Piotr, thank you very much for agreeing to take part in ESG 12on12. The season of general meetings is behind us. Many public companies have elected supervisory boards, some supervisory boards have elected management boards. Both these bodies will soon be working in a different reality – on October 13, 2022, the much-discussed amendment to the Code of Commercial Companies in Poland will come into force. You have been an active supervisory board member for 20 years and, since 2020, you have been a member of the Expert Team for Improving the Efficiency of Supervisory Boards of the Committee for Corporate Governance Reform under the Ministry of State Assets, which worked on the aforementioned amendment. You are therefore the ideal person to explain to us all what the changes in law are all about.
Milena, thank you very much for this invitation. It will be an honour for me to talk about the changes to the Code of Commercial Companies, which will come into force in October, and also, I hope very much to share a little about my professional experience in promoting professional supervisory boards and corporate governance in Poland. As you mentioned, I have been an active supervisory board member for more than 20 years and I would like to share some thoughts here as well. Thank you very much for the invitation, too.
Thank You! Let us start by distinguishing the meaning of the words 'term of office’ and 'mandate’ in relation to members of bodies of commercial companies. Reviewing the current reports of listed companies, one may notice, for example, sudden resignations of elected members of supervisory boards due to different end dates of the term of office and mandate. Please explain to us how these words differ and whether the new law will alter the situation?
To put it simply, a 'term of office’ is the length of time for which a body (supervisory or management board) has been appointed to execute its functions, while a 'mandate’ is the authority of an individual member of a body (supervisory or management board) to perform his/her functions.
In current practice, there has been considerable doubt about how to count terms of office, i.e. how long, for example, a 3-year term of office lasts. One approach took as the first year of operation of the body, the year in which it was appointed, while the other approach assumed that we start counting the term of office only from the first day of the new financial year. This is best illustrated by an example. A supervisory board member appointed, for example, on July 20, 2022 – in the first option, 2022 is counted as the first year of the term, while in the second version, the first year is 2023. To reduce these doubts, the legislator opted for the second solution, which means that a supervisory board member appointed for a three-year term, for example on July 20, 2022, will start his/her term from January 1, 2023, assuming that the financial year coincides with the calendar year.
An important element of supervisory boards operations is decision-making in the form of resolutions. What changes does the new law introduce in this respect, in particular with regard to the openness of voting? Is the new law symmetrical with regard to management and supervisory boards?
It can be said that it is in principle the legislator’s solution that voting will be public. Until now we had the practice that some votes had to be kept secret, some could be kept secret e.g. at the request of a supervisory board member. After the amendment, as a rule, votes will be open.
Minutes are taken of supervisory and management board resolutions. How does the new law consider minutes? Does it introduce new requirements?
In terms of minutes of supervisory board meetings, the amendments to the Code of Commercial Companies do not introduce new solutions. Also in the case of the boards of joint stock companies, we have no changes. What is new is the introduction of compulsory minutes of board meetings of limited liability companies.
Above, we have mentioned above the formal issues related to corporate bodies. Let us now turn to issues related to the liability of board members – will this change for management and/or supervisory board members with the entry of the new law into force?
The idea of the amendments to the Code of Commercial Companies is to increase the competence and scope of actions of supervisory boards. It is aimed at exercising stronger supervision over the activities of companies, in particular joint-stock companies. Obviously, this entails greater responsibility, both on the side of the management board (in terms of properly informing the supervisory board about its activities) and for the supervisory board (in terms of proactive activity of the board).
You have mentioned the responsibilities of members of the bodies. Let us now discuss them in turn. Is there a duty of loyalty to the company? How is the company understood? How is this duty linked to confidentiality? Does it only apply to the length of the term of office or does it also apply to members of corporate bodies after cooperation with the company has ended?
Let us start with loyalty. I very often hear the statement that a supervisory board member is expected to be loyal. These words are most often uttered by the majority shareholder and, as if by implication, he/she wants to convey that he/she expects board members to be loyal to himself/herself. This is fundamentally flawed thinking – a 'loyal’ supervisory board member is loyal to his or her principal and is not in a position to pass on potential criminal liability to his or her principal 'loyally’. Loyalty to the company, as indicated by law, therefore means such conduct by a supervisory board member that no one, including himself/herself, has any doubt that the actions he/she takes, including the resolutions he/she adopts, are not contrary to the best interests of the company – the company as shareholders, supervisory board members, management board members, but also the entire range of stakeholders, including suppliers, employees or government authorities. Thus, a loyal board member is one who puts the company first. From practice, it can be said that the biggest challenge is to meet this requirement when there is a significant 'disconnect’ between the interests of the company and the interests of shareholders.
In my practice on supervisory boards, I am always loyal to the company – otherwise I cannot imagine my professionalisation.
However, the obligation to maintain secrecy, even after the expiry of the mandate, is something to be strongly appreciated in the amendment. Information acquired by a member of the body in the course of his or her work, especially information of a business secret nature, but not only this, should never be used outside the company.
What is the business judgement rule or due diligence on decisions? There is a saying „backward analysis always works” – how do you make decisions that will stand up over time?
If, in Polish conditions, the business judgement rule comes down only to the after-the-fact assessment of the correctness of decisions – then it can be said that the adoption of this principle in Polish regulations will be a failure. Its purpose is completely different – it is to allow decisions to be made in the most rational manner possible. Rational, i.e. based on information, analyses and other data available at a given moment. It is therefore supposed to be a tool for making decisions, as well as for protecting management and supervisory boards from the possible negative effects of those decisions, and not a tool for later sanctioning, i.e. looking for where the wrong decision was made. I believe that the business judgement rule will develop in this direction – i.e. for the benefit of sound business decisions.
One of the aims of the new law was to increase the effectiveness of work of supervisory boards and to give this body more powers. One of the solutions introduced is to reduce the asymmetry of information between management board (which runs the company’s operations and has access to all knowledge about the company) and the supervisory board (which very often depends on information provided to it by management). How do you think this provision will be applied? Will it contribute to increasing the supervisory boards’ knowledge of the supervised company?
I think so, the information asymmetry should decrease. My concern, however, is elsewhere. Currently, there is a perception that it takes no time at all to 'sit’ on supervisory boards and, additionally, that anyone can sit on a supervisory board. From October 13, 2022, every supervisory board member will not only have to devote a significant amount of his or her time to evaluating the documents submitted by the management board, but also often make substantive decisions based on these documents. I believe that most supervisory board members are aware of their upcoming responsibilities and will either prepare for them accordingly or simply resign. After October 13, 2022, the time burden on supervisory board members, in particular of public limited companies, will really increase significantly.
Another novelty is the possibility for the supervisory board to hire an advisor (without consulting the management board). In which situations should the supervisory board use the institution of an advisor? Are there any restrictions on the choice?
The function of an advisor to the supervisory board is a new and very interesting solution that will allow the supervisory board to use an external professional expert. However, I do not suppose that cases where the supervisory board uses this solution completely without the knowledge of the management board will be frequent. This is likely to be the case when there are internal corporate conflicts or when the management board really should not know about the activities in question.
Linked to the advisor to the supervisory board is another innovation, namely introduction of a budget that the supervisory board can dispose of without having to ask the management board for its approval. For what purposes will this budget be allowed to be used?
The use of the advisor to the supervisory board may be limited by a resolution of the general meeting which will set, for example, the maximum expenditure limit that the supervisory board may incur. On the other hand, the budgets of the supervisory board were not introduced as mandatory by the current amendment to the Code of Commercial Companies, it was rather a „best practice” in many companies. Now, however, the term budget may actually include a quota limitation in the use of an advisor to the supervisory board.
The name holding law also indicates that it covers holding groups. What is a ‘group of companies’ and the ‘interest of a group of companies’ within the meaning of the new law? For what reason were these definitions introduced? How might issuing of a binding order to the management of a subsidiary look like in practice?
Above all, and importantly, existing groups of companies will not become groups of companies after October 13, 2022. A group of companies and the interest of a group of companies that you indicate will in principle only be possible once the relevant resolutions have been passed by both the parent company and the subsidiaries and entered in the National Court Register. And only then binding orders will be possible.
These provisions are quite heavily criticised. I am very curious to see how groups of companies will be adopted in practice and how often binding orders will be used.
Thank you very much for explaining the new regulations to us in such an accessible way. In your opinion, will they contribute to increasing the effectiveness of supervisory boards?
Yes but under two conditions. Firstly, that this is genuinely wanted by the majority shareholders. Many of the new responsibilities – in case of limited liability companies – have to be written into the articles of association and, in case of joint stock companies, can be limited or even excluded from application. The legislation provides an opportunity to make supervisory boards more efficient and I think whoever wants to use it will do it. And whoever does not want to have professional supervision, even the best legal solutions will not force them to do so. I think that a kind of test will be the direction into which limited liability companies will change. At the moment, supervisory boards at such companies are not popular. Only one in 90 of them – where a supervisory board is not compulsory – has appointed a supervisory board. And whether supervisory boards in limited liability companies become more common – will be one indicator of how the rules are applied in practice. Shareholders, of course, have their specific tasks in terms of the professionalisation and effectiveness of supervisory boards.
Secondly – also on the side of supervisory boards and its members, there is a lot to do. We have about 70,000 people on the supervisory boards of commercial companies in Poland, and it can be said that it depends on each individual person how our profession will be judged.
For example – if shareholders of a joint-stock company decide to limit or completely exclude management’s information duties to the supervisory board – the test for supervisory board members will be how they actually behave in this case. It also seems to depend a lot on the individual supervisory board members to what extent the new regulations of the Code of Commercial Companies will contribute to the effectiveness of supervisory boards.
As well as being active on supervisory boards, you also promote corporate governance. In addition to your own portal nadzorkorporacyjny.pl, you also organise an annual conference dedicated to supervisory boards, during which the prestigious title 'Corporate Governance Person’ is awarded. How did the idea for the award come about, who has already received it and what are the criteria for awarding it?
Thank you for noticing this activity of mine as well. Indeed, for several years I have been trying to promote corporate governance in Poland, doing so in several ways. The nadzorkorporacyjny.pl portal you mentioned is one of them. In addition, regular meetings of the Club of Supervisory Board Members are also held. Also the annual „Supervisory Board Conference” – there have been 11 editions so far. Since 2015, the title „Corporate Governance Person” has been awarded to an individual who has made a significant contribution to building corporate governance in Poland. This year – in the autumn – we will award the distinction for the 8th time.
The history of the award is very interesting, because it can be said that if not the agreement of the first awardee, there would probably have not been another award. I managed to convince Andrzej S. Nartowski in the summer of 2015 that it was worthwhile, as part of the then 5th edition of the „Supervisory Board Conference”, to present the award and build a new tradition. In the committee, we have established the rule that the key initiator of the next award is the last awardee and, importantly, the candidate had to be supported by the other committee members. It is likely, however, that this year, as the committee already has nine members, we will have to apply other less stringent selection rules. However, I believe that we will be able to achieve unanimity.
My activities are pro publico bono and, in fact, thanks to the support of many people, including often financial support, we manage to organise next editions of the „Supervisory Board Conference” and to award „Corporate Governance Person” title. And as I noticed you mentioned the prestigious award, it is all the more pleasing for me to be its originator and today to take on the role of coordinating and organising both the conference and the award. It’s lovely to hear such words.
Piotr, thank you very much for this interview!