Corporate governance is the system of rules, practices and processes by which businesses are managed and controlled. It sets the framework for the activities of the organization and promotes its healthy development. What corporate governance really is and how to apply it in practice?
Corporate governance, in practice, covers all areas of company management – from action plans and management control to performance measurement and reporting.
Corporate governance can be viewed from three perspectives:
- narrow (legal) approach – this is the allocation of competences and shaping mutual relations between the bodies of a company
- broad approach (2015 OECD Principles of Corporate Governance) – “Corporate governance involves a set of relationships between a company’s management, its board, its shareholders and other stakeholders” i.e. entities interested in the company’s operations (employees, creditors, local communities, state, etc.)
- the broadest (systemic) approach – Corporate governance is a system or a set of interdependent and complementary legal and economic concepts, aimed at ensuring a healthy and economically effective operation of companies (in particular public joint-stock companies) and solving or at least mitigating conflicts of interests of people involved in the company
Corporate governance therefore relates to the existence of a network of relations between the management of companies, their bodies, partners and shareholders and other stakeholders. It offers a structure by which the company’s goals are established, the means of achieving these goals, and the means of tracking the progress of achieving those goals.
Corporate governance – key objectives
Good corporate governance stimulates the company’s governing bodies and management to achieve the goals in the interest of the company and its partners or shareholders. In addition, supervision and the existing procedures should facilitate the effective tracking of economic performance of the company, thereby promoting a more effective use of the company’s resources.
The history of corporate governance principles in Poland dates back to 2001, when the Good Practices Committee was established. The most recent regulation in this area is the “Best Practice for GPW Listed Companies 2016”, which consists of 6 sections:
I – Disclosure Policy, Investor Communications:
- listed companies should ensure adequate communications with investors and analysts by pursuing a transparent and effective disclosure policy. To this end, they should ensure easy and non-discriminatory access to disclosed information using diverse tools of communication
II – Management Board, Supervisory Board:
- A listed company is managed by its management board, whose members act in the interest of the company and are responsible for its activity. The management board is responsible, among other things, for the company’s leadership, engagement in setting and implementing its strategic objectives, and ensuring the company’s efficiency and safety.
- A company is supervised by an effective and competent supervisory Supervisory Board members act in the interest of the company and follow their independent opinions and judgement. The supervisory board in particular issues opinions on the company’s strategy, verifies the work of the management board in pursuit of defined strategic objectives, and monitors the company’s performance.
III – Internal Systems and Functions:
- Listed companies should maintain efficient internal control, risk management and compliance systems and an efficient internal audit function adequate to the size of the company and the type and scale of its activity.
IV – General Meeting, Shareholder Relations:
- The management board and the supervisory board of a listed company should encourage the engagement of shareholders in matters of the company, in particular through active participation in the general meeting.
- The general meeting should proceed by respecting the rights of shareholders and ensuring that passed resolutions do not infringe on reasonable interests of different groups of shareholders.
- Shareholders who participate in a general meeting should exercise their rights in accordance with the rules of good conduct.
V – Conflict of Interest, Related Party Transactions:
- Companies should have in place transparent procedures for preventing conflicts of interest and related party transactions where a conflict of interest may occur. The procedures should provide for ways to identify, disclose and manage such cases.
VI – Remuneration:
- A company should have a remuneration policy applicable at least to members of the company’s governing bodies and key managers. The remuneration policy should in particular determine the form, structure, and method of determining the remuneration of members of the company’s governing bodies and key managers.
Each section of Best Practice is divided into:
- „Detailed principles” which follow the “comply or explain” approach (which means that non-compliance with a principle requires the company to immediately report and explain the reasons for non-compliance)
- „Recommendations”- require disclosure of compliance details in a statement of compliance with the corporate governance principles included in the listed company’s annual report
Corporate governance – sanctions
The Exchange monitors the companies’ compliance with the principles and recommendations set out in the Best Practice which is subject to sanctions provided for in the GPW Regulations (when the comply or explain approach is not followed) and liability for non-compliance with disclosure obligations provided for in the Polish Act on Public Offering.
Examples of sanctions which may be imposed on a company or persons managing the company:
- Obligation to redress damage;
- A fine of up to PLN 5 million;
- Exclusion of securities from trading on a regulated market;
- 5 years of imprisonment.
Moreover, the resolutions of governing bodies of a listed company which infringe the Best Practice may be effectively appealed in court, what may lead to the invalidation of such resolutions.
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Corporate Governance – not only for public companies
Therefore, corporate governance plays a very important role in public companies. This does not mean, however, that principles of corporate governance should not be implemented in unlisted companies. Proper implementation of corporate governance in a company, in particular the principles resulting from corporate social responsibility:
- helps to increase the efficiency and credibility of the company in this regard;
- facilities the identification and management of risks related to social, environmental and ethical factors;
- helps to hold a dialogue and engage stakeholders in it, supports cooperation and increases efficiency of the company’s operations;
- supports the rationalisation of expenditure – through lower costs of information gathering, fewer crises situations and better knowledge of the market;
- helps managers discover new opportunities and challenges in line with the concept of corporate social responsibility.
It is therefore worth implementing corporate governance regardless of the size of entity and whether the company is listed on the capital market or not.
TGC Corporate Lawyers
Development and implementation of corporate governance – how can we help?
TGC assist in developing the concept of corporate governance and a set of basic policies, procedures and regulations that shape that governance what covers the work of the management board and the supervisory board and their committees. We can also review the existing corporate governance and its compliance with applicable legal regulations.
We can also assist in drafting the following documents:
- A corporate governance structure that includes the tasks of the company’s governing bodies, compliance, risk management and internal audit functions
- Regulations of the Management Board and the Supervisory Board
- Regulations of the Supervisory Board’s Audit Committee
- Policy and selection procedure for an audit firm
- Policy of providing non-audit services by an audit firm
- Decision matrices specifying the types and thresholds of decisions that can be taken at different levels of the organizational structure
- Regulations on granting powers of attorney
- Control and authorization matrices for key business processes
- Documentation to obtain ISO 9001, ISO 27001, SA 8000 or AA 1000 certificates.