Legal Framework for Corporate Governance of Luxembourg companies

Luxembourg, December 2015

Monique BachnerBachner Legalmbachner@bachnerlegal.com +352 621 514632

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Agenda1. Governance => Corporate governance

Definitions & Why it matters

2. The international governance framework

3. The EU governance framework

4. Luxembourg Board structures

5. The Luxembourg governance framework• Luxembourg law on commercial companies• Director duties and responsibilities• Managing liabilities• Looking to the future

6. Governance Institutes – ILA, the Luxembourg Institute of Directors

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Corporate governance – Definition

Governance from the Greek verb κυβερνάω [kubernáo] = „to steer”

Corporate governance = ....Complex web of relationships. Multi-faceted - no single definition

= the way companies organize relationships with stakeholders through their management and their board of directors, in order to provide structures through which Company objectives are set (and monitored)

What can good Corporate Governance Achieve?• Good corporate governance:

• improves the long-term performance of companies (Hermes, 2014)

• adds value to portfolios – it’s as simple as that. (Morley 2006)• Enhances share prices

(on average, 12-14% higher in developed markets and 25-30% higher in emerging markets. (McKinsey 2000)) 3

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Modern organisations - separation of ownership and control:the Principal/Agent Dilemma

• Principals (shareholders and other stakeholders) delegate decision rights to the management to act in the principal's best interests.

• separation of ownership from control => system of corporate governance controls is implemented to attempt to align the incentives of managers with those of shareholders.

Corporate governance – Why it matters (1)

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Rising awareness of Corporate Governance issues:driven by crises and scandals

Corporate governance – Why it matters (2)

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1980 US – tensions between companies and institutional shareholders

UK – major corporate scandals (e.g. Barings Bank 1995) Other countries – similar pattern US – major corporate scandals (Enron 2001, Worldcom 2002) Europe - Parmalat 2003 (Italy), Siemens 2004 (Germany)

From 2007 - The global financial crisis leads to lessons learnt for Corporate Governance in banks, especially risk management

2012 - LIBOR scandal (Barclays and up to 20 banks)

2012 - EU Green Paper 2015 - Updated OECD principles More governance failures (Toshiba, Volkswagen) More focus on culture, behaviour, ethics, sustainability? More rules?

Towards 2020

2010

2000

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Corporate governance – the international framework

Modern corporate governance - only since late 1970s• International Bodies - General

Guidelines

• “Ten Principles” – UN Global Compact (2000) www.unglobalcompact.org

• OECD Principles on Corporate governance (2004 & 2015) • Promote & facilitate rights & duties

of shareholders/stakeholders, • board responsibilities,• disclosure & transparency

• IOSCO reports – various (since 2005)

• Worldwide now over 120 corporate governance codes http://www.ecgi.org/codes/all_codes.php

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“Comply or Explain”

• principles vs. rules

• Preserving governance through disclosures

• quality disclosures©2015

Corporate Governance - the EU frameworkEuropean Union• Bolkestein/Winter Report of High Level Group of Company Law Experts

2002 “A modern regulatory framework for company law in Europe”

• Independent directors 2004

• Remuneration listed companies 2004 & 2009

European Union Green Paper on Corporate Governance 2011

• European Union Action Plan on Company Law and Corporate Governance 2012

• EU Directive on Board Composition November 2012

• EU Directive on disclosure of non-financial and diversity information Nov 2014

• Revision of the Shareholder Rights Directive 2014 and continued

UK• The Stewardship Code revised Sept 2012 (voting by institutional shareholders)

• The UK Corporate Governance Code revised Sept 2014

• The Davies Reports: Women on Boards 2011 & 2014

Luxembourg• 10 Principles of the Luxembourg Stock Exchange

3rd Edition

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Typical types of Luxembourg board structure

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• Luxembourg companies (e.g. S.A., S.à r.l.) typically have one “Board of Directors”

• Also possible to have 2-Tier Boards:1. a board of management

(Vorstand) 2. a supervisory board

(Aufsichtsrat)

• Other structures possible:A company listed in Luxembourg may be incorporated elsewhere, and therefore may have different basic rules

Two tier boardUnitary board

Supervisory Board

(Aufsichtsrat/Beirat)

Non-executive Directors

Management Board

(Vorstand)

Executive DirectorsCEO FD HR

Board of Directors

Exec/Non-exec Directors

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Corporate Governance - the Luxembourg framework (1)

• Fundamental practices are based on:• Company law: Law on Commercial companies of 15 August

1915 (as amended) (“LSC”)

• European Company regulations (Societas Europeas or “SE”)

• Code Civil => general rules regulating execution of agency mandates (“Mandat”)

• Corporate Governance codes• 10 Principles of the Luxembourg Stock Exchange• ALFI Code of conduct• internal overnance codes (company/group codes)

• Sector specific laws and regulations (especially in the financial sector)• “prises de position” by industry bodies

• International & EU initiatives remain important sources of inspiration and influence (e.g. EU directives)

• The Company’s Articles of Incorporation (“Satzung” or “Statuts”)

• Corporate Codes• issued by corporations themselves (on individual or group-wide basis)

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Corporate Governance - the Luxembourg framework (2)

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X Principles of the Luxembourg Stock Exchange (“X Principles”) 3rd Edition Applies to listed companies, but recommended for all

companies Principles based: ‘Comply or explain’ Contents:

1. Corporate governance framework2. Board’s remit3. Composition of the Board and its Committees4. Appointment of Directors and senior management5. Conflicts of interest and business ethical rules6. Board Evaluation7. Management Structure8. Remuneration policy9. Financial reporting, internal control and risk

management10. Shareholders• Appendix D: Independence criteria

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Board Composition (1)

• Boards should have appropriate collective expertise10 Principles : “account to be taken of the specific features of the company and its

activities, and particularly the various business lines of the company and their geographic diversity. ”

• Boards are often criticised for having board members who are too similar• Deep diversity ≠simple surface level differences

= a true mix of personalities, identities, competencies, behaviours

• A certain level of disagreement and debate/conflict between Board members is good (discussion)…. But more difficult to manage

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Board composition

• Should reflect strategic objectives

• Often reflects wishes of major owners

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• no specific qualifications for directors of Luxembourg companies. • certain persons may be excluded• CSSF pre-approval (regulated entities): sufficiently good repute +

experience

• no need to be Luxembourg resident• although sometimes desirable for other reasons (e.g. regulatory,

substance, etc.)• the majority of Board meetings tend to be held in Luxembourg

• no legal requirement to appoint independent directors• however trend towards appointing non-executive directors • definition: “independent “ (Listed Companies – LSE 10 Principles Rec.3.5)

Board composition (2)•Director Appointment

• Board proposes new Director candidates. • Shareholders in general meeting elect (or reject) directors (LSC

a.51)Exception = cooptation until next shareholder meeting

• Maximum 6 year terms (renewable)• Best practice is annual re-election,

with each Director elected separately (no bundling)• appointment letters are not standard in Luxembourg,

however are useful to clarify issues such as remuneration, insurance, terms of appointment, rights after termination (see ICSA examples)

• Shareholders also approve board remuneration (Board submits proposal)

•Director Removal• can resign at any time, but should be careful not to do so where it

could injure the company• in most entities, can be removed at any time by a majority of

shareholders

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Board responsibilities (1)

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The Board “manages the affairs of the company …… in its best corporate interests and to fulfill its interests” (as set out in its Articles)

(but delegates day-to-day execution/management to the Management)

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Management is responsible for managing the company on a day-to-day basis

(delegation from the Board)

Luxembourg Company Law enshrines the Principal-Agent Principle => Shareholders delegate to the Board “LSC a.60 : “The day-to-day management of the business of the company and the power to represent the company with respect thereto may be delegated to one or more directors, officers, managers or other agents, who may but are not required to be shareholders, acting either alone or jointly.... ”

the Board is generally entitled to do all things deemed necessary to achieve the corporate objects except for those actions that have been expressly reserved by law or the Articles for decision by the shareholders.

Role confusion?

What are the appropriate levels of intervention?

Board responsibilities (2)

Managing liability:• Avoiding liability:

• devote necessary time and attention to allow proper discharge of their functions

• act with independence of mind • act conscientiously and with integrity… • increase monitoring & increase involvement during corporate

crises (request additional reports, meet more frequently, ensuring management is correctly staffed for solving the crisis)

• D&O Insurance (Director & Officer’s insurance)• Annual discharge• Indemnities

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Directors are ultimately responsible for both their actions & omissions

“Bon père de famille” => Business judgement ruleDirectors must exercise the standard of care

of an normally prudent & diligent person in the same position

• High standard• Must act in the best interests of the company (company ≠shareholders)• Some laws incur strict liability

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• Minutes of Meetings • Always have (and keep) Minutes (records) of all meetings

• Should be circulated to all present - and commented on before signing

• Best practice = deal with each issue/item in separate points (no bundling)

• Boards are subject to strict confidentiality and loyalty rules• No information received can be shared with third parties or used for

any other purposes• Same for guests to board meetings: (e.g. management, advisers)• A Board meeting is a private affair (the third party cannot vote and

may only comment if invited to do so).

Functioning of the Board (1)

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Board Chair• Influential leadership role• Casting vote• Usually has a close

relationship with senior management/CEO

• Sets Agenda for & chairs Board meetings

• determines necessary information required from management

Company Secretary• Valuable resource,

working with the Chair

• Coordinates, prepares for Board meetings, helps run meetings, take Minutes, coordinates follow-up action points betweenmeetings , etc. ….

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• Board meetings – convening, participation, voting• The Articles usually set out the basic rules regarding Board

meetings (convening, voting majorities, quorum, etc.)

• Articles usually allow directors to participate by proxy, telephone or videoconference

• If proxies are allowed for director meetings, they can only be given to another Director

• The Board should meet as often as is necessary to properly manage the business and exercise its powers - this will differ with the specific needs of each business.

• Board Meetings - information provided to the Board• Board as a body has a right to comprehensive information and

documents from management (but not as individuals)

• “Board Packs”: Convening notices should include a formal Agenda and supporting Information (in a timely manner & appropriate form/quality for review before the meeting, and appropriate discussion & approval at the meeting).

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Functioning of the Board (2)

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Functioning of the Board (3)• Director Conflicts of interest

• Best Practice is for Directors to abstain both:• from participating in the relevant discussion and • from voting in the decision.

• LSC & Codes : conflicts and how handled (& whether to be reported to the shareholders)

• Extremely important to actively manage conflicts of interest• Directors nominations : Shareholder, Employee, Bank

representatives :• best candidates put forward?

• Always acting in the best interests of the company? (also activists…)

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Functioning of the Board (4)

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• Board committees• Sub-committees are possible to deliberate on specific ad hoc issues

• = simply sub-sets of the Board (idea = better efficiency)• the Board as a whole still remains ultimately responsible for any decision

taken

• The Board creates the Committees and appoints their members

• Most listed companies have several committees to increase the efficiency of the supervisory board

e.g. The most common Board committees: Audit Committee• to handle the appointment

of the company’s independent auditor once approved by the AGM of shareholders.

• to address issues of accounting, risk management, compliance and auditor independence.

Nomination Committee • Often to be composed

exclusively of independent representatives (no management)

• proposes suitable candidates to the board for its recommendations for election to the General Meeting

• often this is extended to deal with compensation of CEO & board members

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Enormous regulatory Agenda• EU driven & very political

Rules vs. principles?• Risk to becoming more compliance than

governance• But views might be shifting…

Beyond ticking the box• Increased focus on

• Behaviour• Culture• Ethics• Sustainability

Governance failures continue

Increased fines and litigation ©2015

Corporate governance in Luxembourg - where to from here.....?

AN OVERVIEW OF FUND GOVERNANCE IN LUXEMBOURGINTRODUCTION TO ILA ILA – The Luxembourg Institute of Directors

Founded in 2005 as a non-profit association Timing coincided with growing awareness of

corporate governance in Europe following the Enron and Parmalat scandals (EU “Bolkenstein” Plan for Modernizing Company Law & Enhancing Corporate Governance ....)

“Institute”: mission of research and education

ILA‘s mission is to:

1. Develop highly qualified, effective and respected Directors

2. Promote best practices in Luxembourg in the field of corporate governance

Both independent and executive directors Training, conferences, publications, forum

discussions, research, responses to EU green papers ...

Certification programme

www.ila.lu

ILA Committees

Legal, Regulatory & Practices

Non-profits

Fraud & Governance

Banks, Insurance, Funds

Listed Companies

Financial Companies

Public Sector Companies

Audit Committee

Remuneration

Company Secretaries

Education

Marketing & Communication

Certification

Legal Framework for Corporate Governance of Luxembourg companies

Monique BachnerBachner Legalmbachner@bachnerlegal.com +352 621 514632

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Thank you