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Major principles and themes in corporate gorvernance

The following sections provide an overview of some of the themes currently attracting debate within the various areas of corporate governance.

Shareholder rights
In the first instance, shareholders can exercise their rights by participating in and voting at general meetings. A number of recommendations on corporate governance emphasise that shareholders should play an active role and make full use of their voting rights. The view is also often expressed that institutional investors have a particular responsibility to make use of their voting rights.

Equal treatment of all shareholders is a fundamental principle for listed companies. This implies that there should be a correlation between the extent of control an individual shareholder can exercise and the financial risk to which the shareholder is exposed. If a company has issued one or more classes of shares that are subject to voting restrictions, details of this should be provided.

It is important that that a company's business objective as set out in its articles of association and its capitalisation should bear a sensible relation to the investment goals of its shareholders. The formulation of the statement of business objective in the articles will determine the degree of freedom the board can exercise. A well-formulated statement of business objectives will give shareholders greater control over the scope of decisions that can be taken by the board without prior consultation with shareholders.

General meetings
Companies should ensure that shareholders are able to participate in and vote at general meetings without incurring unnecessary cost. Wherever possible, arrangements should therefore be made to allow shareholders to participate in and vote at meetings via the Internet.

A number of recommendations on good corporate governance stress the importance of issuing the notice calling a general meeting well before the date of the meeting, as well as providing a thorough account in the notice of the matters to be considered by a meeting. In the case of Norwegian companies, the Public Limited Liability Companies Act imposes a minimum notice period when calling a general meeting. Companies should consider whether the minimum notice period is sufficient, or whether they should allow a longer period of notice when calling meetings.

Information should be provided on mandates granted to the board of directors by a general meeting. Some recommendations on corporate governance suggest that the scope of such mandates should be as specific and limited in scope as possible, both in terms of the amounts involved and the period of validity.

Takeover defences
Shareholders must be advised of any measures the company has put in place to defend itself against takeover bids. The effect of any such defences or measures must be foreseeable, and this means that the company should provide an explanation of how it would expect to make use of the measures available. Some recommendations on corporate governance suggest that shareholders should be given the opportunity to consider any takeover bids directly. This would imply that the board should not be permitted to reject takeover bids without general meeting approval.

If the company is aware of any agreements between its shareholders that may be of interest to investors, details of these agreements must also be provided.

Equal treatment of all shareholders
Equal treatment of all shareholders must be a basic principle for all listed companies. Equal treatment is achieved both by ensuring that investors are given equal access to the same information at the same time and by permitting shareholders to participate in new issues etc. in direct proportion to their shareholding interest in the company. Any differences in treatment must be based on concrete and factual reasons, and transactions with close associates must be carried out on the arm's length principle.

Board of Directors
There is broad agreement that the board should take into account the interests of all shareholders. In order to achieve this it is essential that the board has a sufficient number of independent members. There is no universally accepted definition of independence in this context, but it is generally taken to mean that the board should have a sufficient number of members who have no commercial or personal links with the company that might prevent or discourage them from challenging the company's management. It is important that investors are made aware of the criteria used to select candidates for nomination as new members of the board, together with information on how shareholders are notified of and elect such candidates. Other issues considered in various recommendations on corporate governance include the number of members that a board should have, the retirement age for board members and the question of a limit to the number of board appointments any one person should hold.

A number of international recommendations on corporate governance include the establishment of independent committees or subcommittees (such as election committees, remuneration committees, audit committees etc.). If a company has established such committees it should provide information on their membership and areas of responsibility, together with a statement on the extent to which the members of such committees are independent of the company's management. The purpose of such committees is precisely to ensure such independence.

Other recommendations also include themes such as the duties and responsibilities of the board, the manner in which it should operate and the frequency of board meetings.

Performance evaluation and remuneration of senior management and members of the board
Information should be provided on the company's remuneration policy for members of the board and senior management, including details of any share option schemes, bonus schemes etc. operated by the company. Various recommendations on corporate governance also discuss how share option and bonus schemes should be structured and who should be entitled to benefit from such schemes.

Moreover full and detailed information must be provided on the remuneration of members of the board and senior management on an individual basis, including basic salary, employment benefits and bonuses, together with details of any shares, subscription rights or options granted to the individual or any other form of remuneration linked to the performance of the company's share price. The cost to the company of such share-related remuneration arrangements must also be disclosed.

A number of recommendations on corporate governance include a requirement for systematic evaluation of the performance of the board and senior management. If a company does use performance monitoring it should provide a description of how this is carried out and how the results of the monitoring are to be reported.

Communication with the market, shareholders and dividend policy
It is essential that investors receive relevant and reliable information if they are to have confidence in listed companies. Creating a better understanding of the underlying value and critical value drivers for listed companies helps to ensure that the market values companies correctly. This in turn ensures that the cost of capital is properly determined and helps to ensure a more optimal allocation of capital between alternative investments. Companies that prioritise good and open communication with investors will therefore enjoy a competitive advantage. This means that companies should establish an Investor Relations policy to provide a structured approach to their relationship with the investment community and to ensure a consistent approach to providing information to investors. Companies should also ensure that investor information is readily available on their Internet homepages, and should look into making the best possible use of IT to improve communications with their shareholders.

The company should have a predictable shareholder- and dividend policy which has been communicated to the shareholders. In addition, the companies' corporate governance policy should be communicated.

Financial information
Companies must report reliable financial information to their investors. With effect from the 2005 financial year, listed companies in the EU and EEA area will be required to prepare their consolidated financial statements using international accounting standards (IAS). This will make it easier for investors to understand and compare financial information from company to company, even if they are from different countries. In addition the two major bodies for accounting standards, IASB and FASB, have announced the launch of a convergence project with the objective of reducing the differences between the two accounting "languages" of IFRS and USGAAP.

Audit
The key word for auditors is independence. Over the recent past many commentators have criticised the common practice for the accounting firm that carries out the audit or a related firm to provide audit clients with additional services on a scale and of a type that bring into question the ability of the auditors to maintain their independence and objectivity.

In addition questions have been raised as to whether companies should establish a separate audit committee to ensure that the audit function is carried out entirely independently of the company`s management.

 

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Elisabeth Adina Dyvik
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E-mail: ead@oslobors.no
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