The Danish Committee on Corporate Governance has published updated Recommendations for Corporate Governance
On 2 December 2020, the Danish Committee on Corporate Governance published updated Recommendations on Corporate Governance (the “Recommendations”) which will enter into force as of the financial year starting on 1 January 2021 or thereafter. The present Recommendations from 2017 are updated based on new legislation, the most recent development of best practice in terms of transparency concerning management’s remuneration, evaluation of the board of directors and recent trends and developments in society in terms of, for instance, long-term value creation, sustainability, social responsibility and diversity.
1. Interaction with the company’s shareholders, investors and other stakeholders
1.1 Communication with the company’s shareholders, investors and other stakeholders
The Committee's recommendation 1.1.1 that the management through ongoing dialogue and interaction ensure that shareholders, investors and stakeholders gain relevant insight into the company’s affairs continues to apply. As something new, it is stated in the comment that management may consider to have a dialogue with proxy advisors, for instance in relation to institutional investors’ voting. The recommendation is a result of the increasingly larger role of proxy advisors in Denmark and the extensive influence exercised by proxy advisors such as for instance ISS and Glass Lewis on institutional investors’ voting in Danish listed companies. Accordingly, the change merely reflects the Committee’s clarification of the importance of management providing for a good and ongoing dialogue with proxy advisors. It is stated in the comment to recommendation 1.1.2 that the framework for the interaction with shareholders and investors may appear from the company's Investor Relations policy.
1.2 The general meeting
The Committee’s recommendation 1.2.1 on organisation of the general meeting to support active ownership is extended and specified. It is recommended that the board of directors organise the general meeting in a manner that allows shareholders who are unable to attend the meeting in person or are represented by proxy at the general meeting to vote and raise questions to management prior to or at the general meeting. In addition, it is recommended that the board of directors ensure that shareholders can attend the general meeting by webcast or other digital transmission.
The last sentence of the recommendation refers to the rules on partial electronic general meetings, and the Committee has not by this update introduced a recommendation that the articles of association include authority to hold a completely electronic general meeting. This is despite the fact that the inclusion of a provision in the articles of association on the holding of completely electronic general meetings has been discussed in a number of listed companies in the light of the challenges which occurred with respect to the holding of physical general meetings in the spring of 2020 during the Covid-19 lockdown. The Committee’s reluctance should be considered in the light of the fact that proxy advisors have so far recommended to vote against proposals to include in the articles of association such authority to hold completely electronic general meetings.
1.4 Corporate Social Responsibility
The Committee’s recommendation 1.4.1 that the company adopt a policy for its corporate social responsibility has been moved from recommendation 2.2.1, and the new recommendation is extended. It is recommended that the board of directors adopt a policy for the company’s corporate social responsibility, including social responsibility and sustainability, and that the policy is available in management’s commentary and/or on the company's website. It is also recommended that the board of directors ensure compliance with the policy. The update of the recommendation on corporate social responsibility reflects the increased focus on sustainability, among other things, and the companies should consider sustainability in a wider sense (not only economic sustainability). The policy can refer for instance to the company's internal sustainability (for instance economic, financial and innovative) and sustainability in relation to CSR and ESG and the company's role as a positive contributor to society as a whole).
The Committee’s recommendation 1.4.2 on a tax policy is new and is introduced in the wake of the increased focus on compliance with tax legislation in the light of recent tax infringement matters. It is recommended that the board of directors adopt a tax policy to be made available on the company’s website. It is stated in the comment that the board of directors may choose in the tax policy to provide greater insight into the company’s tax matters than required under the law, for instance in respect of the treatment of tax incentives, the use of tax planning, activities in so-called tax havens, payment of tax in countries in which the company operates etc.
2. The duties and responsibilities of the board of directors
2.1 Overall tasks and responsibilities
In recommendation 2.1.1 the Committee has expanded the previous recommendation 2.2.2 that the board of directors consider the company's overall strategy of the company with a view to ensuring value creation. It is recommended in recommendation 2.1.1 that the board of directors consider the company’s purpose and ensure and promote a good culture and sound values in the company. The company should provide an account of this in the management commentary and/or on the company’s website.
The company’s purpose is a new term introduced in the updated Recommendations. The Committee describes the term as the company’s overall aim for long-term value creation which the company delivers to its shareholders, other stakeholders and society. The company’s purpose goes beyond the statutory objects pursuant to its articles of association and should be understood as the company’s mission/vision, which is a considerable driving force in the company’s strategy and decision-making process. It is stated in the comment that the board of directors should ensure cohesion between the company’s purpose and the company’s culture and values. Accordingly, in future, the board of directors should actively consider the company’s purpose, including ensure that such purpose is bound up with the company’s culture and values, and provide an account of these considerations in the management commentary or on the company’s website.
2.2 Members of the board of directors
The Committee's recommendation 2.2.2 that the members of the board of directors regularly update their knowledge and qualifications is new and is intended to ensure and increase the quality of the work of the board of directors. It is recommended that the chairperson in cooperation with the individual members of the board of directors ensure that the members regularly update and supplement their knowledge of relevant matters, and that the members’ special knowledge and qualifications are applied in the best possible manner. Regular updating of the board of directors’ knowledge and competences was previously mentioned in the introduction for section 2 but now becomes a proper recommendation on which the companies should accordingly report. The intention is to make the board of directors actively consider whether the knowledge and qualifications of its members are adequate, and whether they are applied in the best possible manner. The recommendations supplement the new recommendations on evaluation of the board of directors (see recommendation 3.5.1 below).
3. The composition, organisation and evaluation of the board of directors
The Committee has made several updates and clarifications in recommendations 3.1.1-3.1.5 on the composition of the board of directors.
It is specified in recommendation 3.1.1 that the board of directors should review on an annual basis the qualifications of the board of directors, collectively and individually, and should review its composition and diversity. When reviewing diversity, the board of directors may consider age, gender and educational and commercial background. The specification that the board of directors should review the qualifications of the board of directors, collectively and individually, and the diversity of the board of directors is new.
In recommendation 3.1.2 on the company’s diversity policy, it is specified that the policy may also be included in the management commentary and not only made available on the company’s website. It is specified in the comment that the policy should give an account as to how the company actively works to increase diversity, including the gender distribution at its different management levels.
In recommendation 3.1.3 it is now recommended that the assessment of candidates for the board of directors - in addition to individual competencies and qualifications - also consider the need for continuity, renewal and diversity. Continuity is a new addition compared to the last recommendation.
The new recommendation 3.2.2 corresponds to the former recommendation 3.1.5 on the election of chief executives to the board of directors. However, the provision is made more rigorous in that the Committee now recommends that members resigning from the executive management do no join the board of directors immediately thereafter. The previous recommendation 3.1.5 only concerned the chief executive’s direct election as chairman or vice-chairman.
3.3 Members of the board of directors and the number of other management functions
Recommendation 3.3.1 on overboarding is updated. In future, the board of directors and each of the members of the board of directors assess how much time is required to perform the board duties. The provision has not been amended materially apart from the fact that the assessment is now to be made both by the individual member and by the entire board of directors. The recommendation is emphasised anyway, as the Committee notes in its comment that a “scoring system” is not applied with respect to overboarding. Proxy advisors consider scoring systems positively as a tool to prevent overboarding but it is still the opinion of the Committee that the assessment of the board duties in relation to overboarding is best left to the individual companies. It is specified that the assessment should be made in connection with the annual evaluation of the board of directors under recommendation 3.5.1 described below.
In recommendation 3.4.3 on the audit committee, the Committee has consolidated recommendations 3.4.3-3.4.5 in a joint description of the audit committee and the duties of the committee.
3.5 Evaluation of the board of directors and the executive management
The most significant change in section 3 relates to recommendation 3.5.1 on evaluation of the board of directors. The Committee has made the requirements for the annual evaluation of the board of directors more rigorous. The outline of the evaluation of the board of directors in the recommendation previously included a number of issues which may be included in the evaluation of the board of directors, whereas the updated recommendation includes minimum requirements to the evaluation. Accordingly, the company must apply these minimum requirements to its evaluation if it is to be able to report that it complies with the recommendation. These minimum requirements include several new items, including the cooperation on the board of directors and board members’ preparation for and active participation in the meetings of the board of directors. The Committee recommends that the evaluation of the board of directors also focus on the board of directors’ duties, efficiency, composition and organisation in recommendations 3.1-3.4. However, this is not a part of the minimum requirements for the evaluation of the board of directors.
4. Remuneration of management
The recommendations on remuneration policy and remuneration report (recommendations 4.1.1, 4.1.2, 4.2.1, 4.2.2 and 4.2.3) are omitted as a result of the implementation of Directive (EU) 2017/828 of 17 May 2017 as regards the encouragement of long-term shareholder engagement. The recommendations are now covered by sections 139-139b of the Danish Companies Act. Instead, the updated Recommendations include new recommendations on remuneration of management.
The Committee recommends in a new recommendation 4.1.1 that the remuneration for the board of directors and the executive management and other terms of employment/service are considered both competitive and consistent with the company’s long-term shareholder interests. The Committee states in the comment that the board of directors should consider the appropriate balance between avoiding excessive remuneration packages and at the same time being able to attract the people with the right competencies.
The Committee recommends in a new recommendation 4.1.3 that the variable part of the remuneration has a cap at the time of grant, and that there is transparency in respect of the potential value at the time of exercise under pessimistic, expected and optimistic scenarios. According to the comment, the cap at the time of grant may, for instance, be stated in relation to the fixed base salary. Companies will often have indicated a cap for variable salary at the time of grant in the remuneration policy prepared by the company under sections 139 and 139a of the Danish Companies Act. It will be natural to inform about the potential value at the time of exercise in the company’s remuneration report prepared under section 139b of the Danish Companies Act where the relevant accounting methods are determined in cooperation with the auditor.
The Committee’s recommendation on claw back, which was previously included in the deleted recommendation 4.1.2 on variable components of the remuneration policy, is separated into a new recommendation 4.1.6. It is recommended that the company may reclaim, in whole or in part, variable remuneration from the board of directors and the executive management if the remuneration granted, earned or paid was based on information which subsequently proves to be incorrect, or if the recipient acted in bad faith. The new recommendation is extended compared to the previous recommendation, as it, in addition to remuneration paid, also includes granted and earned remuneration. Moreover, it now also includes matters in respect of which the recipient acted in bad faith which implied payment of the variable remuneration. The companies should review the description of the possibilities of claw back in the company’s remuneration policy in the light of the updated recommendation. The companies are to report on any claw back of variable remuneration in the financial year in the company’s remuneration report.
5. Risk management
5.1 Identification of risks and openness in respect of additional information
The Committee’s recommendation 5.1.1 that the board of directors consider and account for relevant risks has been updated. It is recommended that the board of directors based on the company’s strategy and business model consider, for instance, the most significant strategic, business, accounting and liquidity risks. Consideration of accounting and liquidity risks is new compared to the previous recommendation, and the companies are to give an account of the company’s risk management in the company commentary. It is stated in the comment that information on risk management may, if relevant, be extended to include digital risks.
The Committee’s recommendation 5.1.2 that a whistleblower scheme be established is extended to the effect that it is recommended to establish, in addition to a whistleblower scheme, a procedure for handling such whistleblower cases. If the whistleblower scheme is anchored with the audit committee, this task will be included in the audit committee’s duties according to recommendation 3.4.3. It is stated in the comment to recommendation 5.1.2 that it will be relevant on a current basis to inform the audit committee and the board of directors of the number, nature and justification of reports made under the whistleblower scheme.
Recommendation 5.1.3 on regular dialogue and exchange of information with the auditor has been moved from section 5 and is now included partially in recommendation 3.4.3 on the audit committee, as described above, to the extent that it has not been replaced by other legislation.
The impact of the updated Recommendations on the companies
The updated Recommendations enter into force as of the financial year starting on 1 January 2021 or thereafter. Even if the companies are not to report whether they comply with the individual recommendations or to state why they have decided not to comply with one or several recommendations (the comply or explain approach) until the presentation of accounts in 2022 (the 2021 annual accounts), companies should consider already now whether the updated recommendations give rise to any changes in their policies and internal procedures. It is particularly relevant for the companies to consider how they can actively work with the most recent trends in society on long-term value creation, social responsibility and sustainability, diversity and evaluation which are reflected in the updated Recommendations.