Adulthood is an important milestone in human life. After that (it is considered that) we enter the period of maturity. Is it the same with laws? Definitely not for those who are required to always be up to date. Such is the law on Corporate Governance. It is always necessary to meet modern needs. The pre-existing law gives its place, from 17.7.2021, to the new one (: law 4706/2020, Government Gazette AD 136 / 17.7.20). Getting to know the new law is quite interesting. And even more: evaluating it in a comparative, in fact, overview with what, until recently, was in its place.
The importance and value of Corporate Governance
The positive impact of Corporate Governance on Competitiveness and Development is a given. We had the opportunity to approach this issue in our previous article, in the light of the (still valid) Greek Code of Corporate Governance.
Precisely because of this positive effect, however, the issue of Corporate Governance does not only concern listed companies. It concerns, more or less, all businesses. In addition, enhancing competitiveness requires healthy businesses. Business health also requires, among other things, investment funds and / or access to them. The Roots Program of the Athens Stock Exchange, a step in this direction, concerns Greek small and medium enterprises. Enterprises that estimate that they have an interesting investment proposal and are looking for investors. Among the conditions that must be met in order for an enterprise to qualify is the good practices of Corporate Governance.
Therefore: The new law does NOT concern only listed companies.
We are already concerned, in general, with the issue of the attempted improvements of this legislation and its consequences. And this from the previous, still, stage: ever since it was a bill.
It is worthwhile to understand the basic, at least, positions of the new law.
The new law
The first part (articles 1-24) of law 4706/2020 that was mentioned in the introduction (: “Corporate Governance of SAs…”) concerns, exclusively, the restructuring of the Corporate Governance system.
The bill was approved by a larger majority by the Plenary Session of the Parliament. As a result, Law 3016/2002 is replaced, in its entirety, “when it becomes an adult” – and after another year (Article 92, Law 4706/2020). It was about time!
In its 18 years of life, Law 3016/2002 “achieved” the, rather, formal compliance of companies with its provisions. In fact, in most cases, this compliance was not combined with a corresponding adoption of the Corporate Governance Code. It is true, however, that it “left its mark”. It gave directions. It paved the way for other important, and relevant, regulations (eg in the recent law 4548/18 for SAs).
As a result, the new law introduces a stricter Corporate Governance framework. The rigor of the new framework is due to the fact that it includes mandatory provisions. Several of them, as we pointed out in our aforementioned article, have already received strong criticism.
The new law, however, aims, at the same time, to modernize the Corporate Governance system. And to also intocporate the most recent relevant, EU, legislation.
We came to the above conclusions regarding the aspirations of the new law by (also) comparing the previous and the newly voted law. At the same time, the means provided by the legislator for the implementation of the specific aspirations become apparent.
The comparative overview
1. Scope
This law concerns at a formal level, like the pre-existing one, almost all the companies “with shares or other securities listed on a regulated market in Greece” (article 1).
2. The Suitability Policy of the members of the Board of Directors
In the new regulatory framework of Corporate Governance, an innovative, and absolutely binding, obligation of listed companies is institutionalized. This is the Eligibility Policy of the members of the board of directors (: article 3). There was no corresponding obligation in the previous law.
The Suitability Policy aims to ensure the formation of the Board of Directors by the most appropriate persons (fit and proper).
The relevant regulation basically adopts the guidelines that apply to credit institutions. But it lacks (and rightly so) the intensity and interventionism of those.
The eligibility criteria are recorded, in an indicative manner, in the specific provision. However, two of them are mandatory and are, in fact, interesting:
(a) The minimum quota per sex (namely: at least 25% of its members must be female) and
(b) The non-issuance for a member or candidate member (within one year-before or after their election or the assignment of powers) of a final court decision recognizing their involvement in loss-making transactions of a company (listed or not) with related parties.
The criteria included in the above policy (as well as their specifications), are (basically) determined by each company. They are approved by the General Assembly and must be posted on each company’s website.
3. The responsibilities of the Board of Directors
The new law chooses to make a detailed provision of the responsibilities of the Board of Directors (article 4). Clearly, more detailed than the previous law. Among the specific responsibilities, of particular importance (for the institution of Corporate Governance itself) are:
(a) The monitoring and periodic evaluation, every three years, of the institution of Corporate Governance of the company (but let us point out the obvious ambiguity both in terms of how and in terms of the exact object of the evaluation).
(b) Ensuring the effectiveness of the internal control system implemented by the company itself.
The new law fails (unlike the previous one – and rightly so) to repeat the (pointless) reference to issues that are adequately regulated by the law on SAs. These are the obligations of the members of the Board (articles 96 and 97 of Law 4548/2018) -basically for: (a) the promotion of the interest of the company and (b) the non-pursuit of own interests.
The extension, however, of the responsibilities (and consequently) responsibilities of the members of the Board of Directors was not left without a pushback. According to the Association of Listed Companies, the continuous increase of the responsibilities of a member of the Board of Directors will lead to a “lemon market”. Competent people, who can make a real contribution to the company, will avoid taking positions of responsibility.
It is true that the responsibilities of the members of the Board of Directors arising from the recent law on SAs are not insignificant.
In this context, the specific reservations of the Association of Listed Companies could, according to some, be based on truth. For others they could not.
But one wonders: Are there positions of responsibility without responsibilities? And, further, would it be possible for someone to support, albeit in exaggeration, the non-responsibility of the members of the Board? Corporate Governance relies, to a significant degree, on the Board of Directors and its members. For its success it is not possible to choose indifferent and irresponsible men of straw. Serious and remarkable persons are required, with a sense of their responsibility. With clear responsibilities. Always on alert. This will always be a safe condition for the success of the work of the Board of Directors. Also, for the good Corporate Governance and the increase of the value of the companies that it concern.
4. The Structure of the Board of Directors and the individual duties of each category of members
The new law maintains the pre-existing distinction of board members into executive, non-executive and independent (Article 5). The latter (independently) are still appointed, in principle, by the General Assembly. This is despite the fact that many state that they would appoint the Board of Directors as the competent body.
However, the individual duties of each category of members of the Board of Directors are reformed. One of the very useful provisions of the new law is that providing for a list of the minimum duties of each category of members. It should be noted that the previous law had no corresponding provisions. By recording the duties of the members, it is possible to better understand their individual roles. The executive, that is, the non-executive but also, in particular, the independent non-executive members.
Regarding the executive members (Article 6): Their responsibility for the implementation of the strategy of the Board of Directors is highlighted. And so is their obligation to immediately inform the non-executive members in writing, in situations of crisis or danger. Also, in situations that the conditions require measures to be taken that will significantly affect the company.
With regard to the non-executive as well as the independent non-executive members (Article 7): Their highly supervisory role over the executive members is evident, through the responsibilities they are entrusted with. From the specific category of members, it chooses, first of all, the new law to come from the Chairman of the Board of Directors (article 8). However, it also provides for the possibility of derogating from the simultaneous obligation to appoint one of the non-executive members as vice-chairman.
Regarding, in particular, the independent non-executive members (Article 9): For the specific category of members, the new law introduces a more specific provision, corresponding to that of the previous law. It is obvious that the new law aims to strengthen the role of independent members. Also, their (true) independence. In this context, it institutes more criteria for dependence, which, in no case, is tolerated for members of this category.
5. The Committees of the Board of Directors
Another innovation of the new law is the establishment of two new Committees of the Board of Directors (articles 10-12). It is the Remuneration Committee and the Nomination Committee that frame the (pre-existing-remaining in force) Audit Committee. In more detail:
Control Committee
The Audit Committee is still regulated by article 44 of law 4449/2017. It is “… either an independent committee or a committee of the Board of Directors of the controlled entity. It consists of non-executive members of the board of directors and members elected by the General Assembly of the controlled entity “.
Its responsibilities include, inter alia, the supervision of the company’s internal control systems, the monitoring of the statutory audit of the annual and consolidated financial statements and the audit of the selection process and the independence of the chartered accountants.
Its role is therefore twofold. It works protectively for the company and as a guarantee for third parties (investors).
Remuneration Committee
The Remuneration Committee is established for the first time by the new law (Article 11). Its object is the processing of remuneration issues. More specifically, issues of the Remuneration Policy (: article 110 par. 2 law 4548/2018) which is submitted for approval to the General Assembly (principle: say on pay).
The Remuneration Committee is expected to significantly contribute to the work of the Board of Directors (regarding the effective implementation of articles 109-112 of Law 4548/2018-regarding the issues related to the Remuneration Policy).
Nominations Committee
Similarly, the Nominations Committee is introduced for the first time with the new law (article 12). Taking into account the (above, under 2) Eligibility Policy of the Members of the Board of Directors, the Nominations Committee undertakes to nominate the most suitable persons who will fill the positions of its members.
The critique
The establishment of the above, three, distinct committees aims to achieve greater transparency in the operation of a company. However, their introduction has provoked reactions.
Specifically, according to the Association of Listed Companies, the multiple committees burden the companies with unjustified administrative burden. This is because, always according to the Association of Listed Companies, as they have a similar composition and possibly an overlapping structure, their responsibilities could be exercised by a single committee.
This critique seems only partially accurate. In terms of, ie, the administrative cost and the general burden .. Otherwise, it is not accurate. The introductory provision for the establishment of the above-mentioned committees (Article 10) provides for the possibility of concentrating in one Committee the responsibilities of the Remuneration and Nomination Committees.
6. The Rules of Procedure
The Rules of Procedure of the company (article 14), are prepared by the Board of Directors. It is not a new regulation, as it was provided for in the previous law as well (article 6 of law 3016/2002). The content of the Rules of Procedure, however, is formulated with expanded and more demanding content. Further, a summary of the operating regulations is required to be published on the Company’s website.
It is noteworthy that the competent auditor-accountant (or the auditing company) must confirm in their Audit Report the existence and the updated content of this Regulation (Article 21).
7. The Internal Audit Unit
The new law provides (article 15) for the existence of an Internal Audit Unit. A similar provision existed in the previous law (Article 7), which, however, provided for the appointment of internal auditors.
Those who staff the Internal Audit Unit are not members of the Board. In fact, they are defined as full-time employees of exclusive employment. The head of this Unit is, only, a person appointed by the Board of Directors of the company. Not those who staff it.
Any change of the head of the specific Unit must be notified to the Hellenic Capital Market Commission by submitting the relevant minutes of the meeting of the Board of Directors. The notification deadline is extended, as it is set at 20 days from the change (compared to 10 days in the pre-existing law). The Head of the Internal Audit Unit attends the General Assemblies (article 16).
Remarkable, however, are the changes in the responsibilities of the Internal Audit Unit. In the new law, they are presented more extensively in relation to those of the (previous) Internal Audit Service. Internal control thus becomes more thorough and effective.
8. Code of Corporate Governance
The new law provides as mandatory (Article 17) the adoption and implementation of a Code of Corporate Governance by the companies it concerns. However, it is not obligatory to choose a specific Code. In case of deviations of the one adopted, however, the relevant information should be included in the Corporate Governance Statement, based on article 152 of law 4548/2018.
However, in parallel with the implementation of the new law, the amendment of the, in force today, Greek Code of Corporate Governance is expected.
Details for the implementation of this provision are expected, based on the same provision, from the Hellenic Capital Market Commission.
9. Informing the Investors
The new law introduces, for the first time, a set of provisions (articles 18-20), which aims to investor information.
First, there are obligations of transparency and valid information of the company’s shareholders regarding the candidates to be elected as members of the Board of Directors (article 18). The information takes place by the Board of Directors by posting on the Company’s website. The posting is made twenty (20) days, at the latest, before the General Assembly that will elect them. Content of the information-basically: (a) The justification of the candidate member’s proposal, (b) their detailed CV, (c) the determination of the compliance with the eligibility criteria (according to the eligibility policy of the company), as well as ( d) the satisfaction of the other criteria set by law.
At the same time, a provision is provided for the operation of a Shareholder Service Unit (article 19) and a Corporate Announcements Unit (article 20). The first aims at accurate and equal information of shareholders. Also, in their support, regarding the exercise of their rights. The second aims to provide information to shareholders and the investing public, in accordance with the applicable laws.
10. The Share Capital Increases of the Company and the Differences in the Use of Funds Raised
The obligation to submit a report by the Board of Directors to the General Assembly on the use of the funds that will come from the increase of its share capital is known. We (again) find it in the new law (article 22 par. 1). It is identical to that of Law 3022/2016 (article 9 par. 1). The content of this report concerns issues related to the investment plan and the account of the use of the company’s funds. Those, in particular, that were derived from increases that took place during the previous three years (at least).
Changes are found, however, in terms of the implementation of discrepancies in the use of raised funds. In order to implement such a discrepancy, a special decision of the Board of Directors is required. The specific decision is taken by a majority of three quarters (3/4) of its members. However, in addition, approval from the General Assembly is required. Such a decision of the General Assembly requires an increased quorum and majority.
The new law specifies, with greater clarity, for which deviation the above procedure is required to be followed. Law 3022/2016 was limited to the characterization of the one that is assessed as “significant”. Under the new law, a difference of more than twenty percent (20%) of the total funds raised is significant.
In addition, the new law explicitly provides that the above (regarding the deviations in the use of funds raised by cash payment) also applies in cases of issuing a bond loan with a public offer.
11. Disposal of company assets
The new law makes specific reference in the case of a decision of the General Meeting of a company (which is subject to its regulations) for the disposal of assets that exceed certain limits (article 23). These are the disposal of assets: (a) with one or more transactions, (b) which take place within two (2) years, (c) the value of which represents more than fifty one percent (51%) of the total value of the company assets.
In these cases, the decision of the General Assembly must be taken with an increased quorum and majority (article 130 §§3 & 4, law 4548/2018). However, the possible disposal of assets contrary to the provisions of the preceding paragraphs, does not affect the validity of the relevant decisions (Article 24 §3).
12. Sanctions
In case of violation of the obligations arising from this law, serious penalties are under threat (Article 24). The penalties are imposed by the Hellenic Capital Market Commission – without prejudice to the responsibilities of the Bank of Greece.
The sanctions are clearly stricter compared to Law 3016/2002. The fines that are threatened are much higher. The fine that will be imposed can reach up to 3 million Euros. Based on the current ones, it is possible to impose a fine of 1 million Euros – maximum.
In addition, under the new law, the penalties provided may be imposed on the company. In addition, that is, with the legally obliged natural persons.
However, the amount of the fines has provoked reactions. It is argued that the fines provided for could prove devastating. At the same time, the lack of severe monetary sanctions in other EU Member States in cases of breach of Corporate Governance obligations is pointed out.
The new law on Corporate Governance is moving in the right direction. The objections that have been raised are, to some extent, understandable. However, they are not enough for a negative evaluation.
The overall conclusion remains the same: Corporate Governance best practices (and the new law) will inevitably have a positive effect on competitiveness and growth. And, through them, the Greek stock market and the national economy will be benefitted.
There is no doubt.
Further: As mentioned in the introduction, the new law typically covers only listed companies. At a substantive level we will begin to see its regulations affect, more or less, all companies. This effect will also have a positive impact on competitiveness, growth and, of course, the national economy.
And Lastly: Let us not have any doubt about all these positive provisions of the new law on Corporate Governance.
Let’s welcome it!
(α) Η ελάχιστη ποσόστωση ανά φύλο (συγκεκριμένα: 25% των μελών του πρέπει να είναι γυναίκες) και
Τα κριτήρια που περιλαμβάνονται στην ανωτέρω πολιτική (όπως εξάλλου και η εξειδίκευσή τους), ορίζονται (κατά βάση) από την εκάστοτε εταιρεία. Θεσπίζονται από τη Γενική της Συνέλευση και οφείλουν να αναρτώνται στον ιστότοπό της.
Stavros Koumentakis
Managing Partner
Disclaimer: the information provided in this article is not (and is not intended to) constitute legal advice. Legal advice can only be offered by a competent attorney and after the latter takes into consideration all the relevant to your case data that you will provide them with. See here for more details.