The corporate governance framework
Principle I.A calls for the corporate governance framework to “be developed with a view to its impact on overall economic performance, market integrity and the incentives it creates for market participants and the promotion of transparent and efficient markets.” In Estonia, corporate governance issues are dealt with through a mix of legal and institutional mechanisms to promote good corporate governance. The Commercial Code (Ariseadustik), created in 1995, lays out certain conditions and rights for shareholders, the supervisory and management boards. In Corporate Law, the governance structure and certain responsibilities are identified (for example the supervisory board is required to plan the activities of the public limited company). According to the Estonian self-assessment “quite a lot of space is left” for certain functions to be written into statutes or regulated with other legal documents.
The Commercial Code (CC), which entered into force in 1995, has been amended on numerous occasions since its adoption (most recently in 2008 and 2009) and represents the primary piece of legislation for corporate governance in Estonia. As mentioned earlier, the CC mandates a two-tier board system for a public company, in which the shareholders' meeting elects the supervisory board and the supervisory board elects the members of the management board. The CC provides for the general corporate governance rules for different forms of companies. Some general rules, which are applicable to all legal persons, are contained in the general part of the Civil Code Act. In addition, certain specific corporate governance rules for financial institutions such as credit institutions, insurance companies, investment funds and investment companies are set forth in specific laws regulating their activities.
Most market observers express a generally positive view of the overall legal framework, which has been supported by frequent amendments driven by EU directives.9 These include reporting requirements and information available to the market that appear to be relatively transparent. This is relevant to Principle I.B, which recommends that the “legal and regulatory requirements that affect corporate governance practices in a jurisdiction should be consistent with the rule of law”. Furthermore, Estonia has been transposing EU directives at a quite rapid pace. Some interlocutors have argued that it has been too rapid, because it is difficult to keep up with the frequent changes. It was suggested to the review team that lower courts were sometimes struggling to keep up to date with the many legislative changes.
In 2004 the European Bank for Reconstruction and Development (EBRD), as part of a Sector Assessment Project, assessed the corporate governance legislation in Estonia. The general conclusion reached was that the legislative framework was in “medium compliance” with the OECD Principles of Corporate Governance. The major shortcoming identified in the assessment was in the areas of redress regarding disclosure of information. The EBRD found that disclosure tended to be good at a general level, but that procedures in place for obtaining additional disclosure from companies were usually lengthy and complex, and the enforceability of disclosure was weak. Since that time, Estonia has achieved some improvements in this regard, including legislative amendments that authorise the Securities Market regulator to issue higher fines for faulty or late disclosures, and a move towards use of publicly accessible electronic databases.
Reflecting a broader e-government strategy to make use of the Internet for a range of government services, the Estonian Commercial Register and the Central Register of Securities are both online, allowing anyone to access information on companies, such as annual accounts, articles of association, and ownership of shares. By 2010, all tax declarations will be filed online, and all company reports, already on-line in image form, will become fully digitised to facilitate word-by-word electronic searches for information.
The Securities Market Act regulates the public offer of securities and their admittance to trading on regulated securities markets, the activities of investment firms, the provision of investment services, the operations of regulated securities markets and securities settlement systems as well as the exercising of supervision over the securities market and its participants.
In addition, a number of supplementary legislative changes were discussed in Parliament at the time of the first version of this document, and have been enacted since. These include:
- • The Commercial Code has been amended, facilitating remote representation (electronic voting) and setting out a clearer elaboration of shareholder rights regarding information and notification for annual general meetings.
- • The Auditing Act was enacted on the 27 January 2010, and took effect on 8th of March 2010). It has introduced mandatory audit committees for companies over a certain size,10 and companies considered of “public interest”.11 It also sets a mandatory requirement for the rotation of auditors after 7 years. Currently the FSA recommends a rotation at least every five years, but this is voluntary.
- • On the SOE side, the State Assets Act was enacted at the end of 2009 and entered into force on the 1st of January 2010, replacing the Participation in Legal Persons in Private Law by the State Act. More details about these modifications are given in Section 1.3 on “The legal and regulatory framework for SOEs” below.