2.A. Board members should act on a fully informed basis, in good faith, with due diligence and care, and in the best interest of the company and the shareholders, taking into account the interests of bondholders.
All recommendations in Chapter V of the Principles should be applied mutatis mutandis to issuers of listed bonds. When making a decision in circumstances where there is a trade-off between the interests of shareholders and bondholders, board members typically need to decide in favour of shareholders. Nevertheless, as recommended in internationally recognised benchmarks for creditor rights and insolvency frameworks, when the board of directors knows, or ought reasonably to know, that insolvency is imminent or unavoidable, it has a duty to minimise the damage and take appropriate measures, including engaging with bondholders and other creditors and initiating restructuring or insolvency proceedings. This may effectively mean limiting the possibility of boards making high-risk decisions with a positive net-expected value for shareholders if it is detrimental to bondholders.
In this context, the board should periodically review its risk appetite in light of any material changes in the company’s financial position or operating risk profile. Where bonds are issued by a special-purpose vehicle with no standalone operations, the parent company’s board should retain oversight of the group’s capital structure and ensure it remains aligned with the group’s strategy and risk profile. Bond issuers that are not subject to a corporate governance code may consider voluntarily adopting an appropriate code and disclosing in their annual reports how their governance practices align with its principles, thereby providing bond investors with a level of governance transparency comparable to that available to investors in listed equity.
In some jurisdictions, companies may issue preferred shares, which have a preference for receiving the company’s dividends but limited or no voting rights. In this case, policymakers and the courts may need to clarify the expectations for board members in their decision making where there is a trade-off between the interests of ordinary shareholders and preferred shareholders’ contractual rights. Notably, preferred shares with fixed dividends but no voting rights would be similar to subordinated bonds from an economic perspective.
2.B. The boards of issuers of listed bonds should assess whether the company’s capital structure is compatible with its strategic goals and its associated risk appetite to ensure it is resilient to different scenarios.
Consistent with Sub-Principle VI.C.2 of the Principles, “[b]oards should assess whether the company’s capital structure is compatible with its strategic goals and its associated risk appetite to ensure it is resilient to different scenarios”, including regarding the issuance and repayment of corporate bonds, as well as to share buybacks. The capital structure refers to the mix of equity and debt used to finance a company.
In addition to establishing directors’ duties of care and diligence towards shareholders in corporate legislation, some jurisdictions have legal provisions that may more specifically limit or guide the decisions on the issuance of bonds and the capital structure of companies. Policymakers should consider whether there is sufficient clarity regarding directors’ duties of care and diligence in a context of high leverage (but not necessarily in a period leading to insolvency) where the company’s capital structure may be incompatible with the company’s strategic goals and associated risk appetite. Such clarity may be achieved through regulatory guidance or interpretative notes, without necessarily introducing new statutory liabilities. It could also include guidance on how boards may assess whether executive remuneration arrangements are consistent with the company’s strategic objectives and risk appetite.
Various corporate governance frameworks include safeguards against actions by directors that could compromise the interests of creditors, including bondholders. These safeguards include the right of opposition of bondholders to transactions that could undermine their rights, such as, in some cases, mergers and capital reductions that return assets to shareholders.
2.C. Unless otherwise specified in the listed bond issuer's articles of association, the decision to issue bonds should be approved or authorised by the board of directors, which may delegate the preparation and execution of such decisions to senior management.
Board members are best placed to decide if the capital structure of a company is compatible with the strategic goals and its associated risk appetite. For instance, boards have information about the loan rates and conditions offered by commercial banks to the company and the possibilities indicated by investment banks for bond issuance. Likewise, boards can decide much more quickly to issue a bond than the time needed to call a shareholder meeting. However, the issuance of bonds convertible into shares represents a decision that directly affects the ownership of the company, and therefore, shareholders may have the right to approve the issuance of convertible bonds or authorise future issuances to be decided by the board.
2.D. Where companies are not financial institutions and do not pose systemic risks, policymakers should refrain from requiring them to retain profits in mandatory capital reserves or to distribute a minimum share of profits as dividend.
Companies may face pressure to distribute dividends or buy back their shares from shareholders even in cases where its financial situation and investment opportunities would not recommend it. This is why, for instance, some company laws require the establishment of reserves for companies to maintain part of their accumulated profits. The risk may be the opposite, where directors and executives may prefer to grow the assets or revenues of the company regardless of the shareholder value created by new investments. This explains why some company laws demand the distribution of a minimum share of a company’s profits in the form of dividends. However, if the boards of directors are accountable to shareholders and the corporate governance of companies is considered to be effective, such limitations and obligations may only limit the capacity of the company to reach its optimal capital structure and invest in value-creating projects without any clear benefit to shareholders and bondholders.