EC: Commission Recommendation of 15 February 2005 on the role of non-executive or supervisory directors of listed companies and on the committees of the (supervisory) board (Text with EEA relevance)
Date: 2005-02-18
Institutions: European Commission
Subjects: board of directors, business management, co-determination, company law, corporate governance, financial market, management audit, shareholder, stock-exchange listing

25.2.2005

EN

Official Journal of the European Union

L 52/51

COMMISSION RECOMMENDATION

of 15 February 2005

on the role of non-executive or supervisory directors of listed companies and on the committees of
the (supervisory) board

(Text with EEA relevance)

(2005/162/EC)

THE COMMISSION OF THE EUROPEAN COMMUNITIES,

Having regard to the Treaty
establishing the European
Community, and in particular the second indent of Article
211 thereof,

Whereas:

In a Communication adopted on 21 May 2003,
the
Commission presented its Action Plan ‘Modernising
Company Law and Enhancing Corporate Governance in
the European Union — A Plan to Move Forward’ (1). The
main objectives of the Action Plan are to strengthen
shareholders’
employees,
creditors and the other parties with which companies
deal, while
law and corporate
governance rules appropriately for different categories
of company, and to foster the efficiency and competi-
tiveness of businesses, with special attention to some
specific cross-border issues.

and protection for

adapting company

rights

(4)

In its Resolution of 21 April 2004,
the European
Parliament welcomed the Action Plan and expressed
strong support for most of the initiatives announced.
The European Parliament called on the Commission to
to eliminate and prevent conflicts of
propose rules
interest, and stressed in particular the need for listed
committee, whose
companies
functions
external
auditor’s independence, objectivity and effectiveness.

audit
overseeing

an
include

to
should

have

the

(1)

(2)

(3)

in

the

defined

should consider

treatment. As
as

admitted to trading on a regulated market
in the
Community. When implementing this Recommendation,
Member States
specificities of
collective investment undertakings of the corporate type
and prevent the various types of collective investment
undertaking from being subjected, unnecessarily,
to
regards collective investment
unequal
undertakings
Directive
Council
85/611/EEC of 20 December 1985 on the coordination
of laws, regulations and administrative provisions relating
to undertakings for collective investment in transferable
securities (UCITS) (2), that Directive already provides for a
set of specific governance mechanisms. However,
in
order to prevent the unnecessarily unequal treatment of
those collective investment undertakings of the corporate
type not subject to harmonisation at Community level,
Member States should take into account whether and to
what extent these non-harmonised collective investment
governance
undertakings
mechanisms.

to equivalent

subject

are

In view of the complexity of many of the issues at stake,
the adoption of detailed binding rules is not necessarily
the most desirable and efficient way of achieving the
objectives pursued. Many corporate governance codes
adopted in Member States tend to rely on disclosure to
encourage compliance, based on the ‘comply or explain’
approach: companies are invited to disclose whether they
comply with the code and to explain any material
departures from it. This approach enables companies to
reflect sector- and enterprise-specific requirements, and
the markets to assess the explanations and justifications
provided. With a view to fostering the role of non-
executive or supervisory directors, it is therefore appro-
priate that all Member States be invited to take the steps
necessary to introduce
set of
provisions based on the principles set out in this Recom-
mendation, to be used by listed companies either on the
basis of the ‘comply or explain’ approach or pursuant to
legislation.

at national

level

a

their
directors

Non-executive or supervisory directors are recruited by
for a variety of purposes. Of particular
companies
role in overseeing executive or
importance is
managing
situations
involving conflicts of interests. It is vital to foster that
role in order to restore confidence in financial markets.
Member States should therefore be invited to adopt
measures which would
listed
companies, defined as companies whose securities are

dealing with

applicable

and

be

to

(1) COM(2003) 284 final.

(5)

If Member States decide to use the ‘comply or explain’
approach (whereby companies are required to explain
their practices by reference to a set of designated best
practice recommendations), they should be free to do so
on the basis of relevant recommendations developed by
market participants.

(2) OJ L 375, 31.12.1985, p. 3. Directive as last amended by Directive
the Council

the European Parliament and of

2004/39/EC of
(OJ L 145, 30.4.2004, p. 1).

L 52/52

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Official Journal of the European Union

25.2.2005

(6)

(7)

(8)

(9)

the

corporate
that objective

Any measures adopted by Member States in line with
this Recommendation should aim fundamentally at
listed
improving
to the
companies. Since
in all
protection of
companies listed in the Community, whether or not
they are incorporated in one of the Member States, the
measures should also cover companies incorporated in
third countries but listed in the Community.

of
governance
relevant
is
actual or potential,

investors,

executive or supervisory directors in these areas and to
encourage the creation within the (supervisory) board of
committees
respectively for nomination,
responsible
remuneration and audit.

the

capable

decisions

challenging

independent
of

representatives on the
The presence of
of
board,
management,
is widely considered as a means of
protecting the interests of shareholders and other stake-
holders. In companies with a dispersed ownership, the
primary concern is how to make managers accountable
to weak shareholders.
In companies with controlling
shareholders, the focus is more on how to make sure
that the company will be run in a way that sufficiently
takes into account the interests of minority shareholders.
Ensuring adequate protection for third parties is relevant
in both cases. Whatever the formal board structure of a
company, the management function should therefore be
subject to an effective and sufficiently independent super-
visory function. Independence should be understood as
the absence of any material conflict of interest;
in this
context, proper attention should be paid namely to any
threats which might arise from the fact that a represen-
tative on the board has close ties with a competitor of
the company.

sufficient number of

In order to ensure that the management function will be
submitted to an effective and sufficiently independent
the (supervisory) board should
supervisory function,
comprise
committed non-
a
executive or supervisory directors, who play no role in
the management of the company or its group and who
are independent in that they are free of any material
conflict of
legal
In view of
systems existing in Member States, the proportion of
(supervisory) board members to be made up of inde-
pendent directors should not be defined precisely at
Community level.

the different

interest.

The supervisory role of non-executive or supervisory
in three
directors is commonly perceived as crucial
areas, where the potential
interest of
management is particularly high, especially when such
matters are not a direct responsibility for shareholders:
nomination of directors, remuneration of directors, and
audit. It is therefore appropriate to foster the role of non-

for conflict of

(10)

(11)

is

as

for

collectively accountable

In principle, and without prejudice to the powers of the
general meeting, only the (supervisory) board as a whole
has
a
statutory decision-making authority and,
collegiate body,
the
performance of its duties. The (supervisory) board has
the power to determine the number and structure of
the committees which it deems to be appropriate to
facilitate its own work, but
these committees are in
principle not
to be a substitute for the (supervisory)
board itself. As a general rule, therefore, the nomination,
remuneration and audit committees should make recom-
mendations aimed at preparing the decisions to be taken
by the (supervisory) board. However, the (supervisory)
board should not be precluded from delegating part of
to committees when it
its decision-making powers
considers it appropriate and when this is permissible
under national
(supervisory)
board remains fully responsible for the decisions taken
in its field of competence.

even though the

law,

issues

relevant

Since the identification of candidates to fill unitary or
dual board vacancies
to the
raises
selection of non-executive or supervisory directors who
are to oversee management or relevant
to the conti-
the nomination
nuation in office of management,
committee should be composed mainly of independent
non-executive or supervisory directors. That would leave
room on the nomination committee for non-executive or
supervisory directors who do not meet the independence
criteria. It would also leave room for executive/managing
directors (in companies where the nomination committee
is created within the unitary board and as long as execu-
tive/managing directors do not form a majority on that
committee).

a

the

(12) Given the different approaches in the Member States with
to the bodies responsible for appointing and
respect
of
directors,
nomination
role
removing
committee
(supervisory) board
created within the
should essentially be to make sure that, where the (super-
visory) board plays a role in the appointment and
removal process
to table
proposals or to make decisions, as defined by national
law), this role is performed in as objective and profes-
sional a way as possible. The nomination committee
should therefore essentially make recommendations to
the (supervisory) board with respect to the appointment
and removal of directors by the body competent under
national company law.

through a power

(either

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Official Journal of the European Union

L 52/53

(13)

(14)

In the area of remuneration, corporate governance codes
adopted in Member States tend to focus primarily on the
remuneration of executive or managing directors, since
the potential for abuse and conflicts of interest is essen-
tially located there. Many codes also recognise that some
consideration should be given at board level to the remu-
neration policy for senior management. Finally, the issue
of stock options is granted special attention. Given the
different approaches in the Member States with respect to
the bodies responsible for setting the remuneration of
directors, the role of a remuneration committee created
within the (supervisory) board should essentially be to
make sure that, where the (supervisory) board plays a
role in the remuneration setting process (either through
a power to table proposals or to make decisions, as
defined by national
law), this role is performed in as
objective and professional a way as possible. The remu-
neration committee should therefore essentially make
(supervisory) board with
recommendations
respect
to those remuneration issues for decision by
the body competent under national company law.

to the

the

and complete picture of

Two key responsibilities of the (supervisory) board seem
to ensure that the financial reports and other related
information disseminated by the company present an
company’s
accurate
position and to monitor the procedures established for
the evaluation and management of risks. In this context,
most corporate governance codes assign to the audit
committee an essential role in assisting the (supervisory)
board to fulfil these duties. In some Member States, such
responsibilities
to
corporate bodies external to the (supervisory) board. It
an audit
is
committee
(supervisory) board
should, as a general rule, make recommendations to
the (supervisory) board with respect
to those audit
issues, and that such functions may be performed by
other structures — external to the (supervisory) board
— which would be equally effective.

attributed, wholly or partly,

created within the

to provide

appropriate

therefore

that

are

(15)

In order for non-executive or supervisory directors to
play an effective role, they should have the right back-
ground and sufficient time for the job. In addition, a
sufficient number of them should meet appropriate inde-
pendence criteria. Before the appointment of non-
executive or supervisory directors, adequate information
should be provided on these issues and that information
should be updated with sufficient frequency.

because such qualifications will depend, inter alia, on its
activities, size and environment and because they should
be met by the board as a whole. There is nevertheless
one issue which usually raises particular concern, namely
audit
the need for particular
committee where some specific knowledge is deemed
to be indispensable. The (supervisory) board should
therefore determine the desired composition of
the
audit committee and evaluate it periodically, devoting
specific attention to the experience necessary in that
committee.

competence

in the

(17) With respect

to the commitment of directors, most
corporate governance codes seek to make sure that
directors devote sufficient time to their duties. Some of
these codes limit the number of directorships that may
be held in other companies: the positions of chairman or
of executive or managing director are usually recognised
as more demanding than those of non-executive or
supervisory director, but the precise numbers of other
directorships acceptable vary widely. However, the invol-
required from a director may vary widely
vement
depending on the company and its environment;
in
such a situation, each director should undertake to
strike a proper balance between his various engagements.

of

close

that
interest.
the
as

(18) Generally, corporate governance codes adopted in the
Member States
recognise the need for a significant
proportion of non-executive or supervisory directors to
free of any material
is to say,
be independent,
is most often
Independence
conflict of
understood
ties with
absence
management, controlling shareholders or the company
itself. In the absence of any common understanding of
what independence precisely entails, it is appropriate to
provide a general statement describing what the general
objective is. Provision should also be made to cover a
(non-exhaustive) number of situations, involving the rela-
tionships or circumstances usually recognised as likely to
generate a material conflict of interest, which Member
States must duly consider when introducing at national
level the criteria to be used by the (supervisory) board.
The determination of what constitutes
independence
should principally be an issue for
the (supervisory)
board itself to determine. When the (supervisory) board
applies the independence criteria,
it should focus on
substance rather than form.

(16) With respect

to the qualifications of directors, most
corporate governance codes insist on the need to have
qualified individuals on the board, but at the same time
recognise that the definition of what constitutes proper
to the company itself,
qualifications

should be left

(19)

In view of the importance attaching to the role of non-
executive or supervisory directors with respect to the
restoration of confidence, and more generally to the
development of sound corporate governance practices,
the steps taken for the implementation of this Recom-
mendation in Member States
should be monitored
closely,

L 52/54

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Official Journal of the European Union

25.2.2005

HEREBY RECOMMENDS:

1.

1.1.

1.2.

SECTION I

SCOPE AND DEFINITIONS

Scope

a

at national

Member States are invited to take the steps necessary to
introduce,
set of provisions
level,
concerning the role of non-executive or supervisory
the (supervisory)
directors and the committees of
board to be used by listed companies, either through
a ‘comply or explain’ approach or through legislation,
and with the instruments best suited to their legal
environment.

They should take due account of the specificities of
collective investment undertakings of
the corporate
type, as covered by Directive 85/611/EEC. Member
States should also consider the specificities of collective
investment undertakings of the corporate type which
sole
are not
purpose of which is to invest money raised from
investors in a diversified range of assets and which do
not seek to take legal or management control over any
of the issuers of their underlying investments.

covered by that Directive and the

recommendations,

If Member States decide to use the ‘comply or explain’
approach, whereby companies are required to explain
their practices by reference to a set of designated best
practice
require
companies to specify annually the recommendations
with which they have not complied (and, in the case
recommendations whose requirements are of a
of
continuing nature,
the accounting
for what part of
period such non-compliance occurred), and explain in
a substantial and specific manner the extent of, and the
reasons for, any material non-compliance.

should

they

1.3.

In their consideration of the principles set out in this
Recommendation, Member States should, in particular,
take into account the following:

1.3.1.

the functions and characteristics assigned by Member
States to any of
the committees created within the
(supervisory) board and proposed in this Recommen-
dation should duly take into account the rights and
duties of relevant corporate bodies as defined under
national law;

1.3.2. Member States should be allowed to choose, in whole
or in part, between the creation within the (supervisory)
board of any of the committees with the characteristics
advocated in this Recommendation, and the use of
other structures — external to the (supervisory) board
— or procedures. Such structures or procedures, which
companies under
could be
national
at
recommended
national level through a ‘comply or explain’ approach,
should be functionally equivalent and equally effective.

either mandatory for
law or best practice

1.4. With respect to listed companies incorporated in one of
to be
the Member States,
introduced by Member States should cover at
least
those listed companies which are incorporated within
their territory.

the set of provisions

With respect to listed companies not incorporated in
one of the Member States, the set of provisions to be
introduced by Member States should cover at
least
those listed companies which have their primary
listing on a regulated market established in their
territory.

2.

2.1.

Definitions for the purposes of this Recommen-
dation

‘Listed companies’ means companies whose securities
are admitted to trading on a regulated market, within
the meaning of Directive 2004/39/EC, in one or more
Member States.

2.2.

‘Director’ means any member of any administrative,
managerial or supervisory body of a company.

2.3.

2.4.

‘Executive director’ means any member of the adminis-
trative body (unitary board) who is engaged in the daily
management of the company.

‘Non-executive director’ means any member of
the
administrative body (unitary board) of a company
other than an executive director.

2.5.

‘Managing director’ means
managerial body (dual board) of a company.

any member of

the

2.6.

‘Supervisory director’ means any member of the super-
visory body (dual board) of a company.

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Official Journal of the European Union

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3.

3.1.

3.2.

SECTION II

PRESENCE AND ROLE OF NON-EXECUTIVE OR SUPER-
VISORY DIRECTORS ON (SUPERVISORY) BOARDS

Presence of non-executive or supervisory directors

The administrative, managerial and supervisory bodies
should include in total an appropriate balance of execu-
tive/managing and non-executive/supervisory directors
such that no individual or small group of individuals
can dominate decision-making on the part of
these
bodies.

The present or past executive responsibilities of
the
(supervisory) board’s chairman should not stand in
the way of his ability to exercise objective supervision.
On a unitary board, one way to ensure this is that the
roles of chairman and chief executive are separate; in
the case of unitary and dual boards, one option may be
that the chief executive does not immediately become
the chairman of the (supervisory) board. In cases where
a company chooses to combine the roles of chairman
and chief executive or
to immediately appoint as
chairman of the (supervisory) board the former chief
executive, this should be accompanied with information
on any safeguards put in place.

4.

Number of independent directors

A sufficient number of independent non-executive or
supervisory directors should be elected to the (super-
visory) board of companies to ensure that any material
conflict of interest involving directors will be properly
dealt with.

5.

Organisation in board committees

Boards should be organised in such a way that a
sufficient number of
independent non-executive or
supervisory directors play an effective role in key
areas where the potential for conflict of interest is parti-
cularly high. To this end, but subject to point 7, nomi-
nation, remuneration and audit committees should be
created within the (supervisory) board, where that board
plays a role in the areas of nomination, remuneration
and audit under national
taking into account
Annex I.

law,

6.

6.1.

Role of the committees vis-à-vis the (supervisory)
board

The nomination, remuneration and audit committees
should make recommendations aimed at preparing

the decisions to be taken by the (supervisory) board
itself. The primary purpose of the committees should
be to increase the efficiency of the (supervisory) board
by making sure that decisions are based on due consi-
deration, and to help organise its work with a view to
ensuring that the decisions it takes are free of material
conflicts of interest. The creation of the committees is
to remove the matters
not
considered from the purview of
the (supervisory)
board itself, which remains fully responsible for the
decisions taken in its field of competence.

in principle,

intended,

The terms of reference of any committee created should
be drawn up by the (supervisory) board. Where
permissible under national
law, any delegation of
decision-making power should be explicitly declared,
properly described and made public in a fully trans-
parent way.

Flexibility in setting up the committees

the

that

sure

should make

functions
Companies
assigned to the nomination, remuneration and audit
committees are carried out. However, companies may
group the functions as they see fit and create fewer
than three committees. In such a situation, companies
should give a clear explanation both of the reasons why
they have chosen an alternative approach and how the
approach chosen meets the objective set for the three
separate committees.

In companies where the (supervisory) board is small,
the functions assigned to the three committees may
be performed by the (supervisory) board as a whole,
provided that it meets the composition requirements
advocated for the committees and that adequate infor-
mation is provided in this respect. In such a situation,
the national provisions relating to board committees (in
to their role, operation, and
particular with respect
transparency)
to the
(supervisory) board as a whole.

should apply, where relevant,

6.2.

7.

7.1.

7.2.

8.

Evaluation of the (supervisory) board

Every year, the (supervisory) board should carry out an
evaluation of its performance. This should encompass
its membership, organisation and
an assessment of
operation as a group, an evaluation of the competence
and effectiveness of each board member and of the
board committees, and an assessment of how well the
board
performance
objectives which have been set.

performed

against

any

has

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Official Journal of the European Union

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9.

9.1.

9.2.

Transparency and communication

The (supervisory) board should make public at least
once a year (as part of the information disclosed by
the company annually on its corporate governance
structures and practices) adequate information about
its internal organisation and the procedures applicable
to its activities, including an indication of the extent to
which the self-evaluation performed by the (super-
visory) board has led to any material change.

The (supervisory) board should ensure that shareholders
are properly informed as regards the affairs of
the
company, its strategic approach, and the management
of risks and conflicts of interest. The roles of directors
regarding communication and engagement with share-
holders should be clearly delineated.

company’s organisation and activities. The (supervisory)
board should conduct an annual review to identify
areas where directors need to update their skills and
knowledge.

11.4. When the appointment of a director

is proposed,
disclosure should be made of his particular compe-
tences which are relevant to his service on the (super-
visory) board. To enable markets and the public to
assess whether these competences remain appropriate
over
the (supervisory) board should disclose
every year a profile of the board’s composition and
information on the particular competences of individual
directors which are relevant
to their service on the
(supervisory) board.

time,

12.

Commitment

SECTION III

12.1.

PROFILE OF NON-EXECUTIVE OR SUPERVISORY
DIRECTORS

10.

Appointment and removal

Each director should devote to his duties the necessary
time and attention, and should undertake to limit the
number of his other professional commitments (in
particular any directorships held in other companies)
to such an extent that the proper performance of his
duties is assured.

supervisory directors

Non-executive or
should be
appointed for specified terms subject to individual re-
election, at maximum intervals to be determined at
level with a view to enabling both the
national
necessary development of experience and sufficiently
frequent reconfirmation of
It should
also be possible to remove them, but their removal
should not be
an executive or
managing director.

their position.

than for

easier

12.2. Where the appointment of a director is proposed, his
other significant professional commitments should be
disclosed. The board should be informed of subsequent
changes. Every year, the board should collect data on
such commitments, and make the information available
in its annual report.

11.

Qualifications

13.

Independence

In order to maintain a proper balance in terms of the
qualifications possessed by its members,
the (super-
visory) board should determine its desired composition
in relation to the company’s structure and activities, and
evaluate it periodically. The (supervisory) board should
is composed of members who, as a
ensure that
required diversity of knowledge,
whole, have
the
judgement and experience to complete their
tasks
properly.

it

13.1. A director should be considered to be independent only
if he is free of any business,
family or other rela-
tionship, with the company, its controlling shareholder
or the management of either, that creates a conflict of
interest such as to impair his judgement.

The members of the audit committee, should, collec-
tively, have a recent and relevant background in and
experience of
listed
companies appropriate to the company’s activities.

and accounting

finance

for

11.3. All new members of the (supervisory) board should be
offered a tailored induction programme covering to the
the
extent

responsibilities

necessary

their

and

13.2. A number of criteria for assessment of

taking into account

the guidance set out

the inde-
pendence of directors should be adopted at national
in
level,
Annex II, which identifies a number of
situations
reflecting the relationships or circumstances usually
recognised as likely to generate material conflict of
interest. The determination of what constitutes inde-
pendence is fundamentally an issue for the (supervisory)
board itself to determine. The (supervisory) board may
consider that, although a particular director meets all
the criteria laid down at national level for assessment of
the independence of directors, he cannot be considered
independent owing to the specific circumstances of the
person or the company, and the converse also applies.

11.1.

11.2.

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13.3.

information should be disclosed on the
Proper
conclusions reached by the (supervisory) board in its
determination of whether a particular director should
be regarded as independent.

SECTION IV

FINAL PROVISIONS

14.

Follow-up

the

13.3.1. When the appointment of a non-executive or super-
visory director
company should
is proposed,
disclose whether it considers him to be independent;
if one or more of the criteria laid down at national
level
independence of directors is
not met, the company should disclose its reasons for
nevertheless considering that director
to be inde-
should also disclose annually
pendent. Companies
which directors they consider to be independent.

for assessment of

13.3.2. If one or more of the criteria laid down at national level
for assessment of independence of directors has not
been met throughout the year, the company should
disclose its reasons for considering that director to be
independent. To ensure the accuracy of the information
provided on the
the
company should require the independent directors to
have their independence periodically re-confirmed.

independence of directors,

Member States are invited to take the necessary
measures
to promote the application, by 30 June
2006, of the principles set out in this Recommendation
and to notify the Commission of the measures taken in
in order to
accordance with this Recommendation,
enable
the
closely
the Commission to monitor
situation and, on that basis,
to assess the need for
further measures.

15.

Addressees

This Recommendation is addressed to the Member
States.

Done at Brussels, 15 February 2005.

For the Commission

Charlie McCREEVY
Member of the Commission

The following Annexes provide additional guidance for the interpretation of the principles set out in the Recommen-
dation.

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ANNEX I

Committees of the (supervisory) board

1.

COMMON FEATURES

1.1. Size

When committees are created within the (supervisory) board, they should normally be composed of at least three
members. In companies with small (supervisory) boards, they could exceptionally be composed of two members
only.

1.2. Composition

Chairmanship and membership of the committees should be decided with due regard to the need to ensure that
committee membership is refreshed and that undue reliance is not placed on particular individuals.

1.3. Terms of reference

The exact mandate of each committee created should be described in the terms of reference drawn up by the
(supervisory) board.

1.4. Available resources

Companies should ensure that committees are provided with sufficient resources to discharge their duties, which
includes the right to obtain — in particular from officers of the company — all the necessary information or to seek
independent professional advice on issues falling in their area of competence.

1.5. Attendance at committee meetings

With a view to ensuring the autonomy and objectivity of the committees, directors other than the committee
members should normally be entitled to attend its meetings only at the invitation of the committee. The committee
may invite or require certain officers or experts to attend.

1.6. Transparency

1. Committees should discharge their duties within the set terms of reference, and ensure that they regularly report

to the (supervisory) board about their activities and results.

2. The terms of reference set for any committee created, explaining its role and any authority delegated to it by the
(supervisory) board where permissible under national law, should be made public at least once a year (as part of
the information disclosed by the company annually on its corporate governance structures and practices).
Companies should also make public annually a statement by existing committees about their membership,
the number of their meetings and attendance over the year, and their main activities. In particular, the audit
committee should confirm that it is satisfied with the independence of the audit process and describe briefly the
steps it has taken to reach this conclusion.

3. The chairman of each committee should be able to communicate directly with shareholders. The circumstances

in which this should happen should be spelled out in the committee’s terms of reference.

2.

THE NOMINATION COMMITTEE

2.1. Creation and composition

1. Where, under national law, the (supervisory) board is playing a role, either by making decisions itself or by
making proposals for consideration by another corporate body, in the process for appointment and/or removal
of directors, a nomination committee should be set up within the (supervisory) board.

2. The nomination committee should be composed of at least a majority of independent non-executive or super-
visory directors. When a company deems it appropriate for the nomination committee to comprise a minority of
non-independent members, the Chief Executive Officer could be a member of such a committee.

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2.2. Role

1. The nomination committee should at least:

— identify and recommend, for the approval of the (supervisory) board, candidates to fill board vacancies as and
when they arise. In doing so, the nomination committee should evaluate the balance of skills, knowledge and
experience on the board, prepare a description of the roles and capabilities required for a particular
appointment, and assess the time commitment expected,

— periodically assess the structure, size, composition and performance of the unitary or dual board, and make

recommendations to the (supervisory) board with regard to any changes,

— periodically assess the skills, knowledge and experience of individual directors, and report on this to the

(supervisory) board,

— properly consider issues related to succession planning.

2.

In addition, the nomination committee should review the policy of the (management) board for selection and
appointment of senior management.

2.3. Operation

1. The nomination committee should consider proposals made by relevant parties,

including management and
shareholders (1). In particular, the Chief Executive Officer should be adequately consulted by, and entitled to
submit proposals to the nomination committee, especially when dealing with issues related to executive/ma-
naging directors or senior management.

2.

In performing its duties, the nomination committee should be able to use any forms of resources it deems
appropriate, including external advice or advertising, and should receive appropriate funding from the company
to this effect.

3.

THE REMUNERATION COMMITTEE

3.1. Creation and composition

1. Where, under national law, the (supervisory) board is playing a role, either by making decisions itself or by
in the process for setting remuneration of

making proposals for consideration by another corporate body,
directors, a remuneration committee should be set up within the (supervisory) board.

2. The remuneration committee should be composed exclusively of non-executive or supervisory directors. At least

a majority of its members should be independent.

3.2. Role

1. With respect to executive or managing directors, the committee should at least:

— make proposals, for the approval of the (supervisory) board, on the remuneration policy for executive or
managing directors. Such policy should address all forms of compensation, including in particular the fixed
remuneration, performance-related remuneration schemes, pension arrangements, and termination payments.
Proposals related to performance-related remuneration schemes should be accompanied with recommen-
dations on the related objectives and evaluation criteria, with a view to properly aligning the pay of executive
or managing directors with the long-term interests of the shareholders and the objectives set by the (super-
visory) board for the company,

(1) When proposals are submitted by shareholders for the consideration of the nomination committee and the latter decides not to
recommend these candidates for the approval of the (supervisory) board, this does not prevent shareholders from proposing the same
law.
candidates directly to the general meeting when they have the right to table draft resolutions to this effect under national

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— make proposals to the (supervisory) board on the individual remuneration to be attributed to executive or
managing directors, ensuring that they are consistent with the remuneration policy adopted by the company
and the evaluation of the performance of the directors concerned. In doing so, the committee should be
properly informed as to the total compensation obtained by the directors from other companies affiliated to
the group,

— make proposals to the (supervisory) board on suitable forms of contract for executive or managing directors,

— assist the (supervisory) board in overseeing the process whereby the company complies with existing
the remuneration policy

remuneration-related items (in particular

provisions regarding disclosure of
applied and the individual remuneration attributed to directors).

2. With respect to senior management (as defined by the (supervisory) board), the committee should at least:

— make general recommendations to the executive or managing directors on the level and structure of

remuneration for senior management,

— monitor the level and structure of remuneration for senior management, on the basis of adequate infor-

mation provided by executive or managing directors.

3. With respect to stock options and other share-based incentives which may be granted to directors, managers, or

other employees, the committee should at least:

— debate the general policy regarding the granting of such schemes, in particular stock options, and make any

related proposals to the (supervisory) board,

— review the information provided on this topic in the annual report and to the shareholders meeting where

relevant,

— make proposals to the (supervisory) board concerning the choice between granting options to subscribe
shares or granting options to purchase shares, specifying the reasons for its choice as well as the conse-
quences that this choice has.

3.3. Operation

1. The remuneration committee should consult at least the chairman and/or chief executive about their views

relating to the remuneration of other executive or managing directors.

2. The remuneration committee should be able to avail itself of consultants, with a view to obtaining the necessary
information on market standards for remuneration systems. The committee should be responsible for estab-
lishing the selection criteria, selecting, appointing and setting the terms of reference for any remuneration
consultants who advise the committee, and should receive appropriate funding from the company to this effect.

4.

THE AUDIT COMMITTEE

4.1. Composition

The audit committee should be composed exclusively of non-executive or supervisory directors. At least a majority
of its members should be independent.

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4.2. Role

1. With respect to the internal policies and procedures adopted by the company, the audit committee should assist

the (supervisory) board to at least:

— monitor the integrity of the financial information provided by the company, in particular by reviewing the
relevance and consistency of the accounting methods used by the company and its group (including the
criteria for the consolidation of the accounts of companies in the group),

— review at least annually the internal control and risk management systems, with a view to ensuring that the
main risks (including those related to compliance with existing legislation and regulations) are properly
identified, managed and disclosed,

— ensure the effectiveness of the internal audit function,

in particular by making recommendations on the
selection, appointment, reappointment and removal of the head of the internal audit department and on the
department’s budget, and by monitoring the responsiveness of management to its findings and recommen-
dations. If the company does not have an internal audit function, the need for one should be reviewed at
least annually.

2. With respect to the external auditor engaged by the company, the audit committee should at least:

— make recommendations to the (supervisory) board in relation to the selection, appointment, reappointment
and removal of the external auditor by the body competent under national company law, and to the terms
and conditions of his engagement,

— monitor the external auditor’s independence and objectivity,

in particular by reviewing the audit firm’s
compliance with applicable guidance relating to the rotation of audit partners, the level of fees paid by
the company, and other related regulatory requirements,

— keep the nature and extent of non-audit services under review, based inter alia on disclosure by the external
auditor of all fees paid by the company and its group to the audit firm and network, with a view to
preventing any material conflicts of interest from arising. The committee should set and apply a formal
policy specifying, in accordance with the principles and guidance provided in Commission Recommendation
2002/590/EC (1), the types of non-audit services which are (a) excluded, (b) permissible after review by the
committee, and (c) permissible without referral to the committee,

— review the effectiveness of the external audit process, and the responsiveness of management to the recom-

mendations made in the external auditor’s management letter,

— investigate the issues giving rise to any resignation of the external auditor, and make recommendations as to

any required action.

4.3. Operation

1. The company should provide an induction programme for new audit committee members, and subsequent
relevant training on an ongoing and timely basis. All committee members should be provided in particular with
full information relating to the company’s specific accounting, financial and operational features.

(1) OJ L 191, 19.7.2002, p. 22.

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2. The management should inform the audit committee of the methods used to account for significant and unusual
transactions where the accounting treatment may be open to different approaches. In this respect, particular
attention should be paid to both the existence of, and the justification for, any activity carried out by the
company in offshore centres and/or through special purpose vehicles.

3. The audit committee shall decide whether and,

if so, when the chief executive officer or chairman of the
managing board, the chief
financial officer (or senior employees responsible for finance, accounting, and
treasury matters), the internal auditor and the external auditor, should attend its meetings. The committee
should be entitled to meet with any relevant person outside the presence of executive or managing directors,
if it so wishes.

4. The internal and external auditors should, in addition to maintaining an effective working relationship with
management, be guaranteed free access to the (supervisory) board. To this effect, the audit committee shall act as
the principal contact point for the internal and external auditors.

5. The audit committee should be informed of the internal auditor’s work programme, and receive internal audit

reports or a periodic summary.

6. The audit committee should be informed of the external auditor’s work programme, and should obtain a report
by the external auditor describing all relationships between the independent auditor and the company and its
group. The committee should obtain timely information about any issues arising from the audit.

7. The audit committee should be free to obtain advice and assistance from outside legal, accounting or other
advisors as it deems necessary to carry out its duties, and should receive appropriate funding from the company
to this effect.

8. The audit committee should review the process whereby the company complies with existing provisions
regarding the possibility for employees to report alleged significant irregularities in the company, by way of
complaints or through anonymous submissions, normally to an independent director, and should ensure that
arrangements are in place for the proportionate and independent investigation of such matters and for appro-
priate follow-up action.

9. The audit committee should report to the (supervisory) board on its activities at least once every six months, at

the time the yearly and half-yearly statements are approved.

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ANNEX II

Profile of independent non-executive or supervisory directors

1. It is not possible to list comprehensively all threats to directors’ independence; the relationships or circumstances
which may appear relevant to its determination may vary to a certain extent across Member States and companies, and
best practices in this respect may evolve over time. However, a number of situations are frequently recognised as
relevant in helping the (supervisory) board to determine whether a non-executive or supervisory director may be
regarded as independent, even though it is widely understood that assessment of the independence of any particular
director should be based on substance rather than form. In this context, a number of criteria, to be used by the
(supervisory) board, should be adopted at national level. Such criteria, which should be tailored to the national context,
should be based on due consideration of at least the following situations:

(a) not to be an executive or managing director of the company or an associated company, and not having been in

such a position for the previous five years;

(b) not to be an employee of the company or an associated company, and not having been in such a position for the
previous three years, except when the non-executive or supervisory director does not belong to senior
management and has been elected to the (supervisory) board in the context of a system of workers’ representation
recognised by law and providing for adequate protection against abusive dismissal and other forms of unfair
treatment;

(c) not to receive, or have received, significant additional remuneration from the company or an associated company
apart from a fee received as non-executive or supervisory director. Such additional remuneration covers in
particular any participation in a share option or any other performance-related pay scheme; it does not cover
the receipt of fixed amounts of compensation under a retirement plan (including deferred compensation) for prior
service with the company (provided that such compensation is not contingent in any way on continued service);

(d) not to be or to represent in any way the controlling shareholder(s) (control being determined by reference to the

cases mentioned in Article 1(1) of Council Directive 83/349/EEC (1));

(e) not to have, or have had within the last year, a significant business relationship with the company or an associated
company, either directly or as a partner, shareholder, director or senior employee of a body having such a
relationship. Business relationships include the situation of a significant supplier of goods or services (including
legal, advisory or consulting services), of a significant customer, and of organisations that receive
financial,
significant contributions from the company or its group;

(f) not to be, or have been within the last three years, partner or employee of the present or former external auditor

of the company or an associated company;

(g) not to be executive or managing director in another company in which an executive or managing director of the
company is non-executive or supervisory director, and not to have other significant links with executive directors
of the company through involvement in other companies or bodies;

(h) not to have served on the (supervisory) board as a non-executive or supervisory director for more than three terms
length);

(or, alternatively, more than 12 years where national

law provides for normal terms of a very small

(i) not to be a close family member of an executive or managing director, or of persons in the situations referred to

in points (a) to (h);

2. The independent director undertakes (a) to maintain in all circumstances his independence of analysis, decision and
action,
(b) not to seek or accept any unreasonable advantages that could be considered as compromising his
independence, and (c) to clearly express his opposition in the event that he finds that a decision of the (supervisory)
board may harm the company. When the (supervisory) board has made decisions about which an independent non-
executive or supervisory director has serious reservations, he should draw all the appropriate consequences from this.
If he were to resign, he should explain his reasons in a letter to the board or the audit committee, and, where
appropriate, to any relevant body external to the company.

(1) OJ L 193, 18.7.1983, p. 1. Directive as last amended by Directive 2003/51/EC of the European Parliament and of the Council

(OJ L 178, 17.7.2003, p. 16).