What is the guidance?
The European Confederation of Directors Associations (ecoDa) recently published updated guidance to provide principles of good governance focused on unlisted companies. This is a follow up to the last guidance that they published some 11 years ago.
The guidance can be applied to a range of companies, from start-ups to joint ventures and family businesses, no matter what stage or size the company is at. This is because the guidance offers a phased approach so that each type of company can tailor the application of the guidance to its own specific needs based on their developmental phase.
Having clear corporate governance measures and documents in place is important because it provides guidance for shareholders, board members and other stakeholders to help ensure continuity and long-term success of companies, by having that detailed framework in place.
What are the principles?
The guidance provides 14 principles of best practice, of which companies can choose to adopt some or all, based proportionally on their size and current situation. EcoDa recognise that not every company may be in a position to apply all principles at once, and indeed in may not be appropriate for them to do so.
Therefore, the first principles (1 – 9) are universal and can apply to all companies regardless of their size. These are considered basic governance principles, and are as follows:
- Shareholders should establish an appropriate constitutional and governance framework for the company.
- Every company should strive to establish an effective board, which is collectively responsible for the long-term success of the company, including the definition of corporate purpose and strategy. However, an interim step on the road to an effective and independent board may be the creation of an advisory board.
- The size and composition of the board should reflect the scale and complexity of the company’s activities and take into account an appropriate level of diversity in its composition.
- The board should meet sufficiently regularly to discharge its duties and be supplied in a timely manner with appropriate information.
- Levels of remuneration should be sufficient to attract, retain, and motivate executive and non-executive board members of the quality required to run the company successfully.
- The board is responsible for risk oversight and should maintain a sound system of internal control to safeguard the company’s assets and the long-term interests of stakeholders.
- There should be a dialogue between the board, shareholders and other key stakeholders based on a mutual understanding of objectives. The board as a whole has responsibility for ensuring that a satisfactory dialogue with shareholders and stakeholders takes place. The board should not forget that all shareholders have to be treated equally, and that each category of relevant stakeholder should be treated appropriately.
- All board members should receive a proper induction on joining the board and should regularly update and refresh their skills and knowledge.
- Family-controlled companies should establish family governance mechanisms that promote coordination and mutual understanding amongst family members, as well as organise the relationships between family governance and corporate governance.
The second set of principles (10 – 14) are tailored more towards larger and more complex companies, as follows:
10. There should be a clear division of responsibilities at the head of the company between the running of the board and the running of the company’s business. No one individual should have unrestricted powers of decision.
11. Board structures vary according to national regulatory requirements and business norms. However, all boards should contain members with a sufficient mix of competencies and experiences. No single person or small group of individuals should dominate the board’s decision-making.
12. The board should establish appropriate board committees in order to allow a more effective discharge of its duties.
13. The board should undertake a periodic appraisal of its own performance and that of each individual board member.
14. The board should present a balanced and understandable assessment of the company’s position and prospects for external stakeholders and establish a suitable programme of stakeholder engagement.
What does this mean for your business?
The principles are recommended but voluntary, so in order to assist companies in deciding which areas they may like to take action on following this guidance, ecoDa have provided a questionnaire that company directors can use to see if they are already applying some principles and also identify those they have not yet adopted. The questionnaire can be found here.
If you would like any assistance reviewing your existing corporate governance documents such as your current shareholders’ agreement or articles of association, or would like to consider putting in place new corporate governance documents, get in touch with BPE’s Corporate Team who would be happy to assist.
Useful links to external sources or recommended reading
For a copy of the full guidance, please visit the ecoDA website (here).
These notes have been prepared for the purpose of articles only. They should not be regarded as a substitute for taking legal advice.