Significant legislative changes regarding corporate governance | LegalFlash nr. 90

With Roxana Tudor, Partner, and Cătălina Damaschin, Senior Associate - Tudor, Andrei & Associates, Law Firm associated with BDO Romania

The implementation of Romania's National Recovery and Resilience Plan (PNRR) represents a pivotal moment, significantly leading towards Romania's modernization. This process creates a suitable balance between the European Union's priorities and Romania's specific developmental needs.

One of the measures provided in the PNRR aims to improve the procedural framework for implementing corporate governance principles within state-owned enterprises. Several milestones have been established, including:

• Enactment of updated legislation regarding state companies;
• Operationalization of the task force within the Government Center for coordinating and monitoring corporate governance policies.

Upon publishing the monitoring dashboard with financial and non-financial objectives and performance indicators for all categories of public companies (including key sectors like transportation, energy, and public utilities) and parallelly with efforts made towards achieving the targets set by the PNRR, Romania committed to joining the Organization for Economic Cooperation and Development (OECD) and adhering to its corporate governance principles in both letter and spirit.

Romania submitted its candidacy in January 2022 and is currently in the technical phase of the accession process. Within this accession process, the OECD has drafted an Evaluation Report on corporate governance at the level of state-owned enterprises in Romania.

The actions recommended by the OECD in the report include:

• Strengthening the state ownership (Further centralization of the state ownership; defining clear financial and non-financial performance objectives for individual state  enterprises);
• Maintaining fair competition conditions with other companies (Standardizing the legal and corporate form of state enterprises; eliminating legal exemptions applicable to state enterprises);
• Strengthening the autonomy and independence of the board of directors (Ensuring the establishment of professional and independent boards of directors; empowering the boards of directors/supervisory boards to set strategies and oversee management);
• Improving transparency and disclosure practices (Enhancing financial and non-financial disclosure by state enterprises; expanding the scope of aggregated annual reporting);
• Strengthening internal control systems (Improving monitoring and implementation of risk management and integrity measures).

Thus, the most significant issue regarding the operation of public enterprises, regardless of their capital structure, is ensuring good governance. Additionally, strengthening the Romanian state's capacity to provide an appropriate framework for public enterprise governance is essential.

The legal framework for corporate governance is established at the national level by Emergency Ordinance 109/2011 regarding corporate governance of public enterprises.

As previously mentioned, the 2022 OECD Evaluation of corporate governance of state enterprises in Romania found that, compared to the existing national framework, the corporate governance principles defined at the OECD level were not fully transposed and/or by the defined framework.

Following the commitments made through the National Recovery and Resilience Plan and the recommendations made by the OECD in the Evaluation Report on corporate governance at the level of public enterprises, the legislator proposed revising the regulations to improve corporate governance of public enterprises.

Thus, Law 187/2023, which came into effect in June, brings significant changes to the legal framework established by Emergency Ordinance 109/2011 regarding the corporate governance of public enterprises, subsequently amended and approved by Law no. 111/2016 and complemented by Government Decision no. 722/2016.

Implementing the new legal provisions aims to enhance the procedural framework for implementing corporate governance principles of public enterprises, ensuring closer alignment with OECD principles and more precise compliance with them.

Among the most significant changes and additions are those related to:

• Introduction and definition of terms. The updated form of Emergency Ordinance no. 109/2011 defines a series of new terms, as well as the establishment of the Agency for Monitoring and Evaluating the Performance of Public Enterprises (AMEPIP).
• Developing an ownership policy defining the rationale for state or administrative-territorial units holding public enterprises at both central and local levels.
• Establishing long-term governance objectives and the method of notifying AMEPIP regarding the need to initiate the selection and appointment procedure for administrators and directors.
• Conditions related to studies and experience for individuals who will hold the position of administrator or director in public enterprises.
• Conditions related to the composition of the Board of Directors - it cannot exclusively consist of individuals of the same gender, thus complying with the principles provided by Law 202/2002.
• The duration of provisional mandates can be a maximum of 5 months, with the possibility of extension by a maximum of 2 months. It's also new that an individual can concurrently hold a maximum of 2 mandates as a member of the Board of Directors and/or member of the Supervisory Board in public enterprises.
• Mandatory establishment within the Board of Directors of the Nomination and Remuneration Committee, the Risk Management Committee, and the Audit Committee. The articles of association can also provide for the possibility of establishing other advisory committees.
• Compliance with transparency requirements, including the appointment of a compliance officer. The public enterprise, under the care of the Chairman of the Board of Directors, must publish on its website, for shareholders and the public, a series of documents and information relevant to investors.

The legislator's initiative to provide more transparency on the activity of state enterprises by implementing the above-mentioned objectives and its desire to appoint professional administrators in key leadership positions is commendable. However, it remains to be seen to what extent the new regulations will lead to a genuine improvement in corporate governance at the level of public enterprises or will only set the premise for a more sophisticated legal framework.

To ensure the success of such an endeavor, there should first be a strong coordinating structure at the national level (AMEPIP), with a clear vision of development and consolidation in this sector, as well as highly qualified personnel and appropriate implementation systems. Secondly, there should be a genuine management commitment at the level of public enterprises to face this paradigm shift and also to produce performance.

Of course, clear objectives also need to be established for the functioning of the Romanian State at all its activity levels, implying a paradigm shift from a system of expressing high hopes and expectations to a system of planning, coordinating, and implementing realistic and achievable measures, even if bold in places. Throughout history, we have had remarkable achievements, sometimes even exceptional, but there have also been resounding failures. It remains to be seen how we will play our cards in this case or if we will just pretend.

 

With Roxana Tudor, Partner, and Cătălina Damaschin, Senior Associate - Tudor, Andrei & Associates, Law Firm associated with BDO Romania

The implementation of Romania's National Recovery and Resilience Plan (PNRR) represents a pivotal moment, significantly leading towards Romania's modernization. This process creates a suitable balance between the European Union's priorities and Romania's specific developmental needs.

One of the measures provided in the PNRR aims to improve the procedural framework for implementing corporate governance principles within state-owned enterprises. Several milestones have been established, including:

• Enactment of updated legislation regarding state companies;
• Operationalization of the task force within the Government Center for coordinating and monitoring corporate governance policies.

Upon publishing the monitoring dashboard with financial and non-financial objectives and performance indicators for all categories of public companies (including key sectors like transportation, energy, and public utilities) and parallelly with efforts made towards achieving the targets set by the PNRR, Romania committed to joining the Organization for Economic Cooperation and Development (OECD) and adhering to its corporate governance principles in both letter and spirit.

Romania submitted its candidacy in January 2022 and is currently in the technical phase of the accession process. Within this accession process, the OECD has drafted an Evaluation Report on corporate governance at the level of state-owned enterprises in Romania.

The actions recommended by the OECD in the report include:

• Strengthening the state ownership (Further centralization of the state ownership; defining clear financial and non-financial performance objectives for individual state  enterprises);
• Maintaining fair competition conditions with other companies (Standardizing the legal and corporate form of state enterprises; eliminating legal exemptions applicable to state enterprises);
• Strengthening the autonomy and independence of the board of directors (Ensuring the establishment of professional and independent boards of directors; empowering the boards of directors/supervisory boards to set strategies and oversee management);
• Improving transparency and disclosure practices (Enhancing financial and non-financial disclosure by state enterprises; expanding the scope of aggregated annual reporting);
• Strengthening internal control systems (Improving monitoring and implementation of risk management and integrity measures).

Thus, the most significant issue regarding the operation of public enterprises, regardless of their capital structure, is ensuring good governance. Additionally, strengthening the Romanian state's capacity to provide an appropriate framework for public enterprise governance is essential.

The legal framework for corporate governance is established at the national level by Emergency Ordinance 109/2011 regarding corporate governance of public enterprises.

As previously mentioned, the 2022 OECD Evaluation of corporate governance of state enterprises in Romania found that, compared to the existing national framework, the corporate governance principles defined at the OECD level were not fully transposed and/or by the defined framework.

Following the commitments made through the National Recovery and Resilience Plan and the recommendations made by the OECD in the Evaluation Report on corporate governance at the level of public enterprises, the legislator proposed revising the regulations to improve corporate governance of public enterprises.

Thus, Law 187/2023, which came into effect in June, brings significant changes to the legal framework established by Emergency Ordinance 109/2011 regarding the corporate governance of public enterprises, subsequently amended and approved by Law no. 111/2016 and complemented by Government Decision no. 722/2016.

Implementing the new legal provisions aims to enhance the procedural framework for implementing corporate governance principles of public enterprises, ensuring closer alignment with OECD principles and more precise compliance with them.

Among the most significant changes and additions are those related to:

• Introduction and definition of terms. The updated form of Emergency Ordinance no. 109/2011 defines a series of new terms, as well as the establishment of the Agency for Monitoring and Evaluating the Performance of Public Enterprises (AMEPIP).
• Developing an ownership policy defining the rationale for state or administrative-territorial units holding public enterprises at both central and local levels.
• Establishing long-term governance objectives and the method of notifying AMEPIP regarding the need to initiate the selection and appointment procedure for administrators and directors.
• Conditions related to studies and experience for individuals who will hold the position of administrator or director in public enterprises.
• Conditions related to the composition of the Board of Directors - it cannot exclusively consist of individuals of the same gender, thus complying with the principles provided by Law 202/2002.
• The duration of provisional mandates can be a maximum of 5 months, with the possibility of extension by a maximum of 2 months. It's also new that an individual can concurrently hold a maximum of 2 mandates as a member of the Board of Directors and/or member of the Supervisory Board in public enterprises.
• Mandatory establishment within the Board of Directors of the Nomination and Remuneration Committee, the Risk Management Committee, and the Audit Committee. The articles of association can also provide for the possibility of establishing other advisory committees.
• Compliance with transparency requirements, including the appointment of a compliance officer. The public enterprise, under the care of the Chairman of the Board of Directors, must publish on its website, for shareholders and the public, a series of documents and information relevant to investors.

The legislator's initiative to provide more transparency on the activity of state enterprises by implementing the above-mentioned objectives and its desire to appoint professional administrators in key leadership positions is commendable. However, it remains to be seen to what extent the new regulations will lead to a genuine improvement in corporate governance at the level of public enterprises or will only set the premise for a more sophisticated legal framework.

To ensure the success of such an endeavor, there should first be a strong coordinating structure at the national level (AMEPIP), with a clear vision of development and consolidation in this sector, as well as highly qualified personnel and appropriate implementation systems. Secondly, there should be a genuine management commitment at the level of public enterprises to face this paradigm shift and also to produce performance.

Of course, clear objectives also need to be established for the functioning of the Romanian State at all its activity levels, implying a paradigm shift from a system of expressing high hopes and expectations to a system of planning, coordinating, and implementing realistic and achievable measures, even if bold in places. Throughout history, we have had remarkable achievements, sometimes even exceptional, but there have also been resounding failures. It remains to be seen how we will play our cards in this case or if we will just pretend.

 

Roxana Tudor Partner

Cătălina Damaschin Senior Associate