The new Best Practice for WSE Listed Companies (BP2021) was published on March 29, 2021, and came into force on July 1, 2021. BP2021 asks Polish listed companies to disclose which provisions they comply with and explain why they do not apply the others annually.

Five years have passed since the publication of the last version (BP2016). Unlike the prior regime, under BP2021 companies are required not only to disclose non-compliance, including incidental breaches of principles, but also to provide comprehensive compliance disclosure. This particular change to requirements removes the assumption that companies not reporting on compliance do actually comply with all principles of corporate governance. There have long been doubts throughout the Polish capital market regarding the honesty of declarations, as well as the quality of explanations of non-compliance. While application of the BP2021 principles is voluntary, reporting on compliance is required by the Exchange Rules.

BP2021 was developed by a group of experts from the Corporate Governance Committee, an independent body working at the WSE, whose supervisory board adopted the final version. The draft of BP2021 was analysed by market participants who took part in public consultations at the end of 2020. The BP2021 is shorter than the prior BS2016 as it no longer includes issues governed by the Act on Auditors and the Act on Public Offering to avoid duplication. The BP2021 document is accompanied by a set of regularly updated guidelines outlining their application, serving as guidance for companies.

Notable updates for 2021 include:

ESG Integration

One of most important changes to Best Practice is the requirement to integrate ESG in business strategy. This includes climate change and sustainable development, as well as social factors such as gender equality, working conditions, employee rights, and relations with local communities and customers. Companies are expected to report on integration of climate change into strategy and on pay equity for women and men in the prior year.

Board Diversity

Diversity policy should be implemented and should apply to management and supervisory boards. Supervisory board diversity policy must be approved by shareholders. The new provision requires that at least 30% of the board should be composed of the minority gender. The degree to which the policy has been implemented should be discussed in the annual report.

Board Appointments

Under current market practice, in most cases candidates to the supervisory board are submitted at the meeting itself. According to the new BP2021, candidates should be nominated no later than three days before the general meeting and all relevant documents should be published immediately on the company’s website.

Capital & Distributions

Additionally, the updated BP2021 now covers issuance of shares without pre-emptive rights, share buy-backs, and distribution of profits, in particular listing criteria for retaining profits.

Glass Lewis views the updated BP2021 as a positive step for corporate governance in Poland. In particular, the focus on ESG issues should serve to promote alignment with other EU markets and investor expectations on a topic of increasing interest.

That said, WSE Best Practice operates on a comply-or-explain basis, and its ultimate impact will depend on the level of good faith take-up of its principles by companies and other stakeholders – and how well they adjust to new reporting requirements. Notably, after BP2016 was published, approximately 20% of issuers did not submit reports outlining their compliance. Further, market interest in the reporting was muted.

In 2020, CFA Society Poland conducted a survey on corporate governance based on BP2016, in which 101 members of Polish capital market took part. According to governance expert Andrzej Nartowski, advisor to the WSE’s Corporate Governance Committee and author of handbooks for Best Practice, the survey presents an image of a varied, divided and somewhat messy capital market, where voices of minority shareholders cannot be heard and corporate governance is not always respected. Survey participants did not give high marks for the level of compliance with best practices or the operations of supervisory boards, which are often dominated by the majority shareholder and lack diversity of skills, experience and gender. Despite strong interest in corporate governance from 49% of survey participants, at the same time 34% had only minimum knowledge of the WSE Best Practice. However superficial and incomplete the knowledge of Best Practice is among participants of the survey, they nevertheless expressed a strong opinion that any breaches of BP should influence future investment decisions.

Glass Lewis is reviewing its policy guidelines and may make changes to align with BP2021. In relation to board gender diversity, we have already announced a new policy to apply from the 2022 proxy season, whereby we will generally expect directors of each gender to comprise at least 30% of the boards of WIG 20 companies. Where a proposed board election does not align with these targets, we will generally recommend that shareholders vote against the chair of the nominating committee (or equivalent), a new nominee, or the slate of nominees, as applicable, after consideration of certain other factors.

For example, we will generally provide exceptions to this policy for boards consisting of four or fewer members, or where a company provides compelling disclosure as to why it has failed to ensure gender balance on the board. Further, we will always take into account the progress that WIG 20 companies are making to increase gender diversity at board level, generally providing exceptions to companies that have substantially increased board-level gender diversity in recent years or who have disclosed a plan to increase gender diversity in upcoming election cycles. This reflects Glass Lewis’ pragmatic, case-by-case approach to governance analysis, which puts emphasis on the overall market context and each company’s individual circumstances.

For more information on Glass Lewis’ approach to proxy research, contact:

GROW@glasslewis.com (Institutional Investors) | ENGAGE@glasslewis.com (Public Companies)