Estonia: Corporate Governance Recommendations In Estonia

The Corporate Governance Recommendations (hereinafter „Recommendations") are intended first and foremost for the companies whose shares have been admitted to trading on a regulated market operating in Estonia (issuers, except for investment funds registered as public limited companies), but as the aim of the Recommendations is to make the management of listed companies more transparent, it is suggested that all financial institutions that are under the local financial supervision abide by them. All other companies in Estonia are also encouraged to follow these guidelines, because effective risk management and internal control systems, as well as transparent management, are critical not only to financial institutions, but to all companies which want to be successful and sustainable. The Recommendations were enforced by the recommendable guideline of the Estonian Financial Supervision Authority and regulations of the Tallinn Stock Exchange from January 1, 2006.

The principles of the Recommendations are recommended to be carried out by issuers and each issuer shall decide whether or not they adopt these principles as a basis for organising their management. Issuers shall describe, in accordance with the „Comply and Explain" principle, their management practices in a Corporate Governance Recommendations Report that shall be a separate chapter of Management Report contained in the Annual Report of the company. In the mentioned Report the issuer shall confirm their compliance with Recommendations or explain the reasons for their non-compliance. As the Recommendations entered into force on January 1, 2006, the first Corporate Governance Recommendations Reports were prepared for the financial year of 2006.

The Recommendations were prepared on the basis of Estonian legislation and structure of shareholders of issuers acting in Estonia following the recommendations of the European Commission and Principles of Corporate Governance of OECD and other European countries. The structure of the shareholders of the issuers acting in Estonia and the main problems arisen in company management were also taken in account.

The exercise of shareholders’ rights shall be ensured in such a way that it is not hindered by unreasonable formalities or made inconvenient for shareholders in any other way, meaning above all the time and place of holding the General Meeting, data availability and conducting of the General Meeting. The General Meeting shall be conducted at the location of the issuer and at a reasonable time and place, ensuring that a majority of shareholders have the possibility to participate in the General Meeting. Issuers shall enable shareholders to present questions on items mentioned in the agenda, including prior to the day of the General Meeting. If possible, the issuer shall give its responses to questions presented before holding the General Meeting and shall publish the question and response on its website.

Notice calling the General Meeting shall be sent to shareholders and/or published in daily national newspaper concurrently with making it available on the issuer’s website. The notice shall indicate the reason for calling the Extraordinary Meeting and who made the proposal to call it (e.g., management board, supervisory board, shareholders or auditor). The Management Board shall publish on the issuer’s website the essential information connected with the agenda provided to it or otherwise available concurrently with compliance with the General Meeting calling requirements provided by law. Within a reasonable period of time prior to holding a General Meeting, the Supervisory Board shall publish its proposed agenda items on the issuer’s website. If shareholders make substantive proposals to items on the agenda or proposals diverging from those of the Supervisory Board prior to the General Meeting the issuer shall publish the proposals on its website.

The Chair of the General Meeting shall ensure that the General Meeting is conducted in a smooth manner, i.e. swift while considering the interests of all interested parties. The General Meeting shall be conducted in the Estonian language. The Chairman of the Supervisory Board and members of the Management Board cannot be elected as Chair of the General Meeting. Members of the Management Board, the Chairman of the Supervisory Board and if possible, the members of the Supervisory Board and at least one of the auditors shall participate in the General Meeting. Also Supervisory Board member candidates who have not formerly been Supervisory Board members and candidates for auditor shall participate in the General Meeting.

Issuers shall make participation in the General Meeting possible by means of communication equipment (Internet) if the technical equipment is available and where doing so is not too cost prohibitive for the issuer.

The Management Board shall make independent day-to-day decisions without favoring personal and/or controlling shareholder’s interests. The Management Board shall make decisions based on the best interests of the issuer and all shareholders and it obliges to ensure reasonable development of the issuer according to goals and strategy set. The Management Board shall ensure that it undertakes proper risk management and internal audit controls in the activities of the issuer and those proceeding from its activities.

The Management Board shall have more than one member and a Chairman elected by its members. The Management Board or Supervisory Board shall establish an area of responsibility for each member of the Management Board, defining as clearly as possible the duties and powers of each board member. The principles for co-operation between members of the board shall also be established. The Chairman of the Supervisory Board shall conclude a contract of service with each member of the board for discharge of their functions.

The member of the Management Board shall not be at the same time a member of more than two management boards of an issuer and shall not be the Chairman of the Supervisory Board of another issuer. A member of the Management Board can be the Chairman of the Supervisory Board in company belonging to same group as the issuer.

The bases for Management Board remuneration shall be clear and transparent. The Supervisory Board shall discuss and review regularly the bases for Management Board remuneration. Upon determination of the Management Board remuneration, the Supervisory Board shall be guided by evaluation of the work of the Management Board members taking into consideration the duties of each member of the Management Board, their activities, the activities of the entire Management Board, the economic condition of the issuer, the actual state and future prediction and direction of the business in comparison with the same indicators of companies in the same economic sector. Remuneration of members of the Management Board, including bonus schemes, shall be such that they motivate the member to act in the best interest of the Issuer and refrain from acting in their own or another person’s interest.

The bonus scheme of a Management Board member that is connected with the securities of the Issuer, as well as changes in such bonus schemes shall be approved at the General Meeting of the issuer. When granting share options, the Issuer shall comply with the rules and regulations of the Tallinn Stock Exchange.

Basic wages, performance pay, severance packages, other payable benefits and bonus schemes of a Management Board member as well as their essential features (incl. features based on comparison, incentives and risk) shall be published in clear and unambiguous form on website of the issuer and in the Corporate Governance Recommendations Report.

The Chairman of the Supervisory Board shall present the essential aspects of the management board remuneration and changes in it to the General Meeting.

Member of the Management Board shall not make decisions on the basis of their own interests or use business offers addressed to issuer in their own interests. Members of the Management Board shall inform the Supervisory Board and other members of the Management Board regarding the existence of a conflict of interests before the conclusion of a contract of service and immediately upon arising of it later. Members of the Management Board shall promptly inform other Management Board members and the Chairman of the Supervisory Board of any business offer related to business activity of the issuer made to them, a person close to them or a person connected with them.

The Supervisory Board shall approve the transactions which are significant to the issuer and concluded between the issuer and a member of its Management Board or another person connected/close to them and shall determine the terms of such transactions. Transactions approved by Supervisory Board between the issuer and a member of the Board, a person close to them or a person connected to them shall be published in the Corporate Governance Recommendations Report.

Members of the Management Board may engage in other duties alongside their duties as members of the Management Board only on approval of the Supervisory Board.

The duty of the Supervisory Board is to manage internal control of the Management Board activities. The Supervisory Board shall determine and regularly review the issuer´s strategy, general plan of action, principles of risk management and annual budget. The Supervisory Board shall together with the Management Board ensure long-term planning of the issuer’s activity.

The Chairman of the Supervisory Board shall maintain regular contact with the Management Board, in particular with the Chairman of the Management Board and shall discuss with them the issues related to the issuer’s strategy, business activity and risk management. The Supervisory Board shall regularly assess the activities of the Management Board and its implementation of the issuer’s strategy, financial condition, risk management system, the lawfulness of the Management Board activities and whether essential information concerning the issuer has been communicated to the Supervisory Board and the public as required. Upon the establishment of committees (audit committee, remuneration committee etc.) by the Supervisory Board, the issuer shall publish on its website their existence, duties, membership and position in the organization.

The members of the Supervisory Board shall be elected from persons having sufficient knowledge and experience for participation in the work of the Supervisory Board. Upon the election of a member of the Supervisory Board, the nature of the Supervisory Board’s and the issuer’s activities, the risks of conflict of interests and if necessary the age of the potential member shall be taken into account. The membership of the Supervisory Board shall be sufficiently small to ensure efficient management and sufficiently large to involve necessary know-how.

At least half of the members of the Supervisory Board of the issuer shall be independent. If the Supervisory Board has an odd number of members, then there may be one independent member less than the number dependent members. An independent member is a person, who has no such business, family or other ties with the issuer, a company controlled by the issuer, a controlling shareholder of the issuer, a company belonging to the issuer’s group or a member of a directing body of these companies, that can affect their decisions by the existence of conflict of interests.

Upon determination of the remuneration of members of the Supervisory Board, the General Meeting shall take into consideration the duties of the Supervisory Board and their scope and the economic situation of the issuer. The amount of remuneration of a member of the Supervisory Board shall be published in the Corporate Governance Recommendations Report, indicating separately basic and additional payment (incl. compensation for termination of contract and other payable benefits). If a member of the Supervisory Board has attended less than half of the meeting of the Supervisory Board, this shall be indicated separately in the Corporate Governance Recommendations Report.

Members of the Supervisory Board shall prevent conflict of interests from arising through their activities. Members of the Supervisory Board shall give preference to interests of the issuer over their own or those of a third party upon his word as a member of the Supervisory Board. Members of the Supervisory Board shall not use business offers addressed to the issuer for their personal interests.

Members of the Supervisory Board shall promptly inform the Chairman of the Supervisory Board and Management Board regarding any business offer related to the business activity of the issuer made to him, a person close to him or a person connected with him. All conflicts of interests that have arisen in preceding year shall be indicated in the Corporate Governance Recommendations Report along with their resolutions. A member of the Supervisory Board shall resign or be removed if their conflict of interests is of material and permanent nature.

Management Board and Supervisory Board shall co-operate closely for the purpose of better protection of issuer’s interests. The basis of this co-operation is first of all the open exchange of ideas between and within the Management Board and Supervisory Board. The Management Board and Supervisory Board shall jointly develop plans and principles of activities and strategy of the issuer. The Management Board shall operate under strategic guidelines provided by the Supervisory Board and shall discuss its strategic management questions with the Supervisory Board regularly.

The Management Board and the Supervisory Board shall jointly take steps to ensure that the mutual exchange of data shall be adequate and efficient. The Management Board shall inform the Supervisory Board regularly of all material circumstances, which pertain to planning of the issuer’s activities, business activities, risks connected with its activities and management of those risks. The Management Board shall separately call attention to such changes in the business activities of the issuer deviating from plans and purposes set formerly and indicate the reasons of such changes. The information shall be delivered promptly and shall cover all material circumstances.

The Members of the Management Board and Supervisory Board shall observe the rules of confidentiality upon organization of the mutual exchange of data ensuring above all the control over the transfer of price sensitive information. The Management Board shall also ensure the observance of the rules of confidentiality employees of the issuer, who access such information.

The issuer shall treat all shareholders equally and shall notify all shareholders equally of material circumstances. Upon notification of shareholders and investors the issuer shall use proper information channels, including his own web site. The equal treatment of shareholders principle shall not affect the issuer’s right to delay publication of inside information and to deliver the unpublished inside information to persons entitled to receive it.

The web site of the issuer shall be clear in structure and published information shall be easy to find. Published information shall also be available in English. The issuer shall publish the disclosure dates of information subject to disclosure throughout a year (including the annual report, interim reports and notice calling a general meeting) at the beginning of the fiscal year in a separate notice and publish the latter also on his web site.

The following data and information shall be accessible to the shareholders on

• issuer´s web site:
• report on Corporate Governance Recommendations
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• date, place, and agenda of the General Meeting and other information related to the General Meeting;
• articles of association;
• general strategy directions of the issuer as approved by Supervisory Board;
• membership of the Management Board and Supervisory Board;
• information regarding the auditor;
• annual report;
• interim reports;
• agreements between shareholders concerning concerted exercise of shareholders rights (if those are concluded and known to the issuer);
• other information, published on the basis of the Recommendations.

Issuers shall publish annually its annual report and within a fiscal year its interim reports. The Management Board shall draw up annual accounts, which shall be audited by the auditor and the Supervisory Board. On meeting of the Supervisory board, where the annual account shall be reviewed the auditor of the issuer shall participate upon invitation of the Supervisory Board. Members of the Management Board of the issuer and other persons belonging to management shall leave the meeting during the auditor reports the most material conclusions of audit. The shareholders shall be presented the annual report signed by members of the Management Board and the Supervisory Board for examination.

The issuer shall publish an annex of the annual accounts including a list of companies not belonging to the issuer’s group, in which the holding of the issuer has significant importance to the issuer. Annexes to the annual accounts shall also contain information regarding the connections of the issuer with shareholders which are deemed to be connected persons pursuant to standards of international financial reporting.

Together with Notice Calling the General Meeting the Supervisory Board shall make available to shareholders information on a candidate for auditor. If there is a desire to appoint an auditor who has audited Issuers reports on previous financial year the Supervisory Board shall pass judgment on their work. If the Supervisory Board makes a proposal to elect a new auditor it shall justify to the General Meeting its reasons for terminating the contract with previous auditor. The remuneration the issuer has paid or shall pay to the auditor shall also be published to the shareholders.

Before entering a contract for auditing services with an auditor, the Management Board shall present the Supervisory Board with the draft contract for approval. In a contract to be concluded with an auditor, above all the auditor’s functions, timetable and remuneration shall be agreed upon. The contract to be concluded with an auditor shall not in any manner hinder the auditor’s evaluation of the Issuer’s activities.

Pursuant to the contract the auditor obliges to disclose to the Supervisory Board and at the General Meeting the facts, which become evident to them during the course of exercising of a regular audit, indicating non-compliance with the Recommendations by the Management Board or the Supervisory Board. The Auditor shall prepare a memorandum to the issuer regarding these facts along with the auditor’s report.

Pursuant to Estonian corporate law the members of the directing bodies of the companies shall perform their obligations with due diligence and be loyal to the company. The Recommendations should therefore be a model for the issuers and other companies to organise their management, above all taking into account the interests of the company. The Recommendations will also help to strengthen the rights of the shareholders and investors by providing adequate opportunity to supervise the management. As the observance of the Recommendations contributes to better and more transparent of management and management control of the companies, it will also help to structure the work of the directing bodies of the company and the disclosure of the information related to the management and management control.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.