On July 30, 2024, the Minister of Economy approved the new Corporate Governance Code of the Republic of Armenia. This Client Note addresses the main issues and regulations of the new Code. Learn more below.
On July 30, 2024, the Minister of Economy approved the new Corporate Governance Code of the Republic of Armenia. Based on the best international practice (mainly the G20/OECD Principles of Corporate Governance 2023), it aims to foster the development of effective corporate governance mechanisms in Armenia and is much more advanced than the prior code, which was in force from 2010 to 2024. This Client Note addresses the main issues and regulations of the new Code.
Legal Status
Corporate governance codes are classified as soft law. Their provisions are neither imperative nor mandatory. Instead, they establish principles of effective corporate governance. It is assumed that the companies should struggle to apply those mechanisms to the maximum extent possible (in this context, see also the description of the principle ''Comply or explain'' below).
Nevertheless, some companies are factually required to comply with the Corporate Governance Code (or at least that was the case while the former Corporate Governance Code was in force). According to Clause 47 of the Rules of the Armenia Stock Exchange (hereinafter referred to as the ''Exchange') on Securities Listing and Admission to Trading, a company that has listed their securities on the Exchange or filed an application for such listing should comply with the Corporate Governance Code approved by the Government of the Republic of Armenia, if the company has not adopted stricter principles of corporate governance. Taking into account the fact that, unlike the previous code, the new one was not approved by the Government,[1] we assume the Exchange rules will be amended shortly, and reporting issuers will be required to comply with the new code.
Comply or explain
The principle of ''Comply or Explain'' is widely used in corporate governance codes, including the Armenian code. Taking into account the wide variety of economic relations and the differing needs of various companies, the authors of corporate governance codes realize that it is impossible to come up with standard solutions that would be equally effective for all companies. This is the reason why a company would not be qualified as violating the corporate governance code if, notwithstanding formal non-compliance with a provision thereof, it is explained in detail why compliance would not be effective for that particular company and what alternative mechanisms to achieve the result declared by the relevant provision have been undertaken.
Participants and shareholders
The directors (both executive and non-executive) act in the company's best interests for the benefit of the participants and must ensure that the owners of shares of the same type (class) enjoy fair and equal treatment. At the same time, to make decisions, the directors must take into account (assess the potential effect of the relevant decision) the interests of persons who have an interest in the activity of the company. Those are referred to as stakeholders and include the employees, counterparties, customers of the company, the environment, the state, the community, etc.
In other words, the new corporate governance code introduces the concept of enlightened shareholder value. Even though, unlike in other legal systems, it has not been incorporated into Armenian legislation,[2] inclusion thereof into the Corporate Governance Code highlights the idea that in addition to the participants, companies have other beneficiaries as well and promote their interests in the context of corporate decisions.
The Board
As the body responsible for the company's strategic management, the board of directors should be professional and diverse. In other words, being a collective body, the board must consist of members possessing knowledge of all areas of the company's business. The board must also ensure its knowledge and expertise are accustomed to the company's growing needs and changing structure.
Non-executive directors must be fully equipped to perform their controlling and consultancy duties. One of the essential elements of those duties is the availability of full and detailed information necessary for the performance of the mentioned functions. At the same time, a sufficient number of independent directors on the board must be ensured.[3]
The Code also recommends the establishment of specialized committees by the board. In particular, audit, remuneration, and nomination committees comprised exclusively of non-executive directors are mentioned.
Internal control and risk management
To monitor the risks in the context of the company's risk appetite and ensure compliance with applicable normative and other regulations, a company should have risk management and compliance functions. The corporate governance code does not require separate positions for those functions, which means they can be performed by company employees with other primary functions.
At the same time, to provide the board and the CEO with an independent assessment of the corporate systems of internal control and risk management and the efficiency of corporate governance, a company should have an internal auditor or a department of internal audit. Unlike risk management and compliance, this function must be performed exclusively by a designated internal auditor (or a relevant department), whose only function is to provide such independent assessment. The internal auditor (or a relevant department) must be independent of the management.
It is worth mentioning that under the Armenian legislation in force, some financial institutions, namely - banks, investment and insurance companies, and managers of investment funds – are obliged to have internal control systems and internal auditors (or a relevant department). Other joint stock companies and financial institutions of any organizational form not mentioned in the previous sentence (for example, credit organizations, central depository) are not required to have internal auditors. Instead, such companies must have a control committee (controller) whose functions and powers are not as wide as those of an internal auditor.
Finally, we would like to use this opportunity to update you on a recent judicial practice in this area. In particular, in a judgment rendered in August, the Cassation Court held, in the context of the interpretation of Article 90 of the Law on Joint Stock Companies (Fiduciary Duties of Directors), that non-compliance with corporate risk management procedures is a clear violation of director duties invoking personal liability of the relevant director.
Disclosure
Transparency and accountability are among the most important elements of effective corporate governance. According to the Corporate Governance Code, companies must publish an annual report, which shall include:
- the CEO report on company performance, including an analysis of the main risks and the methods for managing those;
- the company’s financial statements, accompanied by an external audit report;
- the purpose of the company and sustainability report (prepared within the framework of any international standards of non-financial reporting), which is a non-financial report prepared and published consistently and periodically and includes information on the value of the company’s assets, environmental and social issues reasonably capable of having an impact on the company’s ability to generate income and ensure long-term growth, as well as the company’s impact on the society and environment;
- information about transactions with interest (affiliated transactions);
- the corporate governance report, which includes:
1) the description of the company’s administrative and corporate structure;
2) information on substantial participants and ultimate beneficial owners;
3) biographies of the board members, the terms of their positions, their status in the board, data about their participation in the board meetings, data about compliance by independent members with the criteria of independence, the annual report on the activities of board committees, the number of meetings summoned by the board (committees) and the non-executive directors, the methods of summoning those meetings, information about continuous professional training of the board members, information about annual personal remuneration of the board members and the connection of their remuneration with the corporate targets, the declarations of board members of any interest in the transactions and agreements of the company;
4) information about annual remuneration of the CEO and the connection of the remuneration with the corporate targets;
5) the amount of company’s shares owned by executive and non-executive directors;
6) rights provided by each type (class) of the shares issued and allocated by the company;
7) information about corporate governance consultants, their services to the company and the board, as well as the compensation for those services;
8) annual corporate governance declaration.
Sustainability
In recent years, sustainability has been considered one of corporate social responsibility's most important and sensitive elements. The transparency requirements described above indicate that the new Corporate Governance Code highlights that importance. In particular, not only publication of an annual sustainability report is encouraged, but also corporate sustainability targets are linked to the remuneration of both executive and non-executive directors and serve as key performance indicators (KPI).
[1] As mentioned above, it was approved by the Order N 1955-Ն of the Minister of Economy of the Republic of Armenia dated July 30, 2024. Pursuant to the Resolution N 1353-Ա of the Government dated 29 August, 2024, the previous code is no longer in force.
[2] Enlightened shareholder value is integral to English law, as provided in the Companies Act 2006. According to Section 172 of that Act, directors must act in the company's best interests for the benefit of the participants but also consider, for the purposes of making decisions, the stakeholders' interests. Armenian legal acts regulating corporate law (the Civil Code and the Laws on Joint-Stock Companies and Limited Liability Companies) do not address the stakeholders and their interests.
[3] In this regard it is worth mentioning that according to Article 85(5) of the Law of the Republic of Armenia on Joint Stock Companies, at least one third of members of the board of an open company must be comprised of independent directors.
