Corporate Governance Review

Review of Annual Reports 2010 of Brussels listed companies 2 Grant Thornton Corporate Governance Review

Contents

Contents 3 Foreword 5 Executive summary 7

PART I - Legally binding provisions 11 1. Corporate Governance Statement 12 2. Remuneration committee 17 3. Remuneration report 19 4. Audit committee – Legal requirements 22

PART II - Results corporate governance code 25 5. Board of directors 26 6. Independence 28 7. Nomination committee 30 8. Audit committee – Code requirements 32

Appendix A - Survey methodology 37 Appendix B - List of companies 39

3 4 Grant Thornton Corporate Governance Review Foreword

We are pleased to present the Another key factor in the corporate governance debate is the interest of the European Commission second annual publication in Grant and the impact this will have on corporate governance Thornton’s series of reviews of the legislation. The European Commission released a corporate governance disclosures consultation paper on an EU corporate governance of Belgian companies quoted on framework and is seeking submissions from interested parties. We may, therefore, see a single EU-wide the Euronext stock exchange. The corporate governance framework in the not so distant review examines the extent to which future. companies comply with regulatory Corporate governance is fundamentally about requirements. ensuring that key stakeholders, including the public, can have confidence in how business is conducted and This year’s report arrives at a time of turmoil for results are disclosed by public interest entities such Belgian listed companies. While the Belgian banking as listed companies, financial institutions and public sector was struggling for survival and stock markets sector organisations. All of the recent changes and were under great pressure, a lot of emphasis has ongoing enquiries need to ensure that the roles and been placed on the effectiveness and independence responsibilities of all stakeholders are clear. We believe of boards and the remuneration of directors. The our research makes an important contribution to corporate governance debate has not only caught this debate by focusing on the extent to which listed the attention of investors, but also the media and the companies actually apply good corporate governance public at large. and by commenting on current and future changes and the implications for companies and their stakeholders. Recent years have seen an increased interest from the legislator in corporate governance resulting in a new Corporate Governance Code in 2009 and the Corporate Governance Act of 6 April 2010. More recently, on 14 September 2011, a law was passed for women to make up one third of the directors on the boards of some government enterprises and publicly quoted companies. Companies will be allowed a transition period of five years. If by the sixth year one-third of the board is not comprised of women, any subsequent nomination will be considered void and remuneration of board members will be frozen. Stefaan Rabaey At present, women occupy on average 9.2 % of the Managing Partner Grant Thornton seats on company boards.

5 6 Grant Thornton Corporate Governance Review Executive summary

In recent years, there has been a must continue to demonstrate that the Corporate Governance Code leads to continuous improvement great improvement in the governance and that companies can be trusted to work within it – – and reporting of governance – not subvert it. of Belgian companies. It is easy to forget that what is accepted as With regard to the overall results of this year’s review, we can conclude that significant progress has been good practice now was not always made with regard to remuneration committees, board commonplace: before the corporate of directors effectiveness and the legal requirements governance code in 2004, companies regarding the audit committee. routinely had no audit committees, Additionally we can conclude that BEL20 companies more executive directors than non- are still leading the pack, with 8 BEL20 companies executives, and one person acting as achieving full compliance with the requirements under review. both CEO and chairman.

However, companies cannot rest on their laurels. Code: A significant minority of Belgian listed companies Audit committee could still improve the quality of their reporting. 100% In ‘explaining’, it is not enough to simply say non- 80% Law: Code: compliance suits the business model: stakeholders Remuneration report Board of directors deserve to know exactly why this is the case and 60% what arrangements have been made, despite non- 40% compliance, to ensure that the business and their 20% interests are protected. Law: Remuneration 0% Code: committee Independence More generally, companies need to consider the reader when preparing their annual report. Boilerplate text may tick the boxes but it does not give the colour or the flavour of the things that bring a business alive. Particularly in the context of the European Law: Code: Audit committee Nomination committee Commission’s recent green paper, the minority of poor performers should raise their reporting Law: CG statement Result 2009 standards to the high level of their peers. Companies Result 2010

7 Positive highlights Challenges remain The overall governance practices of most companies Although there is a positive trend, there are have positively evolved. Although some businesses unmistakably key challenges that need to be are lagging behind, the combination of new legal addressed by most of the companies under review: requirements of the Corporate Governance Act (CG Act) and the principles based approach of • the remuneration report remains the weakest link in the Corporate Governance Code (CG Code) – corporate governance transparency as shown by the underpinned by the need to ‘comply or explain’ – has relatively poor scores for the following items: achieved a quiet revolution in corporate governance. - disclosure of the individual remuneration of the • in 2010 the overall compliance score was 87 % CEO (69%) compared to 77% in 2009. - disclosure of policies regarding severance pay (74%) • compliance with legal requirements stands at 86%. - reporting on performance related elements that compose the variable remuneration of executive • 21 businesses (18%) have achieved full compliance directors or executive management (74%). with the requirements of the CG Act and the CG Code. • only 42% of companies provide real insight into the effectiveness of their internal control and risk • 40 businesses (34%) have achieved full compliance management systems by using the COSO model as with the legal requirements of the CG Act. a reference framework.

• the most significant progress has been noted for the • less than one in ten directors are women and more following items when compared to 2009: than half of all 118 boards are exclusively male. Only eight out of 118 companies already comply - the Corporate Governance Statement provides with the quota of 1/3 women on boards. a description of the key characteristics of the internal control and risk management systems (+27%) - at least one member of the audit committee is independent and has relevant experience in accounting and audit (+29%) - a remuneration committee has been appointed (+39%).

8 Small companies need to bridge the gap The debate continues Our analysis reveals that small companies have The ‘comply or explain’ debate has now been taken significantly lower scores than larger companies, as a up by the European Commission in the Green Paper comparison between BEL20, BELMID, BELSMALL on the EU Corporate Governance Framework, and OTHER shows. which questions whether optional principles and guidance, rather than hard regulation, can achieve Although in some areas they are on a par, smaller effective governance. businesses that are listed on the Belsmall-index or the remainder of Euronext Brussels (Other) are Our review suggests that the Code’s ‘comply or consistently lagging with regard to audit committee explain’ approach has achieved significant success, and remuneration committee requirements. but figures prove that quicker results are achieved by enforcing requirements with regulation. As Overall scores stakeholders and regulators call for more informed reporting, the bar will continue to rise. With this 100% report we would like to encourage companies to 90% 95% 91% make sure their Corporate Governance Statement is 80% 86% of the highest quality by improving transparency and 70% 77% by providing relevant information for their readers. 60%

50% If companies fail to achieve transparency, one can

40% expect the regulator to fill the gap.

30%

20%

10%

0% Bel20 Belmid Belsmall Other

Johan Haelterman Partner Grant Thornton Advisory

9 10 Grant Thornton Corporate Governance Review Part I Legally binding provisions

This part of our report analyses the compliance of 2010 annual reports with the legally binding provisions of the Belgian CG Act. Although some of these provisions (remuneration report, remuneration committee) are applicable from annual reports 2011, and are therefore not legally binding for the reports under review, we found it useful to include them in this part of the report. As the “comply or explain” rule is not applicable in this case, our scoring model and charts include either “compliant” or “not compliant”.

The legally binding provisions covered in our report concern four main areas:

• Corporate Governance Statement

• Remuneration committee

• Remuneration report

• Audit committee

11 Grant Thornton Corporate Governance Review 1. Corporate Governance Statement

In specific cases companies may depart from some of the Code’s provisions, if they give a reasonable explanation of the reasons for doing so. However, it was obvious that not all “explains” were informative and sufficiently underpinning the reason for non-compliance.

The Corporate Governance Act Art3. §2 defines that The best companies make a real effort to provide companies should include a specific chapter in their annual informative disclosures in their Corporate Governance report regarding corporate governance; a Corporate Statement. Innovative approaches include the use of tables Governance Statement. This statement should include as a and summaries of key governance features. Some also use minimum: personal commentary on governance from the chairman, 1. the corporate governance code applied by the company, the either in his statement or within the governance report. At Belgian Corporate Governance Code being imposed as the the other end of the scale, the poorest reports are either reference code for listed companies. minimalistic or even text-heavy often repeating content from 2. if the company does not fully comply with one or more previous years, which is frequently lifted directly from the provisions of this code, it should explain its reasons for not Code. The net result being that readers gain little insight into having done so in the Corporate Governance Statement the company’s governance practices. (‘comply or explain’). 3. a description of the main features of the company’s internal control and risk management systems 4. the shareholder structure and measures against hostile takeover bids. 5. a list of the members of the board, its committees and their terms of reference.

1.1 Code reference

Q1. Is there a statement of compliance with the Corporate Governance Code? CG Act - Art3. §2. 1° “The company should state in its Corporate Governance Statement that it has adopted the CG Code as its reference code. If the company has not complied fully with one or more provisions of this Code, it should explain its reasons for not having done so in the Corporate Governance Statement (‘comply or explain’)”.

Our analysis shows that 100% of companies have formally adopted the CG Code as the reference code in their Annual Report 2010. This is a significant increase when compared to last year’s result of 85%.

Figure 1: code reference 100%

% compliant % not compliant

12 1.2 Comply or explain

CG Act - Art3. §2. 2° “The company should state in its Corporate Governance Statement those sections of the Code it is not complying with, and the reasons for not doing so (‘comply or explain’)”.

In specific cases companies may depart from some of the Our analysis reveals that from our sample of the 1416 Code’s provisions, if they give a reasonable explanation of the Code requirements checked, 11% of our sample was non- reasons for doing so. Smaller companies, for example, may compliant but explained this non-compliance. Another 8% consider that some provisions are disproportionate or less were not compliant without any explanation. And for 4% we relevant. Also, holding and investment companies may have could not find adequate information. This leaves us with 77% a different board structure, which can affect the relevance full compliance with the code requirements. of certain provisions. Companies giving a reasonable explanation as to why they are departing from the Code can still be considered to be applying the Code. However, the legislator has made the “comply or explain” approach mandatory. As such non-compliance items should always be explained.

Figure 2: comply or explain

% compliant % explain % not compliant % no information 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%

Table 1 shows the three most common explanations related to the CG Code and the scores for “Explain”, “No information” and “Non-compliance”.

Table 1: items with highest rate of “explain”

Comply Explain No compliant No information

Is at leasthalf of the audit committee comprised of independent directors? 66% 23% 10% 1%

Is at leasthalf of the nomination committee comprised of independent directors? 58% 22% 18% 3%

Does the audit committee meet at least four times a year? 58% 21% 19% 3%

Our review does not include a detailed qualitative assessment of the explanations, however, it was obvious that not all were informative and sufficiently underpinning the reason for non-compliance.

13 1.3 Internal control and risk management

Q2. Does the Corporate Governance Statement provide a description of the key characteristics of the internal control and risk management systems? CG Act - Art3. §2. 3° “Corporate Governance Statement should contain a description of the main features of the company’s internal control and risk management systems, in relation to the financial reporting process”.

The effectiveness of internal controls and risk management For the 2010 annual reports, companies are legally obliged has attracted considerable interest in the last year, especially to provide a description of their internal control and risk with the current economic crisis and its repercussions in management systems. In order to make this requirement the financial sector. A company’s business environment, more concrete, the Corporate Governance Committee objectives, internal organisation and processes are constantly drafted guidelines and a questionnaire that can help evolving and as a result the risks it faces are changing too. companies to describe, in a formalised way, their internal Therefore, the identified risks, and controls in place to control and risk management systems. mitigate these risks, require regular review and evaluation to More than 90% of the companies did include a description ensure they are still adequate and effective. of their internal control and risk management system in By describing the features of their risk management and their Corporate Governance Statement. However, many internal control systems in their annual report, companies of the descriptions were not truly informative, only 42% demonstrate their commitment towards good governance. used the COSO model - as proposed by the guidelines of the Corporate Governance Committee - as a more comprehensive framework.

Figure 3: description of the main features of the internal control and risk management systems 90% 10%

% compliant % not compliant

1.4 Shareholder structure

Q3. Are the major shareholders disclosed in the Corporate Governance Statement? CG Act - Art3. §2. 4° “Corporate Governance Statement should disclose the shareholder structure together with a description of their voting rights and special control rights”.

Through legislative initiatives on both a European and of the annual report. For this review, we qualified companies national level, shareholder transparency has become an that included an overview of the identity of their shareholders important corporate governance topic. The CG Code helps on their website or in their Corporate Governance Statement to keep stakeholders better informed about how a company as being compliant. is controlled. More recently the new CG Act contains a legal obligation to disclose the shareholder structure in the 94% of companies were compliant with the requirement Corporate Governance Statement of the annual report. Many to list their major shareholders, though not all companies companies provide the required information, though some disclosed a full description of voting rights and special have published their shareholder structure in other sections control rights.

Figure 4: disclosure of shareholder structure 94% 6%

% compliant % not compliant

14 1.5 Composition of the board and committees

Q4. Does the Corporate Governance Statement identify all board members? CG Act - Art3. §2. 5° “Corporate Governance Statement should disclose the composition of the board, its committees and their terms of reference”.

According to the second principle of the CG Code and Disclosures in relation to board composition reveal that the CG Act, companies should have an ‘effective and all but two out of 118 Corporate Governance Statements efficient board that takes decisions in the corporate interest’. included a list of board members and members of related Furthermore the Code stipulates that the composition of the committees. board should be determined on the basis of gender diversity and diversity in general (e.g. capabilities, experience and Best practice annual reports provide information about board knowledge). The Corporate Governance Statement should composition in a tabular format including information on: include a list of board members. board membership and role, committee memberships and role, date of appointment and other relevant information complemented by a short CV of all board members.

Figure 5: board composition 98% 2%

% compliant % not compliant

1.6 Board size Figure 6: board size

Boards should be small enough to allow for 25 0 efficient and effective decision and large enough 24 0 23 1 to ensure knowledge and expertise across the 22 0 key business domains. We found that, on 21 0 average, a board is composed of nine members 20 0 while research on group dynamics for effective 19 0 decision making indicates that groups of seven 18 2 are the most effective. On average, board 17 0 composition of Belgian listed companies is 16 3 reasonable, but some boards are still too large to 15 1 operate effectively as shown in figure 6. Boards 14 3 with substantially more members should assess 13 5 if they still can operate effectively. 12 5 11 8 10 11 9 20 8 16 7 15 6 20 5 6 4 1 3 1 2 0 1 0

0 5 10 15 20 25

15 1.7 Women in boards

The Law requires at least one third of board members to be Our analysis revealed that only eight of 118 companies of the opposite gender as from 1 January 2017. Small listed already comply with the legislation and that more than half companies, or those with a free float of less than 50%, have do not have women on their boards at all. The distribution of an additional two year period to comply with this legal women on boards is depicted in figure 7. requirement. Regression analysis revealed other interesting conclusions: The law foresees sanctions when the new quota is not 1. no significant correlation could be found between the met. In case of non-compliance, the next general meeting number of women on boards and the free float, though must appoint a new board of directors which complies the free float is one of the parameters for delaying the with the legal quota. If the new board of directors remains implementation of the requirement. non-compliant, all benefits received by directors, financial 2. no significant correlation could be found between the CG or otherwise, will be frozen. The law also requires listed score of the companies under review and the percentage of companies to provide an overview in their Corporate women on their boards. Governance Statement of efforts made to ensure that at least one third of the board are of the opposite gender.

Figure 7: distribution of women on boards

70

62

60

50

40

30

20 20

14

10 9

3 3 3 2 1 1 0 0-5 6-10 11-15 16-20 21-25 26-30 31-35 36-40 41-45 46-50

% of women in boards

16 Grant Thornton Corporate Governance Review 2. Remuneration committee

A considerable number of boards still struggle with creating independent remuneration committees.

Listed companies on the public market of Euronext • small companies, i.e. companies that meet at least two of Brussels are required to establish a remuneration committee. the following three criteria, are not required to appoint a The remuneration committee prepares and proposes the remuneration committee: remuneration policy for directors and executive managers, (a) average number of employees not exceeding 250 and submits a remuneration report to the board. (b) balance sheet total of less than or equivalent to 43.000.000 EUROS The following principles apply to the remuneration (c) annual net turnover of less than or equivalent to committee: 50.000.000 EUROS. • the remuneration committee is composed of non-executive directors and of a majority of independent directors. According to the Corporate Governance Act, companies will • the chairman of the board or another independent director be obliged to have appointed a remuneration committee from chairs the remuneration committee. 2011. Legal compliance starts from next year’s annual report.

2.1 Remuneration committee

Q5. Has a remuneration committee been appointed? CG Act – Art7 “… Companies listed on the public market of Euronext Brussels are required to establish a remuneration committee”.

According to the CG Act, companies will be obliged to have regulation apply the “small companies” exception rule and appointed a remuneration committee from 2011. For the as such, do not have an effective remuneration committee in annual reports of 2010 we found that 91% of companies are place. In such cases, the role of the remuneration committee in line with the legal requirement. However, we would like is taken over by the board. to emphasise that many small companies in line with this

Figure 8: remuneration committees appointed 91% 9%

% compliant % not compliant

17 2.2 Remuneration committee composition

Charged with setting executive remuneration, the profile of, and recommendations made by remuneration committees have come under increased scrutiny by shareholders and the media. Remuneration committees are trying to balance the expectations of executives with the needs of the shareholders and the company.

Q6. Are all remuneration committee members non-executive directors? Q7. Is the majority of the remuneration committee comprised of independent directors? CG Act – Art7 “…The remuneration committee is composed of non-executive directors and of a majority of independent directors.”

Disclosed compliance with Article 7 of the CG Act shows Compliance for small companies is granted when both that a considerable number of boards still struggle with additional legal requirements are fully met: creating independent remuneration committees: a) at least one of the directors of the board is independent. • 89% of remuneration committees are comprised of non- b) when the chairman of the board is an executive director, executive directors the role of chairman is executed by a non-executive • 81 % of remuneration committees have a majority of director for matters relating to remuneration. independent directors

In reality these figures are somewhat lower as many small companies apply the “small companies” exception rule and as such, though they are compliant with the legislation, do not effectively have a remuneration committee in place.

Figure 9: remuneration committee composition 81% 19%

Independent directors % compliant % not compliant

89% 11%

Non-executive directors % compliant % not compliant

18 Grant Thornton Corporate Governance Review 3. Remuneration report

On average, only 69% of all investigated companies disclosed CEO remuneration in line with legal requirements.

The Corporate Governance Committee decided to include Reports 2011 companies will no longer be able to deviate a comprehensive and detailed chapter on remuneration in from this requirement. the 2009 Code. Moreover, the legislator chose to force listed companies to include a remuneration report disclosing For the purpose of this review, this section focuses on the remuneration of directors and executives in their Corporate legal requirements of the remuneration report. Governance Statement. This means that as from the Annual

3.1 Remuneration report disclosure

Q8. Is a remuneration report included in the Corporate Governance Statement? CG Act – Art3 §3 “All listed companies whose shares are admitted for trading on Euronext Brussels should include a remuneration report in their Corporate Governance Statement.”

Most of the companies (86%) have included a remuneration for non-executives, CEO and executive management. Even report in their Corporate Governance Statement. Although though the remuneration report will be mandatory as from the quality of the information in the remuneration report next year’s report, a score of 86% can be considered as high. varies, we have identified a trend to include different sections

Figure 10: remuneration report disclosure 86% 14%

% compliant % not compliant

19 3.2 Remuneration policy for directors and executive management

Q9. Does the company state the remuneration policy including performance related elements? CG Act – Art3. §3. 2° “The remuneration report over the reported financial year should include a declaration of the remuneration policy that has been applied for directors and executive management. This report should include the principles upon which remuneration was based, the relative importance of the components of remuneration, the features of the performance-based premiums, and information over the remuneration policy for the two coming years.”

The CG Act requires companies to disclose the remuneration other elements of the remuneration report, transparency policy and the significance of performance related elements regarding remuneration seems to be a difficult hurdle for of remuneration, in the context of the total remuneration some boards. Most of the companies did not report on the package for directors and executive management. remuneration policy for the two coming years. As such this part of the legislation has been excluded from our scoring Compliance with this requirement was 75% and, as with model.

Figure 11: remuneration policy disclosure 75% 25%

% compliant % not compliant

3.3 Individual remuneration disclosure of non-executive directors

Q10. Does the remuneration report provide information about the individual remuneration of non-executive directors ? CG Act – Art3. §3. 3° “The remuneration report over the reported financial year should include, on an individual basis, the amount of remuneration and other benefits which are awarded to the non-executive directors.”

For this topic we have assessed whether companies have different approaches for non-executive remuneration. Some made disclosures - either specific figures or specific elements companies have no remuneration for their non-executive - to provide shareholders and users of the annual report with directors, while others provide only a fixed remuneration. more detail on non-executive directors’ remuneration. Additionally we would like to point out that with regard The results differ slightly from the previous question, as this to non-executive remuneration, the Code and the Act question concerns only non-executive directors. Moreover, are not aligned. Where the Code requires that non- some companies have failed to disclose performance related executive directors should not receive performance-related elements of remuneration but have nonetheless disclosed remuneration such as bonuses, stock related long-term quantitative figures, and some companies have done the incentive schemes, nor fringe benefits or pension benefits, the reverse. Companies should do both in order to provide Act implicitly approves “other benefits”. As such variable or shareholders with comprehensive information. other components of remuneration for non-executives are permitted as long as sufficient explanations are provided. Best practice companies report remuneration of non- executive directors in tabular format. We have also noted

Figure 12: individual remuneration non executive directors 79% 21%

% compliant % not compliant

20 3.4 Remuneration discolosure of CEO

Q11. Does the remuneration report provide information about the individual remuneration of the CEO, including fixed salary, variable remuneration, pension and other components of the remuneration package? CG Act – Art3. §3. 6° “The remuneration report should disclose at least the following information: the amount of the remuneration of the CEO. This information should include the following components: • basic remuneration; • variable remuneration linked to performance criteria; • pension benefits; • other components of the remuneration.”

For this question we have assessed whether companies have made quantitative disclosures to give shareholders and users of the annual report more detail on the extent to which CEO remuneration comprises of bonuses or performance related elements. On average, only 69% disclosed CEO remuneration in line with the legal requirements.

Figure 13: remuneration disclosure CEO 69% 31%

% compliant % not compliant

With a score of 81%, transparency regarding the overall remuneration of the executive management team scores somewhat better.

3.5 Remuneration report content: comparison of Bel20, Belmid, Belsmall and others.

For the questions related to the remuneration report we have noted significant differences between Bel20, Belmid, Belsmall and ‘other’ companies as indicated in the table below.

Table 2: remuneration report disclosures for bel20, belmid, belsmall and others

performance related individual individual individual overall remuneration Does the remuneration report provide elements that remuneration of the remuneration of remuneration of non- remuneration policy of the Executive the following information: compose variable CEO including all executive directors executive directors Management team remuneration 4 components

Bel 20 95% 100% 95% 95% 95% 100%

Bel mid 87% 90% 83% 87% 77% 93%

Bel small 71% 63% 71% 66% 63% 80%

Other 65% 74% 59% 56% 56% 62%

Grand Total 77% 79% 75% 73% 69% 81%

The supposed reason for these significant differences is that the legislation is effective as from next year and that the smaller companies do not feel the pressure of the financial markets to comply with the law yet.

21 Grant Thornton Corporate Governance Review 4. Audit committee – Legal requirements

A large majority, 93% of all investigated companies, has an audit committee composed of non-executive directors only.

Both the Corporate Governance Code and the Act on audit • monitoring the statutory audit of the annual and committees aim to reinforce the use and effectiveness of audit consolidated accounts, including any follow-up on any committees as a governance instrument. They describe the questions and recommendations made by the external following roles for the audit committee: auditor • reviewing and monitoring the independence of the external • monitoring the financial reporting process auditor, in particular regarding the provision of additional • monitoring the effectiveness of the company’s internal services to the company. control and risk management systems • if there is an internal audit, monitoring the internal audit and its effectiveness

4.1 Audit committee

Q12. Has an audit committee been appointed? Act on audit committees amends Art. 526bis of the Companies Act: “Art. 526bis. § 1. Companies listed on the public market of Euronext Brussels are required to establish an audit committee.”

Companies should apply the Act on audit committees of December 2008. Only small companies that meet two out of the three criteria below are not legally obliged to appoint an audit committee:

- have an average number of employees fewer than 250 during the past financial year. - have a balance sheet total of 43.000.000 EUROS or less. - have a yearly net turnover of 50.000.000 EUROS or less.

For those companies, the responsibilities of such committee should be executed by the board of directors as a whole. Almost all investigated companies (97%) have an audit committee or apply the “small companies” exception rule.

Figure 14: audit committee appointment 97% 3%

% compliant % not compliant

22 4.2 Composition of the audit committee

Q13. Are all audit committee members non-executive directors? Act on Audit Committees amends Art. 526bis of the Companies Act: “Art. 526bis. § 2. The audit committee is composed of non-executive members of the board. At least one member is an independent director and should have accounting and auditing expertise.”

The law requires that audit committees are composed exclusively of non-executives and that at least one of them is independent. The Code is even stricter on this point: it states that a majority of them should be independent. A large majority, 93% of all investigated companies, has an audit committee composed of non-executive directors only.

Figure 15: non executives on audit committee 93% 7%

% compliant % not compliant

Q14. Does the audit committee have at least one member that is independent with relevant experience in accounting and audit? Act on Audit Committees amends Art. 526bis of the Companies Act: “Art. 526bis. § 2. The audit committee is composed of non-executive members of the board. At least one member is an independent director and should have accounting and auditing expertise.”

The number of companies (92%) clearly disclosing which remuneration committee, many small companies in line with member of the audit committee has recent and relevant this regulation do apply the “small companies” exception rule financial experience has considerably improved compared to and as such do not have an effective audit committee in place. last year (63%). The role of the audit committee in these companies is taken As before we rated a company as being compliant only when over by the board in which case there is no requirement for there was explicit disclosure and identification of the member the board to have an expert in audit and finance. We feel that who has appropriate experience. However, as with the the legislation could be improved in this area.

Figure 16: independent directors in audit committees 91% 9%

% compliant % not compliant

23 242 Grant Thornton Corporate Governance Review Part II Corporate Governance Code

This part of our report analyses compliance with those provisions of the Code that are not legally binding. Companies may depart from the Code’s provisions, provided they give sufficient reason for doing so. Companies giving a sound explanation for the reasons why they depart from the Code can still be considered to be applying the Code.

However, a lot of businesses are still choosing to interpret ‘explain’ in the much narrower sense of merely noting which provisions they are not compliant with, and in some cases giving a reason for this non- compliance, but in most cases not describing the alternative governance measures put in place. This is one of the major weaknesses in many of the annual reports. As many companies still provide minimal information, it may take the introduction of regulatory oversight to change this. However, while tougher regulation may improve compliance, shareholder engagement is critical to achieving a long lasting strong governance culture.

In this section of the report we have covered four areas that relate to the application of the CG Code:

• Board of directors

• Independence

• Nomination committee

• Audit committee

255 Grant Thornton Corporate Governance Review 5. Board of directors

With a score of 69%, the evaluation process for boards and their directors is still one of the CG Code requirements with the lowest level of compliance.

5.1 Individual attendance rates

Q15. Is the individual attendance of directors to board meetings disclosed? 2.8 CG Code: “The board should meet sufficiently regularly to discharge its duties effectively. The number of board and board committee meetings and the individual attendance record of directors should be disclosed in the Corporate Governance Statement.”

In order to guarantee the effective functioning of the board, However, disclosure of individual attendance rates of provision 2.8 of the CG Code requires companies to be directors were provided for only 82% of all companies transparent about the number of meetings that were held in included in our review. 3% of companies explained that the past financial year and to communicate the individual the board operates as one and that individual attendance is attendance rate of directors in the Corporate Governance therefore irrelevant. Another 4% did not provide information Statement. and 11% of companies were not compliant. On the other hand, we identified a positive trend regarding disclosure of 93% of the companies disclosed the overall number of individual attendance compared to last year (74%). meetings held in the year by the board and its committees.

Figure 17: individual attendance of directors 74% 3% 0% 23%

2009

82% 3% 4% 11% % compliant % explain 2010 % no information % not compliant

26 5.2 Evaluation process of the board

Q16. Does the Corporate Governance Statement provide disclosure on the evaluation process of the board? 4.15 CG Code: “Information on the main features of the evaluation process of the board, its committees and its individual directors should be disclosed in the CorporateGovernance Statement”.

In line with the fourth principle of the Code, companies Although progress has been made with regard to this, it should have a rigorous and transparent procedure for the is still one of the CG Code requirements with the lowest appointment and evaluation of the board and its members. level of compliance. Only 69% of companies included an Therefore the company should communicate in the overview of main features of the evaluation process for their Corporate Governance Statement to its shareholders and directors, board and its committees – compared to 45% last other stakeholders on the evaluation process of the board, its year. Another 7% explained why they did not disclose or committees and the individual directors. have no board evaluation process. More than 20% did not provide any information or acknowledged that they were not compliant without due explanation.

Figure 18: evaluation process of the board 45% 7% 0% 48%

2009

69% 7% 19% 4% % compliant % explain 2010 % no information % not compliant

Our analysis revealed that there is a large gap between Table 3: evaluation process vs company type transparency of Bel20 companies and all other categories as indicated in the table below. Category Average score Bel 20 95%

Bel mid 73%

Bel small 71%

Other 74%

Overall average 76%

27 Grant Thornton Corporate Governance Review 6. Independence

Our research revealed that 97% of the companies’ Corporate Governance Statements indicated those directors that are independent. Fewer companies, 94% of our sample, comply with the provision to have their board composed of at least one half of non-executive directors.

6.1 Separation of duties between chairman and CEO

Q17. Are the roles of chairman and chief executive officer exercised by different individuals? 1.5 CG Code: “There should be a clear division of responsibilities at the head of the company between the running of the board and the executive responsibility for the running of the company’s business. The chairman of the board and the chief executive officer (CEO) should not be the same individual. The division of responsibilities between the chairman and the CEO should be clearly established, set out in writing and agreed by the board.”

One of the new requirements introduced in the CG Code Overall there was a minimal change in compliance with this of 2009 is to separate the duties of the chairman of the board provision year on year (2010: 86%, 2009: 87%), the decrease and the chief executive officer in order to ensure that the being due to a change in the population. board has effective control over the function of executive management. The CG Code has emphasised the role of the A large majority (86%) adheres to this principle while 7% chairman and his role in developing a climate of trust, to explain why they have the same individual for both the ensure a culture of openness and debate, as well as support functions of CEO and chairman of the board. In most cases for the board’s decisions. it concerns a member of the founding family or an individual that is considered crucial to the functioning of the company.

Figure 19: separation of chairman and CEO 87% 7% 0% 6%

2009

86% 9% 2% 3% % compliant % explain 2010 % no information % not compliant

28 6.2 Independence of the board

Q18. Is at least half of the board comprised of non-executive directors? Q19. Are at least three members of the board independent? 2.3 CG Code: “At least one half of the board should comprise non-executive directors and at least three of them should be independent according to the criteria set out in Appendix A of the Code.”

Another important aspect of good governance is the presence A significant number of companies have taken advantage of of non-executive and independent directors on the board. this disposition to adhere to the minimum requirement of The independence criteria changed significantly under three independent directors (provision 2.3 of the Code). the new code. In general we can say that the new set of requirements is more stringent than the previous version. We Our research revealed that 97% of the companies’ Corporate found that in particular the criteria stating directors can only Governance Statements indicated those directors that are be independent if they have served less than three terms as independent. Fewer companies, 94% of our sample, comply non-executive in the board without exceeding a total term with the provision to have their board composed of at least of more than twelve years was frequently commented in the one half of non-executive directors, and 81% comply with annual reports. The new independence criteria were inserted the requirement of having at least three independent directors in the Companies Act (article 526ter Companies Act) and in on the board. In our assessment we qualified directors that the Corporate Governance Code of 2009. are independent in line with the transition provision as being In this regard we note that a transition period is foreseen compliant. If we had not included the transition provision, for directors that were correctly appointed before the compliance would have been significantly lower. introduction of these requirements, and they can retain the capacity of independent director until 1 July 2011. This transition period was also adopted in the Code.

Figure 20: board independence 81% 10% 2% 7%

Disclosure independent

94% 4% 0% 2% % compliant % explain Disclosure non-executive % no information % not compliant

29 Grant Thornton Corporate Governance Review 7. Nomination committee

57% of the companies in our review had a nomination committee composed of a majority of non-executives.

7.1 Nomination committee

Q20. Has a nomination committee been appointed? 5.3./1 Appendix C CG Code: “The board should set up a nomination committee, the majority of it comprising independent non-executive directors.”

Nomination committees have an important role to play in remuneration committee may be combined, and a significant providing assurance to shareholders and other stakeholders number of companies have done so. In this case the stricter that director appointments are based on fair policies requirements that apply to the remuneration committee also and objective analysis. They lead the process for board apply to this type of combined committee. appointments, the CEO and other management executives, and make recommendations to the board. The Corporate Although the level of compliance with this provision has Governance Code requires companies to set up a nomination significantly increased from 48% to 76%, another 14% committee. However, unlike the audit committee and the explained why they have no nomination committee, remuneration committee, there is no legal obligation to mostly because the company is too small and the board do so. The Code states explicitly that the nomination and takes up the role.

Figure 21: nomination committee appointment 48% 33% 0% 19%

2009

76% 14% 0% 10% % compliant % explain 2010 % no information % not compliant

30 7.2 Nomination committee independence

Q21. Is at least half of the nomination committee comprised of independent directors? 5.3./1 Appendix C CG Code: “The board should set up a nomination committee, the majority of it comprising independent non-executive directors.”

Last year less than 50% of the companies in our review had a nomination committee composed of a majority of non- executives, today this has increased to 57%. However 22% are still not compliant or do not provide information.

Figure 22: nomination committee independence 48% 33% 0% 19%

2009

57% 21% 3% 19% % compliant % explain 2010 % no information % not compliant

31 Grant Thornton Corporate Governance Review 8. Audit committee – Code requirements

Next to the audit committee, the company should have an internal audit function to assess the adequacy of the organisation’s internal control and risk management systems.

In section four of our report we analysed the level of The code also states additional provisions to reinforce the compliance with a number of legally binding provisions effectiveness of the audit committees. The following elements from the Act on audit committees of December 2008. have been analysed during our review: These requirements should be considered as a minimum all companies should have, and concern, the following: • is at least half of the audit committee comprised of independent directors? • an audit committee should be appointed • does the audit committee meet at least four times a year? • all members of the audit committee should be non- • does the company have an internal audit function or does executive directors the audit committee evaluate the need for such a function • at least one member is independent with relevant experience annually? in accounting and audit.

8.1 Audit committee independence

Q22. Is at least half of the audit committee comprised of independent directors? 5.2./4 Appendix C CG Code: “At least a majority of the audit committee’s members should be independent. At least one of them shall have accounting and auditing expertise.”

The level of compliance with this code requirement has remained stable at 66%. Another 23% explained why they did not comply, which is mainly because it concerns smaller companies where the role of the audit committee is exercised by the board.

Figure 23: audit committee independence 66% 22% 1% 11%

2009

66% 23% 1% 10% % compliant % explain 2010 % no information % not compliant

32 8.2 Audit committee meetings

Q23. Does the audit committee meet at least four times a year? 5.2./28 Appendix C CG Code: “The audit committee should meet at least four times a year. It should regularly (and at least every two to three years) review its terms of reference and its own effectiveness and recommend any necessary changes to the board.”

Under the 2004 version of the Code, the minimum number of year. Another 21% of companies explained why they do not meetings of the audit committee was three times per year but comply, the main reason being that many small companies the criterion changed to four times a year in the new Code. are not legally obliged to have an audit committee installed. As information was provided and in line with the code and Only 58% of the companies that fall under the scope of the legislation, our scoring model rated them as “explain”. Code adhere to this minimum requirement of four meetings a

Figure 24: audit committee meetings

51% 20% 3% 26%

2009

58% 21% 3% 19% % compliant % explain 2010 % no information % not compliant

8.3 Internal audit function

Q24. Does the company have an internal audit function or does the audit committee appraise the need of such a function on a yearly basis? 5.2./17 Appendix C CG Code: “An independent internal audit function should be established, with resources and skills adapted to the company’s nature, size and complexity. If the company does not have an internal audit function, the need for one should be reviewed at least annually.”

Next to the audit committee, the company should have our review and differences in reporting for this requirement. an internal audit function to assess the adequacy of the We did not find information on this subject for 19 of the organisation’s internal control and risk management systems. companies under review. The internal auditor reports to the audit committee. Given the fact that the Code only requires installing or Only 62% of companies fully complied with this requirement evaluating the need for an internal audit, and no detailed compared to 67% last year. When considering the “explain” description needs to be provided in the Corporate scores the overall level of compliance reached 79%, which Governance Statement, it was not always obvious if internal is slightly better than last year. The difference in the result audit functions were adapted to the needs of the company. can be explained by either a small change in population of

Figure 25: internal audit function 67% 8% 20% 4%

2009

62% 17% 16% 5% % compliant % explain 2010 % no information % not compliant

33 Appendix

34 35 36 Grant Thornton Corporate Governance Review Appendix A - Survey methodology

This report was compiled in the third quarter For those statements compared to the application of of 2011, based on publicly available data for 118 the law, we have only foreseen a compliant or not companies incorporated in Belgium and whose shares compliant, as «explains» are not considered under the are admitted for trading on a regulated market. This legislation. includes the Bel20 index and the continuous and fixing market segment of Euronext Brussels. A list of For reasons of completeness we mention that the the reviewed companies can be found in Appendix statements were only studied in one language: B. Companies that are not incorporated in Belgium Dutch if available, otherwise English or French. All were not evaluated. figures were rounded to the nearest whole number percentage, therefore in some cases the graph For the purpose of this review, the Corporate percentages do not total 100. Governance Statement, published in the annual reports, was taken as a starting point. For some It is our aim to provide the reader with an extensive specific topics we also consulted the Corporate and objective overview of the current status of Governance Charter. corporate governance in the selected companies. Assessing compliance of the annual reports with the The statements were assessed in light of the 2009 Corporate Governance Code requires some level Corporate Governance Code (Code), the Corporate of interpretation. As such, we have complemented Governance Act of 6 April 2010 (CG Act) and the the results of our analysis with general audit committee Act of 17 December 2008 (AC Act). observations, specific comments and, in some cases, For the statements that were assessed in comparison recommendations for future improvements. to the Code, the charts drawn in the results section include four different parameters: compliant, explain, not compliant and no information.

37 38 Grant Thornton Corporate Governance Review Appendix B - List of companies

The list of companies that were assessed - Information according to annual reports published in 2011 over the year 2010.

Companies

4Energy Invest Delhaize Group MDX Health Solvac AB Inbev Devgen Melexis Solvay Ablynx Dexia Miko Spadel Ackermans & van Haaren Duvel Moortgat Mobistar Spector Photo Group Accentis Econocom Group Montea Sucraf A&B Aedifica Elia Nationale Portefeuille- Systemat Epiq – not listed anymore maatschappij Group Holding Agfa-Gevaert Group Euronav Neufcour Ter Beke Alfacam Group Evs Broadcast Equipment Nyrstar Tessenderlo Group Arseus Exmar Omega Pharma Texaf Ascencio Floridienne Group Option Thenergo Atenor Fluxys Parc Paradisio Think-Media Auximines – not listed anymore Fountain PCB Thrombogenetics Banimmo Galapagos Picanol Group Tigenix Barco GBL PinguinLutosa Transics International Befimmo Gimv Punch International Tubize Bekaert Hamon Quest For Growth UCB Belgacom Henex Real Dolmen Belreca Home Invest Belgium Recticel Unibra Beluga I.R.I.S. Group Rentabiliweb Van de Velde Brederode IBA Resilux VGP Campine IBt Bebig Estates VPK Packaging Group Compagnie Du Bois Sauvage Immo Moury RHJ International Warehouses Estates Belgium CFE ImmoBel Rosier Warehouses De Pauw Cimescaut Intervest Retail Roularta Media Group WereldHave Belgium CMB Intervest Offices Sabca Zenitel Jensen-Group Sapec Zetes Industries Colruyt Group KBC Groep SVK Connect Group Keyware Technologies Serviceflats Invest D’ieteren Kinepolis Group Sioen Industries Deceuninck Leaseinvest Real Estate Sipef Deficom Lotus Bakeries

39 40 Grant Thornton Corporate Governance Review About Grant Thornton

Grant Thornton Belgium Grant Thornton International Grant Thornton in Belgium comprises over 100 staff and Grant Thornton International is one of the world’s leading partners operating from offices in Brussels and Ghent. The organisations of independently owned and managed firm provides a comprehensive range of services including accounting and consulting firms. These firms provide audit, tax and advisory services to public interest entities and assurance, tax and specialist business advice to privately privately held businesses. held businesses and public interest entities. More than 2,600 partners provide clients with distinctive, high quality and personalised service in over 100 countries. For more information visit www.gti.org.

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41 Grant Thornton Corporate Governance Review Contact us

Christoph Vanderstricht Partner Advisory E [email protected]

Johan Haelterman Partner Advisory E [email protected]

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