The composition of the board of directors should ensure that the board can attend to the common interests of all shareholders and meets the company’s need for expertise, capacity and diversity. Attention should be paid to ensuring that the board can function effectively as a collegiate body.
The composition of the board of directors should ensure that it can operate independently of any special interests. The majority of the shareholder-elected members of the board should be independent of the company’s executive personnel and material business contacts. At least two of the members of the board elected by shareholders should be independent of the company’s main shareholder(s).
The board of directors should not include executive personnel. If the board does include executive personnel, the company should provide an explanation for this and implement consequential adjustments to the organisation of the work of the board, including the use of board committees to help ensure more independent preparation of matters for discussion by the board, cf. Section 9.
The chairman of the board of directors should be elected by the general meeting so long as the Public Companies Act does not require that the chairman must be appointed either by the corporate assembly or by the board of directors as a consequence of an agreement that the company shall not have a corporate assembly.
The term of office for members of the board of directors should not be longer than two years at a time.
The annual report should provide information to illustrate the expertise of the members of the board of directors, and information on their record of attendance at board meetings. In addition, the annual report should identify which members are considered to be independent.
Members of the board of directors should be encouraged to own shares in the company.
Commentary:
Composition of the corporate assembly
A company with more than 200 employees is, as a general rule, required to have an elected corporate assembly with 12 members. Shareholders elect 2/3 of the members of a corporate assembly through the general meeting, and 1/3 are elected by and from among the employees. The shareholder-elected representatives on the corporate assembly represent the interests of shareholders in the election of the board of directors. The corporate assembly is also charged with supervising the management of the company by the board and the executive management. It is therefore important that the shareholder-elected members of the corporate assembly represent a broad cross-section of shareholders in order to protect the interests of shareholders in general. A company and its employees may enter into an agreement for the company not to have a corporate assembly. In such circumstances, the employees are given additional rights to elect members of the board of directors. The majority of the duties of the corporate assembly are transferred to the board of directors, including the election of the chairman of the board.
Composition of the board of directors
In addition to having the appropriate expertise, it is important that the board of directors has sufficient capacity to carry out its duties. In practice, this means that each member of the board must have sufficient time available to devote to his or her appointment as a director. Holding a large number of other board appointments, for example, may mean that a director does not have the capacity necessary to carry out his or her duties in the particular company. The commitment involved in being a member of a board can vary from company to company, and it is therefore not appropriate to set an absolute limit for the number of board appointments an individual should hold. However, directors who hold a number of board appointments should at all times bear in mind the risk of conflicts of interest between such appointments.
The composition of the board of directors as a whole should represent sufficient diversity of background and expertise to help ensure that the board carries out its work in a satisfactory manner. In this respect due attention should be paid to the balance between male and female members of the board. The board is responsible as a collegiate body for balancing the interests of various stakeholders in order to promote value creation by the company. The board should be made up of individuals who are willing and able to work as a team.
Independence of the board of directors
It is important that the board of directors, as required by the Public Companies Act, operates as a collegiate body when carrying out its duties. Members of the board must not operate as individual representatives for specific shareholders, shareholder groups or other stakeholders. In order to support the stock market’s confidence in the independence of the board, at least two of its members should be independent of the company’s main shareholder. This principle is particularly important for companies where one or more controlling shareholders could, in practice, decide the outcome of elections to the board.
The majority of the members elected to the board of directors by shareholders should be independent of the company’s executive personnel and its main business connections. It is important that the composition of the board ensures that it is able to evaluate the performance of the executive personnel and consider material agreements entered into by the company in an independent manner. Particular attention should be paid to ensuring that the board is capable of independently evaluating the company’s performance and specific matters put forward by the executive management.
In general terms, a member of the board of directors may be defined as independent when the individual in question has no business, family or other relationships that might be assumed to affect his or her views and decisions. It is difficult to provide an exhaustive summary of all the matters that might affect the independence of a member of the board. When evaluating whether a member of the board is independent of the company’s executive management or its main business connections, attention should be paid to ensuring, inter alia, that the individual:
- has not been employed by the company (or group where appropriate) in a senior position at any time in the last five years
- does not receive any remuneration from the company other than the regular fee as a board member (does not apply to payments from a company pension)
- does not have, or represent, business relationships with the company
- is not entitled to any fees as a board member that are dependent on the company’s performance or to any share options
- does not have any cross-relationships with executive personnel, other members of the board of directors or other shareholder elected representatives
- has not at any time in the last three years been a partner or employee of the accounting firm that currently audits the company.
The criteria listed above may also be relevant to determining whether a member of the board of directors is independent of the company’s main shareholder(s). Such evaluation should then be carried out on the basis of the board member’s relationship with the main shareholder(s) not the company. The rationale for placing such emphasis on the independence of the board of directors is to ensure that the interests of shareholders in general are properly represented. Where a company’s ownership is widely held, the independence of the board is principally intended to ensure that the executive personnel do not play too dominant a role relative to the interests of shareholders. Where a company has controlling shareholders, the independence of the board is principally intended to protect minority shareholders.
Membership of the board of directors by the chief executive
The Public Companies Act stipulates that the chief executive cannot be a member of the board of directors. This Code of Practice recommends that neither the chief executive nor any other executive personnel should be a member of the board.
Term of office and length of service
While the legislation permits a term of office for members of the board of directors of up to four years, this Code of Practice recommends that the term of office should not exceed two years. The situation in respect of both the company’s requirements and the demands of independence can change over the course of a two-year period. Shareholders (and the corporate assembly where appropriate) should therefore be given the opportunity to re-evaluate each shareholder-elected member of the board at least every second year. When considering whether to re-elect members of the board, the value of continuity should be balanced against the need for renewal and independence. Where a member of the board has served for a prolonged continuous period, consideration should be given to whether the individual in question is still considered to be independent of the company’s executive personnel. Recruitment of members of the board should be phased so that the entire board is not replaced at the same time.
Information on members of the board of directors
The annual report should provide key information on members of the board of directors such as their expertise and independence and their record of attendance at board meetings. Information on individual members should include details of their age, education and work experience, and state how long they have been a member of the company’s board. Information should also be provided on any additional work a member has carried out for the company, and on any material appointments or assignments with other companies and/or organisations. Detailed information on candidates for the board (both new appointments and re-elections) should be made available within the 21 day deadline for calling a general meeting, cf. Sections 6 and 7.
Share ownership by members of the board of directors
Ownership of shares in the company by members of the board of directors can contribute to creating an increased common financial interest between shareholders and the members of the board. At the same time, members of the board who do hold shares should take care not to let this encourage a short-term approach which is not in the best interests of the company and its shareholders over the longer term.
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Where a company has a corporate assembly, the members of the board of directors are elected by the corporate assembly, cf. Asal. § 6-37. If, by agreement with its employees, a company with more than 200 employees does not have a corporate assembly, certain of the duties of the corporate assembly are transferred to the board of directors, including the election of the chairman of the board, cf. Asal. § 6-1, second paragraph, § 6-37, fourth paragraph, and § 6-12, fifth paragraph. Where a company does not have a corporate assembly, employees have the right to elect members of the board of directors pursuant to Asal. § 6-4. Both sexes must be represented on the company’s board of directors in accordance with the provisions of Asal. § 6-11a. At least half the members of the board of directors must be citizens of and reside in an EEA country unless the Ministry of Finance grants a specific exemption, cf. Asal. § 6-11. Members of the board of directors serve for a term of two years unless the articles of association stipulate a different term of office, cf. Asal. § 6-6. In certain types of situation, the corporate assembly is replaced by a board of representatives, cf. for example the Commercial Banks Act (Forretningsbankloven) § 9 et seq. or the Insurance Act (Forsikringsloven) § 5-4. The board of representatives has many of the same duties as the corporate assembly in other companies, particularly in electing the members of the board of directors. In accordance with the “Listing rules for shares”, all companies that apply for listing on Oslo Børs are expected to have an independent board of directors in accordance with the Norwegian Code of Practice for Corporate Governance. Pursuant to these rules, companies that apply for listing must submit an account of the independence of the board of directors to the exchange. The rules also state that where a company does not follow the Norwegian Code of Practice for Corporate governance in this respect but provides a reasoned explanation for the deviation, the composition of the board of directors and the reason for not following the Code of Practice may be of significance for whether the company is considered suitable for listing. The board of directors shall itself elect its chairman if the chairman has not been elected by the general meeting, cf. Asal. § 6-1. If the company has a corporate assembly, the corporate assembly shall elect the chairman of the board of directors cf. Asal. § 6-37, first paragraph. If it has been agreed pursuant to the Public Companies Act that the company shall not have a corporate assembly, the board of directors must elect its chairman, cf. Asal. § 6-1, second paragraph. The chief executive cannot be elected as a member of the board of directors, cf. Asal. § 6-1, third paragraph. Members of the board of directors shall serve for a term of two years, cf. Asal. § 6-6. The period of office may be fixed for a shorter or longer term in the articles of association, but not for a term of more than four years. The Auditing and Auditors Act § 4-2, first paragraph, cf. § 4-1, second paragraph, item 4, stipulates that no one may be appointed as auditor of a company if any other auditor or senior employee of the accounting firm for which he or she works, or any member or deputy member of the accounting firm’s corporate bodies, is a member or deputy member of any corporate body of the company in question. |