English
SpanishIndependent directors and good governance. Are independent directors necessary and what are their duties and responsibilities?
Topics: Governance, Independent Director
In the realm of corporate governance, the role of independent directors has increasingly become a focal point for ensuring that companies operate with integrity and accountability. The Luxembourg Stock Exchange has established the X Principles of corporate governance, which, while designed to complement existing Luxembourg legislation, set a benchmark for corporate governance standards. These principles, applicable to companies incorporated under Luxembourg law and listed on a regulated market managed by the Luxembourg Stock Exchange, exclude regulated SICAVs and funds but offer a versatile reference for good governance practices for all corporate entities under Luxembourg law.
The essence of good governance is encapsulated in the principle of dual power, which mandates a clear division between the roles of governance and oversight. This principle underscores the importance of distinguishing between executive directors, who manage the day-to-day operations of a company, and non-executive directors, whose role is to monitor the executive management’s actions. Independent directors, who are non-executive by nature, play a crucial role in this governance structure. They are defined by their absence of close ties with the company’s management, controlling shareholders, or the company itself, ensuring that they can make unbiased decisions and act independently. Their inclusion on the board is pivotal in protecting the interests of shareholders and stakeholders, enhancing board effectiveness by bringing in broader skillsets and acting as gatekeepers of the organisation’s and its shareholders’ interests.
Despite the categorisation of directors into executive, non-executive, and independent non-executive in corporate governance practices, Luxembourg company law does not differentiate between these roles. All directors, irrespective of their classification, are subject to the same duties and responsibilities. These include observing a duty of loyalty, acting with diligence, basing actions on the corporate interest, and ensuring the communication of relevant information to other directors. Directors’ breach of duties, regulations, and mismanagement can lead to civil, criminal, tax, and bankruptcy liability.
“The essence of good governance is encapsulated in the principle of dual power, which mandates a clear division between the roles of governance and oversight. This principle underscores the importance of distinguishing between executive directors, who manage the day-to-day operations of a company, and non-executive directors, whose role is to monitor the executive management’s actions.”
Civil liability for directors arises from wrongdoing, which can be an act, omission, or negligence, requiring the demonstration of fault, causation, and damage suffered by the company or shareholders. Directors may also be held liable towards the company and third parties under the same conditions, with third-party actions based on tort requiring proof of personal and specific damage caused by the manager’s wrongdoing.
In terms of bankruptcy, directors can be held liable if an asset deficiency, caused by their fault, leads to difficulties in reimbursing creditors. The law also scrutinises directors’ actions for criminal liability, with penalties ranging from fines to imprisonment for violations such as failing to submit annual accounts or fraudulently manipulating company assets.
The concept of piercing the corporate veil is also significant in Luxembourg jurisprudence, indicating that directors can be held personally liable if consistent elements indicate a misuse of the company’s legal capacity for personal interests.
In summary, the incorporation of independent directors within the boards of Luxembourg-based companies transcends mere regulatory compliance, embodying a fundamental pillar for fostering robust corporate governance. These directors, by virtue of their independence from the company’s daily management and operations, are uniquely positioned to offer unbiased oversight, critical analysis, and a breadth of knowledge that significantly enhances decision-making processes. Their role is instrumental in safeguarding the interests of shareholders and stakeholders alike, ensuring that management’s actions align with broader corporate objectives and ethical standards. Moreover, the legal framework surrounding directors’ duties and liabilities in Luxembourg underscores the seriousness with which their responsibilities are regarded, holding them to stringent standards of conduct and accountability. The presence of independent directors, therefore, is not just a marker of good governance but a crucial mechanism for maintaining corporate integrity, transparency, and trust. This, in turn, fortifies the company’s reputation, investor confidence, and long-term success, highlighting the indispensable role of independent directors in the architecture of corporate governance.
Authors
Cathrine Foldberg Møller
Partner
Simmons & Simmons Luxembourg LLP
Arnaud Fostier
Partner
Simmons & Simmons Luxembourg LLP
