Corporate Governance Defined - WordPress.com...Corporate Governance refers to that blend of law,...

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Holly J. GregoryPartner

Weil, Gotshal & Manges, LLP767 Fifth Avenue

New York, NY 10153-0119Tel: +1 212 310 80 38Fax: +1 212 310 80 07

email: [email protected]

Ms. Gregory specializes incorporate governance as a

field of legal practice.

©2001 Weil, Gotshal & Manges LLP

Corporate Governance Defined

Corporate Governance refers to that blend of law, regulation, and appropriate voluntary private-sector practices which enables thecorporation to attract financial and human capital, perform efficiently, and thereby perpetuate itself by generating long-termeconomic value for its shareholders, while respecting the interests of stakeholders and society as a whole.

The principal characteristics of effective corporate governance are: transparency (disclosure of relevant financial and operationalinformation and internal processes of management oversight and control); protection and enforceability of the rights andprerogatives of all shareholders; and, directors capable of independently approving the corporation’s strategy and major businessplans and decisions, and of independently hiring management, monitoring management’s performance and integrity, and replacingmanagement when necessary.

Ira M. MillsteinSenior Partner, Weil, Gotshal & Manges, LLPand noted authority on corporate governance

Weil, Gotshal & Manges LLP: Founded in 1931, Weil, Gotshal & Manges LLP has evolved into one of the world’s largest and most highly regarded full-service law firms, with over 800 attorneys in 11 offices worldwide. The Firm’s Corporate Governance Practice spans virtually all its departments –– includingCorporate, Trade Practices & Regulatory Law, Business & Securities Litigation, Business Finance & Restructuring and Tax. The Practice encompassesongoing representation and counseling of boards (of both for-profit and not-for-profit entities), directors, trustees, board committees, management, institutionalinvestors and investment funds. Frequently, WG&M is called on to counsel on issues of board transition, CEO succession, crisis management, and strategicdecision-making; oversight of financial management and financial controls; investigations and employee-related matters; board composition, structure, process,and evaluation; board independence and accountability mechanisms; audit committee functions; board/CEO and investor relations; director and trusteeresponsibilities and business judgment requirements, including use of special committees; stock option-based incentive compensation plans; proxy rulecompliance; and, tax and SEC disclosure requirements. In addition to corporate governance counseling, WG&M provides a full range of legal services,including representation in the various forms of litigation involving shareholders.

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INTERNATIONAL COMPARISON OF CORPORATE GOVERNANCE GUIDELINES AND CODES OF BEST PRACTICE IN DEVELOPED MARKETSHolly J. Gregory

TABLE OF CONTENTS *

OVERVIEW...............................................................................................................................................................................1

1. The Mission of the Board of Directors.................................................................................................................................5

1a. The Role of Stakeholders ....................................................................................................................................................9

2. Board Membership Criteria ................................................................................................................................................13

3. Selecting, Inviting and Orienting New Directors................................................................................................................17

4. Separation of Chairman and CEO .......................................................................................................................................21

5. Lead Director ......................................................................................................................................................................25

6. Board Size...........................................................................................................................................................................29

7. Mix of Inside and Outside Directors...................................................................................................................................33

8. Definition of “Independence”.............................................................................................................................................37

9. Commitment / Changes in Job Responsibility....................................................................................................................41

10. Election Term / Term Limits / Mandatory Retirement .....................................................................................................45

11. Board Compensation Review............................................................................................................................................49

12. Executive Sessions of Outside Directors..........................................................................................................................53

13. Evaluating Board Performance.........................................................................................................................................57

14. Board Interaction with Institutional Investors, Press, Customers, etc. .............................................................................61

15. Attendance of Non-Directors at Board Meetings / Board Access to Senior Management ...............................................65

16. Board Meetings & Agenda................................................................................................................................................69

17. Board Materials and Presentations ...................................................................................................................................73

18. Number, Structure and Independence of Committees ......................................................................................................77

19. Assignment and Rotation of Committee Members...........................................................................................................81

20. Committee Meeting Frequency, Length and Agenda.......................................................................................................85

21. Formal Evaluation of the Chief Executive Officer ...........................................................................................................89

22. Succession Planning / Management Development ...........................................................................................................93

A. Board Job Description........................................................................................................................................................97

B. Outside Advice.................................................................................................................................................................101

C. Content and Character of Disclosure................................................................................................................................105

D. Disclosure Regarding Compensation and Director Assessment......................................................................................109

E. Disclosure Regarding Corporate Governance ..................................................................................................................113

F. Accuracy of Disclosure / Liability....................................................................................................................................117

G. Shareholder Voting Practices (Cumulative & Confidential Voting, Broker Non-Votes,One Share/One Vote) .............................................................................................................................................121

H. Shareholder Voting Powers..............................................................................................................................................125

I. Shareholder Meetings / Proxy Proposals...........................................................................................................................129

J. Anti-Takeover Devices ......................................................................................................................................................133

K. Executive Compensation..................................................................................................................................................137

APPENDIX I – Partial Listing of Corporate Governance Guidelines and Codes of Best Practice.......................................141

APPENDIX II – Excerpts from The Business Sector Advisory Group on Corporate Governance,Corporate Governance: Improving Competitiveness and Access to Capital in Global Markets.A Report to the OECD (Millstein Report) (April 1998)........................................................................................147

* This COMPARISON relies on the General Motors Board of Directors Corporate Governance Guidelines on Significant Corporate Governance Issues as its “vertical axis” for Topic Headings 1 through 22. The remaining lettered Topic HeadingsA through K cover additional issues that were not addressed by the GM Guidelines.

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INTERNATIONAL COMPARISON OF CORPORATE GOVERNANCE GUIDELINES AND CODES OF BEST PRACTICE IN DEVELOPED MARKETSHolly J. Gregory1

2001 Edition

General MotorsBoard Guidelines2

OECD Principles / Millstein Report(International)3

Bosch Report(Australia)4

Merged Code Recommendations(Belgium)5

Federation of Belgian CompaniesRecommendations (Belgium)6

OVERVIEW

The General Motors’ Board Guidelines,developed by the GM Board in 1994 (andregularly updated), are widely viewed as aseminal expression of a board’s voluntaryefforts to improve its own governance. TheGM Guidelines have been widely discussedand emulated, and their influence has extendedwell beyond the U.S.A.

In April 1998, the Business Sector AdvisoryGroup on Corporate Governance, chaired byIra M. Millstein, issued a report to the Organi-sation for Economic Cooperation and Devel-opment (“OECD”) titled “Corporate Govern-ance: Improving Competitiveness and Accessto Capital in Global Markets” (the “MillsteinReport” – see Appendix II). The MillsteinReport addresses the elements and frameworkconditions for corporate governance from aprivate sector viewpoint that focuses on accessto capital. Subsequently, the OECD built uponthis work through the Ad Hoc Task Force’s“Principles of Corporate Governance” (April1999) (hereinafter the “OECD Principles”),and ratified by OECD Ministers in May 1999.

OECD Principles address: I. Rights of Share-holders; II. Equitable Treatment of Sharehold-ers; III. Role of Stakeholders; IV. Disclosureand Transparency; and V. Responsibilities ofthe Board. They are intended to serve as non-binding reference points for local governmentsand private sectors to adapt and build upon.The Principles are grounded on two proposi-tions underpinning the Millstein Report: 1) noone country or existing system can serve as themodel that dictates reform worldwide; and2) access to capital is the primary driver forthe integration of core corporate governancepractices in the international arena.

The Bosch Report, first published in 1991, isthe product of a Working Group representing abroad spectrum of organizations from thecorporate sector. It sets out voluntaryguidelines intended to assist companies andtheir boards in adopting the corporategovernance practices best suited to theirparticular circumstances.

Companies listed on the Australian StockExchange (“ASX”) are required to include astatement of their corporate governancepractices in their annual report under ASXListing Rule 4.10.3. (No set of practices isprescribed; Appendix 4A of the listing setsforth an “indicative” list of matters that thestatement should cover.) A guidance note,published in 1998 by the ASX, recommendsthat listed companies refer to the Bosch Reportas well as the report titled “CorporateGovernance: A Guide for InvestmentManagers and Corporations” (1997) publishedby the Investment & Financial ServicesAssociation (“IFSA”), formerly the AustralianInvestment Managers’ Association (“AIMA”),in preparing their disclosure statementconcerning corporate governance practices.7

In December 1998, the Brussels StockExchange (now Euronext/Brussels) and theBanking & Finance Commission jointly issued“Corporate Governance for Belgian ListedCompanies.” This document, which wasguided by experience gained in other countriesas well as by feedback from the draft CardonReport issued in March 1998, incorporates theCardon Report in final form as Part I, andadds the Banking & Finance CommissionRecommendations as Part II. Part I providesthe main body of corporate governancerecommendations; Part II provides certainadditional recommendations on disclosure.This combined document has been called bysome Belgium’s “Merged Code.”

The Merged Code has a dual objective: toprovide listed companies with a framework inwhich they can consider their corporate gov-ernance, and to enhance the competitiveness ofBelgian companies from the viewpoint of theinternational investor community.

The Euronext/Brussels market authority hasmade the “comply or explain” recommenda-tion of this Code part of its listing rules. Evenso, the Code is expressly intended to be subjectto re-evaluation at regular intervals.

In June 1997, the Management Committee ofthe Federation of Belgian Companies(“VBO/FEB”) formed a company managers’group for the purpose of studying the principalaspects of governing and administeringcompanies and making recommendations. InJanuary 1998, the VBO/FEB ratified thegroup’s report, entitled “CorporateGovernance – Recommendations from theFederation of Belgium Companies.”

The Recommendations are based on theinternationally recognized UK Cadbury Reportas well as proposals from the Brussels StockExchange and the Belgian Banking & FinanceCommission. They are intended primarily forlarge publicly-listed companies, although othercompanies may find them useful as well. EachBelgian company is expected to further adaptthe Recommendations to its unique situation.

The Recommendations take a non-coerciveapproach. The VBO/FEB believes thatcorporate governance lends itself more to self-regulation than to compulsory governmentregulation. However, listed companies areurged to indicate in their Annual Reportswhether, or to what extent, they have put theseRecommendations into practice.

1 Holly J. Gregory, a partner in the law firm of Weil, Gotshal & Manges LLP, practices in the Firm’s corporate governance group, which is led by Ira M. Millstein. Frederick W. Philippi, a senior paralegal, assisted in this comparative analysis. See also Holly J. Gregory,INTERNATIONAL COMPARISON OF CORPORATE GOVERNANCE GUIDELINES AND CODES OF BEST PRACTICE IN DEVELOPING AND EMERGING MARKETS (1998 and regularly revised); INTERNATIONAL COMPARISON – INVESTOR VIEWPOINTS (1997 and regularly revised);INTERNATIONAL COMPARISON – ASIA (2001); COMPARISON – EUROPEAN UNION MEMBER STATES & OECD (2000); COMPARISON – EUROPEAN UNION-BASED INVESTOR VIEWPOINTS & EASD (2000); and COMPARISON – UNITED STATES (1997 and regularly revised). Many ofthese COMPARISONS will soon be available online at <www.corpgov.com>.2 General Motors Board of Directors, GM Board of Directors Corporate Governance Guidelines on Significant Corporate Governance Issues (January 1994; revised August 1995, June 1997, March 1999 and June 2000).3 Organization for Economic Cooperation and Development (“OECD”), Principles of Corporate Governance (April 1999); Business Sector Advisory Group on Corporate Governance, Corporate Governance: Improving Competitiveness and Access to Capital in Global Markets(the Millstein Report) (April 1998) (see APPENDIX II).4 Working Group representing Australian Institute of Company Directors, Australian Society of Certified Practicing Accountants, Business Council of Australia, Law Council of Australia, The Institute of Chartered Accountants in Australia & The Securities Institute of Australia,Corporate Practices and Conduct (Bosch Report) (3d ed. 1995).5 Brussels Stock Exchange/Banking & Finance Commission, Corporate Governance for Belgian Listed Companies (the Merged Code) (December 1998).6 Federation of Belgian Companies (VBO/FEB), Corporate Governance – Recommendations (January 1998).7 The IFSA Report (as revised in 1999) is reflected in the INTERNATIONAL COMPARISON OF CORPORATE GOVERNANCE GUIDELINES AND CODES OF BEST PRACTICE – INVESTOR VIEWPOINTS.

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Dey Report(Canada)8

Viénot Reports I & II(France)9

Berlin Initiative Group Code(Germany)10

Mertzanis Report(Greece)11

Preda Report(Italy )12

OVERVIEW

The Toronto Stock Exchange Guidelinesrecommend but do not mandate governancepolicies for companies listed on the TorontoStock Exchange.

The Guidelines were promulgated in 1994 bythe Toronto Stock Exchange Committee onCorporate Governance which was comprisedof investors, CEOs, academics, and otherindividuals active in the corporate sector.

The Committee’s Final Report was presentedto the Toronto Stock Exchange with therecommendation that listing companies berequired to disclose their system of corporategovernance with reference to the Report.

Both the Toronto and Montreal StockExchanges have since adopted such adisclosure requirement. See Toronto StockExchange Bylaw No. 6.

The listing requirement on which the proposalsin the Final Report are based will apply only tocompanies incorporated in Canada or aprovince of Canada (and listed on a stockexchange which accepts the proposals) ratherthan to all companies wherever incorporated.

In July 1995, the Conseil National du PatronatFrançais (“CNPF”) and the Association Fran-çaise des Entreprises Privees (“AFEP”) re-leased a report titled “The Boards of Directorsof Listed Companies in France” (“Viénot I”).It examined corporate governance issuesaffecting the membership, power, andoperation of the boards of directors of Frenchlisted companies, with an eye towards howwell the current legislative frameworkaddressed these issues.

In July 1999, the CNPF and AFEP released“The Report of the Committee on CorporateGovernance” (“Viénot II”). This reportaddresses various matters that were either notaddressed in the earlier report or wereaddressed in a more limited fashion, e.g.,separation of the offices of Chairman andCEO, the definition of an independent director,and disclosure regarding executivecompensation.

Relevant texts from both reports are quotedbelow, with source information indicatingeither the 1995 report (“Viénot I at [page]”) orthe 1999 report (“Viénot II at [page]”).

The Berlin Initiative Group’s “German Codeof Corporate Governance” (June 2000) issomewhat unique insofar as it has been draftedfrom a managerial perspective.

The Management Board forms the clearleadership center of the public corporation.(Commentary on Thesis 5)

This code views the role of the SupervisoryBoard as counterbalancing the ManagementBoard, and reaffirms the German custom of asmany as half of the seats on the SupervisoryBoard being held by employees or theirrepresentatives in accordance with agovernance practice known as “co-determination.”

Although this code attaches a particularsignificance to shareholders’ interests, it viewsmanagement’s role as ultimately holding inbalance the interests of all stakeholders,including shareholders.

The code is of a non-legal nature, susceptibleto flexibility and adaptation. It is directedprimarily towards large, quoted public stockcorporations, but may also apply in principleto private companies.

The Committee on Corporate Governance inGreece, established by the Capital MarketCommission, consists of representatives ofgovernment, private industry, the Athens StockExchange, the European Commission, institu-tional investors, banking, law, auditing andacademia. It issued “Principles on CorporateGovernance in Greece: Recommendations forIts Competitive Transformation” in October1999. The Committee, which took into accountthe OECD’s “Principles of Corporate Govern-ance,” considers transformation of the nation-al corporate governance framework to be asine qua non for enhancing competitiveness:

The achievement of competitiveness makesnecessary that corporations, especially thosewhose shares are listed on the Athens StockExchange, move toward . . . efficientrestructuring of the entire range of relationsamong shareholders, managers and otherstakeholders, at a faster pace and moreclosely allied to internationally prevailingcorporate governance rules and procedures.

(Introduction)The Committee’s Principles and Recommenda-tions have the status of a “White Paper” thatmay serve as the basis for a government-initiated reform of the corporate legal system.

The Committee for the Corporate Governanceof Listed Companies consists of high-levelrepresentatives of the Borsa Italiana (ItalianStock Exchange), major corporations,institutional investors and other experts. Itissued its “Report and Code of Conduct”(hereinafter “the Report” and “the Code”) inOctober 1999.

The Committee’s aim was to align the Codewith international practice while being mindfulof specifically Italian corporate features suchas corporate structure that includes both aboard of directors and a board of auditors, andthe fact that most Italian companies do nothave a broad shareholder base. The Codeprovides for flexible governance structures,precise definitions of responsibilities, and atransparent corporate governance environ-ment. It is voluntary in character, but theCommittee urges the Borsa Italiana to make aprovision for companies to report on whether,and to what extent, they are implementing theprovisions of the Code.

Italy’s political authorities are expected tohave a role to play by respecting and fosteringthe self-regulatory efforts expressed in theCode.

8 Toronto Stock Exchange Committee on Corporate Governance in Canada, “Where Were The Directors?” Guidelines For Improved Corporate Governance in Canada (Dey Report) (December 1994).9 Conseil National du Patronat Français (“CNPF”) & Association Française des Entreprises Privees (“AFEP”), The Boards of Directors of Listed Companies in France (“Vienot I”) (July 10, 1995); Report of the Committee on Corporate Governance (“Vienot II”) (July 1999).10 Berliner Initiativkreis (Berlin Initiative Group), German Code of Corporate Governance (June 6, 2000).11 Committee on Corporate Governance in Greece (under the coordination of the Capital Market Commission), Principles on Corporate Governance in Greece: Recommendations for Its Competitive Transformation (October 1999).12 Comitato per la Corporate Governance delle Società Quotate (Committee for the Corporate Governance of Listed Companies), Report & Code of Conduct (Preda Report) (October 1999).

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Corporate Governance Forum Principles(Japan)13

Peters Code(The Netherlands)14

Securities Markets Comm’n Recommendations(Portugal)15

Olivencia Report(Spain)16

Swedish Academy Report(Sweden)17

OVERVIEW

The 1998 “Final Report on CorporateGovernance Principles” was prepared by theCorporate Governance Committee of theCorporate Governance Forum of Japan, acommittee comprised of corporate executives,institutional investors, and academics.

The Report suggests two tiers of principles forgovernance reform: “Step A Principles”“should be adopted immediately (or as soon aspossible following necessary legal reform)”;“Step B Principles” are more extensive, andwould require “legal reforms on a grandscale.”

Ultimately, the Committee intends to developthe Principles into a “Code of Best Practice”as explained in the letter from the Chairperson(pp. 33-34):

Our aim is to establish an independentsystem of outside directors in Japan, and byestablishing a market for independentdirectors to promote the transferability ofcorporate executives between companies.Also we will endeavour to have thesePrinciples adopted as part of therequirements for Initial Public Offerings.

The Committee on Corporate Governance wasestablished by the Association of SecuritiesIssuing Companies and the Amsterdam StockExchange Association for the purpose ofinitiating debate and producing recommenda-tions on Corporate Governance. This processresulted in the issuance of a final reportentitled “Recommendations on CorporateGovernance in the Netherlands –Recommendations for Sound Management,Effective Supervision and Accountability”(June 1997). In the Netherlands, as inGermany, a two-tier board system prevails,and the Code reflects this fact.

The Code is not linked to any listingrequirement, and it does not contain statutoryremedies or sanctions. Compliance with theCode and disclosure regarding compliancewith it are both voluntary.

The Portuguese Comissão do Mercado deValores Mobiliários (Securities MarketsCommission) issued “Recommendations on theGovernance of Listed Companies” in Novem-ber 1999. Developed in response to the OECD“Principles of Corporate Governance,” theseRecommendations cover 5 main topics:

I. Disclosure;II. Shareholder Voting and Representation Rights;III. Institutional Investors;IV. Internal Company Regulations; andV. Structure and Role of the Board of Directors.

The Recommendations are followed byCommentary. Adapted to Portugal’s legal andmarket context, the Recommendations areintended to initiate critical reflection oncorporate governance. They are subject torevision and amendment.

The Recommendations are not mandatory.However, listed companies and institutionalinvestors are urged to disclose in their annualreports the extent to which they comply withthem. (Cf. Introduction)

The Spanish Cabinet created the SpecialCommittee for the Study of a Code ofGovernance for Boards of Directors of ListedCompanies in June 1997 to (among otherthings) establish a voluntary Ethical Code ofGovernance. (Cf. I.1)

The Committee issued its report, “TheGovernance of Spanish Companies,” inFebruary 1998. It consists of:

§ Introduction (Part I)§ Report on the Boards of Directors

(Part II, hereinafter “the Report”) and§ Code of Best Practice

(23 Recommendations) (Part III,hereinafter “the Code”).

The report addresses itself primarily to listedcompanies that are owned by a large numberof smaller shareholders. However, it may alsoapply to other companies seeking to raisecapital and companies that are owned by asingle shareholder or small group of largeshareholders.

Promulgated by the Swedish Academy ofDirectors, the “Introduction to a Swedish Codeof ‘Good Boardroom Practice’” (1994) isintended to promote the development of goodboardroom practice in the Swedish businesscommunity.

Compliance with the Code is strictly voluntaryand no disclosure regarding the degree ofcompliance is required.

13 Corporate Governance Forum of Japan, Corporate Governance Principles — A Japanese View (Final Report) (May 26, 1998).14 Committee on Corporate Governance, Corporate Governance in the Netherlands — Forty Recommendations (Peters Code) (June 25, 1997).15 Comissão do Mercado de Valores Mobiliários (“CMVM”) (Securities Markets Commission), Recommendations on the Governance of Listed Companies (November 1999).16 Comisión Especial para el Estudio de un Código Etico de los Consejos de Administración de las Sociedades, El gobierno de las sociedades cotizadas (Olivencia Report) (February 1998). English translation by Instituto Universitario Euroforum Escorial, The Governance ofSpanish Companies (February 1998).17 The Swedish Academy of Directors, Western Region, Introduction to a Swedish Code of ‘Good Boardroom Practice’ (Swedish Academy) (March 1994).

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Cadbury Report(United Kingdom)18

Hampel Report(United Kingdom)19

The Combined Code / Turnbull Report(United Kingdom)20

1996 NACD Report(USA)21

1997 BRT Report(USA)22

OVERVIEW

The Cadbury Report, sometimes referred to asthe “Magna Carta of Corporate Governance,”is one of the earliest and most influentialdocuments of its kind. It was produced by theCommittee on the Financial Aspects ofCorporate Governance, chaired by Sir AdrianCadbury.

The Cadbury Report consists of a formal Code(hereinafter “the Code”) and of extensivecomments and recommendations (hereinafter“the Report”).

The Cadbury Report was eventually followedby the Greenbury Commission Report (ondirector and executive remuneration), theHampel Commission Report, and TheCombined Code of the Committee onCorporate Governance of the London StockExchange.

The Hampel Report, a follow-up to theCadbury Report, was created by the Committeeon Corporate Governance, a group sponsoredby the London Stock Exchange (“LSE”), theConfederation of British Industry, the Instituteof Directors, the Consultative Committee ofAccountancy Bodies, the National Associationof Pension Funds and the Association ofBritish Insurers.

The Hampel Report, issued in January 1998,notes:

We intend to produce a set of principles andcode of good corporate governance practicewhich will embrace Cadbury and Greenburyand our own work. We shall pass this to theLondon Stock Exchange. We suggest thatthe London Stock Exchange should consulton this document, together with anyproposed changes in the Listing Rules.

(Summary 7.3)

The Report draws a distinction between itsmore general Principles of corporategovernance (hereinafter “Principles”) and itsmore detailed guidelines (hereinafter“Guidelines”).

“The Combined Code: Principles of GoodGovernance and Code of Best Practice,”issued by the London Stock ExchangeCommittee on Corporate Governance, hasbeen appended to the London Stock ExchangeListing Rules. It builds on the Cadbury,Greenbury and Hampel Reports, while makingcertain changes. It is structured as follows:§ Preamble§ Principles of Good Governance

(“Code Principles”) Section 1: Companies Section 2: Institutional Shareholders§ Code of Best Practice

(“Code Provisions”) Section 1: Companies Section 2: Institutional Shareholders.

The Combined Code requires that each listedcompany disclose in its annual report how ithas applied the Code Principles, and whetherit has complied with the Code Provisions.(Cf. The Listing Rules, 12.43A(a) and (b).)

See also Institute of Chartered Accountants inEngland and Wales, “Internal Control:Guidance for Directors on the CombinedCode” (“Turnbull Report”) (1999) (discussingthe accountability of company directors andmanagement); Law Commission and ScottishLaw Commission, “Company Directors:Regulating Conflicts of Interests andFormulating a Statement of Duties” (1999)(recommending changes to Company Law).

The 1996 “Report of the National Associationof Corporate Directors (“NACD”)Commission on Director Professionalism,”chaired by Ira M. Millstein, discussesgovernance practices designed to promote aculture of “professionalism” for boards andboard members. The NACD Report is intendedto be forward-looking and aspirational. Itrecognizes that board practices are evolvingand believes that they will continue to evolve inthe direction it suggests. Adoption of any ofthe Report’s recommendations is purelyvoluntary.

The Report grants the premise that eachcorporation has its unique history andperspectives, and its own future to plan.Fixed, rigid rules of board governance arenot, therefore, in order. The Report suggeststhat qualified directors collectively maketheir own rules for the governance of theirrespective boards, and it strongly urges thatthey do so after thoughtful and rigorousdeliberation.In no sense is this a “one-size-fits-all”approach; rather, it is a sophisticated “do-it-yourself” process for board members seek-ing a culture of boardroom professionalism.

(Introduction by Ira M. Millstein at 2)

The Business Roundtable (“BRT”) released arevised “Statement on Corporate Governance”in September 1997. It parallels the “one sizedoes not fit all” approach and many of thesuggestions on corporate governancecontained in the NACD report.

The BRT Statement encourages theexamination of governance issues withinorganizations; compliance with therecommendations contained in the report ispurely voluntary.

18 Report of the Committee on the Financial Aspects of Corporate Governance (Cadbury Report) (December 1, 1992).19 Committee on Corporate Governance – Final Report (Hampel Report) (January 1998).20 London Stock Exchange Committee on Corporate Governance, The Combined Code: Principles of Good Governance and Code of Best Practice (June 1998); Institute of Chartered Accountants in England and Wales, Internal Control: Guidance for Directors on the CombinedCode (Turnbull Report) (September 1999); Law Commission & The Scottish Law Commission, Company Directors: Regulating Conflicts of Interests and Formulating a Statement of Duties (September 1999).21 National Association of Corporate Directors (“NACD”), Report of the NACD Commission on Director Professionalism (Nov. 1996).22 The Business Roundtable (“BRT”), Statement on Corporate Governance (September 1997).

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General MotorsBoard Guidelines

OECD Principles / Millstein Report(International)

Bosch Report(Australia)

Merged Code Recommendations(Belgium)

Federation of Belgian CompaniesRecommendations (Belgium)

1. The Mission of the Board of Directors23

The General Motors Board of Directorsrepresents the owners’ interest in perpetuatinga successful business, including optimizinglong term financial returns. The Board isresponsible for determining that theCorporation is managed in such a way toensure this result. This is an active, not apassive, responsibility. The Board has theresponsibility to ensure that in good times, aswell as difficult ones, management is capablyexecuting its responsibilities. The Board’sresponsibility is to regularly monitor theeffectiveness of management policies anddecisions including the execution of itsstrategies.In addition to fulfilling its obligations forincreased stockholder value, the Board hasresponsibility to GM’s customers, employees,suppliers and to the communities where itoperates – all of whom are essential to asuccessful business. All of theseresponsibilities, however, are founded upon thesuccessful perpetuation of the business.(Introduction)

The corporate governance frameworkshould ensure the strategic guidance of thecompany, the effective monitoring ofmanagement by the board, and the board’saccountability to the company and theshareholders.A. Board members should act on a fully

informed basis, in good faith, with duediligence and care, and in the best interestof the company and the shareholders.

B. Where board decisions may affectdifferent shareholder groups differently,the board should treat all shareholdersfairly.

C. The board should ensure compliance withapplicable law and take into account theinterests of stakeholders.

(OECD Principle V)

Together with guiding corporate strategy, theboard is chiefly responsible for monitoringmanagerial performance and achieving an ade-quate return for shareholders, while preventingconflicts of interest and balancing competingdemands. . . . [It also] implement[s] systemsdesigned to ensure that the corporation obeysapplicable laws, including tax, competition,labor, environmental, equal opportunity, healthand safety laws. In addition, boards areexpected to take due regard of, and deal fairlywith, other stakeholder interests includingthose of employees, creditors, customers,suppliers and local communities. Observanceof environmental and social standards isrelevant in this context. (OECD Principle VAnnotation at 40)

See Millstein Report, Perspective 21 ([C]orpo-rations should disclose the extent to which theypursue projects and policies that diverge fromthe primary corporate objective of generatinglong-term economic profit so as to enhanceshareholder value in the long term.).

Directors should use their best efforts to ensurethat the company is properly managed andconstantly improved so as to protect andenhance shareholder wealth in perpetuity, andto meet the company’s obligations to all partieswith which the company interacts – itsstakeholders. The essence of any system ofgood corporate governance is to allow theboard and management the freedom to drivetheir company forward but to exercise thatfreedom within a framework of effectiveaccountability. (p. 7)

It is the duty of the board of directors tomanage the company’s affairs exclusively inthe interests of the company and all its share-holders, within the framework of the laws,regulations and conventions under which thecompany operates. . . . The board of directorsis responsible for all strategic decisions, forensuring that the necessary resources areavailable to achieve the objectives, forappointing and supervising the executivemanagement and, lastly, for reporting to theshareholders on the performance of its duties.(Part I: A.2)

In addition to its function of taking the neces-sary action at strategic level and implementingstrategy, the responsibility of the board ofdirectors chiefly relates to the quality of theinformation it provides to shareholders.(Part I: A.7)

The board of directors is the highest authoritywithin the company. In addition to itsdecision-making duties, the board mustexercise full and effective control over thecompany. To that end, it must meet regularlyand must be capable of monitoring theexecutive management. (Part I: B.1.1)

Without prejudice to its statutory duties, theboard of directors is responsible for definingthe strategic objectives and establishinggeneral policy on the basis of proposalssubmitted by the executive management,appointing the executive management andapproving the structures designed to facilitatethe achievement of these objectives. It is alsothe board of directors’ task to supervise theimplementation of policy and the control of thecompany and to report to the shareholders.(Part I: B.1.2)

The Board of Directors, which is a collegiatebody, must . . . exercise effective control overthe company and the activities of its ExecutiveDirectors. (1.1)

A number of decisions must belong to theexclusive competence of the Board ofDirectors, so that the administration andcontrol of the company remain clearly in thehands of that Board. (1.4)Apart from its legal powers and powersprovided for by the Articles, and apart from thepowers of the General Meeting, the Board ofDirectors decides on what is covered by itspowers.It is the task of the Board of Directors, on aproposal from the Executive Directors, todetermine the strategic objectives of thecompany and the general policy plan, toappoint the management and to developstructures which will make it possible toachieve these objectives, to supervise theexecution of the policy plan and the control ofthe company, and to give the necessaryinformation to the partners.The Board of Directors also defines theprocedures which have to be followed fortransactions which are binding on thecompany, and it defines the cases when thesignature of directors is required. It alsodefines the procedures which have to befollowed if decisions have to be taken betweentwo meetings of the Board of directors. (Noteto 1.4)

The Board of Directors must ensure that anefficient system of internal control isestablished. (4.5)

23 See also American Bar Association, Committee on Corporate Laws, Section of Business Law, Corporate Director’s Guidebook (2d ed. 1994) (“ABA Guidebook”) at 5 (“Stated broadly, the principal responsibility of a corporate director is to promote the best interests of thecorporation and its shareholder’s business and affairs.”).

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Dey Report(Canada)

Viénot Reports I & II(France)

Berlin Initiative Group Code(Germany)

Mertzanis Report(Greece)

Preda Report(Italy)

1. The Mission of the Board of Directors

The board of directors of every corporationshould explicitly assume responsibility for thestewardship of the corporation and, as part ofthe overall stewardship responsibility, shouldassume responsibility for the followingmatters:

i. adoption of a strategic planning process; ii. the identification of the principal risks

of the corporation’s business andensuring the implementation ofappropriate systems to manage theserisks;

iii. succession planning, includingappointing, training and monitoringsenior management;

iv. a communications policy for thecorporation; and

v. the integrity of the corporation’sinternal control and managementinformation systems.

(Guideline 1)

We define the principle objective of directingand managing the business and affairs of thecorporation as enhancing shareholder value.(Guideline 2.2(2))

[W]hatever a board’s membership andprocedures may be, its members collectivelyrepresent all shareholders and it must at alltimes put the company’s interest first.(Viénot I at 2)

[T]he board of directors . . . determines thecompany’s strategy, appoints the corporateofficers charged with implementing thatstrategy, supervises management, andensures that proper information is madeavailable to shareholders and marketsconcerning the company’s financial positionand performance, as well as any majortransactions to which it is a party. (Viénot Iat 2)

[I]n continental Europe, and particularly inFrance, [the emphasis in the area of duties ofthe board of directors] tends to be on thecompany’s interest. . . .The interest of the company may be under-stood as the overriding claim of the companyconsidered as a separate economic agent,pursuing its own objectives which are distinctfrom those of shareholders, employees, credit-ors including the internal revenue authorities,suppliers and customers. It nonetheless repre-sents the common interest of all these persons,which is for the company to remain in businessand prosper. The Committee thus believes thatdirectors should at all times be concernedsolely to promote the interests of the company.The Committee thus believes that directorsshould at all times be concerned solely topromote the interests of the company.(Viénot I at 5)

The Committee believes that while it is theChairman’s role to draw up and propose astrategy, this must be adopted by the board.By virtue of the same principle, it mustconsider and decide on all strategicallyimportant decisions. (Viénot I at 8)

Management Board

The Management Board . . . forms thecompany’s clear locus of decision-making.(The Code, I.6)

The Management Board leads the publiccorporation. (The Code, III.1.1)

Decisions of fundamental importance for thecompany (basic decisions) are the responsi-bility of the Management Board as a whole.(The Code, III.3.4)

See the Code, I.2 (The target of companymanagement is the sustained increase in thevalue of the company.).

See also the Code, III (Governance Standardsfor the Management Board).

See also Thesis 5 (The Management Boardstands at the center of the . . . guidelines.).

Supervisory Board

The Supervisory Board plays an important role. . . with its selection and supervision of theManagement Board. It does not, however,have any managerial function. (Thesis 6)

The Supervisory Board serves as supervisoryauthority which controls and advises theManagement Board in the sense of “checks andbalances.” In this, it is not on an equal footingnext to, or even above, the Management Board.The Supervisory Board serves rather as acounterweight to the Management Boardwhich can and should limit, but normallyneither counterbalances nor outweighs, theinfluence of the organ of management on thedestiny of the company.” (Commentary onThesis 6; see the Code, I.6)

See the Code, I.7 ([A] supporting significanceattaches to the standards for supervision.)

The corporate governance framework shouldensure the strategic leadership of thecorporation, the efficient monitoring ofmanagement by the Board of Directors and theaccountability of the Board to the corporationand its shareholders. (Principle 5)

The Board of Directors is the authority thatgoverns the corporation. Its duties involvedecision-making and the responsibility forexercising full and efficient monitoring of allactivities of the corporation.(Recommendation 5.1)

In the case where the decisions of the Board ofDirectors may affect the different classes ofshares in a different manner, the Board ofDirectors should treat all shareholders withoutdiscrimination. (Recommendation 5.2)

See Introduction (The Board has the responsi-bility to deal with the corporation’s affairsexclusively in the interests of the corporationand its shareholders within the existing regu-latory framework. The Board has the mainresponsibility for ensuring the establishment ofefficient governance rules and must be ac-countable to the general shareholders meetingsfor its activities and performance. The Boardhas the main responsibility for setting thecorporation’s long-term goals and making allstrategic decisions, making available allrequired sources for the achievement ofstrategic goals as well as the appointment andsupervision of management.).

Listed companies are governed by a board ofdirectors. . . . The Committee believes that theprimary responsibility of the board of directorsof a listed company is to set the company’sstrategic objectives and to ensure they areachieved. (Commentary on the Code, 1.1)

The creation of value for the generality ofshareholders is the primary objective that thedirectors of listed companies seek to achieve.(Commentary on the Code, 1.4; the Report, 4)

See Commentary on the Code, 5 ([T]he boardof directors is required by law to inform theboard of auditors.).

See also the Report, 5.1 ([T]he fundamentalfeature [of the Code] is the central position ofthe board of directors, charged with providingstrategic and organizational guidance andverifying the existence of the controls neededto monitor companies’ performance.).

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Corporate Governance Forum Principles(Japan)

Peters Code(The Netherlands)

Securities Markets Comm’n Recommendations(Portugal)

Olivencia Report(Spain)

Swedish Academy Report(Sweden)


In the Japanese corporate system, the corporategovernance function by definition rests withthe board of directors, who are elected torepresent the shareholders. The directors areentitled to govern the company, and tosupervise and monitor the company’smanagers in order to promote effectivemanagement and ensure accountability to theshareholders. The board of directors thereforeis the primary overseer of the company,monitoring management to ensure that itcontinually endeavors to maximize long-termcorporate value for the shareholders, and isalways accountable for its actions to allstakeholders, in particular the shareholders.(Ch. 1.3)

[G]overnance by the board of directors alsocomprehends elements of social responsibility:through their duty of supervisingmanagement’s actions, directors contribute tothe transparency of the market. (Ch. 1.4)

The Principles . . . present a Japanese model ofcorporate governance. They place specialemphasis on the obligation of directors torepresent the long-term interests ofshareholders as well as simultaneously topromote the benefits of all concernedstakeholders. (Ch. 1.7)

The function of the board of directors shouldbe rejuvenated to cope with the increasinglycomplex and rapidly changing global market,through its metamorphosis into an honest andrigorous advisory body for management, whichmight otherwise be tempted to be complacent.(Ch. 2.6)

Supervisory Board

In accordance with the law, the SupervisoryBoard, in performing its duties, is bound by theinterests of the company and the enterpriseconnected therewith. It is responsible for thesupervision of management policy and thegeneral course of affairs in the company.Under the full ‘structure regime,’ the Super-visory Board is responsible for appointments tothe Board of Directors. (Recommendation 2.1)

Management Board

The Board of Directors is responsible for themanagement of the company, which implies,inter alia, that the Board is responsible forrealizing the company’s objectives, the stra-tegy and policy and the ensuing developmentof results. (Recommendation 4.1)

The Board of Directors should report in writingto the Supervisory Board on the company’sobjectives, strategy and the associated risks ofa financial nature. (Recommendation 4.2)

There are no conceivable circumstances whichcan justify any relaxation of the principle thatthe management should be fully accountable tothe providers of risk capital.(Recommendation 5.1)

[T]he board exercise[s] effective control in itsguidance of the company, reserving decisionson important matters. To pursue this objective,it should . . . ensure the supervision of themanagement of the company. (Commentaryon Recommendation 14)

The Board of Directors should take charge ofthe general function of supervision as its coremission, directly carrying out – not delegating– the responsibilities it entails and drawing upa formal schedule of matters specificallyreserved for its knowledge. (The Code,Recommendation 1)

[T]he Committee considers that the generalfunction of supervision is the most genuinefunction of the Boards of Directors of listedcompanies. Within this function, theCommittee separates three basicresponsibilities: guiding the company’spolicies and strategies, controllingmanagement, and liasing [sic] withshareholders. (The Report, II.1.1)

[The Committee] recommend[s] establishing,as an ultimate corporate goal and consequentlyas a criterion that must rule the performance ofthe Board of Directors, the maximization ofcorporate value or, to use an expression thathas taken root in the market, the creation ofshareholder value. (The Report, II.1.3)

The Board of Directors is responsible for theorganization of the company and for theadministration of the affairs of the company.(General Corporation Act) (p. 4)

The Board of Directors carries the totalresponsibility for the company. It is importantthat each of the board members is clear abouther/his responsibility and the importance ofacting in the interest of the company. . . .[T]he Board of Directors shall initiate changesand evaluate different options. The boardroomwork shall be practical and aimed atdeveloping the company. (p. 5)

The Board of Directors should lift theirattention above the everyday rush and focustheir interest on the world around the companyand interpret signals, question and discussstrategies and the business concept both on ashort-term, but above all on a long-term, basis.(p. 5)

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Cadbury Report(United Kingdom)

Hampel Report(United Kingdom)

The Combined Code / Turnbull Report(United Kingdom)

1996 NACD Report(USA)

1997 BRT Report(USA)


The board should . . . retain full and effectivecontrol over the company and monitor theexecutive management. (The Code, 1.1)

[T]he effectiveness with which boardsdischarge their responsibilities determinesBritain’s competitive position. They must befree to drive their companies forward, butexercise that freedom within a framework ofeffective accountability. This is the essence ofany system of good corporate governance.(The Report, 1.1)

Every listed company should be headed byan effective board which should lead andcontrol the company. (Principle A.I)

The single overriding objective shared by alllisted companies, whatever their size or type ofbusiness, is the preservation and the greatestpracticable enhancement over time of theirshareholders’ investment. All boards have thisresponsibility and their policies, structure,composition and governing processes shouldreflect this. (Guideline 1.16)

The prime responsibility of the board ofdirectors is to determine the broad strategy ofthe company and to ensure its implementation.To do this successfully requires high-qualityleadership. It also requires that the directorshave sufficient freedom of action to exercisetheir leadership. The board can only fulfil itsresponsibilities if it meets regularly andreasonably often. (Guideline 3.11)

Every listed company should be headed byan effective board which should lead andcontrol the company. (The Code, PrincipleA.1)

The objective of the corporation (and thereforeof its management and board of directors) is toconduct its business activities so as to enhancecorporate profit and shareholder gain. Inpursuing this corporate objective, the board’srole is to assume accountability for the successof the enterprise by taking responsibility forthe management, in both failure and success.This means selecting a successful corporatemanagement team, overseeing corporatestrategy and performance, and acting as aresource for management in matters ofplanning and policy. (p. 1)

[T]he principal objective of a businessenterprise is to generate economic returns to itsowners. (p. 1)

[T]he paramount duty of management and ofboards of directors is to the corporation’sstockholders; the interests of other stakeholdersare relevant as a derivative of the duty tostockholders. (p. 3)

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1a. The Role of Stakeholders

In addition to fulfilling its obligations forincreased stockholder value, the Board hasresponsibility to GM’s customers, employees,suppliers and to the communities where itoperates – all of whom are essential to asuccessful business. All of these responsibil-ities, however, are founded upon the successfulperpetuation of the business. (Introduction)

The corporate governance frameworkshould recognize the rights of stakeholdersas established by law and encourage activecooperation between corporations andstakeholders in creating wealth, jobs, andthe sustainability of financially soundenterprises .A. The corporate governance framework

should assure that the rights of stake-holders that are protected by law arerespected.

B. Where stakeholder interests are protectedby law, stakeholders should have theopportunity to obtain effective redress forviolation of their rights.

C. The corporate governance frameworkshould permit performance-enhancingmechanisms for stakeholder participation.

D. Where stakeholders participate in thecorporate governance process, they shouldhave access to relevant information.

(OECD Principle III)

The board should . . . take into account the in-terests of stakeholders. (OECD Principle V.D)

Boards are expected to take due regard of, anddeal fairly with . . . stakeholder interestsincluding those of employees, creditors,customers, suppliers and local communities.(OECD Principle V Annotation at 40)

See Millstein Report, 1.2.16 (Corporate suc-cess is linked to the ability to align the interestsof directors, managers and employees with theinterests of shareholders. . . . [C]orporateactions must be compatible with societalobjectives. . . . Attending to legitimate socialconcerns should, in the long run, benefit allparties, including investors.)

See also Millstein Report,Perspective 18 (re: law-abiding corporations);Perspective 19 (re: individual welfare); andPerspective 20 (re: income and opportunitydivergence).

Directors should use their best efforts to . . .meet the company’s obligations to all partieswith which the company interacts – itsstakeholders. (p. 7)

[T]he board’s functions include . . . ensuringthat the company has in place a policy thatenables it to communicate effectively with itsshareholders, other stakeholders and the publicgenerally. (pp. 8-9)

Elements providing guidance to a companydeveloping its own code of conduct include:§ A section on relations with customers and

consumers. . . .§ A section on relations with suppliers. . . .§ A section on employment practices. . . .§ A section on responsibilities to the

community.(pp. 40-41)

All employees have some responsibility forinternal control as part of their accountabilityfor achieving objectives. They, collectively,should have the necessary knowledge, skills,information and authority to establish, operateand monitor the system of internal control.This will require an understanding of thecompany, its objectives, the industries andmarkets in which it operates, and the risks itfaces. (Turnbull Report, 19)

Transparency is the basis on which trustbetween the company and its stakeholders isbuilt, notwithstanding the constraints imposedon the company by its competitive environ-ment. Transparency is conducive to thecompany’s effectiveness, because it allows theboard of directors to act promptly whennecessary. (Part I: A.7)

Not covered.

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Dey Report(Canada)




Preda Report(Italy)


A system of corporate governance recognizesthe role of other stakeholders. We havealready identified the responsibility of theboard to manage the corporation to enhancevalue for shareholders – in contrast tomanaging in order to address the interests ofstakeholders, including employees, thecommunity, suppliers, creditors and customers.Notwithstanding the primary responsibility ofthe board, the longer-term interests of share-holders will not be well-served if the interestsof other stakeholders are not addressed.Creating shareholder wealth in a marketeconomy will usually be in the best interests ofstakeholders generally. (Guideline 2.2(4))

Having said that directors have no corporatelaw duty to act in the best interests of anyparticular stakeholder group, it is obvious thata board cannot make a decision withoutunderstanding the implications of its decisionfor this broader group of stakeholders. Inmaking decisions to enhance shareholdervalue, the board must take into account theinterests of other stakeholders. In today’senvironment it is difficult for a corporation toprosper if it is not “on side” with all of itsstakeholders. (Guideline 4.17)

French law provides for the attendance ofworks council (comité d’entreprise) represen-tatives at board meetings, where they have aconsultative vote, and allows for full boardmembership of representatives of employees(by ministerial order of 1986) or of employeeshareholders (under legislation dated 1994).(Viénot I at 12)

See Viénot I at 5 (The interest of the companymay be understood as . . . distinct from those ofshareholders, employees, creditors, . . .suppliers and customers. It nonethelessrepresents the common interest of all of thesepersons, which is for the company to remain inbusiness and prosper.).

Company management must sensibly balancethe interests of the various stakeholders of thecompany. (Thesis 8)

Among those with an interest in the publiccorporation are principally the owners (stock-holders), but also employees, customers, loancreditors and suppliers, as well as the public atlarge. . . . (Commentary on Thesis 8)

[D]istinctive of the constitution of Germancompanies is . . . inclusion of employees bymeans of various forms of participation (co-determination). (The Code, I.4)

Representatives of employees on theSupervisory Board contribute towardsbalanced discussion. (The Code, II.4.4)

The Management Board should be aware ofsocial responsibility to a reasonable extent.(The Code, III.1.4)

The Supervisory Board should . . . be aware ofsocial responsibility to a reasonable extent.(The Code, IV.1.4)

Employees . . . are institutionally anchored incorporate governance as a result of co-determination. (The Code, V.2.1)

Co-determination at plant level, according tothe Labor-Management Relations Act, is car-ried out in individual company plants. . . .Employees elect a works council in every plantwith at least five employees. (The Code, V.2.2)

Co-determination at enterprise level takesplace on the Supervisory Board. (The Code,V.2.3)

See generally the Code, V.2 (EmployeeCo-determination).

The corporate governance framework shouldrecognize the rights of stakeholders in thecorporation, as established by law, andencourage active participation betweencorporations and stakeholders in creatingwealth, jobs and the sustainability offinancially sound enterprises. (Principle 3)

The corporate governance framework shouldensure that the rights of stakeholders that areprotected by law are respected.(Recommendation 3.1)

Where law protects stakeholder interests,stakeholders should have the opportunity toseek effective redress for violation of theirrights. (Recommendation 3.2)

The corporate governance framework shouldencourage the role of stakeholders in thecorporation in a manner that enhances theperformance of the corporation and the market.There should be provision for the disclosure ofinformation which is relevant to the interests ofstakeholders. (Recommendation 3.3)

Where stakeholders participate in the corporategovernance processes, they should have accessto relevant information. (Recommendation3.4)

See Recommendation 1.7 (The solution ofproblems and the settlement of differencesamong the corporation’s agents is encouragedto be done by consensus, taking into accountthe long-term interests of the corporation.).

The Committee has identified themaximization of shareholder value as theprimary objective of good CorporateGovernance, considering that, in the longerterm, the pursuit of this goal can give rise to avirtuous circle in terms of efficiency andcompany integrity, with beneficial effects forother stakeholders – such as customers,creditors, consumers, suppliers, employees,local communities and the environment –whose interests are already protected in theItalian legal system. (The Report, 4)

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The board of directors has the importantresponsibility of coordinating the variousinterests of all the other stakeholders, whilesubstantively representing the immediateinterests of the shareholders. Therefore, thedirectors should undertake wider disclosure ofcompany information, including policystatements as well as environment-relatedreports, for the benefit of all stakeholders whomay have divergent interests. (Principle 4A)

The publicly-owned corporation . . . is actuallya system of cooperative relationships betweenvarious stakeholders, including shareholders,management, employees, consumers, clientsand creditors. (Ch. 1.2)

[M]anagement is to strive to maximize share-holders’ profit while simultaneously ensuringthe appropriate profit level for other stake-holders. As long as the market mechanism isproperly functioning, the shareholders’ interestin maximizing profits is justified.In reality, however, the market mechanismdoes not function perfectly. . . . This is whymanagement oversight of the allocation ofprofit among stakeholders is indispensable.(Ch. 1.4)

Without stable cooperation between employeesand management, shareholders’ value willnever be maximized. To achieve smoother andmore effective cooperation, Japanese compan-ies have introduced devices [to] share profitswith employees. . . . The goal of these systemsis to reconcile the dual aims of maximizingshareholders’ profit and maximizing the profitallocation for all stakeholders. (Ch. 1.6)

[Companies] must seek a good balancebetween the interests of the providers of riskcapital (investors) and the other stakeholders.In the long-term, this should not mean aconflict of interests. (Recommendation 1.1)

The company is accountable to its variousstakeholders. (Recommendation 1.1)

Supervisory Board members [should ensure]. . . a division of duties and responsibilities andpowers effecting the satisfactory balance ofinfluence of all the stakeholders. The basicprinciple here is that members of the Board ofDirectors and Supervisory Board membersshould – also in public – be accountable fortheir conduct. (Recommendation 1.2)

An employee stock option plan serves tostrengthen involvement in the company overthe long-term (at least 3 years). The employeestock option is a form of remuneration whichshould be related to the degree of success ofthe efforts made by the person concerned toenhance the market value of the company.This should be reflected in the conditions onwhich the stock options are granted.(Recommendation 4.6)

Not covered. Not covered. Not covered.

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Not covered directly, but see The Report, 2.7(Although the reports of the directors areaddressed to the shareholders, they areimportant to a wider audience, not least toemployees whose interests boards have astatutory duty to take into account.).

See also The Report, 3.2 (Openness on thepart of companies, within the limits set by theircompetitive position, is the basis for theconfidence which needs to exist betweenbusiness and all those who have a stake in itssuccess.).

See also The Report, 4.29 (It is important thatall employees should know what standards ofconduct are expected of them. We regard it asgood practice for boards of directors to drawup codes of ethics or statements of businesspractice and to publish them both internallyand externally.).

See also The Report, 4.50 (What shareholders(and others) need from the report and accountsis a coherent narrative, supported by thefigures, of the company’s performance andprospects. We recommend that boards shouldpay particular attention to their duty to presenta balanced and understandable assessment oftheir company’s position.).

Good governance ensures that constituencies(stakeholders) with a relevant interest in thecompany’s business are fairly taken intoaccount (Guideline 1.3)

[T]he directors’ relationship with shareholdersis different in kind from their relationship withother stakeholder interests. The shareholderselect the directors. . . . [D]irectors as a boardare responsible for relations with stakeholders,but they are accountable to the shareholders.This is not simply a technical point. From apractical point of view, to redefine directors’responsibilities in terms of stakeholders wouldmean identifying all the various stakeholdersgroups and deciding the nature and extent ofthe directors’ responsibility to each. The resultwould be that the directors were not effectivelyaccountable to anyone since there would be noclear yardstick for judging their performance.This is a recipe neither for good governancenor for corporate success. (Guideline 1.17)

This does not mean, of course, that directorsmust run the company exclusively in the short-term interests of today’s shareholders. . . .[T]he directors’ duty is to shareholders bothpresent and future. The shareholders, many ofwhose holdings remain largely stable overtime, are interested in a company’s sustainedprosperity. As regards stakeholders, differenttypes of company will have different relation-ships, and directors can meet their legal dutiesto shareholders, and can pursue the objectiveof long-term shareholder value successfully,only by developing and sustaining thesestakeholder relationships. We believe thatshareholders recognize that it is in theirinterests for companies to do this and –increasingly – to have regard to the broaderpublic acceptability of their conduct.(Guideline 1.18)

Not covered. [T]he board should clearly define its role,considering both its legal responsibilities toshareholders and the needs of otherconstituencies, provided shareholders are notdisadvantaged. (Summary and Conclusion, 1)

[T]o manage the corporation in the long-terminterests of the stockholders, management andthe board of directors must take into accountthe interests of the corporation’s otherstakeholders. Indeed, a number of states haveenacted statutes that specifically authorizedirectors to take into account the interests ofconstituencies other than stockholders, and avery limited number of state statutes actuallyrequire consideration of the interests of otherconstituencies.In the Business Roundtable’s view, the para-mount duty of management and of boards ofdirectors is to the corporation’s stockholders;the interests of other stakeholders are relevantas a derivative of the duty to stockholders. Thenotion that the board must somehow balancethe interests of stockholders against theinterests of other stakeholders fundamentallymisconstrues the role of directors. It is,moreover, an unworkable notion because itwould leave the board with no criterion forresolving conflicts between interests ofstockholders and of other stakeholders oramong different groups of stakeholders.(pp. 3-4)

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2. Board Membership Criteria24

The Committee on Director Affairs isresponsible for reviewing with the Board, onan annual basis, the appropriate skills andcharacteristics required of Board members inthe context of the current make-up of theBoard. This assessment should include issuesof judgment, diversity, age, skills such asunderstanding of manufacturing technologies,international background, etc. – all in thecontext of an assessment of the perceivedneeds of the Board at that point in time.(Guideline 1)

Not covered directly, but see OECD Principle IAnnotation at 25 (Shareholders’ rights toinfluence the corporation center on certainfundamental issues, such as . . . influencing thecomposition of the board.).

Not covered. Not covered directly, but see Part I: B.1.1([The board of directors] must meet regularlyand must be capable of monitoring theexecutive management.).

Not covered directly, but see Topic Heading 3,below.

24 See also National Association of Corporate Directors, Report of the NACD Blue Ribbon Commission on Performance Evaluation of Chief Executive Officers, Board and Directors (1994) (“1994 NACD Report ”) at 7-8 (Directors “should be chosen on the basis of . . . talent,expertise, and accomplishment. Diversity of race, gender, age, and nationality . . . may also be taken into account . . . Diversity should not, however, be confused with constituency representation . . . . Also, each director should be a shareholder of the corporation.”); 1990 BusinessRoundtable Statement at 9, 11-12 (Directors should be “highly experienced in business, investments, large organizations or public affairs, [and] willing and able to commit the time and effort needed to be an effective director. . . .”); ABA Guidebook at 15, 39 (“[T]he focus shouldbe on the personal qualities and business experience of the individual directors, and the overall mix of experience, independence, and diversity of backgrounds likely to make the board of directors, as a body, most effective in monitoring the performance of the corporation. . . . Theprincipal qualities . . . include strength of character, an inquiring and independent mind, practical wisdom and mature judgment.”).

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Dey Report(Canada)




Preda Report(Italy)

2. Board Membership Criteria

Not covered. Not covered directly, but see Viénot I at 14([T]he existence of cross-shareholdings may beviewed as a transitional phenomenon in Frenchcapitalism, and one whose elimination asquickly as possible would appear highlydesirable. . . . The Committee thus believesthat when a board is considering how best tostructure its membership, it should takecare to avoid including an excessive numberof such reciprocal directorships.).

See also Viénot II at 24 (When a director’sappointment or the extension of his or her termof office is referred to the meeting ofshareholders, the annual report and noticecalling the shareholders should include, inaddition to the statutory statements, abiographical notice outlining his or herrésumé.).

See also Topic Heading 3, below.

Management Board

Not covered directly, but see the Code, II.1.1([A] balanced multiplicity of qualifications andthe ability of the individual ManagementBoard members to work together as a team hasto be ensured.).

See also the Code, II.1.2 (Making certain of anoptimal qualification of Management Boardmembers belongs to [the Supervisory Board’s]tasks.).

Supervisory Board

In its proposals to the annual general meetingfor the election of new members as well as re-appointments to office, the Supervisory Boardallows itself to be guided by the considerationthat, as to suitability of the persons appointed,the decisive factor is ability. In order to ensurethe necessary quality in proposals forappointment, the Supervisory Board discussesand makes decisions based on transparentcriteria for the assessment of the candidateswho come up for election. (The Code, IV.4.1)

In particular, the Supervisory Board makescertain with its proposals as to appointmentsthat the representatives of the stockholderspossess those various qualifications which arerequired for competent control of theManagement Board according to the realitiesof the company. (The Code, IV.4.2)

Not covered. [E]ach company should determine the . . .experience and personal traits of its non-executive directors in relation to its size, thecomplexity and specific nature of its sector ofactivity, and the total membership of the board.(Commentary on the Code, 2.2)

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Not covered directly, but the Report does notethat the optimal characteristics that should bepossessed by the Japanese company’s shacho(president)25 in his/her style of corporategovernance are as follows:

[A]n effective shacho is hard working, spirited,reliable, level-headed, a good decision-maker,with excellent communication skills and has acomprehensive grasp of where the company isheaded in the future. All these qualities,however, are insufficient unless he or she is aperson of responsibility, firmly determined tomaximize long-term corporate value for thebenefit of shareholders. Modern corporationsare on-going concerns. . . . The legitimacy ofthe shacho derives from, and is recognizedonly by his or her sense of dedication andresponsibility to the shareholders and theirrepresentatives, the board of directors, throughthe pursuit of the maximization of corporatevalue. (Ch. 1.5)

See also Ch. 2.8 (Independent externaldirectors . . . are more likely to be genuinelyneutral agents of shareholders and so able togovern the company more effectively.).

The Supervisory Board of each companyshould draw up a desired profile of itself inconsultation with the Board of Directors. TheSupervisory Board should evaluate this profileperiodically and draw conclusions regarding itsown composition, size, duties and procedures.New developments, for example technologicaland financial innovations, are also ofimportance. . . The profile should reflect, interalia, the nature of activities, the degree ofinternalization, the size of the company shouldbe taken into account. (Recommendation 2.2)

No more than one former member of theCompany’s Board of Directors should serve onthe Supervisory Board. (Recommendation 2.5)

The Committee advocates that the number ofSupervisory Board memberships which oneperson can hold in (listed) companies shouldbe limited so as to guarantee a properperformance of duties. (Recommendation2.10)

The basic principle is that the Board ofDirectors and the Supervisory Board shouldhave the confidence of the shareholders’meeting. The Committee thereforerecommends that this be borne in mind whenappointing board members. Board of Directorsand Supervisory Boards cannot performsatisfactorily in the long run without thatconfidence. (Recommendation 5.3)

Not covered. [T]here is no single independent directorprofile. Therefore, it is not advisable to selectthem exclusively from among the significantexecutives of other companies, although thisprovenance might especially qualify them indirecting the strategy and efficientlyperforming the supervision function. It is alsoconvenient to incorporate individuals fromother professional extractions. (The Report,II.5.2)

The Nomination Committee’s mission is to . . .define and review the criteria to be followed indetermining the composition of the Board ofDirectors and the selection of candidates.(The Report, II.5.1)

The ownership structure of the companiesmaking up our stock market features . . . anoticeable capital concentration and hence astrong presence of significant shareholders(shareholders able to influence, eitherindividually or collectively, the control of thecompany). Recognition of this fact has led usto encourage the participation of theseshareholders on the Board of Directors(“proprietary directors”). (The Report, II.8.6)

The composition of the Board of Directorsdepends on the size of the company, itsorganization, type and direction.§ In small, family owned businesses the

external board members can be businesscolleagues, or local and competentbusiness people and/or board memberswith special skills. . . .

§ In growing, medium-sized companies, theBoard must be supplemented with anexperienced generalist. A specialist mayalso be needed.

§ In a subsidiary, the external boardmember should be a local, skilledbusiness woman/man.

§ In a parent company, board membersshould be skilled and able to contribute tothe development of the company and tosupport management.

(p. 5)

25 The shacho is the top management executive (Corporate Governance Principles—A Japanese View (Final Report), Ch. 1-5), i.e., he or she is the CEO and often chairman of the board of directors in Japanese companies.

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Not covered directly, but see The Report, 4.15(Given the importance of their distinctivecontribution, non-executive directors should beselected with the same impartiality and care assenior executives. We recommend that theirappointment should be a matter for the boardas a whole and that there should be a formalselection process, which will reinforce theindependence of non-executive directors andmake it evident that they have been appointedon merit and not through any form ofpatronage. We regard it as good practice for anomination committee to carry out theselection process and to make proposals to theboard.).

Executive directors share with their non-executive colleagues overall responsibility forthe leadership and control of the company. . . .Boards should only appoint as directorsexecutives whom they judge to be able tocontribute [by showing leadership, speakingfor the area for which he/she directlyresponsible, and exercising independentjudgement]. Board appointment should not beregarded simply as a reward for goodperformance in an executive role.(Guideline 3.6)

Non-executive directors are normallyappointed to the board primarily for theircontribution to the development of thecompany’s strategy. . . . [T]he non-executivedirectors should command the respect of theexecutives and should be able to work withthem in a cohesive team to further thecompany’s interests. (Guideline 3.8)

Most non-executive directors are executives orformer executives of other companies. Thisexperience qualifies them both in constructivepolicy making and in the monitoring role.Non-executive directors from otherbackgrounds are often appointed for theirtechnical knowledge, their knowledge ofoverseas markets or their political contacts. . . .We do not favour diversity for its own sake, togive a politically correct appearance to the listof board members or to represent stakeholders.But we believe, given the diversity of businessand size of listed companies, that there arepeople from other fields who can make a realcontribution on the board. (Guideline 3.15)

Not covered directly, but see the Code,Provision A.6.2 (The names of directorssubmitted for election or reelection should beaccompanied by sufficient biographical detailsto enable shareholders to take an informeddecision on their election.).

See also the Code, Provision A.3.1 (The boardshould include non-executive directors ofsufficient calibre and number for their views tocarry significant weight in the board’sdecisions.).

[I]ndividual directors should possess all of thefollowing personal characteristics:§ Integrity and Accountability . . .§ Informed Judgment . . .§ Financial Literacy . . .§ Mature Confidence . . . [and]§ High Performance Standards . . . .[T]he board as a whole should possess all ofthe following core competencies, with eachcandidate contributing knowledge, experience,and skills in at least one domain:§ Accounting and Finance . . .§ Business Judgment . . .§ Management . . .§ Crisis Response . . .§ Industry Knowledge . . .§ International Markets . . .§ Leadership . . . [and]§ Strategy/Vision.(pp. 7-9)

[C]andidates should be prepared to own asignificant equity position in the company.(p. 13)

Boards should seriously consider . . . thedistinctive skills, perspectives, and experiencesthat candidates diverse in gender, ethnicbackground, geographic origin andprofessional experience . . . can bring to theboardroom. (p. 14)

Board[s] should consider guidelines that limitthe number of positions on other boards,subject to individual exceptions – for example,for CEOs and senior executives, one or two;for others fully employed, three or four; andfor all others, five or six. (p. 22; see p. 12)

[The board] should encompass individuals withdiverse talents, backgrounds, and perspectiveswho can work effectively together . . . whilepreserving their ability to differ with each otheron particular issues. . . . Men and women fromdifferent geographical areas and of differentages, races and ethnic backgrounds cancontribute different, useful perspectives. (p. 7)

Effective boards are composed of individualswho are highly experienced in their respectivefields of endeavor and whose knowledge,background and judgment will be useful to thecorporation. Directors must have the abilityand willingness to learn the corporation’sbusiness and to express their personal views.(p. 8)

Each person serving as a director must devotethe time and attention necessary to fulfill theobligations of a director. . . . [S]ervice on toomany boards can interfere with an individual’s. . . ability to perform his or herresponsibilities. . . . Because time demandsfrom board to board and capacities ofindividual directors will vary, [the BRT] doesnot endorse a specific limitation on the numberof directorships an individual may hold. (p. 8)

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3. Selecting, Inviting and Orienting New Directors26

The Board itself should be responsible, in factas well as procedure, for selecting its ownmembers and in recommending them forelection by the stockholders. The Boarddelegates the screening process involved to theCommittee on Director Affairs with the directinput from the Chairman of the Board and theChief Executive Officer. The Board and theCompany have a complete orientation processfor new Directors that includes backgroundmaterial, meetings with senior managementand visits to Company facilities. (Guideline 2)

The invitation to join the Board should beextended by the Board itself via the Chairmanof the Board and Chief Executive Officer ofthe Company, together with an independentdirector, when appropriate. (Guideline 3)

Basic shareholder rights include the right to . . .elect members of the board. (OECD PrincipleI.A)

Shareholders’ rights to influence thecorporation center on certain fundamentalissues, such as the election of board members,or other means of influencing the compositionof the board. (OECD Principle I Annotation at25)

The board should fulfill certain key functions,including . . . ensuring a formal and transparentboard nomination process. (OECD PrincipleV.D.3)

In order to improve board practices and theperformance of its members, some companieshave found it useful to engage in training andvoluntary self-evaluation that meets the needsof the individual company. This might includethat board members acquire appropriate skillsupon appointment, and thereafter remainabreast of relevant new laws, regulations, andchanging commercial risks. (OECD PrincipleV.E.2 Annotation at 42)

The Working Group also believes that it isgood practice for companies to establish asystem of orientation and training for directorsand it may be considered appropriate for it tobe discussed with incoming board members.An alternative may be to give each incomingdirector a directors’ source book which couldinclude, inter alia, copies of the articles ofassociation, extracts from relevant policies, theexecutive summary of the corporate plan andother appropriate information. (Guideline 3)

[T]he General Meeting of Shareholders isresponsible for appointing the members of theboard of directors. (Part I: A.2)

Non-executive directors should be selectedthrough a formal procedure, and both thisprocedure and proposals for the nomination ofnon-executive directors should be a matter forthe board as a whole.The Belgian Commission on CorporateGovernance regards it as good practice for anomination committee, where such exists, tocarry out the selection process and to makerecommendations to the board for thenomination of both executive and non-executive directors, singling out the non-executive directors. (Part I: B.2.4)

Non-executive directors are appointed by theGeneral Meeting on a proposal from the Boardof Directors. (2.3)

According to Belgian law, the General Meetingappoints all directors, whether they areexecutive or not.For non-executive directors, however, thisappointment must take place on a proposalfrom the Board of Directors. . . . Theappointments committee should makeproposals to the Board of Directors. (Note to2.3)

26 See also 1994 NACD Report at 10 (“The Nominating Committee should evaluate the profile of the board and discuss it with the CEO and the rest of the board, forming a consensus on the number of additional directors to be added at the time and the ideal set of job skills. TheNominating Committee, with input from the entire board, should make a list of candidates. The CEO should have input into the process, as well. Once a list of candidates has been established, the members of the Nominating Committee, the Chairman and CEO should meet witheach candidate to evaluate his or her suitability. The Nominating Committee can recommend a candidate to the board, or the board as a whole can select, based on the Nominating Committee’s advice.”); 1990 Business Roundtable Statement at 9, 13 (“The directors are in the bestposition to recommend the slate of nominees for board membership which is presented to the shareholders for election at the annual meeting. Nominating committees should develop their own process for dealing with shareholders suggestions of nominees to the board. . . . Inaddition, the nominating committee is responsible for recommending a slate of nominees to the board.”); ABA Guidebook at 38 (“The Nominating Committee Chair should have prominent involvement in the recruiting process in order to reinforce the perception as well as thereality that the invitee’s selection is being made by the Committee and the board, and not by the CEO.”).

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Dey Report(Canada)




Preda Report(Italy)

3. Selecting, Inviting and Orienting New Directors

The board of directors of every corporationshould appoint a committee of directorscomposed exclusively of outside, i.e., non-management, directors, a majority of whom areunrelated directors, with the responsibility forproposing to the full board new nominees tothe board and for assessing directors on anongoing basis. (Guideline 4)

Every corporation, as an integral element ofthe process for appointing new directors,should provide an orientation and educationprogram for new recruits to the board.(Guideline 6)

The Committee recommends that boardsshould set up special committees to selectboard members and corporate officers.(Viénot I at 14-15)

Selection committee Made up of 3 to 5members, including the chairman and at least 1independent director, this committee would becharged with proposing candidates after dueexamination of all relevant factors. (Viénot Iat 15)

In order to give full weight to the process forappointment of Directors by the shareholders,it is essential for the latter to have all theinformation relevant to their decision. Theannual report should therefore specifysystematically the dates of the beginning andexpiry of each Director’s term of office, andtherefore the staggering of terms, together withthe following information: age, main positionheld, directorships in French or foreign listedcorporations other than group affiliates, and, ifapplicable, membership on a Board committee.When the meeting of shareholders is requiredto act upon the appointment or extension of aDirector’s term, both the annual report and thenotice calling the meeting should present thecandidate for appointment through abiographical notice outlining his or her résumé,without prejudice to the existing statutoryrules. (Viénot II at 14)

Management Board

The Supervisory Board decides on theselection of the members of the ManagementBoard. . . . The decision of the SupervisoryBoard is prepared by the personnel committeeor a search committee. (The Code, II.1.2)

As soon as a vacancy in the ManagementBoard becomes evident, the ManagementBoard members, in conjunction with thepersonnel committee of the Supervisory Board,should present concrete appointment proposals.. . . Notwithstanding such possible suggestions. . . , the Supervisory Board remains master ofthe appointment procedure. (The Code, II.1.7)

See generally the Code, II.1 (Composition ofthe Management Board).

Supervisory Board

[The annual meeting of shareholders] elects themembers of the Supervisory Board insofar asthey may be appointed by the stockholders –depending on the co-determination situation.(The Code, I.5)

[E]mployees elect either one-third or one-halfof the members of the Supervisory Board,depending on the size of the corporation. Theythus participate in all responsibilities of thisorgan. The one-third equal footing co-determi-nation applies according to Labor-ManagementRelations Act 1952 to all corporations with atleast 500 but fewer than 2,000 employees, andparity co-determination according to the Co-determina-tion Act 1976 in companies with aworkforce exceeding 2,000. (The Code, V.2.3)

Shareholders should have the right to . . . theapproval of the appointment and/or dismissalof the members of the Board of Directors.(Recommendation 1.2.5)

Proposals for appointments to the position ofdirector, accompanied by detailed informationon the personal traits and professionalqualifications of the candidates, shall bedeposited at the company’s registered office atleast 10 days before the date fixed for theshareholders’ meeting or at the time theelection lists, if provided for, are deposited.(The Code, 7.1; see the Report, 4.5.1)

In general, proposals for the election ofdirectors are put forward by the majority orcontrolling shareholders, who obviously makea preliminary selection of the candidates.

In the case of companies with a broadshareholder base, instead, candidates are alsoput forward, sometimes by means of electionlists provided for in the by-laws, by minority ornon-controlling shareholders. (Commentaryon the Code, 7)

Board of AuditorsProposals to be submitted to the shareholders’meeting for appointments to the position ofauditor, accompanied by detailed informationon the personal traits and professionalqualifications of the candidates, shall bedeposited at the company’s registered office atleast 10 days before the date fixed for theshareholders’ meeting or at the time the relatedlists are deposited. (The Code, 13.1)

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[A] committee should be established within theboard, with responsibilities for the appointmentof directors. (Principle 9B)

Independent directors should be carefullyselected so as to ensure that the board is wellbalanced, and reflects the different values ofsociety at large. (Comment on Principle 8B)

The introduction of a majority of independentnon-executive directors to the board willincrease its effectiveness, in particular as it willenable the creation of an audit committeewithin the board of directors. However,companies whose situation is such that theconventional dual board system, comprisingseparate boards of directors and auditors, willensure equally effective risk management maymaintain this structure as long as this isaccompanied by a full explanation of itsrationale. (Comment on Principles 11A and13B)

Currently, a sufficient supply of independentexternal directors does not exist in Japan. Thislimited market for independent directors aswell as corporate auditors may be an Achilles’heel. But, in the medium-term, the uniquelyJapanese system of cross-shareholding mightbegin to unravel, which will necessitate asystem of governance more reliant onindependent and external directors, in turnleading to the creation of a market for suchindividuals. (Chs. 2.7)

Under the full “structure regime” theSupervisory Board is responsible forappointments to the Board of Directors. Incompanies not subject to the full “structureregime,” nominations for such appointmentswill be the duty of the Supervisory Board.(Recommendation 2.1)

It is important that Supervisory Boardmembers are selected from a wide circle. Onemeans of helping to achieve this would be via afurther internationalization of the compositionof the Supervisory Board. (Recommendation2.10)

Preparation of the selection criteria andnomination procedures for Supervisory Boardmembers, executive directors and highermanagement posts [may be conducted by aselection and nomination committee].(Recommendation 3.2)

Not covered. The Board’s intervention in the selection andre-election of its members should adjust to aformal and transparent procedure and shouldissue from a reasonable proposal made by theNomination Committee. (The Code,Recommendation 11)

The Nomination Committee’s mission is towatch over the integrity of the process ofappointing directors; to this end, it seems wiseto entrust it with the following functions:(a) define and review the criteria to be

followed in determining the compositionof the Board of Directors and the selectionof candidates;

(b) submit appointment proposals to theBoard of Directors, so that it can eitherappoint them directly (co-optation) orrelay those proposals to the GeneralShareholders’ Meeting;

(c) propose which directors should be in eachCommittee.

(The Report, II.5.1)

[C]ompanies receiving this report should havean induction programme for new directors totop the appointment process. The purpose ofthis program would be to provide them withadvice on their legal duties, inform them aboutcorporate governance rules and provide abriefing on the company’s features, situationand environment. (The Report, II.5.3)

The Board is nominated and appointed by theowners at the Annual General Meeting.Several larger companies have appointedNomination, Remuneration and AuditingCommittees to propose directors. (pp. 2, 7)

Before starting the search after a suitable boardmember the present position of the companymust be mapped . . . . The owner/managementmust formulate and describe where thecompany should be 3-5 years from now. Thusby positioning the company in the future it ispossible to derive the skill/competence andexperience that the company and its Board ofDirectors are in need of to take the company tothis future position. . . . When the profile andthe skill/competence requirements of the boardmember has been established [selection]start[s] by analyzing [one’s] own network andbusiness contacts. (p. 16)

[Board members should] make sure that theyreceive an adequate briefing on the company,of divisional heads, of subsidiary heads and ofthe Managing Director and set aside 2-5 daysfor the learning period. (p. 21)

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Non-executive directors should be selectedthrough a formal process and both this processand their appointment should be a matter forthe board as a whole. (The Code, 2.4)

We recommend that [a non-executivedirector’s] appointment should be a matter forthe board as a whole and that there should be aformal selection process, which will reinforcethe independence of non-executive directorsand make it evident that they have beenappointed on merit and not through any formof patronage. (The Code, 2.4; The Report,4.15)

One approach to making board appointments,which makes clear how these appointments aremade and assists boards in making them, isthrough the setting up of a nominationcommittee, with the responsibility of proposingto the board, in the first instance, any newappointments, whether of executive or of non-executive directors. A nomination committeeshould have a majority of non-executivedirectors on it and be chaired either by thechairman or a non-executive director.(The Report, 4.30)

See Topic Heading 2, above.

There should be a formal and transparentprocedure for the appointment of newdirectors to the board. (Principle A.V)

All directors should be required to submitthemselves for re-election at regularintervals and at least every three years.(Principle A.VI)

[O]n the first occasion that an individual isappointed to the board of a listed company, heor she should receive induction into theresponsibilities of a director. It is the board’sresponsibility to ensure that this help isavailable. It is equally important that directorsshould receive further training from time totime, particularly on relevant new laws andregulations and changing commercial risks.(Guideline 3.5)

Appointment to the board should be atransparent process. Decisions should betaken, in reality as well as in form, by thewhole board. We support the Cadburycommittee’s endorsement of the nominationcommittee (report, 4.30); indeed, we believethat the use of such a committee should beaccepted as best practice, with the proviso thatsmaller boards may prefer to fulfil the functionthemselves. (Guideline 3.19)

In general, we see appointment of directors torepresent outside interests as incompatible withboard cohesion, but there may be exceptionalcases where it is appropriate for a majorcreditor or a major shareholder to nominate adirector. (Guideline 3.20)

There should be a formal and transparentprocedure for the appointment of newdirectors to the board. (The Code, PrincipleA.5)

Every director should receive appropriatetraining on the first occasion that he or she isappointed to the board of a listed company, andsubsequently as necessary. (The Code,Provision A.1.6)

Unless the board is small, a nominationcommittee should be established to makerecommendations to the board on all newboard appointments. (The Code, ProvisionA.5.1)

The names of directors submitted for electionor reelection should be accompanied bysufficient biographical details to enableshareholders to take an informed decision ontheir election. (The Code, Provision A.6.2)

Boards should establish a wholly independent. . . “nominating” . . . “organizational” [or] . . .“governance” . . . committee that is responsiblefor . . . nominating directors for boardmembership. . . . (p. 3)

Creating an independent and inclusive processfor nominating . . . directors . . . will ensureboard accountability to shareholders andreinforce perceptions of fairness and trustbetween and among management and boardmembers. (p. 4)

Boards should involve all directors in all stagesof the CEO and board member selectionprocess. (p. 4)

Boards should institute as a matter of course anindependent director succession plan andselection process, through a committee oroverseen by a designated director or directors.(p. 5)

In selecting members, the board must assureitself of their commitment to . . . learn thebusiness of the company and the board . . .[and] importantly, devote the necessary timeand effort. (p. 22)

See generally Ch. 3, pp. 7-14.

It is the board’s responsibility to nominatedirectors. (p. 7)

Each nominating/governance committeeshould develop its own process for consideringstockholder suggestions for board nominees.(p. 9)

The nominating/governance committee istypically responsible for . . . reviewing possiblecandidates for board membership . . . andrecommending a slate of nominees. The boardshould have the benefit of the CEO’sinvolvement in the selection process, but theresponsibility for selection of board nomineesremains that of the board. (p. 16)

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4. Separation of Chairman and CEO 27

The Board should be free to make this choiceany way that seems best for the Company at agiven point in time.Therefore, the Board does not have a policy,one way or the other, on whether or not therole of the Chief Executive and Chairmanshould be separate or combined and, if it is tobe separate, whether the Chairman should beselected from the non-employee Directors orbe an employee. (Guideline 4)

The Chairman as the head of the board canplay a central role in ensuring the effectivegovernance of the enterprise and is responsiblefor the board’s effective function. TheChairman may in some countries be supportedby the company secretary. In unitary boardsystems, the separation of the roles of the ChiefExecutive and Chairman is often proposed as amethod of ensuring an appropriate balance ofpower, increasing accountability andincreasing the capacity of the board forindependent decision making. (OECDPrinciple V.E Annotation at 42)

The Belgian Commission on CorporateGovernance recommends that there should be aclear division of responsibilities at the head ofa company to ensure a sound balance of powerand authority. (Part I: B.1.3)

The Belgian Commission on Corporategovernance recommends that there should be aclear division of responsibilities at the head ofa company to ensure a sound balance of powerand authority. (Part I: B.1.3)

Not covered directly, but see Topic Heading 5,below.

27 See also ABA Guidebook, at 16-17 (suggesting ways to strengthen the role of independent directors, including having an “independent director serve as chair of the board, thus separating the roles of chair and CEO”).

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Dey Report(Canada)




Preda Report(Italy)

4. Separation of Chairman and CEO

Every board of directors should have in placeappropriate structures and procedures to ensurethat the board can function independently ofmanagement. An appropriate structure wouldbe to

i. appoint a chair of the board who is not amember of management withresponsibility to ensure the boarddischarges its responsibilities or

ii. adopt alternate means such as assigningthis responsibility to a committee of theboard or to a director, sometimesreferred to as the “lead director.”

(Guideline 12)

The French position seems unique in that noother country offers the option between aunitary system (Board of Directors) and a dualsystem (Supervisory Board and Board ofManagement) in all corporations, includinglisted corporations. While it is a fact that,overall, the latter system is selected by only2% or 3% of corporations, it is noteworthy,however, that 20% of the corporations in theCAC 40 index apply it, so that among theleading listed corporations the proportion ofthose separating the offices is the same as inthe USA. (Viénot II at 5)

The Committee considers that introduction intoFrench law of great flexibility in the unitarysystem with a Board of Directors is particularlydesirable, and that the Boards of corporationsshould be allowed an open choice betweencombination or separation of the offices ofChairman and Chief Executive Officer.At present, the law imposes a uniform require-ment [on unitary boards] of a combination ofduties in the hands of a Chairman and ChiefExecutive Officer, allowing no derogation, theonly other option being a change to thestructure with a Supervisory Board and Boardof Management. . . .A change in the law would allow achievementof the desired flexibility since, in the systemusing a Board of Directors, it would make theoption between combination and separation ofduties the general rule. (Viénot II at 6)

See generally Viénot II at 6-9 (separation ofroles as a legal option).

Not covered directly, however, in Germany’stwo-tier board system, the Chairman of theSupervisory Board is normally appointed fromamong those Supervisory Board members whorepresent the shareholders. (See the Code,V.2.6)

The separation of duties and responsibilities inthe highest levels of the corporation’sgovernance should be encouraged with thepurpose of achieving a balance betweenauthority, functions and their control. Theeffectiveness of the chairman of the Board ofDirectors in monitoring the operation of theBoard is obviously weakened when that personexercises simultaneously the duties of theChief Executive Officer (CEO) of thecorporation. (Recommendation 5.5)

The Committee has found that it is notuncommon in Italy for management powers tobe delegated to the chairman, either alone ortogether with other managing directors.Accordingly, it does not recommend theseparation of the two roles as a matter ofprinciple. It does, however, recommend thatlisted companies should make the division oftasks and responsibilities among the variouspositions absolutely clear and discloseadequate information in this respect.(The Report, 5.2)

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The chairperson of the board of directors as theperson ultimately responsible for thegovernance structure, and the shacho as theofficer ultimately responsible for businessexecution, should ideally not be the sameperson. When the combination of these twofunctions is unavoidable, an explanationshould be offered to the shareholders.(Principle 10B)

Not covered. Not covered. [C]onsidering that holding both [Chairman andCEO] positions is the most widespread practicein Spain and in surrounding countries, theCommittee recognizes that at present it is notproper to offer a general guideline.Nevertheless, the concern of maintainingoptimal conditions for the proper fulfillment ofthe general function of supervision leads us torecommend that some cautionary measures beadopted whenever one individual is to hold thetwo positions. It is a question of creatingcounterweights allowing the Board ofDirectors to operate independently from themanagement team and to keep its power tocontrol it. (The Report, II.3.2)

Not covered directly, but see the Code, 11.2(recommending an “agenda committee” whenthe roles of chairman and CEO are combined).

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There should be clearly accepted division ofresponsibilities at the head of a company,which will ensure a balance of power andauthority, such that no one individual hasunfettered powers of decision. Where thechairman is also the chief executive, it isessential that there should be a strong andindependent element on the board, with arecognized senior member. (The Code, 1.2)

Given the importance and particular nature ofthe chairman’s role, it should in principle beseparate from that of the chief executive.(The Report, 4.9)

There are two key tasks at the top of everypublic company – the running of the boardand the executive responsibility for therunning of the company’s business. Adecision to combine these roles in oneindividual should be publicly explained.(Principle A.II)

Cadbury recommended that the roles ofchairman and chief executive officer should inprinciple be separate; if they were combined inone person, that represented a considerableconcentration of power. We agree withCadbury’s recommendation and reasoning, andwe also note that in the largest companies thesemay be two full-time jobs. But a number ofcompanies have combined the two rolessuccessfully, either permanently or for a time.Our view is that, other things being equal, theroles of chairman and chief executive officerare better kept separate, in reality as well as inname. Where the roles are combined, the onusshould be on the board to explain and justifythe fact. (Guideline 3.17)

There are two key tasks at the top of everypublic company – the running of the boardand the executive responsibility for therunning of the company’s business. Thereshould be a clear division of responsibilitiesat the head of the company which willensure a balance of power and authority,such that no one individual has unfetteredpowers of decision. (The Code, Principle A.2)

A decision to combine the posts of chairmanand chief executive officer in one personshould be publicly justified. (The Code,Provision A.2.1)

The purpose of creating [a non-executivechairman or board leader] is not to add anotherlayer of power but instead to ensureorganization of, and accountability for, thethoughtful execution of certain criticalindependent director functions. The boardshould ensure that someone is charged with:§ organizing the board’s evaluation of the

CEO and providing continuous ongoingfeedback;

§ chairing executive sessions of the board;§ setting the agenda with the CEO; and§ leading the board in anticipating and

responding to crises.Boards should consider formally designating anon-executive chairman or other independentboard leader. If they do not make such adesignation, they should designate, regardlessof title, independent members to lead the boardin its most critical functions. (p. 4)

Each corporation should be free to make itsown determination of what leadership structureserves it best, given its present and anticipatedcircumstances. The [BRT] believes that mostcorporations will continue to choose, and bewell served by, unifying the positions ofchairman and CEO. Such a structure providesa single leader with a single vision for thecompany and most [BRT] members believe itresults in a more effective organization.(p. 13)

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5. Lead Director28

The Chairman of the Committee on DirectorAffairs will be an independent Directorresponsible for chairing the regular sessions ofthe independent Directors and communicatingthe Board’s annual evaluation of the chairmanand the CEO to those individuals. Thechairman of the Committee, together with themembers of that Committee, will develop theagendas for those regular sessions andperiodically review the Board’s governanceprocedures (guidelines). (Guideline 5)

Not covered directly, but see Topic Heading 4,above.

Where the roles of the Chairman and CEO arecombined, the appointment of an independentnon-executive director as Deputy Chairmanshould be considered. (Guideline 1.2)

Where the chairman is also the chief executive,it is essential that there should be strong andindependent persons on the board whoseauthority is acknowledged. (Part I: B.1.3)

The division of responsibilities between theBoard of Directors and the Executive Directorsmust be clearly defined. If the chairmanship ofthese governing bodies is entrusted to the sameperson, it is necessary to ensure that there areone or more prominent individuals on theBoard of Directors who can form a counter-balance to the influence of the chairman.This is because it is necessary to ensure that noone can exercise discretionary powers withoutcontrol. (1.2)

28 See also 1994 NACD Report at 4 (discussing board appointment of a lead director for the CEO evaluation process); ABA Guidebook at 17 (suggesting ways to strengthen the role of independent directors, including having “the independent directors designate one of the membersto act as a lead director, if the CEO serves as chair”).

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Dey Report(Canada)




Preda Report(Italy)

5. Lead Director

Every board of directors should have in placeappropriate structures and procedures to ensurethat the board can function independently ofmanagement. An appropriate structure wouldbe to:

i. appoint a chair of the board who is not amember of management withresponsibility to ensure the boarddischarges its responsibilities; or

ii. adopt alternate means such as assigningthis responsibility to a committee of theboard or to a director, sometimesreferred to as the “lead director.”

(Guideline 12)




Not covered.

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5. Lead Director

Not covered. Not covered. Not covered. [T]he concern of maintaining optimalconditions for the proper fulfillment of thegeneral function of supervision leads us torecommend that some cautionary measures beadopted whenever one individual is to hold thetwo positions [of CEO and Chairman]. It is aquestion of creating counterweights allowingthe Board of Directors to operateindependently from the management team andto keep its power to control it. Said measurescan be issued in many ways, although the mosteffective one could be to appoint, among theindependent Directors, a Vice-President withco-ordination functions. This individual couldbe empowered to call the Board meeting, putdown new points on the agenda, submitinformation to directors, and voice theirconcerns. (The Report, II.3.2)

See the Code, Recommendation 5 (In the eventthat the Board of Directors chooses to adjointhe position of Chairman and CEO in the sameindividual, the necessary cautionary measuresshould be taken to reduce the risks arising fromconcentrating power in the hands of oneindividual.).

See also the Code, Recommendation 6 (TheSecretary of the Board should be granted moreprominence, reinforcing his/her independenceand stability and emphasizing his/her functionof watching over the material and formallawfulness of Board proceedings.).

Not covered.

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5. Lead Director

Where the chairman is also the chief executive,it is essential that there should be a strong andindependent element on the board, with arecognized senior member. (The Code, 1.2)

If the chairman is also the chief executive,board members should look to a senior non-executive director, who might be the deputychairman, as the person to whom they shouldaddress any concerns about the combinedoffice of chairman/chief executive and itsconsequences for the effectiveness of theboard. A number of companies haverecognized that role and some have done soformally in their Articles. (The Report, 4.5)

See The Report, 4.9 (Where the chairman isalso the chief executive, it is essential thatthere should be a strong and independentelement on the board.).

Cadbury also recommended that where theroles of chairman and chief executive officerwere combined, there should be a strong andindependent element on the board, with arecognized senior member (Code, 1.2). Buteven where the roles of chairman and chiefexecutive officer are separated, we see a needfor vigorously independent non-executivedirectors. There can, in particular, beoccasions when there is a need to conveyconcerns to the board other than through thechairman or chief executive officer. To coverthis eventuality, we recommend that a seniorindependent non-executive director – e.g., adeputy chairman or the chairman of theremuneration committee – should have beenidentified in the annual report. We do notenvisage that this individual would for thispurpose need special responsibilities or anindependent leadership role, nor do we thinkthat to identify him or her should be divisive.(Guideline 3.18)

Whether the posts [of chairman and chiefexecutive officer] are held by different peopleor by the same person, there should be a strongand independent non-executive element on theboard, with a recognized senior member otherthan the chairman to whom concerns can beconveyed. The chairman, chief executiveofficer and senior independent director shouldbe identified in the annual report. (The Code,Provision A.2.1)

See Topic Heading 4, above. Where [the CEO and Chairman] positions areunified, the [BRT] . . . believes that it isdesirable for directors to have anunderstanding as to how non-executiveleadership of the board would be provided,whether on an ongoing basis or on atransitional basis if and when the need arose.In some boards, the presence of one strongfigure might provide the natural leader. Inother circumstances, there could be anunderstanding that leadership would fall to thecommittee chairman responsible for the subjectmatter that gave rise to the need. In stillothers, it could be the responsibility of thecommittee chairs to recommend whether non-executive leadership is required, and if so, inwhat form. Whether the board’s understandingof the process would be codified as a formalboard action should be a matter for individualboards to determine. (p. 13)

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6. Board Size29

The Board in recent years has averaged fifteenmembers. It is the sense of the Board that thissize is about right. However, the Board wouldbe willing to go to a somewhat larger size inorder to accommodate the availability of anoutstanding candidate(s). (Guideline 6)

Not covered. A function of the Board is the determination ofthe appropriate size and composition of theBoard. (Guideline 2)

The Commission takes the view that, in mostcases, the board of directors should not consistof more than twelve members.The board of directors should decide on thenumber of directors necessary to govern thecompany in the best possible manner, takinginto account all relevant data. Therefore, theboard must consist of enough members toallow a fruitful discussion; too high a numberof directors will not enhance the exchange ofideas. (Part I: B.1.8)

Not covered.

29 See also 1994 NACD Report at 7 (“Ideally, a board should be small enough to permit thorough discussion of important issues, with enough ‘air time’ for each view presented, yet large enough to bring a sufficient variety of views and talents to the table.”); 1990 BusinessRoundtable Statement at 11 (“Many authorities believe small, cohesive boards work more effectively than large boards. From experience it would appear that the optimum number of non-management board members for a large U.S. corporation ranges between 8 and 15. Theaverage size of the board of directors of large publicly-traded U.S. corporations (Fortune 500) is estimated to be 13.”); ABA Guidebook at 17-18 (“Each corporation should determine the best board size to accommodate key objectives, including sufficient independent directors toperform the functions normally assigned to the oversight committees and . . . effective functioning in terms of discussing and decision making. . . . Other factors that might influence board size are the special needs of certain types of corporations to maintain a strong communitypresence, to establish or maintain relationships with customers or other constituencies, and to respond to other factors that may be idiosyncratic to the corporation or industry in which it operates. In accommodating these other needs, the board size should not be expanded to suchan extent as to interfere with its effective functioning.”).

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Dey Report(Canada)




Preda Report(Italy)

6. Board Size

Every board of directors should examine itssize and, with a view to determining the impactof the number upon effectiveness, undertakewhere appropriate, a program to reduce thenumber of directors to a number whichfacilitates more effective decision-making.(Guideline 7)

Not covered directly, but see Viénot I at 10([T]he number of [board] members should notbe increased to a point where it would bedifficult for each to contribute to discussion.).

Management Board

Normally, [the Management Board] has at leastthree and at most nine members. (The Code,III.3.1)

Supervisory Board

The Supervisory Board has – insofar as it ispermissible – six or nine members. If thenumber required by law is higher, theSupervisory Board should ordinarily notexceed the minimum size stipulated by statute.(The Code, IV.3.2)

For reasons of flexibility in the decision-making process, it is recommended that themaximum number of Board members be nohigher than thirteen. (Recommendation 5.11)

The Board of Directors should recommend tothe general shareholder meeting the number ofBoard members required for the corporation’sefficient and flexible governance in the bestpossible way and having available all relevantinformation. Therefore, the Board of Directorsshould consist of a sufficient number ofmembers in order to secure conditions ofefficient interaction and exchange of ideas.(Footnote 8 to Recommendation 5.11)

[E]ach company should determine the number. . . of its non-executive directors in relation toits size, the complexity and specific nature ofits sector of activity, and the total membershipof the board. (Commentary on the Code, 2.2)

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6. Board Size

The number of directors should be appropriateto guarantee effective discussion at board-level, and enhance articulate and timelycorporate decision-making. (Principle 6A)

As regards the desired size and composition ofthe Supervisory Board the nature and the sizeof the company should be taken into account.(Recommendation 2.2)

[E]ach board should balance the number ofmembers with due efficiency, taking intoconsideration that an excessive number ofmembers may hamper the desired cohesion andcontribution of each member in discussion anddecision-making. (Commentary onRecommendation 14)

The Board of Directors should adjust its size toachieve a most efficient and participativeoperation. In principle, the appropriate sizecould range from five to fifteen members.(The Code, Recommendation 4)

The composition of the Board of Directorsdepends on the size of the company, itsorganization, type and direction. (p. 5)

The Board of Directors shall consist of at leastthree members. If the share capital of thecompany is less than one million SEK onemember is sufficient if she/he has a deputyboard member. (p. 7)

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6. Board Size

Not covered. Not covered. Not covered Boards should determine the appropriate boardsize, and periodically assess overall boardcomposition to ensure the most appropriate andeffective board membership mix. (p. 5)

Boards of directors of most large publiclyowned corporations typically range in sizefrom eight to sixteen individuals. Optimalboard size will vary from corporation tocorporation and industry to industry. Ingeneral, the experience of many [BRT]members suggests that smaller boards are oftenmore cohesive and work more effectively thanlarger boards. (p. 10)

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7. Mix of Inside and Outside Directors30

The Board believes that as a matter of policy,there should be a majority of independentDirectors on the GM Board (as defined in By-law 2.12). The Board believes thatmanagement should encourage seniormanagers to understand that Boardmembership is not necessary or a prerequisiteto any higher management position in theCompany. Managers other than the Chairmanand Chief Executive Officer and the ViceChairman currently attend Board meetings on aregular basis even though they are notmembers of the Board.On matters of corporate governance, the Boardassumes decisions will be made by theindependent Directors. (Guideline 7)

The corporate governance framework shouldensure the strategic guidance of the company,the effective monitoring of management by theboard, and the board’s accountability to thecompany and the shareholders. (OECDPrinciple V)

The board should be able to exercise objectivejudgement on corporate affairs independent, inparticular, from management. (OECDPrinciple V.E)

Boards should consider assigning a sufficientnumber of non-executive board memberscapable of exercising independent judgementto tasks where there is a potential for conflictof interest. Examples of such key responsibili-ties are financial reporting, nomination andexecutive and board remuneration. (OECDPrinciple V.E.1)

Policy makers and regulators should encouragesome degree of independence in the composi-tion of corporate boards. Stock exchangelisting requirements that address a minimalthreshold for board independence . . . haveproved useful, while not unduly restrictive orburdensome. However, . . . corporate govern-ance – including board structure and practice –is not a “one-size-fits-all” proposition, andshould be left, largely, to individual partici-pants. (Millstein Report, Perspective 15)

The Working Group considers that the boardsof listed public companies should include amajority of non-executive directors who havean appropriate mix of skills and experience andwhose abilities are appropriate to the needs ofthe company. (Guideline 1.1)

The board should consist of a majority of non-executive directors of sufficient calibre fortheir views to carry significant weight in theboard’s decisions. (Part I: B.1.4; cf. B.2.2)

A number of non-executive directors should beindependent of the executive management andof the dominant shareholders, and free fromany business or other relationship with thecompany which could interfere with theirindependent judgement. (Part I: B.2.2)

See Part I: B.1.5 (The board should operate onthe principal of collective responsibility, withno one category of directors exerting greaterinfluence than any other.)

The Board of Directors must include non-executive directors, i.e., directors who do notexercise any leading role in the company.They must be sufficiently capable, influentialand numerous to assert their point of view andmake it count in decisions taken by the Boardof directors. (1.3)

The non-executive directors must besufficiently numerous in comparison with theexecutive directors. Some of the non-executive directors may represent the dominantshareholders of the company.Certain non-executive directors must beindependent of the dominant shareholders andalso of the management. They are called“independent directors.” (2.2)

30 See also 1990 Business Roundtable Statement at 11 (“Boards of directors of large publicly-held public corporations should be composed predominantly of independent directors who do not hold management responsibilities within the corporation. In addition, a number of boardfunctions should be reserved for non-management directors only, such as membership on the audit, compensation/personnel, and nominating committees, selection and evaluation of the CEO, and board evaluation and selection.”); ABA Guidebook at 16 (“To encourage anenvironment likely to nurture independence in fact and to communicate the appearance of independence, at least a majority of members of the boards of publicly held corporations should be independent of management.”).

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Dey Report(Canada)




Preda Report(Italy)

7. Mix of Inside and Outside Directors

The board of directors of every corporationshould be constituted with a majority ofindividuals who qualify as unrelated directors.(Guideline 2)

If the corporation has a significant shareholder,in addition to a majority of unrelated directors,the board should include a number of directorswho do not have interest in or relationshipswith either the corporation or the significantshareholder and which fairly reflects theinvestment in the corporation by shareholdersother than the significant shareholder. Asignificant shareholder is a shareholder withthe ability to exercise a majority of the votesfor the election of the board of directors.(Guideline 2)

French law already imposes strict limits on theboard membership of management, setting aceiling on the number of directeurs généraux(executive directors) and on the number ofdirectors who may at the same time beemployees of the company.* (Viénot I at 2)

* Article L93 of the Code des Sociétés (codeof company law) limits the number ofdirectors holding a contract of employmentwith the company to a third of boardmembers, and article L115 limits thenumber of directeurs généraux to five.(Footnote, Viénot I at 2)

The appropriate balance between independentdirectors, shareholder directors and executivedirectors varies from one company to another,although in general the last should in any casenot be too numerous. The Committee thusconcludes that the boards of all listed com-panies should have at least two independentmembers, although it is up to each board todetermine the most appropriate balance inits membership. (Viénot I at 11-12)

The Committee confirms that the presence ofgenuinely-independent Directors in sufficientnumbers on Boards of Directors and Boardcommittees is an essential factor in guarantee-ing that the interests of all the shareholders willbe taken into account in the corporation’sdecisions. (Viénot II at 15)

See Viénot I at 12 (Some have suggested thatboard members should include representativesof certain interest groups, but the Committeebelieves that a move in this direction wouldnot be desirable . . . . [T]he presence of inde-pendent directors should suffice to ensure thatall legitimate interests are taken into account.).

With the exception of special regulationswhich apply to the coal, iron and steelindustries, the employees elect either a third ora half of the members of the SupervisoryBoard, depending on the size of thecorporation. . . . The one-third equal footingco-determination applies according to Labor-Management Relations Act 1952 to allcorporations with at least 500 but fewer than2,000 employees, and parity co-determinationaccording to the Co-determination Act 1976 incompanies with a workforce exceeding 2,000.(The Code, V.2.3)

It is considered a good practice to have themajority of the members of the Board ofDirectors consisting of non-executive membersso that independent judgment is ensured.(Recommendation 5.6)

The number of independent Board membersshould be sufficient for their views to carryadequate weight in the decision-makingprocess. (Footnote 9 to Recommendation 6.2)

The board of directors shall be made up ofexecutive directors (i.e., the managingdirectors, including the chairman where he orshe has delegated powers, and those directorswho perform management functions within thecompany) and non-executive directors. Thenumber and standing of the non-executivedirectors shall be such that their views cancarry significant weight in taking boarddecisions. (The Code, 2.1; see Commentary onthe Code, 3 and the Report, 5.1)

In Italy, non-executive directors normallyoutnumber executive directors. TheCommittee recommends that, in practice, eachcompany should determine the number,experience and personal traits of its non-executive directors in relation to its size, thecomplexity and specific nature of its sector ofactivity, and the total membership of the board.(Commentary on the Code, 2.2)

See Commentary on the Code, 3 and theReport, 5.1 ([T]he Committee believes that thepresence on the board of directors of memberswho can be considered “independent” is thebest way to guarantee the composition of theinterests of all the shareholders, majority andminority alike.).

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The board of directors should includeindependent, non-executive directors who haveno direct interests in the company.(Principle 5A)

Suitable outside persons should be included asnon-executive members of the board ofdirectors. For companies where this may bedifficult to carry out immediately, werecommend the appointment of a “managementadvisory committee” composed of someoutside persons as a transitional measure. Inthis case the rights and responsibilities of theadvisory committee should be clearly defined.(Comment on Principle 5A)

The functions of the board of directors and anymanagement board should be separated so thatcorporate decision-making and businessexecution are clearly distinguished.(Principle 7A)

The board of directors should consist of bothexecutive directors and independent, non-executive directors. Independent, non-executive directors should comprise a majorityon the board. (Principle 8B)

The Supervisory Board should be composed insuch a way that its members operate independ-ently and critically in relation to each other andthe Board of Directors. (Recommendation 2.3)

Supervisory Board members who have beenappointed on the basis of a nomination shouldperform their duties without a mandate fromthose who nominated them and independentlyof the subsidiary interests associated with thecompany. (Recommendation 2.6)

The board should be composed of a number ofmembers who provide effective guidance forthe management of the company to itsmanagers. (Recommendation 14)

See Commentary on Recommendation 14([T]he efficiency of board meetings dependssignificantly on the diversity of opinions andthe vitality of the deliberation process.).

The Board of Directors should incorporate areasonable number of independent directorswho have a good reputation in their professionand are detached from the management teamand from the significant shareholders.(The Code, Recommendation 2)

Outside directors (proprietary and independentdirectors) should widely outnumber executivedirectors on the Board of Directors, and theproportion between proprietary andindependent directors should be establishedbearing in mind the relationship between sharecapital made up by significant packages andthe rest. (The Code, Recommendation 3)

Among outside directors we must distinguish,on the one hand, the above-mentionedindependent directors and, on the other hand,those who could be called proprietarydirectors. The former, as has already beenstated, are those called to the Board ofDirectors because of their high professionalqualifications, regardless of whether they areshareholders. The latter are those who aremembers of the Board because they areshareholders or represent important packagesof shareholdings. . . . [T]he composition of thegroup of outside directors should be subject tocertain regulations that ensure a due balancebetween independent and proprietarydirectors.).* (The Report, II.2.2)

* Independent outside directors are viewedas representing the interests of a largenumber of smaller shareholders (“free-floating capital”), while the proprietaryoutside directors are viewed as linked to thecontrolling shareholder or controlling group(“steady capital”). (See Footnote, theReport, II.2.2)

External board members, adding competenceto the company, are understood as being verypositive. (Foreword, p. 2)

In the small family-owned business where theowner also is Managing Director, the Board ofDirectors should consist of at least one orpossibly two external board members apartfrom the Managing Director.In the growing, medium-sized company . . .three, maybe four, external board membersapart from the Managing Director/owner maybe considered.The Board of Directors of subsidiaries shouldconsist of the Managing Director of thesubsidiary, a member of the GroupManagement, a board member from the GroupBoard of Directors, a ‘sponsor’ in case theManaging Director is young and ‘green’ plusone or two specialists, preferably from theowners circle. One of these can very well bethe Managing Director from one of the sistersubsidiaries.In the Board of Directors of the parentcompany, the ‘heaviest’ owners should berepresented, [plus] three to four boardmembers, who by way of their skills cancontribute to the development of the companyand to support the Managing Director. (p. 5)

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The board should include non-executivedirectors of sufficient calibre and number fortheir views to carry significant weight in theboard’s decisions. (The Code, 1.3)

Non-executive directors should bring anindependent judgement to bear on issues ofstrategy, performance, resources, including keyappointments, and standards of conduct.(The Code, 2.1)

Every public company should be headed by aneffective board which can both lead andcontrol the business. . . . [T]his means a boardmade up of a combination of executivedirectors, with their intimate knowledge of thebusiness, and of outside, non-executivedirectors, who can bring a broader view to thecompany’s activities, under a chairman whoaccepts the duties and responsibilities whichthe post entails. (The Report, 4.1)

The board should include a balance ofexecutive directors and non-executivedirectors (including independent non-executives) such that no individual or smallgroup of individuals can dominate theboard’s decision taking. (Principle A.III)

[I]t is important that there should be asufficient number of non-executive directors, amajority of them independent and seen to beindependent; and that these individuals shouldbe able both to work co-operatively with theirexecutive colleagues and to demonstrateobjectivity and robust independence ofjudgment when necessary. (Guideline 2.5)

Non-executive directors have an important partto play in corporate governance. We believethat it is difficult for them to be effective ifthey make up less than one-third of the board.(Guideline 3.14)

The board should include a balance ofexecutive and non-executive directors(including independent non-executives) suchthat no individual or small group ofindividuals can dominate the board’sdecision-taking. (The Code, Principle A.3)

The board should include non-executivedirectors of sufficient calibre and number fortheir views to carry significant weight in theboard’s decisions. Non-executive directorsshould comprise not less than one-third of theboard. (The Code, Provision A.3.1)

The majority of non-executive directors shouldbe independent of management and free fromany business or other relationship which couldmaterially interfere with the exercise of theirindependent judgement. Non-executivedirectors considered by the board to beindependent in this sense should be identifiedin the annual report. (The Code, ProvisionA.3.2)

Boards should require that independentdirectors fill the substantial majority of boardseats. (p. 9)

Boards should ensure that any directorcandidate under consideration, with theexception of their own CEO or seniormanagers, is independent. (p. 10)

[T]o ensure board independence:§ Boards should define and disclose to

shareholders a definition of “independentdirector.”

§ Boards should require that directorcandidates disclose all existing businessrelationships between them or theiremployer and the board’s company.

§ Boards should then evaluate the extent towhich, if any, a candidate’s otheractivities may impinge on his or herindependence as a board member, anddetermine when relationships are suchthat a candidate can no longer beconsidered independent.

(p. 10)

It is important for the board of a large, publiclyowned corporation to have a substantial degreeof independence from management.Accordingly, a substantial majority of thedirectors of such a corporation should beoutside (non-management) directors. (p. 10)

Inside directors will ordinarily include the[CEO] and may also include other officerswhose positions or potential for successionmake it appropriate, in the judgment of theboard, for them to sit on the board. (p. 12)

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8. Definition of “Independence”31

GM’s By-law 2.12, defining independentDirectors, was approved by the Board inJanuary 1991. The Board believes there is nocurrent relationship between any independentDirector and GM that would be construed inany way to compromise any Board memberbeing designated independent. Compliancewith the By-law is reviewed annually by theCommittee on Director Affairs. (Guideline 8)

By-law 2.12(c) provides:

For purposes of this by-law, the term“Independent Director” shall mean a directorwho:

i. is not and has not been employed by thecorporation or its subsidiaries in anexecutive capacity within the five yearsimmediately prior to the annual meetingat which the nominees of the board ofdirectors will be voted upon;

ii. is not (and is not affiliated with acompany or a firm that is) a significantadvisor or consultant to the corporationor its subsidiaries;

iii. is not affiliated with a significantcustomer or supplier of the corporationor its subsidiaries;

iv. does not have significant personalservices contract(s) with the corporationor its subsidiaries;

v. is not affiliated with a tax-exempt entitythat received significant contributionsfrom the corporation or its subsidiaries;and

vi. is not a spouse, parent, sibling or childof any person described by (i) through(v).

The board should be able to exercise objectivejudgement on corporate affairs independent, inparticular, from management. (OECDPrinciple V.E)

The variety of board structures and practices indifferent countries will require differentapproaches to the issue of independent boardmembers. Board independence usuallyrequires that a sufficient number of boardmembers not be employed by the company andnot be closely related to the company or itsmanagement through significant economic,family or other ties. This does not preventshareholders from being board members.(OECD Principle V.E Annotation at 41)

Whether in a single-tier or two-tier boardsystem, individual corporations should ensurethat an effective number of board of directormembers – or in certain nations, board ofauditor members – are persons who are capableof exercising judgement, independent ofmanagement views. Generally, this willrequire that such board members are personswho are not employed by the company.(Millstein Report, Perspective 24)

See Millstein Report, 1.4.34 (For the board toplay [its] role in a meaningful way, it needs tobe capable of acting independently of manage-ment. This requires board members (or insome nations, board of auditor members)capable of exercising business judgementindependently of management – whether in asingle-tier or two-tier board.).

The majority of non-executive directors shouldpreferably be independent, not only ofmanagement but of any other externalinfluence that could detract from their ability toact in the interests of the company as a whole.Independence is more likely to be assuredwhen the director:

i. is not a substantial shareholder of thecompany,

ii. has not been employed in any executivecapacity by the company within the lastfew years,

iii. is not retained as a professional adviserby the company (either personally orthrough their firm),

iv. is not a significant supplier to orcustomer of the company, and

v. has no significant contractualrelationship with the company otherthan as a director.

(Guideline 1.1)

Non-executive directors are directors who donot perform a management function within thecompany or its subsidiaries. (Part I: B.1.4)

[A] director may be considered independent if:§ he/she is not a member of the executive

management or of the board of associatedcompanies (subsidiaries etc.) . . . ;

§ he/she has no family ties with any of theexecutive directors which might interferewith the exercise of his/her independentjudgment;

§ he/she is not a member of the executivemanagement or board of directors of oneof the dominant shareholders and has . . .no business, financial or other relationshipwith the latter;

§ he/she is not a supplier of goods orservices of a nature which might interferewith the exercise of his/her independentjudgement, nor is he/she a member of thefirm of which the company’s adviser orconsultant is part;

§ he/she has no other relationship with thecompany which . . . might interfere withthe exercise of his/her judgment. . . .

(Part I: B.2.2)

See Part I: B.1.9 ([A]ll directors, includingthose related to the dominant shareholders, areto exercise their duty in an independentmanner, in the sole interest of the company.).

See also Part I: B.2.2 (It is for the board todecide whether an independent directorsatisfies the definition of independence.).

[D]irectors [who are] independent of thedominant shareholders and also of themanagement . . . are called “independentdirectors.” (2.2)

See 1.2 (The division of responsibilitiesbetween the Board of Directors and theExecutive Directors must be clearly defined.. . . This is because it is necessary to ensurethat no one can exercise discretionary powerswithout control.).

See also 1.3 (The Board of Directors mustinclude non-executive directors, i.e., directorswho do not exercise any leading role in thecompany.).

See also 2.1 (The non-executive directors mustbe able to make an independent judgment onthe company’s strategy, performance andresources.).

See also Note to 2.2 (It is desirable that non-executive directors should not take part inplans in relation to the granting of shareoptions and should not receive pensions byvirtue of their mandate. The reason for this isto ensure their independence.).

31 See also 1994 NACD Report at 34 (“A director will be considered independent if he or she: (1) has never been an employee of the corporation or any of its subsidiaries; (2) is not a relative of any employee of the company; (3) provides no services to the company; (4) is notemployed by any firm providing major services to the company; or (5) receives no compensation from the company, other than director fees.”); 1990 Business Roundtable Statement at 12 (“In order to underscore their independence, non-management directors should not bedependent financially on the companies on whose boards they serve.”); ABA Guidebook at 16 (“As a general rule a director will be viewed as independent only if he or she is a non-management director free of any material business or professional relationship with the corporationor its management.”).

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Dey Report(Canada)




Preda Report(Italy)

8. Definition of “Independence”

An unrelated director is a director who is freefrom any interest and any business or otherrelationship which could, or could reasonablybe perceived to, materially interfere with thedirector’s ability to act with a view to the bestinterests of the corporation, other than interestsand relationships arising from shareholding.(Guideline 2)

The application of the definition of “unrelateddirector” to the circumstances of eachindividual director should be the responsibilityof the board which will be required to discloseon an annual basis whether the board has amajority of unrelated directors or, in the caseof a corporation with a significant shareholder,whether the board is constituted with theappropriate number of directors which are notrelated to either the corporation or thesignificant shareholder. The board will also berequired to disclose on an annual basis theanalysis of the application of the principlessupporting the conclusion. (Guideline 3)

The notion of independent director is opposednot only to that of executive directors, it is alsoopposed to that of any director with any sort ofspecial interest in the company, whether as ashareholder, a supplier or a customer.(Viénot I at 11).

An independent Director is to be understoodnot only as a “non-executive Director,” i.e.,one not performing management duties in thecorporation or its group, but also one devoid ofparticular bonds of interest (significantshareholder, employee, other) with them. Forthe sake of simplicity, an independent Directorcan be defined as follows: “A Director isindependent of the corporation’s managementwhen he or she has no relationship of any kindwhatsoever with the corporation or its groupthat is such as to jeopardize exercise of his orher free judgment.” (Viénot II at 15)

See Viénot I at 10 (Debate concerning boardmembership has concerned in particular therepresentation of interest groups and expertise,reflecting public doubts as to the independenceand impartiality of current members.Having examined such criticism and relatedsuggestions, the Committee can only affirmits attachment to the traditional principlesof French law and practice. However it ismade up, and whoever its members may be,the board of directors collectively representsall company shareholders, and is not the sumof conflicting interests. It must carry out itsduties in the interests of the company.).

Not covered directly, but see the Code, IV.4(Personnel appointments to the SupervisoryBoard from the side of the stockholders).

See also Topic Heading 7, Mix of Inside andOutside Directors, above, and Topic Heading I,Shareholder Meetings, below.

Certain non-executive members of the Boardshould be independent from executivemembers and the majority shareholders in thecorporation, and have no business relation withthe corporation. (Recommendation 6.2)

Director independence requires that:§ s/he is not a member of executive

management or of a Board of Directors ofa corporation directly or indirectlyconnected with the corporation. . . .

§ s/he is not related to other executivemembers of the Board.

§ s/he is not simultaneously a member ofthe group forming the majority ofshareholders of the corporation [nor]involved in any transactions with thegroup.

§ s/he has no other relationship with thecorporation which, by its nature, mayaffect his/her independent judgment.

(Recommendation 6.3)

See Recommendation 5.12 (All members of theBoard of Directors should exercise their dutiesin an independent manner.).

See also Recommendation 6.1 (Non-executivemembers of the Board should formindependent judgments especially with respectto the corporation’s strategy, performance,asset management and the appointment ofmanagement.).

See also Footnote 4 to Recommendation 5.1(inadequacy of current legislation as regardsdirector independence).

See also Footnote 9 to Recommendation 6.2(the board is the ultimate arbiter of directorindependence).

Directors are independent who:a) do not entertain business relationships

with the company, its subsidiaries, theexecutive directors or the shareholder orgroup of shareholders who control thecompany of a significance able toinfluence their autonomous judgment;

b) do not own, directly or indirectly, aquantity of shares such that they maycontrol the company, nor participate inshareholders’ agreements to control thecompany.

(The Code, 3; see the Code, 1.3; the Report,5.1)

Directors shall act and decide autonomously. . . and pursue the objective of creating valuefor the shareholders.The decisions of each director are autonomousto the extent that they are taken in the light ofhis or her unbiased assessment of the facts inthe interest of the generality of shareholders.Accordingly, even when operational choiceshave already been assessed by the controllingshareholders . . . , each director is required tocast his or her vote autonomously, makingchoices that can reasonably be expected tomaximize shareholder value. (The Code, 1.3,Commentary on the Code, 1.3)

Board of Auditors

The members of the board of auditors shall actautonomously with respect to shareholders,including those that elected them. (The Code,13.2)

[M]embers of the board of auditors proposedor elected by the majority or the minority [ofshareholders] are not their “representatives”[nor are they] authorized to communicateinformation [to them]. (Commentary on theCode, 13)

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Independent [directors are] non-executivedirectors who have no direct interests in thecompany. (Principle 5A)

Independence means being independent of anyother stakeholders than shareholders.(Comment on Principle 5A)

The influence that a person’s formermembership of the Board of Directors mayhave on that individual’s functioning on theSupervisory Board as well as on thefunctioning of the Supervisory Board and ofthe Board of Directors should be considered.(Recommendation 2.5)

This applies especially in cases where a formerchairman of the Board of Directors is theintended chairman of the Supervisory Board.(Recommendation 2.5)

Supervisory Board members should notcommit to certain subsidiary interests whileneglecting other associated interests.Neither hierarchic subordination within aninterest group, cross bonds nor any otherrelations with persons under their supervisionshould prevent members of the SupervisoryBoard from performing their dutiesindependently. (Recommendation 2.11)

Not covered directly, but see Recommendation15 (The inclusion on the board of one or moremembers who are independent in relation tothe dominant shareholders is encouraged, so asto maximize the pursuit of corporate interests.).

See also Commentary on Recommendation 15(Independent [board] members should exercisea significant influence on collective decision-making and should contribute to thedevelopment of the company strategy, therebyfavoring the interests of the company.).

[T]he name [“independent director”] applies tothose directors who are neither linked to themanagement team nor to the core ofshareholder groups that control and exert agreat influence upon management.(The Report, II.2.1)

[T]he first thing to be checked [regardingnominees to the Board of Directors] is thecandidate’s independence with respect to themanagement team, examining whether he/shehas any significant bond – whether it be afamily, professional, business or any otherconnection – with anyone in managementpositions. . . .[W]ould-be directors [must also be]independent from the influence that controllingshareholder groups may exert on themanagement team. (The Report, II.5.2)

Not covered.

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Non-executive directors should bring anindependent judgement to bear on issues ofstrategy, performance, resources, including keyappointments, and standards of conduct.(The Code, 2.1)

The majority [of non-executive directors]should be independent of management and freefrom any business or other relationship whichcould materially interfere with the exercise oftheir independent judgement, apart from theirfees and shareholding. Their fees shouldreflect the time which they commit to thecompany. (The Code, 2.2)

We recommend that the majority of non-executives on a board should be independent ofthe company. This means that apart from theirdirectors’ fees and shareholdings, they shouldbe independent of management and free fromany business or other relationship which couldmaterially interfere with exercise of theirindependent judgement. It is for the board todecide in particular cases whether thisdefinition is met. Information about therelevant interests of directors should bedisclosed in the Directors’ Report.(The Report, 4.12)

The Cadbury committee recommended that amajority of non-executive directors should beindependent, and defined this as ‘independentof management and free from any business orother relationship which could materiallyinterfere with the exercise of their independentjudgement.’ (Cadbury Report 4.12) We agreewith this definition, and after carefulconsideration we do not consider that it ispracticable to lay down more precise criteriafor independence. We agree with Cadbury thatit should be for the board to take a view onwhether an individual director is independentin the above sense. . . . We recognize,however, that non-executive directors who arenot in this sense ‘independent’ maynonetheless make a useful contribution to theboard. (Guideline 3.9)

The majority of non-executive directors shouldbe independent of management and free fromany business or other relationship which couldmaterially interfere with the exercise of theirindependent judgement. Non-executivedirectors considered by the board to beindependent in this sense should be identifiedin the annual report. (The Code, ProvisionA.3.2)

Relationships that may compromise adirector’s independence include, but are notlimited to: reciprocal directorships (or“director interlocks”); an existing significantconsulting or employment relationship; anexisting substantial commercial relationshipbetween the director’s organization and theboard’s company; or new businessrelationships that develop through boardmembership. (p. 10)

At Appendix C, the NACD Report includes avariety of definitions of independence,including a definition adopted by the NACD inan earlier report:A director will be considered independent if heor she:§ has never been an employee of the

corporation or any of its subsidiaries;§ is not a relative of any employee of the

company;§ provides no services to the company;§ is not employed by any firm providing

major services to the company;§ receives no compensation from the

company, other than director fees.(Report of the NACD Blue RibbonCommission on Performance Evaluation ofChief Executive Officers, Boards, andDirectors, Appendix G (1994))

The degree of independence of an outsidedirector may be affected by many factors,including the personal stature of the directorand any business relationship of the directorwith the corporation or any business orpersonal relationship of the director withmanagement. Directors, or firms in which theyhave an interest, are sometimes engaged toprovide legal, consulting, accounting or otherservices to the corporation, or a director mayhave an interest in a customer, supplier orbusiness partner of the corporation, or may atan earlier point in his or her career have beenan employee or officer of the company.Depending on their significance to the directorand to the corporation, such relationships mayaffect a director’s actual or perceivedindependence. The [BRT] believes that, wheresuch relationships exist, boards should bemindful of them and make a judgment about adirector’s independence based on his or herindividual circumstances rather than throughthe mechanical application of rigid criteria.This would involve consideration of whetherthe relationships are sufficiently significant asto interfere with the director’s exercise ofindependent judgment. (pp. 10-11)

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9. Commitment / Changes in Job Responsibility32

Former Chairman/Chief Executive Officer’sBoard Membership. The Board believes thisis a matter to be decided in each individualinstance. It is assumed that when theChairman or Chief Executive Officer resignsfrom that position, he/she should submithis/her resignation from the Board at the sametime. Whether the individual continues toserve on the Board is a matter for discussion atthat time with the new Chief Executive Officerand the Board. A former Chairman or ChiefExecutive Officer serving on the Board willnot be considered an independent Director forpurposes of voting on matters of corporategovernance. (Guideline 9)It is the sense of the Board that individualDirectors who change the responsibility theyheld when they were elected to the Boardshould submit a letter of resignation to theBoard.It is not the sense of the Board that in everyinstance the Directors who retire or changefrom the position they held when they came onthe Board should necessarily leave the Board.There should, however, be an opportunity forthe Board, via the Committee on DirectorAffairs, to review the continued appropriate-ness of Board membership under thesecircumstances. Independent Directors areencouraged to limit the number of other boardson which they serve, taking into accountpotential board attendance, participation andeffectiveness on these boards. IndependentDirectors should also advise the Chairman ofthe Board and the Chairman of the Committeeon Director Affairs in advance of accepting aninvitation to serve on another board.(Guideline 10)

Board members should devote sufficient timeto their responsibilities. (OECD PrincipleV.E.2)

It is widely held that service on too manyboards can interfere with the performance ofboard members. Companies may wish toconsider whether excessive board serviceinterferes with board performance. Somecountries have limited the number of boardpositions that can be held. Specific limitationsmay be less important than ensuring thatmembers of the board enjoy legitimacy andconfidence in the eyes of shareholders.(OECD Principle V.E.2 Annotation at 42)

Not covered. Not covered directly, but see Part II: B.1(Information [to be disclosed] on the composi-tion of the board of directors [includes] agelimit, if any, for serving on the board.).

Not covered.

32 See also ABA Guidebook at 39 (“Some companies expect a director to offer to resign if the director’s principal occupation changes.”).

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Dey Report(Canada)




Preda Report(Italy)

9. Commitment / Changes in Job Responsibility

Not covered. [B]oards should consider . . . how manydirectors with seats on other boards it isprepared to accept. (Viénot I at 10)

[T]he existence of cross-shareholdings may beviewed as a transitional phenomenon in Frenchcapitalism, and one whose elimination asquickly as possible would appear highlydesirable.Cross-shareholdings frequently, but not inevit-ably, result in reciprocal board membership,with one company holding a seat on the boardof another company, which in turn has a seaton the board of the first company. Thissituation naturally raises some questions on themarket.The Committee thus believes that when aboard is considering how best to structureits membership, it should take care to avoidincluding an excessive number of suchreciprocal directorships. (Viénot I at 14)

Directors must devote the necessary timeand attention to their duties. If they arechairman or directeur général (executivedirector) of a company, they should inprinciple not accept more than 5 directorshipswith French or foreign listed companiesoutside their group. (Viénot I at 20)

Directors must be assiduous and attend allmeetings of the board and any of its advisorycommittees of which they are members.(Viénot I at 21)

See Viénot II at 14 ([T]he Committee consid-ers it essential to issue a reminder of the rulelaid down by the 1995 report: a Director hold-ing an executive position in a listed corporationshould restrict the number of directorships heldin French or foreign listed corporations notaffiliated to the group, and in any event abstainfrom holding more than five.).

Management Board

Participation by members of the ManagementBoard in other companies must be revealed tothe chairman of the Supervisory Board and hasto be examined for any possible conflicts ofinterest. (The Code, II.5.3)

The Chairman of the Supervisory Board mustapprove acceptance of a seat on theSupervisory Board of another company, aswell as engaging in significant ancilliaryactivities. (The Code, III.5.4)

Supervisory BoardMembers of the Supervisory Board may notexercise any mandates in other undertakingswhich are competitors of the company.Further, they must not sit on the ManagementBoard of a company or be employed by itwhere a Management Board member of thecompany belongs to its Supervisory Board.The move to the Supervisory Board of thecompany by retiring Management Boardmembers is normally restricted to one member.(The Code, IV.4.4)

The Board of Directors should operate on thebasis of collective responsibility, and no classof members should be any different withrespect to authority or responsibility.(Recommendation 5.7)

The members of the Board of Directors shoulddevote adequate time to their duties.(Recommendation 5.14)

Directors shall accept their appointment to theboard when they deem they can devote thenecessary time to the diligent performance oftheir duties. (The Code, 1.3)

The reference to the time to be devoted to thediligent performance of the duties of directorsconfirms the principle that all directors areindividually required to make an appropriatecommitment to the position, so that companiescan benefit from their expertise. Each directoris therefore responsible for assessing inadvance his or her ability to play the rolediligently and effectively. (Commentary onthe Code, 1.3)

The Committee did not deem it desirable to laydown quantitative guidelines in terms ofnumber of directorships [held simultaneouslyby a director]. (The Report, 5.1)

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Not covered. Not covered. Not covered. [T]he general duty of loyalty by whichdirectors are bound obliges them to resignwhenever their presence on the Board mightjeopardize the interests of the company orwhen the reasons behind his/her appointmentdisappear (for instance, when a proprietarydirector sells his/her share in the company oran independent director joins the managementteam). (The Report, II.5.5)

Not covered.

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Not covered. [O]nce a director has been elected to serve, heowes it to the shareholders to complete histerm, or to give an explanation if he is unableto do so. There are many reasons for adirector’s resignation which need not concernshareholders – health, family commitments,increased work commitments elsewhere; inthese cases, the privacy of the individualshould be respected. (Guideline 3.23)

Remuneration committees should considerwhat compensation commitments (includingpension contributions) their directors’ contractsof service, if any, would entail in the event ofearly termination. They should in particularconsider the advantages of providing explicitlyin the initial contract for such compensationcommitments except in the case of removal formisconduct. (The Code, Provision B.1.9)

Where the initial contract does not explicitlyprovide for compensation commitments,remuneration committees should, within legalconstraints, tailor their approach in individualearly termination cases to the wide variety ofcircumstances. The broad aim should be toavoid rewarding poor performance whiledealing fairly with cases where departure is notdue to poor performance and to take a robustline on reducing compensation to reflectdeparting directors’ obligations to mitigateloss. (The Code, Provision B.1.10)

Boards should consider whether a change in anindividual’s professional responsibilitiesdirectly or indirectly impacts that person’sability to fulfill his or her directorshipobligations.Boards should require that the CEO and otherinside directors submit a resignation as amatter of course upon retirement, resignation,or other significant change in their professionalroles and responsibilities.Boards should require that all directors submita resignation as a matter of course uponretirement, a change in employer, or othersignificant change in their professional rolesand responsibilities.If the board determines that a directorcontinues to make a contribution to theorganization, the Commission supports thecontinued membership of that director on theboard. (p. 13)

It is now common practice to establish rulesfor the retirement or resignation of directors.These may, for example, include a mandatoryretirement age for directors or a requirementthat a director submit his or her resignation atsuch time as the director no longer occupiesthe position he or she held at the time ofelection, unless the change in position is as aresult of normal retirement. Even in theabsence of such provisions, a board shouldplan for its own continuity and succession – forthe retirement of directors and the designationof new board members. Because thecomposition and circumstance of boards willvary, so too will the retirement policies ofdifferent corporations. (p. 14)

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10. Election Term / Term Limits / Mandatory Retirement33

The Board does not believe it should establishterm limits. While term limits could helpinsure that there are fresh ideas and viewpointsavailable to the Board, they hold thedisadvantage of losing the contribution ofDirectors who have been able to develop, overa period of time, increasing insight into thecompany and its operations and, therefore,provide an increasing contribution to the Boardas a whole.As an alternative to term limits, the Committeeon Director Affairs, in conjunction with theChief Executive Officer, will formally revieweach Director’s continuation on the Boardevery five years. This will also allow eachDirector the opportunity to convenientlyconfirm his/her desire to continue as a memberof the Board. (Guideline 11)It is the sense of the Board that the currentretirement age of 70 is appropriate.(Guideline 12)

Not covered. All directors should be sent a formal letter ofappointment which sets out the term of theirappointment (probably three years butrenewable). The Working Group does notbelieve that it is necessary for any formal limitto be placed on the period of time a director isable to serve. (Guideline 3)

All directors should be sent a formal letter ofappointment which sets out, if appropriate, theboard’s policy on the age of retirement.(Guideline 3)

In accordance with the law on commercialcompanies, directors must be appointed forspecified terms, which must not exceed sixyears, and reappointment is not automatic.(Part I: B.2.3)

Information on the composition of the board ofdirectors [that should be disclosed includes]dates on which the mandates of the directorsexpire. (Part II: B.1)

The mandate of the directors is for a limitedperiod and is not automatically extended. (1.6)The law stipulates, on the one hand, that theduration of the directors’ mandate must notexceed six years and, on the other hand, thatthey may be re-elected, unless stipulated to thecontrary in the Articles of Association.The obligations, the duration of the mandateand the means of remuneration of directorsmust be announced at the time of theirappointment. (Note to 1.6)

33 See also ABA Guidebook at 39 (“Some publicly held corporations impose term limits on directors and many have a mandatory retirement age.”).

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Preda Report(Italy)

10. Election Term / Term Limits / Mandatory Retirement

The Report states that a guideline to the effectthat each director hold office for a period ofnot more than a specified number of years is

artificial and unnecessary. We believe thatthe nominating committee, which will beassessing the performance of the board, canpropose changes to the board compositionwhich can result in the injection of a freshapproach to board decisions whereappropriate.

(§ 5.47, p. 32)

Under French law, the duration of Directors’terms of office is set by the by-laws, but maynot exceed six years. While it is possible,therefore, for the by-laws to provide for a termof office of less than six years, this seems inpractice to remain the most common.Determination of the duration of a Director’sterm of office must combine two differentrequirements: to allow the shareholders to ruleupon appointment of their agents on the Boardof Directors with sufficient frequency, and totake account of the need for reasonablecontinuity in a corporation’s administration. Inthis respect, a term of four years seems mostappropriate.Combining these two objectives also leads tofavoring a staggering of terms of office so as toavoid replacement of all the Directors togetherand to organize regular replacement of theBoard, for instance by classes of approximatelyequal numbers of Directors. (Viénot II at 14)

The Committee considers that withoutaffecting the duration of current terms ofoffice, the duration of the Directors’ term ofoffice, set by the by-laws, should not exceed amaximum of 4 years, in order to enable toshareholders to rule upon their appointmentwith sufficient frequency.

The terms of office should be staggered so asto avoid renewal as a whole and to make thereplacement of Directors smoother. (Viénot IIat 23)

Management Board

[T]he initial appointment [of ManagementBoard members] should at first normally belimited in duration to three years at most. Anappropriate statutory regulation is to berecommended in order to ease the practicalapplication of this limitation. (The Code,II.1.9)

Supervisory Board

Members of the Supervisory Board should bein a position in the long run, both in terms oftime and personal health, to fulfil with properdiligence the requirements made bysupervisory tasks. They should normally notexhaust the legally permissible maximumnumber of their Supervisory Board mandates,and not exceed the retirement age of 70 years.(The Code, IV.4.5)

It is good practice that the non-executivemembers of the Board are not elected for manyterms. (Recommendation 6.4)

The Committee did not deem it desirable to laydown quantitative guidelines in terms of . . .the duration of appointments. (The Report,5.1)

[There is a] legal requirement for appoint-ments to the board of directors not to last morethan three years. (The Report, 5.4.1)

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Not covered. Members of the Supervisory Board incompanies not subject to the “structureregime” should be appointed for a certainperiod of time. (Recommendation 2.7)

The Supervisory Board should draw up a rotafor resignation to prevent an unnecessarilyhigh number of re-appointments having to bediscussed at once. A four-year term of officecould serve as a basis. (Recommendation 2.7)

Not covered. An age limit must be set for the performance ofdirector duties, which could be between 65 and70 years for executive directors and theChairman of the Board, and a more flexiblebracket for the rest of the directors.(The Code, Recommendation 13)

The re-election of executive and proprietarydirectors should have no restrictions other thanthose arising from the evaluation and lastingconfidence of support groups. (The Report,II.5.4)

[T]here are proposals to restrict the possibilityof re-election [of independent directors] to justone term. Nevertheless, this Committee doesnot consider that such a dramatic recommenda-tion is appropriate. The scarce empirical dataavailable show that the possible costsassociated with less independence do notjustify renouncing the benefits of accumulatedexperience. Moreover, the presence of a timelimit for directors may reduce the incentivesfor them to dedicate efforts to their Board-related tasks and, in general terms, to beinvolved in and committed to the company’sfuture. (The Report, II.5.4)

[T]he establishment of an age limit for theperformance of director functions must beconsidered. Our criterion here is that somemeasures must be passed in order to make iteasier to replace the eldest Board members,though granting companies some leeway sothat they may take advantage of the wideexperience of certain directors. (The Report,II.5.5)

The Board of Directors normally is appointedat the Annual General Meeting for a term up tothe next regular AGM has been held. TheAGM can however appoint the Board ofDirectors for a term up to four (4) years. (p. 7)

External board members should not be on theBoard of Directors more than 5 years as amaximum. (p. 12)

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Non-executive directors should be appointedfor specified terms and reappointment shouldnot be automatic. (The Code, 2.3)

[Executive] directors’ service contracts shouldnot exceed three years without shareholders’approval. (The Code, 3.1)

Companies have to be able to bring aboutchanges in the composition of their boards tomaintain their vitality. Non-executivedirectors may lose something of theirindependent edge if they remain on a board toolong. Furthermore, the make-up of a boardneeds to change in line with new challenges.We recommend, therefore, that non-executivedirectors should be appointed for specifiedterms. Their Letter of Appointment should setout their duties, term of office, remunerationand its review. Reappointment should not beautomatic, but a conscious decision by theboard and the director concerned. (The Report,4.16)

All directors should be required to submitthemselves for re-election at regularintervals and at least every three years.(Principle A.VI; see Guideline 3.21)

[A retirement requirement based on age andlength of service] assumes that the effective-ness and objectivity of the director will declinewith increasing age and length of service.There is a risk that this could happen, andboards, and the individuals themselves, shouldbe vigilant against it. But a reasonably longperiod on the board can give directors a deeperunderstanding of the company’s business andenable them to make a more effectivecontribution. Individuals’ capacities, and theirenthusiasm for the task, vary widely, and arecommendation would be inappropriate.(Guideline 3.22)

[I]t has been suggested to us that shareholdersare entitled to know if a resignation resultsfrom a policy disagreement or a personalityclash. This may be helpful in appropriatecases; there are likely to be rumours, and opendisclosure may be in shareholders’ interests.(Guideline 3.23)

All directors should be required to submitthemselves for re-election at regularintervals and at least every three years.(The Code, Principle A.6)

Non-executive directors should be appointedfor specified terms subject to reelection and toCompanies Act provisions relating to theremoval of a director, and reappointmentshould not be automatic. (The Code, ProvisionA.6.1)

All directors should be subject to election byshareholders at the first opportunity after theirappointment, and to re-election thereafter atintervals of no more than three years. (TheCode, Provision A.6.2)

There is a strong case for setting notice orcontract periods at, or reducing them to, oneyear or less. Boards should set this as anobjective; but they should recognize that it maynot be possible to achieve it immediately.(The Code, Provision B.1.7)

If it is necessary to offer longer notice orcontract periods to new directors recruitedfrom outside, such periods should reduce afterthe initial period. (The Code, Provision B.1.8)

[B]oards should recognize that when certainpredetermined criteria are met – for example,10 to 15 years of service or a specifiedretirement age – it may be desirable to promotedirector turnover to obtain the fresh ideas andcritical thinking that a new director can bringto the board. However – for the sake ofcontinuity – some directors’ tenures shouldsurvive that of the CEO.Unless boards have a process to evaluate theperformance of individual directors, theyshould establish tenure conditions underwhich, as a matter of course, directors shouldsubmit a resignation for consideration or offerto withdraw from consideration forrenomination. (p. 13)

The [BRT] recognizes that certain corporationsmay have histories or circumstances that maketerm limits desirable for them. However, [theBRT] generally does not favor the establish-ment of term limits for directors. Such limitsoften cause the loss of directors who havegained valuable knowledge concerning thecompany and its operations and whose tenureover time has given them an importantperspective on long-term strategies andinitiatives of the corporation. (p. 14)

It is now common practice to establish rulesfor the retirement or resignation of directors.These may, for example, include a mandatoryretirement age for directors or a requirementthat a director submit his or her resignation atsuch time as the director no longer occupiesthe position he or she held at the time ofelection, unless the change in position is as aresult of normal retirement. Even in theabsence of such provisions, a board shouldplan for its own continuity and succession – forthe retirement of directors and the designationof new board members. Because thecomposition and circumstance of boards willvary, so too will the retirement policies ofdifferent corporations. (p. 14)

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11. Board Compensation Review34

It is appropriate for the staff of the Company toreport once a year to the Committee onDirector Affairs the status of GM Boardcompensation in relation to other large U.S.companies. As part of a Director’s totalcompensation and to create a direct linkagewith corporate performance, the Boardbelieves that a meaningful portion of aDirector’s compensation should be providedand held in common stock units.Changes in Board compensation, if any, shouldcome at the suggestion of the Committee onDirector Affairs, but with full discussion andconcurrence by the Board. (Guideline 13)

The full Board (independent Directors) shouldmake this evaluation [of the Chairman of theBoard] annually . . . . The evaluation will beused by the Executive CompensationCommittee in the course of its deliberationswhen considering the compensation of theChairman. (Guideline 26)

The board should fulfil certain key functions,including [reviewing] board remuneration.(OECD Principle V.D.3)

The Working Group considers that as a matterof principle, the level and form ofremuneration should not be determined by therecipient(s) but should be approved byindependent persons acting in the interests ofthe shareholders. The remuneration of non-executive directors, including all benefits suchas options, rights and pensions, should be fullydisclosed to shareholders and approved bythem. The level of remuneration shouldreasonably reflect the responsibilities and risksof being an effective director. (Guideline 5)

The remuneration received by non-executivedirectors should reflect the amount of timewhich they commit to the company. Theirremuneration should not be performance-related, but may be related to the evolution ofthe value of the company. Therefore,remuneration can take the form of companyshares. However, it is recommended that theremuneration of non-executive directors shouldnot take the form of stock options, nor of aparticipation in the pension scheme of thecompany. (Part I: B.2.1)

Not covered directly, but see Note to 2.2 (It isdesirable that non-executive directors shouldnot take part in plans in relation to the grantingof share options and should not receivepensions by virtue of their mandate. Thereason for this is to ensure theirindependence.).

34 See also 1994 NACD Report at 20 (“Each board must decide what plan best serves the needs of the company, its shareholders, and its directors. For companies that wish to increase stock ownership by directors, there is a range of possibilities, from restricted stock grants withprohibitions on resale, to stock options, to voluntary guidelines for stock purchases. Every board should develop clear and comprehensive criteria for director pay, making occasional exceptions when unforeseen events make this necessary. Also, each board must decide the mostappropriate mechanics for disclosing its process for setting director compensation. Director pay should be set annually, but evaluated on an ongoing basis.”); ABA Guidebook at 18-19 (“Directors have an unavoidable conflict of interest in fixing their own compensation. Thatconflict is not reduced if the recommendation is made by management. When directors recognize they have the responsibility to determine their own compensation, they are more likely to make sure they have the data necessary to reach a fair conclusion. That includes data oncomparable companies, together with analysis of any special factors that may relate to the particular corporation.”).

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Preda Report(Italy)

11. Board Compensation Review

The board of directors should review theadequacy and form of the compensation ofdirectors and ensure the compensationrealistically reflects the responsibilities andrisk involved in being an effective director.(Guideline 8)

[I]t is the board’s duty to take the necessarymeasures to ensure members’ attendance at itsmeetings and those of its advisory committees.Such measures may include . . . making feesproportional to attendance. . . .Considering the responsibilities borne bydirectors and the time they must devote to theirduties, fees should be more than token, and itthus appears natural to encourage directors toparticipate in advisory committees byincreasing fees. (Viénot I at 22)

The third part [of a proposed chapter in theannual report disclosing compensation] woulddeal with attendance fees. It would specify themaximum amount permitted by the meeting ofshareholders and the amount actually paid tothe members of the Board of Directors duringthe elapsed financial year in relation to theprevious year. In addition, the rules forallocation of the fees (Chairman, Directors,fixed portion, variable portion, additional feesfor membership of Board committee) would beprecisely stated. Last, this part would describethe rules for collection of attendance feesgranted to members of the general-management team in respect of directorshipsheld in group affiliates. (Viénot II at 12)

[T]he Committee recommends that a statutoryamendment favor the personal holding byDirectors of shares of their corporation’s stock,and for this purpose, allow the Board ofDirectors to resolve upon payment of all orpart of the attendance fees in shares of thecorporation’s stock, valued at the market priceon the date of payment. (Viénot II at 12)

See Viénot I at 20 (Directors shouldpersonally own a fairly significant numberof their company’s shares, whether or not thisis required by company by-laws. Should thisnot be the case on their appointment, theyshould use their directors’ fees for thispurpose.).

Management Board

The remuneration of the members of the Man-agement Board embraces fixed and variablecomponents. The basis for determining thevariable components of remuneration issystematic evaluation of the individualmembers of the Management Board carried outperiodically by the personnel committee of theSupervisory Board. (The Code, III.6.2)

Supervisory BoardThe remuneration of members of theSupervisory Board is made at a reasonablelevel and is related to performance. . . . Even iftaking into consideration the fact thatSupervisory Board remuneration is only taxdeductible up to one-half, it should be adjustedupwards if it is unreasonably low. (The Code,IV.7.1)

The basis for assessing the performance of theindividual members of the Supervisory Boardis the extent of their duties. What has to betaken into account in doing this is, inparticular, chairmanship of the SupervisoryBoard, the number of memberships on itscommittees, and the frequency of participationin meetings. (The Code, IV.7.2)

Supervisory Board members do not receivestock options or similar remuneration related tomarket price of the stock, in order to maintainthe necessary distance from managerialmeasures taken by the Management Board.(The Code, VI.7.3)

Shareholders should have the right to . . .approv[e] the . . . compensation [of the boardof directors]. (Recommendation 1.2.5)

The compensation of non-executive membersof the Board should be comparable to the timethey devote to Board meetings and decision-making. Compensation should not be tied tothe corporation’s performance. Compensationmay take the form of stock options but shouldnot take the form of participation in thecorporation’s insurance or pension programs.(Recommendation 6.1)

[W]here the shareholders’ meeting has notalready done so, [the board of directors shall]allocate the total amount to which the membersof the board . . . are entitled. (The Code, 1.2.c)

Directors’ pay is a field where decisions mustbe taken in such a way that no director caninfluence the determination of his or herremuneration . . . . It is also important thatremuneration packages should be able toattract and motivate persons with adequateexperience and ability. (The Report, 5.4.2)

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[A] committee should be established within theboard, with responsibilities for . . . settingdirectors’ remuneration. (Principle 9B)

The remuneration of Supervisory Boardmembers should not be dependent on theresults of the company. Stock options shouldnot be granted to a person by virtue of hiscapacity as a Supervisory Board member. Noris it desirable to remunerate a SupervisoryBoard member separately for his advice.(Recommendation 2.13)

Dutch company law prescribes that the GeneralMeeting of Shareholders determines theremuneration of the members of the Board ofDirectors, unless the company’s articles ofassociation stipulate otherwise. Generally, thisremuneration is fixed by the SupervisoryBoard. (Recommendation 4.4)

The board is encouraged to create internalcontrol committees with powers conferred formatters in which there are potential situationsof conflicts of interest, such as . . . analysis ofthe remuneration policy. (Recommendation17)

The director remuneration policy, which is tobe proposed, evaluated and reviewed by theRemuneration Committee, should meet thecriteria of moderation, connection with thecompany’s performance and include detailedand individualized information. (The Code,Recommendation 15)

It is advisable that the [Remuneration]Committee be formally granted at least thefollowing powers:(a) proposing the system and amount of

directors’ annual remunerations to theBoard;

(b) reviewing remuneration programmes fromtime to time, gauging their adequacy andresults; and

(c) watching over the transparency ofremunerations.

(The Report, II.7.1)

[T]he Committee thinks it [appropriate] tofavour schemes linking a significant part ofdirectors’ remunerations, particularly those ofexecutive directors, to the company’sperformance, because director incentives arethereby better aligned with shareholderinterests (which are to be maximized).(The Report, II.7.3)

The base for the size of remuneration is thetime spent [by board members]. . . . It isimportant to . . . document . . . the size of theremuneration and how it is to be paid. (p. 17)

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There should be full and clear disclosure ofdirectors’ total emoluments and those of thechairman and highest-paid U.K. director,including pension contributions and stockoptions. Separate figures should be given forsalary and performance-related elements andthe basis on which performance is measuredshould be explained. (The Code, 3.2)

Executive directors’ pay should be subject tothe recommendations of a remunerationcommittee made up wholly or mainly of non-executive directors. (The Code, 3.3)

Levels of remuneration should be sufficientto attract and retain the directors needed torun the company successfully. Thecomponent parts of remuneration should bestructured so as to link rewards to corporateand individual performance. (Principle B.I)

Companies should establish a formal andtransparent procedure for developing policyon executive remuneration and for fixingthe remuneration packages of individualexecutive directors. (Principle B.II)

Cadbury and Greenbury both recommendedthat the boards of listed companies shouldestablish a remuneration committee to developa policy on the remuneration of executivedirectors and, as appropriate, other seniorexecutives; and to set remuneration packagesfor the individuals concerned. We agree. Wealso agree with Greenbury that the membershipof this committee should be made up wholly ofindependent non-executive directors.(Guideline 4.11)

See generally Guidelines 4.1-4.21.

Levels of remuneration should be sufficientto attract and retain the directors needed torun the company successfully, but compan-ies should avoid paying more than is neces-sary for this purpose. A proportion of exec-utive directors’ remuneration should bestructured so as to link rewards to corporateand individual performance. (The Code,Principle B.1)

Companies should establish a formal andtransparent procedure for developing policyon executive remuneration and for fixingthe remuneration packages of individualexecutive directors. No director should beinvolved in deciding his or her ownremuneration. (The Code, Principle B.2)

The performance-related elements ofremuneration should form a significantproportion of the total remuneration package ofexecutive directors and should be designed toalign their interests with those of shareholdersand to give these directors keen incentives.(The Code, Provision B.1.4)

Executive share options should not be offeredat a discount save as permitted by paragraphs13.30 and 13.31 of the Listing Rules.(The Code, Provision B.1.5)

In designing schemes of performance-relatedremuneration, remuneration committees shouldfollow the provisions in Schedule A to thiscode. (The Code, Provision B.1.6)

The board itself or, where required by theArticles of Association, the shareholdersshould determine the remuneration of the non-executive directors, including members of theremuneration committee, within the limits setin the Articles of Association. Wherepermitted by the Articles, the board mayhowever delegate this responsibility to a smallsub-committee, which might include the chiefexecutive officer. (The Code, Provision B.2.4)

See the Code, Schedule A: Provision on theDesign of Performance-Related Remuneration.

A significant ownership stake leads to astronger alignment of interests betweendirectors and shareholders. . . .§ Boards should establish a process by

which directors can determine thecompensation program in a deliberativeand objective way.

§ Boards should set a substantial target forstock ownership by each director and atime period during which this target is tobe met.

§ Boards should define the desirable totalvalue of all forms of directorcompensation.

§ Boards should pay directors solely in theform of equity and cash – with equityrepresenting a substantial portion of thetotal up to 100 percent; boards shoulddismantle existing benefit programs andavoid creating new ones.

§ Boards should disclose fully in the proxystatement the philosophy and process usedto determine director compensation andthe value of all elements of compensation.

(p. 5)

Board compensation should be competitive inview of industry practices and the extent ofburdens placed on board members. The formof such compensation will vary fromcorporation to corporation and may depend onthe circumstances of the directors which theboard may be seeking to attract and retain.Boards should consider aligning the interestsof directors with those of the corporation’sstockholders by including some form of equity,such as stock grants or options, as a portion ofeach director’s compensation.Some corporations may wish to establish aspecific goal for equity ownership by directors;however, the desirability of setting such a goalis company specific and may depend on thecircumstances of its directors. For example,some directors whose principal occupations arein public service or academic settings mayprefer current cash compensation.Although there has recently been a trend awayfrom retirement programs for directors, [theBRT] believes that the focus should be on theappropriate level of total compensation, ratherthan the timing of payments. (p. 16-17)

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12. Executive Sessions of Outside Directors35

The independent Directors of the Board willmeet in Executive Session two or three timeseach year. Executive Sessions will be chairedby the Chairman of the Committee on DirectorAffairs. The format of these meetings willinclude a discussion with the Chairman andthe Chief Executive Officer on each occasion.(Guideline 14)

Not covered. It may be necessary to arrange separatemeetings of the non-executive directors or toestablish a strong governance or directors’affairs committee made up of independentdirectors. (Guideline 1.2)

Not covered directly, but see Part I: B.4.3.c(The audit committee should have a discussionwith the internal and external auditors(including statutory auditors) at least once ayear, from which the executive directors maybe excluded, to ensure that there are nounresolved issues of concern.).

See also Part I: B.3.2 (In case no remunera-tion committee is created, the board ofdirectors should decide on the principles of theremuneration of the executive management, inthe absence of the executive directors.).

Not covered directly, but see 3.1 (If there is noremuneration committee, the remuneration ofexecutive directors should be submitted to thenon-executive directors.).

See also Note to 4.3 (The [audit] committeeshould hear the company auditors at least onceeach year, on an occasion when the executivedirectors are not present.).

35 See also 1994 NACD Report at 4 (noting that the CEO should respect the outside directors’ need to meet independently); ABA Guidebook at 17 (suggesting ways to strengthen the role of independent directors, including having “the independent directors meet periodically as abody to review the performance of management and of the members of the board.”).

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12. Executive Sessions of Outside Directors

Every board of directors should have in placeappropriate structures and procedures to ensurethat the board can function independently ofmanagement. . . . Appropriate procedures mayinvolve the board meeting on a regular basiswithout management present or may involveexpressly assigning the responsibility foradministering the board’s relationship tomanagement to a committee of the board.(Guideline 12)

Not covered. In order to promote openness of discussion, theSupervisory Board meets at times for onesitting per year without the ManagementBoard. (The Code, IV.5.3)

See the Code, IV.5.2 ([Among SupervisoryBoard members,] [s]eparate preliminarydiscussions by the representatives of thestockholders and by those of the employees, ifthey take place, should ease the process ofshaping opinion, but not lead to actual pre-arrangements.).

Not covered directly, but see Footnote 6 toRecommendation 5.7 (Certain [Board]members – executive or non-executive – mayundertake special duties regarding certaincorporate tasks for which they are accountableto the Board of Directors that meets in fullmembership.).

Not covered.

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Not covered. At least once a year the Supervisory Boardshould meet without the Board of Directorsand discuss its own performance, itsrelationship with the Board of Directors andthe composition and performance of the Boardof Directors, including issues regardingsuccession and remuneration.(Recommendation 3.5)

Not covered. Not covered directly, but see the Report, II.3.2(suggesting that an independent Vice-Presidentof the board be appointed and empowered tocall meetings, add agenda items and submitinformation to directors).

Not covered.

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Not covered. Not covered. Not covered. Executive sessions provide board members theopportunity to react to management proposalsand/or actions in an environment free fromformal or informal constraints. They alsoprovide an opportunity for dialogue betweenand among independent directors thatfacilitates a more open and timely exchange ofideas, perspectives, and feelings.Regularly scheduled executive sessions set anexpectation that private discussions amongindependent directors will be held as a matterof course, thus disarming concern over anaction that may otherwise be perceived asunusual or threatening.Boards should adopt a policy of holdingperiodic executive sessions at both the fullboard and committee levels on a presentschedule. (p. 6)

There should be an opportunity for the board tomeet periodically, at least annually, outside thepresence of the CEO and other inside directors.This may be a portion of a normally scheduledboard meeting, and the CEO’s annualperformance evaluation is a good opportunityfor such a meeting. (p. 17-18)

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13. Evaluating Board Performance36

The Committee on Director Affairs isresponsible to report annually to the Board anassessment of the Board’s performance. Thiswill be discussed with the full Board. Thisshould be done following the end of each fiscalyear and at the same time as the report onBoard membership criteria.This assessment should be of the Board’scontribution as a whole and specifically reviewareas in which the Board and/or theManagement believes a better contributioncould be made. Its purpose is to increase theeffectiveness of the Board, not to targetindividual Board members. (Guideline 15)

The full Board (independent Directors) shouldmake this evaluation [of the Chairman of theBoard] annually, and it should becommunicated to the Chairman . . . by theChairman of the Committee on DirectorAffairs. The evaluation should be based onobjective criteria including performance of thebusiness, accomplishment of long-termstrategic objectives, development ofmanagement, etc. (Guideline 26)

Boards should consider assigning a sufficientnumber of non-executive board memberscapable of exercising independent judgment totasks where there is a potential for conflict ofinterest. Examples of such key responsibilitiesare: financial reporting, nomination andexecutive and board remuneration. (OECDPrinciple V.E.1)

Independent board members . . . can bring anobjective view to the evaluation of theperformance of the board. (OECD PrincipleV.E Annotation at 41)

In order to improve board practices and theperformance of its members, some companieshave found it useful to engage in training andvoluntary self-evaluation that meets the needsof the individual company. (OECD PrincipleV.E.2 Annotation at 42)

Nomination committees should have writtenterms of reference which set out theirresponsibilities and rights. These are likely toinclude assessing the performance of the boardas a whole or making arrangements for theboard to assess its own performance, andassessing the contribution of individualdirectors or arranging for the board to do so.(Guideline 2)

Not covered. Not covered.

36 See also 1994 NACD Report at 13-14 (“Directors should evaluate board performance as a whole. Each board should consider developing goals for the board as a whole and for each of its committees. . . . The board can then measure board, chairmen, and committeeperformance against these goals, position descriptions, and responsibilities, making any appropriate recommendations for improvement. . . . The board should evaluate not just its process for nominating director candidates, but also its process for educating and renominating newdirectors. It should evaluate the evaluation process itself. The focus of the evaluation should also include some evaluation of individual director performance.”); 1990 Business Roundtable Statement at 15 (“The most difficult duties of the board include a thorough evaluation ofthe board’s own effectiveness including the contributions of its individual members. The non-management directors (or a committee such as the Nominating Commit tee) are responsible for periodically undertaking a self-evaluation. The results of this evaluation will fortify andprovide excellent background for the board’s recommendation of a slate of directors to the shareholders.”); ABA Guidebook at 5 (The board has the responsibility to “evaluate the overall effectiveness of the board.”).

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13. Evaluating Board Performance

Every board of directors should implement aprocess to be carried out by the nominatingcommittee or other appropriate committee forassessing the effectiveness of the board as awhole, the committees of the board, and thecontribution of individual directors.(Guideline 5)

The governance committee will not only beresponsible for the approach of the corporationto governance issues, but will also function asa forum for concerns of individual directorsabout matters that are not readily or easilydiscussed in a full board meeting. Thesematters could include . . . the performance ofthe board or individual members of the board.. . . We recognize that assessment of . . .individual directors may be the responsibilityof the Nominating Committee. The importantprinciple, of course, is that these responsibil-ities be assumed by one or more committees ofthe board. (§ 6.7 at pp. 39-40)

The Committee considers that each boardshould periodically review its membership,organization and operations and keepshareholders informed of conclusions andaction taken. (Viénot I at 3)

The Committee suggests that the boardshould collectively consider the status of itsmembers and their capacity to fulfill theirduties, notably in that they have thenecessary information, and should nothesitate to impose requirements . . . if itbelieves the company’s circumstances makethis necessary. These tasks could be carriedout by the board’s selection committee.(Viénot I at 21)

[A]bsenteeism is rare among directors. Whereit does arise, it is the board’s duty to take thenecessary measures to ensure members’attendance at its meetings and those of itsadvisory committees. (Viénot I at 22)

Among the measures recommended by the1995 report, the Committee wishes to stress theduty for each Board to consider “the desirableequilibrium in its membership or those of itscommittees” and “to review periodically theadequacy of its organization and operation toits tasks.” . . .It is . . . fundamental for the proper practice ofcorporate governance that the Board shouldevaluate its ability to meet the expectations ofthe shareholders having appointed it to managethe corporation, by reviewing periodically itsmembership, its organization, and its operation(implying an identical review of the Boardcommittees).The Committee considers that this reviewshould be reported to the shareholders in theannual report. (Viénot II at 14-15)

Regular evaluation promotes continuousimprovement in the corporate governance of acompany. (Thesis 10)

Management Board

The individual performance of eachManagement Board member . . . is . . . to besystematically evaluated annually by thepersonnel committee. In this, the target-orientated development of the company andindividual contributions made by ManagementBoard members provide the scale for makingthe assessment. (The Code, II.1.10)

Appointments of Management Board memberswhose performance falls short of the level ofperformance which may reasonably beexpected are not renewed. Serious deficienciesin performance and mistakes lead ascompelling grounds to premature dismissal.(The Code, II.1.11)

The Management Board systematicallysupervises the success of its own decisions(preparatory to, and in addition to, theSupervisory Board). (The Code, III.2.6)

[T]he Supervisory Board . . . checks inparticular whether the dealings of theManagement Board increase the value of thecompany on a sustained basis and correspondwith generally accepted principles of propercompany management. (The Code, IV.2.3)

Supervisory BoardThe Supervisory Board subjects its activities tosystematic evaluation at regular intervals inorder to continually improve them. (The Code,IV.2.6)

If the work of a member of the SupervisoryBoard displays serious flaws, it is theSupervisory Board that causes him to beremoved. (The Code, IV.4.3)

The Board of Directors has the responsibility. . . for . . . monitoring the efficacy of thegovernance practices that characterize theoperation of the Board of Directors and thedecision-making procedures.(Recommendation 5.4)

See Recommendation 5.13 (The structure andoperational procedures of the Board ofDirectors should ensure the establishment ofbest performance conditions for thecorporation.).

The importance of the responsibilities andtasks of directors led the Committee to call onthem to make a conscientious self-assessmentof their ability to devote sufficient care andattention to the duties of the office. (TheReport, 5.1)


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Not covered directly, but see Letter ofChairperson T. Suzuki (Our “16 StandardPrinciples” are aimed at positioning entrepre-neurs and the board of directors at the heart ofthe corporate governance debate, and will giveus appropriate standards against which we canjudge ourselves.).

Deliberation regarding [the reappointment of aboard member] should be conducted in theabsence of the person concerned and should beheld on the basis of a report drawn up by thechairman on the interview with the resigningSupervisory Board member.The proposal for reappointment should statethe motives for reappointment and shouldexplicitly mention why it is felt that theperformance of the member in question wassatisfactory. (Recommendation 2.7)

A Supervisory Board member’s prematureresignation can be expedient in cases ofunsatisfactory performance, fundamentaldifferences of opinion, or conflicts of interestor if his integrity is at issue.(Recommendation 2.8)

Corporate governance has . . . an internalaspect and an external aspect. . . . [E]xternalcontrol . . . relates to the assessment of theperformance of the company, which isconducted through the normal function ofmarket mechanisms. . . .It is, indeed, the market itself that constitutesthe main assessor of the excellence of theleadership and control options adopted bylisted companies. (Introduction)

In order to ensure the proper operation of theBoard of Directors, its meetings should be heldwith the necessary frequency to fulfill itsmission. The Chairman of the Board shouldencourage all the directors to participate andfreely state their views. The wording of theMinutes should be especially watched and thequality and efficiency of directors’ workshould be evaluated at least once a year.(The Code, Recommendation 10)

[I]t is advisable that the Board of Directorsreflect at least once a year on its ownperformance, if possible, in a meeting devotedto this subject alone. It is a matter ofevaluating the quality of its work, theefficiency of its rules and, as the case may be,of correcting whatever has proven to be non-functional. In this task, which has the finalpurpose of ensuring the efficiency of the Boardand its ability to supervise businessmanagement, it will have to pay specialattention to the reports of the ComplianceCommittee. (The Report, II.4.5)

[The Committee] recommends that companies,as a major part of the re-election process,provide for the Nomination Committee toevaluate the candidate’s work and effectivededication during the last term, issuing a reportto that effect. We expect this could reduce therisk of Boards deciding automatically to re-elect directors regardless of their performance.(The Report, II.5.4)

See p. 19 (list of items for board members toconsider and/or to do); p. 20 (list of items forthe chairman of the board to consider and/ordo); and p. 21 (advice to a board member).

See also p. 8 ([I]t is part of the role of theaccountant appointed by the Board to ascertainthat the Board and Managing Director have notacted in conflict with the General CorporationAct or the Articles of Association, and havenot acted in a way that may result in litigationand subsequent damage claims on thecompany.).

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Not covered. A recent report of the US National Associationof Corporate Directors recommended theintroduction of formal procedures by whichboards would assess both their own collectiveperformance and that of individual directors.Some UK boards already operate suchprocedures. We believe that this is aninteresting development which boards mightusefully consider in the interest of continuousimprovement, though we do not feel able atthis stage to make a firm recommendation onthe subject. (Guideline 3.13)

Not covered directly, but see the Code,Schedule A: Provisions on the Design ofPerformance-Related Remuneration, 1-7.

Board effectiveness and credibility depend inpart on regular self-evaluation. . . . Theevaluation process should be:§ controlled by the independent directors§ aligned with established evaluation

processes and goals§ tailored to meet the needs of the

individual company and board§ designed to ensure candor, confidentiality,

and trust§ regularly reviewed and improved as

necessary, and§ disclosed (process only) to shareholders

and the public.Evaluation of board performance shouldinclude consideration of the execution ofgeneral board responsibilities as well as:§ delineation of board and management

powers§ effective interaction between and among

directors, and§ director education and development.Evaluation of individual director performanceshould include consideration of the executionof specific board responsibilities as well as:§ personal characteristics, and§ core competencies.Additional consideration should be given to:§ varying roles for directors, and§ means for removing under-performing

directors, if necessary.(p. 23)

See also pp. 15-20 and Appendix D.

The board is responsible for its own evaluationfrom time to time. Such evaluations willprovide the basis for the board’srecommendation of a slate of directors to thestockholders. Boards also implicitly evaluateindividual directors by endorsing them for re-nomination. Some boards formalize thisprocess through evaluations of individualdirectors. Other boards formally addressindividual director performance only when itappears that a particular director is notcontributing sufficiently to the performance ofthe board as a whole. While no particularapproach to individual director evaluation isbest for all companies at all times, each boardshould have a process, formal or informal, fordischarging its responsibility to nominate gooddirectors.The board should from time to time review itsown structure, governance principles,composition, agenda, processes and scheduleto consider whether it is functioning well inview of its responsibilities and the evolvingsituation of the corporation. (p. 9)

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14. Board Interaction with Institutional Investors, Press, Customers, etc.37

The Board believes that the Managementspeaks for General Motors. Individual Boardmembers may, from time to time at the requestof Management, meet or otherwisecommunicate with various constituencies thatare involved with General Motors. Ifcomments from the Board are appropriate, theyshould, in most circumstances, come from theChairman. (Guideline 16)

Not covered directly, but see OECD PrincipleIV.D (Channels for disseminating informationshould provide for fair, timely and cost-efficient access to relevant information byusers.).

See also OECD Principle V.D.7 (The boardshould fulfil certain key functions, including. . . [o]verseeing the process of disclosureand communications.).

See also Millstein Report, Perspective 17(Governments should avoid regulations thatunduly inhibit the ability of institutionalinvestors to compete with one another.However, sound, prudent management of thesefunds should remain the overriding objectiveof public policy in this area.).

Not covered. To operate in a [global] market, Belgiancompanies will need to improve transparencywith respect to the shareholders and, morespecifically, to local and international institu-tional investors. . . . Belgian companies willhave to broaden their shareholder base andcomply as closely as possible with inter-national standards of corporate governance.(Part I: A.1)

See Part I: B.4.1 (The report and accounts . . .should contain the information needed toenable investors and their investment advisorsto form a view of the company’s financialposition and performance.).

Not covered.

37 See also American Society of Corporate Secretaries, Suggested Guidelines for Public Disclosure and Dealing with the Investment Community (1997) at 4-9 (“Corporate Secretaries Guidelines”) (Suggested guidelines include instituting an “open-door” policy in relating to theinvestment community, avoiding selective disclosure and curing any such occurrences with press releases, distinguishing between voluntary and required disclosure of forward-looking information in management’s discussion and analysis, adopting a prudent approach tocommenting on analysts’ reports, and advice on how to avail oneself of the benefits of the “bespeaks caution” and “safe harbor” protections regarding liability for omissions or misrepresentations.); ABA Guidebook at 14, 17 (“[A]n individual director is not usually authorized to bea spokesperson for the corporation and, particularly when market-sensitive information is involved, should avoid responding to such inquiries. A director normally should refer investors, market professionals, and the media to the CEO or other individual designated by thecorporation.” The Guidebook suggests that the role of independent directors can be strengthened by having “independent directors available to meet with substantial shareholders, particularly when those shareholders are not satisfied with responses they have received frommanagement.”).

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14. Board Interaction with Institutional Investors, Press, Customers, etc.

Not covered directly, but see Guideline 1(iv)(The board of directors of every corporationshould explicitly assume responsibility for thestewardship of the corporation and, as part ofthe overall stewardship responsibility, shouldassume responsibility for . . . acommunications policy for the corporation.).

Not covered directly, but see Topic Heading C,below.

The communication system extends inparticular to the supply of information foractual and potential investors (investorrelations), the workforce (employee relations),the consumers (customer relations) and thepublic-at-large (public relations). (The Code,VI.1.2)

All stockholders receive access to the sameinformation without regard to the extent oftheir particular shares. The precept of equaltreatment with information also appliesparticularly to institutional investors on the oneside and private small investors on the other.(The Code, VI.1.3)

See the Code, VI.1.5 (The company also usesmodern means of telecommunication such asthe Internet for current and consistentinformation to the various stakeholders of thecompany. Provided that it is commerciallyjustified, it opens up the possibility of beingable to follow press and analyst conferencesdirectly over the new media.).

Shareholders, and particularly institutionalinvestors and pension funds, should beencouraged to use their voting rights in amanner that promotes the efficiency of thecorporation and the market. Theencouragement to make use of voting rightsshould take into account the increasinginternationalization of the corporation’sshareholder base and not be confined withinthe national limits. The use of voting rights byinstitutional investors should not be opposed tothe interests of small private investors.(Recommendation 1.4.5)

See Recommendation 1.1.3 (Basic shareholderrights include the right to . . . obtain sufficientand relevant information on the corporation ona timely and regular basis.).

See also Recommendation 4.3 (Channels fordissemination of information should providefair, timely and cost-efficient access to relevantinformation.).

The chairman of the board of directors and themanaging directors shall . . . actively endeavorto develop a dialogue with . . . institutionalinvestors based on recognition of theirreciprocal roles. They designate a person or,where appropriate, create a corporate structureto be responsible for this function. (The Code,11; see Commentary on the Code, 11 and theReport, 5.5, 6)

[M]anaging directors . . . shall propose to theboard of directors the adoption of an internalprocedure for the disclosure of information tothird parties. (The Code, 6.1; see the Report,5.3)

[I]t is in the interest of the generality ofshareholders to know the personal traits andprofessional qualifications of candidates . . .sufficiently in advance for them to be able tocast their votes in an informed manner,especially in the case of institutional investors,which are often represented in shareholders’meetings by proxies. (Commentary on theCode, 7)

[D]ialogue [with institutional investors] can befostered by . . . an ad hoc . . . structure for thisfunction. . . . The Committee . . . hopes thatrecognition by [institutional investors] of theimportance of the rules of CorporateGovernance contained in this Code may help topromote a more whole-hearted and widespreadapplication of its principles by listedcompanies. (The Report, 5.5)

See the Report, 6 (The task of verifying thesuitability of the choices made [in the Code],and the extent of the Code’s application, is . . .reserved to shareholders’ meetings andencounters with institutional investors.).

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The board of directors should require that themanagement of the company be fully account-able to shareholders as well as the board ofdirectors through the provision of accurate,substantive, practical and reliable information.It is the responsibility of the board of directorsto oversee the company’s entire informationnetwork, in particular the shareholder relationmechanism. (Principle 1A)

The board of directors should be aware of thevital importance of the rigorous managementof company risk and the timely disclosure ofinformation which might seriously affectshareholders’ interests, including for example,accidents, litigation, mergers and acquisitionsand unfavorable business reports, etc.(Principle 2A)

The board of directors should begin to reportglobally consolidated semi-annual accountsbased on the mark to the market accountingsystem as soon as the “international standard”now under consideration is finalized.Quarterly reporting of accounts should also beintroduced as soon as possible. (Principle 3A)

Separately from the Annual General Meeting,open information meetings with majorshareholders may be held for more detaileddiscussion. (Principle 15A)

Research analysts and fund managers ofinstitutional investors often receive privilegedinformation through meetings with variouscompanies. Other major shareholders (thelargest 20 or 30) should be given equalprivileges. (Comment on Principle 15A)

The providers of risk capital should be able todemand from the management a clear andtransparent account of the policy that has beenpursued. . . . The influence of the investors canbe enhanced if there is active accountabilitytowards the shareholders or holders ofcertificates of shares. [T]he Board of Directorsand the Supervisory Board will have to take[investor] reactions into serious account in theconduct of their future policy. . . . TheCommittee is confident that if the shareholders,especially the institutional investors and othermajor shareholders, are . . . present at theGeneral Meeting of Shareholders and maketheir views heard, this will lead to higherattendance rates and to a considerableimprovement in the quality of the GeneralMeeting of Shareholders. (Recommendation5.1)

The Committee believes that investors shouldbe able to exert real influence within thecompany. . . . The company’s managementmust not be allowed over a long period of timeto ignore the opinions of investors on subjectsthat concern them. (Recommendation 5.4.1)

See Recommendation 5.5.

The company should ensure the existence ofpermanent contact with the market, respectingthe principle of equality for shareholders andtaking precautions against asymmetries inaccess to information among investors. Forthis purpose, the creation of an investorinformation department is recommended.(Recommendation 7)

The creation of an investor informationdepartment . . . should be encouraged, since itis one of the measures that allows central-ization of all questions raised by investors andthe necessary explanations that may beprovided with the disclosure of thisinformation to the market, when this is judgedappropriate. (Commentary onRecommendation 7)

See Introduction (Corporate governance has. . . an internal aspect and an external aspect.. . . [E]xternal control . . . relates to theassessment of the performance of the companywhich is conducted through the normalfunction of market mechanisms, a domain inwhich the proceedings of institutional investorsare of capital importance.).

See also Commentary on Recommendation 11(It is important to allow the market to easilyassess the attitude of institutional investors tothe governance of listed companies.).

The Board of Directors should promote theimplementation of proper measures to extendloyalty duties to significant shareholders,especially establishing cautionary measures inrespect to transactions between thoseshareholders and the company. (The Code,Recommendation 17)

Measures aimed at . . . emphasizingcommunication between the company and itsshareholders, especially institutional investors,should be passed. (The Code,Recommendation 18)

[The] Committee trusts in the increasingcommitment of institutional investors with thepromotion of best governance rules. In thisrespect, it invites them to state theirpreferences on Board of Director organizationpatterns and to make good use of theirinfluence to promote or favour theiracceptation by companies targeted for theirinvestments. (The Report, II.9.4)

Not covered directly, but see The Code, p. 15(The Board should keep the bank informed andassist in the business dialogue [in order toform] a basis for a constructive cooperation.).

See also Foreword to The Code, p. 2 (Lendersand investors are attaching great interest to thecomposition of the board of directors.).

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Institutional investors should encourageregular, systematic contact at senior executivelevel to exchange views and information onstrategy, performance, board membership andquality of management. (The Report, 6.11)

See The Report 6.1 - 6.16 (accountability ofboards to shareholders).

[S]ome [institutional investors] now take amore active interest in corporate governance.They can do this by voting on resolutions inGeneral Meetings, and informally throughcontact with the company. (Guideline 5.3)

The idea of contact between companies andinstitutions was developed in 1995 in the reportof a joint City/Industry working group chairedby Mr. Paul Myners and titled DEVELOPING AWINNING PARTNERSHIP . The mainrecommendations of this report included:§ investors to articulate their investment

objectives to management;§ investors to be more open with

management in giving feedback oncompanies’ strategies and performance;

§ improved training for fund managers onindustrial and commercial awareness;

§ improved training for company managersinvolved in investor relations;

§ meetings between companies andinstitutional investors to be properlyprepared, with a clear and agreed agenda.

(Guideline 5.10)

These recommendations have been broadlywelcomed by companies and investors, and[the Committee] very much hope[s] that theywill be widely adopted and acted on.(Guideline 5.11)

See generally Guidelines 5.1-5.25 (The Role ofShareholders).

Companies should be ready, wherepracticable, to enter into a dialogue withinstitutional shareholders based on themutual understanding of objectives.(The Code, Principle C.1)

Institutional shareholders should be ready,where practicable, to enter into a dialoguewith companies based on the mutualunderstanding of objectives. (The Code,Principle E.2)

When evaluating companies’ governancearrangements, particularly those relating toboard structure and composition, institu-tional investors should give due weight to allrelevant factors drawn to their attention.(The Code, Principle E.3)

The chairman of the board should ensure thatthe company maintains contact as requiredwith its principal shareholders about remunera-tion in the same way as for other matters.(The Code, Provision B.2.3)

See the Code, Provision E.1.1 (Institutionalshareholders should endeavor to eliminateunnecessary variations in the criteria whicheach applies to the corporate governancearrangements and performance of thecompanies in which they invest.).

Not covered. In general, the corporation’s managementshould speak for the corporation.Communications with the public at large, thepress, customers, securities analysts andstockholders should typically flow through andbe coordinated by the CEO or othermanagement. From time to time outsidedirectors may be requested by the board ormanagement to meet with or speak with otherparties that are involved with the corporation.(p. 19)

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15. Attendance of Non-Directors at Board Meetings / Board Access to Senior Management38

The Board welcomes the regular attendance ateach Board meeting of non-Board memberswho are in the most senior managementpositions of the company.Should the Chairman or the Chief ExecutiveOfficer want to add additional people asattendees on a regular basis, it is expected thatthis suggestion would be made to the Board forits concurrence. (Guideline 17)

Board members have complete access to GM’smanagement.It is assumed that Board members will usejudgment to be sure that this contact is notdistracting to the business operation of theCompany and that such contact, if in writing,be copied to the Chairman or Chief ExecutiveOfficer, as appropriate.Furthermore, the Board encourages theManagement to, from time to time, bringmanagers into Board meetings who: (a) canprovide additional insight into the items beingdiscussed because of personal involvement inthese areas, and/or (b) are managers withfuture potential that the senior managementbelieves should be given exposure to theBoard. (Guideline 18)

In order to fulfil their responsibilities, boardmembers should have access to accurate,relevant and timely information. (OECDPrinciple V.F)

The contributions of non-executive boardmembers to the company can be enhanced byproviding access to certain key managerswithin the company. (OECD Principle V.FAnnotation at 43)

The Working Group considers that, as a matterof principle, all directors, including non-executive directors, must have full access to allrelevant information. Except where conflictsof interest are involved, there is no matter sosecret that it should be withheld from directors.In the case of matters to be considered by theboard, directors must insist that full details aremade available to them in sufficient time toallow proper consideration. (Guideline 4)

Not covered directly, but see Topic Heading 20and Topic Heading B, below.

Not covered directly, but see Note to 4.3 (Thecompany auditors and, if such exist, the personresponsible for the internal audit and thefinancial director, should attend the meetingsof the [audit] committee.The [audit] committee should hear thecompany auditors at least once each year, onan occasion when the executive directors arenot present.The [audit] committee has the widestinvestigative powers within its domain andmay, by a majority decision, call uponprofessionals from outside the company andallow them to attend its meetings.).

38 See also ABA Guidebook at 41 & 21 (“[S]ome argue that attendance at board meetings of senior [management] officers in a non-director, nonvoting capacity is sufficient to ensure that directors have ready access to all necessary information regarding the business and operationsof the corporation, without compromising the independence of judgment that an effective director must enjoy. . . . The law recognizes certain prerogatives as necessary to performance of a director’s duties. Among the most im portant [is] the right to communicate with keyexecutives, subject to reasonable time constraints. . . .”).

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Dey Report(Canada)




Preda Report(Italy)

15. Attendance of Non-Directors at Board Meetings / Board Access to Senior Management

Not covered. The Committee considers it legitimate forBoard committees to be allowed theopportunity to approach the corporation’s mainexecutives, other than corporate officers, or tocall for outside technical reviews at thecorporation’s expense. It goes without sayingthat this option should be exercised bycommittees only in performance of theirrespective duties, and after informing theChairman of the Board of Directors. In allcases, the committees should report to theBoard of Directors on the information andopinions obtained on such occasions.(Viénot II at 17)

In order to allow the members of the Super-visory Board the opportunity of systematicallybecoming acquainted with potential candidatesfor membership of the Management Board, theManagement Board regularly suggests personsfrom the inner circle of junior management forpresentations in the Supervisory Board and itscommittees. (The Code, II.1.7)

See the Code, II.2.5 (The Supervisory Board,particularly its Chairman and its committees,require for their part all information from theManagement Board which they . . . require inorder to carry out efficiently the duties ofsupervision. The positive definition of theadditional requirement of information is animportant part of the duties of the SupervisoryBoard.).

See also the Code, IV.5.2 (The exercise ofsupervision – apart from contacts of theChairman of the Supervisory Board with theManagement Board – is primarily made in themeetings of the Supervisory Board and itscommittees.).

Not covered directly, but see Recommendation5.9 (Procedures should be established thatallow the Board of Directors to obtain adviceby external advisors which would assist theexercise of their duties.).

See also Footnote 7 to Recommendation 5.10(It is essential that the members of the Boardhave full access to all information required,under the responsibility of the chief executiveofficer and the secretary of the Board.).

See also Recommendation 4.7 (The InternalAudit Committee should be able to obtainexternal advice and, if necessary, to inviteexternal specialists to attend the workings ofthe committee.).

Not covered.

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Not covered. Not covered. Not covered. The right of all directors to collect and obtainthe information and advice needed to fulfilltheir supervision functions must be formallyrecognized. Appropriate channels should becreated to exercise this right, even resorting tooutside experts in special circumstances.(The Code, Recommendation 14)

Within this [new directors’ induction]program, it would be very useful to offer newdirectors the chance of knowing theorganization directly and dealing personallywith its main managers. (The Report, II.5.3)

The Managing Director should . . . use theBoard of Directors as a “sounding board,” asadvisors, to arrange access to new networks,and to act as “questioners.” (Foreword, p. 2)

[T]he key person in the boardroom work is theManaging Director. . . . The issues that he putson the table of the Board of Directors and theinformation which he is giving his fellowboardroom members to a very high degreedetermines the quality of the boardroom workin family-owned companies. (p. 12)

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All directors should have access to the adviceand services of the company secretary, who isresponsible to the board for ensuring that boardprocedures are followed and that applicablerules and regulations are complied with.(The Code, 1.6)

See The Report 4.14 (Non-executive directorslack the inside knowledge of the company ofthe executive directors, but have the same rightof access to information as they do.).

Not covered. Not covered. Not covered directly, but see p. 1 ([T]he boardshould act as a resource for management inmatters of planning and policy. To ensureeffective decision-making . . . board membersmust not only act as advisors, question-askers,and problem-solvers, but also as activeparticipants and decision-makers in fosteringthe overall success of the company. ).

Board members should have full access tosenior management and to information aboutthe corporation’s operations. Except inunusual circumstances, the CEO should beadvised of significant contacts with seniormanagement. (p. 19)

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16. Board Meetings & Agenda 39

The Chairman of the Board/Chief ExecutiveOfficer will establish the agenda for eachBoard meeting. They will issue a schedule ofagenda subjects to be discussed for the ensuingyear at the beginning of each year (to thedegree these can be foreseen). Each Boardmember is free to suggest the inclusion ofitem(s) on the agenda. (Guideline 19)

Not covered. Not covered directly, but see Topic Heading 1,above, and Topic Heading A, below.

Not covered directly, but see Part II: B.2(Information [to be disclosed] on thefunctioning of the board of directors [includes]the number of meetings per year [and] the mostsignificant types of subjects discussed.).

See also Topic Heading 1, above, and TopicHeading A, below.

The Board of Directors, which is a collegiatebody, must meet at regular intervals. (1.1)

The Secretary of the Board must ensure thatthe procedures in relation to the functioning ofthe Board and the regulations which apply to itare complied with.If there is no Secretary of the Board ofDirectors, the Board shall take the necessaryaction so that a person is given the task ofmonitoring compliance with the procedures inconnection with the functioning of the Boardand the applicable regulations. (1.5)


39 See also 1990 Business Roundtable Statement at 14 (“A carefully planned agenda is very important for effective board meetings. In practice, the items on the agenda are determined by the chairman in consultation with the board, with important subjects being suggested byvarious outside board members. A board member’s request to add a specific subject to a future agenda is almost always complied with promptly. To ensure continuing effective board operations, the CEO can periodically ask the directors for their evaluation of the general itemsfor board meetings and any suggestions they may have for improvement.”); ABA Guidebook at 10, 20 (“While agendas for both board and committee meetings are generally initiated by management, a director is entitled to place matters the director reasonably considers to beimportant on the agenda. . . . Further, the board should satisfy itself that there is an overall annual agenda of matters that require recurring and focused attention, such as achievement of principal operational or financial objectives and review of the performance of the CEO andother members of executive management.”).

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Preda Report(Italy)

16. Board Meetings & Agenda

Not covered directly, but see Topic Heading 1,above, and Topic Heading A, below.

[W]hile it is the Chairman’s role to draw upand propose a strategy, this must be adopted bythe board. By virtue of the same principle, [theboard] must consider and decide on all stra-tegically important decisions. (Viénot I at 8)

In general, the boards of listed companies meet3 or 4 times a year, and in practice meetingslast around 2 hours.The frequency and duration of meetings are notamenable to the definition of general rules, andshould be left up to each board to decide.Clearly, boards should meet whenevercircumstances make this desirable, but whereno special circumstances arise, 4 to 6 meetingsshould be sufficient to review businessdevelopments and take necessary decisions,especially if preparatory work has been carriedout by specialized committees. The meetingsshould last long enough to allow properconsideration of the items on the agenda.(Viénot I at 16)

The minutes of the meeting summarizediscussion and report decisions taken.(Viénot I at 17)

[T]he frequency and duration of meetings [ofthe Board] cannot be subjected to anystandards, as the situations and needs varyextensively in this area.It remains that it is up to the Directors toensure that they are such as to allow in-depthreview and discussion of matters within thepurview of the Board. (Viénot II at 16)

See Topic Heading 1, above, and TopicHeading A, below.

Management Board

The chairman or speaker of the ManagementBoard sets the agenda for the meetings of theManagement Board. Each member of theManagement Board may include on the agendapoints for discussion and decision by way ofthe chairman or speaker. (The Code, III.4.1)

Supervisory Board

The Supervisory Board normally meets on sixoccasions annually. Extraordinary events mayrequire a higher number of meetings. Thefrequency of committee meetings is taken intoaccount when determining the number ofmeetings of the entire Supervisory Board. Theduration of the meetings should allow properexercise of supervisory tasks. (The Code,IV.5.1)

The exercise of supervision – apart fromcontacts of the Chairman of the SupervisoryBoard with the Management Board – isprimarily made in the meetings of theSupervisory Board and its committees.(The Code, IV.5.2)

The chairman of the Supervisory Boardprepares a systematic schedule of supervisionwhich stipulates the sequence and main focusof the topics more precisely to be discussed inthe individual meetings of the SupervisoryBoard or its committees. (The Code, IV.5.4)

The chairpersons stipulate the agenda for theindividual meetings of the Supervisory Boardand its committees on the basis of the scheduleof supervision as well as current developments.(The Code, IV.5.7)

[T]he Board should meet at least once a month(according to the size of the corporation andthe sector it belongs to). (Recommendation5.1)

See Footnote 7 to Recommendation 5.10 (It isessential that the members of the Board havefull access to all information required, underthe responsibility of the chief executive officerand the secretary of the Board.).

The chairman shall call the meetings of theboard. (The Code, 4.1; see Commentary on theCode, 4; see the Report, 5.2)

The chairman shall co-ordinate the activities ofthe board of directors and moderate itsmeetings. (The Code, 4.2; see the Report, 5.2)

The Code . . . notes that the guidance function[of the board of directors] requires regular andsufficiently frequent meetings. (The Report,5.1)

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[The board] should meet at regular intervals.(Commentary on Recommendation 14)

[T]he Chairman of the Board is not onlysupposed to call, prepare the agenda and leadthe meetings, but must also ensure thatmembers of the Board receive the necessaryinformation, participate actively and becommitted to their tasks. (The Report, II.3.2)

See also the Report, II.3.2 (suggesting that anindependent Vice-President of the board beappointed and empowered to call meetings,add agenda items and submit information todirectors).

An agenda committee may be important ininstances where companies for whateverreason have the roles of the chair and chiefexecutive in one person or a dominant boardmember appointed by the controllingshareholder. It could go some way in ensuringthat matters which the minorities or otherinterested stakeholders would want to raise, arein fact raised on the agenda. (The Code, 11.2)

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The board should meet regularly. (The Code,1.1)

The board should have a formal schedule ofmatters specifically reserved to it for decisionto ensure that the direction and control of thecompany is firmly in its hands. (The Code,1.4)

The board can only fulfil its responsibilities ifit meets regularly and reasonably often.(Guideline 3.11)

See Topic Heading 1, above, and TopicHeading A, below.

The board should meet regularly. (The Code,Provision A.1.1)

The board should have a formal schedule ofmatters specifically reserved to it for decision.(The Code, Provision A.1.2)

[D]eveloping the agenda for [board] meetingsis a critical element in determining andreinforcing board independence andeffectiveness.Boards should ensure that members areactively involved with their CEO in setting theagendas for full board meetings. A designateddirector or directors should work with the CEOto create board agendas (incorporating otherboard members’ input as provided). . . .For committee meetings, committee chairsshould work with the CEO and committeemembers to create agendas (incorporatingother board members’ input as provided) andto ensure that all relevant materials areprovided in a timely manner prior to eachmeeting. (p. 4)

A carefully planned agenda is important foreffective board meetings, but it must beflexible enough to accommodate crises andunexpected developments. In practice, theitems on the agenda are typically determinedby the chairman in consultation with the board,with subjects also being suggested by variousoutside board members. A CEO should beresponsive to a director’s request to add aspecific subject to a future agenda. (p. 18)

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17. Board Materials and Presentations 40

Information and data that is important to theBoard’s understanding of the business [should]be distributed in writing to the Board beforethe Board meets. The Management will makeevery attempt to see that this material is asbrief as possible while still providing thedesired information. (Guideline 20)

As a general rule, presentations on specificsubjects should be sent to the Board membersin advance so that Board meeting time may beconserved and discussion time focused onquestions that the Board has about the material.On those occasions in which the subject matteris too sensitive to put on paper, thepresentation will be discussed at the meeting.(Guideline 21)

Not covered directly, but see OECD PrincipleV.F (In order to fulfil their responsibilities,board members should have access to accurate,relevant and timely information.).

See also OECD Principle V.F Annotation at 43(Board members require relevant informationon a timely basis in order to support theirdecision-making. Non-executive boardmembers do not typically have the same accessto information as key managers within thecompany. . . . In order to fulfil theirresponsibilities, board members should ensurethat they obtain accurate, relevant and timelyinformation.).

Not covered directly, but see Guideline 4 (TheWorking Group considers that, as a matter ofprinciple, all directors, including non-executivedirectors, must have full access to all relevantinformation. Except where conflicts of interestare involved, there is no matter so secret that itshould be withheld from directors. In the caseof matters to be considered by the board,directors must insist that full details are madeavailable to them in sufficient time to allowproper consideration.).

An internal procedure should be established toensure that all directors, and in particular thenon-executive directors, are provided with andhave access to adequate information to enablethem to perform their duties. The availabilityof information should be guaranteed to alldirectors equally.It is essential that the directors are providedwith, and have access to, the information theyrequire in good time. This is in particular theresponsibility of the chairman, who may beassisted by the secretary to the board.Directors cannot use the information obtainedfor other purposes than for the exercise of theirmandate. They have an obligation of discre-tion relating to the confidential informationreceived in their capacity as director. (Part I:B.1.7)

Not covered.

40 See also ABA Guidebook at 10 & 20 (“When specific actions are contemplated, directors should receive appropriate information sufficiently in advance of the board or committee meeting to allow study of and reflection on the issues raised. Important time-sensitive materialsthat become available between meetings should be distributed to board members. . . . A balance should be sought between management presentations and discussion among directors and management” at board and committee meetings.).

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Preda Report(Italy)

17. Board Materials and Presentations

Not covered. [T]he chairman is obliged to provide directors,in due time, with all significant informationnecessary to the fulfillment of their supervisoryduties. Directors should receive, in due time,documentation concerning items on the agendarequiring particular analysis and priorconsideration (whenever this is not preventedby the need to respect confidentiality).The Committee considers that whendirectors believe they have not been put in aposition to make an informed judgment, it istheir duty to say so at the board meetingand to demand the information they need.(Viénot I at 17)

Directors must ensure that they are proper-ly informed and to this end make timelyrequests to the chairman for any informationnecessary for proper consideration of items onthe board’s agenda. (Viénot I at 21)

Prior and continuing information to theDirectors is an essential requirement for properperformance of their duties.As the case-law has outlined it for the past 15years, the Committee considers it desirable toaffirm the following positions:§ Corporations are bound to provide their

Directors with the information required totake part effectively in the Board’sproceedings, prior to Board meetings ifappropriate, in order to enable them toperform their duties appropriately. . . .

§ This duty to provide prior and continuinginformation to the Directors, which mustbe sufficient, relevant and first-rate, lieswith the chairman. . . .

§ Conversely, the Directors are bound tocall for the appropriate information thatthey consider necessary to perform theirduties.

(Viénot II at 16)

Management Board

All members of the Management Boardreceive information and supportingdocumentation relevant to the decision in goodtime before the Management Board meetings.(The Code, III.4.4)

Supervisory Board

To ensure the necessary basis of informationfor supervisory duties is the task of both theManagement Board (“obligation lying in ren-der”) and of the Supervisory Board (“obliga-tion lying in collection”). The main responsi-bility for this lies with the Management Boardas a result of the asymmetry of knowledge ofboth organs. (The Code, II.2.1)

The Management Board’s general duty toprovide information arises from the informa-tion system specified by the SupervisoryBoard. The Supervisory Board informationsystem takes up the statutory duties to reportand puts the content, frequency and technicalprovisions of the information to be supplied inconcrete terms. (The Code, II.2.2)

The Supervisory Board information systemalso stipulates that the Management Boardreports once a year on the strategic develop-ment of the company. (The Code, II.2.3)

All members of the Supervisory Board receivethe schedule of supervision before eachsupervisory period. (The Code, IV.5.6)

All documentation which is necessary forproper discussion of the items of the agendapending, is delivered to the members of theSupervisory Board or the committees in goodtime before each meeting. (The Code, IV.5.8)

See generally the Code, II.2 (Provision ofInformation to the Supervisory Board).

The members of the Board of Directors shouldhave all relevant information, act in good faithand with all required diligence and care in theinterest of the corporation and its shareholders.(Recommendation 5.1)

Internal audit procedures should be establishedensuring that all members of the Board havetimely, full and equitable access to allinformation required for the exercise of theirduties. (Recommendation 5.10)

It is essential that the members of the Boardhave full access to all information required,under the responsibility of the chief executiveofficer and the secretary of the Board.(Footnote 7 to Recommendation 5.10)

See Introduction (All functions of the Board ofDirectors . . . should aim at the enhancement ofthe entire performance of the corporationwithin an adequately supervised and informedenvironment.).

The chairman . . . shall endeavor to ensure thatthe members of the board are providedreasonably in advance of the date of themeeting (except in cases of necessity and as amatter of urgency) with the documentation andinformation needed for the board to express aninformed view on the matters it is required toexamine and approve. (The Code, 4.1; see theReport, 5.2)

See Commentary on the Code, 5 ([T]heCommittee believes that, since the board ofdirectors is required by law to inform the boardof auditors, all the directors must possess atleast as much information as is provided to theboard of auditors.).

See also the Report, 5.1 (The Code . . . notesthat the guidance function [of the board ofdirectors] requires . . . knowledge of the facts.).

See also the Code, 6.2 and the Report, 5.3 (Allthe directors are required to treat thedocuments and information they acquire in theperformance of their duties as confidential andto comply with the procedure for the disclosureto third parties of such documents andinformation.).

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Not covered. Not covered directly, but see Recommendation4.2 (The Board of Directors should report inwriting to the Supervisory Board on thecompany’s objectives, strategy and theassociated risks and the mechanisms needed tocontrol risks of a financial nature.).

See also Recommendation 4.3 (The Board ofDirectors will report in writing to theSupervisory Board on the risks entailed in thepolicy and strategy.).

See also Recommendation 4.3 (As a minimumrequirement, the Board of Directors shouldreport to the Supervisory Board on the resultsof its assessment of the structure andfunctioning of the internal control systemswhich are intended to provide reasonablecertainty that the financial information isreliable.).

Not covered directly, but see the Code,Commentary on Recommendation 14 ([Theboard should] be duly informed at all times.).

The necessary measures must be adopted toensure that Directors are duly provided withsufficient information, specifically put togetherfor the purpose of preparing Board meetings.The significance or confidential nature of thisinformation will not render this measureinapplicable, unless exceptional circumstancesconcur. (Code Recommendation 9)

[T]he Chairman of the Board is not onlysupposed to call, prepare the agenda and leadthe meetings, but must also ensure thatmembers of the Board receive the necessaryinformation. . . . (II.3.2)

[A]mong the independent Directors, a Vice-President with co-ordination functions . . .could be empowered to call the Board meeting,put down new points on the agenda, submitinformation to directors, and voice theirconcerns. (II.3.2)

The Secretary should see to the properdevelopment of Board meetings, taking specialcare to provide directors with proper adviceand information. . . . (II.3.3)

We must underscore the authority and duty thateach director individually has of seeking andobtaining all the information required for thefulfillment of his/her supervision functions.(II.6.1)

Not covered.

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It is for chairmen to make certain that theirnon-executive directors receive timely,relevant information tailored to their needs,[and] that they are properly briefed on theissues arising at board meetings. (The Report,4.8)

[T]he board should meet regularly, with duenotice of the issues to be discussed supportedby the necessary paperwork. (The Report,4.23)

See The Report, 4.14 (Boards should regularlyreview the form and the extent of theinformation which is provided to all directors.).

The board should be supplied in a timelyfashion with information in a form and of aquality appropriate to enable it to dischargeits duties. (Principle A.IV)

We endorse the view of the Cadburycommittee (Report, 4.14) that the effectivenessof non-executive directors (indeed, of alldirectors) turns, to a considerable extent, on thequality of the information they receive.(Guideline 2.6)

The board should be supplied in a timelymanner with information in a form and of aquality appropriate to enable it to dischargeits duties. (The Code, Principle A.4)

Management has an obligation to provide theboard with appropriate and timely information,but information volunteered by management isunlikely to be enough in all circumstances anddirectors should make further enquiries wherenecessary. The chairman should ensure that alldirectors are properly briefed on issues arisingat board meetings. (The Code, ProvisionA.4.1)

A designated director or directors should workwith the CEO . . . to ensure that all relevantmaterials are provided in a timely manner priorto each meeting. (p. 4)

The board must be given sufficient informationto exercise fully its governance functions. Thisinformation comes from a variety of sources,including management reports, personalobservation, a comparison of performance toplans, security analysts’ reports, articles invarious business publications, etc. Generally,board members should receive informationprior to board meetings so they will have anopportunity to reflect properly on the items tobe considered at the meeting. (p. 18)

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18. Number, Structure and Independence of Committees 41

From time to time, the Board may want toform a new committee or disband a currentCommittee depending upon the circumstances.The current six Committees are Audit, CapitalStock, Director Affairs, ExecutiveCompensation, Investment Funds and PublicPolicy. Except for the Investment FundsCommittee, committee membership willconsist only of independent Directors asdefined in By-law 2.12. (Guideline 22)

Boards may consider establishing specificcommittees [which] may require a minimumnumber, or be composed entirely of, non-executive members. (OECD Principle V.E.1Annotation at 42)

Stock exchange listing requirements thataddress a minimal threshold for . . . auditcommittee independence have proved useful,while not unduly restrictive or burdensome.(Millstein Report, Perspective 15)

Where it is particularly important that boardsexercise, and are seen to exercise, independentjudgment, such as in the areas of companyaccounts, remuneration practices and theselection of board members, the independenceand objectivity of the judgement can beenhanced by the appointment of appropriatecommittees. Their establishment isparticularly important when boards are large orwhen executive directors constitute a powerfulpresence. In such cases, it is very desirablethat the membership of the committees be seento be predominantly independent.It is good practice for the membership ofcommittees to be set out in the company’sannual report, and consideration should begiven to the disclosure of a summary of theterms of reference and other arrangements thathave been put in place. (Guideline 1.3)

See Topic Heading 19, below.

Certain directors – whether executive or non-executive -- may be given special responsibil-ity for certain areas, on which they report tothe full board. (Part I: B.1.5)

The nomination committee should include amajority of non-executive directors and shouldbe chaired by the chairman of the board or anon-executive director. (Part I: B.2.4)

The executive management’s pay should besubject to the recommendations of a remunera-tion committee . . . made up of a majority ofnon-executive directors. (Part I: B.3.2)

[A]n audit committee should be establishedconsisting of at least three non-executivedirectors whose authority and duties are clearlystated at the time of their appointment. (Part I:B.4.3)

See Part I: B.1.5 (The board should lay downrules to determine materiality for differentcategories of transactions, establishing clearlywhich transactions require multiple boardsignatures. The board should also establish theprocedures to be followed when, exceptionally,decisions are required between boardmeetings.).

See also Part II: B.6 (If the company . . . iscontrolled or significantly influenced by one ormore dominant shareholders, [disclosureshould be made] of any agreements betweenthese shareholders and of the contents of suchagreements and of any committees established[and] the role played by these committees.).

If there is an appointments committee, itshould be composed mostly of non-executivedirectors and chaired by the Chairman of theBoard of Directors or by a non-executivedirector. The appointments committee shouldmake proposals to the Board of Directors, onthe one hand for the appointment of non-executive directors, and on the other hand forappointments to certain key posts. (Note to2.3)

If there is a remuneration committee, it shouldbe exclusively composed of non-executivedirectors, and the remuneration of executivedirectors should be submitted to thatcommittee for an opinion.If there is no remuneration committee, theremuneration of executive directors should besubmitted to the non-executive directors. (3.1)

The Board of Directors must exercise an auditfunction. To that end, it may set up an auditcommittee and determine its composition andmandate. (4.3)

41 See also 1990 Business Roundtable Statement at 12-13 (“A wide diversity of approach in committee structure and function responds to the specific needs of companies facing different business challenges and different corporate cultures, and reflects the need to alloworganizational experimentation. Each corporation should have an audit committee, a compensation/personnel committee, and a nominating committee. Other common committees are an executive committee to act for the board between meetings and handle other specificallyassigned duties, and a finance committee. Some boards have a pension or retirement plan committee, a social responsibility or public policy committee, or other special function committees.”); ABA Guidebook at 24 (“Diversity in board structure and size does not allow uniformmandates for a particular committee organization.” Note that the Guidebook specifically discusses the Nominating, Audit and Compensation Committees (at 27-42). It also mentions the executive, finance and strategic planning committees, stating that each corporation needs totailor the functions of these committees to its own needs (at 26).).

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Dey Report(Canada)




Preda Report(Italy)

18. Number, Structure and Independence of Committees

The board of directors of every corporationshould appoint a committee of directorscomposed exclusively of outside, i.e., non-management directors, a majority of whom areunrelated directors, with the responsibility forproposing to the full board new nominees tothe board and for assessing directors on anongoing basis. (Guideline 4)

Committees of the board of directors shouldgenerally be composed of outside directors, amajority of whom are unrelated directors,although some board committees, such as theexecutive committee, may include one or moreinside directors. (Guideline 9)

Every board of directors should expresslyassume responsibility for, or assign to acommittee of directors, the generalresponsibility for, developing the corporation’sapproach to governance issues. Thiscommittee would, amongst other things, beresponsible for the corporation’s response tothese governance guidelines. (Guideline 10)

The audit committee of every board ofdirectors should be composed only of outsidedirectors. (Guideline 13)

See § 6.3 at p. 39 (The inclusion ofmanagement on board committees should bethe exception rather than the rule, reflectingour belief . . . on the importance of the boardbeing able to function independently ofmanagement.).

[B]oards may appoint some of their membersto form committees to consider specific aspectsof company operations. Quite a number haveset up such committees with responsibilities insuch areas as remuneration, auditing andstrategy, and these have been functioningsatisfactorily for several years within thecurrent legal framework. (Viénot I at 2)

[I]t is up to each board to determine themost suitable structure for its own member-ship and that of the committees it sets up,and to ensure that markets and sharehold-ers have no reason to doubt their independ-ence and impartiality. (Viénot I at 10)

The Committee recommends that all boardsshould set up special committees for theselection of directors, for remuneration andfor accounting. (Viénot I at 18)

[T]he presence of genuinely independentDirectors in sufficient numbers on . . . Boardcommittees is an essential factor in guaran-teeing that the interests of all the shareholderswill be taken into account in the corporation’sdecisions. In order to establish the rolerecognized for independent Directors, theCommittee considers:§ that they should account for at least one-

third of the Board of Directors, the auditcommittee and the appointmentscommittee;

§ that they should be in the majority of thecompensation and options committee,having regard to its duties;

§ that they should be identified individuallyin the annual report.

(Viénot II at 15)

See Viénot I at 18-19 (independence ofremuneration and audit committees).See Topic Heading 3, above (Selectioncommittee).

The Supervisory Board forms committees inorder to increase working efficiency. Thecommittees should have at least three but nomore than five members. The Chairman of theSupervisory Board co-ordinates the activitiesbetween the committees in consultation withthe chairpersons of the committees.(The Code, IV.3.3)

The number and tasks of the committeesdepend on the size of the Supervisory Boardand the respective realities of the company.This includes principally the size of thecompany as well as the type, degree ofdiversification and geographical extent of itsvalue-creating processes. Normally, there is tobe established:§ at least one business committee for

managerial key policy issues,§ a personnel committee for all matters

affecting the personnel of theManagement Board and, if necessary, acommittee pursuant to §27(3) of the Co-Determination Act 1976,

§ an investment and finance committee,§ an audit committee, and§ a committee for corporate governance.Next to these are committees to be consideredfor particularly important functions (such asresearch and development), products andmarkets of the company. (The Code, IV.3.4)

The establishment of an Internal AuditCommittee should be encouraged, which willconsist of non-executive members of the Boardof Directors whose power and duties areclearly described during the approval of theirappointment by the general shareholdermeeting. (Recommendation 4.7)

It is a good practice that a review committee,consisting of the majority of non-executiveBoard members, be established by the generalshareholder meeting, which would reviewmanagement compensation.(Recommendation 7.2)

The board of directors shall . . . delegatepowers to the managing directors and to theexecutive committee. (The Code, 1.2)

Where the board of directors has established acommittee to propose candidates forappointment to the position of director, themajority of the members of such committeeshall be non-executive directors. (The Code,7.2)

However, the large proportion of companieswith concentrated ownership . . . , and the by-laws providing for election lists in somecompanies with a broad shareholder base,suggested that it would not be advisable toinstitutionalize such a [nominations]committee. (The Report, 5.4.1)

The board of directors shall form aremuneration committee . . . , the majority ofwhose members should be non-executivedirectors (The Code, 8.1; see The Report,5.4.2)

[However,] [d]etermining . . . remuneration oftop management obviously remains the task ofthe managing directors. (Commentary on theCode, 8)

The board of directors shall establish aninternal control committee . . . made up of anappropriate number of non-executive directors.(The Code, 10.1; see the Report, 5.4.3)

[D]ialogue [with institutional investors] can befostered by . . . an ad hoc . . . structure for thisfunction. (The Report, 5.5)

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Several committees should be establishedwithin the board, with responsibilities for theappointment of directors, setting directors’remuneration, expediting corporategovernance, and so on. Non-executivedirectors should comprise the majority on thesecommittees. The chairpersons of thesecommittees should be non-executive directors.Remuneration of the shacho and the executivedirectors should be decided only by non-executive directors. (Principle 9B)

An audit committee should be created withinthe board of directors as soon as the majorityof the directors are independent and non-executive. All members of the auditcommittee should be non-executive directors.Its function will be to audit, in particular, theappropriateness of the company’s riskmanagement, in addition to overseeingcompliance issues. (Principle 13B)

Suitable outside persons should be included asnon-executive members of the board ofdirectors. For companies where this may bedifficult to carry out immediately, werecommend the appointment of a “managementadvisory committee” composed of someoutside persons as a transitional measure. Inthis case the rights and responsibilities of theadvisory committee should be clearly defined.(Comment on Principle 5A)

[T]he board of directors might make greateruse of support and information staff, e.g.,“executive committees” which are common inthe U.S. (Ch. 2.6)

Not covered directly, but see Recommendation3.2 (The Supervisory Board considers whetherto appoint from its midst a selection andnomination committee, an audit committee anda remuneration committee. These committeessubmit reports on their findings and makerecommendations to the full SupervisoryBoard.).

The board is encouraged to create internalcontrol committees with powers conferred formatters in which there are potential situationsof conflicts of interest, such as the nominationof directors and managers, the analysis of theremuneration policy and assessment of thecorporate structure and governance.(Recommendation 17)

If an Executive Committee is created, itscomposition should reflect, insofar as it ispossible, the balance existing in the boardbetween directors linked to dominantshareholders and independent shareholders.(Recommendation 16)

The composition of the Executive Committee,if there is one, should reflect the existingbalance in the Board of Directors among thedifferent types [of directors]. Relationshipsbetween both [bodies] should be inspired onthe transparency principle, in order that theBoard is completely aware of the matters dealtwith and the decisions made by the Committee.(The Code, Recommendation 7)

The Board of Directors should create ControlCommittees within the Board, made up solelyof outside directors, for information andaccounting control matters (Audit Committee),the selection of directors and executives(Nomination Committee), defining andreviewing remuneration policies(Remuneration Committee), and evaluating thegovernance system (Compliance Committee).(The Code, Recommendation 8)

See Topic Heading 19, below.

Not covered directly, but see p. 7 (Severallarger companies have appointed Nomination,Remuneration, and Auditing Committees topropose remuneration to board members and tothe managing director at the [Annual GeneralMeeting]. The Auditing Committee, consistingof some of the board members, shall meet theaccountants at least once a year. Themanaging director is not to participate in thiscommittee.).

See also the Code, 11.2 (recommending an“agenda committee” when the roles ofchairman and CEO are combined).

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The board should establish an audit committeeof at least three non-executive directors withwritten terms of reference which deal clearlywith its authority and duties. (The Code, 4.3)

A nomination committee should have amajority of non-executive directors on it andbe chaired by either the chairman or a non-executive director. (The Report, 4.30)

Membership [of the audit committee] shouldbe confined to the non-executive directors ofthe company and a majority of the non-executives serving on the committee should beindependent. (The Report, 4.35)

We also recommend that boards shouldappoint remuneration committees, consistingwholly or mainly of non-executive directorsand chaired by a non-executive director, torecommend to the board the remuneration ofthe executive directors in all its forms, drawingon outside advice as necessary. (The Report,4.42)

See also The Report, APPENDIX 4, AUDITCOMMITTEES, and Topic Heading 19, below.

We support the Cadbury committee’sendorsement of the nomination committee(Cadbury Report, 4.30); indeed, we believethat the use of such a committee should beaccepted as best practice. (Guideline 3.19)

Cadbury and Greenbury both recommendedthat the boards of listed companies shouldestablish a remuneration committee to developa policy on the remuneration of executivedirectors and, as appropriate, other seniorexecutives; and to set remuneration packagesfor the individuals concerned. We agree. Wealso agree with Greenbury that the membershipof this committee should be made up wholly ofindependent non-executive directors.(Guideline 4.11)

Larger companies have implemented the[Cadbury Report] recommendations [that eachcompany should establish an audit committeeof at least three non-executive directors, atleast two of them independent] almostuniversally, and we believe that the resultshave been beneficial. Audit committees havestrengthened the independence of the auditorsby giving them an effective link to the board;and the explicit remit of the audit committeehas strengthened its members in questioningthe executive directors. (Guideline 6.3)We do not favour relaxing the guidelines onthis point by size of company. (Guideline 6.4)

Unless the board is small, a nominationcommittee should be established to makerecommendations to the board on all newboard appointments. A majority of themembers of this committee should be non-executive directors, and the chairman shouldbe either the chairman of the board or a non-executive director. (The Code, ProvisionA.5.1)

Remuneration committees should consistexclusively of non-executive directors who areindependent of management and free from anybusiness or other relationship which couldmaterially interfere with the exercise of theirindependent judgment. (The Code, ProvisionB.2.2)

The board should establish an audit committeeof at least three directors, all non-executive,with written terms of reference which dealclearly with its authority and duties. Themembers of the committee, a majority ofwhom should be independent non-executivedirectors, should be named in the report andaccounts. (The Code, Provision D.3.1)

The role of board committees in the review [ofthe effectiveness of internal control], includingthat of the audit committee, is for the board todecide, and will depend upon factors such asthe size and composition of the board; thescale, diversity and complexity of thecompany’s operations; and the nature of thesignificant risks that the company faces.(Turnbull Report, 26)

Boards should require that key committees—compensation, audit, and nominating orgovernance—include only independentdirectors, and are free to hire independentadvisors as necessary.Boards should establish guidelines for, anddiscuss with some pre-defined frequency, thenumber of committees [and] the size andstructure of committees. (p. 5)

For certain functions, such as membership onan audit or compensation committee, morespecific standards of independence should beused. For example, Section 162(m) of theInternal Revenue Code prescribes certainstandards that the compensation committeemust meet to permit the deduction for federalincome tax purposes of performance-basedcompensation exceeding $1 million paid to theCEO and the four other highest paid executiveofficers. There are other examples ofprescribed standards for members of thecompensation committee under §16 of theSecurities Exchange Act of 1934 and formembers of the audit committee under rules ofthe New York Stock Exchange. In addition,more particularized rules apply in certainindustries, such as banking. It is recommendedthat the board, or a committee such as thegovernance/nominating committee,periodically confirm that the composition ofthe relevant committees meets the applicablerequirements as well as any other criteriadetermined by the board. (pp. 11-12)

It is recommended that each corporation havean audit committee, which is required underNew York Stock Exchange rules, acompensation/personnel committee, and anominating/governance committee and thatmembership in these committees be limited tooutside directors. The board may also wish toestablish other committees with other specificresponsibilities. (p. 15)

For a full discussion of committee functions,see pp. 15-16.

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19. Assignment and Rotation of Committee Members42

The Committee on Director Affairs isresponsible, after consultation with theChairman of the Board and with considerationof the desires of individual Board members, forthe assignment of Board members to variousCommittees.It is the sense of the Board that considerationshould be given to rotating Committeemembers periodically at about a five yearinterval, but the Board does not feel that such arotation should be mandated as a policy sincethere may be reasons at a given point in time tomaintain an individual Director’s Committeemembership for a longer period.(Guideline 23)

Not covered directly, but see OECD PrincipleV.E Annotation at 41-42 ([Independent boardmembers] can play an important role in areaswhere the interests of management, thecompany and shareholders may diverge, suchas executive remuneration, successionplanning, changes of corporate control,takeover defenses, large acquisitions and theaudit function.).

See also Topic Heading 18, above.

It is particularly important that nominationcommittees should have at least a majority ofindependent non-executive directors, one ofwhom should be chairman. If the chairman ofthe board is an independent director, it isappropriate that they chair the nominationcommittee. (Guideline 2)

The Working Group recommends that theboards of public companies, and in particularcompanies listed on the Australian StockExchange, should appoint remunerationcommittees with at least a majority ofindependent non-executive directors.(Guideline 5)

The Working Group considers that each listedcompany board of more than four membersshould appoint an audit committee with at leasta majority of non-executive directors; themembers should preferably be independent.(Guideline 6)

Not covered directly, but see Topic Heading18, above, and Topic Heading 20, below.

Not covered.

42 See also 1990 Business Roundtable Statement at 12 (“It is recommended that the audit committee, compensation/personnel committee and nominating committee limit their membership to non-management directors only.”); ABA Guidebook at 25, 27, 34, 38, 40 (“Thecomposition of the committee should be appropriate to its purpose. This includes relevant experience and independence from management by all or at least a majority of the members of such key committee as audit, nominating, and compensation. . . . “The role of the NominatingCommittee in some corporations has been broadened to include making recommendations to the board regarding the responsibilities, organization, and membership of board committees. . . . The Compensation Committee should be composed solely of non-management directors.The Audit Committee should be composed solely of independent directors. The Nominating Committee should be composed of directors who are not officers or employees of the corporation.”).

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Preda Report(Italy)

19. Assignment and Rotation of Committee Members

If the chair of the board is separate from theCEO, he or she might be an appropriate personto chair the governance committee or thecommittee responsible for governance matters.(§ 6.6 at p. 39)

Any concern that the governance committee orthe nominating committee has the real powerof the board and therefore creates two classesof directors can be addressed by providing forrotation of membership through thecommittees. (§ 6.8 at p. 40)


[T]he Committee advises boards againstappointing directors to their remunerationsor audit committees when these directorsrepresent another company where its ownrepresentatives are members of theequivalent committees. (Viénot I at 14)

[T]he Committee recommends that boardsshould avoid appointing directors to theirremunerations committee when thesedirectors represent another company whoseown representatives are members of theequivalent committee. (Viénot I at 18)

Not covered Not covered. The managing directors shall . . . appoint oneor more persons to run [the internal controlcommittee]. (The Code, 9.1)

[P]rovision [is] made for the possibleparticipation at meetings of the [internalcontrol] committee of the chairman of theboard of auditors, as the representative of thecontrol body provided for in the by-laws. Themanaging directors may also participate in theinternal control committee, since they areempowered to intervene in the mattersexamined and to identify adequate measures totackle potentially critical situations.(Commentary on the Code, 10)

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Not covered. Not covered. Not covered directly, but see Commentary onRecommendation 17 ([T]he members of eachcommittee [need not] be different; however, itis not recommended to unite all responsibilitiesinto one single committee, because of the riskof reducing its efficiency due to an excess ofwork and concentration of powers.).

The Nomination Committee’s mission is towatch over the integrity of the process ofappointing directors; to this end, it seems wiseto entrust it with . . . propos[ing] whichdirectors should be in each Committee.(The Report, II.5.1)

[T]he Committee believes that other types ofmeasures [besides term limits] must beconsidered to minimize risks [of weakenedindependence of directors due to long-termdirectorships] and specifically suggests thepossibility of creating internal rotationguidelines for independent directors regardingtheir assignment to specific control tasks. It isbasically a question of avoiding theirpermanent attachment to the same ControlCommittee. (The Report, II.5.4)

Not covered.

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Not covered. Not covered. Not covered. Boards should establish guidelines for, anddiscuss with some pre-defined frequency . . .the selection and rotation of committeemembers. (p. 5)

Not covered.

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20. Committee Meeting Frequency, Length and Agenda43

The Committee Chairman, in consultation withcommittee members, will determine thefrequency and length of the meetings of theCommittee. (Guideline 24)

The Chairman of the Committee, inconsultation with the appropriate members ofCommittee and management, will develop theCommittee’s agenda.Each Committee will issue a schedule ofagenda subjects to be discussed for the ensuingyear at the beginning of each year (to thedegree these can be foreseen). This forwardagenda will also be shared with the Board.(Guideline 25)

Not covered directly, but see Topic Heading18, above.

Not covered. Certain directors – whether executive or non-executive -- may be given special responsibil-ity for certain areas, on which they report tothe full board. Irrespective of the specialpowers invested in certain individuals, theboard of directors as a whole retains responsi-bility for fulfilling its obligations. (Part I:B.1.5)

The Commission’s recommendations on auditcommittees are as follows:a) They should be formally created as sub-

committees of the main board, to whomthey are answerable and should reportregularly; they should be given writtenterms of reference which deal adequatelywith their membership, authority andduties; they should meet at least twice ayear.

b) Membership should be confined to thenon-executive directors, and there shouldbe a majority of independent directors. . . .

c) The audit committee should have adiscussion with the internal and externalauditors (including statutory auditors) atleast once a year, from which the execu-tive directors may be excluded, to ensurethat there are no unresolved issues ofconcern.

d) The audit committee should have explicitauthority to investigate any matters withinits terms of reference, to have availablethe resources which it needs to do so andhave full access to information. Thecommittee should be able to obtainoutside professional advice and, ifnecessary, to invite outsiders with therelevant experience to attend meetings.

(Part I: B.4.3)

If there is an audit committee, it should complywith the following rules:a) It is set up by the Board of Directors, to

which it is accountable and to which itmust regularly give an account of itsmandate. It meets at least twice eachyear.

b) The composition of the committee isdetermined by the Board of Directors. Itwill ensure that the committee includesnon-executive directors and independentdirectors. . . .

c) The company auditors and, if such exist,the person responsible for the internalaudit and the financial director, shouldattend the meetings of the committee.These meetings are also accessible to alldirectors who wish to attend.

d) The committee should hear the companyauditors at least once each year, on anoccasion when the executive directors arenot present.

e) The committee has the widestinvestigative powers within its domainand may, by a majority decision, call uponprofessionals from outside the companyand allow them to attend its meetings.

f) The composition of the committee isannounced in the Annual Report and theChairman of the committee replies to thequestions which are asked at the GeneralMeeting about the activities of thecommittee.

(Note to 4.3)

43 See also ABA Guidebook at 20 & 25 (“Time at . . . committee meetings should be budgeted carefully. A balance should be sought between management presentations and discussion among directors and management. Written reports that can be given concisely and effectivelyin advance should be furnished. . . . The full board should satisfy itself that its committees are following an appropriate schedule of meetings and have agendas and procedures to enable them to fulfill their delegated functions. Furthermore, the full board should be kept informed ofcommittee activities. This includes periodic reports at board meetings and circulation of committee minutes and reports of meetings to all directors.”).

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Preda Report(Italy)

20. Committee Meeting Frequency, Length and Agenda

[The governance or nominating] committeewould propose changes to the board ofdirectors necessary to respond to thegovernance guidelines. This committee wouldalso be responsible for the explanation to theinvestment community of the differencesbetween the corporation’s governance systemand the guidelines. (§§ 6.4, 6.5 at p. 39)

The governance committee . . . will alsofunction as a forum for concerns of individualdirectors about matters that are not readily oreasily discussed in a full board meeting. (§ 6.7at p. 39)

The audit committee should have directcommunication channels with the internal andexternal auditors to discuss and review specificissues as appropriate. The audit committeeduties should include oversight responsibilityfor management reporting on internal control.While it is management’s responsibility todesign and implement an effective system ofinternal control, it would be the responsibilityof the audit committee to ensure thatmanagement has done so. (§ 6.21 at p. 43)

Executive committees are generally delegatedall the powers of the board, except for powerswhich can effect a fundamental change to thecorporation. The historical model of theexecutive committee comprised of the realdecision-makers within the board has virtuallydisappeared. We support this trend. (§ 6.22 atp. 43)

See § 6.18 at p. 40 (When the board appoints acommittee, it has to spell out the authority ofthe committee and, in particular, whether thecommittee has the authority to act on behalf ofthe board or simply has authority to examine aparticular issue and report back to the boardwith a recommendation.).

[T]he frequency and duration of meetings [ofBoard committees] cannot be subjected to anystandards, as the situations and needs varyextensively in this area.It remains that it is up to the Directors toensure that they are such as to allow in-depthreview and discussion of matters within thepurview of the Board and Board committees.(Viénot II at 16)

The Committee considers that it is up to theaudit committee to ascertain [the independenceof a corporation’s outside auditors], and toreport on this matter to the Board of Directorsevery year.Likewise, it is up to the audit committee toascertain that the amount of fees for auditing,assistance and consultancy paid by thecorporation and affiliates of its group to thestatutory auditors’ network does not accountfor an excessive percentage of the total feescollected by that network during the year, andto report on the matter to the Board ofDirectors annually. (Viénot II at 17)

The election among various [accounting]standards may be momentous for corporations’earnings, according, for instance, to theduration selected for amortization of goodwill,or the duty to amortize intangible assets or not.The financial managers and statutory auditorsof corporations are naturally in charge of thetechnical reviews of this matter.The Committee considers, however, that it isup to the audit committee to obtain thetechnical reviews supported by appropriatedocumentation, and to ensure that it is updatedhaving regard to the rapid changes inaccounting standards.The Audit Committee should then report to theBoard of Directors. (Viénot II at 18)

See Viénot I at 18-19 (overview of auditcommittee tasks).

The chairman of the Supervisory Boardprepares a systematic schedule of supervisionwhich stipulates the sequence and main focusof the topics more precisely to be discussed inthe individual meetings of the SupervisoryBoard or its committees. (The Code, IV.5.4)

The chairpersons stipulate the agenda for theindividual meetings of the Supervisory Boardand its committees on the basis of the scheduleof supervision as well as current developments.(The Code, IV.5.7)

The Internal Audit Committee:§ Should be established as a sub-committee

of the Board of Directors, to which it isaccountable, and should inform regularly.The operation of the sub-committeeshould be characterized by clearly definedreference terms. . . . The meetings of thesub-committee should take placeregularly, two or three times per year.

§ Should include in its composition at leastthree non-executive members of theBoard of Directors.

§ Should communicate with the internal(independent) and external auditors of thecorporation . . . .

§ Should have the authority to inquire intoall matters that fall into its domain, havethe required financial resources as well ashave access to all necessary informationrequired to accomplish its tasks. TheInternal Audit Committee should be ableto obtain external advice and, ifnecessary, to invite external specialists toattend the workings of the committee.

§ Should disclose its composition in thecorporation’s annual report.


The Board of Directors should make availablethe resources required to assist the exercise ofproper and efficient internal auditing.(Recommendation 4.8)

See Recommendation 4.9 (The members of theBoard of Directors should disclose to theInternal Audit Committee all necessaryinformation regarding the prospects of thecorporation.).

The executive committee – in the person of itschairman – and the managing directors shallperiodically report to the board of directors. . . .The bodies with delegated powers shall alsoprovide adequate information . . . to the boardof directors. They shall provide the board ofdirectors and the board of auditors with thesame information. (The Code, 5)

[The] remuneration committee . . . shall submitproposals to the board on the remuneration ofthe managing directors and of those directorswho are appointed to particular positions and,on the indication of the managing directors, onthe criteria for determining the remuneration ofthe company’s top management. (The Code,8.1; see the Report, 5.4.2)

[T]he internal control committee shall:a) assess the adequacy of the internal control

system;b) assess the work program prepared by the

persons responsible for internal control,and receive periodic reports;

c) assess the proposals put forward byauditing firms to obtain the auditengagement, the work program forcarrying out the audit and the resultsthereof as set out in the auditors’ report. . . ;

d) report to the board of directors on itsactivity and the adequacy of the internalcontrol system at least once every sixmonths . . . ;

e) perform other duties entrusted to it by theboard of directors, particularly as regardsrelations with auditing firms.

(The Code, 10.2; see the Code, 9.2 andthe Report, 5.4.3)

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Not covered. The Supervisory Board or the AuditCommittee should meet with the auditor atleast once a year. (Recommendation 6.4)

As a general rule, the function of [thenomination, remuneration and corporategovernance] committees should be basicallyinformative and consultative, since they are notsupposed to replace the board in decision-making but rather provide it with information,advice and proposals that may help itefficiently develop its function of supervisionand increase the quality of its performance inthese matters. (Commentary onRecommendation 17)

The role of the Audit Committee is basicallythat of evaluating the company’s auditingsystem, ensuring that the external auditor isindependent, and reviewing the internal controlsystem. The major function of the NominationCommittee is to see to the soundness of theselection process for the company’s directorsand top management, seeing to it that the can-didates meet the profile required for the vacantposition. The basic task of the RemunerationCommittee is to assist the Board in determin-ing and supervising the remuneration policy ofthe company’s directors and top management.The basic mission of the ComplianceCommittee is to watch over compliance withthe company governance rules, reviewingresults from time to time and reporting reformproposals to the Board. (The Report, II.3.6)

[T]he Audit Committee must be entrusted withat least the following powers: (a) propose theauditors, terms and conditions of the auditagreement and, as the case may be, revocationor non-renewal; (b) review the company’saccounts, watching over compliance with legalrequirements and the proper application ofgenerally accepted accounting principles, aswell as reporting management proposals tochange accounting principles and criteria; (c)act as a communication channel between theBoard of Directors and the auditors, evaluatingthe results of each audit and the managementteam’s response to their recommendations, andmediate and arbitrate in the event of anydisagreement regarding the appropriateprinciples and criteria to be used in thepreparation of financial statements; (d) verifythe adequacy and integrity of internal controlsystems and supervise the appointment andreplacement of the individuals in charge; (e)supervise the fulfillment of the auditagreement, seeing to it that the opinion on theannual accounts and the main contents of theauditing report are written in a clear andaccurate way. (The Report, II.11.1)

Not covered.

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Combined Code(United Kingdom)




[A] nomination committee [has] theresponsibility of proposing to the board, in thefirst instance, any new appointments, whetherof executive or of non-executive directors.(The Report, 4.30)

[Audit committees] should normally meet atleast twice a year. (The Report, 4.35(a))

The audit committee’s duties should bedetermined in the light of the company’s needsbut should normally include:

i. making recommendations to the boardon the appointment of the externalauditor, the audit fee, and any questionsof resignation or dismissal;

ii. review of the half-year and annualfinancial statements before submissionto the board;

iii. discussion with the external auditorabout the nature and scope of the audit,co-ordination where more than oneaudit firm is involved, any problems orreservations arising from the audit, andany matters which the external auditorwishes to discuss, without executiveboard members present;

iv. review of the external auditor’smanagement letter;

v. review of the company’s statement oninternal control systems prior toendorsement by the board;

vi. review of any significant findings ofinternal investigations.

(The Report, 4.35(e))

Where an internal audit function exists, theaudit committee should ensure that it isadequately resourced and has appropriatestanding within the company. (The Report,4.35(f))

See Topic Heading 18, above. The remuneration committee should providethe packages needed to attract, retain andmotivate executive directors of the qualityrequired but should avoid paying more than isnecessary for this purpose. (The Code,Provision B.1.1)

Remuneration committees should judge whereto position their company relative to othercompanies. They should be aware whatcomparable companies are paying and shouldtake account of relative performance.(The Code, Provision B.1.2)

Remuneration committees should be sensitiveto the wider scene, including pay andemployment conditions elsewhere in the group,especially when determining annual salaryincreases. (The Code, Provision B.1.3)

To avoid potential conflicts of interest, boardsof directors should set up remunerationcommittees of independent non-executivedirectors to make recommendations to theboard, within agreed terms of reference, on thecompany’s framework of executiveremuneration and its cost; and to determine ontheir behalf specific remuneration packages foreach of the executive directors, includingpension rights and any compensationpayments. (The Code, Provision B.2.1)

The duties of the audit committee shouldinclude keeping under review the scope andresults of the audit and its cost effectivenessand the independence and objectivity of theauditors. (The Code, Provision D.3.2)

For committee meetings, committee chairsshould work with the CEO and committeemembers to create agendas (incorporatingother board members’ input as provided) andto ensure that all relevant materials areprovided in a timely manner prior to eachmeeting. (p. 4)

Not covered.

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21. Formal Evaluation of the Chief Executive Officer44

The full Board (independent Directors) shouldmake this evaluation [of the CEO] annually,and it should be communicated to . . . the ChiefExecutive Officer by the Chairman of theCommittee on Director Affairs. Theevaluation should be based on objectivecriteria including performance of the business,accomplishment of long-term strategicobjectives, development of management, etc.The evaluation will be used by the ExecutiveCompensation Committee in the course of itsdeliberations when considering thecompensation of the . . . Chief ExecutiveOfficer. (Guideline 26)

Not covered directly, but see OECD PrincipleV.D.2 (The board should fulfil certain keyfunctions, including . . . [s]electing,compensating, monitoring and, whennecessary, replacing key executives.).

See also OECD Principle V.E Annotation at 41([Independent board members] can bring anobjective view to the evaluation of theperformance of . . . management.).

The board should assess the performance of theCEO annually. (Guideline 2)

Not covered. Not covered directly, but see 2.1 (Arecommendation from [the non-executivedirectors] is required for appointments tocertain key posts and for the standards ofconduct which the company imposes onitself.).

44 See also 1994 NACD Report at 1, 3 (“Formal performance reviews of the CEO are necessary. The process can take many different forms, depending on the company. Every board should consider developing a job description for the CEO. The CEO and the board should agreeto performance objectives, established in advance of each fiscal year. Such objectives might include quantitative performance factors and qualitative ones, such as integrity, vision and leadership.”); 1990 Business Roundtable Statement at 8, 15 (“Boards must have in place acredible process that ensures that the CEO’s performance is reviewed periodically. That review must lead to appropriate compensation and continuation decisions. . . . The most difficult duties of the board include a thorough evaluation of the CEO. The non-management directors(or a committee such as the Compensation Committee) are responsible for periodically evaluating the CEO’s performance. This evaluation is used to guide the board’s decisions about the CEO’s compensation, incentive pay and continued employment, as well as to identifystrengths or areas needing improvement. The CEO will, of course, be informed of the results of the evaluation.”); ABA Guidebook at 4 (The board has the responsibility to evaluate “the performance of senior management and to take appropriate action, including removal, whenwarranted. . . . Nominating Committee members should actively and directly review the performance of the CEO and members of senior management.”).

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Dey Report(Canada)




Preda Report(Italy)

21. Formal Evaluation of the Chief Executive Officer

The board of directors, together with the CEO,should develop position descriptions for theboard and for the CEO, involving thedefinition of the limits to management’sresponsibilities. In addition, the board shouldapprove or develop the corporate objectiveswhich the CEO is responsible for meeting.(Guideline 11)

See § 6.7 at pp. 39-40 (The governancecommittee . . . will also function as a forum forconcerns of individual directors about mattersthat are not readily or easily discussed in a fullboard meeting. These matters could includethe performance of management or individualmembers of management. . . . We recognizethat assessment of management may be theresponsibility of the Human ResourcesCommittee. . . . The important principle, ofcourse, is that these responsibilities be assumedby one or more committees of the board.)

Not covered directly, but see p. 15 (Theappointment of the chairman . . . is the soleresponsibility of the board.).

The individual performance of . . . theChairman of the Management Board is . . . tobe systematically evaluated annually by thepersonnel committee. In this, the target-orientated development of the company andthe individual contributions made [by theChairman] provide the scale for making theassessment. (The Code, II.1.10 at 11)

The Chairman of the Management Board . . . isprimus inter pares (and not “CEO”). Inparticular, he does not have right of commandover the other members of the ManagementBoard. (The Code, III.3.3 at 18)

Shareholders should have the right to . . . theapproval of the . . . chief executive officer(CEO) [and] his/her duties . . . , following therecommendations of the Board of Directors.(Recommendation 1.2.6)

See Recommendation 5.1 ([T]he Board should. . . monitor continuously t he corporation’sexecutive management.).

See also Recommendation 5.3.3 (The Board ofDirectors has the responsibility . . . for . . .[t]he selection, appointment and monitoring ofexecutive management . . . by taking accountof the corporation’s interests, as well as theexecutive management’s dismissal andreplacement.).

Not covered directly, but see the Code, 8.1(The [remuneration] committee . . . shallsubmit proposals to the board . . . on criteriafor determining the remuneration of thecompany’s top management.).

See also the Code, 8.2 ([I]n determining thetotal remuneration payable to the managingdirectors, the board of directors shall providefor a part to be linked to the company’sprofitability and, possibly, to the achievementof specific objectives laid down in advance bythe board of directors itself.).

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Not covered. Not covered. Not covered directly, but see Recommendation2 (Information should be disclosed on theactual functions of each member of the boardof directors and executive management of thecompany.).

[I]t seems wise to complement these measures[for counterbalancing the power of a combinedCEO/Chairman] with an evaluation of theChairman’s performance once a year – asChairman and as corporate CEO. (The Report,II.3.2)

Not covered.

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Not covered directly, but see The Report, 4.4 &4.5 (noting the important contributions non-executive directors have in reviewing theperformance of the board and of the CEO).

Not covered. Not covered. Boards should regularly and formally evaluatethe CEO. . . . Boards should ensure thatindependent directors create and control themethods and criteria for evaluating the CEO. (p. 6)

The selection and evaluation of the chiefexecutive officer and concurrence with theCEO’s selection and evaluation of thecorporation’s top management team isprobably the most important function of theboard. In its broader sense, “selection andevaluation” includes consideringcompensation, planning for succession and,when appropriate, replacing the CEO or othermembers of the top management team.The performance of the CEO should generallybe reviewed at least annually without thepresence of the CEO and other inside directors.The board should have an understanding withthe CEO with respect to the criteria on whichhe or she will be evaluated, and there should bea process for communicating the board’sevaluation to the CEO. (p. 5)

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22. Succession Planning / Management Development45

There should be an annual report by the ChiefExecutive Officer to the Board on successionplanning.There should also be available, on a continuingbasis, the Chairman’s and the Chief ExecutiveOfficer’s recommendation as to a successorshould he/she be unexpectedly disabled.(Guideline 27)

There should be an annual report to the Boardby the Chief Executive Officer on theCompany’s program for managementdevelopment.This report should be given to the Board at thesame time as the succession planning reportnoted previously. (Guideline 28)

The board should fulfil certain key functions,including . . . overseeing succession planning.(OECD Principle V.D.2)

[Independent board members] can play animportant role in areas where the interests ofmanagement, the company and shareholdersmay diverge, such as . . . succession planning.(OECD Principle V.E Annotation at 41-42)


45 See also 1990 Business Roundtable Statement at 7 (“The primary function of the board of directors includes concurrence with the CEO’s selection of the company’s top management team.”); ABA Guidebook at 41 (“[N]on-management directors may wish to utilize one or moreboard positions to evaluate the succession prospects of certain individuals and to ensure that they themselves develop a peer relationship and firsthand contact with senior executives who have detailed knowledge of the corporation’s business.”).

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Dey Report(Canada)




Preda Report(Italy)

22. Succession Planning / Management Development

The board of directors of every corporationshould explicitly assume responsibility for thestewardship of the corporation and, as part ofthe overall stewardship responsibility, shouldassume responsibility for . . . successionplanning, including, appointing, training andmonitoring senior management.(Guideline (1)(iii))

In contrast to the situation in other countries, itis generally thought that French boards do notmake adequate provision for the replacementof the chairman, which makes for someconcern on the market.The Committee thus recommends that itshould be the permanent responsibility ofthe selection committee to be in a position topropose successors at short notice, althoughclearly this would require confidentiality.(Viénot I at 15)

The Committee wishes to stress the need for aplan for succession of executive Directors.This is one of the main tasks of theappointments committee, though it may, ifappropriate, be assigned by the Board to an adhoc committee.It is natural that the corporation’s Chairmanshould be a member of the committee inperformance of this assignment. However,even though his or her opinion should beobtained, it is not desirable that the Chairmanshould chair this committee. (Viénot II at 18)

The appointments committee (or an ad hoccommittee) should draw up a plan forsuccession of the executive directors. Thechairman should be a member of thatcommittee, but not its chairman. (Viénot IIat 26)

Recruiting members of the Management Boardfrom within the ranks of the company’s ownexecutives is the normal case and is the resultof planned training for the next generation.The Management Board should be endowedwith a particularly good insight into the currentpotential of junior management by reason of itsposition as organ of management.Consequently, it is advisable that the membersof the Management Board (as part of theirmanagerial functions) narrow down the circleof potential successors to a manageablenumber of persons. The Chairman of theSupervisory Board is kept informed about thisfrom time to time. (The Code, II.1.4)

The suggestions of the Management Boardshould certainly not unduly restrict the optionsof the Supervisory Board as regards personnel.The Supervisory Board can and must moreobjectively assess the contribution of possiblecandidates to an optimal qualification profileof the organ of management, by reason of itsgreater distance. Accordingly, the Manage-ment Board’s knowledge of personnel mattersis to be combined with the neutrality of theSupervisory Board. (The Code, II.1.5)

In order to allow the members of theSupervisory Board the opportunity ofsystematically becoming acquainted withpotential candidates for membership of theManagement Board, the Management Boardregularly suggests persons from the inner circleof junior management for presentations in theSupervisory Board and its committees.(The Code, II.1.7)

[E]fficient governance means that, in view ofthe accomplishment of good long-termcorporate performance and sustainability,executive management should be endowedwith considerably flexibility and freedom ofmovement which would make possible theproper and timely acquisition and implementa-tion of organizational and technological know-ledge. Efficient knowledge is an essentialprerequisite for the effective confrontation ofmodern competitive challenges. In such aflexible framework, the required long-termcommitment and efficiency of managementwill be secured by the proper development,consistent monitoring and effective supervisionof the capital market. (Introduction)

Not covered.

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Not covered. Not covered directly but see Topic Heading 12,above.


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Not covered. Not covered. Not covered. Boards should institute as a matter of course anindependent director succession plan andselection process, through a committee oroverseen by a designated director or directors.(p. 5)

Boards should institute a CEO succession planand selection process, through an independentcommittee or overseen by a designated directoror directors. (p. 5)

[A] board should plan for its own continuityand succession – for the retirement of directorsand the designation of new board members.Because the composition and circumstance ofboards will vary, so too will the retirementpolicies of different corporations. (p. 14)

See Topic Heading A, below.

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A. Board Job Description46


The board should fulfill certain key functions,including:1. Reviewing and guiding corporate strategy,

major plans of action, risk policy, annualbudgets and business plans; setting per-formance objectives; monitoring imple-mentation and corporate performance; andoverseeing major capital expenditures,acquisitions and divestitures.

2. Selecting, compensating, monitoring and,when necessary, replacing key executivesand overseeing succession planning.

3. Reviewing key executive and boardremuneration, and ensuring a formal andtransparent board nomination process.

4. Monitoring and managing potentialconflicts of interest of management, boardmembers and shareholders, includingmisuse of corporate assets and abuse inrelated party transactions.

5. Ensuring the integrity of the corporation’saccounting and financial reportingsystems, including the independent audit,and that appropriate systems of controlare in place, in particular, systems formonitoring risk, financial control, andcompliance with the law.

6. Monitoring the effectiveness of thegovernance practices under which itoperates and making changes as needed.

7. Overseeing the process of disclosure andcommunications.

(OECD Principle V.D)

The specific functions of board members maydiffer according to the articles of company lawin each jurisdiction and according to thestatutes of each company. (Annotation toOECD Principle V.D at 41)

The Working Group considers that whatevermechanism is adopted, there should be nodoubt about which matters should be referredto the board for decision and which should becovered specifically in reports to the board.The division of responsibilities, terms ofreference of delegations from the board tomanagement should be put in writing andreviewed periodically, probably annually.(p. 8)


The board of directors is responsible for ensur-ing that proper rules of corporate governanceare in place. The board of directors isaccountable for its administration to thegeneral meeting of shareholders. (Part I: A.2)

Non-executive directors should bring an in-dependent judgment to bear on issues relatingto the company’s strategy, performance andresources, including key appointments andstandards of conduct. (Part I: B.2.1)

The board shall see to it that executivemanagement develops and implements thetools necessary to allow appropriate andeffective internal control. (Part I: B.4.4)

If there is a Secretary of the Board ofDirectors, the directors must be able to consultwith him and call upon his services. TheSecretary of the Board must ensure that theprocedures in relation to the functioning of theBoard and the regulations which apply to it arecomplied with.If there is no Secretary of the Board ofDirectors, the Board shall take the necessaryaction so that a person is given the task ofmonitoring compliance with the procedures inconnection with the functioning of the Boardand the applicable regulations.In both cases, he can only be replaced by adecision of the Board itself. (1.5)

The Board of Directors defines theappointments which are within its powers.(Note to 2.1)


46 See also 1990 Business Roundtable Statement at 7 (“The board of directors should: (i) Select, regularly evaluate and, if necessary, replace the CEO. Determine management compensation. Review succession planning; (ii) Review and, where appropriate, approve the financialobjectives, major strategies, and plans of the corporation; (iii) Provide advice and counsel to top management; (iv) Select and recommend to shareholders for election an appropriate slate of candidates for the board of directors, evaluate board processes and performance;(v) Review the adequacy of systems to comply with all applicable laws/regulations.”); ABA Guidebook at 4-5 (Under Model Act Section 8.01(b) “[a]ll corporate powers shall be exercised by or under authority of, and the business and affairs of the corporation managed under thedirection of, its board of directors. . . . This language is used to emphasize the responsibility of directors, especially directors of publicly held corporations, to oversee the management of the corporation — not to manage, but to oversee.”).

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Dey Report(Canada)




Preda Report(Italy)

A. Board Job Description

The board of directors, together with the CEO,should develop position descriptions for theboard and for the CEO, involving thedefinition of the limits to management’sresponsibilities. (Guideline 11)


With the exception of the powers which thelaw expressly reserves to the board as a whole,both the board of directors and the chairmanhave the widest powers to act in the company’sname in all circumstances. (Viénot I at 4)

While a company is instituted by privateagreement, in France the respective powers ofits governing bodies are determined by law andmay not be altered by the terms of thisagreement. (Viénot I at 5)

The only conflicts of authority which havegiven rise to some dispute have concerned thedivestment of major business operations andassets. The case law in this area is perfectlyclear, making the board or its chairman alonecompetent to effect such divestments, except inthe event that they prejudice the company’sobjects [sic], which the extraordinary generalmeeting of shareholders alone is competent tomodify.Clearly, then, the board must respect the rightsof the general meeting of shareholders when itenvisages a transaction which is of a nature toaffect, de jure or de facto, the company’sobjects [sic], which represent the purposes forwhich it was established. Even if this is not thecase, it is the Committee’s opinion that theboard should also ask the general meeting ofshareholders to consider any divestmentrepresenting a preponderant portion of thecompany’s assets or activities. (Viénot I at 6)

In addition to strict compliance with legalobligations to shareholders, the board ofdirectors of a listed company bears specialresponsibility to the market. (Viénot I at 6)

See Viénot I at 20-21 (directors’ rights andobligations).See also Topic Heading 1, above.

The Management Board operates as initiator ofmeasures, while the Supervisory Board takesup the role of informed discussion partner(sounding board). (The Code, II.3.2)

Management Board

[R]esponsibility for developing the value of thecompany lies primarily with . . . theManagement Board. (The Code, I.7)

A member of the Management Board isresponsible for the core activity of work andsocial services within the ambit of the Co-determination Act 1976 (director for employeerelations). (The Code, V.2.4)

See the Code, III (Governance standards forthe Management Board).

Supervisory Board

The co-operation between representatives ofthe stockholders and of the employees in theSupervisory Board is based on consent. It isthe joint discussions in Supervisory Boardcommittees which offer the chance ofpreventing or breaking up dysfunctionalformations of fractions between the two sides.(The Code, V.2.5)

In the case of insurmountable divergences ofopinion between the representatives of thestockholders and of the employees in aSupervisory Board where the members haveparity, the Chairman of the Supervisory Board,who is normally appointed from thestockholder side, has a second vote forresolving the stalemate. (The Code, V.2.6)

See the Code, II.3 (Decision-making whensetting fundamental directions); II.4(Promotion of the culture of discussion).

See also the Code, IV (Governance standardsfor the Supervisory Board).

The Board of Directors has the responsibility,more specifically, for the following:§ The design of the general strategy and

planning of the corporation, the formationof the corporation’s annual budget andbusiness plan, the determination of thecorporation’s performance targets and themonitoring of the efficiency ofgovernance practices followed during theoperation of the corporation and in largecapital transactions.

§ The adoption and implementation of thecorporation’s general policy based on thesuggestions and recommendations byexecutive management.

§ The selection, appointment andmonitoring of executive management andthe determination of their compensationby taking account of the corporation’sinterests as well as the executivemanagement’s dismissal and replacement.

§ The consistency of disclosed accountingand financial statements, including thereport of the (independent) certifiedaccountants, the existence of riskevaluation procedures, supervision, andthe degree of compliance of thecorporation’s activities to existinglegislation.

§ The monitoring and resolution of conflictsamong executive management, themembers of the Board of Directors andthe shareholders, including the cases ofmismanagement of the corporation’sassets and of privately beneficialtransactions.

§ The reporting of the corporation’sactivities to its shareholders.


See Introduction (It is important to establishthe specification and distribution of tasksbetween executive and non-executive Boardmembers and management.).

See also Footnote 4 to Recommendation 5.1(legally specified functions of the board).

The board of directors shall:§ examine and approve the company’s

strategic, operational and financial plans,and the corporate structure. . . ;

§ delegate powers to managing directorsand the executive committee. . . ;

§ determine . . . remuneration. . . ;§ supervise the general performance of the

company, with special reference tosituations of conflict of interest. . . ;

§ examine and approve transactions havinga significant impact on the company’sprofitability, assets and liabilities orfinancial position. . . ;

§ check the adequacy of the generalorganizational and administrativestructure. . . ;

§ report to the shareholders at shareholders’meetings.

(The Code, 1.2)

Managing directors shall endeavor to informthe board of the main statutory and regulatoryinnovations. (The Code, 1.4)

Non-executive directors shall bring theirspecific expertise to board discussions andcontribute to the taking of decisions that areconsistent with the shareholders’ interests.(The Code, 2.2)

The managing directors shall ensure theeffectiveness and adequacy of the internalcontrol system [and] define its procedures.(The Code, 9.1)

Board of Auditors

The members of the board of auditors are re-quired to treat the documents and informationthey acquire in the performance of their dutiesas confidential and to comply with the proced-ure for the disclosure to third parties of suchdocuments and information. (The Code, 13.3)

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Directors should concentrate their efforts onstrategic decision-making for the company aswell as overseeing business operations carriedout by managers: thus they should be clearlydistinguished from the “executive officers”whose role is to execute the business of thecompany. (Comment on Principle 7A)

Probably, the major activity of the board ofdirectors will comprise the oversight ofmanagement’s execution of businessoperations. (Comment on Principle 10B)

The function of the board of directors shouldbe rejuvenated to cope with the increasinglycomplex and rapidly changing global market,through its metamorphosis into an honest andrigorous advisory body for management, whichmight otherwise be tempted to be complacent.In order to achieve such a goal, the board ofdirectors might make greater use of supportand information staff, for example “executivecommittees” which are common in the U.S.(Ch. 2.6)

The Supervisory Board is responsible for thesupervision of management policy and thegeneral course of affairs in the company.(Recommendation 2.1)

The Supervisory Board advises the Board ofDirectors. It acts as a body with collectiveresponsibility, without a mandate andindependently of subsidiary interestsassociated with the company.(Recommendation 2.1)

The Supervisory Board has a chairman whoensures that the Supervisory Board functionsproperly. The chairman has specific dutiesregarding discussions on relevant issues,communication between the SupervisoryBoard members and the Board of Directors, theaccountant and the external advisers appointedby the Supervisory Board. The chairmankeeps in frequent contact with the chairman ofthe Board of Directors. The specific duties ofthe Supervisory Board and those of itschairman are laid down in the regulations forthe Supervisory Board. (Recommendation3.1).



Internal regulations of the company must layout the obligations arising from the generalduties of diligence and loyalty, especiallycovering situations of conflicting interests, theobligation of confidentiality, and the use ofbusiness opportunities and corporate assets.(The Code, Recommendation 16)

[T]he Committee recommends that the Boardof Directors explicitly assume the followingresponsibilities:(a) approval of the general corporate strategy;(b) appointment, remuneration and, as the

case may be, removal of top management;(c) control of management and evaluation of

performance;(d) identification of major corporate risks and

implementation and follow-up of internalcontrol and information systems;

(e) establishment of information and reportpolicies in respect of shareholders,markets and the public opinion.

The Committee considers that the Board ofDirectors should take the above as functionsthat cannot be delegated. (The Report, II.1.2)

Directors as such have no specific functionwithin the Board structure. All of them have totake part in the deliberations and collectivedecisions and are accountable for them. . . .Directors coming from the executive line areespecially expected to provide information,strategic assessment and decision proposals,whereas outside directors are basicallyexpected to provide an independent view,evaluation capacity and authority to solveconflicting interests. (The Report, II.3.4)

[T]he Board of Directors [should] delegate therunning administration to the ManagingDirector. In order to safeguard against possiblemisunderstandings, the Board of Directorstherefore should issue plain and cleardirections and instructions for the ManagingDirector. (p. 4)

It is the responsibility of the Board of Directorsto make sure that there is a satisfying control ofthe bookkeeping and of the fundsadministration. (p. 4)

In the interaction between the ManagingDirector (the Management) and the Board ofDirectors it is important to make clear thedistribution of responsibility. (p. 5)

The Board of Directors need to stimulate themanagement. The boardroom meetings shallbe set up to be constructive and stimulating.(p. 5)

A board member can never be passive but mustall the time keep her/himself informed aboutthe company development. (p. 13)


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The board should have a formal schedule ofmatters specifically reserved to it for decisionto ensure that the direction and control of thecompany is firmly in its hands. (The Code,1.4)

It is the board’s duty to present a balanced andunderstandable assessment of the company’sposition. (The Code, 4.1)

We recommend that boards should have aformal schedule of matters specificallyreserved to them for their collective decision,to ensure that the direction and control of thecompany remains firmly in their hands and as asafeguard against misjudgments and possibleillegal practices. A schedule of these mattersshould be given to directors on appointmentand should be kept up to date. (The Report,4.23)

These matters are discussed in detail at 4.25 ofThe Report.


The board should maintain a sound systemof internal control to safeguard share-holders’ investment and the company’sassets. (Principle D.II)

Executive directors share with their non-executive colleagues overall responsibility forthe leadership and control of the company. Aswell as speaking for the business area orfunction for which he or she is directlyresponsible, an executive director shouldexercise individual judgement on every issuecoming before the board, in the overallinterests of the company. (Guideline 3.6)

Non-executive directors are normallyappointed to the board primarily for theircontribution to the development of thecompany’s strategy. (Guideline 3.8)

The prime responsibility of the board ofdirectors is to determine the broad strategy ofthe company and to ensure its implementation.To do this successfully requires high qualityleadership. It also requires that the directorshave sufficient freedom of action to exercisetheir leadership. The board can only fulfil itsresponsibilities if it meets regularly andreasonably often. (Guideline 3.11)

[R]emoval of the company secretary should bea matter for the board as a whole. (The Code,Provision A.1.4)

All directors should bring an independentjudgment to bear on issues of strategy,performance, resources, including keyappointments, and standards of conduct.(The Code, Provision A.1.5)

The board of directors is responsible for thecompany’s system of internal control. Itshould set appropriate policies on internalcontrol and seek regular assurance that willenable it to satisfy itself that the system isfunctioning effectively. The board mustfurther ensure that the system of internalcontrol is effective in managing risks in themanner which it has approved. (TurnbullReport, 16)

Reviewing the effectiveness of internal controlis an essential part of the board’s responsibili-ties. . . . Management is accountable to theboard for monitoring the system of internalcontrol and providing assurance to the boardthat it has done so. (Turnbull Report, 25)

Should the board become aware at any time ofa significant failing or weakness in internalcontrol, it should determine how the failing orweakness arose and reassess the effectivenessof management’s ongoing processes for de-signing, operating and monitoring the systemof internal control. (Turnbull Report, 34)

Re: factors for the board’s consideration indetermining its policies with regard to internalcontrol, see the Turnbull Report, 17.

Re: elements of a sound system of internalcontrol, see the Turnbull Report, 20-24.

[E]ach board has the freedom – and . . . theobligation – to define its role and duties indetail. (p. 1)

[B]oard responsibilities include:§ approving a corporate philosophy and

mission§ selecting, monitoring, evaluating,

compensating, and – if necessary –replacing the CEO. . .

§ reviewing and approving management’sstrategic and business plans. . .

§ reviewing and approving thecorporation’s financial objectives, plans,and actions . . .

§ reviewing and approving materialtransactions not in the ordinary course ofbusiness

§ monitoring corporate performance againstthe strategic and business plans

§ ensuring ethical behavior and compliancewith laws . . .

§ assessing its own effectiveness . . .§ performing such other functions as are

prescribed by law.(pp. 1-2)

Boards should periodically review board. . . .role descriptions to accommodate changes incorporate governance and company operations.(p. 4)

See generally Ch. 2, pp. 3-6; see also TopicHeading 1, above.

The business of a corporation is managedunder the direction of the board . . . but theboard delegates to “management” the authorityand responsibility for managing the everydayaffairs. . . . The extent of this delegation variesdepending on the size and circumstances of thecorporation. In a large corporation that isperforming well and has strong management,the board may delegate more; in a smaller orclosely-held corporation, or one facing criticalchallenges, more detailed involvement by theboard . . . may be appropriate. In a large publiccorporation that is not facing extraordinarydifficulties, in addition to reviewing andapproving specific corporate actions asrequired by law (e.g., declaration ofdividends), the principal [board] functions are:

i. Select, regularly evaluate and, ifnecessary, replace the [CEO], determinemanagement compensation, and reviewsuccession planning;

ii. Review and, where appropriate, approvethe major strategies and financial andother objectives and plans of thecorporation;

iii. Advise management on significantissues facing the corporation;

iv. Oversee processes for evaluating theadequacy of internal controls, riskmanagement, financial reporting andcompliance, and satisfy itself as to theadequacy of such processes; and

v. Nominate directors and ensure that thestructure and practices of the boardprovide for sound corporate governance.

(p. 4-5)

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B. Outside Advice47

Not covered. An annual audit should be conducted by anindependent auditor in order to provide anexternal and objective assurance on the way inwhich financial statements have been preparedand presented. (OECD Principle IV.C)

It is widely felt that the application of high-quality audit standards and codes of ethics isone of the best methods for increasingindependence and strengthening the standingof the profession. Further measures includestrengthening of board audit committees andincreasing the board’s responsibility in theauditor selection process.Other proposals have been considered byOECD countries. Some countries applylimitations on the percentage of non-auditincome that the auditor can receive from aparticular client. Other countries requirecompanies to disclose the level of fees paid toauditors for non-audit services. In addition,there may be limitations on the total percentageof auditor income that can come from oneclient. Examples of other proposals includequality reviews of auditors by another auditor,prohibitions on the provision of non-auditservices, mandatory rotation of auditors andthe direct appointment of auditors byshareholders. (OECD Principle IV.CAnnotation at 38)

The contributions of non-executive boardmembers to the company can be enhanced byproviding . . . recourse to independent externaladvice at the expense of the company. (OECDPrinciple V.F Annotation at 43)

Policy makers and regulators should encouragesound audit practices, which include boardselection of, and reliance on, an independentauditor. (Millstein Report, Perspective 16)

To enable directors to discharge their fiduciaryduties properly, it may be necessary for themto be provided with expert advise, particularlyon legal and financial matters. Such adviceshould be objective and as independent aspossible. In the first instance, advice is likelyto be requested from company officers oradvisers but in some circumstances, advicefrom independent external source may beappropriate. It is important that an agreedprocedure be established which makes clearunder what circumstances, with whatinformation and by what method boardcommittees or individual directors can obtainsuch advice at the company’s expense. Wherea nomination committee with a majority ofindependent directors has been appointed, itmay be the best mechanism for consideringrequests. (Guideline 4)

There should be an agreed procedure fordirectors in the furtherance of their duties totake independent professional advice at thecompany’s expense. (Part I: B.1.6))

The board should ensure that the auditors haveno relationship with the company, whetherdirectly or indirectly, which could influencetheir judgment. (Part I: B.4.2)

The audit committee should have a discussionwith the internal and external auditors(including statutory auditors) at least once ayear, from which the executive directors maybe excluded, to ensure that there are nounresolved issues of concern. (Part I: B.4.3.c)

The audit committee . . . should be able toobtain outside professional advice and, ifnecessary, to invite outsiders with relevantexperience to attend meetings. (Part I:B.4.3.d)

See Part I: A.2 ([T]he General Meeting ofShareholders is responsible for appointing . . .the auditors. (Part I: A.2)

The Board of Directors must ensure thatobjective relationships are developed with thecompany auditors, based on the highest degreeof professionalism. (4.2)This recommendation is, of course, onlyapplicable in companies where there is acompany auditor. (Note to 4.2)

The company auditors and, if such exist, theperson responsible for the internal audit andthe financial director should attend themeetings of the [audit] committee. . . .The [audit] committee should hear thecompany auditors at least once each year, onan occasion when the executive directors arenot present. . . .The [audit] committee has the widestinvestigative powers within its domain andmay, by a majority decision, call uponprofessionals from outside the company andallow them to attend its meetings. (Note to4.3)

47 See also ABA Guidebook at 7 (“A director should be able to communicate directly with the corporation’s principal external and internal advisers, including its auditors, legal counsel, and, when such relationships exist, its investment banking and executive compensationadvisers. Further, there may be occasions when an outside adviser should be specially retained to assist the board or a committee in connection with a particular matter.”).

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B. Outside Advice

The audit committee should have directcommunication channels with the internal andexternal auditors to discuss and review specificissues as appropriate. (Guideline 13)

The board of directors should implement asystem which enables an individual director toengage an outside adviser at the expense of thecorporation in appropriate circumstances. Theengagement of the outside adviser should besubject to the approval of an appropriatecommittee of the board. (Guideline 14)

The Committee considers it legitimate forBoard committees to be allowed theopportunity . . . to call for outside technicalreviews at the corporation’s expense. It goeswithout saying that this option should beexercised by committees only in performanceof their respective duties, and after informingthe Chairman of the Board of Directors. In allcases, the committees should report to theBoard of Directors on the information andopinions obtained on such occasions. (p. 17)

The independence of a corporation’s auditorsshould not be jeopardized by the award toentities belonging to their networks of assist-ance or consulting assignments (technical,legal, tax, organization, etc.) by the corporationitself or by other affiliates of its group, whichare of material importance either in terms ofstakes for the corporation and its group or interms of the related fees. (Viénot II at 17)

The choice among various [accounting]standards may be momentous for corporations’earnings. . . . The financial managers andstatutory auditors of corporations are naturallyin charge of the technical reviews of thismatter. (Viénot II at 18)

[The Supervisory Board’s] controllingactivities are supported and complemented bythe auditor who [independently] examines thecompany’s rendering of accounts. (The Code,I.5)

The auditor is an independent guarantor ofopen disclosure for the reference groups of thecompany and, in addition, is a supportivepartner to the Supervisory Board in thesupervisory process. The auditor controlsseparate parts of Management Board dealingsbut is also available to the Management Boardas advisor. (The Code, VI.2.1)

In the case of a public corporation with a stockmarket quotation, the auditor also has to assessthe efficiency of risk management. (The Code,VI.2.4)

Apart from the audit certificate required bystatute, the auditor also prepares a report forthe Management Board noting the weak pointsin the company (management letter). (TheCode, VI.2.5)

The independence of the auditor is essential fora consistent and reliable control. Hence, theauditor takes all reasonable steps to safeguardneutrality. (The Code, VI.2.6)

The Supervisory Board should also take intoconsideration, on the recommendation for theappointment of the auditor, whether the workof the auditor should undergo evaluation by anexpert third party at regular intervals (peerreview). (The Code, VI.2.7)

[T]he general shareholder meeting has theresponsibility of appointing . . . the external . . .auditors. (Introduction)

Shareholders should have the right to . . . theapproval of the appointment and/or dismissalof the external and internal auditors, theirduties and compensation, following therecommendations of the Board of Directors.(Recommendation 1.2.7)

The Board of Directors should ensure thegeneral shareholder meetings that the externalauditors have no relationship with thecorporation, directly or indirectly, which couldaffect their judgment and evaluation.(Recommendation 4.5)

The Internal Audit Committee . . . [s]houldcommunicate with the internal (independent)and external auditors of the corporation withthe purpose of achieving a settlement of allunresolved issues in the corporation.(Recommendation 4.7.3)

Procedures should be established that allow theBoard of Directors to obtain advice by externaladvisors, which would assist the exercise oftheir duties. The corporation should meet thecost of external advice. (Recommendation 5.9)

See Footnote 3 to Recommendation 4.6 (legalrequirements for Board oversight of externaland internal auditors, and expansion of suchrequirements).

[T]he [remuneration] committee may employexternal consultants at the company’s expense.(The Code, 8.1)

[The internal control committee] should assess. . . the reports of the external auditors . . . andthe offers and work programs of auditingfirms. (The Report, 5.4.3)

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B. Outside Advice

The quality of corporate auditing should beimproved by the appointment of more than oneindependent (external) corporate auditor, andby more carefully defining the role ofindependent external auditors vis-à-vis internalauditors. The neutrality of the auditingfunction should be ensured by selectingcorporate auditors only with the full consent ofthe board of corporate auditors itself. The“five year rule,” by which a former officer ofthe company may be appointed as an externalauditor after five years of absence from thecompany or a related company, must beabolished. (Principle 11A)

Under [the] new system, public accountantswill also be required to submit audit reports tothe board of directors. (Comment onPrinciple 13B)

See Principle 12A (Auditors should be free torequest all information relating to the decision-making activities of managers and directors.).

See also Comment on Principles 11A, 12A([Under the new system, t]he auditing ofdirectors activities [will] necessarily require[ ]the initial auditing of the appropriateness ofthese activities. Therefore, the CommercialCode should be clearly interpreted as requiringthat auditors audit the appropriateness ofdirectors strategic decision-making process aswell as the actual decisions themselves. Wealso propose an increased role for publicaccountants, in performing independent andimpartial auditing from a professionalstandpoint.).

Not covered. Not covered. The right of all directors to collect and obtainthe information and advice needed to fulfilltheir supervision functions must be formallyrecognized. Appropriate channels should becreated to exercise this right, even resorting tooutside experts in special circumstances.(The Code, Recommendation 14)

The Board of Directors and the AuditCommittee should watch over situations thatmay pose risks for the independence of theexternal auditors of the company. They shouldparticularly check the percentage that thecompany’s fees represent in the total revenuesof the auditing firm and should publicly reportany fees corresponding to professional servicesother than auditing. (The Code,Recommendation 21)

There is no auditing law in Sweden, but theGeneral Corporation Act requires theappointment of an accountant. The Code notesthat the accountant normally is appointed bythe Board at the AGM. The Code also notesthat the accountant may also give generaladvice to the Board. (p. 8)

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B. Outside Advice

There should be an agreed procedure fordirectors in the furtherance of their duties totake independent professional advice ifnecessary, at the company’s expense.(The Code, 1.5)

The board should ensure that an objective andprofessional relationship is maintained with theauditors. (The Code, 4.2)

The company’s statement of complianceshould be reviewed by the auditors insofar as itrelates to paragraphs 1.4, 1.5, 2.3, 2.4, 3.1-3.3,and 4.3-4.6 of the Code. (Footnote to the Codeat 60)

Occasions may arise when directors have toseek legal or financial advice in the furtheranceof their duties. They should always be able toconsult the company’s advisors. If, however,they consider it necessary to take independentprofessional advice, we recommend that theyshould be entitled to do so at the company’sexpense, through an agreed procedure laiddown formally, for example in a BoardResolution, in the Articles, or in the Letter ofAppointment. (The Report, 4.18)

We recommend that boards appoint remunera-tion committees [that draw] on outside adviceas necessary. (The Report, 4.42)

The board should establish formal andtransparent arrangements for maintainingan appropriate relationship with thecompany’s auditors. (Principle D.III)

The external auditors should . . .independently assure the board on thedischarge of its responsibilities . . .in accordance with professional guidance.(Principle D.IV)

There should be a procedure agreed by theboard for directors in the furtherance of theirduties to take independent professional adviceif necessary, at the company’s expense.(The Code, Provision A.1.3)

Remuneration committees should consult thechairman and/or chief executive officer abouttheir proposals relating to the remuneration ofother executive directors and have access toprofessional advice inside and outside thecompany. (The Code, Provision B.2.5)

Boards and board committees occasionallyneed independent advice. In most cases, thecompany and the board can jointly satisfy theirneeds through the retention of a commonresource. In other cases, given the differentroles and responsibilities of management andthe board, the board may need to retain its ownprofessional advisors.

Board members and senior management, asnecessary, should concurrently participate inthe selection of outside professionals who giveadvice both to the board and to management.

Under special circumstances, the board andboard committees may wish to hire their ownoutside counsel, consultants, and otherprofessionals to advise the board. (p. 6)

Because the information and expertise relevantto the board’s regular decision-making willnormally be found within the corporation, themain responsibility for providing assistance tothe board rests on the internal organization.There may, however, be occasions when it isappropriate for the board to seek legal or otherexpert advice from a source independent ofmanagement, and generally this would be withthe knowledge and concurrence of the CEO.(p. 19)

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C. Content and Character of Disclosure48

Not covered. The corporate governance frameworkshould ensure that timely and accuratedisclosure is made on all material mattersregarding the corporation, including thefinancial situation, performance, ownership,and governance of the company.

Disclosure should include, but not be limitedto, material information on:1. The financial and operating results of the

company.2. Company objectives.3. Major share ownership and voting rights.4. Members of the board and key executives,

and their remuneration.5. Material foreseeable risk factors.6. Material issues regarding employees and

other stakeholders.7. Governance structures and policies.(OECD Principle IV.A)

Capital structures and arrangements that enablecertain shareholders to obtain a degree of con-trol disproportionate to their equity ownershipshould be disclosed. (OECD Principle I.D)

Members of the board and managers should berequired to disclose any material interests intransactions or matters affecting thecorporation. (OECD Principle II.C)

Re: public filing of information, seeAnnotation to OECD Principle IV.D at 39.

Regulators should encourage ongoing im-provements in both disclosure techniques andformats. (Millstein Report, Perspective 12)

[C]orporations should disclose the extent towhich they pursue projects and policies thatdiverge from the primary corporate objectiveof generating long-term economic profit so asto enhance shareholder value in the long term.(Millstein Report, Perspective 21)

Not covered. Information about the relevant interests ofdirectors should be disclosed in the annualreport. (Part I: B.2.2)

The report and accounts should contain acoherent narrative of the company’s financialposition, supported by information on thecompany’s performance and prospects. . . .The need for the report to be readilyunderstood emphasizes that words are asimportant as figures. (Part I: B.4.1)

The directors should report on the company’sprospects. (Part I: B.4.5)

Information [to be disclosed] on the composi-tion of the board of directors [includes]:§ List of the directors de facto representing

the dominant shareholders, the directorsin charge of the daily management, andthe directors considered by the companyas being independent from the dominantshareholders and the management.

§ When the function exercised by a directorin the company is not his main function,indication of his main function outside thecompany. . . .

§ Mention of the rules, if any, . . . governingthe appointment of directors and therenewal of their mandates. . . .

§ For natural persons representing directors,which are actually legal personae,indication of these persons’ capacity inthe company which they represent.

(Part II: B.1)

See Topic Heading E, below.

The obligations, the duration of the mandateand the means of remuneration of directorsmust be announced at the time of theirappointment. (Note to 1.6)

The responsibilities of the Board of Directorsinclude producing a comprehensive andobjective Annual Report on the situation of thecompany each year. (4.1)This Annual Report and the annual accountsmust represent the situation and results of thecompany and developments underconsideration, as clearly as possible and innumerical form. This . . . must refer to bothsuccesses and failures, in words which are easyto understand. (Note to 4.1)

48 See also Corporate Secretaries Guidelines at 9-10 (In outlining how to design disclosure policies and procedures, the Guidelines suggest the following components: careful due diligence, designation of press/analyst spokespersons, centralized accountability for the disclosureprocess, approval of speeches to the investment community, avoidance of leaks and protection of confidential information, and monitoring of electronic communication.).

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C. Content and Character of Disclosure

Among the aspects of the corporate system thatare not addressed in this report is the content ofa corporation’s annual disclosures toshareholders. (2.13)

Corporations are obligated to disclose whetherthe board has a majority of unrelated directorsand, if the corporation has a significantshareholder, the corporation will be obligatedto disclose whether the board is constitutedwith the appropriate number of directors whoare not related to either the corporation or thesignificant shareholder. (App. A)

See Toronto Stock Exchange Listing Packet,Section entitled “Once Your Company IsListed” (The Toronto Stock Exchange has alisting requirement that every listed companymust disclose in a timely manner “anyinformation likely to affect the price of itsshares.”).

While it is the Chairman’s duty to provide themarket with a regular flow of information on aday-to-day basis, the board of directors is re-sponsible for presenting annual and half-yearlyfinancial statements, and for informing themarket of major financial transactions. . . .[T]he board must provide quality information,which is sufficiently reliable and clear toensure the fair execution of transactions. . . .[T]he board should publish its assessment ofall transactions concerning the company’ssecurities, even when this is not legallyrequired. (Viénot I at 6)

The annual report is the location for theinformation due to the shareholders, to whichthe reasons for, and justification of, the optionsmade by the Board should be reported.(Viénot II at 9)

There remains . . . too much diversity in thepractices of listed corporations with respect tothe time required for the publication ofaccounts. The Committee recommends thatlisted corporations should take all necessarysteps to achieve, as soon as possible,compliance with the following schedule:§ if the corporation publishes estimated or

provisional consolidated annual accounts,they should be published, at the latest, onemonth after the close of the financial year,followed by final accounts within threemonths after the close;

§ if not, the final accounts should bepublished within two months after theclose of the financial year;

§ final consolidated half-yearly accounts,for their part, should be published, at thelatest, two and a half months after the endof the first half, if the estimated orprovisional accounts are not publishedsooner.

(Viénot II at 18-19)

Information on the efficiency of the companyensures the confidence of the stakeholders andis therefore of strategic importance. (Thesis 9)

The public corporation does not restrict itselfto information for the stockholders and otherreference groups [by merely] fulfillingminimum statutory requirements which arisefrom the appropriate regulations concerningfinancial reporting and disclosure. Rather, thecompany establishes an integrated system ofexternal communication which covers . . . thelegitimate information needs of the variousstake-holders of the company. (The Code,VI.1.1)

The stockholders receive access to allinformation which has been provided tofinancial analysts and similar addressees.(The Code, VI.1.4)

The company reports at regular intervals on,among other things, the company’s strategy,and periodically on realized as well as planneddevelopment of important managerial ratios inthe individual sectors of business. (The Code,VI.1.6)

The company also makes the existing risks forthe present, and for the business activitiesplanned for the future, transparent. (The Code,VI.1.7)

See Commentary on Thesis 9 (Adequateinformation on the terms, results and planneddevelopments of the company’s activities, forthe stockholders and other reference groups, isa pre-condition for reinforcing the trust, andwith it the necessary support, of thoseinterested in the company.).

The corporate governance framework shouldensure the full, timely and detailed disclosureof information on all material matters,including the financial situation, performance,ownership structure and governance of thecorporation. (Principle 4)

The establishment of transparency involves thedisclosure of information on:§ The financial and operating results of the

corporation.§ The corporation’s ownership structure.§ Members of the Board of Directors and

management.§ Quantitative and qualitative matters

concerning employees and otherstakeholders in the corporation.

§ Governance structures and policies.§ Corporate targets and prospects.§ The execution of unusual and complex

transactions, transactions on derivativeproducts and their level of risk.


All investors should be able to obtaininformation on the voting rights affiliated withall classes of shares before their purchase ofshares. (Recommendation 2.1.1)

The Board of Directors should ensure thegeneral shareholder meetings that the internal(independent) auditors are given the requiredfinancial and operating autonomy toaccomplish their task completely. Internalauditors should be subject to oversight in asatisfactory manner. (Recommendation 4.6)

The Internal Audit Committee . . . [s]houlddisclose its composition in the corporation’sannual report. (Recommendation 4.7.5)

See Topic Headings D, E and F, below.

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When the company holds meetings for majorshareholders, it should publicize theinformation it gives out through, for instance,the mass media or the internet. In this case, theoffered information may be provided equallyto other shareholders on request.Issues such as allocation of company profitsand executive remuneration . . . , including forexample stock option plans, should bedisclosed to the shareholders in the form ofbusiness statements, enabling shareholders toevaluate them.Simplification of the Annual General Meetingmust not result in the dilution of informationoffered to shareholders. (Comments onPrinciples 14A, 15A & 16B)

[M]anagement oversight of the allocation ofprofit among stakeholders is indispensable, andshould be accompanied by full disclosure.(Ch. 1.4)

[T]he chairman should ensure that informationis not made available solely to certain groupsof shareholders. (Recommendation 2.6)

The Supervisory Board should report on theexistence of . . . committees in the annualreport. (Recommendation 3.2)

The main points of the report of the Board ofDirectors to the Supervisory Board should begiven a permanent place in the annual report.(Recommendation 4.2)

In the General Meeting of Shareholders athorough exchange of ideas should take placebetween company executives and investors.Relevant information should therefore besupplied so that, on the basis of soundly-basedsector and investment analyses, it is possible tocommunicate effectively about and make acritical assessment of strategy, risks, activitiesand financial results. (Recommendation 5.2)

The Board of Directors should take stock ofthe influence available to the investors in thecompany and should report its findings inwriting to them. (Recommendation 5.4.3)

To enhance the quality of the debate in theGeneral Meeting of Shareholders and bringabout a de facto increase in the influence of theinvestors, it is not only of importance that theBoard of Directors provides good qualityinformation in good time, but that the investorscan also have recourse to the work done byinvestment analysts and the press.(Recommendation 5.4.4)

The audit of the annual accounts is an integralpart of a sound system for CorporateGovernance. (Recommendation 6.3)

A description of the market behavior of theshares should be made and issued at least oncea year. (Recommendation 3)

Information should be disclosed to the publicon the dividend policy commonly adopted bythe company. (Recommendation 4)

Shareholder agreements regarding the exerciseof rights in the company or regardingtransferability of shares, when relevant to theorganization of companies, should be disclosedto the public. (Recommendation 5)

See Recommendation 6 (The use of newinformation technologies is encouraged for thedisclosure of financial information.).

[T]his Committee recommends that the Boardof Directors stretch its sense of duty to thepoint of offering immediate and sufficientinformation not only on relevant facts that mayhave a sizeable influence on price formation inthe stock market, but also on anything thatmay:

§ influence the company’s ownershipstructure (particularly significant sharevariations, syndication agreements andother coalitions that may be established);

§ involve a substantial change ofgovernance rules (this is in addition towhat is laid out under 12.2 below);

§ deal with specially relevant linkedtransactions (transactions within the groupand with individuals linked to Boardmembers); or

§ have to do with the company’s equity.(The Report, II.10.1)

The Board should prepare its Annual Reportand distribute the Report at least one weekprior to the AGM. (p. 7)

It is the responsibility of the Board of Directorsto make sure that the company has anorganization that is such that the accountingsystem makes it possible to generate runningreports concerning the result and balance of thecompany. (p. 13)

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An open approach to the disclosure ofinformation contributes to the efficientworking of the market economy, promptsboards to take effective action and allowsshareholders and others to scrutinizecompanies more thoroughly. (The Report, 3.2)

What is required of financial reporting is that itshould be honest and that it should present abalanced picture of the state of the company’saffairs. (The Report, 3.3)

The lifeblood of markets is information andbarriers to the flow of relevant informationrepresent imperfections in the market. Theneed to sift and correct the information put outby companies adds cost and uncertainty to themarket’s pricing function. The more theactivities of companies are transparent, themore accurately will their securities be valued.(The Report, 4.48)

Boards should aim for the highest level ofdisclosure consonant with presenting reportswhich are understandable and with avoidingdamage to their competitive position.(The Report, 4.51)

The demand for an ever-increasing amount ofdetail in reports and accounts has to beweighed against the need for them to beunderstandable by the reasonably informedshareholder. (The Report, 4.58)

The board should present a balanced andunderstandable assessment of thecompany’s position and prospects.(Principle D.I)

The board should establish formal andtransparent arrangements for maintainingan appropriate relationship with thecompany’s auditors. (Principle D.III)

The external auditors should independentlyreport to shareholders in accordance withstatutory and professional requirements andindependently assure the board on thedischarge of its responsibilities under D-Iand D-II above in accordance withprofessional guidance. (Principle D.IV)

The board should present a balanced andunderstandable assessment of thecompany’s position and prospects.(The Code, Principle D.1)

The board should maintain a sound systemof internal control to safeguardshareholders’ investment and thecompany’s assets. (The Code, Principle D.2)

The board should establish formal andtransparent arrangements for consideringhow they should apply the financialreporting and internal control principlesand for maintaining an appropriaterelationship with the company’s auditors.(The Code, Principle D.3)

The directors should explain theirresponsibility for preparing the accounts, andthere should be a statement by the auditorsabout their reporting responsibilities.(The Code, Provision D.1.1)

The board’s responsibility to present abalanced and understandable assessmentextends to interim and other price-sensitivepublic reports and reports to regulators as wellas to information required to be presented bystatutory requirements. (The Code, ProvisionD.1.2)

The directors should, at least annually, conducta review of the effectiveness of the group’ssystem of internal control and should report toshareholders that they have done so. Thereview should cover all controls, includingfinancial, operational and compliance controlsand risk management. (The Code, ProvisionD.2.1)

Companies which do not have an internal auditfunction should from time to time review theneed for one. (The Code, Provision D.2.2)

Boards should disclose evaluation proceduresto shareholders in the proxy statement or othershareholder communication. Board disclosureof procedures is distinct from sharing thesubstance of such deliberations, which shouldbe confidential. (p. 17)

Each board should debate [the subjects ofboard structure, process, composition and self-evaluation] thoroughly and disclose the resultsof its deliberations to shareholders. (p. 23)

Not covered.

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D. Disclosure Regarding Compensation and Director Assessment

Not covered. The corporate governance frameworkshould ensure that timely and accuratedisclosure is made on all material mattersregarding the corporation, including thefinancial situation, performance, ownership,and governance of the company.

Disclosure should include, but not be limitedto, material information on . . . [m]embers ofthe board and key executives, and theirremuneration [and g]overnance structures andpolicies. (OECD Principle IV.A.4, 7)

Companies are generally expected to disclosesufficient information on the remuneration ofboard members and key executives (eitherindividually or in the aggregate) for investorsto properly assess the costs and benefits ofremuneration plans and the contribution ofincentive schemes, such as stock optionschemes, to performance. (Annotation toOECD Principle IV.A.4 at 37)

The remuneration of non-executive directors,including all benefits such as options, rightsand pensions, should be fully disclosed toshareholders and approved by them. (p. 30)

It is recommended to disclose the total amountof the non-executive directors’ remunerationseparately in the annual report and to specifyboth the fixed and the variable part of theremuneration. In addition, the principlesunderlying the calculation of the variable part,if any, should be disclosed. (Part I: B.2.1)

It is recommended to disclose the total amountof the executive management’s remunerationseparately in the annual report and to specifyboth the fixed and the variable part of theremuneration. In addition, the principlesunderlying the calculation of the variable part,if any, should be disclosed. (Part I: B.3.1)

Information [to be disclosed] on thefunctioning of the board of directors [includes]the rules and procedures with regard to thedetermination of total emoluments, annualfees, benefits in kind and share options grantedto directors, as well as loans and advanceswhich may have been granted to them.(Part II: B.2)

The means of remuneration of directors mustbe stated in the Annual Report. (1.7)

The Annual Report must state the method ofremuneration of the directors (fixed amounts,bonuses, variable results-linked part, etc.)Large companies (in the sense of accountinglaw) are obliged to provide information in thenotes to the Annual Accounts on the totalremuneration of the directors. (Note to 1.7)

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Dey Report(Canada)




Preda Report(Italy)


Although the Report makes no recommenda-tions of its own, it discusses the Ontario rulesrequiring disclosure of executive compensationin the context of a discussion on openness andaccountability. See § 3.2 at p. 11.

EU directives provide that corporations arerequired to state in the notes on the accountsthe total compensation paid to theadministration, management and supervisorybodies, but the information need not bepublished if it results in disclosure of anindividual situation. (Viénot II at 10)

The Committee recommends that withassistance from the compensation committee,the membership of which would be stated, theBoard of Directors of any listed corporationshould include in its annual report a specificchapter relating to disclosure to theshareholders of the compensation collected bythe corporate officers. (Viénot II at 11; for adescription of contents of the proposedchapter, see Viénot II at 12)

[T]he Committee considers that any listedcorporation, having granted options, ought todraft a related chapter to be included in thesection of the annual report dealing with thestructure of, and changes in, the corporatecapital. (Viénot II at 12; for a description ofcontents of the proposed chapter, see Viénot IIat 13)

The annual report and the notice calling theannual meeting of shareholders, every year,should inform the shareholders, who arelegitimately highly interested in the matter, ofthe number of shares held by each Director inthe corporation’s stock. (Viénot II at 14)

The number of shares of stock held by eachDirector in his or her personal capacity in thecorporation concerned should be entered in theannual report and notice calling the meeting ofshareholders. (Viénot II at 24)

Management Board

Apart from the emoluments of theManagement Board as a whole, the companyalso discloses the fundamentals of the systemfor remuneration. In this are included, inparticular, the procedure and the standards ofcomparison for evaluating the performance ofthe Management Board, as well as the form ofany market price-orientated compensationsystems. (The Code, III.6.4)

Supervisory Board

The company also publishes, apart from thetotal remuneration, the principles of theremuneration system of the members of theSupervisory Board. (The Code, IV.7.4)

Total compensation of non-executive membersof the Board should be reported separately andwith the required justification in thecorporation’s annual report. (Recommendation6.1)

It is a good practice that the total compensationof management be disclosed and justified inthe financial statements of the corporation.(Recommendation 7.1)

See Recommendation 7.2 (It is a good practicethat a review committee, consisting of themajority of non-executive Board members, beestablished by the general shareholder meeting,which would review managementcompensation. The review committee’scomposition should be disclosed in thecorporation’s annual report.).

Directors’ pay is a field . . . which calls foradequate disclosure of information andtransparency concerning fees and the mannerof determining them. (The Report, 5.4.2)

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Issues such as allocation of company profitsand executive remuneration should beexcluded from the Annual General Meeting,and should be decided by the board ofdirectors, but this will require the revision ofCommercial Code. However these issues,including, e.g., stock option plans, should bedisclosed to the shareholders in the form ofbusiness statements, enabling shareholders toevaluate them. (Comment on Principle 14A)

The aggregate number of shares certificates ofshares and stock options49 held by all theSupervisory Board members should bepublished each year in the annual report.(Recommendation 2.12)

The aggregate number of securities held by allthe members of the Board of Directors at theend of the financial year should be included inthe annual report and should be subdividedinto:§ shares/certificates of shares;§ convertible bonds;§ marketable options;§ options issued by the company;§ together with the most significant

conditions relating thereto.(Recommendation 4.5)

Information should be disclosed on the actualfunctions of each member of the board ofdirectors and executive management of thecompany, as well as their positions in othercompanies. (Recommendation 2)

[T]he Committee recommends that directorremuneration information policies be groundedon a principle of maximum transparency.Applying this principle requires a quickadvancement from the current situation tomore complete and detailed information ondirector remunerations. This involvesindividual information on each one, itemizedby headings, whether they be remunerationsattached to their director status (fixed earnings,allowances, share of profits, bonuses,incentives, pensions, insurance, payments inkind or others) or remunerations paid by thecompany for other kinds of legal relations(professional services, line management orexecutive positions).The Committee recommends that companiestargeted by this report that do not choose toimmediately apply this maximum transparencyprinciple, but prefer a gradual implementation(or by stages), provide an explanation in theirAnnual Report. In either case, these compan-ies should provide at least individualizedinformation on the remunerations of all of thedirectors as such, for each of the items statedabove as well as any professional fees. On theother hand, the remuneration of executivedirectors would be stated for all of them in theaggregate, stating how many directors receiveeach of the remuneration items. All thisinformation would be included in the AnnualReport. (The Report, II.7.4)

Not covered.

49 Marketable options and not employee stock options are meant here, because the Committee assumes that, in accordance with Recommendation 2.13, no employee stock options will be granted to Supervisory Board members.

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Shareholders are entitled to a full and clearstatement of directors’ present and futurebenefits, and of how they have beendetermined. We recommend that in disclosingdirectors’ total emoluments and those of thechairman and highest-paid UK director,separate figures should be given for their salaryand performance-related elements and that thecriteria on which performance is measuredshould be explained. Relevant informationabout stock options, stock appreciation rights,and pension contributions should also be given.(The Report, 4.40)

Note: Following the issuance of theGreenbury Report, the London Stock Exchangeadopted listing rules requiring that companieslisted on the exchange disclose directors’remuneration packages (broken down bydirector) including salary, bonuses, pensions,and stock option plans. Also, companies muststate whether or not they comply with theremuneration committees and policy sectionsof the Cadbury Report. See London StockExchange Listing Rule 12.43 (w) and (x).


The company’s annual report shouldcontain a statement of remuneration policyand details of the remuneration of eachdirector. (Principle B.III)

We recommend that all names submitted forelection or re-election as directors should beaccompanied by biographical details indicatingtheir relevant qualifications and experience.This will enable shareholders to make aninformed decision whether to support thedirector’s re-election. (Guideline 3.21)

Directors’ remuneration is of legitimateconcern to the shareholders. They are entitledto expect that remuneration will be ‘sufficientto attract and retain the directors needed to runthe company successfully’; and that ‘theremuneration of executive directors should linkrewards to corporate and individualperformance’. More generally, now thatdetails of individual directors’ remunerationare disclosed, they are liable to have an impactboth on the company’s reputation and onmorale within the company. (Guideline 4.2)


The company’s annual report shouldcontain a statement of remuneration policyand details of the remuneration of eachdirector. (The Code, Principle B.3)

The board should report to the shareholderseach year on remuneration. The report shouldform part of, or be annexed to, the company’sannual report and accounts. It should be themain vehicle through which the companyreports to shareholders on directors’remuneration. (The Code, Provision B.3.1)

The report should set out the company’s policyon executive directors’ remuneration. It shoulddraw attention to factors specific to thecompany. (The Code, Provision B.3.2)

In preparing the remuneration report, the boardshould follow the provisions in Schedule B tothis code. (the Code, Provision B.3.3)

Shareholders should be invited specifically toapprove all new long term incentive schemes(as defined in the Listing Rules) save in thecircumstances permitted by paragraph 13.13Aof the Listing Rules. (The Code, ProvisionB.3.4)

See also the Code, Schedule B: Provisions OnWhat Should Be Included in the RemunerationReport, 1-7.

Shareholders’ understanding of board anddirector assessment processes and criteria isindispensable to both board credibility andshareholders’ ability to appraise the board’srecommended resolutions and proposed slateof directors. Boards should disclose evaluationprocedures to shareholders in the proxystatement or other shareholder communication.Board disclosure of procedures is distinct fromsharing the substance of such deliberations,which should be confidential. (p. 17)

Each board should debate [the subjects ofboard structure, process, composition and self-evaluation] thoroughly and disclose the resultsof its deliberations to shareholders. (p. 23)

Not covered directly, but see pp. 5-6(“[S]election and evaluation” [of the CEO]includes considering compensation . . . .Boards have a responsibility to ensure thatcompensation plans are appropriate andcompetitive and properly reflect the objectivesand performance of management and thecorporation. Incentive plans will vary . . . andshould be designed to provide the properbalance between long- and short-termperformance incentives. Stock options andother equity-oriented plans should beconsidered as a means for linkingmanagement’s interests directly to those ofshareholders.).

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E. Disclosure Regarding Corporate Governance50

Not covered in the Guidelines, but theGuidelines are published by the company andwidely available.

Disclosure should include, but not be limitedto, material information on . . . [g]overnancestructures and policies. (OECD PrincipleIV.A.7)

Companies are encouraged to report on howthey apply relevant corporate governanceprinciples in practice. Disclosure of thegovernance structures and policies of thecompany, in particular the division of authoritybetween shareholders, management and boardmembers, is important for the assessment of acompany’s governance. (OECD PrincipleIV.A.7 Annotation at 38)

See Millstein Report, Perspective 3(Regulatory intervention in the area of corpo-rate governance is likely to be most effective iflimited to:§ Ensuring the protection of shareholder

rights and the enforceability of contractswith resource providers (Fairness);

§ Requiring timely disclosure of adequateinformation concerning corporatefinancial performance (Transparency);

§ Clarifying governance roles and respon-sibilities, and supporting voluntary effortsto ensure the alignment of managerial andshareholder interests, as monitored byboards . . . having some independentmembers (Accountability); and

§ Ensuring corporate compliance with otherlaws and regulations. (Responsibility).).

See also Millstein Report, Perspective 23(Individual corporations, shareholders andother interested parties should continue theirefforts to articulate and adopt – voluntarily –corporate governance “best practices” designedto improve board independence and activism,and accountability to shareholders.).

On 1 July 1995, the ASX introduced ListingRule 3C(3)(j) which requires listed companiesto set out their main corporate governancepractices in their annual report. Morespecifically, the rule states that a listedcompany must, for reporting periods ending onor after 30 June 1996, include in its annualreport . . . a statement of the main corporategovernance practices that the company has hadin place during the reporting period. (p. 3)

See ASX Guidance Note re: Disclosure ofCorporate Governance Practices (September 2,1998).

[The Code] proposes a so-called “comply orexplain” approach. (Part I: A.5)Note: This proposal was subsequentlyincorporated into the Euronext/ Brusselslisting rules.

[M]embership of the remuneration committeeshould be disclosed in the annual report.(Part I: B.3.2)

[M]embership of the [audit] committee shouldbe disclosed in the annual report. (Part I:B.4.3.e)

Information [to be disclosed] on the function-ing of the board of directors [includes]:§ Indications on the most significant types

of subjects discussed [in meetings].§ Indication of specific rules, if any, . . .

governing the decision-making process. . .§ A description of the way in which the

board of directors is organized tosupervise the daily management. . . .

§ A description of the way in which theboard of directors is organized to followthe evolution of the activities ofsubsidiaries and participating interests.

§ If the board of directors has adopted rulesfor the exercise of the director’s function,this should be mentioned together with asummary of these rules.

(Part II; B.2)

See Part I: A.4 (Belgian company law alreadyincorporates the basic concepts required foradequate corporate governance.).

See also Part II: B.3 (disclosure of informationon committees) and B.4 (disclosure re:organization of board oversight of dailymanagement).

See also Topic Heading C, above.

The composition of the [audit] committee isannounced in the Annual Report. (Note to 4.3)

See 2.1 (A recommendation from [the non-executive directors] is required for . . . thestandards of conduct which the companyimposes on itself.).

50 While American stock exchanges do not require any significant disclosure of corporate governance practices, some companies in the United States are beginning to voluntarily and formally disclose in annual reports and proxy statements information about corporate governancepractices. See, e.g., Campbell Soup Company, Proxy Statement (1996) at 8. In contrast to American exchanges, some foreign exchanges have listing rules requiring companies to make annual disclosures about their corporate governance practices. See The Stock Exchange ofHong Kong Limited, Code of Best Practice contained in Guide for Directors of Listed Companies (1996); Toronto Stock Exchange, Listing Packet: “Once Your Company is Listed”; London Stock Exchange, Listing Rules, 12.43(j); Australian Stock Exchange, Listing Rules,3C(3)(j).

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Dey Report(Canada)




Preda Report(Italy)

E. Disclosure Regarding Corporate Governance

The disclosure – a “Statement of CorporateGovernance Practices” – should be made in thecorporation’s annual report or informationcircular. [Such disclosure] would be relativelybrief but would address at least the followingpoints:§ Mandate of the board . . .§ The composition of the board . . .§ If the board does not have a chair separate

from the CEO, the structures andprocesses which are in place to facilitatefunctioning of the board independently ofmanagement

§ Description of board committees . . .§ Description of decisions requiring prior

approval by the board§ Procedures for recruiting new directors

and other performance-enhancingmeasures . . .

§ Measures for receiving shareholderfeedback and measures for dealing withshareholder concerns

§ The board’s expectation of management.(8.1)

[T]he TSE [might do well to] adopt thedisclosure obligation as a listing requirement[and] discuss with other Canadian exchangesthe extension of the listing requirement tocompanies listed on those exchanges. (8.2)

[E]ach board should periodically review itsmembership, organization and operations,and keep shareholders informed ofconclusions and action taken. (Viénot I at 3)

The Committee believes that each boardshould inform shareholders of the arrange-ments made to ensure that its duties areproperly performed, and should periodicallyreview the adequacy of its organization andoperation. In particular, such arrangementsshould include more formal procedures forthe preparation of meetings. (Viénot I at 16)

[I]t is essential that the shareholders and thirdparties be fully informed of the options and ofthe allocation of powers selected by the Board.. . . . It ought to be possible to append the rulesof operation, having become the basiccollection of rules for internal operation, to theby-laws, or at least to disclose them to thirdparties. Information to the latter relating to thenature of the election made could also beprovided by measures such as an entry in theRegistry of Commerce and Companies or amention in the corporate documents.(Viénot II at 9)The annual report should specify the number ofmeetings of the Board of Directors and Boardcommittees held during the elapsed financialyear, and provide shareholders with informa-tion as to the Directors’ actual attendance atthe meetings. (Viénot II at 16)

The annual report should specify precisely thedates of the initiation and expiry of each direc-tor’s term, so as to highlight the staggering [ofDirectors’ terms]. It should also mention foreach Director his or her age, major position,and directorships in other listed corporations(other than group affiliates), and specify thenames of all the members of each Boardcommittee. (Viénot II at 24)

Adequate information . . . is a pre-condition forreinforcing trust. . . . This applies not least toinformation on the chosen form of corporategovernance. (Commentary on Thesis 9)

Companies with more than 500 employeesshould formulate guidelines for themanagement and supervision of the company.(The Code, VII.3)

See also:

Thesis 1 ([This Code] strengthens the qualityand transparency of the management ofGerman companies.).Thesis 2 ([This Code] must take into accountthe special context of German companies in aglobalized economy.).Thesis 3 (An effective [German Code] has ademonstratively managerial perspective.).Thesis 4 (Rules on corporate governance mustbe tailored to the particular characteristics ofcompanies, principally their legal forms andowner structures.).Thesis 5 (The Management Board stands at thecenter point of [these] guidelines.).Commentary on Thesis 5 (Rules for thesupervision of the Management Board by theSupervisory Board are certainly of importance,but they must not take center stage anddominate the understanding of corporategovernance. In the final analysis, an excellentcompany management does not allow itself tobe “checked into.”. . .What is inappropriate in particular is theattempt to want to ‘check into’ the quality ofmanagement by concentrating on . . . super-vision and the auditor of the company. Insteadof such control, or Supervisory Board over-balance, the aim should rather be to establishterms most promising for success of themanagement of the company. (The Code, I.7)

The corporate governance framework shouldensure the shareholders that the operation ofthe corporation is characterized by fairness andtransparency:§ The rules and procedures governing the

selection of the members of the Board ofDirectors, the acquisition of control of alisted corporation and the execution ofunusual and complex transactions . . .should be fully analyzed and disclosed sothat investors know their rights and theprocedure. The price of these transactionsshould be transparent and be settled interms and conditions that protect therights of the shareholders.

§ Capital structures and arrangements thatenable certain shareholders to obtain adegree of control disproportionate to theirequity ownership should be disclosed.

(Recommendations 1.4.1 and 1.4.2)

See Recommendation 2.2 (Actions andtransactions based on insider information orundertaken for private benefit should beprohibited.).

See also Recommendation 2.3 (Members of theBoard of Directors and executive managersshould be required to disclose information onany private material interest involved intransactions or other matters affecting thecorporation.).

See also Footnote 2 to Recommendation 4.1.1(legal stipulations as regards disclosure ofcorporate information).

The Committee recommends that the electionof members of the board of directors shouldtake place in accordance with a transparentprocedure. (Commentary on the Code, 7; seethe Report, 5.4.1)

Where . . . the board has delegated powers tothe chairman, it shall disclose adequateinformation in its annual report on the powersdelegated. (The Code, 4.3; see Commentaryon the Code, 4; the Report, 5.2)

[The nominations] committee . . . serves theprimary purpose of rendering the selectionprocedure transparent. (Commentary on theCode, 7)

[T]he Committee recommends that themembers of the board of auditors be elected bymeans of a transparent procedure and thatshareholders should receive the informationthey need to exercise their voting rights in aninformed manner. (Commentary on the Code,13; see the Report, 5.6)

See the Report, 6 (The task of verifying thesuitability of the choices made [in the Code],and the extent of the Code’s application, isentrusted to the institutional fora for theconfrontation between companies and the mainactors interested in good CorporateGovernance: It is therefore to be reserved toshareholders’ meetings and encounters withinstitutional investors.).

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[M]anagement oversight of the allocation ofprofit among stakeholders is indispensable, andshould be accompanied by full disclosure oftheir allocation of profits to the company’svarious constituent stakeholders. In this sense,governance by the board of directors alsocomprehends elements of social responsibility:through their duty of supervising manage-ment’s actions, directors contribute to thetransparency of the market. In an opaquemarket, the directors are not able to coordinatethe relative interests of stakeholders in anappropriate way. (Ch. 1-4)

The profile [of the Supervisory Board] is apublic document and should be available forinspection at the company’s offices.(Recommendation 2.2)

The annual report should state the ages of theindividual Supervisory Board members, theiroccupation, main job, nationality and the mainadditional posts they hold, to the extent that thelatter are of importance for performing theduties of a Supervisory Board member. Thereport should also state when a member wasfirst appointed and the current term of theappointment. (Recommendation 2.4)

The main principles of Corporate Governancein the company should be outlined in theannual report. In its annual report the companyshould give an argued explanation of the extentof its compliance with the recommendations.(Recommendation 6.1)

The fact that discussion [regardingperformance of the Supervisory Board & theBoard of Directors] has been held is to bementioned in the Supervisory Board’s report inthe annual report. (Recommendation 3.5)

[I]t is recommended that listed companies andinstitutional investors include a mention intheir annual reports of the adoption, or degreeof adoption, of these recommendations, withthe grounds for this adoption. (Introduction)

Information should be disclosed on the sharingof powers between the different bodies anddepartments or divisions of the company,within the framework of the corporate decisionprocess, particularly through flowcharts orfunctional maps. (Recommendation 1)

It is recommended that, for those matterswhich are central to the configuration ofcorporate governance, information bedisclosed, even if only summarized, on thespecial procedures of decision, particularlyregarding the company’s strategic options.(Commentary on Recommendation 1)

It is recommended that, within the internalorganization of the company, specific regu-lations be established aimed at regulatingsituations of conflict of interest betweenmembers of the board and the company, aswell as the main obligations resulting fromduties of diligence, loyalty and confidentialityof the members of the board, particularlyregarding the prevention of improper use ofbusiness opportunities and company assets.(Recommendation 12)

Internal control procedures, besides thepossibility of them having a significant impacton the level of corporate efficiency, are . . .privileged means to guarantee transparentcorporate governance. (Commentary onRecommendation 12)

The Board of Directors, beyond currentregulatory requirements, should be in charge offurnishing markets with quick, accurate andreliable information, particularly in connectionwith the shareholder structure, substantialchanges in governance rules, and especiallyrelevant transactions or those having to do withtreasury stock. (The Code, Recommendation19)

The Board of Directors should include in itspublic annual report some informationconcerning its governance rules, providing anexplanation in connection with any rulesdeviating from the recommendations of thisCommittee. (The Code, Recommendation 23)

[T]he Board of Directors would be bound toinclude in the company’s Annual Reportinformation on transactions carried out withsignificant shareholders (volume oftransactions and nature of the most significanttransactions) so that their reach and importancewill be known to all. (The Report, II.8.6)

The objective is that the Board of Directorsinclude information on its governance ruleswithin its annual public documentation. Itseems very wise that companies justify theirdecision to not follow the recommendations ofthe Code of Best Practice issuing from thisreport. (The Report, II.12.2)

Not covered.

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We recommend that listed companies . . .should state in the report and accounts whetherthey comply with the Code and identify andgive reasons for any areas of non-compliance.(Cadbury Report 3.7)

We envisage, however, that many companieswill wish to go beyond the strict terms of theLondon Stock Exchange rule and make ageneral statement about the corporategovernance of their enterprises as some leadingcompanies have already done. We welcomesuch statements and leave it to boards to decidethe terms in which they make their statementsof compliance. (Cadbury Report 3.8)

Note: Rule 12.43(j) of the Listing Rules of theLondon Stock Exchange requires companieslisted on the exchange to state whether or notthey comply with the Cadbury Report Code ofBest Practice and to give reasons for any areasof non-compliance.

We draw a distinction between principles ofcorporate governance and more detailedguidelines like the Cadbury and Greenburycodes. With guidelines, one asks: “How farare they complied with?”; with principles, theright question is: “How are they applied inpractice?” [The Committee] recommends thatcompanies should include in their annualreport and accounts a narrative statement ofhow they apply the relevant principles to theirparticular circumstances. Given that theresponsibility for good corporate governancerests with the board of directors, the writtendescription of the way in which the board hasapplied the principles of corporate governancerepresents a key part of the process. We do notprescribe the form or content of this statement,which could conveniently be linked with thecompliance statement required by the ListingRules. (Guideline 2.1)

See Principle C.III (When evaluatingcompanies’ governance arrangements,particularly those relating to boardstructure and composition, institutionalinvestors and their advisers should give dueweight to all relevant factors drawn to theirattention.).

In June 1998, when the Combined Code wasissued, it stated:

The London Stock Exchange intends tointroduce a requirement that listedcompanies disclose how they apply thePrinciples of Good Governance and whetherthey are in compliance with the Code ofBest Practice Provisions. (Preamble)

This Combined Code requirement became partof The London Stock Exchange Listing Rulesin January 1999 as §12.43A(a) and (b).

The chairman, chief executive officer andsenior independent director should beidentified in the annual report. (The Code,Provision A.2.1)

Non-executive directors considered by theboard to be independent . . . should beidentified in the annual report. (The Code,Provision A.3.2)

The chairman and members of the nominationcommittee should be identified in the annualreport. (The Code, Provision A.5.1)

The members of the remuneration committeeshould be listed each year in the board’sremuneration report to shareholders.(The Code, Provision B.2.3)

The members of the [audit] committee, amajority of whom should be independent non-executive directors, should be named in thereport and accounts. (The Code, ProvisionD.3.1)

If the company does not have an internal auditfunction and the board has not reviewed theneed for one, the Listing Rules require theboard to disclose these facts. (Turnbull Report,47)

The most important result the Commissionseeks is board deliberation on the subjectsraised and on the judgments expressed in thisReport. Each board should debate these issuesthoroughly and disclose the results of itsdeliberations to shareholders. The board’sconclusions can and should be amended fromtime to time as circumstances change. (p. 23)

It is important that each board consider itspolicies and practices on corporate governancematters. Whether or not a board will formalizeits board practices in written form will varydepending on the particular circumstances.Some corporations have found that over-formalization leads to a rigid structure whichemphasizes form over substance, while othershave found that insufficient formalization leadsto a lack of clarity. (p. 19)

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F. Accuracy of Disclosure / Liability51

Not covered. The corporate governance frameworkshould ensure that timely and accuratedisclosure is made on all material mattersregarding the corporation, including thefinancial situation, performance, ownership,and governance of the company. (OECDPrinciple IV)

Information should be prepared, audited, anddisclosed in accordance with high qualitystandards of accounting, financial and non-financial disclosure. (OECD Principle IV.B)

The Principles support development of highquality internationally recognized standards.(Annotation to OECD Principle IV.B at 38)

An annual audit should be conducted by anindependent auditor in order to provide anexternal and objective assurance on the way inwhich financial statements have been preparedand presented. (OECD Principle IV.C)

Regulators should require that corporationsdisclose accurate, timely information concern-ing corporate financial performance.(Millstein Report, Perspective 9)

Regulators should cooperate internationally indeveloping clear, consistent and comparablestandards for disclosure. (Millstein Report,Perspective 10)

Policy makers and regulators should articulateclearly the legal standards that govern share-holder, director and management authority andaccountability, including their fiduciary rolesand legal liabilities. . . . [L]egal standardsshould be flexible and permissive of evolution.(Millstein Report, Perspective 13)

See OECD Principle V.D.7 (The boardshould fulfil certain key functions, including. . . [o]verseeing the process of disclosureand communications.).

See also Topic Headings B and C, above.

Not covered. Integrity demands that the financial reports andother information disseminated by thecompany present an accurate and completepicture of the company’s position. . . .[T]he responsibility of the board of directorschiefly relates to the quality of the informationit provides to shareholders. (Part I: A.7)

The report and accounts should contain acoherent narrative of the company’s financialposition, supported by information on thecompany’s performance and prospects.Depending on the nature of the company, itshould contain the information needed toenable investors and their investment advisersto form a view of the company’s financialposition and performance. . . . Balancerequires that setbacks should be dealt with aswell as successes. (Part I: B.4.1)

The Secretary of the Board must ensure thatthe procedures in relation to the functioning ofthe Board and the regulations which apply to itare complied with.If there is no Secretary of the Board ofDirectors, the Board shall take the necessaryaction so that a person is given the task ofmonitoring compliance with the procedures inconnection with the functioning of the Boardand the applicable regulations.In both cases, he can only be replaced by adecision of the Board itself. (1.5)

51 See also Corporate Secretaries Guidelines at 1 (“Developing and continually refining procedures to manage ‘formal’ and ‘informal’ communications to avoid legal liability and enhance company credibility is a challenging but essential exercise for all public companies.”).

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Dey Report(Canada)




Preda Report(Italy)

F. Accuracy of Disclosure / Liability

We support the examination by Canadiansecurities administrators of the imposition ofcivil liability upon boards of directors for theaccuracy of corporate disclosures concerningmaterial changes in the business and affairs ofcorporations. (1.17)

The prospectus is the most comprehensivedisclosure document and its accuracy iscertified by the corporation and the board ofdirectors. The directors, in addition to thecorporation, are liable for anymisrepresentations contained in the prospectusalthough the directors have available a duediligence defense. (7.13)

There is no statutory civil liability attaching tothe decision as to the timing of the publicationof a timely disclosure release. In addition, nostatutory civil liability attaches to the contentof the timely disclosure or quarterly or annualreports, with two exceptions, i.e., issuersundertaking securities offerings in the shortform system and issuers who are registered inthe United States. (7.14)

[T]he issue of legislated civil liability inrespect of timely and continuous disclosureshould be put back on the policy agenda. Weapplaud the appointment by the TSE of acommittee to explore disclosure issues relatingto listed companies. The timeliness andquality of information is not only critical toefficient capital markets but also to effectivecorporate governance. (7.16)

See Appendix 5.56 (“Statutory Liabilities ofDirectors”); Appendix 5.60 (“Response ofGovernments to Committee Invitation toReview Legislation Imposing PersonalLiability Upon Directors”).

While it is the Chairman’s duty to provide themarket with a regular flow of information on aday-to-day basis, the board of directors isresponsible for presenting annual and half-yearly financial statements, and for informingthe market of major financial transactions. Insuch cases, the board must provide qualityinformation . . . sufficiently reliable and clearto ensure the fair execution of the transactionsconcerned. (Viénot I at 6)

[The board of directors] must carry out itsduties in the interests of the company and, if itfails to do so, its members are jointly andseverally liable. (Viénot I at 10)

The Committee recommends that eachboard should appoint an advisory commit-tee principally charged with ensuring theappropriateness and consistency ofaccounting policies applied in consolidatedand company financial statements, and withverifying that internal procedures forcollecting and checking information aresuch that they guarantee its accuracy.(Viénot I at 19)

The statutory rules with respect to civil andcriminal liability would need to be amended soas to provide for the situation where the Boardof Directors elects to separate the positions ofChairman and Chief Executive Officer. Insuch a case, as the Chairman of the Board ofDirectors is devoid of management preroga-tives, he or she should be subject to either civilor criminal liability only in respect of miscon-duct in the performance or in connection withperformance of his or her personal duties,exclusive of mismanagement. (Viénot II at 8;see also at 22)

The choice among various [accounting]standards may be momentous for corporations’earnings. . . . [F]inancial managers andstatutory auditors of corporations are naturallyin charge of the technical reviews of thismatter. (Viénot II at 18)

Not covered. Information should be prepared, audited anddisclosed according to the prevailing rules ofthe European Union, and should be in the spiritof the rules of the [OECD]. (Recommendation4.2)

The annual report and the quarterly financialstatements should contain consistent reportingof the entire financial situation of thecorporation, supplemented by the provision ofsufficient information on the corporation’sperformance and prospects. . . . [T]he annualreport and the quarterly financial statementsshould contain all necessary information, incomprehensive form, required by investors andtheir consultants for the formation of a clearprofile of the corporation’s financial situationand prospects. (Recommendation 4.4)

The Board of Directors has the responsibility. . . for . . . [t]he consistency of disclosedaccounting and financial statements, includingthe report of the (independent) certifiedaccountants, the existence of risk evaluationprocedures, supervision, and the degree ofcompliance of the corporation’s activities toexisting legislation. (Recommendation 5.3.4)

See Recommendation 1.2.4 (Shareholdersshould have the right to . . . be sufficiently,timely and properly informed on decisions thatneed to be made regarding fundamentalchanges in the corporation. These changesinclude . . . the solution of problems related todesigning, reporting and maintainingtransparency in the financial statements andprofit-sharing policies.).

See Recommendation 7.3 (It is a good practicethat a financial chief executive officer beappointed as part of the management team.).

The internal control system is charged with thetask of checking effective compliance with theoperational and administrative internalprocedures adopted to guarantee a sound andefficient management and to identify, forestalland limit, as far as possible, financial andoperational risks and fraud at the company’sexpense. (The Code, 9.2; see the Report,5.4.3)

[The internal control] committee is theformally constituted body able to assessautonomously and independently from both themanaging directors on issues concerning thesafeguarding of the company’s integrity andfrom the auditing firms on the results set out inthe auditors’ report and their letter ofsuggestions. (Commentary on the Code, 10)

See the Code, 9.3 (The persons appointed torun the internal control system . . . shall reporton their activity to the directors delegated tothe task, to the internal control committee, andto the members of the board of auditors.).

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Not covered. The agenda for the annual General Meeting ofShareholders is organized in such a way thatclearly identifiable decisions can be madeconcerning . . . approval of the policy pursuedby the Board of Directors and of thesupervision carried out by the SupervisoryBoard, which approval shall likewise imply arelease from liability for the Board of Directorsand the Supervisory Board. (Recommendation3.6)

Not covered. The Board of Directors, beyond currentregulatory requirements, should be in charge offurnishing markets with quick, accurate andreliable information, particularly in connectionwith the shareholder structure, substantialchanges in governance rules, and especiallyrelevant transactions or those having to do withtreasury stock. (The Code, Recommendation19)

Any periodic financial information which ismade available to markets (besides the annualaccounts) must be produced according to thesame principles and professional practices asthe annual accounts and must be verified bythe Audit Committee prior to its disclosure.(The Code, Recommendation 20)

The Board of Directors should try to avoid thatits accounts be submitted to the GeneralShareholders’ Meeting with reserves [sic] andprovisos on the audit report. Whenever this isnot possible, both the Board of Directors andthe auditors should clearly explain to share-holders and markets the nature and scope ofthose discrepancies. (The Code,Recommendation 22)

The duty of loyalty also involves the obligationfor directors to report personal circumstances,those of close relatives or even circumstancesrelating to companies where they may play asignificant role. This includes shareholdings,positions and activities performed in otherorganizations, unionization agreements and, ingeneral terms, any fact, situation or link whichmight be relevant for their loyal performanceas trustees. (The Report, II.8.5)

[I]t is part of the role of the accountantappointed by the Board to ascertain that theBoard and Managing Director have not actedin conflict with the General Corporation Act orthe Articles of Association, and have not actedin a way that may result in litigation andsubsequent damage claims on the company.(p. 8)

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Directors are responsible under s. 221 of theCompanies Act 1985 for maintaining adequateaccounting records. To meet these responsi-bilities, directors need in practice to maintain asystem of internal control over the financialmanagement of the company, including pro-cedures designed to minimize the risk of fraud.There is, therefore, already an implicit require-ment on directors to ensure that a proper sys-tem of internal control is in place.(The Report, 4.31)

Since an effective internal control system is akey aspect of the efficient management of acompany, we recommend that the directorsshould make a statement in the report andaccounts on the effectiveness of their system ofinternal control and that the auditors shouldreport thereon. (The Report, 4.32)

The cardinal principle of financial reporting isthat the view presented should be true and fair.Further principles are that boards should aimfor the highest level of disclosure consonantwith presenting reports which are understand-able and with avoiding damage to their compe-titive position. They should also aim to ensurethe integrity and consistency of their reportsand they should meet the spirit as well as theletter of reporting standards. (The Report,4.51)

The Committee is convinced that an effectiveinternal control system is an essential part ofthe efficient management of a company. . . . Agreat deal of detailed work is now necessary todevelop these proposals, and we recommendthat the accounting profession . . . should takethe lead. (The Report, 5.16)

See APPENDIX 6: AUDITORS’ LIABILITY : THECAPARO CASE .

The board should maintain a sound systemof internal control to safeguard sharehold-ers’ investment and the company’s assets.(Principle D.II)

The board should establish formal andtransparent arrangements for maintainingan appropriate relationship with the com-pany’s auditors. (Principle D.III)

Accounting principles and the content of finan-cial statements are regulated by both the lawand by accounting standards. The Cadburycommittee drew attention to weaknesses whichthen existed in financial reporting, andendorsed the objectives of the then newlyestablished Financial Reporting Council andthe Accounting Standards Board in settingreporting standards. Cadbury also welcomedthe actions of the Financial Reporting ReviewPanel in monitoring compliance. These bodiesare making good progress. We note that thereare moves towards the international harmon-ization of accounting standards. However, wedo not consider that our remit requires us to re-view these areas, in which the accounting au-thorities are closely involved. (Guideline 6.16)

In this report we do not propose any change inthe role of auditors or their public reportingresponsibilities. We feel that best practiceshould be allowed to develop and evolve. It isclear, however, that while boards often seekgreater reassurance about controls and othermatters, auditors feel inhibited in going beyondtheir present functions because of concernsabout the present law on professional liability.We consider that account should be taken ofthese concerns by those setting professionalstandards and when decisions on changes inthe relevant law are taken. (Guideline 6.19)

See generally PART 6, ACCOUNTABILITY ANDAUDIT.

The board should maintain a sound systemof internal control to safeguard sharehold-ers’ investment and the company’s assets.(Principle D.2)

The directors should, at least annually, conducta review of the effectiveness of the group’ssystem of internal control and should report toshareholders that they have done so.(Provision D.2.1)

Effective financial controls, including themaintenance of proper accounting records, arean important element of internal control. Theyhelp ensure that the company is not unneces-sarily exposed to avoidable financial risks andthat financial information used within thebusiness and for publication is reliable. Theyalso contribute to the safeguarding of assets,including the prevention and detection offraud. (Turnbull Report, ¶12)

It is the role of management to implementboard policies on risk and control. (TurnbullReport, ¶¶16, 18)

An internal control system encompasses thepolicies, processes, tasks, behaviors and otheraspects of a company that, taken together,facilitate its effective and efficient operation.. . . This includes the safeguarding of assetsfrom inappropriate use or from loss and fraud,and ensuring that liabilities are identified andmanaged. (Turnbull Report, ¶20)

A sound system of internal control thereforeprovides reasonable, but not absolute, assur-ance that a company will not be hindered inachieving its business objectives. . . . [It] can-not, however, provide protection with certaintyagainst a company failing to meet its businessobjectives or all material errors, losses, fraud,or breaches of laws or regulations. (TurnbullReport, ¶24)

See the Turnbull Report, passim.


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G. Shareholder Voting Practices (Cumulative & ConfidentialVoting, Broker Non-Votes, One Share/One Vote)

Not covered. The corporate governance frameworkshould protect shareholders’ rights. (OECDPrinciple I)

The corporate governance frameworkshould ensure the equitable treatment of allshareholders, including minority andforeign shareholders. All shareholdersshould have the opportunity to obtaineffective redress for violation of their rights.

A. All shareholders of the same class shouldbe treated equally.1. Within any class, all shareholders should

have the same voting rights. All investorsshould be able to obtain information aboutthe voting rights attached to all classes ofshares before they purchase. Any changesin voting rights should be subject toshareholder vote.

2. Votes should be cast by custodians ornominees in a manner agreed upon withthe beneficial owner of the shares.

3. Processes and procedures for generalshareholder meetings should allow forequitable treatment of all shareholders.. . .

B. Insider trading and abusive self-dealingshould be prohibited.(OECD Principle II.A & B))

Some companies issue preferred (or prefer-ence) shares which have a preference in respectof receipt of the profits of the firm but whichnormally have no voting rights. Companiesmay also issue participation certificates orshares without voting rights which wouldpresumably trade at different prices than shareswith voting rights. All of these structures maybe effective in distributing risk and reward inways that are thought to be in the best interestof the company and to cost-efficient financing.The Principles do not take a position on theconcept of “one share/one vote.” (OECDPrinciple II.A.1 Annotation at 30)

Shareholders should have made a sufficientanalysis to vote in an informed manner on allissues raised at general meetings. Whereappropriate, reasons for voting against amotion should be made known to the boardbeforehand. (p. 52)

Shareholders in listed companies should take apositive interest in the performance of theboard and should exercise their votes in theelection of directors in an informed manner.(p. 52)

Shareholders should take a positive interest inthe election of auditors and should exercisetheir votes in an informed manner. (p. 52)

Belgian company law already incorporates . . .the principle of “one share/one vote.” (Part I:A.4)

Not covered.

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Not covered directly, but see 7.1 (Decisionsmade by shareholders relate to the election ofdirectors, the election of auditors, andgenerally to fundamental changes to thecorporation’s constitution or business. Goodgovernance also requires shareholder votes incircumstances where the board of directorsmay be interested in the transaction.Shareholder votes may be mandated by thegoverning corporate law, securitiescommission policy statements, etc.Periodically, a shareholder advisory vote willbe conducted by a board in respect of a matteron which the board seeks shareholder views,although the results of the vote do nottechnically bind the board and are simply forthe board’s guidance.).

Not covered. Not covered directly, but see Topic HeadingsH and I, below.

Basic shareholder rights include the right to . . .cast a vote for each share, regardless of class.(Recommendation 1.1.7)

Shareholders should be able to vote in personor through a representative, and equal effectshould be given to votes whether cast in personor through a representative. (Recommendation1.3.3)

Multiple voting procedures and the issuance ofnon-voting privileged shares should bediscouraged. (Recommendation 1.6)

Votes through a representative should be castafter consultation with the legal owner of theshares. (Recommendation 2.1.2)

The procedures of the corporation should makeit simple and inexpensive to cast votes.(Recommendation 2.1.3)

Not covered.

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Not covered. The general principle should be that propor-tionality exists between capital contributionand influence. The maxim of “one share/onevote” is the customary way of expressing thisprinciple. (Recommendation 5.1)

[M]easures such as priority shares andcertification may be justified [in certaincircumstances]. (Recommendation 5.1.1)

[T]he trust office should give a proxy to thoseholders of certificates of shares who requestsuch, unless – in exceptional cases – the natureof the relevant certification system is opposedto this. (Recommendation 5.6.1)

The board of the trust office will in generalhave to take account of the opinions of theholders of certificates of shares and, ifnecessary, adjust its voting behavioraccordingly at the General Meeting ofShareholders. (Recommendation 5.6.1)

Regarding priority shares issued to protect thecompany’s interests, the Committee proposesthat, in situations where approval has to begiven in advance, the holder of priority sharesshould not stand in the way of the decisionscalled for by the investors in the General Meet-ing of Shareholders. (Recommendation 5.6.2)

[F]inancing preference shares should not beissued until the Board of Directors has givenaccount of the intended issue in the GeneralMeeting of Shareholders and has explainedwhat evident financial benefits the issue willbring for the company. (Recommenda-tion 5.6.3)

[P]rotective preference shares should undernormal circumstances not be issued. Thevoting right on protective preference sharesshould be exercised with due regard for thefunction of the shares. (Recommendation5.6.3)

Not covered directly, but see Topic Heading H,below.

[A] rule of abstention . . . would obligesignificant shareholders not to vote in boarddecisions regarding which they have a direct orindirect interest (for instance, defensivemeasures against hostile takeover bids).(The Report, II.8.6)

A shareholder is not allowed to vote more thanone-fifth of all shares represented at the AGM.(p. 6)

In case the Articles of Association must bechanged, the change must be made with at least2/3 majority of shares as well as of votes at theAGM. The reason is to protect minorities.(p. 7)

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Not covered directly, but see Topic Heading H,below.

Not covered directly, but see Guideline 9.5 (Ithas been suggested that institutions shouldmake public their voting records, both in theaggregate, in terms of the proportion ofresolutions on which votes were cast or non-discretionary proxies lodged, and in terms ofthe numbers of votes cast and proxies lodgedon individual resolutions. Institutionalinvestors should, in our view, take steps toensure that their voting intentions are beingtranslated into practice; publishing figuresshowing the proportion of voting opportunitiestaken would be one way of doing this. Wetherefore recommend that institutions should,on request, make available to their clientsinformation on the proportion of resolutions onwhich votes were cast and non-discretionaryproxies lodged.).

Not covered directly, but see the Code,Provision E.1.3 (Institutional shareholdersshould take steps to ensure that their votingintentions are being translated into practice.).

Not covered. Cumulative voting is generally notrecommended for large publicly ownedcorporations because it may lead to the electionof directors who represent particular groups ofstockholders, which can in turn createfactionalism and undermine the effectivenessof the board. (p. 8)

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H. Shareholder Voting Powers

Not covered. The corporate governance frameworkshould protect shareholders’ rights.A. Basic shareholder rights include the right

to:1) secure methods of ownership

registration;2) convey or transfer shares;3) obtain relevant information on the

corporation on a timely and regularbasis;

4) participate and vote in general share-holder meetings;

5) elect members of the board; and6) share in the profits of the corporation.

B. Shareholders have the right to participatein, and to be sufficiently informed on,decisions concerning fundamentalcorporate changes.

C. Shareholders should have the opportunityto participate effectively and vote ingeneral shareholder meetings and shouldbe informed of the rules, including votingprocedures, that govern generalshareholder meetings.

(OECD Principle I)

The corporate governance frameworkshould ensure the equitable treatment of allshareholders, including minority andforeign shareholders. All shareholdersshould have the opportunity to obtaineffective redress for violation of their rights.(OECD Principle II)

In some OECD countries it was customary forfinancial institutions . . . to vote in support ofmanagement unless specifically instructed bythe shareholder to do otherwise. . . . Rules insome countries have recently been revised torequire custodian institutions to provide share-holders with information concerning theiroptions in the use of their voting rights.(OECD Principle II.A.2 Annotation at 30)

Policy makers and regulators should protectand enforce shareholders’ rights to vote.(Millstein Report, Perspective 14)

Not covered. Not covered directly, but see Topic Heading G,above, and Topic Heading I, below.

Not covered directly, but see Topic Heading I,below.

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Decisions made by shareholders relate to theelection of directors, the election of auditors,and generally to fundamental changes to thecorporation’s constitution or business. Goodgovernance also requires shareholder votes incircumstances where the board of directorsmay be interested in the transaction.Shareholder votes may be mandated by thegoverning corporate law, securitiescommission policy statements, etc.Periodically, a shareholder advisory vote willbe conducted by a board in respect of a matteron which the board seeks shareholder views,although the results of the vote do nottechnically bind the board and are simply forthe board’s guidance. (7.1)

Not covered. All stockholders have the same powers ofinfluence over the public corporation accordingto their holding in the company. The preceptof equal treatment within the limits of theextent of the participation also applies inparticular against institutional investors on theone side and private small stockholders on theother. (The Code, V.1.1)

See the Code, V.1.3 (Depositary banks have aparticular responsibility for safeguarding theinterests of stockholders. They must keepclear of possible conflicts of interest. . . .Proper representation of the rights of thestockholders is also a duty of the protectionassociations.).

The corporate governance framework shouldprotect shareholder rights. (Principle 1)

The corporate governance framework shouldensure the equitable treatment of allshareholders, including minority and foreignshareholders. All shareholders should have theopportunity to obtain an effective redress forviolation of their rights. (Principle 2)

Basic shareholder rights include the right to . . .vote in general shareholder meetings [andprotection of] the rights of minorityshareholders in a manner that establishes theirrepresentation and their ability to exercisecontrol of managers. (Recommendations 1.1.4,1.1.6)

Shareholders should have the right toparticipate equitably and efficiently in thegeneral shareholder meetings and besufficiently, timely and properly informed onthe decisions that need to be made regardingfundamental changes in the corporation. Thesechanges include . . . the adoption of votingprocedures compatible with the market’sprevailing exchange ethics as regards votinginfluence and the concentration of corporateownership. (Recommendation 1.2.8)

All shareholders of the same class should betreated equally: within any class, allshareholders should have the same votingrights. . . . Any changes in voting rightsbetween or within classes should be subject toshareholder vote. (Recommendation 2.1.1)

In the event of a significant change in themarket value of the company, the compositionand/or the number of shareholders, thedirectors shall assess whether proposals shouldbe submitted to the shareholders’ meeting toamend the by-laws as regards the majoritiesrequired for the approval of resolutions toadopt the measures and exercise the rightsprovided to protect minority interests. (TheCode, 12.5)

The Committee believes that in a correctsystem of Corporate Governance, the interestsof the generality of shareholders must all beput on the same footing and equally protectedand safeguarded.The Committee is convinced that the interestsof the majority and minority shareholders mustconfront each other in the election of thegoverning bodies; subsequently, the governingbodies, and hence also the members of theboard of auditors, must work exclusively in theinterest of the company and to create value forthe generality of shareholders. (Commentaryon the Code, 13; see the Report, 5.6)

See Topic Heading I, below.

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Shareholders, who may be widely dispersed,can elect directors, who in turn choosemanagers to manage the company effectivelyon behalf of the shareholders. (Ch. 1.2)

In principle Dutch company law grantsconsiderable powers to shareholders. At thesame time, however, it offers possibilities,which are frequently applied, for these powersto be substantially curtailed in the companies’articles of association, for example, bystipulating that the cooperation of the priorityshareholder(s) is required for the adoption ofresolutions in the General Meeting ofShareholders. (Recommendation 5.2)

Those who exercise powers on behalf of thereal providers of risk capital should, during thedecision-making process at the General Meet-ing of Shareholders, be aware at all times thatthe said powers are in principle vested in thoseproviders of risk capital. This creates an obli-gation for them to attach particular importanceto the interests of the investors when exercisingthese powers. (Recommendation 5.2)

Although the Committee realizes that under thecircumstances mentioned above the continuityof decision-making and the protection againsthostile takeovers may justify a departure fromthe principle that the investor should be able toexercise a degree of influence which is propor-tionate to the capital contribution, the Commit-tee believes that this should never lead to theinvestors being deprived of exerting a realinfluence. (Recommendation 5.4.1; cf. 5.4.4,5.7)

[T]he Supervisory Board and the Board ofDirectors, if an initiative for decision-makingis needed in the General Meeting of Share-holders, should not stand in the way of deci-sions called for by the investors in the GeneralMeeting of Shareholders, unless a substantialcompany interest rules against such.(Recommendation 5.6.4)

The active exercise of voting rights should bestimulated, whether directly (postal) or byrepresentation. (Recommendation 8)

Institutional investors should take intoconsideration their own responsibilities fordiligent, efficient and critical use of the rightsconferred by the securities of which they areholders, or whose management has beenentrusted to them, in particular as regardsinformation and voting rights.(Recommendation 10)

See Commentary on Recommendation 5(Voting agreements and other shareholderagreements to contest takeover bids areconsidered shareholder agreements [and shouldtherefore be disclosed].).

See also Recommendation 11 (Institutionalinvestors should disclose information on thepractice followed regarding the exercise ofvoting rights on securities whose managementhas been entrusted to them.).

Measures aimed at making the system ofvoting by proxy more transparent andemphasizing communication between thecompany and its shareholders, especiallyinstitutional investors, should be passed.(The Code, Recommendation 18)

All shareholders are, as a whole, the owners ofthe company, but the different roles of each ofthe groups of shareholders requires thatmoderation or counterweight steps are passedso that none of the groups assumes power atthe expense of the interests of other groups.(Introduction, I.2)

[The Committee suggests that there be] a ruleof powers, according to which the Board ofDirectors should formally keep to itselfknowledge of any direct or indirecttransactions between the company and asignificant shareholder, in order that it may notbe passed unless the most appropriatedelegated Committee issues a favorableopinion. Said Committee will evaluate thetransaction from the standpoint of equalconsideration for all shareholders and equalmarket conditions. (The Report, II.8.6)

Regarding the use of non-public information,the Committee is aware of a degree of concernin the market on the unequal distribution ofinformation among shareholders and onsignificant shareholders accessing confidentialinformation. The Board of Directors shouldwatch over such situations, in order to decidewhether there are any anomalies or leakagesthat someone would be held accountable for.In any event, it might be appropriate toconsider extending to significant shareholdersthe obligation of keeping certain informationconfidential and not using inside informationto their advantage. (The Report, II.8.6)

Only shareholders entered in the stock registerare entitled to vote. (p. 6)

At the AGM, unless otherwise stipulated in theArticles of Association, a shareholder is notallowed to vote more than one fifth (1/5) of allthe shares represented at the AGM. This isvalid either if it is the shareholder’s own sharesor shares represented by proxy. (p. 6)

The accountant of the company or stockholdersholding at least 10% of the shares can exercisetheir right to ask the Board of Directors tosummon an extra AGM within two weeks ofhaving received such a request. (p. 6)

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The formal relationship between theshareholders and the board of directors is thatthe shareholders elect the directors, thedirectors report on their stewardship to theshareholders and the shareholders appoint theauditors to provide an external check on thedirectors’ financial statements. (The Report,6.1)

Institutional investors should make positive useof their voting rights, unless they have goodreason for doing otherwise. They shouldregister their votes whenever possible on aregular basis. (The Report, 6.11.2)

The Institutional Shareholders’ Committee’sadvice to its members to use their voting rightspositively is important in the context ofcorporate governance. Voting rights can beregarded as an asset, and the use or otherwiseof those rights by institutional shareholders is asubject of legitimate interest to those on whosebehalf they invest. We recommend thatinstitutional investors should disclose theirpolicies on the use of voting rights.(The Report, 6.12)

Institutional shareholders have aresponsibility to make considered use oftheir votes. (Principle C-I; see Guideline2.14)

[S]hareholders should be invited specifically toapprove all new long-term incentive plans . . .which potentially commit shareholders’ fundsover more than one year, or dilute the equity.(Guideline 4.20)

[S]ome [institutional investors] now take amore active interest in corporate governance.They can do this by voting on resolutions inGeneral Meetings, and informally throughcontact with the company. (Guideline 5.3)

The right to vote is an important part of theasset represented by a share, and in our viewan institution has a responsibility to the clientto make considered use of it. (Guideline 5.7)

[S]hareholders should have an opportunity tovote separately on each substantially separateproposal. (Guideline 5.17)

[P]rivate investors [can] hold shares throughnominees. This deprives the investorsconcerned of the right to vote and to receivecompany information, unless some specialarrangement is made. A number of companieshave established their own “in-house” nomineeand use it to restore rights to private share-holders. We commend this. (Guideline 5.25)

Institutional shareholders should, on request,make available to their clients information onthe proportion of resolutions on which voteswere cast and non-discretionary proxieslodged. (The Code, Provision E.1.2)

See the Code, Principle E.1 (Institutionalshareholders have a responsibility to makeconsidered use of their votes.).


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I. Shareholder Meetings / Proxy Proposals

Not covered. Shareholders should have the opportunity toparticipate effectively and vote in generalshareholder meetings and should be informedof the rules, including voting procedures, thatgovern general shareholder meetings:1. Shareholders should be furnished with

sufficient and timely informationconcerning the date, location and agendaof general meetings, as well as full andtimely information regarding the issues tobe decided at the meeting.

2. Opportunity should be provided forshareholders to ask questions of the boardand to place items on the agenda atgeneral meetings, subject to reasonablelimitations.

3. Shareholders should be able to vote inperson or in absentia, and equal effectshould be given to votes whether cast inperson or in absentia.

(OECD Principle I.C)

Processes and procedures for general share-holder meetings should allow for equitabletreatment of all shareholders. Companyprocedures should not make it unduly difficultor expensive to cast votes. (OECD PrincipleII.A.3)

The Principles recommend that voting byproxy be generally accepted. Moreover, theobjective of broadening shareholder participa-tion suggests that companies consider favor-ably the enlarged use of technology in voting.(OECD Principle I.C.3 Annotation at 26)

Proposals to change the voting rights ofdifferent classes of shares are normallysubmitted for approval at general shareholdersmeetings by a specified majority of votingshares in the affected categories. (OECDPrinciple II.A.1 Annotation at 30)

Not covered directly, but see p. 52(Shareholders should take a positive interest inthe auditor’s report and the competence ofauditors and where appropriate, be prepared toask questions of the auditor.).

[T]he general meeting of shareholders isresponsible for appointing the members of theboard of directors and the auditors. The boardof directors is responsible for . . . reporting tothe shareholders on the performance of itsduties. (Part I: A.2)

It is the board’s duty to present a clear andaccurate evaluation of the company’s situationto the general meeting of shareholders. (Part I:B.4.1)

See Part II: B.5 (Information [to be disclosed]on the functioning of the board of directors[includes] information on the policy applied bythe board of directors in its proposals to theGeneral Meeting with regard to the appropria-tion and, especially, the distribution of theresults.).

According to Belgian law, the General Meetingappoints all directors, whether they areexecutive or not.For non-executive directors, however, thisappointment must take place on a proposalfrom the Board of Directors. (Note to 2.3)

[T]he Chairman of the [audit] committeereplies to the questions which are asked at theGeneral Meeting about the activities of thecommittee. (Note to 4.3)

The Board of Directors has the task ofproducing the Annual Accounts and presentingthem to the General Meeting. (4.4)This recommendation corresponds to arequirement of company law. (Note to 4.4)

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The effectiveness of the proxy solicitationprocess and the shareholder meeting as a forumfor shareholders to express their views is opento question but is an issue which theCommittee does not propose to address in anydetail. We note that shareholders andcorporations recognize the limitations of theshareholders meeting and are becoming morecreative in exchanging views. (7.2)

See 4.6(4) (The fourth principal responsibilityof the board is to ensure the corporation has inplace a policy to enable the corporation tocommunicate effectively with its shareholders,other stakeholders and the public generally.This policy must effectively interpret theoperations of the corporation to shareholdersand must accommodate feedback fromshareholders, which should be factored into thecorporation’s business decisions.).

[T]he board of directors is collectivelyanswerable to the General Meeting ofShareholders for the fulfillment of its duties.. . . [It] informs the shareholders’ meetingthrough its annual report and the financialstatements which it adopts. (Viénot I at 5)

[T]he board must respect the rights of theGeneral Meeting of Shareholders when itenvisages a transaction which is of a nature toaffect, de jure or de facto, the company’s[purposes]. (Viénot I at 6)

[I]t is the Committee’s opinion that the boardshould also ask the general meeting of share-holders to consider any divestment represent-ing a preponderant portion of the company’sassets or activities. (Viénot I at 6)

The Committee recommends that all boardsshould set up special committees [and] informthe Annual General Meeting of Shareholdersof the existence of these committees and of thenumber of meetings they have held in thecourse of the year. (Viénot I at 18)

[T]he Committee considers it highly desirablefor directors to attend general meetings ofshareholders. (Viénot I at 21)

The Committee recommends first that the com-pany statute provide for the following system:

The statute would require listed corporationswith Boards of Directors to refer to theextraordinary meeting of their shareholders,within a period in the order of 18 monthsafter its enactment, the appropriateamendment of the by-laws to allow theoption between combination and separationof the offices of Chairman of the Board ofDirectors and Chief Executive Officer.

The purpose of the amendment in the by-lawswould be to include the provisions required forexercise of the option by the Board ofDirectors. (Viénot II at 7)

The annual general meeting as the organ of thestockholders decides mandatorily in certainbasic questions as well as when so demandedby the Management Board. It elects themembers of the Supervisory Board insofar asthey may be appointed by the stockholders –depending on the co-determination situation –either completely, or as to two-thirds, or as toone half. (The Code, I.5)

The annual general meeting also appoints theauditor. (The Code, I.5)

Properly understood checks and balances incompany management are expressed by thefact that the Management Board . . . presentsfundamental issues, subject to certain pre-conditions, to the annual general meeting forfinal decision. (The Code, II.3.1)

After approval by the Supervisory Board hasbeen given, the Management Board lets theannual general meeting decide in casesexpressly provided for by statute, or if thefundamental structural and managerialmeasures affect the core membership rights ofstockholders. (The Code, II.3.5)

Stockholders exercise their influence at theannual general meeting. (The Code, V.1.2)

The Management Board, the SupervisoryBoard and the auditor participate in the annualgeneral meeting. (The Code, V.1.4)

The stockholders alone decide whether toaccept or reject offers of acquisition.(The Code, V.1.6)

[T]he general shareholder meeting has theresponsibility of appointing the Directors to theBoard, the external and internal auditors, andapproving the corporation’s general strategy.(Introduction)

All functions of the . . . general shareholdermeetings should aim at the enhancement of theentire performance of the corporation within anadequately supervised and informedenvironment. It is important to . . . empowerthe authority of the general shareholdermeeting and establish the rights of the minorityshareholders. (Introduction)

Shareholders should have the right to partici-pate equitably and efficiently in the generalshareholder meetings and be sufficiently,timely and properly informed on the decisionsthat need to be made regarding fundamentalchanges in the corporation. (Recommendation1.2; for a list of proposed changes in thecorporation about which shareholders shouldbe informed, see Recommendation 1.2)

Procedures for general shareholder meetingsshould ensure the equitable treatment of allshareholders. (Recommendation 2.1.3)

The Board of Directors should present to thegeneral shareholder meeting a clear andcredible evaluation of the existing situation andthe prospects of the corporation.(Recommendation 4.4)

See Recommendation 1.3 (shareholders’ activeparticipation and voting in general shareholdermeetings).

The directors shall encourage and facilitate thebroadest possible participation of shareholdersin shareholders’ meetings. (The Code, 12.1;see the Report, 5.5)

As a general rule, all the directors shall attendshareholders’ meetings. (The Code, 12.2; seethe Report, 5.5)

Shareholders’ meetings shall also be anopportunity to provide shareholders withinformation on the company. (The Code, 12.3;see the Report, 5.5)

The board of directors shall propose for theshareholders’ approval a set of rules to ensurethe orderly and effective conduct of thecompany’s ordinary and extraordinaryshareholders’ meetings, while guaranteeing theright of each shareholder to speak on thematters on the agenda. (The Code, 12.4)

In the event of a significant change in themarket value of the company, the compositionand/or the number of shareholders, thedirectors shall assess whether proposals shouldbe submitted to the shareholders’ meeting toamend the by-laws as regards the majoritiesrequired for the approval of resolutions toadopt the measures and exercise the rightsprovided to protect minority interests.(The Code, 12.5)

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The company Annual General Meeting shouldbe utilized to enhance the scope of dialoguebetween shareholders and the board ofdirectors. This is desirable to promote thequality of directors’ accountability.(Principle 14A)

Resolutions submitted for decision at theAnnual General Meeting should be limited tothose which are of vital importance to thebusiness, e.g., revision of corporate articles,transfer of business rights, mergers andacquisitions which require a three-quartermajority special resolution of the shareholders,and the election of directors and corporateauditors. (Principle 16B)

The Annual General Meeting should be a goodopportunity to exchange opinions betweenshareholders, directors and management.Therefore, the issues to be reported upon anddiscussed should be of a broad scope withoutany rigid limitation. the timing of the AnnualGeneral Meeting should, where possible, notcoincide with that of other companies.(Comment on Principle 14A)

[I]f the shareholders, especially the institution-al investors and other major shareholders, arein actual fact present at the General Meeting ofShareholders and make their views heard, thiswill lead to higher attendance rates and to aconsiderable improvement in the quality of theGeneral Meeting of Shareholders.(Recommendation 5.1)

[E]ach company’s General Meeting is theforum to which the Board of Directors and theSupervisory Board report and to which they areaccountable for their performance. The agendaitems should include the company strategy,policy – financial and otherwise – and thebusiness results. (Recommendation 5.2)

In the General Meeting of Shareholders athorough exchange of ideas should take placebetween company executives and investors.Relevant information should therefore besupplied. (Recommendation 5.2)

The basic principle is that the Board ofDirectors and the Supervisory Board shouldhave the confidence of the shareholders’meeting. (Recommendation 5.3)

[A]n effective proxy solicitation systemwithout prohibitive costs would improve therepresentative nature of the General Meeting ofShareholders. The Committee is aware that astudy group is preparing a proposal for theimplementation of proxy solicitation.(Recommendation 5.4.4)

An efficient proxy solicitation system shouldbe established [and] entrusted to a neutralbody that draws up and publishes theconditions for admission. (Recommenda-tion 5.9)

The principles of good practice and trans-parency which should inform corporategovernance recommend that the proceduresrelated to requests for proxy voting at GeneralMeetings should be developed. In particular, itis fundamental that shareholders be providednot only with the information necessary to takea correct decision regarding the stipulation ofvoting instructions, but also that the groundsexplaining how the representatives should votebe clear, especially in the event of a lack ofinstructions from the shareholder represented.(Recommendation 9)

See Recommendation 6 (The use of newinformation technologies is encouraged for thedisclosure of . . . preparatory documents forGeneral Meetings.).

See also Commentary on Recommendation 8(The generic regulations set out in thePortuguese Companies Act . . . on the exerciseof voting rights leave room for companies, intheir own statutes, to establish measures tostimulate the exercise of this right, in order tocombat the frequent absence of shareholders atGeneral Meetings. In line with thisphilosophy, the new Securities Code . . . hasconfirmed the principle of admissibility ofpostal votes at General Meetings of publicly-held companies, and developed the system ofrepresentation of shareholders by proxy, a signof a legislative development that should beaccompanied in practice by companies.).

Measures aimed at making the system ofvoting by proxy more transparent . . . shouldbe passed. (The Code, Recommendation 18)

The Board of Directors should try to avoid thatits accounts be submitted to the General Share-holders’ Meeting with reservations and provi-sos on the audit report. Whenever this is notpossible, both the Board of Directors and theauditors should clearly explain to shareholdersand markets the nature and scope of thosediscrepancies. (The Code,Recommendation 22)

[T]his Committee cannot ignore an undeniablefact—the effectiveness of the GeneralShareholders’ Meeting of listed companies asan instrument of control and decision is subjectto many structural limitations. Experienceshows, in fact, that most ordinary shareholdersneglect General Shareholders’ Meeting tasks.. . .To a great extent, the reform movement driv-ing this report, with the purpose of boosting theBoard as a supervising body, takes rise fromthe proven lack of disciplinary efficiency of theGeneral Shareholders’ Meeting. Against thisbackdrop, this Committee harbours doubts onthe effectiveness of certain policies directedtowards the reactivation of the General Share-holders’ Meeting by fostering participation ofshareholders (creating shareholder committees,seeing to it that meetings urged by sharehold-ers are called, resorting to attendance premia,etc.). This does not mean, however, that anyaction directed to increase the efficiency ofshareholder control should be rejected. In fact,the Committee considers that this is a fieldwhere a lot can still be done. (The Report,II.9.1)

[The] Annual General Meeting [is] theshareholders’ own institution and the highestdecision-making body. (p. 3)

The Annual General Meeting: A forumcoming together once each year in order toratify the annual report, to decide whether theyshould grant a discharge of responsibility forthe members of the Board of Directors, selectthe new Board of Directors and CPAs for thefollowing year and to establish theirremuneration. (p. 3)

The right of the stockholders to make decisionsregarding the affairs of the company is exer-cised at the Annual General Meeting. It is thenand only then that the owners of the companyin their capacity as owners can make theirvoices heard. (p. 6)

Stockholders can exercise their right to vote byattending personally. However, it is also possi-ble through a dated proxy, valid for maximumone year, to hand over the right to vote to anagent. A shareholder is also allowed the com-pany of an assistant, i.e., a person skilled inlegal or financial matters supporting her/hisown actions. The assistant has the right toexpress her/himself. (p. 6)

The Board should arrange the Annual GeneralMeeting (AGM), to be held latest six monthsafter the end of the accounting year. (p. 6)

At the regular AGM, the Annual Report of theBoard of Directors is dealt with. (p. 7)

The AGM also appoints the Board of Directorsand the Accountants. (p. 7)

It is only at the AGM that a decision of givingout a stock dividend issue or to submitconvertible promissory notes or subscriptionrights can be taken. Sometimes the AGM candelegate the decision to the Board of Directors.(p. 7)

See generally section titled “The Role of theAnnual General Meeting (AGM) – TheCadbury Report,” pp. 6-7.

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[T]he chairman of the [remuneration]committee should be available to respond toany concerns of shareholders at the AnnualGeneral Meeting. (The Report, 4.44)

The Annual General Meeting provides theopportunity for shareholders to make theirviews on such matters as directors’ benefitsknown to their boards. . . . [S]hareholders canplay a more practical governance role byaiming to influence board policies in this way,than by seeking to make the detail of boarddecisions subject to their vote. (The Report,4.45)

[S]hareholders can make their views known tothe boards of the companies in which theyhave invested by communicating with themdirect and through their attendance at generalmeetings. (The Report, 6.5)

Reports and accounts are presented toshareholders at the Annual General Meeting.. . . In particular, the Annual General Meetinggives all shareholders . . . direct and publicaccess to their boards. (The Report, 6.7)

[T]he chairman of the [audit] committeeshould be available . . . at the AGM.(Appendix 4, 6(f))

Companies should use the AGM tocommunicate with private investors andencourage their participation.(Principle C.IV)

The AGM is often the only opportunity for thesmall shareholder to be fully briefed on thecompany’s activities and to question seniormanagers on both operation and governancematters. (Guideline 5.13)

[C]hairmen of . . . committees [should] beavailable to answer questions at the AGM.(Guideline 5.19)

[D]irectors must lay before the AGM theannual accounts and the directors’ report. . . .Most boards propose a resolution relating tothe report and accounts. . . . We recommendthis as best practice, which allows a generaldiscussion of the performance and prospects ofthe business, and provides an opportunity forthe shareholders in effect to give – or withhold– approval of the directors’ policies andconduct of the company. (Guideline 5.20)

Notice of the AGM and accompanyingdocuments should be circulated at least 20working days in advance. (Guideline 5.21)

Boards should use the AGM to communi-cate with private investors and encouragetheir participation. (The Code, Principle C.2)

The board’s annual remuneration report toshareholders need not be a standard item ofagenda for AGMs. But the board shouldconsider each year whether the circumstancesare such that the AGM should be invited toapprove the policy set out in the report andshould minute their conclusions. (The Code,Provision B.3.5)

Companies should count all proxy votes and,except where a poll is called, should indicatethe level of proxies lodged on each resolution,and the balance for and against the resolution,after it has been dealt with on a show of hands.(The Code, Provision C.2.1)

Companies should propose a separateresolution at the AGM on each substantiallyseparate issue, and should in particular proposea resolution at the AGM relating to the reportand accounts. (The Code, Provision C.2.2)

The chairman of the board should arrange forthe chairmen of the audit, remuneration andnomination committees to be available toanswer questions at the AGM. (The Code,Provision C.2.3)

Companies should arrange for the Notice of theAGM and related papers to be sent toshareholders at least 20 working days beforethe meeting. (The Code, Provision C.2.4)

Not covered. Meetings of stockholders provide an importantforum for the consideration of managementand stockholder proposals. An orderlydiscussion of the corporation’s affairs isfacilitated by following a specific agenda andby adhering to a code that governs the conductof the meeting. (p. 20)

The consideration of management and stock-holder proposals and board nominations islargely conducted through the proxy processrather than through proposals raised at stock-holder meetings. This gives all stockholders,rather than only those who attend the meeting,the opportunity to consider relevant matters.. . . [M]atters brought to stockholder attentionthrough the proxy statement should be mattersof significance to the business of the corpora-tion and to stockholders as a whole. (p. 20)

Reasonable notice of topics permits allinterested parties to participate in the processin a considered way. As a result, The [BRT]recommends that corporations consideradvance notice requirements in by-lawsbecause such requirements generally promotegood corporate governance. (p. 21)

See generally Section IV (StockholderMeetings) at 20-21.

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J. Anti-Takeover Devices

Not covered directly, but see By-Law 6.12:Except as set forth in Subsection (b) hereof,in addition to any affirmative vote ofstockholders required . . . , neither thecorporation nor any subsidiary shallknowingly effect any direct or indirectpurchase or other acquisition of any GMEquity Security of any class or classesissued by the corporation at a price which isin excess of the highest Market Price of suchGM Equity Security on the largest principalnational securities exchange in the UnitedStates on which such security is listed fortrading on the date that the understanding toeffect such transaction is entered into by thecorporation . . . from any Interested Person. . . who has beneficially owned such GMEquity Securities for less than two yearsprior to such date, without the affirmativevote of the holders of the Voting Shareswhich represent at least a majority of theaggregate voting power of the corporation,excluding Voting Shares beneficially ownedby such Interested Person, voting together asa single class.

Shareholders have the right to participate in,and to be sufficiently informed on . . . extra-ordinary transactions that in effect result in thesale of the company. (OECD Principle I.B)

Markets for corporate control should beallowed to function in an efficient andtransparent manner.1. The rules and procedures governing the

acquisition of corporate control in thecapital markets, and extraordinarytransactions such as mergers, and sales ofsubstantial portions of corporate assets,should be clearly articulated and disclosedso that investors understand their rightsand recourse. Transactions should occurat transparent prices and under fairconditions that protect the rights of allshareholders according to their class.

2. Anti-takeover devices should not be usedto shield management fromaccountability.

(Principle I.E)

In some countries, companies employ anti-takeover devices. However, both investors andstock exchanges have expressed concern overthe possibility that widespread use of anti-takeover devices may be a serious impedimentto the functioning of the market for corporatecontrol. In some instances, takeover defensescan simply be devices to shield managementfrom shareholder monitoring. (OECDPrinciple I.E.2 Annotation at 28)

[Independent board members] can play animportant role in . . . changes of corporatecontrol. (OECD Principle V.E Annotation at41-42)

Not covered directly, but see p. 55 (A directormust act honestly, in good faith and in the bestinterests of the company as a whole. . . . Adirector must not allow personal interests, orthe interests of any associated person, toconflict with the interests of the company.).


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Dey Report(Canada)




Preda Report(Italy)


Not covered. The Committee has reviewed a resolution by ameeting of shareholders, the legitimacy ofwhich has given rise to recurring discussion, towit, permission granted to the Board of Direc-tors to use delegations of authority to increasecapital after a takeover bid has been made.In 1989, the legislature laid down a principle ofsuspension of those delegations at such a time,subject to one exception: the extraordinarymeeting of shareholders may expressly permitthe Board of Directors, for a term not exceed-ing one year, to make use, after a takeover bidhas been made, of the delegations of authoritygranted to it by the meeting of shareholders fora capital increase with or without preemptivesubscription rights, provided that the capitalincrease is open (not restricted). . . .Since then, most listed companies havesubmitted to their meeting of shareholdersevery year a resolution for this purpose. Inrecent years, approval by the shareholders ofthis resolution, to which many institutionalinvestors object as a “poison pill,” has beenincreasingly lukewarm.Accordingly, the Committee recommends thatcorporations cease in future to submit to theextraordinary meeting of their shareholders aresolution expressly permitting the use ofdelegations of authority to increase the capitalafter a takeover bid has been made. (Viénot IIat 19)

The stockholders alone decide whether toaccept or reject offers of acquisition. TheManagement Board and the Supervisory Boardare obliged to present the chances and risks ofthe offers in a balanced manner. The chiefmeasure for evaluation in this is the presumeddevelopment in the prosperity of the companyon an acquisition or with independence.Securing the independence of the company isnot normally a material aim of the company.(The Code, V.1.6)

Devices that limit or prevent merger andacquisition activity should be adopted onlywhen they are considered to be in the interestof the corporation and its shareholders.(Recommendation 1.4.3)

The corporate governance framework shoulddiscourage the use of devices that preventmerger and acquisition activity. However, anysuch use should take place only in the interestof the shareholders. (Recommendation 5.13)

See Recommendation 1.2.3 (Shareholdersshould have the right to participate equitablyand efficiently in the general shareholdermeetings and be sufficiently, timely andproperly informed on the decisions that need tobe made regarding fundamental changes in thecorporation. These changes include . . . theapproval of unusual and complex capitaltransactions, such as mergers, acquisitions andsales of the corporation’s assets.).

See also Recommendation 5.8 (The Board ofDirectors should establish rules governing theprocedures for special transactions, such asmergers, acquisitions and other import capitaltransactions in the corporation.).

Not covered.

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Not covered. In the situation where the company becomesthe target of a hostile takeover bid by a partyattempting to acquire control over it, thecompany’s management should be allowed thetime to provide adequate protection for theinterests to which the hostile takeover bidrelates. Protective measures can, withincertain limits, be accepted in thesecircumstances. Anti-takeover regulations donot fall within the remit of the Committee andit awaits the proposed legislation on thissubject. (Recommendation 5.1.2)

Although the Committee realizes that under thecircumstances mentioned above the continuityof decision-making and the protection againsthostile takeovers may justify a departure fromthe principle that the investor should be able toexercise a degree of influence which isproportionate to the capital contribution, theCommittee believes that this should never leadto the investors being deprived of exerting areal influence. (Recommendation 5.4.1)

The Committee believes that protectivepreference shares should under normalcircumstances not be issued. The voting righton protective preference shares should beexercised with due regard for the function ofthe shares. The holder of these shares shouldbe reticent in using the voting rights attachedto these shares when decisions are being takenthat do not concern the protection of thecompany against an unfriendly acquisition ofcontrol. (Recommendation 5.6.3)

[S]hareholder agreements to contest takeoverbids [should be disclosed to the public].(Commentary on Recommendation 5)

Measures adopted to prevent the success oftakeover bids should respect the interests of thecompany and its shareholders. Measuresconsidered contrary to these interests includedefensive clauses intended to cause anautomatic erosion in company assets in theevent of transfer of control or change ofcomposition in the board, detrimental to thefree transferability of shares and the freeassessment by shareholders of the performanceof members of the board. (Recommendation13)

Efficiency of the shareholder control market isbased essentially on the right to transferabilityof shares, on the unwaivable possibilitygranted to the shareholder to assess thesituation of the company and on theresponsibility of its leaders for the resultsobtained. These principles require a distinctionto be made between benign defensive measuresand those that harm the rights and expectationsof shareholders and the market in general. Forthis reason, it is important to condemn theadoption of certain defensive measures which,seeking at all costs to contain the success oftakeover bids without the agreement of theboard, end up damaging the interests ofpartners and the company. (Commentary onRecommendation 13)

[A] rule of abstention . . . would obligesignificant shareholders not to vote in boarddecisions regarding which they have a direct orindirect interest (for instance, defensivemeasures against hostile takeover bids).(The Report, II.8.6)

[I]n the event of including a proposal tointroduce defensive measures against hostiletakeover bids, it should be stated that the Boardof Directors is in a conflicting situation.(The Report, II.9.2)

Not covered.

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Not covered directly, but see The Report, 4.6(An important aspect of effective corporategovernance is the recognition that the specificinterests of the executive management and thewider interests of the company may at timesdiverge, for example, over takeovers. . . .Independent non-directors, whose interests areless directly affected, are well-placed to help toresolve such situations.).

Not covered. Not covered. Not covered. Not covered.

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g152General MotorsBoard Guidelines





K. Executive Compensation

Not covered. The board should fulfil certain key functions,including [reviewing] key executive and boardremuneration. (OECD Principle V.D.3)

[Independent board members] can play animportant role in areas where the interest ofmanagement, the company and shareholdersmay diverge, such as executive remuneration.(OECD Principle V.E Annotation at 41-42)

See OECD Principle IV.A.4 (Disclosure shouldinclude, but not be limited to, materialinformation on . . . [m]embers of the board andkey executives, and their remuneration.).

The primary functions of the remunerationcommittee should include matters such as theremuneration arrangements for the chiefexecutive officer and other senior executives(including incentive plans, share options andother benefits) and service contracts. (p. 31)

The Belgian Commission on CorporateGovernance regards it as good practice for partof the executive management’s pay to berelated to the company’s performance and/orvalue. (Part I: B.3.1)

The executive management’s pay should besubject to the recommendations of a remunera-tion committee, where such exists, made up ofa majority of non-executive directors. In caseno remuneration committee is created, theboard of directors should decide on theprinciples of the remuneration of the executivemanagement, in the absence of the executivedirectors. (Part I: B.3.2)

Not covered directly but see 3.1 ([T]heremuneration of executive directors should besubmitted to [the remuneration] committee foran opinion.If there is no remuneration committee, theremuneration of executive directors should besubmitted to the non-executive directors.).

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Dey Report(Canada)




Preda Report(Italy)


The board of directors should review theadequacy and form of the compensation ofdirectors and ensure the compensationrealistically reflects the responsibilities andrisk involved in being an effective director.(Guideline 8)

The board must ensure that objectives are inplace against which management’sperformance can be measured. Not only is thisa sensible management approach but therelationship between management performanceand compensation must be reasonable. Thisrelationship is being closely monitored by theinvestment community as a result of the fairlyrecent executive compensation disclosurerequirements. (4.6(3))

See 3.2 ([T]he enactment of the Ontario rulesrequiring disclosure of executive compensation[is] intended to enable shareholders to betterrelate executive and corporate performance tocompensation. The amount of executivecompensation and the process for determiningthe amount are high profile aspects ofcorporate governance.).

Most boards already have a committee chargedwith recommending remuneration levels forcorporate officers, including in some casesstock option plans, although these may be theresponsibility of a separate committee.(Viénot I at 18)

See Topic Heading D, above.

The remuneration of members of theManagement Board is made at a reasonablelevel and is related to performance.(The Code, III.6.1)

The remuneration of the members of theManagement Board embraces fixed andvariable components. The basis fordetermining the variable components ofremuneration is systematic evaluation of theindividual members of the Management Boardcarried out periodically by the personnelcommittee of the Supervisory Board.(The Code, III.6.2)

The variable remuneration can also be paid inpart according to stock option schemes orcomparable schemes orientated towards themarket price of stock. (The Code, III.6.3)

Shareholders should have the right to . . . theapproval of the . . . chief executive officer(CEO) [and] his/her . . . compensation,following the recommendations of the Boardof Directors. (Recommendation 1.2.6)

The Board of Directors has the responsibility. . . for . . . [t]he selection, appointment andmonitoring of executive management and thedetermination of their compensation.(Recommendation 5.3.3)

It is good practice that managementcompensation be tied to the corporation’sgeneral level of profitability and overallperformance. . . . It is good practice thatconcrete determination procedures be adoptedfor management compensation.(Recommendation 7.1)

It is a good practice that a review committee,consisting of the majority of non-executiveBoard members, be established by the generalshareholder meeting, which would reviewmanagement compensation.(Recommendation 7.2)

The board of directors shall . . . determine,after examining the proposal of the specialcommittee and consulting the board ofauditors, the remuneration of the managingdirectors and of those directors who areappointed to particular positions within thecompany and, where the shareholders’ meetinghas not already done so, allocate the totalamount to which the members of the board andof the executive committee are entitled.(The Code, 1.2.c)

The [remuneration] committee . . . shall submitproposals to the board on the remuneration ofthe managing directors and of those directorswho are appointed to particular positions and,on the indication of the managing directors, onthe criteria for determining the remuneration ofthe company’s top management. (The Code,8.1)

As a general rule, in determining the totalremuneration payable to the managingdirectors, the board of directors shall providefor a part to be linked to the company’sprofitability and, possibly, to the achievementof specific objectives laid down in advance bythe board of directors itself. (The Code, 8.2)

The Committee believes that the appropriatestructuring of the total remuneration ofmanaging directors is one of the main means ofaligning their interests with those of theshareholders and that systems of variableremuneration linked to results . . . make iteasier to motivate the entire top management.(Commentary on the Code, 8; see the Report,5.4.2)

It is important that remuneration packagesshould be able to attract and motivate personswith adequate experience and ability . . . fortop management positions. (The Report, 5.4.2)

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[E]xecutive remuneration . . . should bedecided by the board of directors, but this willrequire the revision of the Commercial Code.[S]tock option plans, e.g., should be disclosedto the shareholders in the form of businessstatements, enabling shareholders to evaluatethem. (Comment on Principle 16B)

Not covered. The board is encouraged to create internalcontrol committees with powers conferred formatters in which there are potential situationsof conflicts of interest, such as . . . analysis ofthe remuneration policy. (Recommendation17)

[T]he Committee recommends that directorremuneration information policies be groundedon a principle of maximum transparency.Applying this principle requires a quickadvancement from the current situation tomore complete and detailed information ondirector remunerations. This involvesindividual information on each one, itemizedby headings, whether they be remunerationsattached to their director status (fixed earnings,allowances, share of profits, bonuses,incentives, pensions, insurance, payments inkind or others) or remunerations paid by thecompany for other kinds of legal relations(professional services, line management orexecutive positions).The Committee recommends that companiestargeted by this report that do not choose toimmediately apply this maximum transparencyprinciple, but prefer a gradual implementation(or by stages), provide an explanation in theirAnnual Report. In either case, thesecompanies should provide at leastindividualized information on theremunerations of all of the directors as such,for each of the items stated above as well asany professional fees. On the other hand, theremuneration of executive directors would bestated for all of them in the aggregate, statinghow many directors receive each of theremuneration items. All this informationwould be included in the Annual Report. (TheReport, II.7.4)

The remuneration is often paid only to externalboard members, while internal (employed bythe company or main owners) do not enjoyremunerations. (p. 17)

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[Executive] Directors’ service contracts shouldnot exceed three years without shareholders’approval. (The Code, 3.1)

Executive directors’ pay should be subject tothe recommendations of a remunerationcommittee made up wholly or mainly of non-executive directors. (The Code, 3.3)

We also recommend that boards shouldappoint remuneration committees, consistingwholly or mainly of non-executive directorsand chaired by a non-executive director torecommend to the board the remuneration ofthe executive directors in all its forms, drawingon outside advice as necessary. (The Report,4.42)

[A] significant part of executive directors’remuneration should be linked to thecompany’s performance, whether by annualbonuses, share option schemes, or long-termincentive plans. (Guideline 4.6)

A proportion of executive directors’remuneration should be structured so as tolink rewards to corporate and individualperformance. (The Code, Principle B.1)


The performance-related elements ofremuneration should form a significantproportion of the total remuneration package ofexecutive directors and should be designed toalign their interests with those of shareholdersand to give these directors keen incentives toperform at the highest levels. (The Code,Provision B.1.4)

Executive share options should not be offeredat a discount save as permitted by paragraphs13.30 and 13.31 of the Listing Rules.(The Code, Provision B.1.5)

[The] board should . . . determine the methodfor selecting and compensating . . . the CEO.(p. 21)

“[S]election and evaluation” [of the CEO]includes considering compensation. . . .Boards have a responsibility to ensure thatcompensation plans are appropriate andcompetitive and properly reflect the objectivesand performance of management and thecorporation. Incentive plans will vary . . . andshould be designed to provide the properbalance between long- and short-termperformance incentives. Stock options andother equity-oriented plans should beconsidered as a means for linkingmanagement’s interests directly to those ofshareholders. (pp. 5-6)

* Investor viewpoint.

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APPENDIX IP A R T I A L LI S T I N G O F C O R P O R A T E G O V E R N A N C E G U I D E L I N E S A N D C O D E S O F B E S T P R A C T I C E

INTERNATIONAL ORGANIZATIONS

§ APEC Secretariat, The APEC Business Code of Conduct (draft, March 25, 2001). <www.mof.gov.sg/ cor/cor_pcode.html>§ European Association of Securities Dealers (“ EASD”), Corporate Governance: Principles and Recommendations (May 2000). <www.easd.com/ recommendations>§ Euroshareholders, Euroshareholders Corporate Governance Guidelines 2000 (February 2000). <www.dcgn.dk/publications/2000>*§ European Association of Securities Dealers Automated Quotations (“ EASDAQ”), EASDAQ Rule Book (3d ed., January 2000). <www.easdaq.be/services/ rule.htm>§ Hermes Investment Management Ltd., International Corporate Governance Principles (December 13, 1999). <www.hermes.co.uk>*§ Commonwealth Association for Corporate Governance (“CACG”), CACG Guidelines: Principles for Corporate Governance in the Commonwealth (November 1999). <www.cbc.to>§ International Corporate Governance Network (“ ICGN”), Statement on Global Corporate Governance Principles (July 1999). <www.icgn.org>*§ Organization for Economic Cooperation and Development (“OECD”) Ad Hoc Task Force on Corporate Governance, OECD Principles of Corporate Governance (April 1999).

<www.oecd.org/daf/governance/principles.htm>§ ICGN, Global Share Voting Principles (July 1998). <www.icgn.org>*§ OECD Business Sector Advisory Group on Corporate Governance, Corporate Governance: Improving Competitiveness and Access to Capital in Global Markets, Report to the OECD (Millstein Report) (April 1998).

<www.oecd.org>§ European Bank for Reconstruction and Development (“ EBRD”), Sound Business Standards and Corporate Practices: A Set of Guidelines (September 1997). <www.ebrd.com>§ Centre for European Policy Studies (“ CEPS”), Corporate Governance in Europe – Recommendations (June 1995). <www.ecgn.org>

AUSTRALIA

§ Investment & Financial Services Association (“IFSA”), formerly Australian Investment Managers Association (“AIMA”), Corporate Governance: A Guide for Investment Managers and Corporations (3d ed., July 1999).<www.ifsa.com.au>*

§ Working Group representing Australian Institute of Company Directors, Australian Society of Certified Practicing Accountants, Business Council of Australia, Law Council of Australia, The Institute of CharteredAccountants in Australia & The Securities Institute of Australia, Corporate Practices and Conduct (Bosch Report) (3d ed., 1995). <www.ecgn.org>

BELGIUM

§ Fondation des Administrateurs (“FDA”), The Directors’ Charter (January 2000). Forthcoming at <www.ecgn.org>§ Brussels Stock Exchange/Banking & Finance Commission, Corporate Governance for Belgian Listed Companies (the Merged Code) (December 1998).

<www.cbf.be/pe/pec/en_ec01.htm>§ Brussels Stock Exchange, Report of the Belgium Commission on Corporate Governance (Cardon Report) (draft, March 1998). <www.ecgn.org>§ Federation of Belgian Companies (VBO/FEB), Corporate Governance – Recommendations (January 1998). <www.ecgn.org>

BRAZIL

§ Instituto Brasileiro de Governança Corporativa (“IBGC”), formerly Instituto Brasileiro de Conselheiros Administraçao (“IBCA”), Code of Best Practice of Corporate Governance (May 8, 1999, revised April 9, 2001).<www.ibgc.org.br>


* Investor viewpoint.** Hybrid consisting of investors, academics and private business sector representatives.

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CANADA§ Joint Committee on Corporate Governance, Beyond Compliance: Building a Governance Culture (Saucier Report) (March 2001). <www.jointcomgov.com>§ Pension Investment Association of Canada (“PIAC”), Corporate Governance Standards (September 1993; revised March 1997, updated June 1998). <www.piacweb.org>*§ Toronto Stock Exchange Commission on Corporate Disclosure, Responsible Corporate Disclosure: A Search for Balance (March 1997). <[email protected]>§ Toronto Stock Exchange Committee on Corporate Governance in Canada, “Where Were The Directors?”: Guidelines For Improved Corporate Governance in Canada (Dey Report) (December 1994). <www.ecgn.org>

CHINA

§ China Securities Regulatory Commission, Corporate Governance Code and Standards for Chinese Listed Companies (draft, June 11, 2001). Available upon request at <[email protected]>. English translation inpreparation.

CZECH REPUBLIC

§ Czech Securities Commission (Komise pro Cenne Papiry), Draft Corporate Governance Code Based on the OECD Principles (September 2000).§ Czech Institute of Directors, Corporate Governance Code of Practice (draft, August 2000).

DENMARK

§ Danish Shareholders Association, Guidelines on Good Management of a Listed Company (Corporate Governance) (draft dated February 29, 2000). <www.shareholders.dk>*

FINLAND

§ Ministry of Trade and Industry, Guidelines for Handling Corporate Governance Issues in State-Owned Companies and Associated Companies (November 7, 2000). <www.vn.fi/ktm/eng/newsktm_etu.htm>§ Central Chamber of Commerce/Confederation of Finnish Industry and Employers, Corporate Governance Code for Public Limited Companies (February 10, 1997).

FRANCE

§ Association Française des Entreprises Privées (AFEP) & Mouvement des Entreprises de France (MEDEF), Report of the Committee on Corporate Governance (Viénot II) (July 1999). <www.ecgn.org> (French and English).§ Association Française de la Gestion Financière – Association des Sociétés et Fonds Français d’Investissement (“ AFG-ASFFI”), Recommendations on Corporate Governance (Hellebuyck Commission Recommendations)

(June 9, 1998) English translation by AFG-ASFFI. <www.afg-asffi.com>*§ Stock Exchange Operations Commission, Regulation No. 98-01 – 98-10 (March 1999). English translation available at <[email protected]>§ Conseil National du Patronat Français (“ CNPF”) & Association Française des Entreprises Privees (“AFEP”), The Boards of Directors of Listed Companies in France (Viénot I) (July 10, 1995). <www.ecgn.org> (French

only). English translation by CNPF & AFEP.§ CNPF & AFEP, Stock Options: Mode d’Emploi pour les Enterprises (Lévy-Lang Report) (1995). English translation by CNPF & AFEP.

GERMANY

§ Grundsatzkommission Corporate Governance (German Panel on Corporate Governance), Corporate Governance Rules for German Quoted Companies (January 2000, revised July 2000). English translation by GCP.<www.corgov.de>**

§ Berliner Initiativkreis (Berlin Initiative Group), German Code of Corporate Governance (June 6, 2000). English translation by Berlin Initiative Group. <www.gccg.de>§ Deutsche Schutzvereinigung für Wertpapierbesitz e.V. (“DSW”), DSW Guidelines (June 1998). <www.ecgn.org>*§ Deutsche Bundestag, Gestez zur Kontroll und Tranzparenz im Unternehmensbereich (Law on Control and Transparency in the Corporate Sector) (“KonTraG”) (March 1998).



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GREECE

§ Capital Market Commission’s Committee on Corporate Governance in Greece, Principles on Corporate Governance in Greece: Recommendations for its Competitive Transformation (Mertzanis Report) (October 1999).<www.ecgn.org>

HONG KONG

§ Hong Kong Society of Accountants, Corporate Governance Disclosure in Annual Reports: A Guide to Current Requirements and Recommendations for Enhancement (March 2001). <www.hksa.org.kk>§ The Stock Exchange of Hong Kong (“ SEHK”), Code of Best Practice (December 1989; revised June 1996, February 1999, August 2000). <www.sehk.com>§ SEHK, Model Code for Securities Transactions by Directors of Listed Companies (August 2000). <www.sehk.com>§ Hong Kong Society of Accountants (“ HKSA”), New Corporate Governance Guide on Formation of Audit Committees (January 1998). <www.hksa.org.hk>

INDIA

§ Securities & Exchange Board of India (“ SEBI”) Committee on Corporate Governance (“Kumar Mangalam Committee”), Draft Report on Corporate Governance (September 1999). <www.sebi.gov.in>§ Confederation of Indian Industry, Desirable Corporate Governance – A Code (April 1998). <[email protected]>

IRELAND

§ Irish Association of Investment Managers (“IAIM”), Corporate Governance, Share Option and Other Incentive Scheme Guidelines (March 1999). <www.iaim.ie>*§ IAIM, Statement of Best Practice on the Role and Responsibilities of Directors of Public Limited Companies (1992). <www.iaim.ie>*

ITALY

§ Comitato per la Corporate Governance delle Società Quotate (Committee for the Corporate Governance of Listed Companies), Report & Code of Conduct (Preda Report) (October 1999). <www.borsaitalia.it>§ Ministry of the Italian Treasury, Report of the Draghi Committee (Audizione Parlamentare, Prof. Mario Draghi, Direttore Generale de Tesoro) (December 1997). <www.ecgn.org>

JAPAN

§ Kosei Nenkin Kikin Rengokai (Pension Fund Corporate Governance Research Committee), Action Guidelines for Exercising Voting Rights (June 1998).*§ Corporate Governance Forum of Japan, Corporate Governance Principles – A Japanese View (May 1998).§ Japan Federation of Economic Organizations (Keidanren), Urgent Recommendations Concerning Corporate Governance (Provisional Draft, Sept. 1997). <www.ecgn.org>

KENYA

§ The Private Sector Initiative for Corporate Governance, Principles for Corporate Governance in Kenya and a Sample Code of Best Practice for Corporate Governance (November 1999, revised July 2000).<[email protected]>

KYRGYZ REPUBLIC

§ Prime Minister’s Office of the Kyrgyz Republic, Department of Economic Sectors Development, Model Charter of a Shareholding Society of Open Type (Approved by decree of government July 26, 1997).<www.cdc.kg/eng/doc_2.html>

§ Working Group on Corporate Governance, Handbook on Best Practice – Corporate Governance in the Kyrgyz Republic (Approved by decree of government July 26, 1997). <www.cdc.kg/eng/doc_3.html>



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MALAYSIA

§ Kuala Lumpur Stock Exchange, Listing Requirements (January 2001, effective as of June 1, 2001). <www.klse.com.my>§ JPK Working Group I on Corporate Governance in Malaysia, Report on Corporate Governance in Malaysia (March 20, 2000). <www.sc.com.my/html/publications/inhouse>§ High Level Finance Committee on Corporate Governance, Report on Corporate Governance (March 25, 1999). <www.sc.com.my/html/publications/fr_public.html>

MEXICO

§ El Consejo Coordinador Empresarial (“ CCE”) y la Comisión Nacional Bacaria y de Valores (“ CNBV”), Código de Mejores Práticas (June 9, 1999). English translation available at www.ecgn.org, Corporate GovernanceCode for Mexico. <www.ecgn.org>

THE NETHERLANDS

§ Committee on Corporate Governance, Corporate Governance in the Netherlands – Forty Recommendations (Peters Code) (June 1997). <www.ecgn.org>§ Vereniging van Effectenbezitters (“ VEB”), Ten Recommendations on Corporate Governance in the Netherlands (1997). www.vebbottomline.com*

NEW ZEALAND

§ Institute of Directors in New Zealand, Inc., under the aegis of the Commonwealth Association for Corporate Governance (“ CACG”), Best Practice Statements for Boards and Directors in New Zealand (August 2000).<[email protected]>

PORTUGAL

§ Comissäo do Mercado de Valores Mobiliários (Securities Market Commission), Recommendations on Corporate Governance (November 1999). <www.cmvm.pt>

ROMANIA

§ International Center for Entrepreneurial Studies (Bucharest University) & Strategic Alliance of Business Associations, Corporate Governance Code: Corporate Governance Initiative and Economic Democracy in Romania(draft March 24, 2000).

RUSSIA

§ Corporate Governance Initiative of the World Economic Forum, Changing Corporate Governance in Russia (January 29, 2001).§ Yeltsin, Boris, President of the Russian Federation & Parker School of Foreign & Comparative Law, Columbia University, Decree on Measures to Ensure the Rights of Shareholders (as amended, October 27, 1993)

(Release No. 28, TRANSNATIONAL JURIS, 1996).

SINGAPORE

§ Singapore Ministry of Finance, Proposed Code of Corporate Governance (draft, March 2001).§ Stock Exchange of Singapore, Listing Manual (as amended) & Best Practices Guide (1998, amended 2000). <www.ses.com.sg>

SOUTH AFRICA

§ The Institute of Directors in Southern Africa, The King Report on Corporate Governance (King Report) (November 1994). <www.ecgn.org>

SOUTH KOREA

§ Committee on Corporate Governance (sponsored by the Korea Stock Exchange et al.), Code of Best Practice for Corporate Governance (September 1999). <www.ecgn.com>



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SPAIN

§ Comisión Especial para el Estudio de un Código Etico de los Consejos de Administración de las Sociedades, El gobierno de las sociedades cotizadas (Olivencia Report) (February 1998). English translation by InstitutoUniversitario Euroforum Escorial, The Governance of Spanish Companies (February 1998). <www.ecgn.org> (Spanish); English translation: <[email protected]>

§ El Circulo de Empresarios, Una propuesta de normas para un mejor funcionamiento de los Consejos de Administración (October 1996). <www.ecgn.org>

SRI LANKA

§ The Institute of Chartered Accountants of Sri Lanka, Code of Best Practice: Report of the Committee To Make Recommendations on Matters Relating to Financial Aspects of Corporate Governance (December 12, 1997).<[email protected]>

SWEDEN

§ Swedish Shareholders Association, Corporate Governance Policy (January 2000). <www.aktiesparana.se> English translation: <www.ecgn.org>*§ The Swedish Academy of Directors, Western Region, Introduction to a Swedish Code of “Good Boardroom Practice” (March 27, 1995). <[email protected]>

THAILAND

§ The Stock Exchange of Thailand (“SET”), The Roles, Duties and Responsibilities of the Directors of Listed Companies (December 1997; revised October 1998). <[email protected]>

UNITED KINGDOM

§ Pensions Investment Research Consultants (“ PIRC”), PIRC Shareholder Voting Guidelines (1993 and regularly revised through March 12, 2001). <www.pirc.co.uk/pubserv.htm>*§ Hermes Investment Management Ltd., Statement on UK Corporate Governance & Voting Policy (July 1998, revised January 2001). <www.hermes.co.uk>*§ Association of Unit Trusts and Investment Funds, Code of Good Practice (January 2001). <www.investmentfunds.org.uk>*§ Institute of Chartered Accountants in England and Wales, Internal Control: Guidance for Directors on the Combined Code (Turnbull Report) (September 1999). <www.ecgn.org>§ Law Commission & The Scottish Law Commission, Company Directors: Regulating Conflicts of Interests and Formulating a Statement of Duties (September 1999). <www.lawcom.gov.uk/library/lc261>§ National Association of Pension Funds, (“ NAPF”), Corporate Governance Pocket Manual (1999). <www.napf.co.uk>*§ London Stock Exchange Committee on Corporate Governance, The Combined Code: Principles of Good Governance and Code of Best Practice (July 1998). <www.ecgn.org>§ Committee on Corporate Governance (sponsored by the London Stock Exchange et al.), Final Report (Hampel Report) (January 1998). <www.ecgn.org>§ Study Group on Directors’ Remuneration, Final Report (Greenbury Report) (July 1995). <www.ecgn.org>§ Institute of Directors, Good Practice for Directors – Standards for the Board (1995).§ The City Group for Smaller Companies, The CISCO Guide: The Financial Aspects of Corporate Governance: Guidance for Smaller Companies (1994)§ Report of the Committee on the Financial Aspects of Corporate Governance (Cadbury Report) (December 1, 1992). <www.ecgn.org>§ Institutional Shareholders’ Committee, The Role and Duties of Directors: A Statement of Best Practice (April 1991).*§ Institute of Chartered Secretaries and Administrators, Good Boardroom Practice: A Code for Directors and Company Secretaries (February 1991, reissued 1995). <www.thecorporatelibrary.com/docs/index.html>



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UNITED STATES

§ Council of Institutional Investors (“CII”), Core Policies, General Principles, Positions & Explanatory Notes (March 1998 and revised annually through March 2001). <www.cii.org/corp_governance.htm>*§ General Motors Board of Directors, GM Board of Directors Corporate Governance Guidelines on Significant Corporate Governance Issues (January 1994; revised August 1995, June 1997, March 1999, June 2000).

<www.gm.com/company/investors/stockholders/guidelines.html>§ Teachers Insurance and Annuity Association – College Retirement Equities Fund (“TIAA-CREF”), TIAA-CREF Policy Statement on Corporate Governance (October 1997, revised March 2000). <www.tiaa-

cref.org/governance>*§ Blue Ribbon Commission on Improving the Effectiveness of Corporate Audit Committees, Report and Recommendations (1999) (sponsored by New York Stock Exchange & National Association of Securities Dealers).

<www.nyse.com> or <www.nasd.com>§ California Public Employees’ Retirement System (“CalPERS”), Global Corporate Governance Principles and Country Principles for: UK; France; Germany; Japan (1999). <www.calpers-governance.org>*§ CalPERS, Domestic Proxy Voting Guidelines and International Proxy Voting Guidelines (February 1999). <www.calpers-governance.org>*§ CalPERS, Corporate Governance Core Principles and Guidelines: The United States (April 1998). <www.calpers-governance.org>*§ The Business Roundtable (“BRT”), Statement on Corporate Governance (September 1997). <www.brtable.org/issue.cfm>§ American Federation of Labor and Congress of Industrial Organizations (“AFL-CIO”), Investing in Our Future: AFL-CIO Proxy Voting Guidelines (1997). <[email protected]>*§ American Society of Corporate Secretaries, Suggested Guidelines for Public Disclosure and Dealing with the Investment Community (1997). <www.ascs.org/ascstitles.html>§ National Association of Corporate Directors (“NACD”), Report of the NACD Blue Ribbon Commission on Director Professionalism (November 1996). <www.nacdonline.org>§ NACD, Report of the NACD Blue Ribbon Commission on Performance Evaluation of Chief Executive Officers, Board and Directors (1994). <www.nacdonline.org>§ American Bar Association, Committee on Corporate Laws, Section of Business Law, Corporate Directors’ Guidebook (1978; 2d ed. 1994): abanet.org/abapubs/business.html>§ American Law Institute (“ALI”), Principles of Corporate Governance: Analysis & Recommendations (1992). <www.ali.org/index.htm>§ BRT, Statement on Corporate Governance and American Competitiveness (1990).

APPENDIX IIExcerpts from Business Sector Advisory Group on Corporate Governance Report to the OECD

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CORPORATE

GOVERNANCE

Improving Competitivenessand Access to Capital

in Global Markets

A Report to the OECDby the Business Sector Advisory Group

on Corporate Governance

Ira M. Millstein (Chairman)Michel Albert

Sir Adrian CadburyRobert E. DenhamDieter Feddersen

Nobuo Tateisi

April 1998

© OECD (April 1998)Excerpts reproduced herein subject to copyright permission granted by the OECD on November 22, 1999


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LETTER FROM THE CHAIRMAN

2 April 1998

Dear Mr. Secretary-General,

I am pleased to submit to the OECD the Report of the Business Sector Advisory Group on CorporateGovernance, entitled “Corporate Governance: Improving Competitiveness and Access to Capital in Global Markets”.

OECD economies increasingly rely on the vitality and strength of their respective private sectors, in what hasbecome a world market. The corporation is the primary engine of each respective private sector – it raises capital,creates jobs, earns profits, and divides its value added among those contributing to its success.

The governance of the corporation, the internal means by which it accomplishes its performance, is thereforeof current great international interest and concern. There is little debate that good corporate governance can positivelyimpact the corporation’s overall economic performance. Moreover, there is little debate that transparent corporategovernance is key to accessing global capital markets; visible governance provides investors with a definitivedescription of their rights vis à vis the corporation.

While governance is comprised of the internal relationships amongst shareholders, boards of directors, andmanagers, those relationships are the result of government regulations, public perception and voluntary privateinitiatives. To understand those relationships requires an understanding of the respective roles of the government andprivate sector in shaping corporate governance.

Recognizing the significance of corporate governance to the economies of its Member countries, and thenecessary interplay of governmental and private sector initiatives involved, the OECD determined to ascertain whetherit could be of significant assistance to its Members in developing an understanding of the respective roles ofgovernment and private sector. Such an understanding would be of invaluable assistance to policy makers, public andprivate, throughout the OECD Member countries.

At the 1996 meeting of the Council at Ministerial level, OECD Ministers requested that there be commencedsuch a study of corporate governance. The Business Sector Advisory Group on Corporate Governance was establishedthat same year to review and analyze international corporate governance issues and to suggest an agenda and prioritiesfor further OECD initiatives.

Since that time, the Advisory Group has met in Paris on a number of occasions and, between meetings, hascommunicated in writing and through telephone conferences. As an integral part of its work, the Advisory Group hasconsulted with a wide circle of business sector practitioners from OECD Member countries and has held a BusinessSector Colloquium on Corporate Governance in June 1997 to achieve even greater input. A summary of theColloquium discussions, and a list of participants and other commentators is appended to this Report. The quotationsin the text of this Report derive from this Colloquium.

In addition, the Advisory Group has invited and received comments on the Colloquium topics includingcomments through BIAC (the Business and Industry Advisory Committee to the OECD) and comments submitted byAustralian business leaders who participated in a series of related colloquia sponsored by the Australian Institute ofCompany Directors, Blake Dawson Waldron lawyers and the Australian Stock Exchange Limited.

All of this input has provided a rich resource base for the Advisory Group to draw on in formulating itsReport, and has assisted the Group to identify some key areas of common understanding:

◊ Corporate governance practices constantly evolve to meet changing conditions. As a work-in-progress,there is no single universal model of corporate governance. Nor is there a static, final structure incorporate governance that every country or corporation should emulate. Experimentation and varietyshould be expected and encouraged.

◊ Corporate governance practices vary and will continue to vary across nations and cultures. We can learna great deal from observing experiences in other countries.

◊ Corporate governance practices will also vary as a function of ownership structures, businesscircumstances, competitive conditions, corporate life cycle and numerous other factors.

There are, however, a few fundamental parameters:

◊ Increasingly, it is accepted that the corporate objective is maximizing shareholder value, which not onlyrequires superior competitive performance but also generally requires responsiveness to the demandsand expectations of other stakeholders.

◊ Increased transparency and independent oversight of management by boards of directors are the centralelements of improved corporate governance.

◊ Board practice should be subject to voluntary adaptation and evolution, in an environment of globallyunderstood minimum standards.

◊ There are certain areas in which the adoption of universal rules is preferable (such as in accounting).


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The Advisory Group has endeavored in this Report to explain why it has emphasized the foregoing parametersas a basis for both public and private sector initiatives to improve corporate governance throughout the OECDcountries, to suggest certain public and private initiatives and to suggest an agenda and priorities for further OECDefforts in corporate governance.

We hope therefore that this Report will contribute positively to the economic performance of corporationsthroughout the OECD countries, and thereby contribute to the welfare and prosperity of their respective economies andcitizens.

It has been a great honor, as well as an intellectual and personal pleasure, to chair the Advisory Group andwork with its highly talented and experienced members – Michel Albert, Sir Adrian Cadbury, Robert E. Denham,Dieter Feddersen and Nobuo Tateisi. Each Advisory Group member has contributed generously of his time andinsights – all in his individual capacity, and not as representatives of any organization, government or country. I thinkthe Report reflects this remarkable collaboration, which enabled a consensus to emerge from individuals grounded indiverse national and cultural experiences.

The Advisory Group wishes to emphasize that this Report reflects the consensus of the Advisory Groupmembers as regards the principal perspectives and recommendations set forth. Individual members may not necessarilyagree with every aspect of the Report.

On behalf of the Advisory Group, I wish to thank Joanna R. Shelton, Deputy Secretary-General of the OECD,for her considerable intellectual support and assistance. We especially wish to acknowledge the substantive research,drafting and organizational assistance of Mats Isaksson and Rauf Gönenç of the OECD staff. They were instrumentalin organizing the June 1997 Colloquium, and in providing each of the members of the Advisory Group, and certainlyits Chairman, with knowledgeable and steady assistance throughout. Thanks also to Holly J. Gregory of Weil, Gotshal& Manges LLP, for her invaluable editing of this Report, and her assistance in coordinating much of thecommunications on which this Report is based.

Finally, on behalf of the Advisory Group, I thank you and the OECD for the opportunity to explore andcomment on the important issues of corporate governance in the context of evolving international markets.

Sincerely yours,

Ira M. MillsteinChairman

MEMBERS OF THE OECD BUSINESS SECTOR ADVISORY GROUP ONCORPORATE GOVERNANCE

Mr. Ira Millstein (Chairman), Senior Partner, Weil, Gotshal & Manges LLP; Eugene F. Williams, Jr. VisitingProfessor in Competitive Enterprise and Strategy at the Yale School of Management; Chairman of theNational Association of Corporate Directors Commission on Director Professionalism; Member, AmericanAcademy of Arts and Sciences; author of The Limits of Corporate Power and various articles on governancetopics. United States.

Mr. Michel Albert, Member of the Monetary Policy Council, Banque de France; Former Chairman, AssurancesGénérales de France (AGF); author of several books on social and economic matters, including Capitalismversus Capitalism. France.

Sir. Adrian Cadbury, Former Chairman, Cadbury-Schweppes; Chairman, Committee on the Financial Aspects ofCorporate Governance 1991-95; contributor to several works in the area of corporate governance and authorof The Company Chairman. United Kingdom.

Mr. Robert E. Denham, Former Chairman, and Chief Executive Officer, Salomon Inc. (parent company of SalomonBrothers); Member, Independence Standards Board (rule-making body for auditor independence); Member,Board of Trustees, The Conference Board; Member, President’s Bipartisan Commission on Entitlement andTax Reform. United States.

Prof. Dr. ieter Feddersen, Partner, Feddersen Laule Scherzberg & Ohle Hansen Ewerwahn; Honorary Professor,University of Heidelberg; Chairman and member of several Supervisory Boards in GermanAktiengesellschaften and GmbHs; Member, German American Lawyers Association, International FiscalAssociation and several other learned and non-profit organisations. Germany.

Mr. Nobuo Tateisi, Chairman and Representative Director, OMRON Corporation; Vice Chairman, Policy BoardMember, Chairman of ILO Committee and Chairman of the International Committee of the Japan Federationof Employers’ Association (Nikkeiren); Co-Chairman of the Committee on Asia and Oceania of the JapanFederation of Economic Organization (Keidanren); Vice Chairman of the Japan Institute for Social andEcnomic Affairs (Keizai Koho Center). Japan.

SECRETARIAT

Mr. Rauf Gönenç Mr. Mats Isaksson Ms. Holly J. GregoryPrincipal Administrator Principal Administrator CounselIndustry Division Industry Division Weil, Gotshal & Manges LLPOECD OECD New York


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CHAPTER 1

OVERVIEW, PUBLIC POLICY PERSPECTIVES ANDRECOMMENDATIONS TO THE OECD

1.1 Corporate Governance in a New Economic Environment

1. Individual OECD nations are at an economic (and perhaps social) watershed as their market-oriented economiesincreasingly rely on the vitality and strength of the private sector in what rapidly is becoming a world market. OECDeconomies rely on the corporation – as the engine, worldwide, for private sector participation in the global market – toraise capital, create jobs, earn profits and divide the value added among those contributing to its success.

2. To succeed in their primary objective of generating long-term economic profit, corporations must seek to achievea sustained competitive advantage. This requires significant flexibility to take necessary risks in responding quickly toopportunities and challenges in a constantly changing environment. Corporations must be able to develop andimplement their respective competitive advantages, to raise capital, to assemble and re-deploy resources to that endand, at the same time, to meet the expectations of their shareholders, employees, suppliers, creditors, customers,communities and society at large.

3. Corporate governance comprehends that structure of relationships and corresponding responsibilities among a coregroup consisting of shareholders, board members and managers designed to best foster the competitive performancerequired to achieve the corporation’s primary objective.

4. Corporate governance tends to gain public attention when performance problems are apparent, both at national andcompany levels. For example, the current crisis in East Asian economies is generating considerable discussion aboutfailed corporate governance practices relating to lending and borrowing. Similarly, performance problems at thecompany level frequently draw attention to governance problems. While developing appropriate remedies for cases ofvisible failure is important, the more long-term policy objective is to prevent such failures. All OECD nations sharethis challenge in their efforts to improve the functioning of their market economies.

5. While there may be some debate in the academic literature about the impact of corporate governance on corporateperformance, the Advisory Group is convinced – based on its collective experience, the views of respected businessgroups, and recent research and academic commentary – that improved corporate governance can positively impactoverall corporate performance.

6. The quality of corporate governance is of particular importance at a time when interactions between corporationsand their capital suppliers are undergoing fundamental changes, with significant implications for other corporatestakeholders, such as employees. Given the globalisation of competition in markets for goods, services, key humanresources and capital, corporations in all OECD countries face common competitive challenges and opportunities. Dueto global deregulation and technological change, capital suppliers are encountering new opportunities to improve theirreturns; entrepreneurs and companies are exposed to a wider and more complete range of capital-raising vehicles; andemployees are experiencing greater exposure to the risks and rewards of increased competition.

7. With international deregulation, investment capital is more mobile and investors are demanding broaderinvestment opportunities with internationally competitive levels of profitability (risk–adjusted returns). Forcorporations, this development has brought about access to a wider pool of financing and a greater range of risk- andreward-sharing equity placements; broader financing options in turn can support a variety of research and developmentactivities, spin-offs, capacity expansion and new firm creation. However, greater competition for capital results ingreater pressure for corporate economic performance and significant pressures on long-standing relationships withemployees.

“Due to domestic and international deregulation, financial institutions have access to a much broader groupof investment opportunities, which has resulted in very aggressive return expectations. Enhancedopportunities to find higher returns on investments have raised a challenge for all companies competing toattract capital.”

Ms. Heidi Kunz, Chief Financial Officer, ITT Industries (United States)

8. Good corporate governance should allow corporations and economies to capture fully the inherent benefits fromthese developments while maintaining a sensitivity to the social concerns raised. Failure to adapt to efficientgovernance practices may well lead to restricted access to capital markets. Again, the current crisis in East Asianeconomies provides a stark example. Capital providers increasingly rely on the corporate governance of thecorporations they invest in, or lend to, to provide actual accountability and responsibility to investors and lenders.

9. Because worldwide the corporation is the essential engine driving the private sector economically, and becausecorporate governance can be critical to competitive performance in all of a corporation’s markets (goods, services,capital and human resources), the quality of corporate governance can affect the dynamism of the private sector andultimately the credibility of market economies in providing economic growth and promoting citizen welfare.Accordingly, corporate governance has become an important international topic for discussion.

10. The task of adapting, refining and adjusting corporate governance is a necessary and ongoing process. To becompetitive, both corporations and investors must be allowed to innovate relentlessly and to adapt their governancepractices to new economic circumstances; corporate governance should be viewed as “work in progress”. For thisreason, the Advisory Group rejects a “one-size-fits-all” approach to corporate governance practice and focuses thisReport on a set of general public policy perspectives and guiding norms in a context of pluralism and adaptability.

11. To enable flexibility, experimentation and continuous improvement, the design of corporate governancerelationships and practices should be left to market forces: corporate governance should remain, basically, decisions byindividual actors in the private sector. While the need to protect investor rights is undisputed, the Advisory Groupbelieves that market-driven solutions emerging from competition among alternative practices are generally superior tothose mandated by regulating authorities.

12. This market-based perspective does not exclude a role for government. Policy makers and regulatory bodies havea distinct and important responsibility for shaping a regulatory framework, compatible with their respective societalvalues, that allows market forces to work and permits investors and companies to design their governance arrangementsin accordance with their respective needs.

13. The collective efforts of the business community to evaluate and disseminate experiences in the form of “bestpractices” and governance guidelines are important as well. It is the Advisory Group’s view that such efforts increase


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the collective knowledge about workable solutions and thereby help to invigorate a broad understanding of theprinciples underlying good corporate governance practices, and the continued evolution of better practices.

14. Although this Report focuses on publicly traded corporations (i.e., corporations whose stock is listed on a stockexchange or other market), the Advisory Group believes that many of the issues discussed are also of importance towholly privately held, family-owned and state-owned companies – which account for a significant portion of economicactivity in many OECD countries. Increasingly, banks and other lenders are relying on principles of improvedcorporate governance to protect their investments. Moreover, privately held, family-owned and state-owned companiesare affected by corporate governance standards as soon as they seek capital from equity markets to finance theiractivities (and convert into the legal structure of a publicly traded corporation). Therefore, privately held, family-owned and state-owned companies – many of which will be the publicly traded companies of tomorrow – are well-advised to consider the corporate governance principles applicable to publicly traded corporations.

1.2 An Agenda for Modernization

15. The Advisory Group believes that enabling the corporation to improve its competitiveness and access to capitalmarkets through improved corporate governance will require both public policy and private sector initiatives. TheAdvisory Group offers this Report to promote supportive international public policy perspectives, to encouragevoluntary private sector initiatives and, particularly, to offer the OECD suggestions about the direction of its furtherefforts.

“There will be increased pressure on all our economies and societies to adjust to the requirements of globalfinancial markets. This process of convergence must of course be guided by building up a consensus onwhat should be the rules of the game. Institutions like the OECD can play an important role in shaping thatprocess.”

Dr. Henning Schulfe-Noelle, Chairman of the Board of Management, Allianz AG (Germany)

16. The Advisory Group suggests that such further public and private sector initiatives – and OECD efforts – focus onthe following Agenda (which is described in the remaining chapters of this Report):

◊ Defining the mission of the corporation in the modern economy: Generating long-term economic gain toenhance shareholder (or investor) value is necessary to attract equity investment capital and is, therefore, thecorporation’s central mission. At the same time, however, corporations must function in the larger society. Tovarying degrees, different national systems and individual corporations may temper the economic objective of thecorporation to address non-economic objectives. Full transparency of economic and non-economic objectives –both as to the national system and the individual corporation – will be necessary in the global competition forcapital. (Chapter 2)

◊ Ensuring adaptability of corporate governance arrangements: The primary role for regulation is to shape acorporate governance environment, compatible with societal values, that allows competition and market forces towork so that corporations can succeed in generating long-term economic gain. Specific governance structures orpractices will not necessarily fit all companies at all times. Nor should it be taken for granted that a given designmay suit the same company during different stages of its development. For dynamic enterprises operating in arapidly changing world, corporate governance adaptability and flexibility – supported by an enabling regulatoryframework – is a prerequisite for better corporate performance. (Chapter 3)

◊ Protecting shareholder rights: For companies to attract equity investment, regulatory safeguards mustemphasize fairness, transparency and accountability. These safeguards should take into account the new andgrowing category of non-controlling shareholders who have emerged in the form of institutional investors. Thefocus of current efforts to improve shareholder protection should center on investor access to performance-relatedinformation, shareholder exercise of voting rights, and promotion of active and independent (non-executive)members of boards of directors to strengthen the quality of corporate governance. (Chapter 4)

◊ Aligning the interests of shareholders and other stakeholders: Corporate success is linked to the ability toalign the interests of directors, managers and employees with the interests of shareholders. Performance-basedcompensation is a useful tool for this purpose. Independent (non-executive) members of the board of directors –or in certain nations, board of auditors – have a special responsibility in designing and approving appropriateremuneration schemes. (Chapter 6)

◊ Recognizing societal interests: Companies do not act independently from the societies in which they operate.Accordingly, corporate actions must be compatible with societal objectives concerning social cohesion, individualwelfare and equal opportunities for all. Attending to legitimate social concerns should, in the long run, benefit allparties, including investors. At times, however, there maybe a trade-off between short-term social costs and thelong-term benefits to society of having a healthy, competitive private sector. Societal needs that transcend theresponsive ability of the private sector should be met by specific public policy measures, rather than by impendingimprovements in corporate governance and capital allocation. (Chapter 7)

17. The specific topics on this Agenda are interrelated and complementary. Therefore, the consequences of anyparticular public policy reform measure need to be carefully considered to ensure a coherent approach to corporategovernance.

18. Based on its discussion of this Agenda in the ensuing Chapters, the Advisory Group has formulated Perspectivesthat it believes should guide:

◊ public policy makers and regulators to encourage the development of improved governance practices, with strongemphasis on government enabling voluntary private sector development rather than attempting to regulate it; and

◊ corporations and investors voluntarily to improve governance practices.

19. Based on these Perspectives, and the Advisory Group’s discussion of specific substantive issues in this Report, theAdvisory Group has also formulated Recommendations for further efforts by the OECD.

1.3 Perspectives for Public Policy Improvement

20. For the private sector and specifically the publicly traded corporation to flourish, policy makers and regulatorsneed to shape a corporate governance environment, compatible with the respective society’s values, that allows marketforces to work and corporations to succeed in generating long-term economic profit. Largely this entails protecting theintegrity and efficiency of capital markets (thus promoting confidence), by protecting shareholder rights and providingfor the disclosure of information.

21. Since regulation is a powerful and potentially rigid tool, it should be used with care in the context of corporategovernance. If corporations are to fulfill their potential in exploiting opportunities to create long-term economic profit,market forces must be allowed to determine the most efficient deployment of investment and other corporate resources.


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22. Protecting shareholders and promoting investor confidence are key elements in providing the access to capitalneeded to create and maintain a dynamic, competitive corporate sector. By focusing primarily on shareholderprotection, disclosure of information and voluntary corporate governance improvements, policy makers and regulatorscan avoid developing overly rigid and intrusive regulatory systems.

Perspective 1 (Flexibility). Policy makers and regulators should be sensitive to corporations’ need forflexibility in responding to the changing competitive environment and the related need for flexible, adaptivegovernance structures. Regulation should support a range of ownership and governance forms so that amarket for governance arrangements develops.

Perspective 2 (Regulatory Impact). Policy makers and regulators should consider the impact of anyproposed regulatory initiate on the ability of the corporate sector to respond to competitive marketenvironments. They should avoid those regulations that threaten to unduly interfere with marketmechanisms.

◊ The Advisory Group endorses and encourages efforts by the OECD to promote greater reliance on competitionand market forces through its multi-sector study of regulatory reform. The Advisory Group invites theinternational business community to support the OECD’s efforts.

Perspective 3 (Regulatory Focus). Regulatory intervention in the area of corporate governance is likely tobe most effective if limited to:

◊ Ensuring the protection of shareholder rights and the enforceability of contracts with resource providers(Fairness);

◊ Requiring timely disclosure of adequate information concerning corporate financial performance (Transparency);

◊ Clarifying governance roles and responsibilities, and supporting voluntary efforts to ensure the alignment ofmanagerial and shareholder interests, as monitored by boards of directors – or in certain nations, boards ofauditors – having some independent members (Accountability); and

◊ Ensuring corporate compliance with the other laws and regulations that reflect the respective society’s values(Responsibility).

1.3.1 Fairness

23. To encourage both the domestic and foreign capital investment necessary for the development of globallycompetitive enterprises, shareholders require reasonable assurances that their assets will be protected against fraud,managerial or controlling shareholder self-dealing, and other “insider” wrongdoing.

24. Market confidence also depends on a clear understanding of – and faith in – contractual relationships among othercorporate resource providers and consumers, and an expectation that contractual relationships are enforceable.

Perspective 4 (Clarity, Consistency, Enforceability). Policy makers and regulators should provide clear,consistent and enforceable securities and capital market regulations designed to protect shareholder rightsand create legal systems capable of enforcing such regulations. Such regulations should seek to treat allequity investors – including minority shareholders – fairly, and should include protections against fraud,dilution, self-dealing and insider trading.

Perspective 5 (Litigation Abuse). Regulations aimed at protecting shareholder rights should be designedto protect against litigation abuse. This can be accomplished through the use of tests for the sufficiency ofshareholder complaints and the provision of safe harbors for management and director actions.

Perspective 6 (Basic Contract, Commercial and Consumer Law). Policy makers and regulators shouldensure that an adequate system of contract, commercial and basic consumer protection law is in place, sothat contractual relationships are enforceable. (This is particularly relevant to those developing andemerging market nations with less established legal systems).

Perspective 7 (Regulatory Impact on Active Investors). Policy makers and regulators should reviewwhether their securities, tax and other regulations unduly hinder active investors, and whether theirregulations concerning institutional investors inappropriately inhibit them from participating as activeinvestors.

Perspective 8 (Corruption and Bribery). Policy makers and regulators should ensure that corporationsfunction in an environment that is free from corruption and bribery.

◊ The Advisory Group welcomes the OECD Convention on Combating Bribery of Foreign Public Officials inInternational Business Transactions and encourages efforts by the OECD to establish common international rulesoutlawing bribery by corporations. The Advisory Group invites the international business community to supportthe OECD’s efforts.

1.3.2 Transparency

25. Investor confidence and market efficiency depend on the disclosure of accurate, timely information aboutcorporate performance. To be of value in the global capital markets, disclosed information should be clear, consistentand comparable. This enables investors worldwide to make educated decisions concerning the allocation of their assets,and provides high-performing corporations with lower-cost capital.

Perspective 9 (Accurate, Timely Disclosure). Regulators should require that corporations discloseaccurate, timely information concerning corporate financial performance. Adequate enforcementmechanisms should be provided.

Perspective 10 (Consistent, Comparable Disclosure). Regulators should cooperate internationally indeveloping clear, consistent and comparable standards for disclosure of corporate financial performance,including accounting standards.

Perspective 11 (Ownership Disclosure). Regulators should extend such disclosure requirements to thecorporate ownership structure, including disclosure of any special voting rights and of the beneficialownership of controlling of major blocks of shares.

Perspective 12 (Disclosure Improvement). Regulators should encourage ongoing improvements in bothdisclosure techniques and formats. This may encompass both the use of new information technologies, andthe disclosure of non-financial but relevant information concerning intangible assets.

1.3.3 Accountability

26. The potential for management and shareholder interests to diverge is a defining characteristic of the modern,publicly traded corporation. Addressing this “agency” problem is a central concern of corporate governance, and the


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system of rights and responsibilities it encompasses. For corporate governance to be most effective, the majorparticipants – shareholders, directors and managers – need a clear understanding of their respective roles, rights andresponsibilities.

27. The board of directors – or in certain nations, the board of auditors – is uniquely positioned as the internalcorporate mechanism for holding management accountable to shareholders. Board oversight can be viewed as a meansof reducing the potential for significant divergences between management and investor interests. The board is bestpositioned to perform this role when – at least to an effective degree – its members are distinct from, and independentof, management. Although the structure of corporate boards for publicly traded corporations differs among OECDnations – for example, by including both single- and two-tier boards – board independence can be promoted in any typeof board system.

28. Accountability generally is based on a system of internal checks and balances. In the corporate context, theseinclude sound audit practices.

29. Within the broad limits set in a given national economy, each corporation needs flexibility to determine for itselfthe governance practices that best fit.

Perspective 13 (Corporate Governance Legal Standards). Policy makers and regulators shouldarticulate clearly the legal standards that govern shareholder, director and management authority andaccountability, including their fiduciary roles and legal liabilities. However, because corporate governanceand expectations concerning roles and liabilities continue to evolve, legal standards should be flexible andpermissive of evolution.

Perspective 14 (Shareholder Protection). Policy makers and regulators should protect and enforceshareholders’ rights to vote and participate in annual shareholders’ meetings.

Perspective 15 (Independent Corporate Boards). Policy makers and regulators should encourage somedegree of independence in the composition of corporate boards. Stock exchange listing requirements thataddress a minimal threshold for board independence – and frequently board audit committee independence– have proved useful, while not unduly restrictive or burdensome. However, policy makers and regulatorsshould recognize that corporate governance – including board structure and practice – is not a “one-size-fits-all” proposition, and should be left, largely, to individual participants.

Perspective 16 (Sound Audit Practices). Policy makers and regulators should encourage sound auditpractices, which include board selection of, and reliance on, an independent auditor.

Perspective 17 (Investor Competition). Governments should avoid regulations that unduly inhibit theability of institutional investors to compete with one another. However, sound, prudent management ofthese funds should remain the overriding objective of public policy in this area.

1.3.4 Responsibility

30. While pursuing their objectives, corporations should observe the standards of the societies in which they operate.

31. In economic systems that rely heavily on market forces to organize the economic foundations of society, afundamental role of government is to provide a framework that can support and protect individuals in adjusting to theimpacts of market forces.

Perspective 18 (Law-abiding Corporations). Policy makers and regulators should ensure thatcorporations abide by laws that uphold the respective society’s values, such as criminal, tax, antitrust, labor,environmental protection, equal opportunity, and health and safety laws.

Perspective 19 (Individual Welfare). Policy makers and regulators should support and encourageeducation and training efforts, the provision of unemployment benefits, and other similar efforts aimed atpromoting the welfare of individuals.

Perspective 20 (Income and Opportunity Divergence). Policy makers and regulators may wish toconsider the implications of significant divergence in income and opportunity paths. In particular,government action may be necessary to promote skill acquisition in certain sections of society that do notbenefit from present market trends.

1.4 Perspectives for Voluntary Self-Improvement

32. Good corporate governance is a key element in corporate competitiveness and access to capital.

33. The focal point of corporate governance is the board of directors as a mechanism to represent shareholderinterests, prevent conflicts of interest (i.e., address the agency problem), monitor managerial performance and balancecompeting demands on the corporation.

34. For the board to play this role in a meaningful way, it needs to be capable of acting independently of management.This requires board members (or in some nations, board of auditor members) capable of exercising business judgementindependently of management – whether in a single-tier or two-tier board.

35. Suggested governance “best practices” and individual board guidelines have proliferated in the 1990s and serve asuseful tools for board self-improvement.

36. The right to vote and participate in annual meetings that is generally associated with share ownership is animportant investor asset.

Perspective 21 (Corporate Objective). Individual corporations should disclose the extent to which theypursue projects and policies that diverge from the primary corporate objective of generating long-termeconomic profit so as to enhance shareholder value in the long term.

Perspective 22 (Governance and Competition). Individual corporations and shareholders shouldrecognize the important role that corporate governance plays in positioning the corporation to competeeffectively while meeting the expectations of its primary resource providers.

Perspective 23 (Board “Best Practices”). Individual corporations, shareholders and other interestedparties should continue their efforts to articulate and adopt – voluntarily – corporate governance “bestpractices” designed to improve board independence and activism, and accountability to shareholders.

Perspective 24 (Independent Oversight). Whether in a single-tier or two-tier board system, individualcorporations should ensure that an effective number of board of director members – or in certain nations,board of auditor members – are persons who are capable of exercising judgement, independent of


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management views. Generally, this will require that such board members are persons who are notemployed by the company.

Perspective 25 (Voting as an Asset). Investors should consider the right to vote and participate in annualmeetings as an asset that provides an opportunity to influence the direction and management of thecompany.

1.5 Recommendations for Further OECD Efforts

37. The Advisory Group believes that future OECD efforts on corporate governance will be most valuable if theyextend beyond collection and synthesis of information about the issues discussed in this Report. OECD efforts shouldextend to the articulation of a set of common public policy principles to guide national policy reviews and reforms inOECD Member nations, as well as private sector initiatives. The Advisory Group believes that the OECD is ideallysituated to formulate a set of common public policy principles, grounded in a review and understanding of Membercountry governance policies. We expect that such an OECD effort will lead to improved corporate governance,competitiveness and access to capital markets for corporations throughout the world, with resulting benefits toeconomic growth, employment and society at large.

Recommendation 1. The Advisory Group recommends that, in its ongoing efforts to encourage Membernations to create an enabling regulatory framework, the OECD pay special attention to the needs of bothinvestors and enterprises in adapting corporate governance arrangements to changing competitive andmarket forces, so as to support the generation of long-term economic gain and thereby benefit society.

Recommendation 2. The Advisory Group recommends that OECD efforts to assist policy reviews in thearea of corporate governance be based on the consideration of the Perspectives set forth in this Report, aswell as a comparison of OECD nations’ corporate governance and disclosure policies and practices, andthat such efforts focus on:

◊ Formulating and issuing a public policy document or instrument recommending minimum international standardsof corporate governance designed to promote fairness, transparency, accountability and responsibility.

◊ Formulating and issuing a suggested code of voluntary corporate governance “best practices” designed to improvethe board’s ability to be responsible and accountable to shareholders, which would encompass processes to ensureboard independence.

◊ Encouraging common principles for addressing the comparability, reliability and enforcement of corporatedisclosure concerning corporate financial performance, corporate ownership structure and corporate governance,culminating in the formulation and issuance of a public policy document or instrument.

Recommendation 3. The Advisory Group recommends that, as part of its overall work on corporategovernance, the OECD emphasize the importance of societal concerns and the need to clarifyresponsibilities between the public and private sectors.

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