The main objective of the Guidelines is to contribute to good corporate governance by clarifying the roles and responsibilities of managers and enabling them to perform their tasks while simultaneously securing the interest of stakeholders and other invested parties. The Guidelines include recommendation over and above that laid down in the relevant legislation and as such are more flexible, as it is difficult to set standards that are suitable for companies of all types and sizes.
One must bear in mind that the Act on Public Limited Companies stipulates that companies must have three decision-making bodies in a hierarchical relationship to one another: the Shareholders’ Meeting, the Board of Directors and the Chief Executive Officer (CEO). The power and influence of shareholders is thereby limited to the Shareholders’ Meetings, while the Board seeks its authority from the Shareholders’ Meeting and carries out the supreme authority between Shareholders’ Meetings. It is then the responsibility of the Board to recruit the Chief Executive Officer (one or more) and call them to account regarding the operations of the Company. The CEO is responsible for the day-to-day management of the Company and shall pursue the policies and instructions of the Board. A vital part of good corporate governance is following this three-way division of roles and responsibilities, bringing about a clear distinction between the powers and responsibilities of each party, and ensuring that the parties involved do not encroach on matters that are the responsibility of another.
The layout of the fifth edition of the Guidelines is quite different from the previous versions. The Guidelines which companies need to comply with or explain deviations from are now in a numbered sequence. A short introduction in a shaded text box can now be found at the beginning of most chapters of the Guidelines. This introductory text is meant to clarify the Guidelines contained in each chapter and companies are not required to report non-compliance with such remarks. Many provisions have additional commentary that is marked specifically as such. Companies are not required to report non-compliance with such commentary. To prevent any uncertainty regarding the requirements of the Guidelines, the wording has been harmonised so that now, for instance, the phrase “the Board shall” is always used when referring to obligations of the Board.
This version of the Guidelines is applicable from 1 June 2015.This means that this version covers decisions regarding corporate governance practices taken after that date. It may be more practical in some circumstances for procedures and standards in force to remain applicable until a certain point in time, such as the end of the fiscal year or until the next AGM.
Which companies are to apply the Corporate Governance Guidelines?
The Guidelines on Corporate Governance are specifically targeted at public-interest entities, i.e. companies with securities listed on a regulated market, pension funds, financial institutions and insurance companies.Under Act No 79/2008 on Auditors, cf. Act No 80/2008 on Annual Accounts, the following undertakings are considered public-interest entities: a) legal person with registered domicile in Iceland and with securities listed on a regulated securities market in a State within the European Economic Area, in a Member State of the European Free Trade Association or in the Faroe Islands; b) pension funds with a fully valid operating permit; c) lending institutions pursuant to the Act on Financial Undertakings; d) undertakings with a license to operate insurance operations in accordance with the Insurance Act. It should be noted that financial undertakings, insurance companies and companies with securities listed on a regulated market must follow recognised Guidelines on corporate governance.Cf. Article 19(3) of the Act No 161/2002 on Financial Undertakings and Article 6(3) of the Insurance Act (Act No 56/2010).
The Guidelines on Corporate Governance can however benefit all companies, regardless of their size and activities. It is furthermore desirable for State-owned enterprises to adhere to Guidelines on Corporate Governance in their operations.
The ‘comply or explain’ principle
The Guidelines on Corporate Governance are based on the ‘comply or explain’ principle. The principle allows company boards the flexibility to decide the extent to which certain aspects of the Guidelines suit their companies. As such, a company can be considered to adhere to the Guidelines even if it deviates from some of its standards. The ‘comply or explain’ principle does however place on boards the burden of providing a detailed explanation for all deviations from the Guidelines in the Company’s corporate governance statement.
This arrangement offers more flexibility for companies to tailor the Guidelines on Corporate Governance to their size, structure and sector. This also encourages boards and managers to contemplate and evaluate their own corporate governance conduct regularly.
If a company decides to deviate from the Guidelines on Corporate Governance, it shall explain:
- the way in which the Guidelines have been deviated from;
- why the Guidelines have been deviated from;
- how the decision to deviate from the recommendations in question was made within the Company;
- what measures were taken to offset deviations and how they conform to the underlying objectives of the Guidelines, wholly or partially.
- If the deviation is temporary, the Board shall explain how the Guidelines will later be met.
These explanations should be clearly set forth in the Company’s corporate governance statement, so that shareholders, investors and other invested parties can easily familiarise themselves with their content. The characteristics and special circumstances of the relevant company – such as size, organisation and ownership of the Company – shall be outlined.