Corporate Governance in the UK, USA
and Belgium
Andrew Bloom
www.steptoe.com
16 June 2009
What is Corporate Governance?
The UK Government’s View

“Transparency and accountability are the most
important elements of good corporate governance.
This includes:



Source: BERR
the timely provision by companies of good quality
information;
a clear and credible company decision-making
process;
shareholders giving proper consideration to the
information provided and making considered
judgements.”
What is Corporate Governance?
The Accountants’ View

“Corporate governance is… a system by which
organisations are directed and controlled. It is the
process by which company objectives are
established, achieved and monitored. Corporate
governance is concerned with the relationships and
responsibilities between the board, management,
shareholders and other relevant stakeholders within a
legal and regulatory framework.”
Source: ICAEW
Sources of Corporate Governance
rules in the UK
 The corporate governance framework in the UK operates at a
number of levels:

internal company rules and industry codes of practice

companies’ constitutions or articles of association

common law, i.e. past cases

legislation, particularly the Companies Act

regulation and in particular for listed companies through
the Listing Rules and other corporate governance rules
(responsibility of the Financial Services Authority)

Combined Code (responsibility of the Financial Reporting
Council)
Companies Act 2006
 Directors’ fiduciary and other duties have been codified
in sections 170-177 Companies Act 2006
 Have effect in place of common law rules and equitable
principles but interpreted in the same way
 Duties owed by directors and shadow directors to the
company (i.e. not directly owed to shareholders)
Companies Act 2006 –
Directors’ Duties






Act within powers
Exercise independent judgment
Exercise reasonable care, skill and diligence
Avoid conflicts of interest
Not to accept benefits from third parties
Declare an interest in a proposed transaction
or arrangement
Duty to promote success of the
company
A director… must act in the way he considers, in good faith,
would be most likely to promote the success of the company for
the benefit of its members as a whole, and in doing so have
regard (amongst other matters) to • the likely consequences of any decision in the long term,
• the interests of the company's employees,
• the need to foster the company's business relationships with
suppliers, customers and others,
• the impact of the company's operations on the community and
the environment,
• the desirability of the company maintaining a reputation for
high standards of business conduct, and
• the need to act fairly as between members of the company
Derivative Claims



May only be brought for an actual or
proposed act or omission involving
negligence, default, breach of duty or breach
of trust by a director
Cause of action on behalf of the company
against director or another person or both
Require Court permission to pursue claim
Combined Code on Corporate
Governance
 Applies to companies admitted to listing by the UK Listing



Authority and incorporated in the UK
Compliance not mandatory but non-compliance must be
explained to shareholders - i.e. “comply or explain”
Two sections:

companies’ responsibilities

institutional shareholders’ responsibilities
Key principles deal with the following areas:

directors

remuneration

accountability and audit

relations with shareholders

institutional shareholders
Combined Code – Main Aims

Covers the key areas vital to the success of any
company:



the need for an effective board which provides
entrepreneurial leadership and which interacts
effectively with shareholders so that there is an
informed dialogue
board balance in terms of the representation of
executive, and independent non-executive directors,
in order to avoid concentrations of power and
encourage balanced decision-making
ensuring that effective controls are in place to
manage risks
Combined Code - Summary

Role and Composition of the Board

Single board of appropriate size, members collectively responsible

Division of responsibilities for running board and running
company; no individual has unfettered powers

Balance of exec and independent non-exec directors

Larger companies at least 50% independent non-execs

Smaller companies at least 2 independent non-execs

Formal, rigorous and transparent procedures for appointing directors

Appropriate and timely information to board, induction, regular training

Annual performance evaluation of board and committees

All directors to be elected at first AGM and subject to re-election at
least every three years
Combined Code - Summary

Remuneration





aim to attract, retain and motivate directors of
quality to run company successfully without paying
more than is necessary, link to corporate and
individual performance
formal and transparent procedures
no director involved in deciding own remuneration
remuneration committee must be made up of
independent directors
vote for shareholders on new long-term incentive
schemes
Combined Code - Summary
 Nominations


nomination committee majority independent non-execs
chairman permitted to chair nominations committee, except where
committee is considering appointment of chairman’s successor
 Accountability and audit

board responsible for
• presenting a balanced assessment of company’s position and
prospects (including interim and other price sensitive reports)
• maintaining sound systems of internal control and risk
management and review annually


formal and transparent procedures for carrying out responsibilities
audit committee made up of independent directors, at least one to
have recent and relevant financial experience
Combined Code - Summary
 Dialogue with shareholders based on mutual understanding of
objectives –board as a whole responsible



shareholder views communicated to board as a whole
maintain contact with major shareholders and individual
directors
separate resolutions at AGMs
 Institutional Shareholders




institutional shareholders to enter into a dialogue with
companies based on mutual understanding of objectives
institutional shareholders have a responsibility to make a
considered use of their votes and give explanations to the
company if do not accept company’s position
avoid box ticking approach to corporate governance
consider size and complexity of company and nature of risks
and challenges it faces
Sources of Corporate Governance
Rules in the US
 Historically, corporate governance was defined by laws of state
of incorporation
 Fundamental aspect of Federalism assumes regulatory
differences between states reflect differences in values,
interests, etc.
 States can be laboratories for testing new concepts, e.g.
Cumulative Voting for director appointments in California
 Companies naturally flock to jurisdictions offering governance
rules and processes attractive to investors, e.g. Delaware for
public companies
US Corporate Governance Increasingly
Dictated by Federal Regulation

Congress and SEC have long used securities
regulation disclosure requirements to influence
corporate decision making

Sarbanes-Oxley following Enron and WorldCom –
marked a significant step-up in establishing national
standards for public company board and
management governance
Corporate Governance - US

Fiduciary duties and the Delaware
Governance Model



Duty of care
Duty of loyalty
Business Judgment Rule
Corporate Governance - US
 Fiduciary duty trends


1980’s: M&A boom, hostile takeovers, poison pills, and
golden parachutes provide “stress test” to existing
standards on care and loyalty
1990’s: Caremark (filed 1994, decided 1996)
• “[O]nly a sustained or systematic failure of the
board to exercise oversight – such as an utter failure to
attempt to assure that a reasonable information and
reporting system exists – will establish the lack of
good faith that is a necessary condition to liability.” In re
Caremark Int’l Derivative Litig., Delaware Chancery Court 1996
Corporate Governance - US

Fiduciary duty trends, continued


The late 90’s dot-com boom/bust, and the
age of Enron and WorldCom
Personal liability concerns and the WorldCom
settlement
Corporate Governance - US

US case law appears to be swinging back in favour of
boards and deference to their business judgment and
sound governance principles

The Disney decisions


Underlying action: board approval of Ovitz termination/
severance agreement ($140 million for 12 months)
Negligence and personal liability must be predicated on
failure to act in good faith: i.e., where there is an
“intentional dereliction of duty” and “conscious disregard
for one’s responsibilities” In re The Walt Disney Co. Derivative Litig.,
Delaware Chancery Court 2005, affirmed by the Delaware Supreme Court, 2006
Main provisions of Sarbanes-Oxley
Act of 2002
 The provisions and requirements of the Act include:





Measures intended to enhance the independence of external
auditors, including the mandatory rotation of audit partners,
restrictions on the non-audit services that may be provided by
external auditors and limitations regarding the employment of
external auditor personnel by client companies
Measures intended to enhance the independence of members of
audit committees of listed companies and the effectiveness of
audit committees
Requirements for CEOs and CFOs personally to certify the
contents of periodic reports, with significant criminal penalties for
knowing false certifications
Enhancements to the ability of the SEC to prohibit persons from
serving as directors and officers
A prohibition on "insider" trades during pension fund blackout
periods
Main provisions of Sarbanes-Oxley
Act of 2002






Establishment by the SEC of a compensation fund for
investors
Rules requiring disclosure of off-balance sheet
transactions, the use of pro forma financial information,
management reports on the effectiveness of internal
controls and the adoption (and waivers) of codes of ethics
for senior financial officers
Prohibition on loans to directors and executive officers
Rules requiring rapid and current disclosure, in plain
English, of material changes in the financial condition or
operations of public companies
Creation of new criminal offences regarding securities fraud
and the destruction of documents and the increase of
criminal penalties
New protections for whistleblowers
Possible Forthcoming US Changes







SEC pressed to pursue enforcement agenda
Federalised corporate governance standards are on the rise
Say on pay appears likely
Shareholder activists have new momentum
Changes by SEC and new Delaware rules (and similar changes
in other states’ corporate laws) likely will encourage more
shareholder activism
Pressure to add majority vote provisions for election of directors
combined with change to NYSE rules likely will make it harder to
get elected, and combined with changes to proxy access rules,
likely to increase number of contested elections
Bylaw changes should be considered in light of how they will
affect company’s anti-takeover defences
Sources of Corporate Governance rules
in Belgium

Belgian Corporate Governance regime is based on a composite of
legal sources:

Company law and financial legislation (hard law)

Governance codes (soft law)

2002: introduction of the Corporate Governance Law

modified the Belgian Code of Companies and financial
legislation

introduced basic Corporate Governance principles

Parallel to hard law, two corporate governance codes were issued:

Corporate Governance Code (stock exchange listed
companies)

Code Buysse (non-listed entities)

Specific governance directives for insurance companies
Belgian Corporate Governance
Legislation for Listed Companies

Composition of the board

Collegial board (i.e. collective responsibility, secrecy of
deliberations, decisions by committees bind entire boards)

Minimum 3 directors, directors dismissed at will

Conflicts of interest

Strict legal provisions on conflicts of interest (i.e. required
advice by a committee composed of independent directors)

Installation of an audit committee

Composed of executive and independent directors

Exemption for smaller companies

Tasks include the monitoring of the internal / statutory audit,
financial reports, annual accounts

External audit

Focus on independence of the auditor

Appointment and remuneration by shareholders’ meeting
Belgian Corporate Governance
Code 2009 for Listed Companies







New update in 2009 (after financial crisis)
contains principles, provisions and guidelines for Belgian listed companies
complementary to existing Belgian law
structured around the comply or explain approach
transparency through disclosure via:

Corporate Governance Charter, posted on the company’s website

Corporate Governance Statement, a section of the annual report
Key innovations:

Composition of the Board:
• Based on gender diversity and diversity in general
• Half of the board should comprise non-execs and at least three of
them should be independent directors
Specialized committees:

Audit Committee (in accordance with Belgian legislation)

Nomination Committee (recommendations with regard to the
appointment of CEO and other members of the executive management)

Remuneration Committee (makes proposals on the remuneration policy
for non-execs)
Corporate Governance in Belgium


Remuneration:
 Should be ‘fair and responsible’
 Structured so to link rewards to corporate and individual
performance
 Disclosure of remuneration of directors and managers (through
remuneration reports)
 Severance pay should not exceed 12 months’ basic and variable
remuneration
Communication with shareholders
 Based on a mutual understanding of objectives and concerns
 Disclosure of major shareholders and key elements of shareholders’
agreements
 Appropriate explanations on agenda items and resolutions
 Board should try to persuade controlling shareholders to respect
the interests of minority shareholders and to respect the Code.
….and finally
The Marquis of Bute (1892)
The Marquis of Bute was president of
the Cardiff Savings Bank. The post
was a sinecure, first bestowed on him
when he succeeded his father at the
age of six months. The Marquis only
ever attended one board meeting, did
not read any of the papers sent to him
and played no part at all in the bank’s
affairs. The management of the
company was left to other directors.
The bank became insolvent as a result
of a fraud, and the liquidator claimed
the Marquis should be liable to make
up some of the lost funds. The court
held that the Marquis had no
knowledge of the fraud and was
entitled to rely on the more expert
directors to detect any problems.
This communication is provided by Steptoe & Johnson for educational and informational purposes only
and does not constitute the rendering of legal advice or other professional services. No lawyer−client
relationship is created, nor is there any offer to provide legal services by the distribution of this
publication.
Andrew Bloom
abloom@steptoe.com; Tel: +44 (0)20 7367 8058
www.steptoe.com
16 June 2009