Sergio Beristain looks at the development of Belgium's corporate governance initiative

In December 2004 Belgian banker Maurice Lippens presented the final version of the Belgian code on corporate governance to the country's prime minister Guy Verhofstadt, calling upon the authorities to designate the code as the Belgian code of reference for corporate governance, as requested by the European Commission. The code, which has been produced by a committee that includes stock traders, business representatives, academics, publishers, and retailers, came into force on 1 January, and Belgian businesses must demonstrate compliance by January 2006.

One size fits all

The Belgian code on corporate governance will be supervised by company directors, shareholders and regulators. A key principle is transparency, with companies required to disclose their corporate governance charter both on their website and in their annual report. "We are assuming that listed companies will implement most of the code's provisions. Companies that see fit to deviate from a particular provision must explain this in their annual report. This may be the case for recently listed small caps or for young growing companies," said Lippens.

One of the biggest challenges for the corporate governance committee that set up the code was to create a standard that would be flexible enough to adapt to the small scale structure of an SME as well as to the complex holdings of multinationals. Multinationals may well see few problems with compliance, and many appreciate that they cannot afford to lose more trust from shareholders, who have become sceptical after several mismanagement scandals in Europe. However, SMEs that already have good direct contact with investors could easily see new corporate governance requirements as imposing huge costs that are difficult to justify on a small-scale budget. Implementing a standard is an investment that can easily become a costly overhead when running a small company. Therefore, it was important to make the code flexible.

"The code has a degree of built-in flexibility, enabling it to be adapted to each company's size, activities and culture," explained Lippens. It incorporates a top down approach, so that the essence of the code is kept regardless of the specific guidelines adopted by companies.

A layered approach

The code has three layers: principles, provisions and guidelines. The principles are broad enough to enable all companies to adhere to them, the provisions describe how to apply those principles and the guidelines detail interpretation of the provisions.

The nine principles are the core sections of the code. They involve:

- adoption of a clear governance structure
- effective and efficient decision taking at board level
- integrity and commitment of directors
- rigorous and transparent procedures when appointing and evaluating board members
- creation of specialised committees
- definition of a clear structure
- fair and responsible director remuneration
- rights to shareholders
- adequate disclosure of the company's corporate governance.

All listed companies in Belgium will have to respect these nine principles.

"With this unanimously approved code, the corporate governance committee aims both to adopt a clear, firm view regarding the essentials of good governance and to put them plainly to listed companies," said Lippens.

If companies do not comply with the core requirements (principles), they will have to explain their reasons when detailing their implementation plan. "The code is based on a 'comply and explain' system, which allows companies to deviate from the provisions of the code when their specificities justify it, but makes them subject to providing adequate explanation," Lippens explained.

In Belgium, one or more shareholders often control listed companies.

Therefore in the code the committee has opted for the involvement of different players to provide a combined monitoring system. These players include the board of trustees, shareholders and the Banking, Finance and Insurance Commission (CBFA).

The code allows shareholders to make comments on any deviations that the company makes from the general standard. If they do not accept the company's position, they will have to compromise on the application of the code. 'They (shareholders) should be prepared to enter into a dialogue if they do not accept the company's position, bearing in mind in particular the size and complexity of the company and the nature of the risks and challenges it faces,' states the code.

Listed companies will still have to explain themselves if they do not comply with the code. Although the CBFA role is limited to verifying the company's explanations for non-compliance, its role as supervisor will allow it to impose sanctions if a company breaks any law or regulation - which may be very much linked to the code itself.

"First, the board of directors must ensure that the corporate governance charter and the corporate governance chapter in the annual report are accurate and complete. Then it is up to shareholders to carefully evaluate the company's corporate governance policy. If the company deviates from the provisions set out in the code, it is their duty to find out why and assess those reasons, taking account of the company's specific characteristics.

Finally, the CBFA will verify the observance of the 'comply or explain' principle," said Lippens.

Reaching consensus

The consultation document issued last year led to nearly 80 comments from a wide range of sources, including listed companies, institutional investors and lawyers, as well as organisations representing companies, directors and professionals. One of the main confusions among stakeholders was precisely the 'comply or explain' approach of the code. Many of the comments received mentioned the fact that there were no clear instructions for directors to explain their non-compliance.

Law firm Allen & Overy, which organised two workshops with about 40 directors at the time that the draft code was published, agreed that this was unclear for many company directors. It issued a memorandum stating: 'Many directors feel that the code should put even more emphasis on the ability to 'explain' and should provide more guidance in which non-compliance could be justified'.

Listed companies also agreed that there was no clear difference between a principle and a rule. Pan-European stock exchange Euronext took this further and explained that the success of the code lies in the clear distinction of a principle and a best practice provision, and that this should be clearly stated in the text. Importantly, the code needed to spell out the legal consequences of non-compliance.

These comments prompted changes in the preamble to the original code, describing the differences between the three basic layers.

Another comment repeatedly mentioned during the consultation period was the role of independent auditors in the audit committee. According to Allan & Overy, the obligation to have an independent audit committee is difficult to implement in small companies, for example in the case of shareholders who are members of a family-owned business and want to join the company's audit committee as well.

The Belgian Administrator Foundation agreed with this view and argued that the majority of national corporate governance codes foresee a majority rather than an entirety of independent administrators to audit a company.

In Anglo-Saxon countries the situation is different to that in Belgium, since the independence is defined in the report to management instead of being defined in the report to shareholders.

Not surprisingly, the most debated topic in Allen & Overy's workshops was the disclosure of remuneration. Although the law firm agreed that disclosure was appropriate, the Commission of Listed Companies complained that the publication of a CEO's salary would trigger 'voyeurism' and that multinational companies would be tempted to offer their executives a higher salary as a result.

The real compromise, however, was over the date for implementation of the code. It was clear that forcing companies to integrate the new code in their annual report for 2004 was unrealistic. Therefore the committee finally agreed to set the deadline for compliance as January 2006, just after companies had published their own corporate governance charters in their 2005 annual reports.

EU and corporate governance

When adapting the code of corporate governance after the first consultation with stakeholders, the committee had to take account of the requirements of the European Commission. Although the Belgians based their code on the Commission's corporate governance guidelines, released in 2000, the EC has since been working on related policies. Its corporate governance action plan has led to the release of several company law directives.

For example, the Transparency Directive requires listed companies to release relevant information on their websites and national filing systems.

Although this is a part of a set of rules to harmonise the amount of information companies need to provide to their shareholders, the Belgian committee had to address this issue. Furthermore, the Commission recently launched a new initiative on corporate governance. "We have just launched a public consultation on corporate governance; we are in the process of looking into the different areas of corporate governance which are critical to European businesses," said Commission spokesman, Oliver Drewes.

The OECD also released its own new principles of corporate governance some months before the Belgian code was issued, and these too had to be integrated in the Belgian code.

According to the records of the European Corporate Governance Institute, Singapore and Belgium are the latest countries to release corporate governance codes. In 2004, Europe alone saw the development of new codes in the Czech Republic, Iceland, Italy, Sweden, UK and the Netherlands.

- Sergio Beristain is a freelance journalist.


The Belgian corporate governance committee was set up in December 2003 by the Banking and Finance and Insurance Commission (CBFA), the Federation of Enterprises in Belgium (FEB) and the Benelux stock exchange Euronext.

It was headed by Maurice Lippens, chairman of the board of Benelux bank Fortis. Other committee members included:

- Oliver Lefebvre, executive vice president, Euronext
- Luc Vansteenkiste, chairman, FEB
- Eddy Wymeersch, chairman, CBFA
- Marco Becht, executive director, European Corporate Governance Institute
- Pierre-Olivier Beckers, managing director and chairman of the executive committee of retail chain Delhaize
- Didier Bellens, president and CEO of telecom company Belgacom.