted to the company's nature, size and complexity. If the company does not have an internal audit function, the need for such a function should be reviewed at least annually.
The 2009 Code introduced a third committee, namely the nomination committee, whose duties may also be exercised by the remuneration committee, in which case it shall be known as the remuneration and nomination committee. The nomination committee should have at least three members, a majority of whom should be independent non-executive directors. The chair of the board of directors or another non-executive director shall chair the nomination committee. The chair cannot preside over meetings of the nomination committee when the committee is discussing the appointment of the chair's successor. The nomination committee should make recommendations to the board with regard to the appointment of directors, the CEO and other executive managers, and should consider proposals made by relevant parties, including management and shareholders. It should meet at least twice a year and review (at least every two to three years) its terms of reference and its own effectiveness, and recommend any necessary changes to the board.
The 2008 financial crisis led to an animated debate on the (at times excessive) remuneration of directors and executive managers of Belgian companies. In an attempt to rein in the remuneration of directors and executive managers, several new provisions were adopted in 2010 and codified in the Belgian Company Code and subsequently the CCA.
As a general rule, the general meeting of shareholders has exclusive power to determine the remuneration of directors. The board of directors, in turn, determines the remuneration of executive management, unless the company's articles of association provide otherwise. In listed companies, the articles of association sometimes provide that the general meeting of shareholders determines the overall remuneration for the board of directors as a whole, while the board itself decides how to distribute this total amount between its members.
The CCA stipulates that the remuneration of individual directors and executive managers shall be determined further to a proposal by the remuneration committee. The remuneration committee should also submit proposals for the company's remuneration policy, which must be explained in the remuneration report that forms part of the board's annual report. The general meeting of shareholders need not approve the remuneration policy per se pursuant to the CCA but does have the power to vote on the remuneration report in which the remuneration policy is described.12 There are no consequences, however, if the general meeting rejects the remuneration report. The remuneration report should also be provided to the works council or, if there is none, the employee representatives on the health and safety committee or, if there is no such committee, the trade union representatives.
If an executive manager receives variable remuneration (i.e., remuneration linked to performance), the criteria used to determine this remuneration should be set out in the contractual or other provisions governing the company's relationship with the manager, and payment can only take place if these criteria have been met within the specified time frame. If this is not the case, the executive's variable remuneration cannot be taken into account to determine his or her severance package.13
If the variable remuneration of an executive manager of a listed company makes up more than one-quarter of his or her annual remuneration, at least 25 per cent of the variable remuneration should be based on previously established and objectively verifiable performance criteria measured over a period of at least two years, and at least another 25 per cent should be based on previously established and objectively verifiable performance criteria measured over a period of at least three years, unless the articles of association provide otherwise or the general meeting of shareholders expressly consents to deviate from this rule.
Unless the articles of association provide otherwise or the general meeting of shareholders expressly agrees, shares granted to a director or executive manager of a listed company shall only vest, and options or other rights to acquire shares shall only be exercisable, by a director or executive manager of a listed company after a holding period of at least three years.14
The general meeting of shareholders should also approve in advance15 any severance package agreed by the company with an executive manager if the severance pay amounts to more than 12 months' remuneration, as well as any variable remuneration granted to an independent or non-executive director.16 If the severance package represents more than 18 months' remuneration, a reasoned opinion from the remuneration committee is also required. Any such contractual provision that has not been approved by the general meeting shall be deemed null and void. The proposal should also be notified to the works council or, if there is none, the employee representatives on the health and safety committee or, if there is no such committee, the union representatives.17
The aforementioned provisions of the CCA are supplemented by the principles and best practices of the 2020 Code with regard to the level and structure of executive remuneration. The board should adopt a remuneration policy based on the advice of the remuneration committee to achieve the following objectives:
- to attract, reward and retain the necessary talent;
- to promote the achievement of strategic objectives in accordance with the company's risk appetite and behavioural norms; and
- to promote sustainable value creation.
The board needs to ensure that the remuneration policy is consistent with the company's overall remuneration framework. The remuneration policy should be in line with and support the company's business strategy, long-term interests and sustainability (and explain how it contributes to these components), and contain the information set out in Article 7:89/1 of the CCA, namely:
- the components of fixed and variable remuneration, including bonuses and other advantages;
- an explanation of how the remuneration and employment conditions of employees have been taken into account;
- clear, comprehensive and variable criteria for the variable remuneration, including financial and non-financial performance criteria, with an explanation of how these criteria support the company's business strategy, long-term interests and sustainability, the methods used to determine whether the performance criteria have been satisfied and information about waiting periods and the right for the company to claim reimbursement;
- the periods during which the company grants shares that form part of the remuneration package and the conditions for the grant of shares, including an explanation of how the grant of shares supports the company's business strategy, long-term interests and sustainability;
- the term of contracts and severance packages;
- the decision-making process to approve, change and implement the remuneration policy, including measures to prevent conflicts of interest; and
- the time of review of, and any changes to, the remuneration policy, an explanation of past significant changes, and how the votes and positions of shareholders have been taken into account, as from the last vote on the policy.
The remuneration policy must be submitted to the general meeting of shareholders for approval. As long as no remuneration policy has been approved, directors and other high-level managers can continue to be paid in accordance with past remuneration practices. Approval of the remuneration policy is also required in the event of a material change, and in any event every four years. The approved remuneration policy should be published on the company's website. Derogations from the remuneration policy are authorised if justified by exceptional circumstances and necessary to safeguard the company's long-term interests and sustainability or required to ensure the survival of the company, provided the derogation is granted in accordance with a procedure laid down in the remuneration policy and only relates to components for which derogations are possible under the remuneration policy.
Further to a special recommendation of the remuneration committee, the severance package can amount to 18 months' fixed and variable remuneration. In any case, the severance package should not take into account variable remuneration or exceed 12 months' fixed remuneration if the departing CEO or executive manager did not meet the agreed performance criteria.18 The 2009 Code added that the prior approval of the general meeting of shareholders is required for schemes that provide for the remuneration of executive managers with shares, options or any other right to acquire shares.
The 2020 Code further provides that the remuneration of non-executive directors should take into account not only their role as ordinary board members but also any specific positions they may hold, such as chair of the board, or chair or member of a board committee, as well as their resulting responsibilities and commitments in terms of time, and that non-executive directors should not be entitled to performance-based remuneration such as bonuses, long-term stock-based incentive schemes, or fringe or pension benefits. The 2020 Code also stipulates that non-executive board members should receive a portion of their remuneration in the form of shares in the company. These should be held until at least one year after the non-executive board member leaves the board and at least three years from the time of award. No stock options should be granted to non-executive board members.
With regard to executive board members, the remuneration policy should describe the various components of their remuneration and determine an appropriate balance between fixed and variable remuneration, and cash and deferred remuneration. The variable remuneration for executive directors should be structured to link reward to overall corporate and individual performance, and to align the interests of the executive with the company's sustainable value-creation objectives. When the company grants short-term variable remuneration to its executive management, this remuneration should be subject to a cap.
Following the financial crisis, executive remuneration plans (such as stock options and incentive schemes) were found to be overly focused on short-term performance. The additional requirements concerning the remuneration policy result from the 2020 Code's broader emphasis on sustainable value creation and long-term growth.ii Directors
The 2020 Code indicates that both executive and non-executive directors, regardless of whether the latter are independent, should exercise independence of judgement in their decision-making. Directors should make sure they receive detailed and accurate information and should study this information carefully to acquire and maintain a clear understanding of the key issues relevant to the company's business. They should seek clarification whenever they deem it necessary to do so.
Non-executive directors should be made aware of the extent of their duties at the time of their appointment, in particular the time commitment involved. A non-executive director should not consider taking on more than five directorships in listed companies. Changes to commitments and the assumption of new commitments outside the company should be reported to the chair of the board as they arise.
Pursuant to the CCA, a director can be either a natural person or a legal entity. In the latter case, a permanent representative should be appointed who is solely responsible for performing this office in the name and on behalf of the legal entity. The representative shall be liable for the performance of this office as if he or she had been appointed in his or her own name, notwithstanding the joint liability of the legal entity being represented. The directors of autonomous government companies and any legal entities over which the state exerts direct or indirect influence19 must be natural persons if they are remunerated for the directorship.20 Any payment to a legal entity, acting as director, in this case will be deemed null and void. A listed company that falls into any of the aforementioned categories (e.g., Proximus)21 must ensure that its remunerated directors are natural persons.
Directors cannot use the information obtained in their capacity as directors for purposes other than the exercise of their official duties. They have an obligation to treat confidential information received in their capacity as directors with care.
Board members should place the company's interests above their own. They have a duty to look after the interests of all shareholders equally and should act according to the principles of reasonableness and fairness. Board members should inform the board of any conflict of interest that could, in their opinion, affect their judgement. In particular, at the beginning of each board meeting, board members should declare whether they have any conflicts of interest regarding the items on the agenda. When board members make a decision, they should disregard their personal interests and should not use business opportunities intended for the company for their own benefit.
In the event of a potential conflict of interest, the board should, under the leadership of its chair, decide which procedure it will follow to protect the interests of the company and all its shareholders. In the next annual report, the board should explain why it chose this procedure. However, if there is a substantial conflict of interest, the board should carefully consider communicating as soon as possible on the selected procedure, the most important considerations and the conclusions. This disclosure should be effected through two different documents: the Corporate Governance Charter, posted on the company's website, and the Corporate Governance Statement, a specific section of the annual report. The CCA indicates a specific procedure to be followed when directors have a pecuniary conflict of interest with the company. A director with a conflict of interest of a financial nature cannot participate in the deliberations or vote on the decision in question. Information on the pecuniary conflict of interest should be included in the board of directors' annual report and the statutory auditor's report.
The board should also take all necessary and useful measures to ensure effective and efficient execution of the Belgian rules on market abuse. It should draw up a set of rules (a dealing code) regulating transactions (and the disclosure thereof) in shares of the company or in derivatives or other financial instruments linked to shares carried out for their own account by directors or other persons with managerial authority.
Directors can be held liable for shortcomings in the performance of their official duties in accordance with the applicable statutory provisions. For a violation of the law or the company's articles of association, directors can be held jointly and severally liable (unless they were not personally involved in the violation and brought it to the attention of the company's board of directors after becoming aware of it). In addition, directors can be held liable in a number of specific circumstances (e.g., in the event of bankruptcy, a conflict of interest or tax liability).
Although the term of office of a director of an NV/SA cannot exceed six years by law, the 2020 Code advises setting the maximum term of directors at four years. This can be done by including a provision to this effect in the articles of association or by a decision of the general meeting of shareholders on the appointment of the director. The 2020 Code indicates that the board of directors should establish nomination procedures and selection criteria for its members, including specific rules for executive and non-executive directors where appropriate. The nomination committee should lead the nomination process and recommend suitable candidates to the board. The board should then make appointment or re-appointment proposals to the general meeting of shareholders. For any new appointment to the board, the skills, knowledge and experience of existing board members and those needed on the board should be evaluated and, in the light of this assessment, a description of the role and skills, experience and knowledge should be prepared. For a director to qualify as independent, a number of criteria should be met.22