Corporate Governance

Corporate Governance
• The OECD principles of corporate governance
(2004) defines “corporate governance as a set of
relationships between a company’s management,
its board, its shareholders and other stakeholders.
• Corporate governance also provides the structure
through which the objectives of the company are
set, and the means of attaining those objectives
and monitoring performance are determined.
 Corporate Governance
• The definitions of corporate governance are either
broad or narrow.
• A definition is narrow if its focus is on the
relationship between a company and its
shareholders or it is broad if it includes
employees, customers, suppliers and other
stakeholders in addition to the relationship
between a company and its shareholders.
 Corporate Governance
• Good corporate governance is essential to share
companies these days, particularly,
– due to separation of ownership and control,
– control of block shareholders as opposed to minority
shareholders and decision making processes,
– and relationships among participants such as
institutional investors, creditors, employees and other
stakeholders in the governance system.
 Corporate Governance
• Corporate governance is one of the most
commonly used phrases in recent businesses and
commercial life.
• The massive corporate scandals and failures that
rocked the business world, namely Enron, World
Com, etc in the dawn of 21st century were mainly
caused by weak corporate governance.
 Corporate Governance
• Management works with tools required to operate
the business affairs of companies, so that it
involves functions of executive management like
making decision, control and other operational
management activities.
 The Structure of Company Governance under the
Ethiopian Share Company Law
• In Ethiopia, the Commercial Code does not define the term
corporate governance.
• It instead employs the term ‘management of the company’.
(Chapter 4) art. 296
• However, corporate governance is different from corporate
management and has its own functions.
– Whereas corporate governance is concerned with setting appropriate
policies, initiatives, strategies, plans, practices and directing companies
to meet their visions, missions, and objectives and develop their
infrastructures.
– Corporate management focuses on the day to day operation of companies
and is concerned with performing appropriate activities within
companies; rather than setting right policies, guidelines and directions.
• Governance of the company is mainly carried on by the
shareholders’ meeting, BOD, SB , general manager, Auditors
 The Structure of Company Governance under the Ethiopian Share Company
Law

Shareholders Meeting

Board of Directors (Art. Supervisory Board

(Art. 331) Auditors (Art. 343)
296)

Gen. Manager (Art. 337)

Secretary (Art. 340)

 The Structure of Company Governance under the
Ethiopian Share Company Law
Shareholders Meeting
• The shareholders’ meeting is the highest decision-making
body and acts on behalf of all shareholders (Art. 362).
• Decisions of a general meeting bind all shareholders
whether absent, dissenting, incapable or having no right
to vote. [Art. 391]
• Resolutions can be set aside (Art. 391.2).
• The provisions of the Commercial Code starting from
articles 365 ff deal with the rights of the shareholders, the
types of shareholders meetings, the manner of passing
decisions and other important company governance
matters.
 Classes of Meetings Art. 365

Shareholders
Meeting

General meeting Special Meeting

Ordinary Extra-ordinary
 Classes of Meetings

GENERAL MEETING
Calling Meetings (Art. 366)
 Under normal circumstances. general meetings are called by
the directors,
supervisory board, if any,
the Auditors, the liquidators or,
where appropriate, by the court.
 Further, general meeting may be called
 By the Ministry of Trade and Industry or any other relevant
government authority may call a general meeting where there is
a compelling reason. [366.2]
 Upon a request of shareholders representing 5% of the share
capital, by representative appointed by a court. [366.3]
 Mode of calling Art. 367

 Mode of calling Art. 367

 Should be reliable and effective (art. 367)
As prescribed in the MOA
In the absence of such prescription shall be published in a
newspaper having nation-wide circulation.
If all shareholders are registered in the register of
shareholders:
at the company`s expense through a registered letter or
an e-mail address given by the shareholder for this
purpose,
or any other reliable electronic message sent to each
shareholder.
For bearer share holders, via e-mail or letter at their own
expense. [Art. 367.3]
 Mode of calling Art. 367

 Informal Meeting (Art. 390 )

 Shareholders or proxies representing all the shares may by agreement hold
a meeting without observing formality for mode of calling of shareholders’
meeting.
 Where shareholders or proxies representing all the shares are present, the
meeting may take any decision and adopt any resolution on any matter that
falls within the scope of powers of a general meeting under this Code.
 Classes of Meetings

Time of Notice of Meetings (Art. 370)

 Notices for first general or special meeting shall be given twenty
four days before the date of such a meeting.
 ORDINARY GENERAL MEETING

Shall be held within four to six months from the

end of each financial year. (Art. 392.1)
Where necessary, additional ordinary general
meetings may be held. (Art. 392.3)
Any shareholder or his representative has the right
to take part in ordinary meetings without regard to
the number of shares held. (Art. 397)
Powers of Ordinary General Meetings
Art. 394
Art. 395
Business conducted at the meeting 419
 ORDINARY GENERAL MEETING

Quorum and majority (Art. 398)

At firs call, composed of number of shareholder
(or proxy) holding voting shares representing at
least one-quarter of the capital;
When called for a second time, the meeting may
be held and decisions made without regard to
the number of voting shares represented;
Decisions are taken by a simple majority of the
capital represented at the meeting by shares
carrying voting right.
 EXTRAORDINARY MEETINGS Art. 399 ff

Power of an Extraordinary General Meeting (Art. 400)

 Notwithstanding any agreement to the contrary, any shareholder has the right to
take part in extraordinary general meetings (Art. 401)
Majority and quorum [more strict]
 Resolutions to be adopted in an extraordinary general meeting require 2/3
majority of capital represented by voting shares form those present at meeting;
Quorum
 at first meeting, where shares carrying voting right representing 1/3 are
present or
represented;
 at second meeting, where shares carrying voting right representing 1/3 are
present or
represented.
 at a third meeting, without regard to the amount of capital represented so far
as shareholders or their proxies are present.
 EXTRAORDINARY MEETINGS Art. 399 ff

Power of an Extraordinary General Meeting (Art. 400)

BUT,(402.4)
 Resolution to change the nationality of the company shall
only be adopted by the unanimous vote of the holders
of all shares carrying voting rights.
 the consent of all shareholders (whether or not carrying
voting rights shall be required to increase the capital of
the company by increasing the par value of the existing
shares.
 SPECIAL MEETINGS 404 ff
 Cases where special meetings are to be called. [426]
 Only attended by shareholders of concerned class.
 A resolution of a general meeting to modify the rights of a class of
shareholders becomes effective only when approved by a special
meeting of the shareholders in the class concerned (Art. 404.1)
Quorum and Majority (Art. 406)
 at first meeting, ½ of shares carrying voting right represented by
the class concerned;
 at second meeting, 1/3 of shares carrying voting right represented
by the class concerned;
 at first meeting, 1/4 of shares carrying voting right represented by
the class concerned;
Majority (Art. 406.2)
 Provisions of extraordinary meeting shall apply to special
meetings.
Board of Directors
 Board Structure
• Board structure is important component of CG as it affects
the nature and extent of directors’ powers, influence and
responsibilities.
• The structure of the board may also affect the ability of
boards to monitor executive managers of the company.
• Nowadays, the dominant board structures are unitary (one-
tier) board and dual (two-tier) board structures.
• The practices of countries also vary with respect to a
particular board structure they follow.
• Some countries provide mandatory one tier board structure;
others require two tier board structure and others voluntary
two-tier system. .
 Board Structure

One-tier Dual Optional

(Unitary) (two-tier) two-tier
 Board Structure
Unitary (one-tier) boards
• The United Kingdom, USA and in Asia, Singapore, are amongst the
prominent countries which employ variants of the unitary (one-tier)
board system.
• Unitary boards combine executive and NEDs in one single
board.
• In other words, both executive management and supervisory
responsibilities are entrusted to one unified board.
• Nevertheless, though it is unitary, the board is divided within and
the roles of all directors in the board are not one and the same.
• But, the attributes of one-tier boards are negatively associated
with the separation of decision management from decision
control due to the convergence of both executive and non-
executive roles in a single board.
 Board Structure
Dual (two-tier) boards
• In dual (two tier) board structure the executives and non-executives
functions of the board are structurally separated in two separate
organizational layers, i.e. supervisory board and management
board.
• Unlike one-tier board, there is a clear distinction between
management and control functions of the board.
• Moreover, as the supervisory board has been deliberately designed to
serve as layer to separate the executive function of the boards from
its monitoring function, executive managing directors are not
entitled to have a position in the supervisory board of the
corporation
• Germany, Poland, Austria and Latvia are amongst the European states
that adopt mandatory two-tier board structure.
• The new Code adopted optional two tier board structure. Art. 331
 Directors
• Are persons by whom the business of co. is carried on.
• Individuals or legal entities can become directors.
• If a legal entity is appointed as a director, it must appoint
representative. (Art. 296.4) The representative shall have joint
liability of the legal entity that he represents. (Art. 296.5)
• The board of director is governed by the provisions of the
commercial code which runs from articles 296 ff.
• Unlike the previous Code, persons who are not shareholders may
be elected as members of the board of directors. (Art. 296.2) They
may not exceed 1/3 of total members.
• Not less than 3 or more than 13 (Art. 296.1) The number shall be
prescribed in the MOA or subscribers meeting. (Art. 296.3)
Requirements to Qualify as a Director Art. 297.
a) Minimum age as specified under MOA
b) Good moral character; (who determines? What
are the metrics?)
c) No record of conviction of breach of trust, theft,
robbery or other similar criminal offenses
holding any managerial position or under any
other circumstance;
d) other requirements set by the memorandum of
association or another law
 Appointment of Directors [Art. 298]
 The first directors may be appointed under the
MOA.
 The appointment shall be submitted to a meeting of
subscribers for approval.
 Where such approval is not given, the meeting shall appoint
other directors.
 Subsequent directors shall be appointed by a general meeting.
 Directors shall be appointed for a term of three years. They are
eligible for re-election unless a contrary stipulation is provided in
the MOA.
 Where more than one director is to be elected, votes shall be cast
for each director separately. (No collective vote)
 BOD
Representation in the board Art. 299
 Where a company has issued different classes of shares, each
class of shares shall appoint at least one representative as a
member of the board of directors.
Chairperson
 The chairperson of the board of directors may be elected by a
meeting of subscribers or shareholders. (Art. 300) The board
shall elect a chairperson where it has not been elected by the
meeting. (2)
 Only a director who is a shareholder and does not take part in the
day-to-day management may become the chairperson of the
board of directors.
 The board may revoke at any time the appointment of
a chairperson or deputy chairperson elected by the board. (but not
the one appointed by the meeting) (3)
 BOD
 Replacing Directors (Art. 303)
 Remuneration of Directors (Art. 304 )
 Directors shall receive an annual remuneration the
amount of which shall be fixed by a general meeting
 An ordinary general meeting of the company may also
decide to give to the directors a specified share in the net profits may not
exceed ten percent of the amount that may be distributed as dividend
(Art. 304 2 & 3).
 Share in the net profits may be paid only where dividend has been distributed to the
shareholders in that year (4)
 Remuneration fixed for the directors shall be made in a lump sum; The
board shall distribute the sum to the directors as it deems it fit. (5)
 On the request of shareholders representing at least 10% of the
capital, the Ministry of Commerce and Industry may order the
reduction of share in the net profits (6)
 Removal of Directors Art. 305
 Directors may be removed at any time by a general meeting
 A director who was removed without good cause is not entitled to
be reinstated but damages for the wrongful dismissal. [Art.
305.2]
 Decisions of the Board of Directors Art. 308.
 No decision may be taken by the board of directors
unless a majority of directors is present personally, by
proxy and by electronic means, unless a greater vote is
required by the MOA.
 the chairperson of the board of directors shall have
casting vote in case of a tie unless contrary is provided
in the MOA [1]
 Decisions of the board shall be drawn up as minutes and
shall be signed by directors who were present [2]
Conduct of Board Meeting by Electronic Means Art. 309

 Possible if not prohibited under MOA

 May be video conference or other means of telecommunications;
 The technology shall;
 Enable establishing the identity of the participants;
 Ensure their effective participation;
 Meet technical requirements allowing continuous and
simultaneous transmissions of the proceedings.
 Unless otherwise provided in the MOA, the board may not pass a
valid decision at such meeting unless at least one third of its
entire membership is physically present [3]
 The MOA may restrict the nature of decisions that may be taken
at such meeting [4]
 Powers and Responsibilities of the Board

Emanate from (315, 324)

law,
MOA, and
Resolutions of general meetings of
shareholders
Responsibilities see art. 315
 Duties Of Directors
• A director has the following general duties:
– Duty to act within powers
– Duty to exercise independent judgment
– Duty to promote the success of the company
– Duty to act in the interests of employees, third parties,
community, environment  
– Duty to exercise reasonable care, skill and diligence
– Duty to avoid conflicts of interest
– Duty not to accept benefits from third parties
– Duty to declare an interest in a proposed transaction or
arrangement
 Duty of Loyalty Art. 316

 Shall act in good faith to promote the success of the company for
the benefit of shareholders of the company as a whole. [1]
 In the discharge of their duty under Sub-Article (1) of
this Article, a director shall have regard to the:
 long-term interests of the company,
 the interests of the company’s employees,
 the interest of company’s creditors and
 the impact of the company’s operations on the community and the
environment.
 By doing so, in addition to providing such elaboration, the new
also recognized the protection of the interest of stakeholders in
the governance of company, which can be taken as one step
towards stakeholder approach.
 Duty of Care and Diligence Art. 318

 A director of a company shall discharge his responsibility with

 Care,
 Skill and
 Diligence
The director shall be liable for damages caused
to the company and shareholders due to lack of
care or diligence on his particle.
How should we measure? See art. 318.2
 Other duties

Duty to avoid Conflict of Interest

(Article 320)
Duty to Disclose Conflict of Interest
(Article 320)
Restrictions on Private Trade (Article
319)
 Directors’ liability
 Directors may be liable to the co. And to 3rd
party.
A. Liability to the company: (art. 325)
 Directors are agents and trustees of the co. &
Jointly and severally liable to the co. And its
shareholders.  [1]
 Directors shall bear the burden of proof for
showing that they have exercised due care and
diligence. [1]
 Directors’ liability
Prohibition of agreements protecting directors from liability [art. 326]
 Any agreement or provision in the MOA or any other contract:
 Which purports to exempt a director of a company;
 By which a company directly or indirectly undertakes to pay or provide an
indemnity
 To any extent, from any liability that would otherwise attach to him in
connection with any negligence, breach of duty or breach of trust in relation to
the company shall be of no effect.
 It seems that liabilities not connected with negligence, breach of duty or breach
of trust can be exempted by agreement.
 However,
 The company may maintain indemnity insurance for board members from
liability. [326.4]
 A company may provide funds for the legal defense of board members in
an action against them by government administrative bodies, creditors or
shareholders subject to refund in case they lose the case. [326.4]
 Directors’ liability

B. Liability to the creditors:

 Directors have duty to preserve the capital of
the co. intact to protect co. & 3rd party.
Defenses against liability (Article 327)

1) A member of board of director who made a business

judgment in good faith shall not be liable for damages to
the company where:- [327.1]
the subject of the business judgment did not
involve conflict of interest;
he was informed with respect to the subject of the business
judgment to the extent that the
director reasonably believed to be appropriate
under the circumstances; and
he reasonably believed that the decision was in the best
interests of the company.
Defenses against liability (Article 327)

2) where he has dissented from the action which is

taken by the board and has notified the external
Auditor of the decision as soon as possible. [327.2]
3) where the decision was taken on the basis of a:
[327.3]
resolution of the general meeting
provisions of the MOA or
the law.
Conflict of interest & Self Dealing Art. 306 & 395
 Dealings which involve conflict of interest covering 10% or more
of the assets of the company shall be approved by a general
meeting before the making of such deals. [Art. 395]
 Any director, manager or shareholder with a potential
conflict of interest with the company shall give complete and
accurate information about . [Art. 395.2]
 Register of Persons Affiliated with a Company (Article
311)
 Disclosure of Ownership Interest (Article 312)
 Register of Shares and Debentures Held by the Directors
(Article 313)
 Duty of directors to Disclose Conflict of Interest (Article
321)
 Conflict of Interest (Article 320)
Conflict of interest & Self Dealing Art. 306 & 395

The external Auditor of the company shall

compile complete information regarding the
conflict of interest and submit the information
he gathered together with his own
recommendation to the general meeting before
the making of the agreement. [Art. 395.3]
A person who stands to benefit from an
agreement involving a conflict of interest may
not vote at the general meeting considering the
approval of such agreement [Art. 395.4]
 Conflict of interest & Self Dealing Art. 306
 The directors of the company shall compile a report containing
detailed information regarding such transaction at the latest
within 72 hours from the approval by the general meeting to the
Ministry of Trade and Industry or any other appropriate
government organ and post the report on the website of the
company.
 See the content of such report under sub 5 of 395.
 An agreement which is not approved in advance by a general
meeting of shareholders and reported as per Sub-Article (1 to 5)
of 395 may be invalidated upon the application of the:
 Company,
 Shareholders or
 Creditors
 Conflict of interest & Self Dealing
 The court may confirm the agreement if it is manifestly
clear that the upholding of the contract is in the best
interest of the company. [395.6]
 If the agreement is invalidated, the company shall be
entitled to damages for harm caused by the agreement
[395.7]
 The director or shareholder or any other person shall
also pay to the company profits obtained as a result of
the agreement together with legal interest. [395.7]
 Conflict of interest & Self Dealing
 In general, shareholders approval is required if the
transaction involves more than 10 % or more of the
assets of the company.
 Subject to the provisions of Article, dealings made
between a company and persons or organizations
affiliated with the company shall be approved in
advance by the board of directors. [Art. 306.1]
 In such case, directors having conflict of interest shall
not vote regarding the approval of the transaction.
 Dealings made without an advance approval of the
board of directors shall be void.
 Conflict of interest & Self Dealing
 Notice of dealings made with a prior approval of the board of
directors shall be given immediately to the Auditors.
 The Auditors shall submit a special report to the general meeting
as regards dealings approved by the board of directors.
 The general meeting may render a decision that it deems
appropriate on the basis of the report.
 Dealings shall remain in force unless the general meeting has
rejected the same on account of serious damage to the company
or fraud.
 Dealings approved by the general meeting may be opposed by
shareholders only on the ground of serious damage to the
company or fraud.
 Scope of Art. 306
 The party who has committed the fraud and members of the
board of directors who knew or should have known the
commission of the fraud or the fact that the dealings would
cause serious damage to the company shall be jointly and
severally liable for damages incurred by the company as a result
of the dealings. [4]
 The provisions Article 306 shall not apply to routine dealings
between a company and persons affiliated with such company,
conducted in the same manner as normal dealings between the
company and its clients. [5]
 Scope of Art. 306
 Who are persons affiliated with the company?
Members of the board of directors,
Manager,
Auditor,
Members of the supervisory board and
Secretaries of the company
 Persons related by affinity or by consanguinity with
those persons listed above pursuant to the revised
federal family code.
 A business organization or concern in which persons
listed above are shareholders or beneficiaries or play
managerial role;
 Scope of Art. 306
 A company that is holding or subsidiary to the
company;
 Persons who have purchased at least 10% of the shares
of
The company or
Companies in which the company is a shareholder or
Companies which have reciprocally purchased each
other`s shares
 other persons indicated in the memorandum of
association or by another law as having affiliation with
the company.
 Loans or Guarantees Concerning Directors Art. 307

 A company may not:

Make a loan to a director of the company or of its
holding company;
Give a guarantee or provide security in connection
with a loan made by any person to such a director
 Where the borrower is a director of the company’s
holding company, the transaction must also be approved
by a resolution of a meeting of shareholders of the
holding company. [2]
 Proceedings against the directors on behalf of the company

1) When directors cause injury to the company;

• The question here is, directors are the ones who represent the
company in lawsuits and how are we expect them to sue
themselves when their own act affects the company.
• In response to this problem, most jurisdictions authorise
shareholders to sue directs by representing the company.
[Derivative claim]
• These claims are unique in that they are not brought on behalf of
the shareholder in question; instead they are brought on behalf of
the company (hence the name derivative claim).
• This form of claim is not recognized under old code [365 only
the company may institute] but the new Code recognized it
under Art. 328 (2 & 3).
 Proceedings against the directors on behalf of the company

Proceeding against directors may be brought:

1) By the company with a resolution of a general meeting [328.1]
2) Jointly by shareholders representing at least 10% of the capital in the name
of the company [328.2]. But, only if the company fails to institute
proceedings within 3 (three) months;
3) If the directors failed to discharge responsibility imposed on them
concerning conflict of interest under Art. 306, by shareholders
representing not less than 10% of the capital [328.3] directly without
waiting the company to institute a claim.
• In such case, the company shall:
– show documents, provide copies and evidence necessary to institute the
proceedings;
– Allow the shareholders to inspect agreements that they assume to have
involved conflict of interest and supporting documents; [328.4]
– refund to the shareholders the costs of the proceedings regardless of the
outcome of such proceedings as long as the suit was instituted in good faith.
[328.5]
 Proceedings against the directors on behalf of the company

• Discontinuance of the proceedings against

the directors [328.6]
– The company`s decision not to institute
proceedings against the directors shall not
affect the creditor`s rights to sue such
directors [329.3]
 Proceedings against the directors

Proceeding against directors may also be brought:

4) By creditors for damage caused to them where: [Art. 329]
 the company continues its business after the time when the
directors knew or ought to have concluded that there was no
reasonable prospect of the company being able to pay its
creditors; [1]
 They fail to preserve intact the company's assets to the extent of
the reduction in the company’s assets they caused where the
company’s assets are not sufficient to pay creditors. [2];
5) By shareholders or third parties (Art. 330), where they have
been personally injured directly owing to the fault or fraud of the
directors.
 Liability of Members of the Supervisory Board

 Members of supervisory board are not exempted from

liability.
 Pursuant to art. 334, they shall be liable jointly and
severally for damages that may be caused
 to the company,
 shareholders or third parties
 However, their liability to the extent their responsibility
under the law, the memorandum of association or
resolution of general meeting e.g. see art. 332 for duties
of the SB
 Period of Limitation [335]

 Except for the institution of criminal proceedings, claims against

directors and members of the supervisory board, shall be barred
after two years from the date when the aggrieved party knew of
the damage and the culprit;
 There shall be an absolute limitation after ten years from the date
when the act complained of took place.
 General Manager Art. 337
• The general manager is a subordinate organ to the board of directors.
• A general manager is appointed by the board. [337 (1)]
• The old Code under article 348 (4) states that, the general manager is
an employee of the company and may not be a director.
• But, as per the new Code: [337.3]
– The general manager is an employee of the company; he may be a member of
the board of directors; but may not be the chairperson of the board.
• The manager is mainly responsible: [338.1]
– for the general day-to-day management of the company;
– Represent the company in its dealings with third parties
• The general manager is responsible to carry out all acts of
management connected to the company and follows the instructions
given by the board.
• See art. 338 Powers and Duties of the General Manager
 Secretary Art. 340
• Read arts. 340 to 342 for appointment,
accountability, responsibilities and
liabilities of the Secretary.
• New inclusion under the amended
Code.
• Mandatory
 Auditors
• Auditing is amongst the principal mechanisms of CG.
• The provisions of the Commercial Code provisions under articles
343 to 361 deals with the appointment, removal, remuneration,
powers and duties and liability of auditors.
• Auditors are appointed by and may be removed by the general
meeting of shareholders.
• Generally, auditors serve as a system of checks and balances that
helps to ensure that the management of a company is being
carried properly, the reports of directors are true and represent
actual financial status of the company and that the company is
governed in accordance with laws.
 Auditors
• The most common duties include the duty
– (a) to audit the books and securities of the company;
– Audit of the Accounts of a Holding Company;
– (b) to verify the correctness and accuracy of the inventories,
balance sheets and profit and loss accounts;
– (c) to certify that the report of the board of directors reflects the
correct state of the company’s affairs;
– To reporting audit findings;
– Inform irregularities or breaches of legal or statutory
requirements to the directors or shareholders as a case may be
and
– Inform the public prosecutor of any matters which would
appear to disclose the commission of an offence.