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Estonia features a two-tier board structure, composed of a supervisory board and a management board. The functions of the supervisory board are described in the Commercial Code. They include planning activities, organising management of the company and supervising activities of the management board. The management board is set as the executive body of the company which represents and directs the company. It must follow the instructions of the supervisory board and must have its approval for all transactions beyond the scope of everyday economic activities.

Estonian SOE supervisory boards may range from a minimum of 3 to a maximum of 10 members under the Commercial Code. As in listed companies, the Supervisory board is tasked with the selection and removal of the management board members. In practice, certain companies interviewed explained that the CEO is selected by the supervisory board, and this person has some flexibility with regards to the selection of the remaining members of the management board. The selected members of the management board need to be approved by the supervisory board. The management board generally has from 1 to 5 members. Supervisory board members are not allowed to be members of the management board and vice versa.

The law does not require the nomination of independent board members, but Estonia’s voluntary Corporate Governance Recommendations (hereafter referred to as the CG code) suggests that “at least half” of the members of the supervisory board should be independent. The CG code mainly defines independence in relation to the controller, because under Estonia’s dual board system, no executives can sit on the supervisory board. An annex to the code sets out a list of negative criteria, defining who should not be considered independent, most of which relate to independence from the controlling shareholder. Until 2007 the Tallinn Stock Exchange listing requirements stipulated that issuers needed to have at least two independent members on supervisory boards.8 This clause was repealed following implementation of the “comply or explain” reporting requirements for the CG code. The FSA’s 2007 analysis of reports from listed companies’ corporate governance shows that “11 issuers disclosed that fewer than half of their supervisory board members were independent”. The FSA concludes this section by stating that “legislative regulation of this recommendation ought to be considered”, as this recommendation “is essential ... to good corporate governance”.

State-owned enterprise (SOE) board members are appointed through a non- centralised process with supervisory board nominations typically split between a ministry designated as having ownership rights and the Ministry of Finance (MoF). The ownership ministry nominates all supervisory board members, half of which are recommended by the MoF (i.e. formally the lead ownership ministry must confirm those MoF-recommended nominations). For boards with an even number of members, the Chair who typically “represents” the ownership Ministry has the tie-breaking vote. In the case of boards with an odd number of members, the State Assets Act grants the ownership Ministry the extra board member.

The law calls for five-year terms for members of the supervisory board for public limited companies as well as SOEs, and three years for management board members, although the articles of association can prescribe a shorter term. Regarding removal, the Commercial Code states that “upon a resolution of the general meeting, a supervisory board [member] may be removed regardless of the reason. A resolution on removal of a member of the supervisory board before expiry of his or her term of authority shall be adopted if at least two-thirds of the votes represented at the general meeting are in favour.”

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