The independence of the members of the board is a strong recommendation for listed companies, but only for them.
There are different rules on the independence, depending on the domicile of the company or the first listing place. However, there are no requirements to have an assessment of a third party on the independence of the members of the board. Sometimes there are members of the board saying that they are independent, even though the picture shows clearly that they do not meet the independence criteria.
Unfortunately, we observed many cases when members of the board mention that they are independent, but after a careful check the reality is that one or even two conditions are not met. This situation was observed not only in Romania, but also for Austrian and German listed companies where crossed directorships are seen in public companies and they are not stated accordingly.
What is the sanction? In Romania there is a practice of criminal convictions for false statements, but this is an extreme effect. In other countries there is a material vote against the member of the board that makes suck misleading statements on his / her independence.
Criteria for independence under Romanian Law
The independence conditions are included in the Romanian Companies Law, and they follow the international practice:
a) not to be a director of the company or of a company controlled by it and not to have held such a position in the last 5 years
b) not to have been an employee of the company or of a company controlled by it or to have had such an employment relationship in the last 5 years
c) not to receive or to have received from the company or from a company controlled by it additional remuneration or other advantages, other than those corresponding to his capacity as a non-executive administrator
d) not to be a significant shareholder of the company
e) not to have or have had in the last year business relations with the company or with a company controlled by it, either personally or as an associate, shareholder, administrator, director, or employee of a company that has such relations with the company, if, by their substantial nature, they are likely to affect its objectivity
f) not to be or to have been in the last 3 years a financial auditor or salaried associate of the current financial auditor of the company or of a company controlled by it
g) to be a director in another company where a director of the company is a non-executive administrator
h) not to have been a non-executive administrator of the company for more than 3 mandates (maximum term for a mandate in Romania is 4 years, so the limit would be 12 years, but in more developed countries 9 years are considered the limit for being independent), and
i) not to have family relations with a person in one of the situations provided for in letter a) and d).
Criteria for independence under Corporate Governance Code for companies listed on Bucharest Stock Exchange
Companies listed on Bucharest Exchange have their conditions for independence, set in Corporate Governance Code issued by Bucharest Stock Exchange in 2015:
1. Not to be the CEO/executive officer of the company or of a company controlled by it and not have been in such position for the previous five years 2. Not to be an employee of the company or of a company controlled by it and not have been in such position for the previous five years.
3. Not to receive and not have received additional remuneration or other advantages from the company or from a company controlled by it, apart from those corresponding to the quality of non-executive director
4. Is not or has not been an employee of, or has not or had not any contractual relationship, during the previous year, with a significant shareholder of the company, controlling more than 10% of voting rights or with a company controlled by it
5. Not to have and not have had during the previous year a business or professional relationship with the company or with a company controlled by it, either directly or as a customer, partner, shareholder, member of the Board/Director, CEO/executive officer or employee of a company having such a relationship if, by its substantial character, this relationship could affect his/her objectivity
6. Not to be and not have been in the last three years the external or internal auditor or a partner or salaried associate of the current external financial or internal auditor of the company or a company controlled by it
7. Not to be a CEO/executive officer in another company where another CEO/executive officer of the company is a non-executive director
8. Not to have been a non-executive director of the company for more than twelve years
9. Not to have family ties with a person in the situations referred to at points 1 and 4.
What a member of the board has to lose in case of an inaccurate statement on his / her independence? Probably the reputation, but also the future chance to be in senior roles.
In January is the time for listed companies to prepare the independence statements for board members. Who should check the independence for members of the board? How many members will state that they are independent when in fact they are not independent? How trustable is a member of the board that presents the situation inaccurate for his / her independence? Is there a risk for such a person to mislead for more serious subjects?