Requirements for corporate governance practices are incorporated into a variety of legislations in Finland. In July 2004, a corporate governance code "Corporate Governance Recommendation for Listed Companies," entered into force on a comply-or-explain basis to harmonize the existing regulations, increase operational transparency, and improve the quality of disclosure. In a 2002 comparative study on corporate governance codes in the European Union, Weil, Gothsal & Manges report that Finnish law already includes many of the provisions that are in the corporate governance codes of most countries, so that the Recommendation serves primarily as a complement to existing requirements. A 2005 Finnish Financial Supervision Authority report states that the corporate governance framework is based on the 2004 Organization for Economic Cooperation and Development Principles of Corporate Governance. The new Limited Liabilities Companies Act entered into force on September 1, 2006, replacing the Limited Liabilities Companies Act of 1978. The new Act was designed to improve the clarity and comprehensiveness of the Companies Act, and to strengthen the legal protection of creditors and minority shareholders.

General Overview

According to the 2003 Corporate Governance Recommendation for Listed Companies, requirements for corporate governance practices are incorporated into a variety of legislation in Finland, including corporate, accounting, and securities market laws, the rules of the Helsinki Exchanges, and the Companies Act. The first four include regulations on corporate governance and disclosure in listed companies. The Companies Act accounts for the protection of minority shareholders and shareholders rights. In July 2004, a corporate governance code, "Corporate Governance Recommendation for Listed Companies," entered into force on a comply-or-explain basis to harmonize the existing regulations, increase operational transparency, and improve the quality of disclosure. A company's level of compliance with the Recommendation, and explanations for non-compliance must be reported in its annual report and on the company website. The Recommendation includes mandates on the annual general meeting (AGM); supervisory board; board and board committees; managing director; other management; compensation; internal control, risk management and internal audit; insider administration; external audit; and communication and disclosure. In a 2002 comparative study on corporate governance codes in the European Union (EU) carried out by the law firm Weil, Gothsal & Manges it is stated that Finnish law already includes many of the provisions that are in the corporate governance codes of most countries, so the Recommendation serves primarily as a complement to existing requirements. A 2005 Finnish Financial Supervision Authority (Rahoitustarkastus, or FIN-FSA)report titled "Corporate Governance and Business Activity - Regulatory Outline," (hereafter referred to as FIN-FSA 2005 regulatory outline) states that the corporate governance framework is based on the 2004 Organization for Economic Cooperation and Development (OECD) Principles of Corporate Governance.

The Ministry of Justice (Oikeusministeriö, or MoJ) reported, in 2005, that an amended Companies Act had been approved by the government and sent to Parliament to improve the clarity and comprehensiveness of the Companies Act, including strengthening the legal protection of creditors and minority shareholders. The Act would lessen the regulations on company management by decreasing requirements for the Articles of Association and the AGM. Other changes are the elimination of the par value of shares, the consolidation of Companies Act-related civil disputes to eight district courts, and changes to the provisions on liability for damages improving the shareholders' rights to compensation and ability to take action. The National Board of Patents website indicates that the new Limited Liabilities Companies Act entered into force on September 1, 2006, replacing the Limited Liabilities Companies Act 1978.

The FIN-FSA is charged with the supervision of the securities markets by the Act on the Financial Supervision Authority, as well as other capital market regulations. It supervises investment firms, the Investor Compensation Fund, fund management companies, the Helsinki exchanges, clearing houses, clearing parties, the Central Securities Depository, and account operators. Its website indicates that it is responsible for ensuring the equal treatment of investors and that, as of 2005, it has been responsible for monitoring companies' compliance with the International Financial Reporting Standards (IFRS). The Securities Markets Association (Arvopaperimarkkinayhdistys, or SMA) website states that the OMX Nordic Exchange Helsinki supervises compliance with the Corporate Governance Recommendation. Also, in 2006, the SMA established a working group which started operations in 2007 to update the Recommendation and evaluate the need for harmonization of Nordic practices.

The Investor Protection Index is a subcomponent of the World Bank's 2007 Doing Business Indicators. The Investment Protection Index consists of three dimensions of investor protection: transparency of transactions (Extent of Disclosure Index), liability for self-dealing (Extent of Director Liability Index), and shareholders' ability to sue officers and directors for misconduct (Ease of Shareholder Suits Index). The indexes vary between 0 and 10, with higher values indicating greater disclosure, greater liability of directors, greater powers of shareholders to challenge the transaction, and better investor protection. Finland scores 6 in the Disclosure Index, against an OECD average of 6.3. It scores 4 in the Director Liability Index, against an OECD average of 5.0 and 7 in the Shareholder Suits Index against an OECD average of 6.6.

The Principles

Principle I: Ensuring the Basis for an Effective Corporate Governance Framework

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According to the Corporate Governance Recommendation for Listed Companies, 2003, requirements for corporate governance practices are incorporated into a variety of legislation in Finland, including corporate, accounting, and securities market laws, the rules of the Helsinki Exchanges, and the Companies Act. The first four include regulations on corporate governance and disclosure in listed companies. The Companies Act accounts for the protection of minority shareholders and shareholders' rights. In July 2004 a corporate governance code, "Corporate Governance Recommendation for Listed Companies," entered into force on a comply-or-explain basis to harmonize the existing regulations, increase operational transparency and improve the quality of disclosure. A company's level of compliance with the Recommendation, and explanations for non-compliance must be reported in its annual report and on the company website. The Recommendation includes mandates on the AGM; supervisory board; board and board committees; managing director; other management; compensation; internal control, risk management and internal audit; insider administration; external audit; and communication and disclosure. In a 2002 comparative study on corporate governance codes in the EU carried out by the law firm Weil, Gothsal & Manges, it is stated that Finnish law already includes many of the provisions that are in the corporate governance codes of most countries, so the Recommendation serves primarily as a complement to existing requirements. A 2005 FIN-FSA regulatory outline reports that the corporate governance framework is based on the 2004 OECD Principles of Corporate Governance. However, there is insufficient publicly available information directly addressing Finland's compliance with this principle.

The National Board of Patents website indicates that the new Limited Liabilities Companies Act entered into force on September 1, 2006, replacing the Limited Liabilities Companies Act of 1978. The MoJ reports in 2005 that the Act was designed to improve the clarity and comprehensiveness of the Companies Act, including strengthening the legal protection of creditors and minority shareholders. The Act lessens the regulations on company management by decreasing requirements for the Articles of Association and the AGM. Other changes are the elimination of the par value of shares, the consolidation of Companies Act related civil disputes to eight district courts, and makes changes to the provisions on liability for damages improving the shareholders' rights to compensation and ability to take action.

The FIN-FSA is charged with the supervision of the securities markets by the Act on the Financial Supervision Authority. It supervises investment firms, the Investor Compensation Fund, Fund Management Companies, the Helsinki exchanges, clearing houses, clearing parties, the Central Securities Depository, and account operators. Its website indicates that it is responsible for ensuring the equal treatment of investors and that as of 2005 it has been responsible for monitoring companies' compliance with the IFRSs. The SMA website conveys that the OMX Nordic Exchange Helsinki supervises compliance with the Corporate Governance Recommendation. Also, in 2006, the SMA established a working group, which started operations in 2007, to update the Recommendation and evaluate the need for harmonization of Nordic practices.

The FIN-FSA 2005 regulatory outline indicates that companies must meet authorization requirements to enter into the market including clear and consistent business practices and a business structure with checks and balances in the decision making process; and the criteria must be met in order to continue functioning. The standards (regulations) for corporate governance are in the process of being revised. They include standards on market entry, owner control, internal governance, fit and proper criteria for managers and other persons holding important responsibilities, consolidated supervision, supervision of financial and insurance conglomerates, business activity, and outsourcing.

Principle II: The Rights of Shareholders and Key Ownership Function

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According to the Corporate Governance Recommendation for Listed Companies, 2003, regulations on corporate governance and disclosure are incorporated into corporate, accounting, securities market laws, and the rules of the Helsinki Exchanges. The Companies Act accounts for the protection of minority shareholders and shareholders' rights. The National Board of Patents website indicates that the new Limited Liabilities Companies Act entered into force on September 1, 2006, replacing the Limited Liabilities Companies Act of 1978. The 2005 MoJ report states that the new Act improves the clarity and comprehensiveness of the Companies Act, including strengthening the legal protection of creditors and minority shareholders. The Act eliminates the par value of shares, and makes changes to the provisions on liability for damages improving the shareholders' rights to compensation and ability to take action. In July 2004 the Corporate Governance Recommendation for Listed Companies entered into force on a comply-or-explain basis. The Recommendation includes mandates on the AGM; supervisory board; board committees; managing director; other management; compensation; internal control, risk management and internal audit; insider administration; external audit; and communication and disclosure. However, there is insufficient publicly available information directly addressing Finland's compliance with this principle.

Weil, Gothsal & Manges' 2002 study reports that mergers, increases in share capital, changes to shareholders rights, and conversion into a private limited company all must be approved by the shareholders. Shareholders take part in decision making at the AGM, and the decision to remove board members may take place at the AGM.

Principle III: The Equitable Treatment of Shareholders

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According to the 2003 Corporate Governance Recommendation for Listed Companies, regulations on corporate governance and disclosure are incorporated into corporate, accounting, securities market laws, and the rules of the Helsinki Exchanges. The Companies Act accounts for the protection of minority shareholders and shareholders rights. The National Board of Patents website indicates that the new Limited Liabilities Companies Act entered into force on September 1, 2006, replacing the Limited Liabilities Companies Act of 1978. The 2005 MoJ report states that the new Act improves the clarity and comprehensiveness of the Companies Act, including strengthening the legal protection of creditors and minority shareholders. The Act eliminates the par value of shares, and makes changes to the provisions on liability for damages improving the shareholders' rights to compensation and ability to take action. In July 2004 the Corporate Governance Recommendation for Listed Companies entered into force on a comply-or-explain basis. The Recommendation includes mandates on the AGM; supervisory board; board committees; managing director; other management; compensation; internal control, risk management and internal audit; insider administration; external audit; and communication and disclosure. However, there is insufficient publicly available information directly addressing Finland's compliance with this principle.

Manne Airaksinen's 2000 presentation on the Enforcement of Minority Shareholders' Rights indicates that Finnish company law provides for mandatory protection for minority shareholders. There are significant controls on decision-making procedures and strict disclosure requirements before a decision. However, the rules may not always be updated with the "sophisticated practices of the securities markets" (p. 2). Sanctions for not enforcing minority shareholder protections are several, such as: (1) compensate shareholders for all damages incurred; (2) the minority can invalidate or require an AGM decision to be changed: (3) criminal sanctions (particularly for providing false information) can be imposed; and (4) redemption rights can be claimed. However, minority shareholders have had little success in taking legal action against directors. The court process is inhibited by lengthy process, poor predictability, and high costs. Still, the nature of the market, being completely liberalized and having a market-oriented system of financing, has strengthened the position of minority shareholders in public companies.

According to Weil, Gothsal & Manges' 2002 study, the Companies Act prohibits the board of directors or any individual director from providing special privilege to any shareholder at the expense of others. The one-share-one-vote principle is generally applied; however, allowances can be made for the uneven voting rights of different classes, if provided for in the articles of association. Preferential shares are permitted, but have no voting rights.

Principle IV: The Role of Stakeholders in Corporate Governance

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According to the 2004 OECD report, the issues surrounding employees as stakeholders are difficult to examine from the corporate governance perspective, in part because of the complexity of such arrangements. Finnish employees do not appoint any board members and there is no constitutional reference to employee participation in the management of a company. However, work councils are mandated by law. Thirty employees is the Finnish threshold for the coverage of mandated work councils. Beyond this threshold, all information related to consultation issues with an effect on employment is information to which employees are entitled access. The following terms of consultation are issues which would have an effect on employment: dismissals, branch closing, organizational change, personnel policy and work conditions, working hours, health and safety, employment policy, training programs, internal information, and social issues. In addition, there is no section on social stakeholders or corporate responsibility toward the environment and other issues in the Corporate Governance Recommendation. However, there is insufficient publicly available information directly addressing Finland's compliance with this principle.

Principle V: Disclosure and Transparency

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According to the Corporate Governance Recommendation for Listed Companies, 2003, regulations on disclosure are incorporated into corporate, accounting, securities market laws, and the rules of the Helsinki Exchanges. In July 2004, a corporate governance code "Corporate Governance Recommendation for Listed Companies," entered into force on a comply-or-explain basis to harmonize the existing regulations, increase operational transparency, and improve the quality of disclosure. A company's level of compliance with the Recommendation, and explanations for non-compliance must be reported in its annual report and on the company website. The SMA website indicates that the OMX Nordic Exchange Helsinki is responsible for monitoring listed companies' compliance with the Recommendation. In a 2006 survey, the SMA reported that the large majority of companies, ninety, had complied with the code, 34 had listed deviations from the code on their website, and only six companies failed to explain deviations. However, there is insufficient publicly available information directly addressing Finland's compliance with this principle.

The 2005 FIN-FSA regulatory outline conveys that auditors are required to report significant information about supervised companies and their decisions to the FIN-FSA. There are a number of other disclosure requirements. The Rules of the Stock Exchange: Listing Procedures and Disclosure and Other Requirements Applicable to the Issuers of Listed Securities, 2007, include several disclosure requirements, as well. Any information that might affect the price of securities, information supporting any decision and any changes to previously disclosed information that may be materially significant must be disclosed. Also, the Rules provide content and format requirements. Regular disclosure requirements include financial statements, annual financial reports, Board of Directors reports, and interim reports. Ongoing financial requirements include dividend reports, audit reports, AGM proposals and decisions, amendments to the articles of association, shareholder agreements, etc.

Principle VI: The Responsibilities of the Board

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In July 2004 a corporate governance code "Corporate Governance Recommendation for Listed Companies," entered into force on a comply-or-explain basis to harmonize the existing regulations, increase operational transparency and improve the quality of disclosure. The Recommendation includes mandates on the AGM; supervisory board; board committees; managing director; other management; compensation; internal control, risk management and internal audit; insider administration; external audit; and communication and disclosure. However, there is insufficient publicly available information directly addressing Finland's compliance with this principle.

According to the 2005 FIN-FSA regulatory outline, the board is responsible for ensuring that a company follows good corporate governance practices, there is an official division between the responsibilities of the board and management, there is a clear organizational structure, the independence of the internal audit, and that management meets the fit and proper test. If the supervisor discovers any problems, it will bring them to the board's attention, and the board is responsible for fixing them. Senior management is responsible for fixing any issues brought to light by the auditors. Internal control and information systems must enable senior management to carry out its corporate governance responsibilities.

Weil, Gothsal & Manges' 2002 study reports that Finnish Boards tend to be dominated by directors representing substantial shareholders. Typically there is at least one independent director. The articles of association may allow employees to elect up to half of the board members. Directors are elected by the AGM and it is their fiduciary duty to act in the best interest of the shareholders and company as a whole. The board is responsible for maintaining financial records, financial matters, and issuing the annual account and audit to the AGM. It acts on behalf of the company.