The Corporate Governance Review: Finland
Overview of governance regime
The main sources of law relating to governance practices of listed companies in Finland are the Companies Act2 and the Securities Markets Act.3 Both acts have recently undergone reforms and incorporate the most recent aspects of modern corporate governance. In addition, related regulations as well as guidelines, recommendations and rules issued by the competent authorities on both domestic and EU level, including the Finnish Financial Supervisory Authority (FIN-FSA), Helsinki Stock Exchange (operated by Nasdaq Helsinki Ltd) and the European Securities and Markets Authority (ESMA), are key regulatory sources in the Finnish governance regime. Requirements for corporate governance increasingly stem from EU level legislation, particularly the EU's Second Shareholder Rights Directive4 (SHRD II), which was implemented in Finnish national legislation on 10 June 2019.
Furthermore, self-regulation plays an essential role, as do the articles of association and other company-specific rules of procedure, such as board and CEO work ordinances. Self-regulation norms can be found in the newly revised Finnish Corporate Governance Code5 (the Code) applied as of 1 January 2020 and in the Helsinki Takeover Code applied as of 1 January 2014, both issued by the Securities Market Association. The Code was amended to correspond to the requirements of SHRD II. The updates concerned particularly the provisions on reporting on remuneration, monitoring and assessing of related-party transactions, competence, expertise and duties of committees as well as assessing and reporting on the independence of board members.
i Board structure and practices
Pursuant to the Companies Act, the mandatory organs of a limited liability company are the general meeting and the board of directors. A supervisory board whose duties comprise the supervision of the company's administration and governance by the board of directors and the managing director may also be appointed. In practice, only a few listed companies have a supervisory board.
Legal responsibilities of the board
The board of directors is responsible for the overall administration of a company and the organisation of its operations, as well as for the arrangement of the control of the company accounts and finances. The board members and the managing director have a general duty to act with due care and in the best interest of the company.
In addition, the Companies Act contains several provisions by which the board of directors or its members are expressly entrusted with specific responsibilities, such as the ability to elect and dismiss the managing director, the obligation to draw up financial statements and the annual report as well as various other administrative obligations.
A quorum is constituted when more than half of the board members are present, unless a larger proportion is required in the articles of association. When the proportion is calculated, disqualified members are considered absent. The opinion of the majority shall constitute the decision of the board of directors. The articles of association may provide that decisions in the board shall, in order to be valid, be made by a qualified majority or unanimously. However, to our knowledge, listed companies very seldom use such qualifications. In the event of a tie, the chairman of the board of directors shall have the casting vote.
The board of directors may establish committees for the preparation of matters within its competence. The board, however, remains responsible for the duties assigned to the such committees. The Code describes the establishment and functions of an audit, remuneration and nomination committee. The board elects the members and the chairman of any such committee amongst its members. A committee shall consist of at least three members, all having the expertise and experience required for the duties of the committee in question.
Pursuant to the Code, a listed company shall establish an audit committee if the extent of the company's business requires that the preparation of matters pertaining to financial reporting and control be done in a more concentrated manner than by the board of directors.
If established, a nomination committee prepares matters pertaining to the election of the members of the board of directors. A remuneration committee, in turn, prepares the remuneration policy and may also be assigned to prepare the appointment of the managing director and the rest of the management team, as well as to assess and prepare their remuneration.
The board may also establish ad hoc committees to deal with matters of particular importance, such as a major acquisition or receipt of a takeover proposal.
Board and company practice in takeovers
Pursuant to the Securities Markets Act, both the party making a takeover bid and the target company listed in Helsinki Stock Exchange shall comply with the Helsinki Takeover Code, a recommendation issued by the Securities Market Association in order to promote good securities markets practice. Further regulations and guidelines concerning takeover bids have been set forth by FIN-FSA.
The board of directors of a target company plays an important role in public takeovers. The Securities Markets Act and the Helsinki Takeover Code impose certain obligations on the board of directors relating to such situations.
The board of directors has an obligation to seek the best possible outcome for the shareholders and actively evaluate and undertake the measures needed in order to achieve such objective. In a takeover bid situation, the interests of the shareholders require that the board of directors evaluate the bid and its consequences from various viewpoints and assess it also in light of other possible alternatives. The board of the target company may also seek competing bids subject to its own discretion.
Pursuant to the Securities Markets Act, the board of directors of a target company shall give a public statement containing well-founded assessment on the bid as well as a recommendation regarding whether or not the bid should be accepted. In any such recommendation, particular attention is to be paid to the valuation, the nature of the consideration and the overall feasibility of the takeover bid.
According to the Companies Act, the general meeting shall decide on the remuneration of the board of directors. The remuneration of the managing director shall be decided by the board. In a listed company, such decisions must be, save for certain exceptions, within the framework of a valid remuneration policy, which shall be presented to the general meeting at least every four years.
Based on the implementation of SHRD II, listed companies are obligated by the Securities Markets Act to disclose an annual remuneration report on the remuneration awarded to the company's managers during the preceding financial year. Detailed rules concerning the remuneration report have been set forth in a decree of the Ministry of Finance6 and in the Code. The Code also recommends listed companies to provide aggregated information on their website on the remuneration of other members of its management team.
Appointment, nomination and term of office
The general rule is that the annual general meeting elects all of the members of the board of directors, unless otherwise provided in the articles of association. If there are fewer than three board members, at least one deputy member shall be appointed. If the board has more than one member, the board shall elect a chairman amongst its members.
In a listed company, the term of a board member shall end with the conclusion of the ordinary general meeting following the election of the member. Other provisions on the term may be included in the articles of association. According to the Code, good corporate governance requires that the entire board of a listed company is elected annually at the annual general meeting. In addition, the general meeting may decide to establish a shareholders' nomination board consisting of representatives of major shareholders for the purposes of preparing a proposal to the annual general meeting for the composition and remuneration of the board of directors.
Competency and independence
According to the Code, a board member must have the competence required by the position and, in general, the composition of the board shall reflect the requirements set by the company's operations and development stage. Pursuant to the Companies Act, legal persons, minors, persons under guardianship, persons with restricted legal competency and bankrupts cannot be appointed as board members. Additionally, a person who has been prohibited by a court decision to conduct business cannot be appointed as board member during the period of validity of the prohibition. Further, according to the Companies Act, at least one member of the board must reside within the European Economic Area unless the company has been exempted from this requirement by the registration authority.
According to the Code, the majority of the board members must be independent of the company and at least two of such members must be independent of significant shareholders of the company. The board of directors has the responsibility to evaluate the independence of its members on a yearly basis.
Liability of directors
A member of the board of directors, a member of the supervisory board and the managing director shall be liable for the loss that he or she, in violation of the duty of care, other provisions of the Companies Act or the articles of association, has in office deliberately or negligently caused to the company. If the damage has not been caused in office, other compensation provisions, particularly the Tort Liability Act,7 may still apply.
Conflicts of interest
Pursuant to the Companies Act, a member of the board of directors is disqualified from the consideration of a matter that concerns a contract or other legal act between such board member and the company, or a contract between such member and a third party, if the member is expected to have a substantial interest in the matter and if the matter may contravene with the company's interest.
As a result of the implementation of SHRD II, a board member of a listed company is also disqualified, with certain exceptions, from the consideration of a matter in the company's or its subsidiary's board, if the matter concerns a contract or other legal act that involves a party related to the board member, as defined in the international financial reporting standards (IFRS), and if the contract or act will not be made in the ordinary course of business or concluded on market terms. In a listed company, the managing director and members of the supervisory board (if appointed) are also bound by the above-mentioned rules of disqualification. Participation of a disqualified member in the decision-making process may lead to invalidity of the decision.
Disclosure obligations and the management of insider information in listed companies are primarily regulated by the EU Market Abuse Regulation (MAR)8 and the Securities Markets Act. Further regulation has been set forth in the rules of Helsinki Stock Exchange and the regulations and guidelines of FIN-FSA and ESMA. Based on applicable disclosure obligations, listed companies are required to provide certain information to the market both on a periodic and an ongoing basis. Violation of or failure to follow the applicable disclosure obligations may result in administrative and criminal sanctions.
Periodic disclosure obligation
Listed companies shall publish financial statements, a management report and an auditor's report annually. The financial statements shall be prepared in compliance with IFRS.
Further, listed companies are obligated to disclose an interim financial report for the first six months of their fiscal year without undue delay and not later than three months from the expiry of the reporting period. Quarterly financial reporting, however, is no longer mandatory although followed by many listed companies.
In addition, listed companies are required to annually disclose a corporate governance statement, either as a part of the annual management report or, as the Code suggests, as a separate report. Detailed rules concerning the periodic disclosure obligation, interim financial reports, the management report and the corporate governance report as well as remuneration policy and the remuneration report have been set forth by the Ministry of Finance.9 The Code also includes recommendations regarding the corporate governance and remuneration reports.
Continuous disclosure obligation
MAR requires issuers to inform the public as soon as possible of information of a precise nature that, if made public, would be likely to have a significant effect on the price of a security. However, pursuant to MAR, a company may, at its own responsibility, delay the disclosure of inside information provided that immediate disclosure is likely to prejudice the legitimate interests of the issuer, the delay is not likely to mislead the public and the issuer is able to ensure the confidentiality of the information in question. In this case an insider list shall be drawn up.
Other requirements and disclosure obligations
MAR requires listed companies to maintain a list of all the persons who have access to inside information and, upon request, provide the list to FIN-FSA. Recommendations concerning the management of insider lists have been set forth in the Code and in the guidelines for insiders of listed companies issued by Nasdaq Helsinki.
According to the Securities Markets Act, a shareholder of a listed company is obligated, with certain exceptions, to notify the company and FIN-FSA the total number of shares and voting rights held (flagging notification), when the proportion reaches, exceeds or falls below certain threshold limits (5, 10, 15, 20, 25, 30, 50, 2/3 and 90 per cent). Upon receipt of a flagging notification, the company must disclose the information of the notification to the public. MAR also requires persons with managerial responsibilities within a listed company, as well as persons closely associated with them, to promptly notify both the company and FIN-FSA of transactions conducted on their own account relating to the issuer's securities.
Based on the implementation of SHRD II, listed companies are also required to disclose transactions that are material and concluded with a related party at latest when the company is bound by the transaction, provided that the transaction has not been entered into in the ordinary course of business or concluded on market terms.
Nasdaq First North Growth Market
Along with Helsinki Stock Exchange, Nasdaq Helsinki Ltd operates First North Finland Growth Market, the only multilateral trading facility in Finland that is an alternative stock exchange designed for small and growing companies. Companies listed on Nasdaq First North Growth Market are subjected to less extensive rules regarding, for instance, listing requirements, disclosure obligations and takeover situations. Further, First North Finland Growth Market listed companies are not obligated to prepare financial statements in accordance with IFRS nor are they required to comply with the Code.
i Corporate social responsibility and wider society
The concept of corporate social responsibility has become more diverse and more important in recent decades and especially during the past few years, which in turn has made companies regard corporate responsibility not merely as a burden but as a strategic opportunity for a reform and a source of competitive advantage.
As social and environmental responsibility has become increasingly important in public speech, companies have started to pay more and more attention also to reputational risk aside from financial and operative risk. For instance, aggressive tax optimisation, poor working conditions in a factory of a foreign subcontractor or unclear information on the origin of raw materials may impose a significant reputational risk for a company. The increased demand for risk management has led to the use of numerous different certificates and standards and increased the importance of company policies and internal auditing. Correspondingly, consumers' growing consciousness of the impact that production of goods has on local ecosystems and communities has increased the demand for transparent reporting.
Corporate social reporting has developed mainly on a voluntary basis. Although some general frames of reference have been developed for responsibility reporting, such as the Global Reporting Initiative, which is used by many Finnish companies, the quality of these reports has varied. Standards and instruments have also been developed to improve environmental management and social responsibility in companies, such as ISO 14000, ISO 26000 and the EU Eco-Management and Audit Scheme (EMAS).
The board of directors is responsible for the organisation and effective oversight of risk management in the company. Recommendations regarding internal control and risk management for the board of directors in listed companies are set forth in the Code. The board shall ensure that the company has defined the operating principles for internal control and that the company monitors its functioning. In addition, companies shall report in the corporate governance statement the operating principles for internal control, the risk management principles relating to financial reporting processes and the main principles applied in internal audit.
Along with diversity in experience, education and nationality, one element of diverse composition of a board of directors is to have balanced gender representation on it. According to the Code, companies must report at least the objectives relating to both genders being represented on the company's board of directors, the means to achieve these objectives and an account of the progress in achieving them.
In 2019, women's share of board seats was 29 per cent (being 18 per cent in 2011)10 in companies listed on Helsinki Stock Exchange, and nearly every company had a female member on the board of directors. Further, 9 per cent of listed companies had a woman as a managing director.11 These numbers have been reached solely through self-regulation and increasing initiative in commerce and industry.
i Shareholder rights and powers
The main rules governing shareholders' rights are set out in the Companies Act. Shareholders exercise their decision-making power at the general meeting. The annual general meeting must be held once a year within six months of the end of the financial period. Extraordinary general meetings must be convened when requested by the board of directors, the auditor, the supervisory board or shareholders holding at least 10 per cent of the total number of shares.
Each shareholder has the right to attend a general meeting. The same applies to the holders of non-voting shares unless otherwise provided in the articles of association.
Matters to be brought to the general meeting
The general meeting shall make decisions on matters that fall within its competence by virtue of the Companies Act. Matters to be decided by the general meeting include, among other things, amending the articles of association, distribution of funds, issuance, acquisition and cancellation of shares as well as any decision on corporate restructuring under the Restructuring of Enterprises Act (47/1993, as amended).
In addition, a shareholder has, regardless of its ownership stake, the right to have a matter falling within the competence of the general meeting dealt with by the general meeting if the shareholder so demands in writing from the board of directors well in advance to be included in the notice of the general meeting.
Decision-making at the general meeting
As a general rule, each share carries one vote. However, it can be arranged through the articles of association that shares carry multiple voting rights or that a certain class of shares carries no voting rights at all.
Normally, a proposal that is supported by more than half of the votes cast constitutes the decision of the general meeting. However, pursuant to the Companies Act, certain decisions must be made by a qualified majority of two-thirds of the votes cast and of the shares represented in the general meeting.
A shareholder is disqualified from voting in a matter pertaining to a civil action against the shareholder or the discharge of the shareholder from liability towards the company. A shareholder is likewise disqualified from voting in a matter pertaining to a civil action against a third party or the discharge of a third party from liability, if the shareholder is likely to derive an essential benefit which may be contrary to the interests of the company. Following the implementation of SHRD II, a shareholder who is a related party (as defined in the IFRS) to the listed company is also disqualified, with certain exceptions, from voting in a matter pertaining to a contract or other transaction that involves the shareholder or persons closely associated with the shareholder, provided that the transaction is not made in the ordinary course of business or concluded on market terms.
Minority shareholder rights
The protection of minority shareholders is based on the principle of equal treatment. The principle prohibits general meeting, the board of directors, the managing director and the supervisory board from making a decision and taking other measures that are conducive to conferring an undue benefit to a shareholder or another person at the expense of the company or another shareholder without the consent of the shareholder or shareholders at whose expense such undue benefit is to be given.
The Companies Act imposes various provisions relating to the exercise of minority rights. Typically, such rights may be exercised by a shareholder or shareholders who together hold at least one-tenth of the total amount of shares in the company. The minority rights include the right to:
- demand an extraordinary general meeting be called to address a specific issue;
- demand a minority dividend be distributed;
- bring a derivative action against the company's directors, the managing director or another shareholder for damages incurred to the company; and
- propose that a special audit be carried out.
Moreover, a shareholder may, in certain cases, demand that another shareholder who has deliberately abused influence in the company redeem the shares of the offended shareholder. However, such situations are uncommon and would require a harsh violation to have taken place.
The right to request information
A shareholder has the right to review the proposed resolutions and the financial data concerning the company before a matter is decided at a general meeting. Such information shall be kept available on the company's website and at the headquarters for at least a week before the general meeting.
At the request of a shareholder, the board of directors and the managing director shall provide more detailed information on circumstances that may affect the evaluation of a matter handled by the general meeting. If the meeting deals with financial statements, the obligation applies also to general information on the financial position of the company. However, such information shall not be provided if it were to cause substantial harm to the company (for example by revealing trade secrets or other confidential information).
Objection to a decision by the general meeting
The decision of a general meeting can be challenged if it violates the Companies Act or the articles of association. Pursuant to the Companies Act, a shareholder may object such decision by bringing an action against the company within three months of the decision.
Void decision by the general meeting
Pursuant to the Companies Act, a decision by the general meeting can be considered void, if:
- no notice has been delivered of the general meeting or the provisions on the notice have been materially breached;
- the decision requires the consent of a shareholder and such consent has not been obtained;
- the decision is clearly contrary to the principle of equal treatment; or
- according to the law, the decision could not have been made, even with the consent of all shareholders.
A shareholder may plead the invalidity of a void decision without a specific time limit, but it has been established that an action of objection shall nevertheless be made within a reasonable time.
ii Shareholders' duties and responsibilities
Duties of a majority shareholder
As a rule, shareholders have the right to pursue self-interest, (i.e., shareholders are not required to act for the benefit of the company, other shareholders or other persons). However, a majority shareholder cannot in any capacity make a decision that would violate the principle of equal treatment.
Under the Securities Markets Act, a shareholder whose proportion of voting rights increases to over 30 per cent or 50 per cent of the votes attached to the shares of the company (bid thresholds) is required to launch a mandatory takeover bid for the remaining shares in the company. According to the Companies Act, a shareholder with more than 90 per cent of all the shares and votes in the company has the right to redeem the shares of the other shareholders at a fair price (right of squeeze-out). Respectively, a shareholder whose shares may be redeemed has the right to demand such redemption (right of sell-out).
iii Shareholder activism
Shareholder activism has remained a fairly modest phenomenon in Finland in the recent decades. However, institutional investors are seeking to take a more active role and have been instrumental in a few recent structural arrangements of listed companies. In Finland, there is a long tradition of the state being a large shareholder of listed companies, and the activity or passivity of the state as a shareholder has been a frequent topic in public discussion. Other significant and influential shareholders of listed companies in Finland are the large mutual pension insurance companies, of which there are only a few.
As a result of the implementation of SHRD II, a large number of different institutional investors and asset managers that have invested in shares traded on a regulated market in the European Economic Area are obligated to develop and disclose an engagement policy that describes how they have integrated shareholder engagement in their investment strategies. They must also disclose on an annual basis how their engagement policies have been implemented including, for example, a general description of voting behaviour. In the case of non-compliance with such requirements, a clear and reasoned explanation must be given.
iv Takeover defences
The Finnish poison pill
In Finnish company law practice, the term poison pill refers to a provision in the articles of association, according to which a shareholder has an obligation to launch a takeover bid for all the other shares in the company for a specified price if the shareholder's proportion of shares or voting right reaches or exceeds a certain threshold.
The importance of poison pills for listed companies decreased after the introduction in the Securities Markets Act of the mandatory 30 per cent takeover bid threshold (while also retaining the 50 per cent threshold) in 2006.
Consent and redemption clauses
According to the Companies Act, it may be provided in the articles of association that the acquisition of a share requires the consent of the company (consent clause), or that a shareholder, the company or another person has the right to redeem shares due to be transferred to a third party by a shareholder other than the company (redemption clause). However, these kinds of provisions restrict the free transferability of shares and are therefore prohibited by the rules of Helsinki Stock Exchange.
In a takeover bid situation, the board is required to take active steps to ensure that the best possible outcome is achieved for the shareholders, which may require the board to seek for a competing bid (white knight defence).
A vote cutter refers to a provision in the articles of association that restricts the voting rights of a shareholder in general meeting. According to the Companies Act, a share may be set to carry a vote in a given matter or no voting rights at all. Vote cutters, which are valid also in listed companies, can be used to hinder majority control and takeover attempts.
v Contact with shareholders
As noted in the Code, due to the principle of equal treatment of shareholders, regulations governing inside information, disclosure obligations, reasons related to competitions law and confidentiality obligations of company managers, to name a few, companies should refrain from giving undisclosed information on company matters to individual shareholders. However, if the board deems that it is in the best interest of the company, it may contact an individual shareholder and give such information subject to proper protection of confidentiality and possible inside information.
With respect to matters falling within the competence of the general meeting, in Finnish corporate governance practice it is customary for the board of directors to be aware of the opinions that the shareholders with significant ownership shares have on the matter being brought for resolution.
The newly implemented SHRD II has altered the operational environment of many listed companies in Finland in the preceding year – especially together with the increasing focus on climate change, aim for sustainable development, strive for gender and other forms of equality as well as other similar issues of a global nature strongly relating to corporate social responsibility. As a Nordic country Finland can be considered a good example with respect to many such trends mentioned, although discussion on corporate social responsibility in Finland can be considered still in its infancy. Transparency in its various forms and aspects has affected and continues to affect the corporate governance regime in Finland not only through regulation and guidelines but increasingly through self-assessment and increase in sense of responsibility on a wider scale.
1 Risto Ojantakanen and Ville Kivikoski are partners and Linda Pihonen is an associate at Itäinen & Ojantakanen Attorneys Ltd.
2 Finnish Limited Liability Companies Act (624/2006, as amended).
3 Finnish Securities Markets Act (746/2012, as amended).
4 Directive (EU) 2017/828 of the European Parliament and of the Council amending Directive 2007/36/EC as regards the encouragement of long-term shareholder engagement.
5 Finnish Corporate Governance Code 2020, Securities Market Association.
6 Decree of the Ministry of Finance on the content requirements and disposition of the remuneration policy and report of an issuer of shares (608/2019).
7 Tort Liability Act (412/1974, as amended).
8 Regulation (EU) No 596/2014 of the European Parliament and of the Council of 16 April 2014 on market abuse (market abuse regulation) and repealing Directive 2003/6/EC of the European Parliament and of the Council and Commission Directives 2003/124/EC, 2003/125/EC and 2004/72/EC.
9 Decree of the Ministry of Finance on issuer's periodic disclosure obligation (1020/2012) and Decree of the Ministry of Finance on the content requirements and disposition of the renumeration policy and report of an issuer of shares (608/2019).
11 Finland Chamber of Commerce: Women in the Boards of Finnish Listed Companies in 2019 (in Finnish) and Finland Chamber of Commerce: Women Director and Executive Report 2019 (in Finnish).