The Finnish Securities Market Association has adopted a new Corporate Governance Code (the “CG Code” or “Code”) that will enter into force on 1 January 2020. The Code was updated mainly as a consequence of the implementation of the EU’s Second Shareholder Rights Directive. The amendments of the Code deals with increased demand of transparency in relation to in particular management and board remuneration, related party transactions and director independence. In addition to the Code, the Advisory Board of Finnish Listed Companies is in the process of amending its model documentation on shareholders’ meetings.
Listed companies are required to prepare and publicly disclose a remuneration policy and report concerning the company’s governing bodies. The bodies are the board of directors, the managing director, the deputy managing director and the supervisory board. The remuneration policy and report replace earlier remuneration statements (in Finnish: palkka- ja palkkioselvitys). Companies are not permitted to deviate from this form of reporting under the “comply or explain” –principle.
A remuneration policy outlines the future remuneration of the governing bodies as well as defines the principles and decision-making processes for remuneration. The actual remuneration must comply with the policy. Temporary deviation from the policy requires that the policy defines in advance the situations, the extent and the procedure for permitted deviations such as takeover situations or alike. Consequently, in order for the board of directors to be able to exercise a certain level of discretion on remuneration, the policy should be prepared with this in mind.
Listed companies are required to submit the remuneration policy to the first annual general meeting held from 1 January 2020 onwards. The policy must be disclosed by a stock exchange release no later than three weeks prior to the meeting. Thereafter, the policy will need to be submitted to the general meeting at every material change and in any case at least every four years. The policy must be made available on the company’s website at least for the period that it is applied.
A remuneration report, in turn, describes how the company’s remuneration policy has been implemented. Accordingly, the report should provide information on the actual remuneration of the governing bodies during the preceding financial year as well as demonstrate how the remuneration policy has been applied in a clear and comprehensive manner. In addition, the report should include information on the remuneration of the executive management. For example, comparative data describing the development of remuneration vis-à-vis the company’s directors and employees over the past five years should be included in the report.
The report shall be issued on an annual basis and disclosed as an appendix to a stock exchange release at the same time as the financial statements, the management report and the CG statement. The report must be presented to the annual general meeting and made available on the company’s website for a period of ten years. The first remuneration report will concern financial year 2020.
The CG Code contains helpful checklists on matters that the remuneration policy and the report should address. In addition, the CG Code contains guidance on what supplementary information regarding the remuneration of the company’s management group should be continuously available at the company’s website.
Related Party Transactions
Under the new CG Code, all listed companies are required to define principles concerning the monitoring and evaluating of related party transactions as well as maintain a list of its related parties. The principles shall be disclosed in the company’s annual CG statement. The principles are meant to ensure that decision-making on related party transactions is conducted in accordance with statutory law (IAS 24).
Directors and shareholders of listed companies are often significant stakeholders in other businesses. Consequently, related party transactions, where directors or shareholders have a financial, intrafamilial or other interest, occur on a frequent basis. For this reason, companies should ensure that all related party transactions are always well-documented and monitored.
The recommendation has been clarified with respect to carrying out and reporting the assessment of independence for directors. The board is obliged to report which of the board members are independent of the company and which are independent of the company’s significant shareholders.
The reasoning for determining that a board member is not independent must also be reported. The criteria to be taken into account in the overall assessment of independence have been amended so that under the interpretation of the criteria, the benefits paid and offered to a member of the board by a shareholder otherwise than on the basis of an employment or service relationship may require assessment.
The new CG Code is currently available in its entirety at the Securities Market Association’s website in both Finnish and English.
A To-Do List for Listed Companies
In consideration of the reviewed changes, Finnish publicly listed companies should adopt the below timetable for introducing new corporate governance practices.
- By the end of 2019, adopt principles for monitoring and evaluating related party transactions (also to be included in the annual corporate governance statement);
- No later than three weeks before the annual general meeting of 2020, establish and publicly disclose the remuneration policy; and
- During 2020, gather information and properly document the remuneration within the group in order to be in the position to issue the remuneration report in 2021.