Finnish Corporate Governance

Originally publised in European Lawyer magazine April 2004.

Finnish Corporate Governance Framework

The Finnish regulatory framework for corporate governance and directors’ duties is governed by the following three Acts: the Companies Act, the Securities Markets Act and the Accounting Act. In addition, the decisions of the Ministry of Finance on listing particulars and the rules of the Financial Supervision Authority and the Helsinki Exchanges impose several requirements and obligations applicable to publicly listed companies. The aforementioned laws, which contain mainly mandatory provisions, cover a number of issues that in many other jurisdictions are stipulated in corporate governance codes. Therefore, it can be stated that the Finnish corporate governance codes in many cases provide a commentary on mandatory provisions of law.

The most important source regulating corporate governance issues in Finland is the Companies Act that is currently undergoing a reform. The new Act will not, however, have any significant new effect on corporate governance issues but it will, as previously, establish the corporate governance platform in Finland.

In addition to the legislation in Finland, there are two sets of guidelines of best practise that can be characterised as corporate governance codes: "Corporate Governance Recommendations for Listed Companies" that was issued in December 2003 ("Recommendation") and "Handling Corporate Governance Issues in State-Owned Companies and Associated Companies" that was issued in 2000 ("Ministry Report").

The goal of the Recommendation is to inter alia harmonise the practices of the listed companies, to improve transparency of their operations and harmonise and improve the of the information given to shareholders. This will, according to the working group, increase investors’ interest in Finnish listed companies and promote trust in the functioning of the Finnish securities markets.

Structure and main issues of the Recommendation

The provisions of the Recommendation will be enacted as an integral part of the rules of the Helsinki Exchanges. The Recommendation enters into force on 1 July 2004. Thereafter all companies listed on the Helsinki Exchanges are required to comply with the Recommendation, provided that it is not in conflict with any mandatory legislation applicable in the domicile of the company. To be precise, the Recommendation has been drafted in accordance with the "comply or explain" principle. Listed companies are required to give information on both their compliance with the Recommendation and to disclose information on the issues presented in the Recommendation both in annual reports and on the company’s website.

The Recommendation includes provisions of the following topics: 1) General Meeting of Shareholders, 2) Supervisory Board, 3) Board of Directors, 4) Board Committees, 5) Managing Director, 6) Other Management, 7) Compensation, 8) Internal Control, Risk Management and Internal Audit, 9) Insider Administration, 10) External Audit and 11) Communication and Disclosure.

Certain noteworthy issues regulated in the Recommendation are listed below:

• The Board shall comprise of at least five directors.

• The majority of all directors shall be independent of the company. In addition, at least two of the directors representing this majority shall be independent of significant shareholders of the company.

• If the company has a supervisory board, its powers shall be restricted to supervision of the management and issuing of instructions.

• The company shall report the fees and other benefits of the Directors.

• The company shall report the benefits contained in the service contracts of the Managing Director and a full-time Chairman of the Board.

The Recommendation emphasises the role of non-executive Board members in promoting the Board’s functions and independence. Furthermore, the code recommends that certain relevant committees be established (i.e. audit committee, remuneration committee and nomination committee) and that non-executive Board members form these committees.

To ensure the effectiveness of the work of the Board of Directors, the Board of Directors and each Board committee must adopt a written charter for its work, which includes a description of the essential duties and working principles of the Board. Such working charter enables the shareholders better to evaluate the operations of the Board. In addition, the Board must conduct an annual evaluation of its performance and working methods. The evaluation can be done as an internal self-evaluation or by using an external evaluator.

The Finnish state is a major shareholder in several listed companies. While the Ministry Report is still applicable to all state-owned companies, the listed companies in which the state is a major shareholder are obligated to primarily follow the provisions of the Recommendation. However, the Finnish government has in February 2004 made certain so-called Decisions-in-Principle according to which the state ownership policy shall be conducted. In deviation from the Recommendation, the Finnish government states that the nomination committee in state-owned companies should be elected by the shareholders and not by the Board of Directors. In addition, the government states that options should be used only in exceptional cases when considering executive compensation policies.