9.1.2.2 Independence criteria

The SCCG 2005 distinguishes two types of independence: independence from the company and its management and independence from major shareholders. Rule 3.2.4 provides that the majority of the board should be independent of the company and its management. The rule gives seven relationships or circumstances that disqualify a board member from being independent. The Swedish Stock Exchange has reacted to these requirements, stating that they should be more in line with the Exchange Rules (Code Group 2004b: 37). The Code Group admits that harmonisation with the Exchange Rules is desirable, but adds that the SCCG 2005 should also be in line with a European Recommendation on this issue, which is described in subsection 6.5.2. Although the European Recommendation and the Exchange Rules both require a majority of the board to be independent, the independence criteria of the European Recommendation are more far-reaching. The Code Group has decided to bring the independence criteria in line with the EU and not to ally with the Exchange Rules on this matter (Code Group 2004b: 39).

At least two board members, who belong to the part of the board that is independent of the company and its management, should be independent of the company’s major shareholders as well, according to rule 3.2.5. A major shareholder is an owner that directly or indirectly controls ten per cent or more of the shares or votes of the company. The rule specifies that a board member of a major shareholder is not considered independent. The split between independence from the company and its management and independence from major shareholders generated reactions as well. Some respondents1 commented that the requirement to have at least two board members who are independent of the major shareholders is not in line with international best practices (Code Group 2004b: 37). These international best practices do not differentiate between different types of independence. The Code Group’s reaction to these comments was that this rule is in line with the Exchange Rules. Moreover, it is based on the special ownership structure in Sweden with several major shareholders in combination with some smaller investors. The positive view attached to this is that these principal owners actively monitor their investments and have a special responsibility to the company. In most cases, representatives of major shareholders comprise a majority of the board. This is welcomed by most shareholders and, in addition, the Swedish Companies Act requires that the entire board should look after the interests of all shareholders. Other shareholders benefit from the efforts of the major shareholders and the Code Group is therefore of the opinion that these benefits justify such a rule in the SCCG 2005. Since the requirement to have at least two board members who are independent of the major shareholders has proved appropriate, the Code Group accepts that this rule is not in line with international standards (Code Group 2004b: 39-40).

With respect to the independence of the chair of the board, rule 3.4.3 states that if the chair executes other tasks for the company as an employee other than fulfilling tasks for his position of chair, these tasks may not involve managing director’s responsibilities. If the chair executes such tasks, the division of work between the managing director and chair of the board should be stated in a formal document. These rules are established to avoid a situation of CEO duality. In a situation where the former managing director is appointed chairman after his resignation, the nomination committee should give a special reason for such a proposal (rule 3.4.2). A number of comments have been received about this rule. Some of the respondents2 are of the opinion that this possibility should be fully excluded, because experience has shown that it is inappropriate (Code Group 2004b: 41). The Code Group is aware of the problems of this arrangement, but replies that in some cases it has worked well. As there is experience of both good and bad cases, the Code Group has decided not to prohibit this possibility. It has added that the United Kingdom does not prohibit it either (Code Group 2004b: 42-43).