International Governance: The risk you face as a Global Director

Question One:

With recent data protection legislation across different jurisdictions, companies are now being held to account regarding their use of personal data. Will this result in a more litigious culture for companies and what does this mean for boards?

The Luxembourg Law implementing the GDPR entered into force on May 25, 2018.

Under the Luxembourg ecosystem, with many companies being members of foreign groups and delegating part of their support functions to external ser- vice providers or to another group company, the implementation of the new obligations regarding the processing of personal data may become particularly complex.

The directors must thus ensure that proper contractual agreements are put in place with these (internal or external) key service providers, that they receive regular reporting on the duties performed and that processes are in place that allow for timely reporting to the competent data protection authorities when there has been a personal data breach.

The Luxembourg National Commission for Data Protection (CNPD), the supervi- sory authority in matter of data protection, succeeded in pragmatically profiling itself more as a partner to consult to avoid breaches than as a sanctioning authority.

Interferences with other legal systems (e.g. non-EU mother companies) and culture still increases this complexity.

However, Luxembourg has been navigating in cross-border and international exchanges for decades and due to its size has integrated this complexity in its business model. Furthermore, for several years now many magic circle law firms have established offices in Luxembourg, moving experts from their home jurisdiction with their culture and expertise. The main advisory firms, whether from the ‘Big Four’ or not, have hired consultants gathering experience collected in most continents and cultures, enabling company directors to get access to the required advisors.

Luxembourg, as a true international financial as well as an industrial hub, has a community of company directors that reflects this diversity.

Question Two:

With global directors now increasingly in demand, how important is it for boards and directors to understand the different expectations of directors and different cultures of governance?

As outlined above, Luxembourg, located at the heart of Europe, has a large and interconnected financial sector composed mostly of subsidiaries of other Member States or countries outside the EU. The country also hosts numerous service and industrial companies whose geographical activities are not limited to Luxembourg but are European and international. A global, multinational, multicultural and diverse composition of a board of directors is thus a common feature here. Many boards have resident and non-resident members.

The Luxembourg Institute of Directors (Institut Luxembourgeois des Adminis- trateurs – ILA), which will celebrate its 15th anniversary this year, counts more than 2,000 members, representing about 40 nationalities, which may be either independent non-executive or as executive directors.

With regard to the concept of the directors’ fiduciary duties, Luxembourg com- panies remain primarily governed by the Law of 10 August 1915 on commercial companies, as amended (the 1915 Act), and certain provisions of the Civil code relating to companies, according to which the “corporate interest” of a

company is to be analysed at the level of the company only, and not at that of the group it belongs to. Each company within a group constitutes a separate legal person so that, in principle, each “corporate interest” should be considered on a standalone basis.

Luxembourg case law, however, adopts a wider approach on what the “common interest of the parties” should mean and holds that this should be the interests of all concerned stakeholders (employees, creditors) and not just that of the company and its shareholders (stakeholder approach).

Some academic literature, however, insists on the importance of the interest of the owners/shareholders among the different interests to be considered in the light of Luxembourg’s longstanding liberal approach.

This rigid approach is neither realistic nor desirable as companies which belong to a group, especially when they are 100 % owned, which is the case for many companies in Luxembourg, behave necessarily in a different manner from stand- alone companies.

Question Three:

How important is an effective board that follows core principles of international corporate governance? Does this give boards a shield against litigation and other issues such as bankruptcy and bribery?

As already pointed above, Luxembourg has historically been opened (willingly or not, depending on the periods) on its neighbouring countries. As from 1929, Luxembourg adopted a favourable legal and tax regime for holding companies, thereby welcoming the headquarters or top holding companies for many foreign industrial or financial groups, many of which were French, German or even Bel- gian, thereby establishing, already in the first part of the 20th century, a strong corporate governance coloured by a multinational culture.

Luxembourg was opportunistic again in the late sixties, early seventies when it allowed the first issuances of euro-bonds and their listing on the Luxembourg Stock Exchange, also created in 1928, which then became by far the main listing exchange for international bond issues, instilling again a new level of multinational flavour in its local governance.

This opportunistic evolution continued in the eighties, when Luxembourg developed into becoming the second investment funds domicile worldwide and created a full-fledged industry with service providers offering a very complete panel of services and the ability to deliver them in the languages most used by their international clients. Luxembourg then kept that leadership when being one of the first adopters of the new and stricter fund governance rules introduced by the 2011/61/UE directive on alternative investment funds managers, with a particular focus on risk management.

Through this evolution, Luxembourg has emerged as one of the main locations to consider when setting up an investment vehicle, whether regulated or not, whether as the top joint venture or as an intermediate special purpose vehicle, where governance and risk management are built-in in the range of the services offered by the local providers.

Representatives of that industry are very active within the European or inter- national fora where the new rules governing these activities are assessed and drafted, ensuring that Luxembourg remains at the forefront of the best practices.

ILA, the Luxembourg Institute of Directors, in partnership with ECODA, the European association of Directors, and INSEAD, provides education programs allowing its members to be fully and timely informed of these best practices.

Luxembourg has so far been spared the wave of lawsuits involving directors of companies for mismanagement, fraudulent bankruptcy or bribery.