What role do other stakeholders, including debt holders, employees, suppliers and customers and the government, typically play in the corporate governance of a company?
The directors of a JST have to consider not only the benefit of the company but also the interest of the employees, the shareholders and the public. Employees’ interest is pursued both through the workers’ representatives in the supervisory board and by the workers’ council in the company. There are no statutory provisions for the involvement of debt holders, suppliers, customers or the government, but individual agreements or actual influence of such stakeholders may exist (e.g. provisions in a loan agreement that require the consent of the bank or information rights prior to certain actions of the company).
Generally speaking the role of other stakeholders is very limited. Government-controlled companies, such as Petrobras, of course have the Government as controlling shareholder and therefore may be influenced by public policy and politics, although this is frowned upon by the market. In some privatized companies, such as Vale and Embraer, the government has retained a “golden share” that gives it a veto power on some decisions that may be taken by the company and companies in which BNDESPAR (the Brazilian development bank investment branch) and government controlled companies pension funds have a large stake can also be subject to government interference in their governance.
Debtholders can have some degree of interference on corporate governance depending on the nature of their debt (typically debentureholders will have some matters that would require their approval in a meeting to be approved by the general meeting) or in case of insolvency/debt restructuring, in which case the restructuring plan needs to be approved by the creditors.
As to employees, government-controlled companies are required to have a representative of the employees elected to the board of directors.
The roles of bondholders and employees in corporate governance are defined by French law.
Bondholders have the right to be consulted on certain decisions, including merger or split-up of the company, in which case bondholder opposition could result in a court decision to require constitution of additional security or reimbursement of the bonds.
As for employees, in addition to board participation as described above, the workers council (comité social et économique), required in any company or group with at least 50 employees, has rights of consultation, including in the following cases: any significant modification of the economic or legal organization of the company, including sale of or significant investment in the company; certain grants of shares or options; merger; tender offer; or insolvency proceedings.
French law does not provide for a formal role in corporate governance of other stakeholders, such as suppliers, customers and the government, but of course management and governing bodies communicate with them and take their interests into account.
Employees are typically represented by works councils, which employees may elect in companies with at least five employees, and so-called economic committees, which must generally be established in companies with more than 100 employees – so-called "operational co-determination" (betriebliche Mitbestimmung). Both bodies have numerous information and consultation rights regarding a wide range of decisions which affect the company's workforce or working conditions. The works council may have veto rights over certain matters. In principle, the works council's rights are strongest regarding social issues (like organization of work schedules and holidays) and weakest in respect of strategic business decisions. In companies with more than 500 employees, employees are also represented on the Supervisory Board – so-called "entrepreneurial co-determination" (unternehmerische Mitbestimmung) (cf. question 7).
If a company has raised debt finance under, for example, a syndicated term loan, then the lending banks may also have an influence on strategic decisions of the company, which can sometimes be fairly far reaching. Loan documentation typically provides for frequent reporting obligations and a broad array of transactions typically require consent or waiver from lenders prior to consummation.
Large customers, and in some cases even key suppliers, may also influence the corporate governance of a company by contractually requiring the company to adhere to numerous covenants regarding its organization and behavior. For example, some companies mandate that customers or suppliers agree to follow a "code of conduct".
Bond loan documentation may provide that bondholders have the right to participate in General Meetings and to vote therein, in order to secure their rights arising from such loans. In principle, employees, suppliers and customers, as well as the government do not have any role in the corporate governance of the company.
Apart from the governing body and shareholders, other stakeholders of a company also contribute to the long-term performance and sustainability of the company and shareholder value. The OECD (Organisation for Economic Co-operation and Development) Principles of Corporate Governance (2015) states that, “the competitiveness and ultimate success of a corporation is the result of teamwork that embodies contributions from a range of different resource providers including investors, employees, creditors, customers and suppliers, and other stakeholders. Corporations should recognise that the contributions of stakeholders constitute a valuable resource for building competitive and profitable companies. It is, therefore, in the long-term interest of corporations to foster wealth-creating co-operation among stakeholders. The governance framework should recognise the interests of stakeholders and their contribution to the long-term success of the corporation.” It is therefore in the best interest of the company to consider the views, needs and expectations of the stakeholders when making business decisions.
- Government and regulators: Hong Kong adopts a “top-down” approach where the government and regulators such as the Hong Kong Stock Exchange and the SFC provide most of the initiatives in regulating corporate governance and improving corporate governance standards. For instance, the Hong Kong Stock Exchange announcement on May 4, 2018 regarding the amendment of Listing Rules provides an avenue for minority shareholders to step up after years-long advocacy in Hong Kong (please refer to Question 23). After the amendment, unless the new shares are to be issued under the authority of an existing general mandate, minority shareholders’ approval is required for all open offers. Listing applicants are also required to disregard any excess applications made by the controlling shareholders and their associates in excess of the offer size minus their pro-rata entitlements.
- Creditors: Agreements entered into between the company and the creditors often disallow transactions that may jeopardize the interest of creditors, and may provide creditors with veto rights against transactions of over a certain amount. If a company disregards those relevant clauses when making certain decisions, an event of default may occur resulting in a creditor’s demand of full repayment before the due date. A company should therefore take into account the undertakings to creditors especially when it comes to making a potential large-sum transaction.
- Employees: A company generally provides employees with employee handbooks and trainings which require employees to fulfill compliance obligations, and may even set up a whistleblower policy for employees to report corruption and/or other misbehaviors within the company. With a good corporate governance system, employees will have a stable and healthy work environment where they can focus on providing quality work. In some companies that provide employee share option scheme or permit employee representation in the board, employees may take a more active role in the corporate governance of the company.
- Suppliers and customers: Long-term supplier and customer relationship is of vital importance to the sustainability of a company. Good corporate governance system allows a company to make timely payment to suppliers and timely delivery of quality products to customers. To enhance the communication between the company and suppliers and/or customers, the departments responsible for dealing with suppliers or customers should constantly conduct interview with them and provide them with an effective channel of complaint.
No laws provide a specific role for stakeholders such as creditors or employees in the context of corporate governance. However, the CGC encourages companies to fully recognise that their sustainable growth and the creation of mid- to long-term corporate value can be achieved as a result of the resources and contributions from a range of stakeholders, including employees, customers, business partners, creditors and local communities. As such, companies are encouraged to make efforts to appropriately cooperate with these stakeholders. Based on this principle, many listed companies consider that these stakeholders are important and indispensable for them to increase their corporate value in a sustainable manner.
Employees’, customers’ and suppliers’ role is becoming more relevant in the corporate governance landscape (for instance annual non-financial reports in respect thereto recently became mandatory for certain public-interest entities). In turn, debtholders have a relevant influence in the context of mergers/demergers and capital reductions. In addition, under their fiduciary duties, the members of administration bodies shall consider these stakeholders’ interests.
Following the sale of several major holdings in private and public companies and the end of golden shares held in important listed companies in the last 10 years, the government’s role in Portuguese companies’ governance is currently focused on its position as regulator/supervisor (or as a shareholder mainly in state-owned companies).
Other than the exercise of voting rights by employee stock ownership associations, Korean law does not provide for other venues that allow employees to be engaged in corporate governance. Employees may utilize activist groups to indirectly affect major corporate decision-making process, by engaging in strikes or negotiating collective bargaining agreements.
Creditors could impose certain restrictions on corporate actions pursuant to loan agreements and bondholders can also exercise certain rights via bondholder meetings. Customers and government entities generally do not have direct legal rights over corporate governance matters.
Other stakeholders are typically not formally involved in the corporate bodies of a company; in particular, Swiss law does not provide for formal employee representation on the board of directors. However, stakeholder interests may be taken into account in decisions of corporate bodies (see question 27). In addition, similar to other European jurisdictions, Swiss corporate law provides for specific protections for creditors, namely capital maintenance provisions, which the board of directors must observe in the interest of creditors.
Companies have many constituencies other than their equity holders, including debt holders, employees, suppliers, customers and the community in which the company does business. The role these other stakeholders play in corporate governance varies from company to company, but having policies and practices in place that help ensure companies treat their employees, customers and suppliers fairly and equitably and encourage companies to be good corporate citizens are generally thought to be important corporate governance practices to help achieve long-term value creation. Such policies and practices with respect to different stakeholders and the role those stakeholders may play in the corporate governance of a company include, among other things, the following:
Employees. In order to foster a productive work environment and a culture of compliance, companies should provide employees with effective methods of alerting management and the board to misconduct without the fear of retaliation. Companies also should communicate honestly with employees about the company’s operations and financial performance and should fully inform employees about the benefits the company provides to them.
Suppliers and Customers. Companies generally have policies setting forth the requirements for engaging with suppliers and customers in a compliant and fair manner. These relationships can be vitally important, because, depending on the industry, customers and suppliers can be the driving force in product innovation, competition and price fluctuations.
Communities. While external stakeholders, such as the community in which the company operates, may have less of an influence on the company, they can be a valuable resource and the sustainability and success of these stakeholders can also be important to the long-term success of the company. Therefore, companies generally try to maintain open communications with local members of the community and to conduct their business with regard to the environmental, health, safety and other sustainability issues relevant their operations.
Debt Holders. Depending on the applicable debt agreement, debt holders can impact a company’s ability to make distributions to shareholders or enter into new transactions, including creating additional debt obligations on the company, which may affect the corporate governance practices of a company.
Directors should have regard (amongst other matters) to the likely consequences of any decision in the long term, the interests of the company's employees, the need to foster the company's business relationships with suppliers, customers and others, the desirability of the company for maintaining a reputation for a high standard of business conduct and the need to act fairly between the shareholders of the company.
While these requirements ultimately remain subordinate to the overarching duty of directors to promote the success of the company for the benefit of its shareholders as a whole, the UK Corporate Governance Code requires the board to understand the views of the company’s other key stakeholders and to describe in their annual report how their interests and the matters referred to above have been considered in board discussions and decision-making.
In addition, as regards engagement with the workforce, the UK Corporate Governance Code recommends using one or a combination of (i) a director appointment from the workforce, (ii) a formal workforce advisory panel and (iii) a designated non-executive director (in the absence of these, the board should explain what alternative arrangements are in place and why these are considered effective). Employees should be able to raise concerns in confidence and, if they wish, anonymously, and these should be reviewed by the Board.
Employees are generally expected to comply with corporate policies, such as a code of ethics and business conduct. In addition, securities laws require audit committees of public companies to establish procedures whereby employees may submit concerns regarding questionable accounting or auditing matters or procedures on a confidential basis.
Corporate law requires that directors, when discharging their duties, act honestly and in good faith with a view to the best interests of the corporation. Canadian jurisprudence provides that in doing so directors are permitted to consider non-shareholder stakeholder interests, including creditors, suppliers, employees and customers. With respect to creditors, corporate law affords an added layer of protection by prohibiting directors from distributing capital or assets to shareholders where such distributions would render the corporation unable to pay debts as they come due.
Unless so provided for on a voluntary basis, stakeholders do not typically play a role in the company’s corporate governance.
It should be noted that, among others: (a) employees may be granted with corporate rights by means of granting them with financial instruments or stock options, (b) pursuant to Art. 2394 ICC, creditors shall have the right to sue the directors for breach of their duties (see point 12 above), (c) pursuant to Art. 2418 ICC, the noteholders’ representative shall have the right to attend the shareholders’ meeting.
The creditors of the company can file lawsuit against the board members and request indemnification if the company incurs loss due to the board members not carrying out their duties with due care of a cautious director (TCC, article 553). In addition, in accordance with the Code on Enforcement and Bankruptcy, the creditors can hold the directors liable in the event that the company become bankrupt since the directors do not fulfill their obligations regarding the management.
Although the employees do not take part in the corporate governance according to TCC, under CPG the employees are listed among the stakeholders whose rights and benefits must be protected (CPG, article 3.1.1).
The benefits and rights of listed stakeholders are also regulated under CPG. Accordingly, the companies must develop models to support participation in the company management in a way that the company activities are not disturbed and this must be set forth in AoA and in internal regulations of the company. The opinions of the stakeholders are obtained for important decisions regarding the benefits of them (CGP, article 3.2).
Usually members of the executive committee, such as the chief executive officer, are employees of the company. They are consequently directly involved in the daily management of the company.
Unless otherwise provided in the articles of association, bond holders may attend general meetings, but only with a consultative voice. Debt holders generally do not have voting rights at shareholders' meetings.
Suppliers, customers and employees usually are the subjects of policies implemented by the company, such as KYC polices, or due diligence examinations in order to avoid damage to the company. In certain large companies or companies in which the State has a significant stake, employees have representatives on the board that count for 1/3 of the board composition.
The government is rather passive in terms of corporate governance of the company and does not explicit specific norms to the company but leaves it to the company itself to ensure compliance with the legislation in force and will sanction breaches through its administrative or criminal enforcement authorities if necessary.
Major debt holders such as banks usually have a strong influence on the company`s corporate governance. Loan or credit line agreements often contain provisions regarding the bank`s consent on certain management decisions as well as the bank`s broad information rights. Moreover, after recent changes in legislation creditors may enter into contracts with JSC shareholders obliging the latter to vote in a certain way at the GM, perform other actions in the company or even sell their shares at a fixed price in certain circumstances. Still, this practice has not yet become common.
Employees, especially top-level management, may have impact on key decision-makers in the company. However, ordinary employees hardly participate in corporate governance, mostly due to the lack of strong and independent labor unions in Ukraine.
Governmental and municipal agencies are not involved in the corporate governance of privately-owned companies and may only exercise overall control in cases stipulated by law.
Generally, the stakeholders do not have direct mean to intervene in the governance of the company; however, the Companies Law grants to specific stakeholders including the following:
- Employees: subject to the satisfaction of certain conditions, companies shall distribute 10% of its annual net profit to their employees; such distributions shall not exceed the aggregate annual salary;
- Debt holders:
- in case of distribution of dividends to shareholders that impacts the ability of the company to pay its debts, the debt holders are entitled to annul the resolution of dividend distribution; and
- the consent of debt holders is required for the demerger.
- Government: GAFI is entitled to attend the general meetings of the company and may call, in special cases, for a general meeting of shareholders to supervise and observe the compliance of the company with the applicable rules and regulations.