Chapter 6. Related party transactions
This section presents the results of the review in the area of related party transactions. It takes stock of the criteria and mechanisms that may motivate and allow flexibility and proportionality in the implementation of rules and regulations relating to the area across the 39 jurisdictions that responded the survey used for the review. It also includes a case study of the Italian corporate governance framework in the area submitted by Marcello Bianchi (Assonime).
Introduction
Related party transactions
One aspect of corporate governance that has attracted increasing attention in recent years is the potential abuse of related party transactions (RPTs). In addition to several high-profile corporate scandals since the early 2000s, concerns have also been driven by a trend towards more concentrated ownership at company level. This trend is caused by a decline in the number of publicly listed companies in several advanced markets where listed companies traditionally have been characterized by dispersed ownership and a strong increase in listings in emerging markets which are typically characterized by concentrated ownership.
There is broad agreement that there is nothing wrong per se with entering into transactions with related parties and that these transactions can be economically beneficial especially in a company group structure. Therefore, prohibiting such transactions is not considered as a solution except in some specifics cases, such as company loans to its directors. However, the potential for abuse by insiders such as controlling shareholders is real. Indeed, such self-dealing has been a key aspect of the development of corporate governance frameworks in many jurisdictions over the last decade (OECD, 2012).
Against this background, the Committee agreed to include related party transactions among the seven areas of regulation for this thematic review on the use of flexibility and proportionality in corporate governance frameworks. This chapter presents the results of the review by taking stock of the criteria that may motivate and allow flexibility and proportionality in the application of rules and regulations across the 39 jurisdictions that responded the OECD survey prepared for the reviews. Information about the research methodology and an overview of the results are presented in the first chapter of the report.
The widely accepted definition of related party transactions, which is provided by the International Accounting Standards Board (IASB) in IAS 24, is a transfer of resources, services or obligations between a company and a related party, regardless of whether a price is charged. Since the definition of related parties includes key management personnel, their remuneration is also recognised as a RPT by IAS 24. However, executive remuneration is not covered in this chapter because the Committees' thematic peer review on flexibility and proportionality also includes a specific chapter on say on pay and the detail of disclosure on remuneration.
Corporate control structures and related parties
In financial reporting standards and corporate governance regulations, the concept of related parties in general includes three main elements: (1) a person or a company that controls or has significant influence over the company; (2) companies that are under the control of the company or that are under common control with the company, in particular in group structures; and, (3) key management personnel.
Transactions between the company and its key management personnel that fall into the definition of a RPT are in general related to the remuneration of key executives and board members. This is also one of the most important, if not the most important, policy issues identified by the traditional agency approach to corporate governance, which primarily focuses on the problems arising from the separation of ownership and control in dispersed ownership structures.
The remuneration issue put aside, the central problem that is addressed by the regulatory framework for related party transactions, including the definition of related parties, remains to be associated with the presence of controlling shareholders or blockholders. Here the agency problem is not between the managers and dispersed owners, but between the controlling shareholders and the minority shareholders.
The ownership structure at company level can be described in two main dimensions. The first is the distribution of ownership among different categories of owners, such as retail investors, pension funds, insurance companies and large individual owners. The second dimension is the degree of concentration of ownership and the portion of the company that is owned by its largest owners.
As shown in Table 6.1, there are significant differences among countries with respect to the categories of owners. For example, institutional owners is the largest category in both the United States and the United Kingdom, holding around 70% of the total capital. In some emerging markets and Asian economies, such as Brazil, Indonesia, Singapore, Russia and Turkey, corporations hold between one-third and half of the total capital. This can be seen as an indicator of strong presence of company groups in these countries. It other Asian economies, namely Japan, Korea and Hong Kong, China, and three large European markets, France, Germany and Italy, corporations also hold on average between 20 to 30% of the total shares. While institutional investors are not as dominant as in the US and UK markets, they also play an important role in these countries.
It is important to note that institutional investors typically are required to disclose their equity holdings if their assets under management are over certain thresholds. Therefore, the amounts in the table for institutional investors should be considered as the minimum numbers. A significant portion of "other free-floating shares" may also be held by institutions in many economies. This is also true for the category of individuals, which basically represents the controlling owners or other strategic investors. Minor retail investments are included in the free-floating numbers.
With respect to the concentration of ownership in individual companies, there is a recent discussion on the re-concentration of ownership in the hands of institutional investors mainly in the United States and some other countries usually classified as having dispersed ownership structures. For example, among the largest 20 US companies, the 5 largest institutional investors in 2016 held on average 21% of the capital and the largest 20 institutional investors held 33% of the company's capital (Bebchuk et al., 2017).
While concentration of ownership of capital is a principal indicator of control at company level, there are several arrangements available in corporate governance frameworks that allow actual control without holding a majority of the company's capital. This includes, multiple-class share structures, shareholder agreements, special voting rules, cross-shareholdings and pyramid structures. For example, many large tech companies that went public in the United States over the last decade have a controlling ownership through multiple-class share structures (Isaksson and Celik, 2013).
The presence of a controlling shareholder is generally assumed to reduce agency problems by closer monitoring of management. However, controlling ownership structures established through separating voting rights from cash flow rights – such as multiple class shares – do not have the same effect. These structures may contribute to a misalignment of incentives between controlling and non-controlling shareholders. (OECD, 2007). The consequence will be an increased potential for abusive related party transactions by the controlling shareholders.
Another important observation from Table 6.1 is that in China; Hong Kong, China; Malaysia and Russia, state ownership also plays an important role with an average ratio ranging from 24 to 42%. In some jurisdictions, there are specific rules addressing state-owned enterprises with respect to RPTs. One key difference emerges from IAS 24, which provides broad exemptions for SOEs from disclosure requirements that are posed to other companies.
The approach of the G20/OECD Principles
Recognising the developments in the corporate ownership worldwide and the fact that controlling owners may take advantage of minority shareholders through abusive self-dealing, the 2015 revision of the G20/OECD Principles further elaborated the recommendations on related party transactions. They now provide guidance with respect to RPTs in three dimensions: disclosure, approval and board responsibility.
With respect to disclosure, the introduction of International Financial Reporting Standards (IFRS) by many countries and convergence of IFRS with other financial reporting standards have to a large extent lead to a harmonized ex-post reporting of RPTs. In addition to disclosure of recurrent transactions in periodic company reports, material transactions are required to be disclosed on an ongoing basis. The G20/OECD Principles also calls for disclosure of major share ownership rights, including beneficial owners, and voting rights that will be necessary for identifying related parties. Such disclosure may include information about the group structure and intra-group relations as well as the ownership of controlling shares and cross-shareholding relationships.
Once the related party transactions have been identified, the emphasis moves on to setting procedures for approving them in a manner that protects the interest of the company and its shareholders. Company boards are in general seen as occupying a crucial role in the approval of RPTs often with a specific role for independent board members. The G20/OECD Principles also recognises approval by disinterested shareholders as an emerging practice.
With respect to the responsibilities of the board, the G20/OECD Principles establishes monitoring of related party transactions and managing conflicts of interest as an important board function. The duty of loyalty here emerges as of key importance to protect minority shareholders, since it underpins effective monitoring of RPTs by the board. This is particularly important for group structures, where the G20/OECD Principles sees the duty of loyalty for a board member as related to the company and all its shareholders and not to any individual or group of shareholders, regardless of how different shareholders voted at the annual shareholders meeting.
Regulatory frameworks for related party transactions around the world
The corporate governance framework of a country typically comprises elements of legislation, regulation, self-regulation and voluntary standards. As an important policy issue in all markets, related party transactions are addressed by a combination of different elements of the corporate governance framework. The focus is mainly on the disclosure requirements and the procedures for approval by board and/or shareholders. Based on the information provided in the OECD Corporate Governance Factbook, Table 6.2 summarises the main features of the regulatory frameworks for RPTs with respect to disclosure and approval procedures in the 39 jurisdictions surveyed in this report.
All jurisdictions have adopted IAS 24 or US GAAP for the disclosure of related party transactions in periodic financial reports, with the exception of Argentina, Australia and Japan. In addition to financial reports, many countries also require listed companies to disclose additional information on RPTs in a periodic corporate governance report. For example, in Brazil, the Czech Republic, Germany, Hungary, Portugal and Slovenia there are certain requirements for companies in a group structure to disclose intra-group transactions, including the negative impact of any influence by the parent company (OECD, 2017). More than half of the countries also require ongoing (immediate) disclosure of material RPTs, as part of the shareholder approval procedures.
A key global trend in corporate governance since the early 2000s has been the empowerment of shareholders in the corporate decision making and monitoring processes. This is also true for the approval of RPTs, in which shareholders are playing an increasingly greater role. However, in general the requirement for shareholder approval has been developed as an additional mechanism to mitigate the risk of potential abusive RPTs. In four countries (Portugal, Russia, Sweden and the United Kingdom), there is a requirement for shareholder voting for approval of RPTs without a requirement for board approval. In all other jurisdictions with a shareholder approval mechanism, a board approval mechanism for non-routine RPTs is also in place.
The board approval mechanism has also been evolving in many jurisdictions towards a stronger involvement of independent directors. In eleven countries shown in Table 6.2, independent board members are required to review related party transactions as part of the audit committees' functions or in some cases as members of the board. While for example the audit committee must review and approve a RPT in Singapore, in Turkey a board decision is required with approval of majority of independent directors. In the United States, however, the board of directors may put in place certain procedural mechanisms including a review by a special committee of independent directors and receipt of an opinion from outside specialist.
In many cases where there is a requirement for board or shareholder approval, there are also quantitative materiality thresholds in place. However, none of the criteria has been adopted as common practice worldwide. Market capitalisation, annual turnover, share capital, total assets are among used criteria with thresholds ranging from 5 to 50% of the total amount.
On the other hand, in some jurisdictions shareholder approval is required for individual RPTs if it is disapproved by any director (Chile) or by the committee of independent directors (Italy) or by the majority of the independent directors (Turkey) or if a board member has conflicts of interest (Colombia). France has a somewhat hybrid system where shareholder vote is required, but transactions that are not approved can also be carried out. This is complemented by a provision in the French Commercial Code that the interested party can be held liable for any detrimental consequence that the unapproved transaction may have had on the company (OECD, 2017).
An important aspect of the shareholder approval procedures is whether shareholders with material interest are allowed to participate in decisions of the shareholders' meetings. Half of the countries in Table 6.2 with a mandatory shareholder approval procedure for material related party transactions also require that shareholders with material interest in the transaction should abstain from voting at the shareholder meeting.
The consequence is that the transaction should be approved by the majority of the minority, where minority means all disinterested shareholders. A different example is the Chilean system where a qualified majority (2/3) requirement was introduced.
The case for flexibility and proportionality
The main purpose of flexibility and proportionality in corporate governance frameworks is to meet the needs of corporations operating in widely different circumstances, facilitating their development of new opportunities to create value and to determine the most efficient deployment of resources.
With respect to regulating the governance of related party transactions, one main factor that needs to be taken into account is the ownership and control structure at company level, which is also identified as one of the company characteristics that may call for flexibility and proportionality. Although for the purpose of analysis, distinctions are usually made between countries with concentrated and dispersed ownership structures at company level, the real picture is somewhat more complex.
As discussed above, there are many companies with a controlled ownership structure in countries that are generally classified as having a dispersed ownership structure. At the same time, there are many companies in concentrated ownership structure countries, mainly in continental Europe, that have a significant free-float ratio, which would indicate a wide dispersion of ownership.
However, identifying the actual ownership and control at company level requires information beyond just capital ownership, including voting rights, pyramid holding structures and cross-shareholdings. Indeed, this plurality in company ownership characteristics calls for flexibility and proportionality.
As described above, most countries have similar financial reporting requirements for RPTs by listed companies as a result of widespread acceptance of IFRS and convergence of IFRS with major national standards. However, in part due to the ex post nature of financial reporting, some jurisdictions have seen this as insufficient for corporate governance disclosure and have introduced complementary requirements with respect to, for example, on-going disclosure of material related party transactions. Since most companies in the world are required to follow principles-based accounting standards, to the extent possible, it would also be cost-effective to align the principles for RPT disclosure requirements with the accounting standards.
With respect to the review and approval procedures of material RPTs, the influence of controlling owners on the board may limit the effectiveness of the board's role in the process. This is why appointment of independent directors has emerged as an important mechanism to support minority rights. However, and for the same purpose, more recently empowering shareholder meetings has also been used in many countries. In this context, low free-float levels in some markets has a potential to create unintended consequences such as giving disproportionate powers to minority shareholders, which may also endanger companies' competitive position. These are all examples of the complexity of issues surrounding RPTs, and cases for flexibility and proportionality.
Survey results
Out of the 39 jurisdictions included in the survey, 33 jurisdictions reported at least one criteria or optional mechanism that allow for flexibility and proportionality in the area of related party transactions (Figure 6.1.).
Source: OECD Survey.
Source: OECD Survey.
Source: OECD Survey.
Looking at the frequency of use of criteria across the different regulatory areas, Figures 6.2. and 6.3. show that there were only 7 jurisdictions that did not report any criteria for flexibility and proportionality with respect to related party transactions.
As described in the main chapter of this thematic review, among all the criteria that jurisdictions employ to promote flexibility and proportionality in their corporate governance frameworks, the criterion of listing/publicly traded and the criterion of size are by far the most used when considering all areas of practice.
In line with the overall results of the survey, the most common criterion from flexibility and proportionality in the area of RPTs is listing status, which is used in 21 countries, followed by size in 11 countries and ownership/control structure in nine countries.
The use of listing/publicly traded as criterion for flexibility and proportionality
Despite being the most common criterion, the way that listing status is used for flexibility and proportionality with respect to related party transactions varies widely across countries. Figure 6.4. shows that some jurisdictions offer flexibility with respect to the listing level or venue, including alternative trading platforms. There are also a few cases where cross-listing is a criterion (Lithuania, Singapore and United States) and when companies that only have debt instruments listed are subject to different regulatory frameworks (Belgium, Brazil, Mexico and Singapore).
Source: OECD Survey.
The use of size as criterion for flexibility and proportionality
As seen in Figure 6.5., size also appears as an important criterion used in the RPT regulatory framework by 11 jurisdictions.
Source: OECD Survey.
The two main definitions of size are total assets and revenues (net sales) mentioned by seven and five jurisdictions respectively. In addition, total equity in Hungary, workforce in Slovenia and market capitalisation in the United States are used as quantitative criteria. All four jurisdictions that indicated a different size criterion (“other size”) than the ones listed in the figure use size of the transaction as the criteria for flexibility.
The use of ownership/control structure criterion for flexibility and proportionality
Figure 6.6. summarises the results with respect to use of ownership and control criteria across 10 jurisdictions. Italy, Spain and the United States mentioned both controlling shareholder and subsidiaries of listed companies as flexibility criteria, while Argentina and Hong Kong, China, were indicating only subsidiaries of listed companies; and, Germany and Ireland only controlling shareholder. Blockholders (United States) and privately owned (Japan) were also mentioned. Two cases where there are particular rules are Ireland where there are special rules for RPTs between companies and their wholly owned subsidiaries, and Korea where there are special rules for controlling shareholder and in particular for related persons who own more than half of a certain corporation or its subsidiary.
Source: OECD Survey.
The use of other criteria for flexibility and proportionality
As presented in Table 6.3, there are also a few cases were legal form, maturity of firm and accounting standards are used as criteria for flexibility. For example in Israel, according to Companies Law, a recurrent transaction with a controlling shareholder should be re-approved every three years. However, a company who offers its securities to the public for the first time may only have to start approving these transactions after five years if they were fully described in the offering prospectus. On the other hand, in Portugal companies that do not follow the international accounting standards pursuant to the European regulation must disclose certain detailed information regarding RPTs as an annex to their financial reports.
The use of opt-in and opt-out mechanisms for flexibility and proportionality
Figure 6.7. provides an overview of the use of opt-in and opt-out provisions as a flexibility and proportionality mechanisms in 14 countries. Italy, Russia and Spain use both opt-in and opt-out mechanisms, while six countries use only opt-out and five countries only opt-in options. As an example of opt-in provisions, in the Netherlands listed companies can opt-in to the use of IFRS for their non-consolidated annual statements, which includes detailed disclosure requirements for RPTs.
Source: OECD Survey.
The use of sectoral criteria for flexibility and proportionality
An analysis of the results per sector of activity reveals that flexibility and proportionality criteria for related party transactions are used in 24 jurisdictions, with a varying degree of scope (Figure 6.8.). Most jurisdictions that present flexible sectoral regulations report having special regimes for the financial sector and for their State-owned companies.
Source: OECD Survey.
Case study: Italy
Overview
Italian listed companies have long been characterized by a high degree of ownership concentration in individual companies and the widespread use of control enhancing mechanisms such as pyramid structures, non-voting shares and coalitions, be they formal or informal.1 Although such arrangements have been declining over time, the large majority of Italian listed companies today are still under the control of a single shareholder holding the majority of voting rights or being able to control the company with a lower block holding.2
A certain degree of concentrated ownership is generally seen to provide strong incentives for ownership engagement, and thus helping overcome the fundamental agency problem between shareholders and managers. However, without an effective regulatory framework, the concentration of ownership and control may also increase the possibilities to extract private benefits through bilateral transactions between the company and its related parties. Italian legislation has traditionally addressed the risks of extraction of private benefits in the context of the transfer of corporate control – applying a mandatory bid rule – while, until recently, payed scant attention to other possible mechanisms for such shortcomings.3
Some high-profile corporate scandals4 in early 2000s caused widespread concern about abusive extraction of private benefits through related party transactions. These concerns led market participants first and policy makers later to take concrete steps for improving the framework for handling RPTs in listed companies, with company law reforms eventually replacing self-regulation. In 2004 policy makers addressed the handling of related party transactions by listed companies with a view to enhance transparency and fairness of such transactions. The new legal framework gives the Italian Securities Regulator (Consob) a key role as rule maker and supervisor.
The OECD's peer review on related party transactions carried out in 2011 included an in-depth analysis of the Italian legal and regulatory framework with a particular focus on the new regulation introduced by Consob in 2010. This case study describes the current regulatory landscape, and the flexibility and proportionally mechanisms therein. It also analyses the progress and challenges in the implementation of the principles-based Consob Regulation adopted since the 2011 review.
The Italian legal and regulatory framework for RPTs
The handling of RPTs by Italian listed companies was first addressed in the Italian Corporate Governance Code (Codice di autodisciplina, the Code) in 1999, which provides examples of best practices for Italian listed companies. Since the Code is in the form of self-regulation, the adoption is voluntary. But once adopted, the company must provide information on a “comply or explain” basis.
A revised version of the Code from 2002 provided some best practices aimed at strengthening safeguards on dealing with related parties, primarily by complementing the key role of the board in reviewing RPTs with an independent review provided by the audit committee and/or by independent experts. The same practices were reframed in the 2006 version of the Code, which entrusted the board with a central duty in defining the procedural steps to be followed when entering into significant RPTs and the approval of such transactions.
The self-regulatory nature of the Code resulted in high compliance rates: 86% of Italian listed companies adopted an internal code for dealing with related parties in line with the Code's recommendations and described it in their annual reports on corporate governance (Assonime and Emittenti Titoli, 2007). However, the high rates of compliance were achieved mainly by a "box-ticking" approach.
Consequently, the self-regulatory approach on RPTs proved to be of limited effectiveness. There are several explanations for this. First, the actual content of the Code on RPTs was quite generic. Beyond a detailed explanation of the process concerning the adoption of the internal procedure, safeguards against potential abusive transactions were mainly provided as examples. This left companies with extensive discretion in deciding which safeguards to actually adopt and when to do it.
Second, despite the high compliance rate, an in-depth analysis of effective adoption of each recommended practice revealed that, in most cases, compliance was limited to the minimum recommended practice while the most effective provisions were mostly ignored by companies.5 6
Third, even if certain public enforcement mechanisms exist with respect to the disclosure and monitoring of how corporate governance codes are actually adopted, reputation is the main driver of actual implementation of self-regulation. But reputational sanctions represent an effective driver only if certain conditions are met. First, disclosure by companies should be reliable, free of window-dressing and entail not only procedures on the books but also their actual implementation. Second, investors should be able and willing to effectively evaluate such disclosure and step up pressure on companies or inflict proper sanctions. The time-limited experience of self-regulation between the 2002 revision of the Code and 2010 reform described below with respect to RPTs did not see the two conditions sufficiently met in the Italian market.
The 2010 Reform
In light of the limits of corporate self-regulation in ensuring investor protection when conflicts of interest between majority and minority shareholders arise, corporate and financial law reforms of 2004-2005 granted more specific regulatory powers to Consob in the area of listed companies' corporate governance.7 Among them, rulemaking on RPTs was of utmost importance not only with respect to the issue itself, but also with respect to the scope of the power that it granted to the regulator. Indeed, the Italian Government amended the company law by introducing a new provision on related party transactions by Italian listed companies that empowers Consob with the authority to adopt rules in the area of governance and decision-making mechanisms.8
According to the new provisions in the Civil Code, the Italian securities regulator was granted power to adopt general principles regarding the transparency, and the procedural and substantial fairness of RPTs while companies were entitled to set out their own internal codes in compliance with the principles provided by the regulator. The result is a three-layer system where the Civil Code provides the legal framework and the general goals, while the securities regulator establishes the principles for achieving the regulatory objectives and the companies define consistently the actual steps to be followed when dealing with related parties.
In this framework, Consob holds informative powers (to Consob itself and to the public) on market disclosure and on actual adoption of the rules. It also holds 'second level' enforcement powers on the company's internal board of auditors appointed by the GM (collegio sindacale), who is in charge of monitoring that the internal code correctly adopts the regulation and that RPTs are conducted in compliance with the procedures that are established in the internal code. Enforcement of the rules also relies on market mechanisms and shareholder activism.
The disclosure requirements in the Consob Regulation are proportionate with respect to the materiality of the transaction and go hand in hand with the differentiated governance procedures for on-going transparency: all RPTs exceeding a given threshold must be disclosed, irrespective of their nature. Some RPTs can be exempted by the application of the disclosure rule, but this possibility is limited to "transactions in the ordinary course of business and entered into on terms equivalent to those that prevail in arm's length transactions", which, at least in principle, is a much narrower definition than that of not "unusual and atypical" which allowed non-disclosure under the previous regime.
The Regulation mandates the disclosure of significant (material) RPTs on an ad hoc and a periodic basis. Material RPTs are defined as a result of a class test provided by Annex 1 to the Consob Regulation. In general, materiality thresholds are quantitative criteria such as 5% of different balance sheet items. However, in the case of pyramid structures, the ratio is 2.5%. Material RPTs must be disclosed within seven days to the market via the issuance of a circular, which provides the description of the transaction, its terms and impact on the company. The fairness opinion of the committee which is made up of all unrelated and independent directors as well as the independent advisor's opinion, if any, must be attached to the circular. With respect to the periodic reporting, companies must include an analytical description of material transactions in their yearly and intermediate (half-year) financial reporting in line with the requirements of the EU Transparency Directive.
In terms of the review and approval processes, the Regulation opted for the enhancement of the role of the board in terms of both developing internal codes for the procedures and approving transactions on an ongoing basis. A primary role was given to independent directors in the whole negotiation and approval phases, while a direct involvement of shareholders was deemed too burdensome for companies both in terms of cost as well as the efficient and timely management of the company's business, and is therefore limited to some specific cases.9
However, the central role assigned to independent directors and, particularly, the possible contradiction between their active engagement and their non-executive role raised some concerns. The regulation addresses these concerns in light of the infrequent nature of material RPTs, for which approval procedure envisages a determining role for independent directors, who play a more or less powerful role in relation to the RPTs materiality. Indeed, the RPT Regulation provides for differentiated review and disclosure requirements according to the materiality threshold met by the transaction, requesting a stronger involvement of independent directors in the special procedure and ad hoc disclosure required for material ones. In particular, while in the general procedure a committee composed of a majority of independent directors provides a preliminary non-binding opinion on the transaction, the special procedure designed for material RPTs requires: (i) the involvement of independent directors in the negotiation, as they must receive adequate information from the executives and can express their views; (ii) the approval of material RPTs by the board of directors with the binding favourable opinion of a committee of independent directors, thus granting to the committee of independent directors a veto power on material RPTs, which may be overcome only with a positive vote of the majority of the "unrelated" minority shareholders (so-called "whitewash procedure" or "MOM"). Under both procedures, the committee of independent directors may seek the advice of an independent expert of its own choice at the expense of the company.
Flexibility and proportionality in the regulatory framework
As mentioned above, the corporate and financial law reforms in 2004 and 2005 for the first time gave a mandate to Consob to issue "principles" for transparency and, procedural and substantial fairness of RPTs rather than rules. In implementing the law mandate, a trade-off immediately emerged. On the one hand, provision of high-level principles for dealing with related parties would have been in line with the legislative mandate but, in light of the experience of self-regulation, it could have had limited impact on improving the governance of RPTs. On the other hand, the definition of detailed and in-depth procedural and transparency duties that most likely would have been more effective in terms of implementation, could turn out to be contradictory with the "principle-based" approach if they were not complemented with sufficient flexibility.
From the regulatory perspective, this posed the challenge to provide a regulatory system with a balanced, flexible and proportionate approach in line with the principle-based nature of the mandate and at the same time achieve effective implementation. Moreover, Consob also faced the challenge to identify the specific pillars of procedural tools that are efficient in fulfilling the ambitious goals established in the Civil Code with respect to transparency and fairness taking into consideration the specificities of Italian companies.
Against this background, the 2010 Consob Regulation was designed in order to provide companies with sufficient degree of flexibility in tailoring their own internal codes about procedural steps and transparency obligations to meet their specificities, while at the same time providing certain default provisions which define the minimum requirements to be met. Concerning some of the default provisions in specific cases of RPTs, there is also a matrix of options for companies to opt in or opt out. This means that companies may tailor their internal codes by "opting in for" or "opting out from" the default rules with a view to calibrating actual rules depending on: (i) the potential for misuse of transactions, based on their characteristics; (ii) the presence of alternative review mechanisms; and, (iii) proportionality for firms with lower complexity, namely newly-listed firms and smaller companies (See Table 6.4. below).
The analysis carried out in 2010,10 just after the entry into force of the new Consob Regulation, highlighted that companies widely used the possibility to tailor their procedures adopting several opt-in and opt-out clauses, confirming their interest for a flexible regulatory approach. The options have been taken advantage of in a variety of ways and the adoption of stricter/looser procedures seems to be linked to certain corporate governance characteristics. While, for example, non-controlled companies have set up better procedures through opting-in, among controlled-companies those where a single shareholder or a coalition holds a stake lower than 50% of voting or cash flow rights preferred to scale down their procedures through opting-out. Moreover, the presence of one director nominated by institutional investors has been positively correlated with stricter procedures.
Regarding the potential for misuse of transactions, companies have important degrees of flexibility allowing them to opt-out from both the approval and ad hoc transparency requirements:
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Most importantly, RPTs in the ordinary course of business that are done on an arm's length basis can be exempted from the application of procedures and the disclosure regime. Material but "ordinary" RPTs which have not been disclosed by a circular must be notified to Consob within 7 days and described in the half-year or annual report.
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Second, intra-group transactions, i.e. with subsidiaries or associate companies, may be excluded from the disclosure and review regimes on the condition that no other related party holds a significant interest in the transaction. The rationale for this exemption is that there is no incentive for the decision makers of the listed parent company to transfer value to companies where the parent company (or the controlling shareholder) holds a lower economic interest. However, such opting-out is not allowed if another related party of the company (e.g. a director, the controlling shareholder) holds a significant interest in the subsidiary, and consequently in the transaction. This can be the case, for example, if a shareholder holds a higher stake in the subsidiary/associate company than in the listed parent company.
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Third, companies may establish that RPTs below a de minimis amount (smaller amount transactions) are excluded from any requirement.
Following a proportionate approach, Consob Regulation envisages also the possibility of a simplified regime for companies characterized by a less complex structure, allowing SMEs (as defined under the EU Accounting Directive) or recently-listed companies (within the third year after the IPO) to opt-out from the procedural requirements for material transactions, but not from its disclosure regime as defined under RPT Regulation for material and non-material transactions. This means that such companies may decide to apply the general procedure for related party transactions regardless of the materiality of the transaction (i.e. also to material RPTs) and opt-out from the more burdensome special procedure that would require the involvement of independent directors in the early negotiation stage and the binding favourable opinion of a committee of all independent directors.
Looking beyond the regulated market, it is important to note that the same simplified approach has been adopted also by the Italian Stock Exchange with respect to the governance requirements for companies whose shares are traded on AIM Italia, a MTF for smaller growth companies managed by Borsa Italiana.11
Nevertheless, the Consob Regulation provides for a proportionate approach also by defining some stricter rules with regard to the company's structure. For example, companies that are controlled by another company listed on the regulated market are excluded from the opt-out option provided for companies with a less complex structure. They are also subject to a different materiality threshold, which is generally defined as 5% of different balance sheet items but set to 2.5% for pyramidal groups.
Challenges in enforcing a flexible and proportionate framework
With the introduction of the quantitative criteria for on-going transparency, the number of material RPTs disclosed surged immediately. In the first three years of the application of the new rules - during the period between 2011 and 2013 - the number of circulars issued by Italian companies was about 80 documents per year. Between 2014 and 2016 the average number decreased to about 50 circulars per year, possibly due to some changes in the ownership structure of Italian listed companies.12 Overall between 2011 and 2016, 392 circulars on material RPTs were issued by Italian listed companies, with an annual average of 65 disclosures. As a comparison, during the six years before the introduction of the new Regulation only 25 RPTs per year were disclosed according to the qualitative (negative) criteria in force at the time.
The change in the criteria for disclosure seems to have affected also the "nature" of RPTs disclosed. Almost two third of all RPTs disclosed in the period 2006-2010 were transactions entered into with companies controlled or under significant influence by the issuer. Those transactions accounted for only 10% of total RPTs disclosed in the period 2011-2016. With respect to the more "risky" transactions, which are those entered into with controlling shareholders or directors, the number of disclosed RPTs increased dramatically from less than 10 per year to about 60 per year.13
As illustrated above, the six-year experience of the Consob Principles shows a substantive improvement in the procedures and disclosure of RPTs. It also provided several examples of the challenges that are affiliated with establishing a flexible and proportionate framework for related party transactions. In the Italian case, these challenges included the definition of related parties; the assessment of independence; the role of independent directors; implementation of exemptions, and the indirect sanctioning powers of Consob.
Definition and identification of related parties
A first issue concerns the definition of related parties. Consob Regulation adopted the definition of IAS 24 in force at the moment of the approval of the regulation. The decision to refer to a static definition was aimed at ensuring the certainty of the relevant legal framework and was strongly advocated by issuers during the consultation process. The IAS 24 definition for related parties is quite complex and revealed to be particularly problematic for entities that control the company "jointly with others". In a number of the Italian listed companies, it is possible to identify groups of shareholders who coalesce in order to play a relevant role but it is not easy to assess if they are able to "jointly" control the company.
To partially address this problem, Consob Regulation required companies to assess whether to apply RPT provisions also in cases where the counterparty has significant role on company's decision-making without being formally identified as related parties.
The main enforcement challenges here are twofold; (1) since the contracts regulating the coalition (shareholder's agreements) are often complex and tend to privilege weak "formal links" even when clear signals of "strong" coordination is in place, the identification of actual joint control in presence of a coalition may not be possible; (2) the assessment of the company's judgement with respect to identifying other related parties ("substantial related parties") to which RPTs provisions will be applied can be hard, in particular in presence of informal coalitions where the ownership structure is highly disperse.
In a context where shareholder agreements and coalitions play a key role in controlling or influencing the decision-making of companies, it becomes evident that failures in identification of related parties or of "substantial related parties" make the discipline totally ineffective.
The assessment of independence
Since independent board members play a pivotal role in the Consob Regulation, another challenge is related to identifying independent directors.
Taking into account the features of the Italian corporate sector as well as some international experiences14, the Consob Regulation provides independent board members with a key role both in the negotiation and the approval of the transactions.15
The decision to enhance the role of independent directors started from the consideration that a concentrated ownership structure may entail a stronger "dependence" of executive board members on the controlling shareholder. At the same time, the choice to enhance the involvement of independent directors in the RPTs would also bolster their access to all relevant information and reduce the knowledge gap between executive and non-executive directors. In order to strengthen the effectiveness of the independent directors' role, the Regulation gave them the possibility to require the assistance of an independent advisor of their own choice and at the company's expense. Therefore, actual independence of both directors and advisors is crucial to ensure the soundness of the system.
The Regulation gave companies the possibility to choose between the legal definition (set forth by the Consolidated Law on Finance)16 and the self-regulatory definition (set forth by a Code of Conduct)17 of independence. Most of the Italian listed companies adopted the latter, whose criteria are more comprehensive than the legal one. Furthermore, the Code's definition of independence relies on the board assessment on a case by case basis of the criteria for independence.
The Code's definition of independence is in principle more effective but it is also more difficult to assess and to challenge, since it is based on the board's qualitative and subjective judgement (like "the absence of material economic or financial relationship with the issuer"). Important examples of specific situations that are difficult to assess that emerged in practice are those where a director is a partner of a law or consulting firm that has the company (or a related party) as a client, where the issue was how to define the materiality of those relationships, especially in cases where the director is not directly involved in the relations but can be indirectly benefited by them.
In addition, the assessment of the independence of external advisors supporting independent directors has proved to be difficult. This is particularly true for larger issuers, who usually have business relations with all the main advisory firms operating in the Italian market.
The role of independent directors in material RPTs
As described above, the involvement of independent directors' in the review and approval of related party transactions differ based on the materiality of the transactions. For minor RPTs, their role is limited to giving a non-binding opinion, where a negative opinion may indicate the possibility of tunnelling.18 In the case of material RPTs, (as a committee19 made up of all unrelated and independent directors) they are not only required to issue a binding opinion (which give them a true veto power on RPTs20) but also to be involved in the negotiation stage of the transaction. This should ensure that they have access to the information they need in order to make a well-founded independent judgment and possibly provide comments or request changes when the negotiations are still in progress.
The involvement of independent directors in the negotiation stage is a distinct feature of the Consob Regulation since it markedly changes the traditional role of independent directors and could affect their "pure" non-executive role. Although their involvement is limited to the right to receive and ask for adequate information from the executive directors conducting the negotiations and to provide comments thereof, it still gives the independent directors a more active role and greater responsibility than traditionally board membership is associated with.
From an enforcement perspective, it may be a challenge to identify the starting date of the negotiations and to correctly assess the actual involvement of independent directors' role, which is expected to be more than a passive "recipient of information". In fact, the effectiveness of this provision depends on the timeliness of the involvement of independent directors21, i.e. when the negotiation is actually still open and possible to influence. It also depends on the substantial interpretation of the independent directors' role in that phase, which implies a pro-active role in challenging the executives' during the negotiation. For example, by stimulating the search for alternative solutions both with respect to the envisaged transaction and to the counterpart of the transaction.22
Implementation of exemptions: the RPTs in the "ordinary course of business"
There have been some specific challenges regarding the assessment of RPTs that are conducted in the ordinary course of business at arm's length, which may be exempted from the application of the rules for procedure and disclosure. The Consob Regulation requires the transactions that fall under the company's ordinary business to be evaluated on the basis of the features of the transaction and be concluded on market terms. In order to benefit from an ordinary course of business exemption for ad hoc disclosure of material RPTs, companies are required to provide Consob with certain information regarding the transactions within seven days. Nevertheless, the transactions remain subject to the periodic disclosure regime and shall therefore be reported in the half-year and annual reports.
Given the complexity of the definition of the exemption clauses and the risk of excessively wide interpretations, the assessment of the objective grounds for granting an exemption might become difficult and demanding as it involves an in-depth assessment both of the business of the individual company and of the specific features of the transaction for which exemption is requested.
The indirect sanctioning powers of Consob
Consob holds informative powers on market disclosure, and on the actual adoption of the rules. It also holds enforcement powers towards the internal board of auditors, which is responsible for the oversight of both the compliance of the internal code with the Consob Regulation and the effective application of the internal code's procedures.
The regulatory approach adopted through the Consob Principles has identified a new role for the securities regulator in monitoring the evaluation and approval of RPTs by the board of directors and its independent members and in verifying that the statutory auditors have effectively supervised the actual application of the rules. Consob's enforcement powers are not directed to the companies themselves (except for breach of disclosure obligations) and their board members, but to the company's board of auditors, which is in charge of directly supervising the implementation of the internal RPTs procedures.23 This means that, at least in the traditional company model (which is adopted by more than 95% of listed companies), the enforcement powers can be used only with respect to persons who are not directly involved in the management of RPTs. In fact, Consob's enforcement does not regard the actual "substantial and procedural fairness of RPTs" but rather the effectiveness of the supervisory activity carried out by the board of auditors and, therefore, its oversight on the compliance with the internal procedures ensuring the "substantial and procedural fairness of RPTs".
The principle-based nature of the regulation implies that only a few aspects of the procedures can be assessed according to a binary approach (implemented/not implemented), while the other, and the more relevant, aspects require an assessment of "how" the procedures have been implemented. Indeed, principles are based on qualitative concepts, like "independent" board members, "independent" advisors, "timely involvement" in the management of transactions, "interest of the company" to enter into the transaction, etc., whose assessment cannot be unequivocal. Moreover, given the indirect nature of Consob enforcement power, the object of the supervision is not the implementation of the Consob Regulation but the quality of supervision by the board of auditors with respect to the qualitative concepts mentioned above, multiplying the levels and complexity of questionability.
The way forward for the Italian system
The Corporate Governance peer review in 2011 recognised the considerable progress made in the previous years with respect to shareholder rights and transparency in the Italian legislative and regulatory framework related to RPTs. The six-year of experience of implementation since then has given an opportunity to analyse the progress and challenges of the principles-based system introduced by the Consob Regulation.
As described above, the introduction of the new regulatory system in 2010 lead to a significant increase in material RPT disclosure. The enforcement of transparency requirements by Consob has also become more effective. Consob has used both hard powers (sanctions) and soft sanctions (request for integrating information disclosed) to improve the implementation of the Regulation.
Within companies, the result has been a stronger involvement of all the main actors. The board, as a whole, has been made more accountable through the requirement that they establish and revise internal procedures and through their role in approving or monitoring RPTs. In particular, the independent directors who sit in the RPTs committee play a major role through their mandatory opinion on all RPTs and through their involvement in the negotiation phase. Finally, also the members of the internal board of auditors have developed their duty to check compliance with the internal rules aiming at ensuring the transparency and fairness of RPTs.
Related party transactions have also received a greater interest from institutional investors and proxy advisors. Some active hedge funds have engaged in challenging individual RPTs while proxy advisors started to mention some specific criteria for RPTs in the proxy voting guidelines.24 However, their interest is still focused on large companies and on specific transactions, while no attention is given to the quality of procedures adopted by individual companies, whose diversity could require a more active and tailor-made monitoring.
Another positive development can be found in the attitude by the main business sector organizations (Assonime, Confindustria, ABI). They have changed their approach from being hesitant about the new rules on RPTs to actually being supportive of the regulatory model, by also developing specific induction sessions for directors and statutory auditors on RPTs.
Naturally, there is still some potential for improvements with respect to clarifying the rules and the effectiveness of enforcement system. As for the rules, uncertainty about the role of the independent directors' committee that assess the RPTs could be addressed by providing it with the full power of conducting and approving the transactions. This can be complemented by providing individual companies with the possibility to opt-out from such a system through the provision of alternative procedures, for example in the form of a shareholders' vote using the whitewash procedure. To improve the effectiveness of enforcement powers, the sanction system could be changed to include direct sanctioning powers towards directors and stronger elements of private enforcement.
However, as Enriques (2014) pointed out in a recent paper, "even fervent enforcement by a committed securities regulator, backed, as it may, by law reforms tightening RPT rules, can reveal itself to be no more than a flash in the pan in countries where either no social norm against tunnelling exists (i.e. where "don't engage in tunnelling" is not, broadly speaking, a specification of the prohibition on theft) or market players do not themselves effectively demand high compliance rates and strict enforcement".
For the overall effectiveness of the system, the general attitude toward tunnelling (social norms) and of market support (both ideologically and technically) by market actors play a key role. And there is broad agreement that the reform of RPTs in Italy has greatly contributed to creating an anti-tunnelling culture. After the reform, there has been an increased general awareness about the relevance of RPTs, both in terms of their actual importance in a company's business and in terms of the risks that they may imply. Notwithstanding this greater awareness, the anti-tunnelling culture within companies still suffers from a lack of professional skills for independent directors to effectively pursue their role. Particularly with respect to the negotiation phase. Another issue has been the over-reliance both by the board as a whole and by the independent directors on the independent advisors' opinion, which is usually focused more on the fairness of the conditions than on the interest of the company to enter into the transaction.
The flexible approach adopted by the Italian regulator can contribute to support the evolution of the general attitude toward tunnelling creating a room for "better practices" and more generally pushing all the actors to play a role not only at a systemic level but also at level of individual companies. The possibility of the opting-in and opting-out clauses provided in the regulation allows companies to tailor the internal procedures to their specific features (in terms of dimension, maturity, ownership structure) and also to signal to the market their attitude toward the management of conflict of interest involved in RPTs. And, considering the effects of the law in action and the wide use of such clauses, the introduction of the Consob Regulation revealed a room (and maybe a need) for a flexible regulatory approach in some corporate governance issues, such as related party transactions.
Conclusions
The survey results show that flexibility and proportionality are important elements of the corporate governance framework in most jurisdictions. It has also highlighted that flexibility and proportionality rules have been widely applied in the governance of related party transactions both in terms of disclosure and the review process. Similar to other areas of regulations, listing status is the most used criterion for flexibility, followed by size of the transaction (mainly as a ratio to the size of assets or revenues) as well as of the size of the company and, ownership and control structure (with strengthened rules for pyramids).
There is nothing wrong per se with entering into transactions with related parties and these transactions can be economically beneficial, especially in a company group structure. However, there is also a risk of abuse by insiders, such as controlling shareholders. To mitigate this risk, many jurisdictions have chosen to strengthen their corporate governance frameworks by introducing flexibility and proportionality rules. Except for a limited number of special cases, prohibiting RPTs has not been seen as a solution to manage the risks that they contain. Instead, there has been a general trend to strengthen shareholder rights. Particularly by empowering the shareholder meeting in the corporate decision-making process. In most jurisdictions, independent directors have also been given a key role in the review and approval processes of the material RPTs.
As demonstrated by the Italian example, there is today an increased focus on the quality of supervision and enforcement. The need to support the legal and regulatory framework by effective supervision and enforcement mechanisms is also emphasised in the G20/OECD Principles. In the area of related party transactions, one challenge is to find the right balance between strengthening public enforcement authorities, such as securities regulators and prosecutors, and private enforcement by shareholders and self-regulatory organisations. Private enforcement has traditionally been weak in countries with concentrated ownership structures and large corporate groups, where there is also a high potential for abusive related party transactions. The empowerment of shareholders that can benefit from a strong disclosure regime can help establishing the right balance.
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Notes
← 1. Bianchi and Bianco (2007).
← 2. Consob, Corporate Governance Report (2016).
← 3. As Gilson and Gordon (2003) pointed out “A controlling shareholder may extract private benefits of control in one of three ways: by taking a disproportionate amount of the corporation’s ongoing earnings, by freezing out the minority, or by selling control. Our thesis is that the limits on these three methods of extraction must be determined simultaneously, or at least consistently, because they are in substantial respects substitutes”.
← 4. The most known examples of abusive RPTs in the Italian market are represented by the Parmalat and the Cirio cases in the early 2000, both being examples of outright expropriation by the controlling family in which RPTs played a major role in exploiting minority shareholders by dragging financial resources to the controlling shareholder or in concealing the company’s distress. More recently in the Ligresti Group the insurance listed companies Fondiaria-Sai and Milano Assicurazioni engaged in a number of RPT with some privately-held side businesses belonging to their controlling shareholder, the Ligresti family; such transactions have been recently challenged in light of the transfer of wealth they realized to the detriment of the listed insurance companies.
← 5. In the consultation paper accompanying the proposal of the regulation on RPTs, Consob carried out an analysis of the adoption of the relevant best practices provided by self-regulation. The results showed that the recourse to independent experts for the provision of legal e/o fairness opinions (especially in Italian blue chips) was envisaged in nearly 60% of cases while a leave or abstain duty for the director having an interest in the transaction was set out in less than half of the market (Consob, 2008).
← 6. Bianchi et al. (2011) evaluate compliance with the corporate governance code by building an ad hoc indicator (CoRe) to assess the actual levels of compliance with the recommendations regarding related party transactions. The authors report that the companies' level of effective compliance with regard to RPTs is considerably lower than their publicly reported levels of formal compliance. The authors also find that higher levels of effective compliance tend to be found in companies where minority shareholders have appointed one or more directors; independent directors serve on important committees; and institutional investor- particularly foreign - hold major stakes and attend general shareholder meetings.
← 7. In parallel with the corporate law reform which introduced Article 2391-bis, the Italian Parliament approved the so called “Law on Savings” (d.lgs. 262/2005), which substantially amended financial market law in the area of corporate governance of listed companies. Among the major changes, the Italian legislator provided for specific rules regarding the composition of the board of Italian listed companies, such as a minimum requirement for independent directors and the introduction of the so-called slate voting system (“voto di lista”) for the appointment of board members, thus allowing minority shareholders to appoint at least one director of their own proposal.
← 8. The provision also covers companies issuing shares which, even if not listed on a regulated market, are widely held by the public according to quantitative criteria.
← 9. The role of shareholders is basically limited to two specific cases. First, in case the committee of independent directors exerts its veto power on a material transaction and the company’s internal code and bylaws so provide, the transaction can still be entered into if non-related shareholders approve it. Second, where the decision-making power of a related party transaction lies with the GM and independent directors rejected the proposal to be submitted to shareholders. Also in such case the whitewash procedure might find application in case of a negative opinion by the committee of independent directors.
← 10. Bianchi et al. (2014) analysed how Italian companies have implemented the 2010 RPTs Regulation, particularly looking at whether and if so how they opted in for or out from some of the default provisions set forth in the regulation, by building an ad hoc firm-specific indicator which focuses on five key provisions.
← 11. See Borsa Italiana AIM Regulation, available at www.borsaitaliana.it/borsaitaliana/regolamenti/aimitalia/aimitalia.en.htm.
← 12. To be sure, the number of pyramids in Italy has decreased over the last years, mostly because of intra-group mergers of companies in the pyramid or of change of control transactions affecting the listed subsidiary.
← 13. According to the statistics yearly published by Consob, material RPTs are more often entered into by smaller and financial companies. Looking at the nature of the resource transferred in a given transaction, in line with the tunnelling taxonomy developer by Atanasov et al. (2009), the majority of RPTs entered into since 2011 has consisted of financing contracts and less frequently sponsorships or other contracts which affected the company’s cash flow. About one material transaction out of four has involved the transfer of major long-term assets, thus influencing firms’ cash generating capacity. Finally, equity tunnelling, i.e. transactions enabling the related party to rearrange her/his ownership claims over the firm such as reserved capital increase, mergers and other transactions that increase the relative importance of the insider’s shareholding, has regarded nearly one transaction out of five. The related counterparty of the transactions has been the controlling shareholder or a shareholder exerting significant influence over the company. Nearly 11% of all transactions have been entered into with subsidiaries or associate companies and 5% with a (non-shareholder) director or her/his businesses. Additionally, Consob provides statistics on the number of material RPTs in the ordinary course of business and entered into at arms’ length condition, the disclosure of which was waived in line with applicable rules. In 2011-2016, 163 ordinary RPTs were reported to Consob, mainly by large companies (57% of RPTs regarded companies in the FTSE Mib market Index).
← 14. E.g. in the US a committee of independent directors plays a relevant role not only in the approval of the RPT but also during its negotiation stage.
← 15. Independent directors’ role arises already during the drafting of the company’s internal procedures and continues during the negotiations (for material RPTs) and the approval of the transactions (with a different weight in relation to the RPT’s materiality).
← 16. See Art. 147-ter CLF, with the reference to independence criteria set for Statutory Auditors in Art. 148 CLF.
← 17. In practice, the reference is linked to the Italian Corporate Governance Code, issued, updated and monitored by the Italian Corporate Governance Committee. The independence criteria are defined in Art. 3 of the Code. More information about the Code and the Committee are available at www.borsaitaliana.it/comitato-corporate-governance/homepage/homepage.en.htm.
← 18. See Enriques, Related Party Transactions: Policy Options and Real-World Challenges (With a Critique of the European Commission Proposal), ECGI Law WP n° 267/2014, p. 21.
← 19. In case of an insufficient number of independent directors (at least three), the fairness opinion may be provided by the existing independent board member or by an independent advisor, but, in the latter case, the opinion is not binding.
← 20. The opinion represents a veto-power of independent directors inasmuch the material RPT can only be approved by the whole board upon their favourable advice (and a negative opinion may be overcome only with the whitewash procedure).
← 21. The timely involvement may be also delegated to an individual director. Nevertheless, their involvement in the negotiations should be timely, inasmuch “the later they get involved in the RPT the more likely a lower number of alternatives will no longer be viable”. See Enriques, Related Party Transactions: Policy Options and Real-World Challenges (With a Critique of the European Commission Proposal), p. 21.
← 22. This point has been deeply discussed during the first consultation process for the adoption of the Consob Regulation.
← 23. The internal Board of Auditors, who is appointed by the GM, represents the control body within companies adopting the so-called traditional or Latin corporate governance model. For companies adopting the two-tier or one-tier corporate governance model (both introduced, through an opt-in clause, with the Company Law reform in 2003), such oversight duties are demanded to the Supervisory Board, in the former case, and to the Audit Committee, in the latter one.
← 24. E.g. for resolutions that seek shareholder approval, PA may recommend voting on a case-by-case basis; for transactions that were not put to a shareholder vote, if they are deemed problematic, PA may recommend voting against the election of the director involved in the related-party transaction or the full board. See ISS (2017) Proxy Voting Guidelines.