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When attempting to create corporations that safeguard the interests of shareholders, many companies implement a two-tier corporate hierarchy. At the first level is the board of directors: elected by the shareholders and on the second tier is the upper management: hired by the board. The one-tier board provides a better understanding of the operational issues at board level and clearer direction; nevertheless, it can simultaneously be hard for other board members to challenge a powerful Chief executive Director (CEO) who is also the Chairman of the Board (Chair).
In many countries having a two-tier board structure is mandatory for legal entities; meanwhile Armenia offers rather a flexible option with the opportunity to choose. Both board structures are available when establishing a limited liability company or a closed joint-stock company, however, in case of open joint stock companies the two-tier option shall be
binding.
ISSUE:
When the role of the Director (CEO) is unified with the role of the Chair, the person occupying both of these roles may better be able to lead the company and to identify any problems that may arise. However, combining the two roles in the same person creates an inherent conflict of interest in most cases and the regulations shall make sure that such do not exist. E.g. a clear conflict of interest can result where the executive pay is decided by the Board, meaning that CEO who is also the chairman votes on his/her own compensation. Another issue may arise because of personality conflict between the CEO and the independent chair for the reason that a boardroom culture of distrust and dysfunction may be created in the company. These issues are among those which many companies in different legislation may face because of flawed regulations.
LEGISLATION/GUARANTEES:
The Armenian legislation on joint-stock companies manages to strike the right balance of power on the stated manner and, eventually, reduce the risks. According to the Law “On Joint Stock Companies” of RA (“Law”), all joint-stock companies in the Republic of Armenia are required to have a board of directors when the number of the shareholders equals to 50 or more.
The board of directors has the power to determine the procedure and conditions of remuneration and compensation to the executive body, namely the director. Nevertheless, the Law stipulates a vital provision which does not permit the positions of the Chair and the Director (CEO) to be combined by the same person in open joint stock companies. By setting forth this provision, the Armenian legislation guarantees the reduction of a possible conflict of interest amongst the body which should deal with the general oversight of the company’s affairs and the body which implements the managements/ day-to-day activities of the company.
Moreover, the Law goes further on with the guarantees towards the reduction of conflict of interest amongst the two bodies by integrating the instrument of independent board members in open joint stock companies. The Law requires that in all open joint-stock companies at least one third of the board members shall be independent. As defined, to be regarded as an independent member of the Board, the latter shall satisfy many preconditions but particularly essential for this case is the one which obligates the latter not have held any leading executive position, not have worked with the company or with any affiliated entity for the last years.
[1]https://www.cba.am/EN/lalaws/9-JSC%20Law.pdf
All said, even though the stakes are high that in closed joint-stock companies the positions may be held by the same person considering that the legislation does not envisage any regulatory limitations on the latter, it deals well with the issues that may arise in bigger companies. In regards to the closed-joint stock companies, the number of shareholders is limited to 49 which alone lessens the risks of possible conflict of interest between two bodies. The primary problem that the provisions on the stated matter help to overcome
is the prevention of the company leadership duality between the two positions. As a result, overall board independence is promoted meanwhile allowing the CEO to focus on the daily activities of managing a company.
Author: Maykl Hovhannesyan, Junior Associate
Email: maykl.hovhannesyan@legelata.am
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LEGELATA LLC,
26/1 Vazgen Sargsyan St., 4th floor, office 412, Yerevan, Armenia, 0010
Phone +374 11 520 510
Email: info@legelata.am
Website: www.legelata.am
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This material is produced by Legelata LLC. The material contained in this newsletter is provided for general information purposes only and does not contain a comprehensive analysis of each item described. Before taking (or not taking) any action, readers should seek professional advice specific to their situation. No liability is accepted for acts or omissions taken in reliance upon the contents of this material.
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