The Act of 17 December 2008 has introduced the obligation for listed companies and certain other entities, such as financial institutions, to set up an audit committee. The Act also provides revised and more stringent criteria for independent directors and reinforces the role and duties of the statutory auditor. Furthermore, on 12 March 2009 the Belgian Corporate Governance Committee has issued a new version of the Belgian Corporate Governance Code to take into account the legislative changes of the past years relating to amongst other insider trading and market manipulation and, most recently, the audit committee. In addition the new Corporate Governance Code includes a number of new and revised recommendations and guidelines with respect to, amongst others, the role of the board committees, golden parachutes and the remuneration of directors and executives.

1. Mandatory audit committee in listed companies and financial institutions
   1. Audit committee
   2. Independent director
   3. Statutory auditor
   4. List of regulated companies
2. The new version of the Belgian Corporate Governance Code
   1. Structure and nature of the Code
   2. The Code and the existing legislation
   3. The main changes of the 2009 Code
   4. Entry into force of the 2009 Code

1. Mandatory audit committee in listed companies and financial institutions

The global financial crisis and the current upheaval in the financial markets made it clear that it is vital for the management, the board of directors and the audit committee of companies to pay extremely close attention to a company’s financial reporting, its risk profile and the assessment thereof in the constantly changing and highly challenging financial markets.

Audit committees and an effective internal controls system help to minimise the financial, operational and compliance risks, and enhance the quality of financial reporting. The establishment of an audit committee was only a recommendation under the “Corporate Governance Code” for listed companies and under several circular letters of the Banking, Finance and Insurance Commission (Commissie voor het
Bank-, Financie- en Assurantiewezen /Commission Bancaire, Financière et des Assurances (CBFA)).

The Act of 17 December 2008¹ which partially implements Directive 2006/43/EC² has turned this recommendation into an obligation for listed companies (including listed European Companies (Europese Vennootschap/Société Européenne/Societas Europaea (SE)) and certain financial institutions (i.e. credit institutions (kredietinstelling/établissement de credit)³, (re)insurance companies (verzekeringsonderneming/enterprise d’assurances)⁴, investment firms (beleggingsonderneming/enterprise d’investissement)⁵ and a management company of undertakings for collective investment (beheervennootschap van instellingen voor collectieve belegging/société de gestion d’organismes de placement collectif)⁶. This has now also been reflected in the 2009 revised version of the Corporate Governance Code (see Section 2 below).

1.1 Audit committee

Composition of the audit committee

Each listed company must set up an audit committee composed exclusively of non-executive directors. A non-executive director will considered to be any member of the board of directors who is not a member of the management committee (directiecomité/comité de direction) and who is not in charge of the daily management of the listed company within the meaning of article 525 of the Belgian Company Code (BCC) (see new article 526bis BCC). At least one member of the audit committee must be independent within the meaning of the new article 526ter BCC (see infra) and must dispose of sufficient individual expertise in accounting and auditing.

The same rules apply for financial institutions, with this distinction that in financial institutions the members of the audit committee must also have a collective expertise in the specific activities of the institution in addition to accounting and auditing.

The individual and, as the case may be, collective expertise of the members of the audit committee must be justified in the annual report of the board of directors (new article 96, 9° BCC). The members of the audit committee must also keep their knowledge in accounting and auditing up-to-date to enable them to perform their duty properly.

The regime applicable to the European Company (Europese Vennootschap/Société Européenne/Societas Europaea (SE)) with respect to the audit committee is very similar to the regime governing an audit committee of a listed company, while duly taking into account the two-tier, or as the case may be, one-tier system of an SE.

Duty of the audit committee

The audit committee must have at least the following duties:

- monitoring of the financial reporting process;

- monitoring of the efficiency of the internal controls and risk management systems of the company;

- monitoring of the internal audit, its efficiency and the relevant activities;

- monitoring of the legal review of the annual accounts and the consolidated annual accounts, including monitoring of questions and recommendations made by the statutory auditor (commissaris/commissaire) or, as the case may be, the auditor (bedrijfsrevisor/reviseur d’entreprise) in charge of the audit of the consolidated annual accounts; and

- assessment and monitoring of the independence of the statutory auditor or, as the case may be, the auditor (bedrijfsrevisor/reviseur d’entreprise) in charge of the audit of the consolidated annual accounts, in particular the nature and extent of non-audit services (One-to-one-rule as set forth in new article 133, §6 BCC)⁷.

The audit committee must report regularly to the board of directors on the progress made in performing the aforementioned duties and certainly when the board has to decide upon the (consolidated) annual accounts and the semi-annual operations and financial results.

No specific liability provisions have been inserted in the Belgian Company Code with regard to the members of the audit committee.

Exemptions

Listed open-ended public undertakings for collective investments⁸ are fully exempted from setting up an audit committee and do not even have to meet the criteria set forth above. Listed companies issuing asset backed securities⁹ are also fully exempted from setting up an audit committee provided that they publish the reasons why they will not set up an audit committee nor entrust the board of directors with the duties of an audit committee (see new article 526bis, §7 BCC).

In addition thereto, if a listed company or the financial institution meets at least two out of three of the following criteria, it will not be obliged to set up an audit committee:

- an average number of employees during the relevant financial year of less than 250 persons;

- total balance sheet of EUR 43,000,000 or less; and

- yearly net turnover of EUR 50,000,000 or less.

For listed companies, the aforementioned numbers must be calculated on a consolidated basis.

In listed companies, credit institutions and (re)insurance companies that wish to benefit from this exemption, the board of directors will have to assume the duties of an audit committee. However, the chairman of the board, being an executive member (e.g. member of the management committee, daily manager, etc.), may in such case not chair the board meeting if such meeting acts in its capacity of audit committee.

In investment firms and management companies of undertakings for collective investments, the board of directors will not have to assume the duties of an audit committee for them to be able to benefit from this exemption.

With respect to credit institutions, (re)insurance companies, investment firms and the management companies of undertakings for collective investment, the CBFA may grant in addition thereto individual exemptions to the obligation to set up an audit committee to such financial institutions which are subsidiaries of a (mixed) financial holding, an insurance holding, another credit institution, an investment firm, a management company of collective investment institutions, organising an audit committee on group-level. The CBFA will make a circular letter with regard to its exemption policy publicly available on its website.

1.2 Independent director

As mentioned above, at least one member of the audit committee must be an “independent” director. The Belgian legislator has opted not to refer to the old definition of an “independent” director set forth in article 524, §4, second section BCC but has opted to put in place a new and more stringent definition in article 526ter BCC which is based on the text of Directive 2006/43/EC. The old definition of an “independent” director set forth in article 524, §4, second section BCC has been deleted and replaced by a reference to the new definition set forth in article 526ter BCC.

This new article 526ter BCC specifies that the independent director within the meaning of the aforementioned article 526bis, § 2 BCC (and article 524, §4 BCC regarding conflicts of interest within listed companies) should at least meet the following criteria, which have been taken over in the revised version of the Corporate Governance Code (see Section 2 below):

(i)    over a period of five years prior to his/her appointment, the director may not have exercised, neither in the company nor in a related company, a mandate of executive director or a function of member of the management committee (directiecomité/comité de direction) or person in charge of the daily management;

(ii)   the director may not have exercised more than three consecutive mandates as non-executive director on the board of directors without this period being longer than twelve years;

(iii)  over a period of three years prior to his/her appointment, the director may not have been part of the management staff of the company or a related company;

(iv)   the director may not have received any compensation or other important indirect benefit from the company or a related company, save for the bonuses and compensation received as non-executive member of the board or a member of the supervisory body;

(v)   a) the director may not have rights to one-tenth or more of the share capital or a class of shares of the company;

b) if the director holds rights to a quota of less than 10%:

- those rights in the same company held by companies controlled by the independent director may not have reached one-tenth of the share capital or a class of shares of the company; or

- the sale of those share or the exercise of the rights attached to those shares may not be subject to agreements or unilateral commitments entered into by the independent member;

c) the director may in no event represent a shareholder who falls under the scope of this paragraph;

(vi)   the director may not have or in the past year had a significant business relationship with the company or a related company, either directly or indirectly as a partner, a shareholder, member of the board or as a member of the management staff;

(vii)  in the past three years, the director may not have been a partner or employee of the current or previous statutory auditor of the company or a related company;

(viii) the director may not have been an executive member of the board of another company in which an executive director of the company has the capacity of non-executive member of the board or member of the supervisory body, and the director may not have any other significant link with executive directors of the company by virtue of mandates in other companies or bodies;

(ix)   the director may not have a husband/wife, cohabiting partner or relative or in-law to the second degree, who is a member of the board, a member of the management committee, a person entrusted with the daily management or a member of the management staff in the company or any related company, or who is in one of the situations as set forth in the previous paragraphs.

A comparison between the old definition of an “independent” director set forth in article 524, § 4, second section BCC and the new definition set forth in article 526ter BCC shows that the Belgian legislator has made the existing criteria more strict and that it has imposed also five additional criteria (i.e. the criteria under (ii), (iii), (iv) c), vii) and viii)) to which a director must comply before he or she can be considered to be an “independent” director.

Furthermore, the King and/or the articles of association of a company may provide for even more stringent criteria for an independent director.

The change of the definition of an “independent director” will have an impact on the composition of the board of directors of the listed companies, which will have to be reviewed and if necessary, modified. The current directors who comply with the conditions for independency set forth in the (old) article 524, §4 BCC (for directors of listed companies) or the conditions for independency set forth in the annual report of the board of directors (for directors of credit institutions, (re)insurance companies, investment firms and the management companies of undertakings for collective investment) and therefore considered to be independent under current legislation, may stay in office until 1 July 2011. Any new “independent” director which will be appointed as from the entry into force of this law shall immediately need to comply with the new rules set forth above.

In the event the duties of the audit committee are assumed by the board of directors and an exception to the One-to-One-Rule is being requested, only the independent director (or the majority of independent directors) within the meaning of article 526ter BCC may approve such exception to the One-to-One-Rule (new article 133, § 6, 1° BCC).

1.3 Statutory auditor

Duties

Notwithstanding the duties of a statutory auditor as already provided in the BCC, the Act of 17 December 2008 sets out certain additional duties for the statutory auditor, especially with regard to the audit committee. A statutory auditor must:

- confirm his/her independence from the company on a yearly basis to the audit committee in writing;

- report all additional services rendered to the company on a yearly basis to the audit committee;

- discuss any possible threats to his/her independence and the safety measures to restrict any possible threats.

Furthermore, the statutory auditor (or, as the case may be, the auditor in charge of the audit of the consolidated annual accounts) must report to the audit committee (or to the board of directors directly if no audit committee has been set up) with regard to issues arising from the audit process and in particular material weaknesses in the internal controls with regard to financial reporting.

Appointment

Following the establishment of an audit committee, the statutory auditor must be proposed by such audit committee to the general meeting of shareholders (new section in article 130 and 156 BCC).

Dismissal

In principle, statutory auditors of a company are appointed for a renewable period of three years. The general meeting of shareholders may dismiss the statutory auditor only where there are proper grounds (unless compensation is paid). The new act now clarifies that divergence of opinions on accounting treatments or audit procedures shall not be proper grounds for dismissal.

Save significant personal reasons, the statutory auditor may, as before, resign only during its mandate at a general meeting and provided that the general meeting has been informed in writing of the reasons for its resignation.

A novelty in the Belgian Company Code is that the audited company and the statutory auditor must report the dismissal or resignation of the statutory auditor to the High Council for Economic Professions. They then have to adequately explain the reasons for dismissal or resignation.

1.4 List of regulated companies

The publication of the lists of “regulated companies” (gereglementeerde ondernemingen/enterprises réglementées)¹⁰ by the CBFA will no longer have to be made in the Belgian Official Gazette. Publication by the CBFA on its website will be sufficient.

The act has entered into force on 8 January 2009.

Click here for the full text of the Act of 17 December 2008 (Dutch and French versions; see pages 68568-68580).
 

2. The new version of the Belgian Corporate Governance Code

The new version of the Belgian Corporate Governance Code was published on 12 march 2009 (the “2009 Code”). This new edition of the Code is the result of the work carried out by the Corporate Governance Committee (the “Committee”). The new version replaces the 2004 version of the Code and takes account of European and Belgian legislation on corporate governance, the evolution of good governance practices and codes in other EU-countries and aims – according to the Committee – to meet “the expectations of society and stakeholders against a backdrop of far-reaching changes and a financial and economic crisis”.

In September 2007, the Committee decided to review the Belgian Corporate Governance Code, and therefore launched a public consultation. However, the public consultation ended before the financial crises broke out, which means that new facts had to be taken into account. The Committee is likely to think that good governance practices, based on transparency and responsibility, will make a considerable contribution to bolstering investor’s trust in Belgian listed companies and, in doing so, will benefit all stakeholders involved.

2.1 Structure and nature of the Code

The structure of the 2009 Code is still based on nine principles, the pillars of corporate governance, along with recommendations and guidelines that clarify the scope of the Code. The Code is based on the ‘comply or explain’ principle, which has been recognised in European Directive 2006/46/EC. In concrete terms, it means the companies are expected to comply with the provisions, however, in specific cases, they may depart from some of the Code’s provisions, if they give a considered explanation for doing so. Departing from a guideline, on the opposite, does not require any explanation.

2.2 The Code and the existing legislation

Like the 2004 Code, the 2009 Code is mainly targeted to listed companies. However, due to its flexibility, it can also serve as a model framework for non-listed companies. Belgian company law and financial legislation contain an extensive set of governance rules that apply to listed companies. The Code is complementary to existing Belgian law and no provision of the Code may be interpreted as derogating from Belgian law. Nevertheless, the Code can go beyond Belgian legislation (e.g. a minimum level of shareholding to make proposals for the agenda of the general shareholders’ meeting).

2.3 The main changes of the 2009 Code

(i)    The 2009 Code stresses the importance of Corporate Social Responsibility, which means, among other things, for the company, and in particular for the board of directors, to take account of social and environment matters in the conduct of its business as well as in its relationship with the stakeholders. The Committee has clarified and emphasised the tasks and responsibilities of the board. The attention has been drawn more explicitly on the monitoring responsibilities, specifically the approval of the framework of internal control and risk management. The Committee recommends that the board describes the main features of the company’s internal control and risk management systems in the Corporate Governance Statement. A new provision stating that the board should foster – through appropriate measures – an effective dialogue with the shareholders and the potential shareholders has also been included.

(ii)    Relating to the composition and the organisation of the board of directors, the Code focuses on diversity, and recommends to listed companies to have their board composed half out of non-executive directors, having at least three members of the board who are independent according to the criteria set out in the new article 526ter of the Belgian Company Code as introduced by the Law of 17 December 2008 on the Audit Committees (see Section 1 above).

The Committee also stressed that the board should meet sufficiently regularly to discharge its duties effectively. Board and board committees’ meetings should therefore be made possible through video, telephone and internet-based services where/when necessary, so that the members of the board are able to participate in the meetings as often and as much as possible.

The board of directors of the company is also invited to appoint a company secretary. The Code confirms the important role of the company secretary and introduces a guideline explaining its functions in those areas relating to corporate governance.

(iii)   The Code recommends to the board of directors of a listed company to take all necessary and useful measures for effective and efficient execution of the Belgian rules on market abuse. It has been brought in line with the Belgian legislation on insider trading and market manipulation, following the implementation of EU Directive 2003/6/EC.

(iv)   The Code sets out that the chairman of the board of directors should be appointed on the basis of his knowledge, skills, experience and mediation strength. If the board envisages appointing a former CEO as chairman, it should carefully consider the positive and the negative aspects in favour of such decision and disclose in the corporate governance statement why such appointment is in the best interest of the company.

The Committee also recommends to the board to regularly asses its size, composition, performance and those of its committees. Additionally, disclosure with regards to the main features of the evaluation process of the board, its committees and its individual directors is being asked for in the corporate governance statement.

(v)    The Committee recommends the board of directors of a listed company to set up an audit committee in accordance with article 526bis of the Company Code. Since the Law on Audit Committees has entered into force, the set up of an audit committee in listed companies is a legal obligation (see also Section 1 above). 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. The nomination committee and the remuneration committee should also review their terms of reference and their own effectiveness and recommend any necessary changes to the board.

(vi)   As for the board, the responsibilities of the executive management have been clarified in the 2009 Code. The executive management is responsible and accountable for the complete preparation and the adequate disclosure of financial statements and other information. Clear procedures should exist for the evaluation of the CEO and the other members of the executive management.

(vii)  The 2009 Code modifies the entire principle on fair remuneration of directors and executive managers in listed companies. According to the new rules, the company should set up a remuneration report which must form a well defined part of the corporate governance statement. The remuneration report will provide the shareholders with the most relevant information on the remuneration packages and the remuneration levels. If the company materially deviates from its remuneration policy applicable for the financial reported year, this should be explained in the remuneration report.

The amount of the remuneration granted to the CEO and the other members of the executive management, the components of the remuneration and the criteria for the evaluation of the performance (where the CEO of the executive manager is eligible for incentives based on performance) should be disclosed in the remuneration report (basic remuneration, variable remuneration as well as pension or other components of the remuneration). Every single change to the policy should be disclosed in the report.

The board of directors should approve the contracts for the appointment of the CEO and other executive managers further to the advice of the remuneration committee. The contracts made on or after 1 July 2009 should refer to the criteria to be taken into account when determining variable remuneration. The contract should contain specific provisions relating to early termination.

The Committee also puts an end to “golden parachutes”. Any contractual arrangement made with the company on or after 1 July 2009 concerning the remuneration of the CEO or any other executive manager should specify that severance pay awarded in the event of early termination of the contract should not exceed 12 months’ basic and variable remuneration. The board of directors may consider higher severance pay further to a recommendation by the remuneration committee but such higher severance pay should be limited to a maximum of 18 months’ basic and variable remuneration. The contract should specify when such higher severance pay may be paid and the board should justify this higher severance pay in the remuneration report. The contract should also specify that the severance package should neither take account of variable remuneration nor exceed 12 months’ basic remuneration if the departing CEO or executive manager did not meet the performance criteria referred to in the contract.

(viii) The company should enter into a dialogue with the shareholders based on mutual understanding. It should also encourage the shareholders to participate to the general shareholders’ meeting.

(ix)   Finally, the Code underlines that even if it has not been implemented under Belgian law yet, according to EU Directive 2006/46/EC, listed companies are required to have a corporate governance statement in their annual report. This corporate governance statement must refer to the corporate governance code they decide to apply. The 2009 Code mentions that the company must state in its corporate governance statement that it adopts this Code as its reference code. In case the company does not comply with some of the provisions, it should give its reasons for non-compliance (comply or explain). Other more factual information should also be mentioned in the corporate governance statement: the remuneration report, a description of the main features of internal control and risk management and a description of the composition and operation of the board.

An overview of the main changes can also be found here.

2.4 Entry into force of the 2009 Code

The second edition of the Code is available since March 2009 and is named the 2009 Code. It applies to reporting years beginning on or after 1 January 2009. Listed companies are expected to adapt their governance in light of the 2009 Code’s provisions and, where appropriate, adjust their governance practices and corporate governance charter accordingly. Companies are expected to comply with these new provisions for disclosure in the 2009 corporate governance statement of their annual report, to be published in 2010.
 

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1 - Act of 17 December 2008, Belgian State Gazette, 29 December 2008, 68568-68580, as amended by the act of 9 February 2009 amending article 133, §6, first section and article 526ter of the Belgian Companies Code, Belgian State Gazette, 25 February 2009, 16211.

2 - Directive 2006/43/EC of the European Parliament and of the Council of 17 May 2006 on statutory audits of annual accounts and consolidated accounts, amending Council Directives 78/660/EEC and 83/349/EEC and repealing Council Directive 84/253/EEC, OJ L 157, 9.6.2006, p. 87–107.

3 - Act of 22 March 1993 on the legal status and supervision of credit institutions.

4 - Act of 9 July 1975 on the supervision of insurance companies.

5 - Act of 6 April 1995 on the legal status and supervision of investment firms.

6 - Act of 20 July 2004 on certain forms of collective management of investment portfolios.

7 - “One-to-one rule”: The total fees for non-audit services performed by the statutory auditor or its global network to the benefit of the audited company or its subsidiaries (Belgian or foreign) may not exceed the total fees for statutory audit mandates performed by the statutory auditor or its global network to the benefit of the audited company or its subsidiaries (Belgian or foreign). However, exceptions can be granted in accordance to article 133, § 6 BCC by a.o. the audit committee, a committee of independent statutory auditors, etc.

8 - As defined in article 10 of the Act of 20 July 2004 regarding certain forms of collective management of investment portfolios.

9 - As defined in article 2, section 5 of Regulation (EC) n° 809/2004.

10 - i.e. the credit institutions and their registered branches, insurance companies, investment firms, undertakings for collective investments, their management companies and, as the case may be, their compartments.
 

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