A typical transnational corporate group can comprise dozens or even hundreds of companies. Controlling such a colossus is not an easy task, especially when it comes to local operational companies, sales offices and R&D centres that are a significant distance from the controlling shareholders and group-level management. Quite often in practice the local managers and their superiors communicate only a couple of times per year, and the main – or even the only – source of information about the local company is its financial reports. In a situation of this kind, the local management becomes much more likely to feel a lack of oversight and go astray, thus causing loss of value for shareholders.
How can group managers and controlling shareholders mitigate this risk and improve the chances of being able to swiftly dismiss rogue managers who have already engaged in harmful corporate practices? In this article associate Aliaksei Vashkevich will describe several legal measures that should help in achieving this aim with respect to a Belarusian subsidiary.
- While the shareholders have broad powers to manage the company, the local management typically exercises a significant level of operational control, which should be limited to prevent managerial misbehaviour.
- Choose suitable structures for management bodies: in companies with more than one shareholder, it is usually a good idea to establish a supervisory board.
- Identify issues that are crucial for the company and ensure that you can control decisions on these matters by adding them to the competence of the meeting of shareholders or supervisory board, and regulating quorum requirements and voting thresholds.
- Require approval for the opening of bank accounts and introduce two-level authorisation for operations involving them.
- Ensure that you can dismiss the CEO at any time: add a termination provision to the employment agreement or civil contract with the CEO. If the CEO is an employee, determine compensation for their dismissal in the absence of misconduct; also grant to the supervisory board the power to suspend the powers of the CEO.
- Have a trusted person to manage the affairs of the company in the absence of the CEO, and properly formalise the duties of this person.
Specifics of corporate governance in Belarus
The risk of managerial misbehaviour and available solutions for its mitigation are to a significant extent influenced by local company law and corporate governance practices. The summary of Belarusian specifics below describes standard corporate governance arrangements for a limited liability company (LLC) – the most widespread company form in Belarus.
The two mandatory management bodies at an LLC are the general meeting of shareholders and the executive body. The former is the supreme body of the company, responsible for key decisions, whereas the executive body deals with day-to-day management and in the vast majority of cases comprises only a sole director (CEO). The CEO can be either an individual or a legal entity.
The shareholders can also opt to have a collegial executive body (management board) which is created either instead of or in addition to the sole director. In practice, this is only done on rare occasions as ordinary management board members do not have statutory powers to represent the company, unlike the CEO who also acts as the head of the management board when it is created.
Notwithstanding the type of the executive body created in the company, the law requires conclusion of an employment agreement or a civil contract with the CEO and each management board member. The usual choice for individuals is an employment agreement, whereas civil contracts are used predominantly when the functions of the CEO are transferred to an external management company.
Another optional management body that can be created at the LLC is a supervisory board. Its main role is to supervise the executive body, but significant flexibility in setting the competence of the supervisory board allows it to perform other functions, for example, strategy-setting, making certain managerial decisions, etc.
Shareholders are the central element of corporate governance at Belarusian LLCs, and they are granted a broad range of powers to manage the company. While the exact list of powers is determined by the company’s articles of association, the Law on Economic Companies limits the authority of other management bodies by referring certain decisions to the exclusive competence of the meeting of shareholders. These decisions can only be made by the shareholders’ meeting and typically concern issues that are crucial for the company, for instance, amendment of the articles of association, approval of annual reports, change to the share capital, reorganisation and liquidation of the company, etc. Shareholders can expand exclusive competence in the articles of association, but in no case can they reduce it below the statutory minimum.
Aside from regulating exclusive competence, the Law on Economic Companies lists decisions that are within the ordinary competence of the meeting of shareholders. The scope of ordinary competence is wide and, in case the company does not have a supervisory board, also includes the statutory powers of the latter. If the supervisory board is in place, the powers within statutory competence of both the supervisory board and the meeting of shareholders can be flexibly distributed between them. Similarly to exclusive competence, the articles of association can include in the scope of ordinary competence additional issues not explicitly mentioned in the statute.
While only a small number of decisions within the statutory ordinary competence of the meeting of shareholders and the supervisory board can be permanently referred to the executive body, the shareholders can authorise it to decide on a one-time basis on any issue which is not within the exclusive competence of the shareholders.
Unless the company has a sole shareholder, all decisions within the competence of the shareholders shall be made at meetings of shareholders, and no separate shareholder can give binding instructions to other management bodies outside of such meetings. The procedure for convoking and conducting meetings of shareholders is thoroughly regulated by law and shall be followed precisely, otherwise any shareholder will be able to challenge the decisions adopted at the meeting. Due to cumbersome procedural requirements, decision-making by shareholders can take a significant time and, therefore, in companies with two or more shareholders it is usually impractical to refer to their competence all cases when some level of supervision of the local management is required.
The CEO (or the head of the collegial executive body if the company has no CEO) has a statutory power to represent the company and conclude transactions on its behalf, unless this power is restricted by the articles of association. Combined with the wide power to hire and dismiss employees as well as the right to issue powers of attorney, it generally results in significant operational control over the company by the CEO.
Furthermore, in the majority of cases the CEO is also responsible for convoking the company’s meeting of shareholders. Even though the shareholders have the right to request a meeting at any time and can also convoke the meeting on their own if the CEO refuses to satisfy this request, this complicates the position of the shareholders in case of a conflict with the CEO, especially if they also hold a share in the company.
Preventing managerial misbehaviour
The key sources of managerial misbehaviour are the operational control exercised by the local management over the company and the incentives to use this control for their own benefit. While it is possible to mitigate this risk by addressing both the incentives (e.g. by adjusting remuneration) and the level of control, in this overview we will focus only on the latter.
Choose a suitable structure for management bodies
The first step on the way to constraining the local management is to determine the bodies that will supervise it. The easiest situation is when the company has only one shareholder, so that the latter can directly control the management and swiftly pass necessary resolutions without holding meetings of shareholders and having to comply with cumbersome related procedural formalities. In this scenario any additional management bodies are unlikely to be necessary, and all supervisory functions can be performed by the directors and employees of the sole shareholder.
In case there are at least two shareholders, a greater level of efficiency and supervision can be achieved by transferring some of the issues within the competence of the meeting of shareholders to another management body. Usually, a better idea is to establish a supervisory board, because the law does not allow the management board to decide on the majority of issues within the statutory competence of the supervisory board and the meeting of shareholders. While the supervisory board cannot totally replace the meeting of shareholders due to the requirements for exclusive competence, the board will still be able to deal with the bulk of supervisory functions and transaction approvals.
Allocate powers wisely
After determining the structure of management bodies, distribute powers between them and regulate quorum requirements and voting thresholds in such a manner so as to ensure your control over key decisions. The exact list of such decisions is highly industry-specific, but, in addition to the statutory exclusive and ordinary competence, it is usually advisable to consider the following issues:
- loans and other financial contracts and instruments, both granted and received by the company
- grants of security
- transactions with real estate
- transactions with crucial equipment
- transactions with key intellectual property
- major commercial contracts
- initiation or settlement of major disputes
In addition to that, consider the option of introducing a requirement to obtain approval for opening bank accounts and implement a system to monitor transactions on these accounts. Usually, banks allow several signatories to be appointed and two-level authorisation of operations to be set.
Furthermore, it may be a good idea to grant the meeting of shareholders and supervisory board the power to decide on issuing and revoking powers of attorney. In case the CEO goes rogue, this measure will ensure that another person can be authorised to deal with the majority of operational matters while the shareholders are replacing the CEO.
If the company has more than one shareholder, transfer as many issues as possible to the competence of the supervisory board. This is especially important when the CEO is also a shareholder of the company. In that situation also try to ensure that you can appoint all or the majority of the supervisory board members.
Set a procedure for director replacement
In some cases, wrongdoing cannot be prevented, and the only way to move forward is to replace the CEO. To ensure that such replacement is possible and can be performed swiftly, a number of measures should be implemented beforehand.
The necessary measures are influenced by the specifics of the replacement process, which comprises two parts: making a corporate decision to dismiss the CEO and terminating an employment agreement or a civil contract concluded with them. With respect to the latter part, the contract shall contain provisions allowing such termination. If the CEO is an employee, dismissal is only possible subject to one of the grounds set out in labour law. The list is exclusive and cannot be expanded by the employment agreement. In the majority of cases when the CEO is dismissed due to a conflict, the preferable ground is termination of employment upon resolution of an authorised management body in the absence of any misconduct of the CEO. However, this ground is only available when the employment agreement stipulates compensation to the director; hence, it is necessary to ensure that a provision about this compensation is in place.
As for the corporate decision, it is made by the meeting of shareholders and should not be a problem if the CEO does not hold a share in the company. If they do, it is advisable to include in the articles of association beforehand the right of the supervisory board to suspend the powers of the CEO until the moment when the meeting of shareholders decides on her replacement.
Aside from the actual dismissal, it is also important to consider who will manage the company while the CEO is suspended or is not willing to cooperate with the shareholders. To this end, it is advisable to have a trusted person in the company and formalise in corporate and employment documents their duty to substitute for the CEO if such a need arises. Furthermore, ensure that the CEO cannot dismiss this person or amend the terms of their employment without approval of the supervisory board or shareholders.
Overall, implementation of the described measures should notably mitigate the risk of managerial misbehaviour and reduce negative impact if the CEO goes rogue. At the same time, it is necessary to remember that proper corporate governance is not determined solely by legal measures and that active involvement of shareholders, healthy relations with the local management and a robust corporate culture are crucial for successful and sustainable business development.
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