Interactive workshop one: selected corporate governance topics (part I), 13 May 2024

Daniel Liemberger

Kunz Wallentin Rechtsanwalte, Vienna

Daniel.Liemberger@kunz.at

After a brief introduction of the six main topics and the corresponding moderators by the chairpersons, the auditorium was divided into a total of 12 tables, two tables with one moderator per topic. The moderators had each prepared their topic in advance with a list of questions so that the results of the two tables per topic were comparable. The results were then compared and summarised by the moderators after a discussion lasting around 30 minutes. The results thus obtained were then presented by the moderator teams for each topic. The results can be briefly summarised as follows:

Table topics and outcomes:

Family matters: opening to new members and investors 

Moderators: Philip Van Hilten and Orsolya Gorgenyi

• Corporate governance re: family holding/foundation/trust?

80 per cent of participants said no special family governance applies. But, if family governance is in place, that will be the corporate governance if family has majority. Furthermore, there are no special practice groups in law firms dedicated to this topic. Private Wealth/Client PGs deal with other aspects.

• New investors/members learning of family governance system

Taking investors is big leap for family businesses. Only second- or third-generations or investors induces family to implement family governance. In addition, it can be tricky to find out who is the real family head (paper v reality).

• Information rights of family members? Overrule/Ignore corporate decisions?

Importance of due diligence on egos and personalities to avoid lengthy disputes.

• Management’s involvement in (funding of) estate planning/taxes/duties?

In all countries there are heavy overlaps despite legal requirements to separate management’s involvement.

• Restrictions on family members? Business free to ignore?

Qualifications/approval processes is needed – can ignore from corporate law perspective, but will risk getting fired

• Use of (family) name?

To put it in a nutshell: according to all participants this is a tricky issue.

• Number of family appointed board members?

Difficulty of ensuring alignment of more family appointees in lack of family governance.

Further outcomes of the discussion:

• Take precautions to avoid families from becoming lazy and spoilt. Train them and keep them aware of what the business is really about.
• Make sure there is an ongoing family governance creating and updating process encompassing all elements of relevance to the family inclusive their background, culture and philanthropy.
• The governance should also provide for measures to be taken if a key member of the family is ‘out of action’ (eg, dead, ill or kidnapped): who takes over control!
• The family governance should provide for a ‘license to kill’ in case of a non-family member becoming CEO of family business and a system to enable the ‘return to power’ of a new family member.
• Timely planning for succession of the head of the family: criteria, training, selection process, involvement of trusted outside ‘arbitrators’. Also, plan the funding of the transfer to the next generation.
• Training the next generation is key: training and involvement.

Technology governance: addressing AI and automation in corporate decision-making; cybersecurity threats and the role of the board/management in AI oversight

Moderators: Allan Grauberd and Patricia Gannon

• Common understanding that artificial intelligence (AI) applications are quite early and governance principles that preexist AI are to be applied in assessing board duties in determining:

1. in what functions would AI be applied;
2. proper delegation to experts in making AI risk assessment; and
3. proper reporting structure to ensure the board has reasonable access to manifestation of AI related risks and ability to implement corrective measures.

• EU Act focuses on characterising different AI applications based on degree of risk with increasing oversight duties and restrictions on use in proportion to risk. Examples of high risk are toys and medical applications. Hiring on the basis of AI is restricted.
• Cybersecurity is better understood, and risk guidelines and procedures are more established.
• It has become increasingly incumbent to obtain cyber related insurance to protect against risk. There are regulatory provisions in place and being developed to systematize reporting of cyber breaches.
• Noted that certain regulatory procedures or standards regarding cloud regulation, cyber and data protection are practical prerequisites for the implementation of AI.
• Discussion on the legal profession and our required compliance. No firms had integrated AI beyond ChatGPT but were exploring options.
• Awareness building is key at the moment and all participants expect to be guided by bar associations regarding ethical and professional compliance in time.

ESG: board and management, climate change, diversity and inclusion, and human capital

Moderators: Daniele Giombini and Dinka Kovačević

• Environmental, social and governace (ESG) skills should be implemented more within the management boards; few companies have ESG skilled directors. Therefore, companies should hire outside experts for certain ESG matters.
• Diversity in management boards (gender, age, race, cultural background, etc) allows wider perspective. However, the topic of diversity needs to be more widely accepted and practiced at management and owner level.
• To increase diversity in the management board you need prior cultural shift
• Management board decisions should take into account that ESG should come from inner needs and purpose of the company’s business and not separate as purpose for itself; ESG and corporate purpose are intertwined.
• Only few ESG clauses have been developed in venture capital filed and investment agreements.
• ESG compliance mostly would affect investment attractiveness within following industries: fashion, automotive (where value of assets is in the brand), textile, etc.

Executive compensation: aligning incentives with long-term shareholder value

Moderators: Harvey Cohen and Alexandra M Martins

• Major stockholders control the board which controls the long- or short-term interest.
  1. Separate remuneration boards – very much linked to the major shareholders boards
  2. A sub-topic in this respect is the question: ‘How to make these board work and what is the benchmark?’
• Whether there are a lot of phantom structures in place or not the tables disagreed.  However, both agreed that is less advantageous from a tax perspective. [the French way: no phantom stocks – ‘but free shares’ – and no taxation right away (contractually flexible).
• Vesting:
  1. Reverse vesting is trend now.
  2. Stock option agreement with extended tenure is another possibility.
• When aligning incentives the correlation with employee salary is important as well. But difficult to pin down how? Best mix – stock or cash – depends on strategy (case-by-case basis). US practice: pool of options to give to employees – CEO discretion
• Metrics needed? Metrics chosen can affect time horizon. Inclusion or diversity goals – should they be metrics? (open discussion)
• What is the best mix? no consensus could be reached among the participants. But stock options still remain the best choice, especially for start-ups.

Shareholder activism and role of stakeholders in close companies: trends and tactics in corporate governance

Moderators: Tom Coulter and Marie-Aude Noury

• Levels of activism have continued to rise despite economic and political uncertainty. Certain jurisdictions shareholder activism is still less prevalent, but more family disputes arose (particularly closed companies).
• Activists are expanding their toolkit to draw attention to ESG-related issues. A significant number of campaigns during 2023 saw some sort of mergers and acquisitions (M&A) demand.
• Activists are using multi-pronged approaches to overwhelm targets, including targeting subsidiaries, negative public campaigns and focusing on governance.
• Key tactics include shareholder engagement, shareholder proposals and voting campaigns/contents.
• To be considered whether there should be increased regulation of the excesses of activism to ensure a level playing field in terms of communication and transparency for companies and activists.

Politics and business: how are boards affected by political uncertainty and unstable global environment?

Moderators: Daniel Rodriguez and Rosina Muller Bernar

• Balancing the risk v business opportunity is key (due diligence procedures from every point of view possible).
• Corruption in some countries complicates the taking of some opportunities and controlling it at a local level important and can have negative consequences.
• Change of laws and impact in long term business plans (nearshoring tariffs).