What are the sources of corporate governance requirements?
The most relevant sources of corporate governance requirements are primarily contained in:
- Austrian and European company law rules (e.g. the Austrian Stock Corporation Act, the Societas Europea Act, the Limited Liability Company Act, the SE Regulation),
- the Austrian Commercial Code,
- for public companies: the Stock Exchange Act and ancillary laws and regulations, including the Takeover Act or the Accounting Control Act,
- the (principally non-binding) Austrian Code of Corporate Governance,*
- certain regulatory laws, e.g. the Austrian Banking Act, as well as regulations and circulars of regulatory bodies like the Austrian Financial Markets Authority or the e-Control;
*Whilst private companies may voluntarily undertake to adhere to the principles of the Austrian Code of Corporate Governance, such a commitment is mandatory for a public company to be admitted to the prime market of the Vienna Stock Exchange.
Further the articles of association of the private and public companies may provide for additional rules on corporate governance, e.g. setting forth additional obligations of the management board and the supervisory board. Finally, special (internal) rules of procedure may regulate corporate governance requirements on company level.
The corporate governance regime applicable to Brazilian companies is basically established by the Brazilian Corporation Law (Federal Law No. 6,404, of 15 December 1976, as amended), the rulings issued by the Brazilian Securities Commission (CVM), and the listing rules issued by the São Paulo Stock Exchange (B3)* to each of its listing segments.
Among the Law and rules mentioned above, it is important to highlight that CVM enacted in June 2017 a new ruling (i.e., Ruling No. 586) establishing the obligation for listed companies to disclose, on an annual basis,** the ‘Brazilian Corporate Governance Code: Listed Companies Information’, whereby the companies shall indicate, in relation to each recommendation of the Brazilian Corporate Governance Code, whether the company was compliant, and if not, would provide an explanation for the non-compliance (i.e., ‘comply or explain’ approach). The Brazilian Corporate Governance Code for listed companies was elaborated by GT Interagentes (the Interagents Working Group, which comprises 11 of the most important agencies concerned with the Brazilian capital markets) and issued on 16 November 2016.
Of the B3 listing segments, the Novo Mercado has the highest standards of corporate governance rules, followed by Level 2 and Level 1. There is also the BOVESPA MAIS, an organised over-the-counter market managed by B3 and created as a way for small and medium-sized companies to access the capital markets. It falls under the authority of CVM, a federal independent agency reporting to the Ministry of Finance that supervises and enforces listed companies’ compliance with the Brazilian Corporation Law and the rules issued by CVM. This enforcement can result in the imposition of fines and restrictions on companies and their administrators.
B3 is responsible for supervising compliance with its listing rules and has the authority to impose on companies and their administrators contractual fines and other sanctions, such as suspension and exclusion from trading in shares in the B3 environment.
Most Brazilian listed companies do not have widely-held stock, but in recent years there has been a trend for CVM to stimulate the participation of minority shareholders in the governance of companies, through the creation of a mechanism that enables all the shareholders to send their votes electronically prior to any shareholders’ meeting. In 2017, implementation of this mechanism was only mandatory for the main companies listed on B3; however, as from 2018 it became mandatory for all companies.
CVM has also enacted rules in recent years to improve the quality and amount of information that a listed company must disclose to its investors, including Ruling No. 480, published at the end of 2009, which created the ‘reference form’, a document containing very detailed information about the company that must be updated at least once a year; and Ruling No. 481 (published simultaneously with Ruling No. 480), which sets forth the mandatory information that must be disclosed by listed companies on an ordinary basis and prior to each shareholders’ meeting. Both these rules have already been adjusted to incorporate improvements that CVM considered necessary.
Furthermore, B3 launched the State-Owned Enterprise Governance Programme in September 2015 in response to the recent scandals and political use of state-owned companies by the government. The Programme aims to restore investor confidence in state-owned companies (which are significant elements of the Brazilian capital markets) by enhancing the corporate governance rules of these companies in the following ways: (1) through more clear disclosure of the company’s objectives; (2) through the creation of mechanisms to remove administrators who divert company activities from their statutory corporate purpose; (3) through the establishment of detailed nomination criteria encompassing the qualifications and expertise of the administrators; and (4) through the commitment of the public controlling shareholder to comply with corporate governance best practices.
*B3 SA – Brasil, Bolsa, Balcão is the current corporate denomination of the São Paulo Stock Exchange, which was formerly denominated BM&FBOVESPA SA – Bolsa de Valores, Mercadorias e Futuros until 10 May 2017.
**The Brazilian Corporate Governance Code: Listed Companies Information must be disclosed within seven months of the end of each fiscal year.
The principal sources of such requirements are the Civil Code (Code civil or “C. civ.”), the Commercial Code (Code de commerce or “C. com.”), the Monetary and Financial Code (Code Monétaire et Financier or “CMF”) and rules promulgated by the Autorité des Marchés Financiers (“AMF”, the French securities regulator). This body of legislation reflects the numerous EU directives touching on corporate governance. An influential source of “soft law” requirements is the code of conduct promulgated jointly by the Association Française des Entreprises Privées (“AFEP”) and the Mouvement des Entreprises de France (“MEDEF”) most recently in June 2018 (the “AFEP-MEDEF Code”), and the code issued by Middlenext most recently in 2016, used principally by smaller listed companies (the “Middlenext Code”).
The main corporate governance requirements result mostly from the following sources:
- Stock Corporation Act (Aktiengesetz);
- Commercial Code (Handelsgesetzbuch);
- Securities Acquisition and Takeover Act (Wertpapiererwerbs- und Übernahmegesetz);
- Securities Trading Act (Wertpapierhandelsgesetz); and
- Stock Exchange Act (Börsengesetz).
A further, albeit non-binding, source of rules is the German Corporate Governance Code (Deutscher Corporate Governance Kodex) ("GCGC"). Finally, the company’s articles of association (Satzung) as well as the rules of procedure (Geschäftsordnungen) of Management Board and Supervisory Board are of relevance.
The main corporate governance source for Societes Anonymes is set out in Law 4548/2018 (“Law”). The Hellenic Federation of Enterprises has also issued a Code of Corporate Governance, which is not mandatory for companies but rather soft law and applies to companies admitted in a regulated market. Given that the Code of Corporate Governance was implemented before the newly enacted Law on Societes Anonymes, it is anticipated that some amendments may take place in order to align to the new Law.
The corporate governance requirements in Hong Kong are not set out in one single document but scattered in many laws, rules, regulations, codes and guidelines. The primary statute that governs entities formed and registered as companies is the Companies Ordinance and the Companies (Winding Up and Miscellaneous Provisions) Ordinance (Chapter 32 of the laws of Hong Kong) (“C(WUMP)O”). Listed companies are also subject to the non-statutory Rules governing the Listing of Securities on the Stock Exchange of Hong Kong Limited in respect of listing on the Main Board (“Main Board Listing Rules”) and Growth Enterprise Market, a platform for growth companies that do not fulfill the profitability or track record requirements for the Main Board (“GEM Board”) (“GEM Listing Rules”) (together with the Main Board Listing Rules, “Listing Rules”). Some of the major codes prescribed under the Listing Rules include the Corporate Governance Code and Corporate Governance Report set forth in Appendix 14 of the Main Board Listing Rules and Appendix 15 of the GEM Listing Rules (“Corporate Governance Code”), the Model Code for Securities Transactions by Directors of Listed Issuers set forth in Appendix 10 of the Main Board Listing Rules, and the Environmental, Social and Governance Reporting Guide set forth in Appendix 27 of the Main Board Listing Rules and Appendix 20 of the GEM Listing Rules.
The Securities and Futures Commission (“SFC”) is one of the financial regulators in Hong Kong responsible for regulating the securities and futures market with licensing, investigative and disciplinary powers. Listed companies are therefore also required to comply with the Securities and Futures Ordinance (Chapter 571 of the laws of Hong Kong) (“SFO”) and other codes published by the SFC including but not limited to the Guidelines on Disclosure of Inside Information. Pursuant to Part XV of the SFO, substantial shareholders, directors and chief executives of a listed company are required to disclose their interests in the listed company upon the occurrence of certain events or the entering of certain types of transactions such as the acquisition of interest. This will be further discussed in Question 16.
Other than general corporate governance requirements, a number of non-statutory guidelines have also been published for directors who form the governing body of a company, including A Guide on Directors’ Duties published by the Companies Registry, the Director’s Handbook published by the Stock Exchange of Hong Kong Limited (“Hong Kong Stock Exchange”), and the Guidelines for Directors and the Guide for Independent Non-Executive Directors, and Guidelines on Corporate Governance for SMEs in Hong Kong published by the Institute of Directors in Hong Kong.
Aside from the above external sources of corporate governance requirements, private and public companies should always pay attention to its own constitutional documents, i.e. articles of association.
The primary sources of corporate governance requirements in Japan may be generally categorised as regulatory and non-regulatory sources:
(i) Regulatory sources
(a) Companies Act (Act No. 86 of 2005) (CA)
The CA sets forth the basic principles that a company needs to abide by regarding the rights and obligations of management members, organs, the disclosure of information, etc. The CA applies to all types of companies, whether or not they are listed.
(b) Financial Instruments and Exchange Act (Act No. 25 of 1948) (FIEA)
The FIEA generally requires that listed companies (x) disclose issues relating to corporate governance in their annual securities reports or quarterly reports, (y) disclose material information in a timely manner in their extraordinary reports, and (z) submit internal control reports to the authorities, etc.
(c) The securities listing regulations published by the TSE (TSE regulations)
The main corporate governance requirements for listed companies under these regulations are (x) to submit corporate governance reports and (y) to elect and disclose the name of at least one independent officer (see question 7).
(ii) Non-regulatory sources
(a) Articles of incorporation
All companies are required to establish articles of incorporation that regulate their corporate governance, including organs and the number of directors.
(b) Japan's Corporate Governance Code (CGC)
Japan's CGC, published in May 2015 (and revised in June 2018) by the Council of Experts Concerning the Corporate Governance Code established by the TSE and the Financial Services Agency, offers fundamental principles for effective corporate governance of listed companies in Japan.
(c) Proxy voting criteria provided by investor groups
Some investor groups, including the Pension Fund Association, who may be subject to the Principles for Responsible Institutional Investors introduced in February 2014 (and revised in May 2017) (Japan's Stewardship Code or SSC), provide criteria for proxy voting that influence the corporate governance of listed companies.
The Companies Code (Decree-Law no. 262/86, of 2 September, as amended) provides for the general corporate governance framework.
In turn, the Securities Code (Decree-Law no. 486/99, of 13 November, as amended) and the related regulations of the Portuguese Securities Exchange Commission [CMVM]), and the IPCG Code (recommendations subject to a “comply or explain” principle of the Portuguese Corporate Governance Institute [IPCG]) apply to listed companies.
Public-interest entities are also subject to the Audit Supervision Regime governing the supervisory body’s composition and powers.
In regulated sectors (e.g., financial sector) and on specific matters (e.g., diversity or remuneration), there are specific corporate governance requirements.
The KCC is the primary statute governing company structures and organizations in Korea. In addition, certain regulated industries (for example financial services, telecommunications and broadcasting) are additionally subject to separate corporate governance regulations applicable to companies in their respective industries (e.g., financial institutions are governed by the Act on the Corporate Governance of Financial Companies). The Monopoly Regulations and Fair Trade Law (“MRFTL”) also aims to lessen the concentration of the economic power of large conglomerates by banning cross-shareholding, circular-shareholding and debt guarantees for affiliates, restraining undue assistance between affiliates, requiring BOD approval for affiliate transactions and imposing other similar restrictions.
Although Korea is a civil law jurisdiction, there is a significant number of civil and criminal case precedents concerning corporate governance matters used in interpreting and applying the relevant statutory provisions.
Swiss company law is primarily set out in art. 620 ff. of the Swiss Code of Obligations ("CO"). The most relevant additional source for listed companies is the Ordinance against Excessive Compensation in Listed Companies ("OaEC"). The OaEC is applicable to companies listed on either a Swiss or foreign exchange. It provides for a mandatory "say on pay" by shareholders regarding executive compensation, the prohibition of severance and certain other forms of payments as well as the duty of the board of directors to produce an annual remuneration report, among further rules. Additionally, companies listed on the SIX Swiss Exchange ("SIX") are subject to SIX's regulations, including the Directive on Information Relating to Corporate Governance ("DCG") which requires companies to publish a Corporate Governance section in the annual report.
The Swiss Code of Best Practice for Corporate Governance ("SCBP") issued by economiesuisse, a private association of Swiss business, contains guidelines regarding matters of Corporate Governance. The SCBP follows a comply-or-explain approach, allowing companies to deviate from the SCBP's provisions if they provide a suitable explanation. Although compliance with the SCBP is not mandatory, its provisions are widely observed and it is thus an important part of the Swiss legal framework. Guidelines by proxy advisors (see question 26 below) have also gained importance in recent years and are taken into account by a growing number of companies.
Corporations and LLCs are both formed and governed under state law. Each state has a set of laws that determine the rules for forming an entity, managing an entity and issuing equity interests of an entity. Delaware is the state of choice for most companies because Delaware case law is highly developed and a special court is dedicated to corporate law. Many other states model their corporate law after Delaware’s and use Delaware case law to interpret their own statutory provisions.
In addition to state law, a variety of federal statutes provide corporate governance requirements for U.S. corporations. The Securities Act of 1933 and the Securities Exchange Act of 1934 impose requirements related to disclosures, audit committees and the process for offering and selling securities, which are generally regulated by the U.S. Securities and Exchange Commission (“SEC”). Record-keeping and accounting requirements for companies are also set forth in the Foreign Corrupt Practices Act of 1977. Pursuant to this federal statute, companies are required to maintain a system of internal accounting controls and monitor compliance within the company.
Further, public companies’ shares are typically traded on a national stock exchange such as the NYSE or the National Association of Securities Dealers Automated Quotations (“NASDAQ”). These stock exchanges have their own listing requirements that regulate corporate governance matters. For example, the stock exchanges require companies to adopt governance guidelines and certain codes of business ethics and conduct. The listing requirements also govern board and committee composition and charter requirements.
Corporations are also governed by their internal constituent documents, typically a certificate of incorporation and bylaws (together, the “Charter Documents”). Charter Documents define the authority and responsibilities of the board of directors and executive officers and the shareholders’ rights and powers. Similarly, the responsibilities of an LLC’s governing body and the rights and powers of its members are typically set out in an operating agreement. A corporation’s Charter Documents and an LLC’s operating agreement may enlarge the statutory corporate governance requirements, or opt out of certain corporate governance requirements if state law permits.
Two more recent federal statutes were passed in response to major corporate mishaps. The Sarbanes-Oxley Act of 2002 was adopted on the heels of widely publicized accounting scandals that occurred in the United States. This statute imposes heightened disclosure and governance requirements for publicly held companies. The more recent Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (the “Dodd-Frank Act”) followed the financial crisis in 2008 and 2009. The Dodd Frank Act gave the SEC the ability to promulgate additional rules regarding corporate governance matters. Many of these rules operate to give shareholders more power in governance matters. For example, one rule that arose out of the Dodd-Frank Act was “say-on-pay,” which gives shareholders of public companies the right to cast an advisory vote on the company’s executive compensation.
Premium listed companies are required to apply the UK Corporate Governance Code and FRC Guidance on Board Effectiveness (together the “UK Corporate Governance Code”) on a "comply or explain" basis – i.e., compliance is not mandatory but any deviations need to be explained (and may influence shareholder voting decisions). A revised version of the UK Corporate Governance Code came into force in respect of financial periods commencing on or after 1 January 2019.
Other relevant regulation includes the Companies Act 2006 (which is the UK's main piece of company legislation), and, for listed companies, the Listing Rules, the Prospectus Rules, the Disclosure and Transparency Rules and the Market Abuse Regulation (MAR).
Corporate governance requirements are regulated, inter alia, under the Italian Civil Code and, as regard listed companies, the Consolidated Financial Act (Testo Unico della Finanza or CFA), as well as other relevant laws, regulations and best practice guidelines, such as the Corporate Governance Code for listed companies (the CG Code) issued by Borsa Italiana S.p.A. (the Italian stock exchange management company).
Corporate governance requirements of banks and financial institutions are regulated under the relevant supranational rules (e.g. EU ones), the CFA, the Consolidated Banking Act (Testo Unico Bancario or CBA), the Private Insurance Companies Act (Codice delle Assicurazioni Private or PICA) and the relevant implementing regulations.
Specific provisions apply to state-owned entities, non-profit and social entities and companies, etc.
The above is without prejudice to supranational soft-law rules and guidelines (e.g. the G20/OECD Principles of Corporate Governance and the Basel Committee on Banking Supervision Corporate governance principles for banks).
The main source of corporate governance is the TCC which adopts international corporate governance and auditing standards such as international trade, industry, finance and transparency in financial reporting, and so on.
In addition to TCC, other important laws, communiqués and principles legalizing the corporate governance are as follows:
- the CML dated December 6, 2012
- Capital Markets Communiqués
- Corporate Governance Communiqué (serial II, No. 17.1) dated January 3, 2014
- Corporate Governance Principles (“CGP”) (Annex I of Corporate Governance Communiqué)
These principles are set forth for the accountability of the persons holding the management due to all kinds of actions and transactions they carry. The principles provide continues supervision on the management and ensures that the partnership activities are carried out in full transparency. Only the public companies having their shares traded on the stock exchange are subject to these principles, especially the mandatory ones. Although CGP aim to be implemented by each and every company regulated under the TCC, the TCC sets forth provisions with respect to the websites, independent auditing, and obligation to provide information and criminal liability only. Therefore for now, these principles constitute as a guide for companies in general.
The main sources of corporate governance requirements in Luxembourg are the Luxembourg Companies Act which is complemented in some aspects by the Civil Code. Further to that, listed companies are subject to the Rules and Regulations as published by the Luxembourg Stock Exchange (the "LSE"), such as "The Ten Principles of Corporate Governance of Luxembourg Stock Exchange" (the "LSE Principles"), which are revised regularly. In addition, the act of 24 May 2011 regarding the exercise of certain shareholder rights at shareholders' meetings, as amended, (the "2011 Act") contain certain provisions relating to corporate governance with respect to shareholders' rights at shareholders' meetings. The 2011 Act will be amended in the course of 2019 further to the transposition of the Second Shareholders' Rights Directive.
The main sources of corporate governance requirements for LLCs and JSCs are the Civil Code of Ukraine, the Commercial Code of Ukraine, the Law on Limited and Additional Liability Companies, the Law on Joint Stock Companies, and the Law on Securities and Stock Market. In addition, there is specific legislation for state-owned and municipal enterprises as well as for banks.
As a soft law source, the National Securities and Stock Market Commission (hereinafter – the “Commission”) adopted the Principles of Corporate Governance aimed to serve as general guidelines for Ukrainian companies.
The most relevant sources of regulation of companies and their corporate governance requirements are:
- legislation, notably the Corporations Act 2001 (Cth) (Corporations Act) and statutory rules and guidance made under it;
- common law;
- a company’s constitution (if it has one), which may impose additional requirements on, or in some cases displace or modify, the general law and statutory requirements; and
- in the case of public companies listed on the Australian Securities Exchange (ASX), the ASX listing rules (Listing Rules) and the ASX Corporate Governance Council’s Corporate Governance Principles and Recommendations (ASX Governance Principles), which are a set of guidance principles that apply to all listed companies on a ‘comply or explain’ basis.
In addition to the above sources, various pieces of legislation include liability provisions affecting companies or their directors in specific areas that therefore influence governance systems, particularly where a failure to implement sufficient systems to prevent harm is grounds for culpability. This approach is taken in the regulation of, for example, competition and consumer protection, environmental protection, and occupational health and safety. There are also some specific legislative and regulatory standards that apply to particular industry sectors. For example, financial institutions (most notably, banks and insurers) must comply with the Prudential Standards of the Australian Prudential Regulation Authority (APRA).