Romania's evolution to higher corporate governance standards

Romania's corporate governance policy for issuers has gradually evolved from a predetermined set of recommendations to a more nuanced approach that responds to market-led trends and needs, focusing on value creation as the ultimate reward for good governance practices.

Early corporate governance standards were ambitious but often disconnected from the local context and stakeholder involvement, causing issuers to perceive them more as an administrative burden rather than as an opportunity to gain visibility with global asset managers and analysts. The first Corporate Governance Code (2001) introduced a "Category Plus" tier for higher transparency standards, but only one issuer sought this promotion. Subsequent codes (2008, 2015) learned from these challenges, fostering greater stakeholder collaboration.

Recently, the Bucharest Stock Exchange adopted a revised Corporate Governance Code. More comprehensive than its predecessors, it is grounded in essential governance elements beyond mere transparency.

The revised Code opens the first section on governing bodies with the statement "Good corporate governance starts with a well-functioning Board of Directors", setting the tone for its primary focus on the role, composition, selection, compensation and conduct of the governing bodies, both executive and non-executive. The board is positioned as a valuable resource for market intelligence and networking, underscoring the importance of board profiling in effective strategy development and oversight. It also requires boards to develop and publish a nomination policy. Specialised board committees are entrusted with additional key responsibilities, including managing sensitive topics that may pose conflicts of interest. Incentive structures have a strong influence on individual performance and behaviour, making it crucial to carefully design and assess remuneration packages.

The Code also emphasises that effective risk management and internal control systems are required to ensure safe and responsible delivery of the corporate strategy. Drawing inspiration from financial regulations, the Code invites the board to adopt formal risk appetite and risk tolerance limits aligned with the company's strategy. The Code outlines two key elements of risk management: a chief risk officer with direct reporting lines to the board and the audit committee, and a robust internal audit function. Additionally, the Code promotes the establishment of a whistleblowing mechanism to enable internal and external stakeholders to identify and mitigate risks effectively.

Since the company's success relies on its employees, customers, suppliers, public authorities and communities, the Code encourages regular engagement to address stakeholder concerns and align with the company's interests, particularly regarding environmental and social impacts.

Like previous versions, the revised Code adopts a "comply or explain" approach, offering issuers the flexibility to choose the most suitable practices for effective governance. Companies are expected to begin aligning their practices with it starting 1 January 2025 with the 2025 annual report being the first reporting based on the revised Code.

author: Veronica Das Alexeev