0. Corporate Governance in the UK, USA and Belgium
Andrew Bloom
16 June 2009

1. What is Corporate Governance? The UK Government’s View
“Transparency and accountability are the most important elements of good corporate governance. This includes:
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.”
Source: BERR

2. 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

3. 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)

4. Companies Act 2006
Directors’ fiduciary and other duties have been codified in sections 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)

5. 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

6. 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

7. 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

8. 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

9. 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

10. 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

11. 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

12. 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

13. 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

14. 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

15. 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

16. Corporate Governance - US
Fiduciary duties and the Delaware Governance Model
Duty of care
Duty of loyalty
Business Judgment Rule

17. 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

18. 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

19. 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

20. 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

21. 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

22. 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

23. 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

24. 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

25. 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)

26. 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.

27. ….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.

28. Andrew Bloom abloom@steptoe.com; Tel: +44 (0)20 7367 8058
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
Tel: +44 (0)
16 June 2009