Source :PLC
5.
In relation to non-executive, supervisory or independent directors:
· Are they recognised?
· Does a part of the board have to consist of them? If
so, what proportion?
· Do non-executive or supervisory directors have to be
independent of the company? If so, what is the test for independence or what
makes a director not independent?
· What is the scope of their duties and potential
liability to the company, shareholders and third parties?
France
Law stated as at 01-Apr-2011
· Recognition. There
are no obligations regarding independent directors. However, the corporate
governance codes of best practice see
Question 1 recommend their appointment to guarantee the overall
independence of the board. In practice, numerous listed companies have
appointed independent directors in recent years.
· Board composition. Board members in unitary structures are all executive
directors, in particular, the chairman of the board, when he also acts as CEO,
is the legal representative of the company. In dual structures, members of the
management board are all executive directors and members of the supervisory
board are all non-executive directors.
· Independence. Independence
is not defined by the law. The AFEP-MEDEF code defines an independent director
as someone having no other relationship of any kind whatsoever with the
company, its group or its management that could compromise his freedom of
judgement. It is recommended that at least one-third of board members (one half
in widely-held companies with no controlling shareholder) should be independent
directors.
· Duties and liabilities. There is no legal distinction between executive,
non-executive and independent directors in terms of duties and liabilities.
Germany
Law stated as at 01-Apr-2011
· Recognition and board composition. As German AGs have a two-tier board structure (see Question 3, Structure), members of the supervisory board cannot form part
of the management board while they serve on the supervisory board. The AktG
requires a cooling-off period according to which members of the management
board can only become members of the supervisory board of the same company
after two years, except if the shareholders vote otherwise.
· Board composition. The
supervisory board is separate from the management board (see above,
Recognition and board composition).
· Independence. During
the recent legal reform, there have been several efforts to strengthen the
independence of the supervisory board members. In 2009, the AktG introduced the
financial expert as a compulsory independent member of the supervisory board.
The DCGK recommends a "sufficient amount" of independent supervisory
board members to ensure objective advice to and supervision of the management
board. According to the DCGK, independence means the absence of any business,
financial or personal relationship with the company or its management board
which could give rise to a conflict of interest. However, there is no specific
test for independence.
· Duties and liabilities. As the supervisory board is not involved in the
day-to-day management of the company, the duties of its members focus on the
supervision and consulting of the management board. Generally, all members of
the supervisory board owe the same duties to the company. However, with the
ongoing discussion regarding the professionalisation of the supervisory board,
different duties evolve with the introduction of more specialised members such
as the financial expert (see above, Independence). The supervisory board
members that breach their duties are liable to the company with respect to the
damages incurred. Liability towards the shareholders and third parties arises
only in exceptional circumstances that usually require wilful misconduct.
India
Law stated as at 01-Apr-2011
· Recognition. Non-executive,
supervisory and independent directors are recognised under Indian law.
· Board composition. In the case of a listed company, at least 50% of the
total number of directors must be non-executive directors. If the chairman of a
company is a non-executive director, the non-executive directors can form
one-third of the total number of the company's directors. There are no similar
requirements in relation to private companies and unlisted public companies.
· Independence. Clause
49 of the Listing Agreement sets out the following criteria for determining
independence of directors:
o apart from receiving director's remuneration, an
independent director should not have any material monetary relationships or
transactions with the company, its promoters, its directors, its senior
management or its holding company, its subsidiaries and associates that may
affect the director's independence;
o an independent director is not related to promoters of
the company or persons occupying management positions at the board level or at
one level below the board;
o an independent director should not have been an
executive of the company in the preceding three financial years;
o an independent director is not a partner or an
executive, or was not partner or an executive during the preceding three years,
of any of the following:
§ the statutory audit firm or the internal audit firm
that is associated with the company; and
§ the legal firm(s) and consulting firm(s) that have a
material association with the company.
o an independent director is not a material supplier,
service provider or customer, or a lessor or lessee of the company;
o an independent director is not a substantial
shareholder of the company (that is, owning 2% or more of the block of voting
shares);
o an independent director must be at least 21 years old.
· Duties and liabilities. The duties and liabilities of an independent
director are as follows:
o duty of care (although the extent of responsibility of
an independent director may differ from that of an executive director). A
director must exercise independent judgement with reasonable care, diligence
and skill which should be reasonably exercised by a prudent person with the
knowledge, skill and experience that may reasonably be expected of a director
in his position and any additional knowledge, skill and experience that he has;
o to contribute to, and constructively challenge,
development of the company strategy;
o to scrutinise management performance;
o to satisfy himself that the financial information of
the company is accurate and ensure that robust risk management is in place;
o to have a greater exposure to major shareholders (this
particularly applies to senior independent directors).
The Netherlands
Law stated as at 01-Dec-2012
There
are no restrictions on the person who can be appointed managing director. A
managing director can be:
· A natural person or a legal entity.
· Part of the group to which the company is a
subsidiary.
· An independent director.
The
articles may set out criteria for eligible managing directors. However, these
criteria can be disregarded by the general meeting by a majority vote equal to
the majority required to amend the articles. For public companies, a vote by a
qualified majority and quorum is required.
There
are no formal age restrictions on directors. Technically any person of any age
or legal capacity can be appointed as director. There is no mandatory
retirement age.
Dutch
law imposes no restrictions on the identity of directors. However, restrictions
can be set out in the articles.
For
companies to qualify for certain tax exemptions, the tax requirement of
substance needs to be met whereby the tax authorities may require that the
majority of the managing directors be Dutch residents. Companies offering
management services (trust offices) often provide Dutch (legal) persons or
residents to sit on the board alongside the representatives of the foreign
parent company. This position should not be pro forma: it is
important that the board members provided by trust offices make their own
independent assessment when performing management tasks at the instruction of
the parent company.
In
large companies, the management board and supervisory board must set out
specific diversity objectives in relation to the composition of the supervisory
board, including with regard to gender and age.
There
are no legal quotas for males and females on the boards. However, the Amendment
Management and Supervision will introduce a quota (see Question 37). The CGC prescribes as a principle for the
supervisory board to aim for diverse composition in terms of, for example,
gender and age.
UK (England and Wales)
Law stated as at 01-Apr-2011
· Recognition. Non-executive
directors are not recognised under UK company law. However, the Code does
recognise a difference and places great reliance on the separate role of
independent non-executive directors.
· Board composition. A
Code Provision recommends that FTSE 350 companies should have at least as many
independent non-executive as executive directors (not counting the chairman),
and that other companies subject to the Code should have at least two
independent non-executive directors. Some major companies have the chief
executive and the finance director as the only executive directors, with
non-executive directors comprising the remaining board members.
There are no equivalent rules for private companies or
other public companies which do not have a premium listing.
· Independence. The
Code suggests that the independence of non-executive directors may be lost if
the director:
o has been an employee of the company or group within
the previous five years;
o has, or within the previous three years has had, a
material business relationship with the company, either directly or as a
partner, shareholder, director or senior employee of a body that has such a
relationship with the company;
o receives or has received remuneration from the company
apart from a director's fee, participates in the company's share option or a
performance-related pay scheme, or is a member of the company's pension scheme;
o has close family ties with any of the company's
advisers, other directors or senior employees;
o holds cross-directorships or has significant links
with other directors through involvement in other companies or bodies;
o represents a significant shareholder;
o has served on the board for more than nine years.
The Code intends these factors to be examples of what
may constitute a lack of independence in a non-executive director. It is for
the board as a whole to decide whether a non-executive director is
"independent in character and judgement and whether there are
relationships or circumstances which are likely to affect, or could appear to
affect, the director's judgement". If, despite contravening one of the
factors above, the board decides a director is independent, an explanation of
their reasoning in the annual report will satisfy the obligation to comply or
explain.
· Duties and liabilities. The duties and liabilities of non-executive
directors are in theory the same as those of executive directors. In practice,
non-executive directors are not engaged in the day-to-day management of a
company's business and therefore, they will often not be the first target for
third parties who allege some failing on the part of a company's management.
One of the duties owed by a director to his company is
to exercise reasonable care, skill and diligence. This involves both an
objective test (the general knowledge, skill and experience to be expected of
all directors), and a subjective test (the general knowledge, skill and
experience that the particular director has). A non-executive director who is a
chartered accountant, for example, is expected to use his financial knowledge
and experience when exercising his duties.
United States
Law stated as at 01-Dec-2012
There
is no statutory age limit imposed on directors of corporations. A corporation
may, however, impose these restrictions in its certificate of incorporation,
bye-laws or corporate governance guidelines. However, 79 of the Top 100 US
Companies have disclosed a mandatory retirement age for their non-employee
directors with 33 of these companies permitting exceptions to be made by the
board or a board committee. Of the companies that have a mandatory retirement
age, the majority impose a retirement age of 72. It is common practice for
employee directors (other than the chairman under certain circumstances) to
retire from the board when they retire from employment with the company (2012
S&S Corporate Governance Survey).
Generally,
there are no nationality restrictions on directors, although nationality may be
relevant in some regulated industries. In addition, a director need not be a
resident of the state in which the corporation is incorporated.
While
there is no requirement to have a certain number of men or women on a board,
most boards strive to have their boards be diverse in as many ways as possible,
including with respect to professional experience, cultural background as well
as gender.
6. Are the roles of individual board members
restricted? For example, can one person be the chairman and chief executive?
France
Law stated as at 01-Apr-2011
Depending
on the bye-laws, the roles of chairman and CEO can be separated or held by the
same person. A natural person can only hold one position as CEO (two under
certain circumstances) and cannot hold more than five offices of director at
any one time, although directorships with a parent company and its unlisted
subsidiaries count as one. This limitation does not apply to legal entities;
however, the position of permanent representative is taken into account.
Although a director cannot enter into an employment agreement with the company,
an employee can become a director and continue working as an employee under
certain conditions.
The
same restrictions apply to members of the supervisory board. A management board
member cannot simultaneously sit on the supervisory board of the same company.
One person cannot hold more than one seat on a management board at the same
time (a second office can be held in a controlled company).
Germany
Law stated as at 01-Apr-2011
The AktG restricts the roles of individual board
members. Members of the supervisory board cannot be members of the management
board at the same time and vice versa. In addition, legal representatives of
controlled companies cannot be members of the supervisory board of the
controlling company.
India
Law stated as at 01-Apr-2011
One of the board members can be the chairman and the
chief executive provided this authorised by the articles of association and the
board. Recommendations have been made that the chairman and chief executive
should not be the same person but these recommendations are not binding.
The Netherlands
As stated as at 01-Dec-2012
Currently
under the DCC, the role of a non-executive director is recognised as a member
of the supervisory board in a company with a two-tiered board structure. The
DCC does not expressly provide for a one-tiered structure and therefore does
not recognise a non-executive director as a member of the management board in a
one-tiered structure (seeQuestion 4, Structure). As of 1 January 2013, the Amendment Management and
Supervision will amend the DCC and introduce a statutory base for a one-tier
board consisting of executive and non-executive directors.
In
a two-tiered structure, the supervisory board performs the role of
non-executive directors. The CGC recommends that in a one-tiered structure, the
majority of the members of the management board be non-executive directors.
Supervisory directors or non-executive directors can only be natural persons.
The
Amendment Management and Supervision introduces additional criteria regarding
the maximum number of positions in a supervisory role (see Question 37). Similar restrictions are already recommended by the
CGC, for example, individuals should not have more than five supervisory
positions with Dutch listed companies (chairmanship of a supervisory board
counts as two).
Supervisory
directors must be guided by the interests of the company and its business when
performing their duties. Large companies cannot appoint the following people as
supervisory directors:
· Employees of the company.
· Employees of a subsidiary of the company.
· Officers and employees of an employees' organisation
usually involved in establishing the employment terms of employees of the
company or its subsidiaries.
The
CGC recommends that the executive directors should be independent of management
and free from any relationships (business or otherwise) with the company that
may interfere with their independence. The CGC sets out criteria for
determining whether a non-executive director is independent and recommends that
the annual report states whether these criteria have been met.
The
supervisory board's duties consist of supervising the management board policy
and the company's general state of affairs. Generally, the liability of the
management board and supervisory board is collective. This means that every
managing director can be held jointly and severally liable for damages caused
by the management board's failure (seeQuestion 16, General duties). In addition, every supervisory director can be held
jointly and severally liable if it is determined that the supervisory board has
failed to properly supervise the failing management board.
UK (England and Wales)
Law stated as at 01-Apr-2011
There are no restrictions in UK law as to the
positions that may be assigned to company directors. The Code contains a Main
Principle, which provides that "there should be a clear division of
responsibilities at the head of the company between the running of the board
and the executive responsibility for the running of the company's business. No
one individual should have unfettered powers of decision." A related Code
Provision explicitly prohibits one person acting as both chairman and chief
executive, but as that is to be applied on a "comply or explain"
basis, it remains open to companies to combine the roles if they can explain
why they believe they have no alternative and can still keep to the spirit of
the Main Principle.
United States
Law stated as at 01-Dec-2012
Federal
securities laws require disclosure of the names of directors who are
independent.
The
NYSE and Nasdaq require the board to consist of a majority of independent
directors. 50 of the Top 100 US Companies have adopted policies requiring more
than a simple majority of directors to be independent (2012 S&S
Corporate Governance Survey). State law does not place any restrictions on
a board's composition.
The
NYSE and Nasdaq have somewhat different rules for determining whether a director
is independent. A director must not fall within one of the categorical
standards of the exchange that would prohibit a board from determining that the
director in question is independent. Corporations must identify their
independent directors and under NYSE rules, disclose the basis for that
determination. This disclosure is usually contained in the corporation’s annual
report or proxy statement filed with the SEC. Both the NYSE and Nasdaq require
that independent directors have regularly scheduled meetings, referred to as
executive sessions. The NYSE and Nasdaq listing standards differ slightly in
this respect. The NYSE rules require either non-management directors or
independent directors to meet at regularly scheduled executive sessions. In
addition, if a company chose to include all non-management directors, it should
hold an executive session including only independent directors at least once a
year. The Nasdaq listing standards require executive sessions of independent
directors only to occur at least twice a year.
Non-executive
directors owe fiduciary duties to the shareholders of the company. In short,
these duties are the duty of loyalty and the duty of care. Directors may have
liability for breaches of these duties under certain circumstances. However,
the directors of most US corporations have some liability protection coverage
in their bye-laws and/or in indemnification agreements with the corporation as
well as through D&O insurance coverage.
France
Law stated as at 01-Apr-2011
Unless
otherwise stipulated in the bye-laws, the maximum term of appointment is:
· Unlisted companies: three years for initial directors,
and six years for directors appointed thereafter.
· Listed companies: six years in all cases.
Directors
can be reappointed.
The
term of appointment of supervisory board members is the same as for directors.
Management board members are appointed for terms of between two and six years,
as determined by the bye-laws.
Germany
Law stated as at 01-Apr-2011
Management board. Management board members can be appointed for a maximum
term of five years. Reappointment and extension of the term are permitted but
require a further decision of the supervisory board. The DCGK recommends that
the initial appointment to the management board should not be for the maximum
of five years.
Supervisory
board. The term of a supervisory board member
depends on the periods of shareholders' meetings (seeQuestion 7, Appointment of directors,
Supervisory board). Generally, the term is about five
years. Reappointment is permitted.
India
Law stated as at 01-Apr-2011
In the case of public companies and private companies
which are subsidiaries of public companies, one-third of the total number of
directors are permanent directors and two-thirds of the directors are
rotational directors. One-third of the rotational directors must retire by
rotation at every annual general meeting. The term of any director required to
retire by rotation cannot exceed three years and this term can be extended by
re-appointment only. A director retiring by rotation can be re-appointed at the
same annual general meeting.
The
above provisions do not apply to private companies, unless the articles of
association of a private company specifically provide for a term of the
directors' appointment.
The Netherlands
Law stated as at 01-Dec-2012
The
shareholders appoint managing directors in a general meeting of shareholders
(general meeting). The articles can provide that managing directors are
appointed by a meeting of holders of shares of a certain class or designation,
or by the sole holder of a share of a certain class or designation as far as
all shareholders can vote for the appointment of at least one managing
director. The articles can also provide for appointment from a nomination made
by a different corporate body of the company, which nomination may be ignored
by the general meeting resolving at qualified majority and quorum.
The
same applies to supervisory directors, whereby the articles can provide for the
option that one-third of the supervisory board is appointed by a different
corporate body than the general meeting.
If
a company has a works council, it must be given the opportunity to advise on a
proposal to appoint, suspend or remove managing directors.
In
large companies, the supervisory board informs the general meeting about the
intended appointment of a managing director before it appoints him. Supervisory
directors of large companies are appointed by the general meeting from a
nomination made by the supervisory board. A general meeting can overrule the
nomination of the supervisory board by a resolution passed by a majority of
votes cast and quorum. The works council and a general meeting can make
recommendations about candidates for the nomination of the supervisory board.
In addition, the works council can recommend candidates for nomination for at
least one-third of the supervisory board, with limited grounds for the
supervisory board to deviate from this nomination (enforced nomination right).
The
articles may set out different principles for appointing directors.
The
company body entitled to appoint directors can also suspend and dismiss them at
any time if certain requirements are met. The articles can provide that a
different corporate body can also dismiss managing directors and that
supervisory directors can also be dismissed by the general meeting. The
supervisory board can at any time suspend managing directors, unless the
articles provide otherwise, this suspension can be lifted by general meeting.
In particular, based on the principle of reasonableness and fairness, a
director must be given the opportunity to defend himself against the intended
removal.
In
large companies:
· The supervisory board removes managing directors after
consulting with the general meeting.
· The general meeting can dismiss the entire supervisory
board by a vote of no confidence, after which the Company Division of the
Amsterdam Court of Appeal will appoint one or more supervisory directors, on a
temporary basis, to ensure the new supervisory board is nominated.
· The general meeting cannot dismiss supervisory
directors individually (but it can request the Company Division of the
Amsterdam Court of Appeal to do so).
Case
law provides that the dismissal of a managing director automatically results in
the termination of that member's employment relationship with the company (if
any (see Question 10, Directors employed by the
company)), possibly giving rise to the company
having to pay compensation through severance payments. Automatic termination of
the employment relationship can only be prevented if the director being removed
agrees to continue his employment relationship.
UK (England and Wales)
Law stated as at 01-Apr-2011
Restrictions on a director's term of appointment may
be contained in a company's articles. They may say that one-third of directors
should put themselves forward for re-election each year, or that each director
should stand for re-election every three years.
In
relation to FTSE 350 companies, such rules have now been overtaken by a Code
Provision, which recommends that all directors stand for re-election each year.
Smaller companies with a premium listing are encouraged to do the same. If they
don't, they remain subject to the previous recommendation that directors be put
forward for re-election at the first general meeting after their appointment
and at three-yearly intervals after that. Once a non-executive director has
served for nine years, the Code provides they should, in any event, stand for
re-election each year.
Subject
to rules on re-election, non-executive directors of listed companies are
usually appointed for three-year terms which may be renewed.
If
a director is given a guaranteed term of employment of more than two years,
shareholder approval must be obtained.
United States
Law stated as at 01-Dec-2012
Nomination. Generally, directors are nominated by the board for
election at the annual shareholders’ meeting (AGM). Companies listed on the
NYSE normally must have a nominating/governance committee, composed entirely of
independent directors, that identifies individuals qualified to become board
members and recommends their nomination to the board. The Nasdaq has similar
requirements, but does not require a formal committee.
Activist
shareholders may also submit their own director nominees to a shareholder vote
in what is referred to as a proxy contest. Currently, shareholders are allowed
to conduct a proxy contest under SEC rules and can recommend to other
shareholders one or more director candidates. However, shareholders find this
process cumbersome and costly as they must provide proxy materials to other
shareholders at their own cost. There has been much debate in recent years as
to the circumstances, if any, under which shareholders should be able to
nominate directors using the company’s proxy materials (commonly referred to as
"proxy access"). After a proposed SEC rule that would have allowed
shareholders to have proxy access for all companies was struck down by a
federal court, the SEC's rule permitting shareholders on a company-by-company
basis to propose proxy access became effective.
In
2009, Delaware enacted important changes to its General Corporation Law
(effective on 1 August 2009) to permit companies to adopt bye-law amendments
that:
· Allow proxy access.
· Fix a record date for voting rights that is different
from the record date for notice of meetings.
· Permit reimbursement of proxy contest expenses.
Election. Directors are elected by shareholders at the AGM.
State corporate laws generally provide that directors are elected by a
plurality vote, in which a director nominee who receives the highest number of
votes cast for an open director’s seat is elected to that position. Under the
plurality voting standard, the only votes that count are votes that are cast
for a director; withhold votes have no effect. However, there has been a significant
movement toward adoption of a majority voting standard for election of
directors in the past several years. Under most majority voting standards,
directors must be approved by more than 50% of the votes cast.
Pressure
from shareholders on voting standards in director elections has resulted in a
dramatic increase in the number of companies adopting a majority vote standard.
91 of the Top 100 US Companies now require directors to be elected by a
majority of the votes cast, up from 11 companies in 2006 (2012 S&S
Corporate Governance Survey). Of those 91 Top 100 US Companies, 81 require
incumbent directors to submit their resignation from the board following their
failure to receive a majority of the votes cast in favour of their election.
Of
the remaining 9 Top 100 US Companies that continue to elect directors by a
plurality of the votes cast, seven have adopted a policy that nominees
receiving more votes withheld than votes for their election must submit or
tender their resignation from the board.
Broker
non-votes. In the US, a meaningful amount of
the shares of US public companies are held by retail investors in brokerage
accounts. Brokers that hold their customers’ shares on behalf of the beneficial
owner but registered in the broker’s name, are said to hold those shares in
“street name”. Under NYSE Rule 452, brokers who hold shares in street name, and
who do not receive voting instructions from the shares’ beneficial owners, can
use the shares’ voting rights in their discretion to vote on routine matters.
Under
a former version of NYSE Rule 452, routine matters included uncontested
director elections. As a result, brokers who held shares in street name, and
who did not receive voting instructions from the shares’ beneficial owners,
typically voted those shares in favour of the director nominees in the
company’s proxy statement. However, amendments to NYSE Rule 452 have made the
uncontested election of directors a non-routine matter, thereby preventing
brokers from being able to vote on the election of directors without specific
voting instructions from beneficial owners of the shares. This rule also
affects companies listed on other exchanges, such as Nasdaq, as the rule
applies to the brokers, who are members of, and are subject to the rules of,
the NYSE.
State
law and the corporation’s certificate of incorporation and bye-laws set out the
methods for removal. Generally, directors can be removed by the corporation’s
shareholders or pursuant to judicial proceedings. Shareholders can usually, by
a sufficient vote, remove any director or the entire board with or without
cause, although removal of directors where the board is staggered may be
subject to different rules. Vacancies can generally be filled by a majority of
the directors then in office, even if there are fewer directors than the
quorum. A company’s certificate of incorporation and bye-laws may also permit
shareholders to fill vacancies.
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