The activities of securities markets and listed companies are extensively regulated by EU legislation and national legislation derived largely from it. The goal of self-regulation by businesses is to supplement statutory procedures and assist companies in interpreting and applying the law.
The collections of recommendations issued by the Securities Market Association as well as the Corporate Governance Code and the Helsinki Takeover Code form a key part of the self-regulation of listed companies. Other more broadly agreed market practices and document templates can also be considered self-regulation. Self-regulation is characterised by companies’ voluntary commitment to self-regulation standards. The rules of the Nasdaq Helsinki Stock Exchange can also be considered part of self-regulation, as companies undertake to comply with them when listing on Helsinki Stock Exchange.
The importance of self-regulation is also acknowledged in legislation. The Finnish Securities Markets Act prohibits practices that are contrary to good securities market practice. According to the explanatory memorandum of the Act, good securities market practice is directed by self-regulation. In addition, chapter 11, section 28 of the Securities Markets Act obligates listed companies to be members of a self-regulatory body that has issued recommendations on takeover bid procedures. As the organisation maintaining the Helsinki Takeover Code, the Securities Market Association acts as this body.
There is no single definition of what is corporate governance. Generally speaking, however, it refers to a company’s governance and steering systems that define the responsibilities of the management, in other words the board of directors and executives, and their relationship with shareholders. Simply put, corporate governance refers to a system through which business operations are managed and controlled.
In Finland, good corporate governance in listed companies consists of several components: legislation and official guidelines, self-regulation and best practices adopted by companies. Finnish governance practices can be considered to be of a good international standard. Self-regulation takes into account both international developments in corporate governance practices (such as the G20/OECD corporate governance principles) and the unique characteristics of Finnish legislation.
Finnish governance practices are similar in many ways to those in other Nordic countries, although there are differences between Nordic countries. Organisations in the Nordic countries that maintain corporate governance codes have jointly published a booklet on the common features of Nordic corporate governance. The booklet, Corporate Governance in the Nordic Countries, is an overview of Nordic corporate governance practices and is intended especially for international readers such as investors and authorities.
National legislation is largely based on EU law. Key international regulatory principles, such as the G20/OECD Principles of Corporate Governance and the IOSCO principles of securities regulation, have also been taken into account in the preparation of EU legislation. Key pieces of EU legislation guiding corporate governance practices include the Shareholder Rights Directive, the codified Company Law Directive and the Corporate Sustainability Reporting Directive, as well as the Commission’s recommendations on corporate governance reporting, executive remuneration and independent directors. An example of directly applied EU regulation is the Market Abuse Regulation.
Key legislation on corporate governance practices include the Limited Liability Companies Act, the Securities Markets Act, the Auditing Act and the Accounting Act, as well as directly applicable EU regulation, such as the Market Abuse Regulation. The Limited Liability Companies Act contains provisions on the governance of limited liability companies, such as the duties of the board of directors and the CEO, shareholder rights and procedures for annual general meetings. The Securities Markets Act, the Auditing Act and the Accounting Act, on the other hand, contain provisions on obligations related to companies’ financial reporting, sustainability reporting and reporting on the transparency of governance, among others. The Securities Markets Act also prohibits practices that are contrary to good securities market practice.
In addition to legal obligations, corporate governance practices are affected by the regulations and guidelines of the Financial Supervisory Authority (FIN-FSA) and guidelines issued by the European Securities and Markets Authority (ESMA). These cover topics such as insider administration and financial reporting, for example. The European Commission has also issued recommendations to Member States on themes such as corporate governance reporting, executive remuneration and independent directors.
The Corporate Governance Code is a collection of recommendations on good corporate governance for listed companies. The Corporate Governance Code contains recommendations for annual general meetings, boards of directors, board committees, the CEO, remuneration and other governance, as well as reporting on corporate governance and remuneration. The Corporate Governance Code seeks to promote efficient board work and transparency of governance. The recommendations of the Corporate Governance Code are prepared in accordance with the comply or explain principle, which means that it is possible to deviate from the recommendations if company can provide reasons for the deviation.
The recommendations of the Corporate Governance Code supplement the obligations of legislation. The purpose of the Corporate Governance Code is to maintain and promote the high quality and international comparability of corporate governance practices of Finnish listed companies. Good corporate governance supports the value creation and attractiveness of Finnish listed companies as targets for investments.
From the perspective of shareholders and investors, the Corporate Governance Code increases the transparency of corporate governance and the possibilities for shareholders and investors to assess the practices followed by individual companies. The Corporate Governance Code also allows investors to form an overall understanding of acceptable corporate governance practices in Finnish listed companies.
The Corporate Governance Code applies to all companies listed on Nasdaq Helsinki Ltd (Helsinki Stock Exchange). According to the rules of the Helsinki Stock Exchange, issuers of shares listed on the exchange must comply with the Corporate Governance Code.
The Market Practice Board of the Securities Market Association may, upon application or on its own initiative, issue interpretations and recommended decisions related to the application of the Corporate Governance Code. The Market Practice Board has also published a Q&A on the application of the Corporate Governance Code. The Board of the Securities Market Association has also issued a statement supplementing the Corporate Governance Code on the selection procedure for members of boards of directors. These are available on the Corporate Governance Code page.
In order to improve corporate governance of unlisted companies Finland Chamber of Commerce has published an Agenda for improving the Corporate Governance of Unlisted
Companies.
The regulation of takeover bids and mergers is also largely based on EU law, particularly the Takeover Bids Directive and the codified Company Law Directive. The most important pieces of directly applicable EU regulation are the Market Abuse Regulation and the Prospectus Regulation.
Chapter 11 of the Securities Markets Act and the Decree of the Ministry of Finance issued on its basis specify the procedures to be followed in takeover bids and disclosure obligations related to a bid. The Securities Markets Act also prohibits practices that are contrary to good securities market practice. The Limited Liability Companies Act, on the other hand, contains provisions on the obligations of the target company’s board of directors, the squeeze-out process and mergers, among other matters.
The provisions of the Securities Markets Act on takeover bids are specified further in the regulations and guidelines issued by FIN-FSA. ESMA has also published guidance on takeover bids.
The status of self-regulation in takeover bids is reinforced by a provision of chapter 11, section 28 of the Securities Markets Act, which obligates listed companies to be members of a self-regulation body that has issued recommendations on takeover bid procedures. The Helsinki Takeover Code is such a recommendation.
The purpose of the Takeover Code is to promote the development of good securities market practice and to guide the procedures followed in takeover bids and mergers. The goal of the Helsinki Takeover Code is to standardise the procedures followed in takeover bids and mergers in Finland and in this way promote the legal protection of the parties in the transaction.
The Takeover Code supplements the legislation on takeover bids and mergers. The Helsinki Takeover Code issues recommendations on the actions of the parties to the transactions as well as the management and shareholders of the target company and the merging company. The Helsinki Takeover Code also addresses takeover measures and the squeeze-out of minority shareholders’ shares in accordance with the Limited Liability Companies Act, which often follow the execution of a takeover bid. In addition, the Helsinki Takeover Code discusses practical questions of interpretation and conduct related to the application of regulations that commonly arise in takeover bids and mergers.
The applicability of the provisions of the Limited Liability Companies Act to the actions of the target company’s board of directors and general meeting at different stages of a takeover bid and merger have been taken into account when preparing the Takeover Code. In particular, compliance with the procedures of the Takeover Code promote the realisation of the general principles mentioned in Chapter 1 of the Limited Liability Companies Act and the fulfilment of the rights of the shareholders of the target company or the merging company in takeover and merger situations. At the same time, following the procedures laid down in the Takeover Code helps ensure that the target company or the merging company does not take any action referred to in Chapter 1, Section 7 of the Limited Liability Companies Act that is likely to give a shareholder or other person undue advantage at the expense of the company or another shareholder, and that the management of the target company or the merging company has acted with due care in the event of a takeover bid or merger in the manner required by Chapter 1, Section 8 of the Limited Liability Companies Act.
The Takeover Board of the Securities Market Association may, upon application or on its own initiative, issue interpretations and recommended decisions related to the application of the Helsinki Takeover Code. The Takeover Board has also published a Q&A on the application of the Helsinki Takeover Code. These are available on the Takeover Code page.
Self-regulation is primarily based on the comply or explain principle. In the Corporate Governance Code and the Helsinki Takeover Code, the comply or explain principle applies to general commitment to the codes. The starting point is that all recommendations formed through self-regulation are complied with. However, a company may, for justified reasons, deviate from individual recommendations of the Corporate Governance Code or the Helsinki Takeover Code. In such cases, the company must, in accordance with the comply or explain principle, explain which recommendations it deviates from and the reasons for the deviation. In other words, compliance with the Corporate Governance Code and the Helsinki Takeover Code also means that a company deviates from individual recommendations only if the deviation can be explained and justified.
The comply or explain principle is mainly based on the obligations laid down in legislation. In the case of the Corporate Governance Code, the relevant obligation is laid down in the Decree of the Ministry of Finance on the Regular Duty of Disclosure of an Issuer of a Security issued under the Securities Markets Act. In the case of the Helsinki Takeover Code, the comply or explain obligation is partly based on the provisions of Chapter 11 of the Securities Markets Act and partly on good securities market practice.
The comply or explain principle is widely used internationally, especially in corporate governance recommendations, and it gives companies flexibility in applying the recommendations. Not all practices described in the Corporate Governance Code apply equally to all companies, and the recommendations of the Corporate Governance Code do not necessarily lead to the best desired outcome in each individual case. A company may have practices that deviate from the individual recommendations of the Corporate Governance Code which are appropriate and sufficient considering the company and its circumstances for reasons related to, for example, the ownership structure or special characteristics of the company or its line of business. A company may also follow more stringent practices than those described in the Corporate Governance Code. As such, the obligations of the Corporate Governance Code must be assessed on a case-by-case basis, from the point of view of the company and its shareholders. A key point is that any deviations from individual recommendations are based on a careful assessment of the company’s starting points, well-founded and appropriately decided. Legislation may also impose restrictions on the types of permitted deviations from individual recommendations.
If a company deviates from the recommendations of the Corporate Governance Code or the Helsinki Takeover Code, the reasons for this must be sufficiently clear and detailed to allow investors to make their own assessment of the significance of the deviation. An explanation that provides the reasons for the deviation in a transparent and comprehensive manner and explains the alternative course of action taken by the company is likely to promote confidence that the company complies with good securities market practice.
Listed companies are required to have a high degree of transparency. In governance, the key transparency requirements relate to financial reporting, sustainability reporting and corporate governance and remuneration. In takeover bids and mergers, transparency requirements concern matters that materially affect shareholders’ assessment of a takeover bid or merger.
Provisions on the regular disclosure obligation of listed companies are contained in particular in the Securities Markets Act and the decrees of the Ministry of Finance issued on its basis. In addition to financial statements and board of directors’ report, listed companies must annually publish a corporate governance statement and a remuneration report for governing bodies. In addition, listed companies are required to publish their remuneration policy for governing bodies. The above documents must also be kept available on the website of the listed company. The remuneration report for governing bodies must be presented to the annual general meeting. The remuneration policy for governing bodies must be presented to the annual general meeting every four years or whenever changes are made to the policy. The resolution of the annual general meeting on the remuneration policy and report is advisory in nature.
The detailed contents of the corporate governance statement and the remuneration policy and report for governing bodies are defined in the reporting section of the Corporate Governance Code. The reporting requirements of the Corporate Governance Code also take into account obligations that are based on mandatory regulations. Deviations from the reporting requirements of the Corporate Governance Code are not possible on a comply or explain basis.
The reporting section of the Corporate Governance Code also lists essential information about corporate governance that listed companies must update on their websites as frequently as possible.
Chapter 11 of the Securities Markets Act and the Decree of the Ministry of Finance issued on its basis specify the disclosure obligations related to takeover bids. In addition to announcing the takeover bid, the offeror shall, among other things, publish a takeover bid document containing essential and sufficient information to assess the merits of the bid. The board of directors of the target company of the bid must, in turn, publish its statement on the bid. In addition, the Helsinki Takeover Code contains several recommendations on information to be disclosed at different stages of a takeover bid.
The disclosure obligation related to mergers is mainly based on the Limited Liability Companies Act, the Securities Markets Act, the Market Abuse Regulation and the EU Prospectus Regulation. The parties to the merger must disclose the draft terms of merger, and the acquiring company must publish a prospectus or exemption document within the meaning of the EU Prospectus Regulation. The Takeover Code also gives recommendations on information to be disclosed at different stages of a merger.
The Securities Market Association does not have the authority to impose sanctions for non-compliance with its recommendations. As such, the association does not carry out actual supervision. The Securities Market Association monitors compliance with its recommendations on the basis of information that is available at the market level. For example, Finland Chamber of Commerce publishes an annual Corporate Governance review, which gives an overview of the key points of Corporate Governance statements published by all listed companies. In addition, the association’s Market Practice Board and Takeover Board may, upon application or on their own initiative, issue recommended decisions for individual cases.
FIN-FSA supervises compliance with the obligations of listed companies based on securities markets legislation. For example, listed companies’ obligation to publish an annual corporate governance statement and the obligation of the offeror and target company in a takeover bid to announce their commitment to the Helsinki Takeover Code or explain deviations from it are based on the Securities Markets Act and are therefore subject to supervision and sanctions by FIN-FSA. FIN-FSA does not have the authority to supervise compliance with the Limited Liability Companies Act.
In addition to FIN-FSA, the market surveillance unit of the Helsinki Stock Exchange supervises that listed companies comply with the rules of the Helsinki Stock Exchange. Compliance with the Corporate Governance Code is thus also subject to market surveillance and possible disciplinary measures by the Helsinki Stock Exchange.