The Corporate Governance Code was prepared under the direction
of the Federal Commission for the Securities Market by "Coudert
Brothers" Legal Advisers.
The project was financed out of the grant of The European Bank for
Reconstruction and Development which was secured by Japanese government.
Team of authors led by:
Doctor of Economic Science I. V. Kostikov, Candidate in the Science
of Law T. M. Medvedeva, B. Metsger, D. Blyum
Team of authors:
Doctor of Historical Science I. V. Belikov, D. Blyum, Doctor in the
Science of Law Professor I. M. Braginskij, Candidate in the Science
of Law A. M. Varlamova, D. A. Glazunov, Candidate in the Science of
Law E. V. Kabatova, Doctor of Economic Science I. V. Kostikov, I.
V. Larionov, Candidate in the Science of Law A. G. Lisitsin-Svetlanov,
Candidate in the Science of Law T. M. Medvedeva, Candidate of Economic
Science M. A. Merzlikina, B. Metsger, K. Yu. Ratnikov, Ya. R. Til'kunova,
A. V. Timofeyev, Candidate of Economic Science A. V. Sharonov, D.
A. Shokhin
Participated in developing certain chapters:
Doctor of Engineering Science N. N. Annikova, K. S. Budayev, A. I.
Varenkov, Candidate of Economic Science A. A. Glushetskij, N. I. Kosheleva,
Yu. S. Nosov, A. V. Popov, Candidate in the Science of Law A. Yu.
Sinenko, V. V. Skaletskij, V. V. Skobara, A. S. Shishmarev, Doctor
of Economic Science L. Z. Shnejdman, Matthew Murray.
Table of Contents
INTRODUCTION
CHAPTER 1 PRINCIPLES OF CORPORATE GOVERNANCE
CHAPTER 2 GENERAL SHAREHOLDERS MEETING
CHAPTER 3 BOARD OF DIRECTORS OF THE COMPANY
CHAPTER 4 EXECUTIVE BODIES OF THE COMPANY
CHAPTER 5 CORPORATE SECRETARY OF THE COMPANY
CHAPTER 6 MAJOR CORPORATE ACTIONS
CHAPTER 7 DISCLOSURE OF INFORMATION ABOUT A COMPANY
CHAPTER 8 SUPERVISION OF FINANCIAL AND BUSINESS OPERATIONS
OF THE COMPANY
CHAPTER 9 DIVIDENDS
CHAPTER 10 RESOLUTION OF CORPORATE CONFLICTS
"Corporate governance" is a term that encompasses a variety of activities connected with the management of companies. Corporate governance affects the performance of economic entities and their ability to attract the capital required for economic growth. Improvement of corporate governance in the Russian Federation is vital for increasing investment in all sectors of the Russian economy from both domestic sources and foreign investors. One means to foster such improvement is to introduce standards that are based on an analysis of best practices of corporate governance.
These standards of corporate governance apply to all economic entities, but are most important for joint stock companies. This is because it is in joint stock companies that the separation between ownership and management is the greatest, and thus conflicts related to corporate governance are most likely. Therefore, this Code has been developed primarily for joint stock companies seeking access to capital markets. This consideration, however, does not rule out the possibility of its use by other economic entities.
Standards of corporate governance should be applied to ensure adequate protection of the interests of all shareholders, regardless of the size of their holdings. The greater the level of shareholders' protection achieved, the more investment capital will be available to Russian joint stock companies (hereinafter referred to as "companies"), which will favorably influence the Russian economy as a whole.
Standards of corporate governance should be instrumental to the attainment of high ethical standards in relations between market participants.
The following sections describe the background of the development of the Corporate Governance Code (hereinafter referred to as the "Code"). It should be also taken into account that any company may develop its own code of corporate governance in accordance with the recommendations of this Code, or incorporate some of the Code’s provisions into its internal regulations. Subject to a company’s legal status, branch affiliation, capital structure, and other specific parameters, such a company may selectively use those recommendations of this Code suitable to it.
1. Russian law already incorporates the majority of the fundamental principles of corporate governance, however, in practice, their use, especially in court, and corporate governance traditions, are still at the formative stage
The existing Russian legislation governing the operation of economic entities is relatively new, however it already reflects most of the generally accepted corporate governance principles.
On the other hand, the main problems in the corporate governance area arise from the lack of durable corporate governance practices rather than the quality of legislation, which is why corporate governance traditions are currently in the formative stage.
2. High standards of corporate governance cannot be assured by legislative provisions alone
Legislation alone cannot be expected and is inherently unable, to regulate all issues related to the management of companies.
First, the law establishes and should establish only general mandatory rules. It cannot regulate, and should not have as its purpose to regulate in detail all matters of corporate operations. Abundance of detail in legal norms makes it difficult for companies to function since each company's business is unique, making it impossible adequately to reflect such uniqueness in the law. That is why the law often completely omits provisions regulating certain relationships (and the absence of such regulation is often not at all a legislative weakness), or establishes general rules leaving it to the parties involved in appropriate business relationships to choose a line of behavior.
Second, legislation is unable to react rapidly to changes in corporate governance practice, as amending laws is very time consuming.
3. Many issues associated with corporate governance lie outside the legal arena and have an ethical rather than legal nature
Many legislative regulations covering corporate governance are based on ethical norms. For example, civil law regulations, in particular, stipulate the possibility of applying requirements of good faith, prudence and equity in the absence of applicable legislation, as well as exercising civil rights in a reasonable and fair manner. Thus, moral and ethical standards of reasonableness, equity and good faith are part and parcel of the existing legislation.
At the same time, such legislative regulations are not always sufficient to ensure proper corporate governance.
Therefore, companies should act in accordance not only with statutory standards, but also with ethical standards which are often more demanding than the law's requirements.
Ethical standards present a set system of behavioral norms and customs of the trade traditionally applied by the business community, which are not based on the law, and which form positive expectations with respect to the anticipated behavior of participants in corporate relations.
Ethical standards of corporate governance form sustainable behavioral patterns common to all participants in corporate relations.
Compliance with these standards is not only a moral imperative; it also helps the company avoid risks, supports long-term economic growth and facilitates successful business activity.
Ethical standards and best practice, together with the law, form a company's policy of corporate governance based on respect for the interests of both the shareholders and management of the company and help to strengthen the company and increase its profit.
4. The Code sets forth recommendations with respect to the best practices of corporate governance, but is, however, not obligatory
The Code shall play a key role in the process of development and improvement of Russian corporate governance practices. It shall become an important educational tool that be extensively used to define Russian company governance standards and to promote the further development of the Russian stock market.
The Code has been developed in accordance with the current provisions of Russian legislation, with due respect to established Russian and foreign corporate governance practices, ethical standards, and the specific needs and business environment of Russian companies and Russian capital markets at the present stage of their development.
The provisions of the Code are based on the internationally recognized corporate governance principles developed by the Organization for Economic Cooperation and Development (OECD), in accordance with which a number of other countries have adopted their own corporate governance codes and similar documents.
The Code is a list of recommendations. The application of the Code should be voluntary for companies, and should be motivated by their desire to increase their attractiveness to present and potential investors.
The Code sets forth the underlying principles of the best corporate governance practices that may be used by Russian companies to build their own systems of corporate governance, and contains recommendations on the practical implementation of these principles and the related disclosure of information.
When shaping their own corporate governance policies, companies may themselves determine which rules and procedures recommended by the Code they should follow and/or whether they should develop new rules and procedures in accordance with the corporate governance principles set forth by the Code.
CHAPTER 1. PRINCIPLES OF CORPORATE GOVERNANCE
Corporate governance should be based on respect for the rights and lawful interests of all participants and improve the quality of a company's operations by means of, among other things, increasing the value of corporate assets, creating jobs and enhancing the financial stability and profitability of the company.
Trust between all those engaged in corporate governance is at the root of the effective operation of a company and the ability to attract investment. The Principles of Corporate Governance described in this chapter are aimed at the creation of trust in relations arising in connection with corporate management.
The principles of corporate conduct are fundamental guidelines underlying the formation, operation and enhancement of a company’s system of corporate governance.
The principles of corporate conduct set forth in this chapter form the basis of the recommendations contained in the chapters of this Code that follow, and also serve as fundamental guidelines to be observed in the absence of specific recommendations. These principles have been drafted according to the Principles of Corporate Governance of the Organization for Economic Cooperation and Development (OECD), international corporate conduct practice, as well as experience accumulated in Russia since the enactment of the Federal Law "On Joint Stock Companies".
1. Corporate conduct practice should provide shareholders with a real opportunity to exercise their rights in relation to the company
1.1. Shareholders should be provided with reliable and effective methods to register ownership of shares and an opportunity to freely and quickly dispose of their shares.
1.2.
Shareholders may participate in the management of a joint stock company
by making decisions at a general shareholders meeting on the most important
issues of a company's business. It is advisable that the following be
provided to guarantee this right:
(1) the procedure for giving notice of a general shareholders meeting
gives shareholders a genuine opportunity to prepare for such meeting;
(2) shareholders are provided with a genuine opportunity to study the
list of persons entitled to take part in a general shareholders meeting;
(3) the place, date and time of a general shareholders meeting is fixed
in such a manner that the shareholders have a genuine and unrestricted
opportunity to take part in it;
(4) procedures whereby shareholders can show that they have a right
to call a general shareholders meeting and introduce changes to the
agenda are not unduly complicated; and
(5) each shareholder has an opportunity to realize its voting rights
in the most simple and convenient way.
1.3.
Shareholders should be provided with an opportunity to share in the
profits of the company. To enable shareholders to exercise this right
it is recommended that the company:
(1) establishes a transparent and shareholder-friendly mechanism for
evaluating the amount of dividends and payment thereof;
(2) provides sufficient information for accurate understanding of the
conditions required to pay dividends and on the procedure for their
payment;
(3) prevents any opportunity to mislead shareholders with respect to
the financial position of the company when paying dividends;
(4) provides for a procedure for the payment of dividends which would
not make it unduly complicated for shareholders to receive such dividends;
and
(5) impose sanctions on executive bodies for incomplete or delayed payment
of declared dividends.
1.4.
Shareholders should have the right to the regular and timely receipt
of complete and accurate information on the company. This right should
be fulfilled by:
(1) provision to shareholders of comprehensive information on each item
of the agenda in preparation for a general shareholders meeting;
(2) inclusion of information necessary for evaluation of the results
of the company's operations for the year in the annual report presented
to shareholders; and
(3) establishment of the position of corporate secretary (hereinafter
referred to as the "secretary of the company") to ensure shareholders'
access to information about the company.
1.5. Shareholders should not misuse the rights conferred upon them.
Neither acts of shareholders aimed exclusively at harming other shareholders or the company, nor other misuses of shareholder rights, should be allowed.
2. Corporate governance practice should provide for equal treatment of shareholders owning an equal number of shares of the same type (category). All shareholders should have access to effective protection in the event of a violation of their rights
Confidence
in a company is largely based on the equal treatment by the company
of equal shareholders. For the purposes of this Code, equal shareholders
mean shareholders that own the same number of shares of the same type
(category). This principle should be observed by means of the following:
(1) the established procedure for holding general shareholders meetings
should provide all persons attending the meeting with a reasonably equal
opportunity to express their opinion and ask questions;
(2) important corporate actions should be taken in such a way that shareholders
have full information about such actions, and their rights are observed;
(3) operations based on inside and confidential information should be
prohibited;
(4) members of the board of directors and the company's executive bodies,
and the director general should be elected in accordance with a transparent
procedure which provides shareholders with full information on such
persons;
(5) members of the board, the director general and other persons who
may be interested in a transaction should disclose information on such
interest; and
(6) all required and possible measures should be taken to settle conflicts
between bodies of the company and its shareholder(s) or between shareholders,
if such conflicts affect the interests of the company (hereinafter referred
to as "corporate conflicts").
3. Corporate governance practice should provide for the strategic management of the company's business by the board of directors, for effective control by the board over the executive bodies of the company, and for the accountability of the board of directors to shareholders
3.1.
The board of directors should determine the company's development strategy
and effectively control the financial and business activities of the
company. For this purpose the board of directors should approve:
(1) priority areas of the company’s operations;
(2) a financial and business plan; and
(3) internal control procedures.
3.2.
The composition of the board of directors of the company should provide
for the most efficient performance of the functions entrusted to the
board of directors. For this purpose it is recommended that:
(1) members of the board of directors should be elected by means of
a transparent procedure which takes into account the diversity of shareholders'
opinions, ensures that the composition of the board of directors meets
the relevant legal requirements and allows for the election of independent
members of the board of directors (hereinafter, an "independent
director");
(2) the board of directors should include a sufficient number of independent
directors;
(3) the procedure for determination of whether there is a quorum at
the meeting of the board of directors should provide for the participation
of non-executive and independent directors.
3.3. It is recommended that members of the board of directors take an active part in the meetings of the board and of board committees.
It
is recommended that the meetings of the board of directors should be
held as follows:
(1) on a regular basis in accordance with a specially drafted plan;
and
(2) with personal attendance or by remote poll depending on the importance
of the items to be considered.
It
is recommended that the board of directors should create committees
for preliminary consideration of the most important issues falling within
its competence:
(1) the strategic planning committee should facilitate the increase
of the company's business effectiveness in the long-term;
(2) the audit committee should provide for control over the financial
and business operations of the company;
(3) the personnel and remuneration committee should encourage attraction
of skilled experts to the management of the company and the creation
of incentives necessary for them to work effectively; and
(4) the committee for settlement of corporate conflicts should encourage
prevention and efficient settlement of corporate conflicts.
The board of directors may also consider the establishment of other committees, including risk management and ethics committees.
3.4. The board of directors should provide for the efficient operation and supervision of executive bodies of the company.
To
this end, it is recommended that the board of directors:
(1) be vested with the right to suspend the authorities of the director
general (managing organization, manager) of the company;
(2) should define eligibility criteria applicable to candidates for
the position of director general (managing organization, manager) and
members of the company's managerial board;
(3) should approve the terms and conditions of contracts between the
company and the director general (managing organization, manager) and
the members of the managerial board, including their remuneration and
other fees.
4. Corporate governance practice should provide executive bodies of the company with the ability to manage the day-to-day activities of the company reasonably, in good faith and solely in the interests of the company, and ensure that executive bodies report to the board of directors and the shareholders
4.1. It is recommended that companies create a collegiate executive body (hereinafter "managerial board"), which should be competent to resolve complicated issues relating to the management of the day-to-day activity of the company.
4.2.
The composition of the executive bodies of the company should provide
for the most efficient performance of the functions entrusted to them.
For this purpose:
(1) the director general and members of the managerial board should
be elected by means of a transparent procedure that provides the shareholders
with full information about such persons;
(2) in making a decision on the transfer of powers of a sole executive
body (hereinafter "director general") to a managing organization
(manager), shareholders should have full information on the managing
organization (manager), including information on risks relating to the
transfer of powers to the managing organization (manager), the reasons
for such a transfer, confirmation that the managing organization (manager)
has the funds available to reimburse losses to the company if such losses
occur through the fault of the managing organization (manager), and
a draft of the contract with the managing organization (manager); and
(3) the director general and members of the managerial board should
have sufficient time to discharge their duties.
4.3. It is recommended that executive bodies act in accordance with the financial and business plan of the company.
4.4. It is recommended that remuneration of the director general (managing organization, manager) and members of the managerial board correspond to their qualifications and reflect their real contribution to the results of the company's operations.
5. Corporate governance practice should provide for timely disclosure of full and accurate information about the company, including information about its financial position, economic parameters, ownership and management structure, to enable shareholders and investors to make informed decisions
5.1. Shareholders should have equal opportunities in terms of access to the same information.
5.2. The information policy of the company should provide for free and unhindered access to information about the company.
5.3. Shareholders should have the opportunity to receive full and reliable information, including information about the financial situation of the company, results of its operations, management of the company, major shareholders of the company, as well as other essential facts which have significant impact on its financial and business operations.
5.4. The company should control the use of confidential and insider information.
6. Corporate governance practice should take into account the statutory rights of interested persons, including employees of the company, and encourage active cooperation between the company and interested persons with a view to increasing the assets of the company and the value of its shares and other securities, and to creating new jobs
6.1. To provide for the efficient operation of the company, its executive bodies should take into account the interests of third persons, including creditors of the company and state and municipal bodies of the territory where the company or its structural subdivisions are located.
6.2. The management bodies of the company should encourage employees’ to be concerned about the efficient operation of the company.
7. Corporate governance practice should provide for the efficient control over the financial and business operations of the company in order to protect the rights and legal interests of shareholders
7.1. It is recommended that companies create an efficiently functioning system of daily supervision of their financial and business operations. For this purpose it is recommended that the company operate on the basis of a financial and business plan, which should be annually approved by the board of directors of the company.
7.2. It is recommended that the company should distinguish between the roles of those bodies and persons included in the system of supervision of financial and business operations of the company and those persons involved in the development, approval, application and evaluation of the internal control system. It is advisable that development of internal control procedures should be assigned to an internal control service (hereinafter referred to as the "control and audit service"), which should be independent of the executive bodies of the company, while approval of internal control procedures should be assigned to the board of directors of the company.
7.3.
It is recommended that the company should ensure efficient coordination
between internal and external audits. For this purpose:
(1) the audit committee should evaluate each nominee auditor of the
company; and
(2) prior to its submission for approval by the general shareholders
meeting, the opinion rendered by the independent audit organization
(auditor) of the company should be presented for evaluation by the audit
committee.
CHAPTER 2. GENERAL SHAREHOLDERS MEETING
Shareholders that participate in a company risk their capital in doing so. Shareholders are the real owners of the company, and must be able to receive detailed and reliable accounts of the policies pursued by the company from the board of directors and executive bodies.
Holding the general shareholders meeting provides the company with an opportunity to inform shareholders at least once a year of its activities, achievements and plans, and to involve them in making decisions on the most significant company matters. For a minority shareholder, the annual general shareholders meeting is often the only chance to obtain information on the company's operations and ask the company management questions regarding the company's administration. By participating in a general shareholders meeting, a shareholder exercises its right to be involved in the company’s management.
A prerequisite for shareholders' trust in their company is the establishment of a procedure for holding annual meetings that assures the equitable treatment of all company shareholders, while not being overly expensive or complicated for them.
1. Convocation of and Preparation for the General Shareholders Meeting
1.1. It is recommended that the notice procedure for the general shareholders meeting allow all shareholders to prepare properly for the meeting.
1.1.1. The convening and preparation of the general shareholders meeting is very important, as it ensures that informed decisions are made. Therefore, notice of the general shareholders meeting must be given to all shareholders so as to allow them sufficient time to formulate their position on the agenda items, to obtain information on persons authorized to participate in the general shareholders meeting, and to contact other shareholders to discuss the agenda.
The law provides that, except in specific circumstances, notice of the general shareholders meeting must be given not later than 20 days before the meeting. Considering the importance of giving timely notice of a general shareholders meeting to shareholders, it is recommended that a company give a 30-day notice of each meeting, unless otherwise provided in the law.
1.1.2. The notice of the general shareholders meeting should contain sufficient information to enable shareholders to decide whether they will participate and, if the meeting is held in person, how they will participate. The law contains requirements as to the content of such notice. However, it is recommended that in addition to these statutory requirements the notice of a general shareholders meeting held in person should state when the registration of participants starts, where registration is conducted, and the person to whom shareholders may address their complaints in the event of violations of the registration procedure. If voting is conducted by poll, it is recommended that the notice should indicate the date when voting ballots must be submitted.
1.1.3. The law provides several options for notifying shareholders of the general shareholders meetings (notification by mail, personal delivery, or publication of the notice). When selecting options the company should take into account the need to inform all shareholders entitled to participate in the general shareholders meeting. It is recommended that the company charter permit use of electronic notices as an additional means of general shareholders meeting, provided that a shareholder has clearly expressed a preference for this.
1.1.4. The law stipulates that where the company charter identifies a printed publication where general shareholders meeting notices will be published, such publication should be selected on the basis of its accessibility to most shareholders. It is recommended that, if it appears necessary, the charter should identify several publications in which the notice will be published simultaneously, and at least two publications should be nominated so that the notice is published even if one of the designated publications terminates its operations.
1.2. Companies should enable shareholders to familiarize themselves with the list of persons authorized to participate in a general shareholders meeting.
1.2.1. Being able to familiarize themselves with the list of persons authorized to participate in a general shareholders meeting permits shareholders holding at least one percent of votes to analyze the relationships at the forthcoming meeting and to contact other shareholders, if necessary, informing them of their position on any of the agenda items and discussing possible voting options, as well as to appoint persons to represent their interests at the general shareholders meeting. Therefore, companies are encouraged to enable shareholders to study lists of authorized participants at any time from the moment of notice and until a general shareholders meeting held in person is over, or, in the case of a general shareholders meeting held by means of absentee ballots, until the last date for submitting voting ballots.
1.2.2. Under the law, companies are required to provide any applicant with an extract from the list of persons authorized to participate in the general shareholders meeting, or a statement confirming that such person in not on the list. Shareholders thus obtain proof of their inclusion in the list and can check that their personal data entered in the list is accurate, thus ensuring that there are no obstacles to their participation in the general shareholders meeting. In addition, a shareholder unreasonably excluded from the list or whose personal data are incorrect has the right to demand to be included or to have the personal data corrected, which right the shareholder should enjoy from the moment of being notified of the meeting. In this regard it is recommended that companies enable shareholders to obtain extracts from the lists of persons authorized to participate in the general shareholders meeting and statements confirming non-inclusion from the date of the general shareholders meeting notice.
1.2.3. Obtaining the list of persons authorized to participate in the general shareholders meeting should not involve an excessively difficult, expensive or time-consuming. It is recommended that companies enable shareholders to study the list and receive extracts there from at the location where the general shareholders meeting materials and documents are made available, as identified in the general shareholders meeting notice.
1.3. It is recommended that information made available in connection with preparation for the general shareholders meeting and the access to such information enable shareholders to gain a full picture of the company's operations and make informed decisions on the agenda issues.
1.3.1. The law prescribes the list of information to be made available to shareholders in connection with the preparation for a general shareholders meeting. This list may be expanded in a company charter.
Companies are encouraged to identify in their charter additional materials and documents to be made available to shareholders on a mandatory basis when preparing for a general shareholders meeting, whether annual or extraordinary. Such information requirement in the company charter would promote shareholders' and potential investors' trust in a company by demonstrating its commitment to the transparency of its operations.
In particular, it is recommended that in addition to the submission of annual statements as prescribed by the law, the charter of the company should stipulate that the board of directors should also present its report to shareholders to allow the company’s performance indicators and growth prospects to be discussed at the general shareholders meeting, and to enable assessment by shareholders of the existing company management practices and the policies pursued by the board of directors and executive bodies.
It is further recommended that the company's charter should define a list of materials to be made available to shareholders with respect to specific issues on the agenda. In particular, when the company’s reorganization is on the agenda for the general shareholders meeting it is advisable that shareholders be provided with the reasons for such reorganization, as well as the annual reports and annual balance sheets for the last three fiscal years of all entities participating in the reorganization.
1.3.2. The law does not preclude the board of directors from providing other materials relevant to the agenda to shareholders during the preparation for the meeting in addition to those specifically listed in the law and the charter. Thus, to facilitate specific and productive discussions at the general shareholders meeting, and to effectively increase shareholders' influence, companies should provide shareholders with analyses and media reports, including those critical of the company's operations.
1.3.3. To make decisions on the agenda items, shareholders need to comprehensively assess the implications a decision may have for the company. The judgment of the board of directors plays a significant role in such an assessment. Making available information on the board's position allows a more balanced approach by shareholders towards decisions that are of significance to the company. To this end it is recommended that reports reflecting the board's position and any dissenting opinions of the directors on each agenda item are submitted to shareholders before each general shareholders meeting.
1.3.4. Materials made available before a general shareholders meeting should be organized in such a manner as to allow the easy correlation of such materials to specific agenda items. If there is no clear relationship between agenda items and corresponding materials, forming an objective opinion on such items and voting on them may become complicated. In this regard, it is recommended that reference to specific agenda items be made in the materials made available before a general shareholders meeting.
1.3.5. General shareholders meeting-related information should be communicated to the shareholders in a manner allowing for thorough review of the agenda items before the general shareholders meeting. Under the law, such information may be made available for shareholders not only at the address of the company's executive bodies, but also at other locations stated in the general shareholders meeting notice. As access to the general shareholders meeting-related information must be given to the maximum number of shareholders, companies are encouraged to make such information available in each area where significant numbers of the company's shareholders reside.
It is also recommended that shareholders be given an additional opportunity to access such information by electronic telecommunication means, including on the Internet. Corresponding provisions should be set forth in a company's charter.
1.3.6. If the agenda of a general shareholders meeting includes the election of members of the board of directors, director general, board members, members of the audit commission, independent audit organization (auditor) of the company, the participants in the general shareholders meeting should be provided with full information on the candidates for such positions. The information presented should contain the written consent of a candidate to fulfill the relevant role. In the absence of this written consent, it is recommended that the candidate should attend the general shareholders meeting in person and verbally confirm such candidate's consent to take the relevant position before the issue is voted on.
1.4. It is recommended that general shareholders meeting agenda items be clearly defined and precisely formulated, leaving no room for multiple interpretations.
1.4.1. The general shareholders meeting agenda is the only source of information for the shareholders on the issues it is proposed to resolve at the general shareholders meeting, and it is these issues that are covered by the materials made available to the shareholders. A vague agenda means that issues may be brought before the general shareholders meeting on which no materials were made available to the shareholders and on which they are unable to make an informed decision. A general shareholders meeting agenda should, therefore, contain a list of all issues to be resolved at the forthcoming meeting. It is not recommended that agenda issues be identified with such words as "other", "miscellaneous", or in any other way that does not clearly identify the issue for discussion.
1.4.2. Information on the proponent of an agenda issue is important to allow a shareholder to form an objective opinion on the issue. Such information allows a shareholder to better understand why an issue was presented to the general shareholders meeting and hence how to act on it. It is, therefore, recommended that general shareholders meetings' agendas disclose the proponents of each item included.
1.4.3. Preparation of the agenda should follow a common rule whereby each proposal on the agenda is included as a separate item. However, resolution of some issues is tied to decisions on other related issues. For example, a decision on reorganization in the form of a spin-off may only be deemed made if the general shareholders meeting resolves to approve the following issues: the spin-off procedure and terms and conditions, establishment of the new companies, the procedure to convert the reorganized company's shares into shares of the new companies, and approval of the spin-off balance sheet. To avoid any doubt as to whether the general shareholders meeting has actually resolved these issues, issues of this kind should be combined on the agenda.
Combination of issues may be useful in other cases, too. Specifically, where separate agenda items cover early termination of the company’s board of directors and election of a new board, approving the former and rejecting the latter will mean that the company is left without an active board of directors.
1.5. The procedures for asserting the rights of shareholders to call general shareholders meetings and propose agenda items should not be excessively complicated.
A shareholder's right to participate in the management of the company implies the right to propose agenda items, nominate candidates for election to the management bodies, and call for general shareholders meetings. The law sets certain requirements as to the number of shares to be held by a shareholder as of the moment when any of the above proposals is made. In Russia most shares are issued on a book-entry basis, and securities legislation permits rights to such shares to be recorded either in the share register or a depository account. Companies should not require that a shareholder appearing in the register produce any documents as evidence of rights. It is recommended instead that the company should check the existence of the shareholder's specific rights against the register. Provided the right to shares is recorded in a deposit account, it is recommended that a current statement of the account be regarded as ample proof of the shareholder's right to the shares.
1.6. It is recommended that easy and uncomplicated access for shareholders be the goal when the place, date and time for the general shareholders meeting are being selected.
1.6.1. Places and times that would make it difficult for the shareholders to participate in the meeting or would cause them to incur unnecessary expenses, should not be chosen for general shareholders meetings.
It is, therefore, recommended that meetings be held where the company is located or in the location expressly identified by the company charter for holding general shareholders meetings.
It is recommended that charters of companies located in places inaccessible by public transport or not freely accessible to all shareholders wishing to participate in the general shareholders meeting provide for another location within the Russian Federation accessible by public transport and freely accessible to the general public.
1.6.2. It is recommended that when premises are selected for the general shareholders meeting, such premises are sufficient to accommodate all shareholders wishing to participate. In the light of these objectives it is recommended that companies determine in advance and as precisely as possible how many participants are likely to attend the meeting, which is especially important for companies with many shareholders owning small blocks of shares.
1.6.3. It is recommended that the annual general shareholders meeting should commence not earlier than 9 A.M. nor later than 10 P.M. local time.
1.7. It is recommended that each shareholder be given the opportunity to exercise his voting rights in a simple and convenient way.
In some situations, it may be more convenient for shareholders to vote via proxy, where the representative must hold a power of attorney. The law sets forth formal requirements for such a power of attorney, which, if not followed, may result in it being invalidated. To avoid this, it is recommended that companies send shareholders, together with blank voting ballots, blank powers of attorney with instructions on how to fill them out, though with shareholders not being obligated to use this form.
2. General shareholders meeting Procedures
2.1. It is recommended that procedures for the conduct of the general shareholders meeting established by the company ensure that all persons present at such meeting are given reasonably equal opportunities to express their opinions and ask questions.
2.1.1. The general shareholders meeting should be conducted in a way that gives shareholders an opportunity to make balanced and informed decisions on all matters on the agenda. To attain this objective, the rules of order of the meeting should allocate reasonable and sufficient time both for presentations on the matters on the agenda and for discussion of such matters.
One of the key figures at the general shareholders meeting is the chairman who should act reasonably and in good faith, without using his authority to limit the rights of shareholders. For instance, the chairman should not interrupt the speaker, unless this is necessary to maintain the rules of order applicable to the general shareholders meeting or to comply with other procedural requirements, nor should the chairman comment upon a presentation made by a shareholder.
In order to give shareholders an opportunity to receive the fullest and most objective information about the company in the course of the meeting, it is recommended that key officers of the company, including chairmen of committees of the board of directors, should be allocated time to speak.
It is also advisable that the agenda of the meeting should reserve some time for shareholders’ presentations.
2.1.2. Accountability of directors, the director general and managers to the company's shareholders implies the right of shareholders to demand written reports and answers to questions regarding various aspects of the company's activities. The general shareholders meeting is the only opportunity for many shareholders to receive competent answers to their questions directly from company officials. Therefore, it is recommended that the director general, managerial board and company directors be present at the meeting.
With the purpose of encouraging the active participation of shareholders in controlling financial and business operations of the company, shareholders should be provided with an opportunity to question members of the audit commission and the auditor of the company about material they have presented and, accordingly, receive answers to the questions asked. In this regard, the company should invite the auditor of the company to attend general shareholders meetings, as well as ensuring that all members of the company's audit commission attend such meetings.
It is clear that sometimes the presence of all members of the managerial board and other company officials may not be possible. In such cases, it is recommended that the chairman of the meeting inform the participants of the reasons for the absence of each such officer as soon as the meeting begins.
2.1.3. The chairman of the meeting should try to have each question asked by shareholders answered directly at the general shareholders meeting. If a question is too complex to allow an immediate answer, it is recommended that the person(s) asked should give a written response after the general shareholders meeting as soon as practicable.
2.1.4. To assure that persons who are elected as directors, and as members of executive bodies and the audit commission are trusted by shareholders, shareholders should be provided with all necessary information about the nominees.
The information about nominees that should be disclosed to shareholders before a general shareholders meeting is specified in other chapters of this Code dealing with activities of the board of directors, executive bodies and other bodies of the company. However, shareholders may find such data insufficient to choose a nominee. Shareholders should, therefore, be allowed to question nominees directly, and for this purpose companies should assure that such nominees are present at the general shareholders meeting. It is worthwhile including into the charter of the company a requirement for candidates to the board of directors, executive bodies and the audit commission of the company, as well as the proposed auditor of the company, to attend a general shareholders meeting when the agenda includes formation of the above bodies of the company (election of the auditor of the company).
2.2. The procedure used by the company to register general shareholders meeting participants must not prevent shareholders from participating.
2.2.1. The procedure for registering participants of a general shareholders meeting is required only to determine whether or not a quorum is present at a meeting. To exclude any possibility of this procedure being used to prevent "unwanted" shareholders from participating in the general shareholders meeting, the registration procedure should be described in detail in the company's internal documents and included in the general shareholders meeting notice.
2.2.2. When the registration procedure is being established, the guiding rule should be that any shareholder wishing to participate in the meeting should be able to do so. In this regard it is recommended that registration of shareholders for participation in the general shareholders meeting be conducted on or near the premises in which the general shareholders meeting will be held and on the day proposed for the meeting.
Compliance with this recommendation by companies where the number of shareholders holding voting shares exceeds 100,000 may cause excessive expense; therefore, these companies may wish to commence the registration procedure in advance. In any such case, however, registration should be done in such a manner as not to cause any additional expense to shareholders.
2.2.3. The time period provided for registration should be sufficient for all shareholders wishing to participate in the meeting to register.
Registration of participants should not cease when a general shareholders meeting proceeds to business. Shareholders arriving after the commencement of the general shareholders meeting may participate in passing resolutions on the matters on the agenda put to the vote after such shareholders have been registered.
2.3. A reconvened general shareholders meeting in large joint stock companies (with more than 500,000 shareholders) is competent if it is attended by shareholders with an aggregate holding of not less than 20 percent of the voting shares of the company.
Pursuant to the existing legislation, a reconvened general shareholders meeting is deemed duly constituted (has a quorum) if shareholders holding on aggregate at least 30 percent of voting shares of the company take part in the meeting. A smaller quorum for transaction of business at a reconvened general shareholders meeting may be stipulated for companies where the number of shareholders is more than 500,000, if this is provided by their charters.
If an excessively low quorum is set for transaction of business at a reconvened general shareholders meeting, this may entail consequences unfavorable for shareholders. For example, this will enable holders of relatively insignificant numbers of shares to take decisions, thus endangering the rights and lawful interests of other minor as well as major shareholders. Validity of resolutions passed by a small number of people entitled to participation in the general shareholders meeting creates incentives for non-compliance with the established procedures for notifying shareholders of a reconvened general shareholders meeting.
In this regard, the charters of large companies should stipulate that a reconvened shareholders meeting is lawful if it is attended by shareholders having in aggregate not less than 20 per cent of the voting shares of the company.
2.4. Procedures for the conduct of the general shareholders meeting should safeguard the rights of shareholders during determination of the outcome of the vote.
2.4.1. It is recommended that the company should conclude its general shareholders meeting on the same day to save additional expenses for the shareholders. If a meeting cannot be finished on the same day, the company should at least continue it on the following day.
2.4.2. The procedure for counting votes should be transparent to shareholders and should preclude any possibility of figures being manipulated when vote results are counted. Companies, therefore, should arrange for independent monitoring of the vote counting process. Their charters and other internal regulations should provide procedures for such monitoring and, in particular, define the authority of persons appointed to monitor the vote counting process.
2.4.3. It is recommended that voting results are counted and announced before the end of the general shareholders meeting. Any doubts concerning voting results will thus be avoided, and shareholders' confidence in the company enhanced.
CHAPTER 3. BOARD OF DIRECTORS OF THE COMPANY
The general shareholders meeting independently passes resolutions on major issues related to the operations of the company lying within the scope of its authority set forth by the law. Decisions connected with the ongoing management of the company's current operations are made by the executive bodies of the company.
However, determination of the general strategy of the company and control over its executive bodies require certain professional qualifications and decision-making ability. The law requires that these issues be decided by a special body of the company - the board of directors, elected at the general shareholders meeting. Pursuant to the law, the board of directors should exercise general management of the company's operations, have wide powers of supervision and control, and be liable for a failure to perform its duties.
1. Functions of the Board of Directors
1.1. The board of directors determines the development strategy of the company and approves its annual financial and business plan
The law charges the board of directors with the responsibility of determining the priority areas of activity for the company. In so doing, the board of directors defines the major targets in the company's long-term operations. At the same time, efficient attainment of strategic objectives approved is possible only if these are objectively evaluated based on the current market situation, the financial position of the company and other factors affecting its financial and business operations.
Such evaluation should be made each year with the approval by the board of directors of a financial and business plan (budget) based upon recommendations of the company's executive bodies, which is the company document reflecting scheduled annual expenses in each area of the company's operations, and the funds to cover such expenses. Such document should also include a production plan, a marketing plan and a business plan for the company's investment projects. It should be noted that the level of detail in such a financial and business plan should permit the company's executive bodies a certain freedom of action in managing the current operations of the company within the scope of the plan.
In practice, companies sometimes draft several documents containing financial parameters for planning their operations. However, for convenience of application and due control over performance of a plan, it is recommended that the board of directors approve a uniform document containing scheduled financial and economic parameters for a year, making any amendments and additions thereto as may become necessary during the year. This will not prevent the company from making separate documents for planning various aspects of its operations (marketing, investments) in compliance with the financial and business plan approved and amended by the board of directors.
1.2. The board of directors provides efficient supervision of the financial and business operations of the company.
1.2.1. Efficient supervision of the company's financial and business operations ensures full implementation of its financial and business plan, compliance with established accounting procedures, and the accuracy of the financial information used by the company. Therefore, it is recommended that the company's charter should assign approval of the procedures for internal supervision of financial and business operations of the company to the authority of the board of directors.
These procedures should be developed taking into consideration the requirements of the Federal Law "On Countering Legalization of Income Generated by Illegal Means (Money Laundering)".
1.2.2. The risks that the company faces in the course of its operations are ultimately borne by shareholders. Therefore, one of the important functions of the board of directors - the guarantor of the rights of shareholders - is the establishment of a risk management mechanism enabling the company to assess the risks it faces in the course of its operations and minimize their negative effect.
Efficient internal controls enable regular identification and evaluation of substantial risks that may affect the achievement of the company's goals. Such evaluation should cover all risks taken by the company – loan risk, insurance risk, currency limitations risk, market risk, interest rate risk, liquidity risk, legal risk, and risks relating to carrying out operations with bills of exchange or other similar payment instruments.
In this respect, companies engaging in banking, investment or insurance activities should follow the risk management requirements established by their respective regulatory authorities.
Therefore, it is recommended that the responsibilities of the board of directors should include approval of internal risk management procedures, ensuring compliance with such procedures, analysis of their efficiency, and their improvement. These procedures should provide for prompt notification of the board of directors of all substantial deficiencies in the risk management mechanisms.
When approving risk management procedures, the board of directors should seek to strike an optimal balance between risks and rewards for the company, always provided that the company is at all times in compliance with the applicable legislation and the provisions of its charter, and to develop adequate incentives for the executive bodies of the company, its structural subdivisions and individual employees.
Companies should not, as a rule, take part in operations and conclude transactions involving a high risk of losing capital and investments.
1.3. The board of directors safeguards and protects the rights of shareholders as well as facilitates resolution of corporate conflicts.
1.3.1. One of the most important functions of the board of directors is ensuring compliance with the corporate procedures that provide the framework for exercising shareholder rights. To enable the board of directors to perform this function, its responsibilities should include appointment of the officer responsible for ensuring compliance with these procedures – the corporate secretary (hereinafter referred to as "secretary of the company").
1.3.2. It is advisable that the board of directors takes all necessary steps to prevent and resolve corporate conflicts that may arise between shareholders and the company's bodies and officers (see a more detailed discussion of the role of the board of directors in corporate conflict settlement in Chapter 10 of this Code, "Resolution of Corporate Conflicts").
1.4. The board of directors ensures efficient operation of the executive bodies of the company by, among other things, supervising their operations.
1.4.1. The law requires that executive bodies are held accountable to shareholders and the board of directors of the company. However, normally executive bodies report to shareholders only at the annual general shareholders meeting, which does not allow shareholders to control their operations effectively. Therefore, the board of directors is the major player in controlling the operations of executive bodies. This function implies that the board of directors should be able to suspend the director general (managing organization, manager) appointed by the general shareholders meeting. Such authority should be granted to the board of directors in the company's charter.
The board of directors should suspend the powers of the director general (managing organization, manager), if violations are revealed in the performance of such person's duties. Therefore, if the executive bodies of the company are appointed by the general shareholders meeting, it is advisable that the company's charter provide that the responsibilities of the board of directors include suspension of the director general (managing organization, manager), as well as the period of and reasons for such suspension.
1.4.2. Efficient operation of the executive bodies of the company is largely dependent on the qualifications of the senior officers. Therefore, the company should seek to retain highly qualified experts for leading managerial positions. Among other things, the company charter should set forth additional requirements of candidates for the positions of director general (managing organization, manager), members of the managerial board and heads of major divisions as well as to their remuneration, other than those provided by the law. Since ensuring effectiveness of the company's operations is one of the functions of the board of directors, it is advisable that the definition of such requirements and determination of the amount of remuneration be included in its responsibilities.
1.4.3. The law does not specify who is responsible for defining the terms and conditions, including the amount of remuneration, of employment contracts between the company on the one hand and the director general (managing organization, manager) and members of the managerial board on the other hand. This matter is not included in the responsibilities of the general shareholders meeting and, evidently, may not be left to the discretion of the executive bodies. Therefore, it is advisable that the charter of the company explicitly states that approval of the terms and conditions of such employment contracts, including those stipulating the amount of remuneration and other payments, is included in the responsibilities of the board of directors.
Inasmuch as members of the managerial board of the company may serve as members of the board of directors, in order to avoid conflicts of interest, such members should refrain from voting on the terms and conditions of employment contracts pertaining to the director general and members of the managerial board.
It is recommended that the votes of executive directors be counted when determining a quorum at the meeting of the board of directors. However, the votes of such members of the board of directors should not be counted when approving the terms and conditions of employment contracts with the director general (managing organization, manager) and members of the managerial board.
1.5. The authority of the board of directors should be clearly defined in the company’s charter in a manner that is consistent with its functions.
The law provides that responsibilities in addition to those provided by the law can be assigned to the board of directors. Such matters should be determined in the accordance with the functions of the board of directors to avoid ambiguity with respect to the division of powers among the board of directors, executive bodies and the general shareholders meeting.
2. Composition and Election of the Board of Directors
2.1. Composition of the board of directors should optimize the effectiveness of the board of directors.
2.1.1. The board of directors should enjoy the trust of shareholders – otherwise it will not be able effectively to perform its functions. The personal qualities of members of the board of directors and their reputation should not give rise to any doubts that they may not act in the best interests of the company; therefore, it is recommended that only persons with impeccable reputations be elected as members of the board of directors. Commission by a person of economic crimes or crimes against the government, public bodies or bodies of local self-government, or the fact that such person has a record of administrative offences, primarily in such areas as entrepreneurial operations, finance, taxes and duties, or stock market operations should be considered in determining a person's suitability to serve as a member of a board of directors.
2.1.2. If a member of the board of directors has a conflict of interests this also gives grounds for doubt that such member will at all times act in the best interests of the company. Thus, it is not advisable to elect to the board of directors a person who is a member of the board of directors, the director general, a member of a management body or an employee of a competitor of the company.
2.1.3. If the board of directors is to discharge properly its duties and make a significant contribution to the management of the company's affairs, its members should have the knowledge, skills and experience required for making decisions on matters within the usual scope of authority of the board of directors, and for performing efficiently the functions of the board of directors of a particular company. Therefore, it is advisable that the charter of the company explicitly sets forth specific criteria for members of the board of directors.
2.1.4. The number of members of the board of directors can be affected by many different factors. However, when determining the number of members of the board of directors, companies should primarily seek a number that will enable the board of directors to hold productive and constructive discussions, make prompt and rational decisions, and efficiently organize the work of its committees.
2.2. It is recommended that the board of directors should include independent directors.
2.2.1. As a rule, boards of directors of Russian companies consist of three categories of directors – executive, non-executive and independent directors.
Under the law, executive directors are defined as members of the board of directors concurrently holding positions as members of the managerial board, and their number may not exceed one-fourth of the total number of members of the board of directors of the company. At the same time, including in the board of directors only those persons who are not members of the managerial board does not in itself guarantee adequate protection of the interests of shareholders. Efficient performance by the board of directors of its functions requires that some of its members are independent directors, i.e., persons who not only do not serve as members of the managerial board, but are also independent from the officers of the company and their affiliated persons and from major business partners of the company, and do not have any other relations with the company that may affect the independence of their opinions (a detailed discussion of the requirements for independent directors is provided in Paragraph 2.2.2 of this Chapter).
2.2.2. Independent directors can make a substantial contribution to consideration and resolution of such matters as preparation of the company's development strategy, evaluation of executive bodies’ performance in terms of implementation of such strategy, resolution of corporate conflicts that involve shareholders, and a number of other matters that may affect the interests of shareholders. Therefore, independent directors ensure that the board of directors forms an objective opinion on matters under discussion, which ultimately increases investor confidence in the company.
In
defining eligibility criteria for independent directors, the company
should consider their ability to make independent judgments. This means
that there should be no factors capable of affecting their position.
Therefore, it is advisable that an independent director should be a
director who:
(1) over the last three years has not been, and at the time of election
to the board of directors is not, an officer (manager) or employee of
the company, or an officer or employee of the managing organization
of the company;
(2) is not an officer of another company in which any of the officers
of the company is a member of the appointments and remuneration committee
of the board of directors;
(3) is not an affiliated person of an officer (manager) of the company
(officer of the company's managing organization);
(4) is not an affiliated person of the company or an affiliated person
of such affiliated persons;
(5) is not bound by contractual relations with the company, whereby
the person may acquire property (receive monies) with a value in excess
of 10 percent of such person’s aggregate annual income, other than through
receipt of remuneration for participation in the operations of the board
of directors;
(6) is not a major business partner of the company (a business partner
with an annual value of transactions with the company in excess of 10
percent of the asset value of the company); and
(7) is not a representative of the government.
No director may be deemed to be independent if he has acted in the capacity of a member of the board of directors of the company for 7 years.
2.2.3. In order to enable independent directors to influence actively the decision-making process and ensure that the board of directors considers the widest possible spectrum of opinions on matters being discussed, their number should comprise at least one-fourth of the total number of members of the board of directors. In any event, it is recommended that the company's charter should provide that the board of directors include at least three independent directors.
2.2.4. Independent directors should refrain from actions that may compromise their independent status. If after election of an independent director to the board of directors such person ceases to be independent due to any changes or new circumstances, such director should notify the board of directors accordingly, and give a detailed account of all such changes and new circumstances. Upon receipt of such notice, or if the board of directors becomes otherwise aware of such changes or new circumstances, the board of directors should notify shareholders accordingly and, if necessary, may call an extraordinary general shareholders meeting to elect a new board of directors. The procedure and grounds for election of a new board of directors should be set forth in the company's charter.
2.2.5. It is advisable that information about independent directors is disclosed in the annual report of the company.
2.3. It is recommended that election of the board of directors be conducted in accordance with a transparent procedure that takes into account the diverse opinions held by shareholders, ensures that the composition of the board of directors is in compliance with statutory requirements, and allows the election of independent directors
2.3.1. The board of directors is accountable to shareholders and must enjoy their trust; therefore, shareholders should have an opportunity to receive full information about all candidates for members of the board of directors. In particular, it is recommended that shareholders be provided with the following information: the identity of the person proposed the relevant candidate: age, education of the candidate, positions held over the last five years, position held at the moment of nomination, nature of relations with the company, membership in the boards of directors or official positions held with other legal persons, as well as nominations for membership in the boards of directors or nominations for election (appointment) to official positions with other legal persons, information on relations with affiliated persons, the nature of relations with major business partners of the company, as well as other information related to the financial status of the candidate or which may otherwise affect the discharge by the person of the duties of a member of the board of directors of the company.
In this connection, it is advisable that the company should, based upon specific eligibility criteria applicable to members of the board of directors, determine in its charter what information about candidates for positions of members of the board of directors is subject to disclosure to shareholders. In addition, it is advisable the company should also disclose to shareholders the fact that a candidate refused to disclose all or any portion of such information.
It is also recommended that the company develop a list of information to be disclosed by members of the board of directors after their election, including information allowing determination of whether any member of the board of directors is affiliated to shareholders or counteragents of the company, as well as to their affiliated persons. Such information should be disclosed in a personal statement of an elected member of the board of directors.
2.3.2. In an election of members of the board of directors, opinions of all shareholders should be taken into account, including those with small share holdings. This goal may be achieved only by electing members of the board of directors by cumulative voting, which should be stipulated in the charter whether or not such a requirement is set forth in law.
Election of members of the board of directors by cumulative voting is an important protection of the rights of minority shareholders. The company should develop and make shareholders aware of simple and easily understandable rules and procedures that they can use to exercise their right to elect the board of directors by cumulative voting.
2.3.3. The law restricts the participation of the director general or members of the managerial board of the company in the board of directors. However, it fails to provide the procedures needed to enforce this restriction during the election of members of the board of directors. Moreover, there is no procedure for ensuring the required number of independent directors in the board of directors. As a result a board of directors may be elected, the composition of which does not comply with the requirements of the law or the recommendations of this Code. Therefore, the company should develop internal documents detailing the steps necessary in order to comply with statutory requirements and these recommendations. In particular, it is advisable to require that shareholders be informed of the statutory criteria applicable to the composition of the board of directors and of the consequences of failure to comply with such criteria before nomination of candidates for the positions of members of the board of directors begins. Moreover, it is advisable that the company indicate in the list of candidates for the positions of members of the board of directors whether each candidate is, or will be at the time of election, the director general, a member of the managerial board, an officer or employee of the company, and whether the candidate meets all the eligibility criteria applicable to independent directors.
If the number of candidates for positions of members of the board of directors who are subject to restrictions exceeds the number of persons required to be elected under the law or recommendations of this Code, the board of directors in consultation with the executive bodies of the company should determine which of the candidates is the most acceptable in terms of ability to properly discharge the duties of a member of the board of directors and is most likely to enjoy the confidence of shareholders. It is advisable that preference should be given to independent directors. The remaining candidates should be asked to withdraw their candidacies and, if they refuse to do so, the board of directors should communicate its voting recommendations to shareholders during the preparation and conduct of the general shareholders meeting.
3. Duties of Members of the Board of Directors
3.1. Members of the board of directors should discharge their duties reasonably and in good faith in the best interests of the company
3.1.1. The composition of shareholders of a company is rarely homogenous. Pursuing their, often conflicting, interests shareholders seek to elect their "lobbyists" onto the board of directors. However, members of the board of directors should act in the interests of the entire company, regardless of which shareholders nominated them or voted for their election.
The duty of members of the board of directors to act reasonably and in good faith in the interests of the company means that in exercising their rights and discharging their duties provided for in the law, the charter and other internal regulations of the company, they should use care and prudence to the maximum extent that could be expected from a good manager in a similar situation under similar circumstances.
3.1.2. The effectiveness of members of the board of directors (primarily non-executive directors) largely depends on the form, timeliness and quality of information available to them. If they rely solely on the information periodically furnished by executive bodies, they will not be able properly to discharge their duties.
Therefore, it is advisable that members of the board of directors demand additional information, when such information is necessary to make a balanced decision. The duty of the officers of the company to provide members of the board of directors with such information should be fixed in internal documents of the company.
3.1.3. The fact that members of the board of directors should act in the interests of the company requires that they enjoy the confidence and trust of shareholders and, therefore, it is necessary to exclude any situations where pressure may be brought to bear upon any member of the board of directors in order to induce such director to take actions or make decisions contrary to such interests.
In particular, members of the board of directors and their affiliated persons should not accept gifts from persons interested in the adoption of certain decisions related to discharge by them of their duties, or use any other direct or indirect benefits provided by such persons (with the exception of symbolic gifts given as a common courtesy, or souvenirs given during official events), which should be specifically stipulated in an internal company documents.
3.1.4. Members of the board of directors cannot efficiently discharge their duties if there is a conflict of interest between the company and the member of the board of directors personally. A conflict of interest may arise, for instance, upon entering into a transaction in which a member of the board of directors is interested, whether directly or indirectly, in the acquisition of shares (an interest) of, or taking an official position with, legal entities competing with the company, or establishment of contractual relations with such legal entities.
Therefore, it is recommended that members of the board of directors should refrain from actions that may result or may potentially result in a conflict between their own interests and the interests of the company and, if such conflict of interests exists or arises, they must disclose it to the board of directors and comply with the company’s procedures applicable to transaction in which a member of the board of directors is interested.
In addition, members of the board of directors are advised to refrain from voting in situations where they have a personal interest in a certain resolution of the matter in question. At the same time, members of the board of directors should immediately inform the board of directors through the secretary of the company of both such an interest and the grounds for it.
3.1.5. Members of the board of directors should perform their duties taking into account the interests of other affected persons, including employees, counteragents of the company, and government and municipal bodies in which the company or its separate structural subdivisions are located.
3.2. It is recommended that members of the board of directors should actively participate in meetings of the board of directors and committees of the board of directors.
3.2.1. In electing a member of the board of directors shareholders expect that the director will employ his/her best personal and professional qualities for the benefit of the company. Therefore, each member of the board of directors should actively take part in the work of the board of directors and, in particular, take an active part in discussing and voting on matters on the agenda of meetings of the board of directors and participate in the work of committees established by the board of directors. It is advisable that members of the board of directors notify the board of directors of their inability to attend any meeting of the board of directors in advance.
3.2.2. The law provides that any member of the board of directors may demand the convocation of a meeting of the board of directors. Active participation in the work of the board of directors implies, among other things, that each member of the board of directors must demand that a meeting of the board of directors is called to discuss a matter that, in such director's opinion, requires prompt consideration in the best interests of the company and needs to be resolved by the board of directors.
3.2.3. Members of the board of directors should have sufficient time for performance of their functions. Therefore, it is advisable that the board of directors of the company develops rules for participation of its members in the boards of directors of other companies, and ensures that these rules are observed in situations where members of the board of directors are nominated, or accept nominations, for positions in the boards of directors of, or other official positions with, other companies.
3.3. Members of the board of directors should not disclose confidential and insider information about the company and use such information in their personal interests or the interests of third parties.
Use of confidential and insider information about the company by members of the board of directors and other persons may undermine confidence in the company and inflict damage upon shareholders and creditors of the company. Therefore, members of the board of directors should take steps to protect such information. Moreover, members of the board of directors who have access to confidential and insider information about the company should not disclose it to those who do not have such access, or use it in their own interests or in the interests of third parties. These standards should also be set forth in an internal company documents. Moreover, it is advisable that contracts between the company and members of the board of directors should stipulate liability for failure to comply with this requirement.
In order to create an effective mechanism for prevention and identification of unauthorized use of confidential and insider information, it is advisable that the company demands that members of the board of directors notify the board of directors in writing of their intention to enter into transactions, in particular involving securities of the company or its subsidiary (controlled) companies, and disclose information about previous transactions with such securities in accordance with the procedure for disclosing material facts.
It is advisable that contracts between the company and members of the board of directors should stipulate the latter's obligation to refrain from disclosure of confidential and insider information for a period of ten years after they leave the company.
3.4. It is recommended that the duties of members of the board of directors be clearly defined and incorporated into internal documents of the company.
The knowledge by each member of the board of directors of his/her obligations and of the rights conferred upon him/her is a critical condition of efficient discharge by the board of directors of its functions. Besides, availability of a list of clearly delineated duties of members of the board of directors increases the probability of holding them liable in situations provided by the applicable legislation. In this connection, it is advisable that the company should develop and incorporate into its internal documents a detailed list of duties of the board of directors so that members of the board of directors may discharge them with utmost efficiency.
By the same token, proper discharge of the duties imposed upon the members of the board of directors is impossible without vesting them with appropriate rights. Therefore, it is also recommended that the internal documents of the company should contain a list of rights granted to members of the board of directors, including, specifically, their right to demand information from executive bodies of the company.
4. Operations of the Board of Directors
4.1. The chairman of the board of directors should ensure efficient organization of operations and interaction between the board of directors and other bodies of the company.
4.1.1. The board of directors is headed by the chairman whose main task is to ensure that the board of directors successfully attains its aims and objectives. The ability of the chairman of the board of directors to properly discharge his/her duties depends not only on him/her being vested with appropriate powers, which should be defined in the internal documents of the company in as much detail as possible, but also on his/her personal and professional qualities. The person acting as the chairman of the board of directors should have an impeccable professional reputation in the operation of the company and ample managerial experience. It should be a person of undisputed integrity, steadfastness and commitment to the interests of the company, enjoying the unconditional trust of shareholders and members of the board of directors.
4.1.2. The chairman of the board of directors should form the agenda of meetings of the board, facilitate efficient resolution of the issues on the agenda and, if necessary, organize an open discussion of such issues in a friendly and constructive atmosphere. It is advisable that internal documents of the company impose upon the chairman of the board of directors the responsibility to take steps to ensure that all members of the board of directors receive in a timely fashion all information required for resolution of the agenda issues, to encourage members of the board of directors to freely express their opinions on these issues and openly discuss them at meetings and to initiate drafting of board resolutions.
4.1.3. The chairman of the board of directors should provide members of the board of directors with an opportunity to express their points of view on matters being discussed and facilitate the search for a decision agreed among members of the board of directors in the shareholders' interests. In doing so, the chairman should take a firm position, and at all times act in the best interests of the company.
4.1.4. It is recommended that the chairman of the board of directors should maintain ongoing contacts with the other bodies and officers of the company. Such contacts should not only facilitate receipt of full and accurate information that the board of directors needs to make decisions, but also ensure, where possible, effective cooperation of such bodies and officers among themselves and with third parties.
4.1.5. The chairman of the board of directors should efficiently organize the work of committees established by the board of directors, and in doing so take the initiative in nominating members of the board of directors for positions in various committees based upon such members' professional and personal qualities, taking into account the views of members of the board of directors with respect to the creation of such committees and ensuring, if this becomes necessary, that matters considered by such committees are presented for determination by the board of directors. The chairman of the board of directors should also take all necessary administrative measures to ensure that committees of the board of directors operate in the most efficient manner possible. It is advisable that the chairmen of various committees keep the chairman of the board of directors informed about the proceedings of their respective committees.
4.2. It is recommended that meetings of the board of directors should be conducted on a regular basis in accordance with an approved plan.
4.2.1. The board of directors should function efficiently and rationally in order to optimize the management decision-making process in the interests of the company. Therefore, it is critical that meetings of the board of directors be conducted regularly.
It is recommended that meetings of the board of directors should be conducted when necessary, generally at least once every six weeks, in accordance with the plan for holding such meetings approved by the board of directors for its term in office and containing a list of matters to be considered at appropriate meetings. This list, which can be amended and supplemented, should incorporate opinions expressed by the persons and bodies entitled to call meetings of the board of directors in accordance with the applicable legislation and the charter of the company.
4.2.2. The first meeting of a newly-elected board of directors should be held not later than one month after the date of the general shareholders meeting that elected the board of directors. The first meeting of the board of directors should define, confirm or adjust the list of priorities of the board of directors, establish its committees and elect their chairmen.
4.2.3. In order to ensure that the board of directors operates in the most efficient manner, it is advisable that the company should develop and incorporate into its internal documents procedures f