Corporate Governance Review. Review of Annual Reports 2010 of Euronext Brussels listed companies

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1 Corporate Governance Review Review of Annual Reports 2010 of Euronext Brussels listed companies

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3 Grant Thornton Corporate Governance Review Contents Contents 3 Foreword 5 Executive summary 7 PART I - Legally binding provisions Corporate Governance Statement Remuneration committee Remuneration report Audit committee Legal requirements 22 PART II - Results corporate governance code Board of directors Independence Nomination committee Audit committee Code requirements 32 Appendix A - Survey methodology 37 Appendix B - List of companies 39 3

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5 Grant Thornton Corporate Governance Review Foreword We are pleased to present the second annual publication in Grant Thornton s series of reviews of the corporate governance disclosures of Belgian companies quoted on the Euronext stock exchange. The review examines the extent to which companies comply with regulatory requirements. This year s report arrives at a time of turmoil for Belgian listed companies. While the Belgian banking sector was struggling for survival and stock markets were under great pressure, a lot of emphasis has been placed on the effectiveness and independence of boards and the remuneration of directors. The corporate governance debate has not only caught the attention of investors, but also the media and the public at large. Recent years have seen an increased interest from the legislator in corporate governance resulting in a new Corporate Governance Code in 2009 and the Corporate Governance Act of 6 April More recently, on 14 September 2011, a law was passed for women to make up one third of the directors on the boards of some government enterprises and publicly quoted companies. Companies will be allowed a transition period of five years. If by the sixth year one-third of the board is not comprised of women, any subsequent nomination will be considered void and remuneration of board members will be frozen. At present, women occupy on average 9.2 % of the seats on company boards. Another key factor in the corporate governance debate is the interest of the European Commission and the impact this will have on corporate governance legislation. The European Commission released a consultation paper on an EU corporate governance framework and is seeking submissions from interested parties. We may, therefore, see a single EU-wide corporate governance framework in the not so distant future. Corporate governance is fundamentally about ensuring that key stakeholders, including the public, can have confidence in how business is conducted and results are disclosed by public interest entities such as listed companies, financial institutions and public sector organisations. All of the recent changes and ongoing enquiries need to ensure that the roles and responsibilities of all stakeholders are clear. We believe our research makes an important contribution to this debate by focusing on the extent to which listed companies actually apply good corporate governance and by commenting on current and future changes and the implications for companies and their stakeholders. Stefaan Rabaey Managing Partner Grant Thornton Belgium 5

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7 Grant Thornton Corporate Governance Review Executive summary In recent years, there has been a great improvement in the governance and reporting of governance of Belgian companies. It is easy to forget that what is accepted as good practice now was not always commonplace: before the corporate governance code in 2004, companies routinely had no audit committees, more executive directors than nonexecutives, and one person acting as both CEO and chairman. must continue to demonstrate that the Corporate Governance Code leads to continuous improvement and that companies can be trusted to work within it not subvert it. With regard to the overall results of this year s review, we can conclude that significant progress has been made with regard to remuneration committees, board of directors effectiveness and the legal requirements regarding the audit committee. Additionally we can conclude that BEL20 companies are still leading the pack, with 8 BEL20 companies achieving full compliance with the requirements under review. However, companies cannot rest on their laurels. A significant minority of Belgian listed companies could still improve the quality of their reporting. In explaining, it is not enough to simply say noncompliance suits the business model: stakeholders deserve to know exactly why this is the case and what arrangements have been made, despite noncompliance, to ensure that the business and their interests are protected. More generally, companies need to consider the reader when preparing their annual report. Boilerplate text may tick the boxes but it does not give the colour or the flavour of the things that bring a business alive. Particularly in the context of the European Commission s recent green paper, the minority of poor performers should raise their reporting standards to the high level of their peers. Companies Law: Remuneration report Law: Remuneration committee Law: Audit committee Code: Audit committee 100% 80% 60% 40% 20% 0% Law: CG statement Code: Board of directors Code: Independence Code: Nomination committee Result 2009 Result

8 Positive highlights The overall governance practices of most companies have positively evolved. Although some businesses are lagging behind, the combination of new legal requirements of the Corporate Governance Act (CG Act) and the principles based approach of the Corporate Governance Code (CG Code) underpinned by the need to comply or explain has achieved a quiet revolution in corporate governance. in 2010 the overall compliance score was 87 % compared to 77% in compliance with legal requirements stands at 86%. 21 businesses (18%) have achieved full compliance with the requirements of the CG Act and the CG Code. 40 businesses (34%) have achieved full compliance with the legal requirements of the CG Act. the most significant progress has been noted for the following items when compared to 2009: - the Corporate Governance Statement provides a description of the key characteristics of the internal control and risk management systems (+27%) - at least one member of the audit committee is independent and has relevant experience in accounting and audit (+29%) - a remuneration committee has been appointed (+39%). Challenges remain Although there is a positive trend, there are unmistakably key challenges that need to be addressed by most of the companies under review: the remuneration report remains the weakest link in corporate governance transparency as shown by the relatively poor scores for the following items: - disclosure of the individual remuneration of the CEO (69%) - disclosure of policies regarding severance pay (74%) - reporting on performance related elements that compose the variable remuneration of executive directors or executive management (74%). only 42% of companies provide real insight into the effectiveness of their internal control and risk management systems by using the COSO model as a reference framework. less than one in ten directors are women and more than half of all 118 boards are exclusively male. Only eight out of 118 companies already comply with the quota of 1/3 women on boards. 8

9 Small companies need to bridge the gap Our analysis reveals that small companies have significantly lower scores than larger companies, as a comparison between BEL20, BELMID, BELSMALL and OTHER shows. Although in some areas they are on a par, smaller businesses that are listed on the Belsmall-index or the remainder of Euronext Brussels (Other) are consistently lagging with regard to audit committee and remuneration committee requirements. Overall scores 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% 95% Bel20 91% 86% 77% Belmid Belsmall Other The debate continues The comply or explain debate has now been taken up by the European Commission in the Green Paper on the EU Corporate Governance Framework, which questions whether optional principles and guidance, rather than hard regulation, can achieve effective governance. Our review suggests that the Code s comply or explain approach has achieved significant success, but figures prove that quicker results are achieved by enforcing requirements with regulation. As stakeholders and regulators call for more informed reporting, the bar will continue to rise. With this report we would like to encourage companies to make sure their Corporate Governance Statement is of the highest quality by improving transparency and by providing relevant information for their readers. If companies fail to achieve transparency, one can expect the regulator to fill the gap. Johan Haelterman Partner Grant Thornton Advisory 9

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11 Grant Thornton Corporate Governance Review Part I Legally binding provisions This part of our report analyses the compliance of 2010 annual reports with the legally binding provisions of the Belgian CG Act. Although some of these provisions (remuneration report, remuneration committee) are applicable from annual reports 2011, and are therefore not legally binding for the reports under review, we found it useful to include them in this part of the report. As the comply or explain rule is not applicable in this case, our scoring model and charts include either compliant or not compliant. The legally binding provisions covered in our report concern four main areas: Corporate Governance Statement Remuneration committee Remuneration report Audit committee 11

12 Grant Thornton Corporate Governance Review 1. Corporate Governance Statement In specific cases companies may depart from some of the Code s provisions, if they give a reasonable explanation of the reasons for doing so. However, it was obvious that not all explains were informative and sufficiently underpinning the reason for non-compliance. The Corporate Governance Act Art3. 2 defines that companies should include a specific chapter in their annual report regarding corporate governance; a Corporate Governance Statement. This statement should include as a minimum: 1. the corporate governance code applied by the company, the Belgian Corporate Governance Code being imposed as the reference code for listed companies. 2. if the company does not fully comply with one or more provisions of this code, it should explain its reasons for not having done so in the Corporate Governance Statement ( comply or explain ). 3. a description of the main features of the company s internal control and risk management systems 4. the shareholder structure and measures against hostile takeover bids. 5. a list of the members of the board, its committees and their terms of reference. The best companies make a real effort to provide informative disclosures in their Corporate Governance Statement. Innovative approaches include the use of tables and summaries of key governance features. Some also use personal commentary on governance from the chairman, either in his statement or within the governance report. At the other end of the scale, the poorest reports are either minimalistic or even text-heavy often repeating content from previous years, which is frequently lifted directly from the Code. The net result being that readers gain little insight into the company s governance practices. 1.1 Code reference Q1. Is there a statement of compliance with the Corporate Governance Code? CG Act - Art The company should state in its Corporate Governance Statement that it has adopted the CG Code as its reference code. If the company has not complied fully with one or more provisions of this Code, it should explain its reasons for not having done so in the Corporate Governance Statement ( comply or explain ). Our analysis shows that 100% of companies have formally adopted the CG Code as the reference code in their Annual Report This is a significant increase when compared to last year s result of 85%. Figure 1: code reference 100% % compliant 12

13 1.2 Comply or explain CG Act - Art The company should state in its Corporate Governance Statement those sections of the Code it is not complying with, and the reasons for not doing so ( comply or explain ). In specific cases companies may depart from some of the Code s provisions, if they give a reasonable explanation of the reasons for doing so. Smaller companies, for example, may consider that some provisions are disproportionate or less relevant. Also, holding and investment companies may have a different board structure, which can affect the relevance of certain provisions. Companies giving a reasonable explanation as to why they are departing from the Code can still be considered to be applying the Code. However, the legislator has made the comply or explain approach mandatory. As such non-compliance items should always be explained. Our analysis reveals that from our sample of the 1416 Code requirements checked, 11% of our sample was noncompliant but explained this non-compliance. Another 8% were not compliant without any explanation. And for 4% we could not find adequate information. This leaves us with 77% full compliance with the code requirements. Figure 2: comply or explain 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% % compliant % explain % no information Table 1 shows the three most common explanations related to the CG Code and the scores for Explain, No information and Non-compliance. Table 1: items with highest rate of explain Comply Explain No compliant No information Is at leasthalf of the audit committee comprised of independent directors? 66% 23% 10% 1% Is at leasthalf of the nomination committee comprised of independent directors? 58% 22% 18% 3% Does the audit committee meet at least four times a year? 58% 21% 19% 3% Our review does not include a detailed qualitative assessment of the explanations, however, it was obvious that not all were informative and sufficiently underpinning the reason for non-compliance. 13

14 1.3 Internal control and risk management Q2. Does the Corporate Governance Statement provide a description of the key characteristics of the internal control and risk management systems? CG Act - Art Corporate Governance Statement should contain a description of the main features of the company s internal control and risk management systems, in relation to the financial reporting process. The effectiveness of internal controls and risk management has attracted considerable interest in the last year, especially with the current economic crisis and its repercussions in the financial sector. A company s business environment, objectives, internal organisation and processes are constantly evolving and as a result the risks it faces are changing too. Therefore, the identified risks, and controls in place to mitigate these risks, require regular review and evaluation to ensure they are still adequate and effective. By describing the features of their risk management and internal control systems in their annual report, companies demonstrate their commitment towards good governance. For the 2010 annual reports, companies are legally obliged to provide a description of their internal control and risk management systems. In order to make this requirement more concrete, the Corporate Governance Committee drafted guidelines and a questionnaire that can help companies to describe, in a formalised way, their internal control and risk management systems. More than 90% of the companies did include a description of their internal control and risk management system in their Corporate Governance Statement. However, many of the descriptions were not truly informative, only 42% used the COSO model - as proposed by the guidelines of the Corporate Governance Committee - as a more comprehensive framework. Figure 3: description of the main features of the internal control and risk management systems 90% 10% % compliant 1.4 Shareholder structure Q3. Are the major shareholders disclosed in the Corporate Governance Statement? CG Act - Art Corporate Governance Statement should disclose the shareholder structure together with a description of their voting rights and special control rights. Through legislative initiatives on both a European and national level, shareholder transparency has become an important corporate governance topic. The CG Code helps to keep stakeholders better informed about how a company is controlled. More recently the new CG Act contains a legal obligation to disclose the shareholder structure in the Corporate Governance Statement of the annual report. Many companies provide the required information, though some have published their shareholder structure in other sections of the annual report. For this review, we qualified companies that included an overview of the identity of their shareholders on their website or in their Corporate Governance Statement as being compliant. 94% of companies were compliant with the requirement to list their major shareholders, though not all companies disclosed a full description of voting rights and special control rights. Figure 4: disclosure of shareholder structure 94% 6% % compliant 14

15 1.5 Composition of the board and committees Q4. Does the Corporate Governance Statement identify all board members? CG Act - Art Corporate Governance Statement should disclose the composition of the board, its committees and their terms of reference. According to the second principle of the CG Code and the CG Act, companies should have an effective and efficient board that takes decisions in the corporate interest. Furthermore the Code stipulates that the composition of the board should be determined on the basis of gender diversity and diversity in general (e.g. capabilities, experience and knowledge). The Corporate Governance Statement should include a list of board members. Disclosures in relation to board composition reveal that all but two out of 118 Corporate Governance Statements included a list of board members and members of related committees. Best practice annual reports provide information about board composition in a tabular format including information on: board membership and role, committee memberships and role, date of appointment and other relevant information complemented by a short CV of all board members. Figure 5: board composition 98% 2% % compliant 1.6 Board size Figure 6: board size Boards should be small enough to allow for efficient and effective decision and large enough to ensure knowledge and expertise across the key business domains. We found that, on average, a board is composed of nine members while research on group dynamics for effective decision making indicates that groups of seven are the most effective. On average, board composition of Belgian listed companies is reasonable, but some boards are still too large to operate effectively as shown in figure 6. Boards with substantially more members should assess if they still can operate effectively

16 1.7 Women in boards The Law requires at least one third of board members to be of the opposite gender as from 1 January Small listed companies, or those with a free float of less than 50%, have an additional two year period to comply with this legal requirement. The law foresees sanctions when the new quota is not met. In case of non-compliance, the next general meeting must appoint a new board of directors which complies with the legal quota. If the new board of directors remains non-compliant, all benefits received by directors, financial or otherwise, will be frozen. The law also requires listed companies to provide an overview in their Corporate Governance Statement of efforts made to ensure that at least one third of the board are of the opposite gender. Our analysis revealed that only eight of 118 companies already comply with the legislation and that more than half do not have women on their boards at all. The distribution of women on boards is depicted in figure 7. Regression analysis revealed other interesting conclusions: 1. no significant correlation could be found between the number of women on boards and the free float, though the free float is one of the parameters for delaying the implementation of the requirement. 2. no significant correlation could be found between the CG score of the companies under review and the percentage of women on their boards. Figure 7: distribution of women on boards % of women in boards 16

17 Grant Thornton Corporate Governance Review 2. Remuneration committee A considerable number of boards still struggle with creating independent remuneration committees. Listed companies on the public market of Euronext Brussels are required to establish a remuneration committee. The remuneration committee prepares and proposes the remuneration policy for directors and executive managers, and submits a remuneration report to the board. The following principles apply to the remuneration committee: the remuneration committee is composed of non-executive directors and of a majority of independent directors. the chairman of the board or another independent director chairs the remuneration committee. small companies, i.e. companies that meet at least two of the following three criteria, are not required to appoint a remuneration committee: (a) average number of employees not exceeding 250 (b) balance sheet total of less than or equivalent to EUROS (c) annual net turnover of less than or equivalent to EUROS. According to the Corporate Governance Act, companies will be obliged to have appointed a remuneration committee from Legal compliance starts from next year s annual report. 2.1 Remuneration committee Q5. Has a remuneration committee been appointed? CG Act Art7 Companies listed on the public market of Euronext Brussels are required to establish a remuneration committee. According to the CG Act, companies will be obliged to have appointed a remuneration committee from For the annual reports of 2010 we found that 91% of companies are in line with the legal requirement. However, we would like to emphasise that many small companies in line with this regulation apply the small companies exception rule and as such, do not have an effective remuneration committee in place. In such cases, the role of the remuneration committee is taken over by the board. Figure 8: remuneration committees appointed 91% 9% % compliant 17

18 2.2 Remuneration committee composition Charged with setting executive remuneration, the profile of, and recommendations made by remuneration committees have come under increased scrutiny by shareholders and the media. Remuneration committees are trying to balance the expectations of executives with the needs of the shareholders and the company. Q6. Are all remuneration committee members non-executive directors? Q7. Is the majority of the remuneration committee comprised of independent directors? CG Act Art7 The remuneration committee is composed of non-executive directors and of a majority of independent directors. Disclosed compliance with Article 7 of the CG Act shows that a considerable number of boards still struggle with creating independent remuneration committees: 89% of remuneration committees are comprised of nonexecutive directors 81 % of remuneration committees have a majority of independent directors Compliance for small companies is granted when both additional legal requirements are fully met: a) at least one of the directors of the board is independent. b) when the chairman of the board is an executive director, the role of chairman is executed by a non-executive director for matters relating to remuneration. In reality these figures are somewhat lower as many small companies apply the small companies exception rule and as such, though they are compliant with the legislation, do not effectively have a remuneration committee in place. Figure 9: remuneration committee composition 81% 19% Independent directors % compliant 89% 11% Non-executive directors % compliant 18

19 Grant Thornton Corporate Governance Review 3. Remuneration report On average, only 69% of all investigated companies disclosed CEO remuneration in line with legal requirements. The Corporate Governance Committee decided to include a comprehensive and detailed chapter on remuneration in the 2009 Code. Moreover, the legislator chose to force listed companies to include a remuneration report disclosing remuneration of directors and executives in their Corporate Governance Statement. This means that as from the Annual Reports 2011 companies will no longer be able to deviate from this requirement. For the purpose of this review, this section focuses on the legal requirements of the remuneration report. 3.1 Remuneration report disclosure Q8. Is a remuneration report included in the Corporate Governance Statement? CG Act Art3 3 All listed companies whose shares are admitted for trading on Euronext Brussels should include a remuneration report in their Corporate Governance Statement. Most of the companies (86%) have included a remuneration report in their Corporate Governance Statement. Although the quality of the information in the remuneration report varies, we have identified a trend to include different sections for non-executives, CEO and executive management. Even though the remuneration report will be mandatory as from next year s report, a score of 86% can be considered as high. Figure 10: remuneration report disclosure 86% 14% % compliant 19

20 3.2 Remuneration policy for directors and executive management Q9. Does the company state the remuneration policy including performance related elements? CG Act Art The remuneration report over the reported financial year should include a declaration of the remuneration policy that has been applied for directors and executive management. This report should include the principles upon which remuneration was based, the relative importance of the components of remuneration, the features of the performance-based premiums, and information over the remuneration policy for the two coming years. The CG Act requires companies to disclose the remuneration policy and the significance of performance related elements of remuneration, in the context of the total remuneration package for directors and executive management. Compliance with this requirement was 75% and, as with other elements of the remuneration report, transparency regarding remuneration seems to be a difficult hurdle for some boards. Most of the companies did not report on the remuneration policy for the two coming years. As such this part of the legislation has been excluded from our scoring model. Figure 11: remuneration policy disclosure 75% 25% % compliant 3.3 Individual remuneration disclosure of non-executive directors Q10. Does the remuneration report provide information about the individual remuneration of non-executive directors? CG Act Art The remuneration report over the reported financial year should include, on an individual basis, the amount of remuneration and other benefits which are awarded to the non-executive directors. For this topic we have assessed whether companies have made disclosures - either specific figures or specific elements - to provide shareholders and users of the annual report with more detail on non-executive directors remuneration. The results differ slightly from the previous question, as this question concerns only non-executive directors. Moreover, some companies have failed to disclose performance related elements of remuneration but have nonetheless disclosed quantitative figures, and some companies have done the reverse. Companies should do both in order to provide shareholders with comprehensive information. Best practice companies report remuneration of nonexecutive directors in tabular format. We have also noted different approaches for non-executive remuneration. Some companies have no remuneration for their non-executive directors, while others provide only a fixed remuneration. Additionally we would like to point out that with regard to non-executive remuneration, the Code and the Act are not aligned. Where the Code requires that nonexecutive directors should not receive performance-related remuneration such as bonuses, stock related long-term incentive schemes, nor fringe benefits or pension benefits, the Act implicitly approves other benefits. As such variable or other components of remuneration for non-executives are permitted as long as sufficient explanations are provided. Figure 12: individual remuneration non executive directors 79% 21% % compliant 20

21 3.4 Remuneration discolosure of CEO Q11. Does the remuneration report provide information about the individual remuneration of the CEO, including fixed salary, variable remuneration, pension and other components of the remuneration package? CG Act Art The remuneration report should disclose at least the following information: the amount of the remuneration of the CEO. This information should include the following components: basic remuneration; variable remuneration linked to performance criteria; pension benefits; other components of the remuneration. For this question we have assessed whether companies have made quantitative disclosures to give shareholders and users of the annual report more detail on the extent to which CEO remuneration comprises of bonuses or performance related elements. On average, only 69% disclosed CEO remuneration in line with the legal requirements. Figure 13: remuneration disclosure CEO 69% 31% % compliant With a score of 81%, transparency regarding the overall remuneration of the executive management team scores somewhat better. 3.5 Remuneration report content: comparison of Bel20, Belmid, Belsmall and others. For the questions related to the remuneration report we have noted significant differences between Bel20, Belmid, Belsmall and other companies as indicated in the table below. Table 2: remuneration report disclosures for bel20, belmid, belsmall and others Does the remuneration report provide the following information: individual remuneration of executive directors individual remuneration of nonexecutive directors remuneration policy performance related elements that compose variable remuneration individual remuneration of the CEO including all 4 components overall remuneration of the Executive Management team Bel 20 95% 100% 95% 95% 95% 100% Bel mid 87% 90% 83% 87% 77% 93% Bel small 71% 63% 71% 66% 63% 80% Other 65% 74% 59% 56% 56% 62% Grand Total 77% 79% 75% 73% 69% 81% The supposed reason for these significant differences is that the legislation is effective as from next year and that the smaller companies do not feel the pressure of the financial markets to comply with the law yet. 21

22 Grant Thornton Corporate Governance Review 4. Audit committee Legal requirements A large majority, 93% of all investigated companies, has an audit committee composed of non-executive directors only. Both the Corporate Governance Code and the Act on audit committees aim to reinforce the use and effectiveness of audit committees as a governance instrument. They describe the following roles for the audit committee: monitoring the financial reporting process monitoring the effectiveness of the company s internal control and risk management systems if there is an internal audit, monitoring the internal audit and its effectiveness monitoring the statutory audit of the annual and consolidated accounts, including any follow-up on any questions and recommendations made by the external auditor reviewing and monitoring the independence of the external auditor, in particular regarding the provision of additional services to the company. 4.1 Audit committee Q12. Has an audit committee been appointed? Act on audit committees amends Art. 526bis of the Companies Act: Art. 526bis. 1. Companies listed on the public market of Euronext Brussels are required to establish an audit committee. Companies should apply the Act on audit committees of December Only small companies that meet two out of the three criteria below are not legally obliged to appoint an audit committee: - have an average number of employees fewer than 250 during the past financial year. - have a balance sheet total of EUROS or less. - have a yearly net turnover of EUROS or less. For those companies, the responsibilities of such committee should be executed by the board of directors as a whole. Almost all investigated companies (97%) have an audit committee or apply the small companies exception rule. Figure 14: audit committee appointment 97% 3% % compliant 22

23 4.2 Composition of the audit committee Q13. Are all audit committee members non-executive directors? Act on Audit Committees amends Art. 526bis of the Companies Act: Art. 526bis. 2. The audit committee is composed of non-executive members of the board. At least one member is an independent director and should have accounting and auditing expertise. The law requires that audit committees are composed exclusively of non-executives and that at least one of them is independent. The Code is even stricter on this point: it states that a majority of them should be independent. A large majority, 93% of all investigated companies, has an audit committee composed of non-executive directors only. Figure 15: non executives on audit committee 93% 7% % compliant Q14. Does the audit committee have at least one member that is independent with relevant experience in accounting and audit? Act on Audit Committees amends Art. 526bis of the Companies Act: Art. 526bis. 2. The audit committee is composed of non-executive members of the board. At least one member is an independent director and should have accounting and auditing expertise. The number of companies (92%) clearly disclosing which member of the audit committee has recent and relevant financial experience has considerably improved compared to last year (63%). As before we rated a company as being compliant only when there was explicit disclosure and identification of the member who has appropriate experience. However, as with the remuneration committee, many small companies in line with this regulation do apply the small companies exception rule and as such do not have an effective audit committee in place. The role of the audit committee in these companies is taken over by the board in which case there is no requirement for the board to have an expert in audit and finance. We feel that the legislation could be improved in this area. Figure 16: independent directors in audit committees 91% 9% % compliant 23

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25 Grant Thornton Corporate Governance Review Part II Corporate Governance Code This part of our report analyses compliance with those provisions of the Code that are not legally binding. Companies may depart from the Code s provisions, provided they give sufficient reason for doing so. Companies giving a sound explanation for the reasons why they depart from the Code can still be considered to be applying the Code. However, a lot of businesses are still choosing to interpret explain in the much narrower sense of merely noting which provisions they are not compliant with, and in some cases giving a reason for this non- compliance, but in most cases not describing the alternative governance measures put in place. This is one of the major weaknesses in many of the annual reports. As many companies still provide minimal information, it may take the introduction of regulatory oversight to change this. However, while tougher regulation may improve compliance, shareholder engagement is critical to achieving a long lasting strong governance culture. In this section of the report we have covered four areas that relate to the application of the CG Code: Board of directors Independence Nomination committee Audit committee 25

26 Grant Thornton Corporate Governance Review 5. Board of directors With a score of 69%, the evaluation process for boards and their directors is still one of the CG Code requirements with the lowest level of compliance. 5.1 Individual attendance rates Q15. Is the individual attendance of directors to board meetings disclosed? 2.8 CG Code: The board should meet sufficiently regularly to discharge its duties effectively. The number of board and board committee meetings and the individual attendance record of directors should be disclosed in the Corporate Governance Statement. In order to guarantee the effective functioning of the board, provision 2.8 of the CG Code requires companies to be transparent about the number of meetings that were held in the past financial year and to communicate the individual attendance rate of directors in the Corporate Governance Statement. 93% of the companies disclosed the overall number of meetings held in the year by the board and its committees. However, disclosure of individual attendance rates of directors were provided for only 82% of all companies included in our review. 3% of companies explained that the board operates as one and that individual attendance is therefore irrelevant. Another 4% did not provide information and 11% of companies were not compliant. On the other hand, we identified a positive trend regarding disclosure of individual attendance compared to last year (74%). Figure 17: individual attendance of directors 74% 3% 0% 23% % 3% 4% 11% % compliant % explain % no information 26

27 5.2 Evaluation process of the board Q16. Does the Corporate Governance Statement provide disclosure on the evaluation process of the board? 4.15 CG Code: Information on the main features of the evaluation process of the board, its committees and its individual directors should be disclosed in the CorporateGovernance Statement. In line with the fourth principle of the Code, companies should have a rigorous and transparent procedure for the appointment and evaluation of the board and its members. Therefore the company should communicate in the Corporate Governance Statement to its shareholders and other stakeholders on the evaluation process of the board, its committees and the individual directors. Although progress has been made with regard to this, it is still one of the CG Code requirements with the lowest level of compliance. Only 69% of companies included an overview of main features of the evaluation process for their directors, board and its committees compared to 45% last year. Another 7% explained why they did not disclose or have no board evaluation process. More than 20% did not provide any information or acknowledged that they were not compliant without due explanation. Figure 18: evaluation process of the board 45% 7% 0% 48% % 7% 19% 4% % compliant % explain % no information Our analysis revealed that there is a large gap between transparency of Bel20 companies and all other categories as indicated in the table below. Table 3: evaluation process vs company type Category Average score Bel 20 95% Bel mid 73% Bel small 71% Other 74% Overall average 76% 27

28 Grant Thornton Corporate Governance Review 6. Independence Our research revealed that 97% of the companies Corporate Governance Statements indicated those directors that are independent. Fewer companies, 94% of our sample, comply with the provision to have their board composed of at least one half of non-executive directors. 6.1 Separation of duties between chairman and CEO Q17. Are the roles of chairman and chief executive officer exercised by different individuals? 1.5 CG Code: There should be a clear division of responsibilities at the head of the company between the running of the board and the executive responsibility for the running of the company s business. The chairman of the board and the chief executive officer (CEO) should not be the same individual. The division of responsibilities between the chairman and the CEO should be clearly established, set out in writing and agreed by the board. One of the new requirements introduced in the CG Code of 2009 is to separate the duties of the chairman of the board and the chief executive officer in order to ensure that the board has effective control over the function of executive management. The CG Code has emphasised the role of the chairman and his role in developing a climate of trust, to ensure a culture of openness and debate, as well as support for the board s decisions. Overall there was a minimal change in compliance with this provision year on year (2010: 86%, 2009: 87%), the decrease being due to a change in the population. A large majority (86%) adheres to this principle while 7% explain why they have the same individual for both the functions of CEO and chairman of the board. In most cases it concerns a member of the founding family or an individual that is considered crucial to the functioning of the company. Figure 19: separation of chairman and CEO 87% 7% 0% 6% % 9% 2% 3% % compliant % explain % no information 28

29 6.2 Independence of the board Q18. Is at least half of the board comprised of non-executive directors? Q19. Are at least three members of the board independent? 2.3 CG Code: At least one half of the board should comprise non-executive directors and at least three of them should be independent according to the criteria set out in Appendix A of the Code. Another important aspect of good governance is the presence of non-executive and independent directors on the board. The independence criteria changed significantly under the new code. In general we can say that the new set of requirements is more stringent than the previous version. We found that in particular the criteria stating directors can only be independent if they have served less than three terms as non-executive in the board without exceeding a total term of more than twelve years was frequently commented in the annual reports. The new independence criteria were inserted in the Companies Act (article 526ter Companies Act) and in the Corporate Governance Code of In this regard we note that a transition period is foreseen for directors that were correctly appointed before the introduction of these requirements, and they can retain the capacity of independent director until 1 July This transition period was also adopted in the Code. A significant number of companies have taken advantage of this disposition to adhere to the minimum requirement of three independent directors (provision 2.3 of the Code). Our research revealed that 97% of the companies Corporate Governance Statements indicated those directors that are independent. Fewer companies, 94% of our sample, comply with the provision to have their board composed of at least one half of non-executive directors, and 81% comply with the requirement of having at least three independent directors on the board. In our assessment we qualified directors that are independent in line with the transition provision as being compliant. If we had not included the transition provision, compliance would have been significantly lower. Figure 20: board independence 81% 10% 2% 7% Disclosure independent Disclosure non-executive 94% 4% 0% 2% % compliant % explain % no information 29

30 Grant Thornton Corporate Governance Review 7. Nomination committee 57% of the companies in our review had a nomination committee composed of a majority of non-executives. 7.1 Nomination committee Q20. Has a nomination committee been appointed? 5.3./1 Appendix C CG Code: The board should set up a nomination committee, the majority of it comprising independent non-executive directors. Nomination committees have an important role to play in providing assurance to shareholders and other stakeholders that director appointments are based on fair policies and objective analysis. They lead the process for board appointments, the CEO and other management executives, and make recommendations to the board. The Corporate Governance Code requires companies to set up a nomination committee. However, unlike the audit committee and the remuneration committee, there is no legal obligation to do so. The Code states explicitly that the nomination and remuneration committee may be combined, and a significant number of companies have done so. In this case the stricter requirements that apply to the remuneration committee also apply to this type of combined committee. Although the level of compliance with this provision has significantly increased from 48% to 76%, another 14% explained why they have no nomination committee, mostly because the company is too small and the board takes up the role. Figure 21: nomination committee appointment 48% 33% 0% 19% % 14% 0% 10% % compliant % explain % no information 30

31 7.2 Nomination committee independence Q21. Is at least half of the nomination committee comprised of independent directors? 5.3./1 Appendix C CG Code: The board should set up a nomination committee, the majority of it comprising independent non-executive directors. Last year less than 50% of the companies in our review had a nomination committee composed of a majority of nonexecutives, today this has increased to 57%. However 22% are still not compliant or do not provide information. Figure 22: nomination committee independence 48% 33% 0% 19% % 21% 3% 19% % compliant % explain % no information 31

32 Grant Thornton Corporate Governance Review 8. Audit committee Code requirements Next to the audit committee, the company should have an internal audit function to assess the adequacy of the organisation s internal control and risk management systems. In section four of our report we analysed the level of compliance with a number of legally binding provisions from the Act on audit committees of December These requirements should be considered as a minimum all companies should have, and concern, the following: an audit committee should be appointed all members of the audit committee should be nonexecutive directors at least one member is independent with relevant experience in accounting and audit. The code also states additional provisions to reinforce the effectiveness of the audit committees. The following elements have been analysed during our review: is at least half of the audit committee comprised of independent directors? does the audit committee meet at least four times a year? does the company have an internal audit function or does the audit committee evaluate the need for such a function annually? 8.1 Audit committee independence Q22. Is at least half of the audit committee comprised of independent directors? 5.2./4 Appendix C CG Code: At least a majority of the audit committee s members should be independent. At least one of them shall have accounting and auditing expertise. The level of compliance with this code requirement has remained stable at 66%. Another 23% explained why they did not comply, which is mainly because it concerns smaller companies where the role of the audit committee is exercised by the board. Figure 23: audit committee independence 66% 22% 1% 11% % 23% 1% 10% % compliant % explain % no information 32

33 8.2 Audit committee meetings Q23. Does the audit committee meet at least four times a year? 5.2./28 Appendix C CG Code: The audit committee should meet at least four times a year. It should regularly (and at least every two to three years) review its terms of reference and its own effectiveness and recommend any necessary changes to the board. Under the 2004 version of the Code, the minimum number of meetings of the audit committee was three times per year but the criterion changed to four times a year in the new Code. Only 58% of the companies that fall under the scope of the Code adhere to this minimum requirement of four meetings a year. Another 21% of companies explained why they do not comply, the main reason being that many small companies are not legally obliged to have an audit committee installed. As information was provided and in line with the code and legislation, our scoring model rated them as explain. Figure 24: audit committee meetings 51% 20% 3% 26% % 21% 3% 19% % compliant % explain % no information 8.3 Internal audit function Q24. Does the company have an internal audit function or does the audit committee appraise the need of such a function on a yearly basis? 5.2./17 Appendix C CG Code: An independent internal audit function should be established, with resources and skills adapted to the company s nature, size and complexity. If the company does not have an internal audit function, the need for one should be reviewed at least annually. Next to the audit committee, the company should have an internal audit function to assess the adequacy of the organisation s internal control and risk management systems. The internal auditor reports to the audit committee. Only 62% of companies fully complied with this requirement compared to 67% last year. When considering the explain scores the overall level of compliance reached 79%, which is slightly better than last year. The difference in the result can be explained by either a small change in population of our review and differences in reporting for this requirement. We did not find information on this subject for 19 of the companies under review. Given the fact that the Code only requires installing or evaluating the need for an internal audit, and no detailed description needs to be provided in the Corporate Governance Statement, it was not always obvious if internal audit functions were adapted to the needs of the company. Figure 25: internal audit function 67% 8% 20% 4% % 17% 16% 5% % compliant % explain % no information 33

34 Appendix 34

35 35

36 36

37 Grant Thornton Corporate Governance Review Appendix A - Survey methodology This report was compiled in the third quarter of 2011, based on publicly available data for 118 companies incorporated in Belgium and whose shares are admitted for trading on a regulated market. This includes the Bel20 index and the continuous and fixing market segment of Euronext Brussels. A list of the reviewed companies can be found in Appendix B. Companies that are not incorporated in Belgium were not evaluated. For the purpose of this review, the Corporate Governance Statement, published in the annual reports, was taken as a starting point. For some specific topics we also consulted the Corporate Governance Charter. The statements were assessed in light of the 2009 Corporate Governance Code (Code), the Corporate Governance Act of 6 April 2010 (CG Act) and the audit committee Act of 17 December 2008 (AC Act). For the statements that were assessed in comparison to the Code, the charts drawn in the results section include four different parameters: compliant, explain, not compliant and no information. For those statements compared to the application of the law, we have only foreseen a compliant or not compliant, as «explains» are not considered under the legislation. For reasons of completeness we mention that the statements were only studied in one language: Dutch if available, otherwise English or French. All figures were rounded to the nearest whole number percentage, therefore in some cases the graph percentages do not total 100. It is our aim to provide the reader with an extensive and objective overview of the current status of corporate governance in the selected companies. Assessing compliance of the annual reports with the Corporate Governance Code requires some level of interpretation. As such, we have complemented the results of our analysis with general observations, specific comments and, in some cases, recommendations for future improvements. 37