4 Duties and responsibilities of the Board, the Chair and members

What the law and good practice expect of the Board as a whole, of its Chair and of each Board member, including independent members.

In this chapter

4.1 Board

The Board implements corporate governance by providing strategic leadership and oversight. Its key purpose is to ensure the sustainable success of the company while meeting the interests of all shareholders and balancing the interests of stakeholders.

All the duties apply to each member of the Board individually and to the whole Board in corpore. The Baltic legal systems emphasise the Board’s duty towards the company’s best interests, while shareholders’ and stakeholders’ interests are derived from it.

This duty is defined as a fiduciary duty, and typically requires more than the law defines. It implies making decisions with care and diligence, in good faith, always with the goal of protecting the company’s best interests and avoiding conflicts of interest. It is always a balancing act, as the exercise of oversight duties must leave management the freedom to execute the strategy without undue interference.

There are two main types of fiduciary duty:

1. Duty of Care
   1. the responsibility always to act within the law and the authority granted by the shareholders and defined in the Articles of Association, and to make informed decisions in order to exercise sound judgement with the highest degree of professional skill, caution and critical awareness of risk. This implies taking responsibility for collecting necessary and sufficient information, examining assumptions and considering alternative options, including obtaining expert advice where appropriate.
   2. Board members are required to perform their duties with such due diligence as would be applied by a prudent executive in the same circumstances:

1. not just a prudent person, but a prudent executive (a higher standard: an average, reasonably experienced business leader, while the subjective circumstances, such as the experience and knowledge of the particular person, would also be taken into account by the courts);
2. comparable circumstances (including available resources and the economic state of the particular company).

2. Duty of Loyalty requires a member to put the best interests of the company first at all times, to disclose upfront any and all relevant information that could affect their ability to carry out their duties for the benefit of the company, to maintain the confidentiality of all information relating to the company, whether written or spoken, and never to use it for personal gain, and to abstain from other conflict-of-interest situations.

Board responsibilities include, among other relevant items and subject to the country-specific legal framework:

1. Determine the company’s purpose, vision, mission and values
2. Guide strategy development, approve the strategy and oversee its implementation
3. Ensure that the company has sufficient resources and tools, including a proper organisational structure, to implement the strategy
4. Focus on long-term sustainable value creation beyond financial returns
5. Develop, improve and monitor the corporate governance framework
6. Challenge assumptions, set ambitious goals and support management in achieving them
7. Approve the medium-term business plan, budget and investment plans, and oversee their implementation as well as financial and non-financial performance
8. Oversee management (including appointing and dismissing the CEO and/or Management Board, defining remuneration and incentive schemes, and ensuring succession planning and talent development)
9. Ensure that the control environment, risk management, compliance, and external and internal audit are effective
10. Report to shareholders and other stakeholders, and oversee disclosure and internal and external communications
11. Establish a framework to safeguard the reputation of the company and ensure the transparency and ethical behaviour of the company
12. Oversee stakeholder relationships and ensure that the interests of stakeholders are taken into account
13. Establish Board committees where needed and ensure their efficient work and contribution to the Board’s activities
14. Take an active leadership role in shaping the company’s direction, advising management and stepping in when necessary to ensure the organisation’s long-term success and sustainability
15. Assess the Board’s own performance and develop continuous improvement plans

To implement the above Board functions efficiently, each Board member shall:

1. participate in person in the meetings of the Board and vote on all agenda items, except in the cases established by law where the Board member does not have the right to vote;
2. familiarise themselves with the agenda items, draft resolutions and other documents associated with the meetings of the Board;
3. actively participate in the discussion of the agenda items;
4. constantly deepen their knowledge and develop the qualifications necessary for the proper performance of the functions of a Board member, in order to fully understand the company’s business, its environment and trends, and to perform tasks efficiently and take professional decisions;
5. perform other obligations established by law, the Articles of Association and the Board regulations or charter.

4.2 Chair of the Board

The Chair acts as an important link between the Board and the organisation’s management via the CEO, and is responsible for the leadership of the Board, but is not the “boss” of the Board members. The Chair is appointed to the position by the Board members, rather than directly by the shareholders or the major shareholder(s). The Chair’s impact on the overall success of the Board’s work should not be underestimated, because the Chair of the Board sets the tone at the top of the organisation, which cascades down and affects the whole company, its performance and its long-term success.

There is an option to appoint a Vice-Chair of the Board, whose main responsibility is to take on the Chair’s role when the Chair is absent or unavailable, e.g. to run Board meetings or represent the company when the Chair cannot attend.

The Chair is responsible for the leadership of the Board, including:

1. facilitating a proper flow of information to the Board;
2. facilitating the effective functioning of the Board, including managing the conduct, frequency and length of Board meetings;
3. communicating the views of the Board, in conjunction with the CEO, to the organisation’s shareholders, broader stakeholders and the public.

In performing this role, the Chair’s responsibilities also include:

1. in consultation with the CEO and/or company secretary:
   1. setting the agenda for the matters to be considered by the Board;
   2. ensuring that the information provided to the Board is relevant, accurate, timely and sufficient to keep the Board appropriately informed of the performance of the organisation and of any developments that may have a material impact on the organisation or its performance;
   3. ensuring that communications with stakeholders are accurate and effective;
2. ensuring that the Board as a whole has the opportunity to maintain an adequate understanding of the organisation’s financial position, performance, operations and affairs generally, and of the opportunities and challenges facing the organisation;
3. facilitating open and constructive communication among Board members and encouraging their contribution to Board deliberations;
4. overseeing and facilitating Board, committee and Board member evaluation reviews and succession planning;
5. liaising with the CEO as the primary contact between the Board and management; and
6. liaising with and counselling, as appropriate, Board members.

4.3 Board members

In one-tier Boards there may be both executive and non-executive directors, while the Supervisory Boards of the two-tier structure consist of non-executive directors only. It is recommended that Boards have as many non-executive directors as possible and, among them, the maximum number of independent directors. Executive directors cannot perform one of the most valuable responsibilities of the Board: challenging management when goals and key performance indicators (KPIs) are set. For instance, if management makes a proposal to the Board to decide on the launch of a certain investment project, executive Board members will not involve themselves in challenging the assumptions of the proposal or the ambition of the proposed targets and goals, because these proposals were made by themselves.

Another reason to have more non-executive directors is the opportunity to bring additional competencies to the Board and the company.

Executive and non-executive directors have the same duties and responsibilities on the Board.

4.4 Independent Board members

Benefits of independent Board members

Although each Board member must act with independence of mind (i.e. should be able to make their own reasoned, objective and independent decisions in performing their Board member functions), good governance requires that the majority of Board members should also be formally independent.

The benefits of having independent members on the Board include:

• Availability of additional competencies, skills, experience and knowledge;
• Unbiased and objective judgement of the company and its prospects;
• Strong ability to challenge the status quo and to identify weaknesses, strengths and opportunities;
• Improved credibility of the Board and the company;
• Increased stakeholder trust;
• Assistance in resolving conflicts that may arise among Board members;
• Reducing or even preventing groupthink¹ on the Board;
• Improved overall proficiency of the Board and the value it creates;
• Overall improvement of corporate governance practices and organisational culture.

Independence principle and criteria

Formal independence means that the Board member does not have any current or recent material relationship or links with the company, its affiliates, their management or the significant direct or indirect shareholders of the company or its affiliates, and does not participate in the day-to-day operations of the company. This principle of the absence of material relationships or links serves as the main measure for evaluating the formal independence of a Board member.

In practice, to aid the assessment of the formal independence of Board members and to clarify which situations may affect it, criteria are established that usually indicate whether or not a member is formally independent. These criteria are used as presumptions that may be rebutted by reasoned and evidence-based arguments as to why the member, despite meeting specific criteria, may nonetheless be deemed formally independent.

Sample lists of formal independence criteria may be provided in:

• Company laws applicable to the company (which may be mandatory for some companies, e.g. listed companies, and serve as a minimum requirement);
• Other laws or regulations (e.g. special requirements for companies operating in specific regulated sectors, such as financial institutions);
• Guidelines, corporate governance codes and principles, best practices and other soft law (e.g. this Handbook, the corporate governance code of the stock exchange on which the company’s shares are listed, and the other examples provided at the end of this section).

The company should decide and record which criteria it will apply to assess and establish the formal independence of its Board members. When selecting the criteria, the company should take into account the mandatory legal and regulatory requirements, the principles set out in soft law (guidelines and codes), and its individual circumstances, which may affect the selection and description of the criteria (e.g. listed entities should take into account the corporate governance code of the market on which their securities are listed; the shareholding threshold for a “material shareholding” will probably be significantly lower for listed companies and/or companies with an otherwise diverse shareholder base; and the company’s overall turnover, the turnover it generates from its top clients or the value of its top supply contracts may affect how the company defines a “material” business relationship).

Based on the Baltic company laws and the soft-law recommendations listed at the end of this section, BICG proposes the criteria below as guidance for establishing the independence of a Board member. A Board member may be considered independent if they:

1. are not, and have not been for at least the past two (2) years, employed by the company or its affiliates;
2. do not have a material relationship with the significant direct and/or indirect shareholder(s) of the company or its affiliates. The threshold of shareholding that qualifies as “significant” may vary depending on the company (e.g. mandatory thresholds may be established for regulated entities, and share listing or widely dispersed shareholdings may merit lower thresholds) and should therefore be defined by the company itself, taking into account the applicable regulatory requirements;
3. do not have, and have not had for at least the past two (2) years, a material business relationship or any other material interest with the company or its affiliates (either directly or indirectly through a related party). The definition of materiality may vary depending on the circumstances of the company and should therefore be defined by the company itself, taking into account the applicable regulatory requirements;
4. do not receive, and have not received for at least the past two (2) years, any additional remuneration from the company or its affiliates other than the fees for the performance of Board member functions;
5. are not employed as an executive officer of another company on whose Board any of the company’s executives serve;
6. are not, and have not been at any time during at least the past three (3) years, affiliated with or employed by a present or former auditor of the company or any of its affiliates;
7. are not (i) a close relative, partner or spouse of any individual who would not meet any of the criteria set out in points 1 to 6, or (ii) a close relative, partner or spouse of a member of the Board of the same company or any of its affiliates;
8. have not served on the Board of the company as an independent director for more than 8–10 years;
9. do not have any other interest or relationship (formal or personal) that could interfere with their ability to act in the best interests of the company;
10. are financially independent from the shareholders (i.e. a substantial part of the Board member’s income is not received from companies of the same shareholder(s)).

The above list is non-exhaustive and further criteria may be added to address the individual circumstances of the company.

Board members’ formal independence criteria and the evaluation process are usually described in the company’s Board member independence policy or another policy. In major companies with well-established Boards and/or a diverse shareholder base, such a policy is approved by the Board itself. In companies establishing the Board as a new corporate body and appointing the Board for the first time, or in smaller companies with a small number of non-executive Board members and/or only a few shareholders, the Board member independence policy may be approved by the general meeting of shareholders.

Recommended proportion of independent members, independence assessment and transparency

Ideally, all Board members should be independent. If this is not possible, good practice requires that the majority of Board members are formally independent.

The formal independence of each Board member should be evaluated:

1. prior to their nomination;
2. upon their appointment; and
3. regularly thereafter (e.g. annually) or ad hoc (upon a change or the occurrence of new circumstances that could affect the member’s formal independence).

A company should be transparent about the formal independence of its Board members and should disclose:

• the criteria on the basis of which the formal independence of Board members is established;
• which of its Board members are deemed independent and which are not;
• any material relationships Board members have with the company, its affiliates or their significant shareholders, as well as directorships and significant shareholdings in other companies.

Such disclosure is usually made on the company’s website and in the annual report.

Each candidate for a Board position, and each Board member, has a duty to disclose to the company all information requested by the company or otherwise relevant to the evaluation of their formal independence. Candidates must disclose such information prior to their appointment, while Board members must update it (i) upon their appointment, (ii) at regular intervals to enable regular (re-)evaluation of formal independence, and (iii) upon a change of circumstances (e.g. a Board member’s engagement in a new business or the occurrence of new private or business relationships).

It is good practice to appoint independent directors to the Board’s audit, risk, remuneration and nomination committees, and to have them chair such committees.

More information on formal independence criteria and the appointment of independent Board members can be found in international guidance and in the Baltic corporate governance codes.²

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