With the assistance of international experts from the International Finance Corporation, the government has drafted the Corporate Governance Code for unlisted joint stock companies. The code incorporates the Organisation for Economic Cooperation and Development (OECD) definitions and principles on corporate governance, setting down the structure under which a company's objectives are set and the means of attaining those objectives and monitoring performance are determined. The code is not legally binding; rather, it is considered to be guidance for unlisted companies in Albania, aiming to provide a best-practice framework above the minimum legal requirements and to assist Albanian companies in developing a sound governance framework.

Good corporate governance is particularly important to the shareholders of unlisted companies. In most cases such shareholders have limited ability to sell their ownership stakes and are therefore committed to staying with the company for the medium to long term. This increases their dependence on good governance. The code comprises 14 relevant principles for all unlisted joint stock companies in Albania, construed primarily under the Law on Entrepreneurs and Companies.

The first four principles focus on the importance of establishing the corporate governance framework, board of directors' structure and organisation. Under these principles, for a well-established corporate governance framework the company's constitutional documents (eg, charter and bylaws) should clearly define the powers and role of the board of directors, which should be guided by the company's best interests. The board should:

• monitor and evaluate management performance;
• set strategic goals and take the necessary measures to meet them; and
• ensure that the company complies with its charter as well as the relevant legal, regulatory and governance requirements.

Moreover, the board should meet regularly enough to discharge its duties, and should be supplied in a timely manner with appropriate information. Thus, the basis for sound corporate governance is found in the company's constitutional documents, where the organisation and its method of functioning must be clearly stated.

The other main principles are those regarding remuneration and oversight. Under these principles, the levels of remuneration should be sufficient to attract, retain and motivate executive and non-managing directors of the quality required to run the company successfully. Remuneration, particularly for directors, should be approved by the shareholders. The directors are responsible for risk oversight and business success, and should maintain a sound system of internal controls (eg, by developing a basic risk register) to safeguard the company's interests and the shareholders' investment. Another principle regulates the governance of family-controlled companies. The establishment of family governance mechanisms is necessary to promote coordination and mutual understanding among family members, as well as to organise the relationship between family business governance and corporate governance. In addition to the proper establishment of the organisation and governance framework, it is essential that there is a clear distinction in governance status between family governance institutions and formal governance structures.

The last five principles are relevant only to large or more complex unlisted joint stock companies. One of these principles refers to the division of responsibilities at the head of the company, which should consist of a clear distinction between the running of the board and the running of the company business (ie, the roles of chairman and chief executive officer should be filled by different people). Moreover, it is vital that no single person or small group of individuals dominates the board's decision-making process. Well-established enterprises should have a majority of non-managing and independent directors on their boards. Another principle states the importance of the establishment of board committees in order to allow a more effective discharge of its duties. The most commonly required committees in large enterprises are the nomination committee, the remuneration committee, the compliance committee and the audit committee. In order to establish a well-organised, successful company, there should be an independent and clear distinction of powers and a check-and-balance system between the company's governing bodies.

The OECD principles adapted into the code provide a best-practice reference for unlisted companies that aim to conduct themselves efficiently to achieve their business objectives. An effective governance framework defines roles, responsibilities and an agreed distribution of power across shareholders, the board, management and other stakeholders. Particularly in smaller companies, it is important to recognise that the company is not an extension of the owner's personal property. Many unlisted enterprises are owned and controlled by single individuals or families. In this context, good corporate governance is primarily concerned not with the relationship between boards and external shareholders (as in listed companies), or with compliance with formal rules and regulations. Rather, it is about establishing a framework of company processes and attitudes that add value to the business, and help to build its reputation and ensure its long-term success.

For further information please contact Ilir Limaj at Boga & Associates by telephone (+355 4225 1050), fax (+355 4225 1055) or email (ilimaj@bogalaw.com).

"This article was originally edited by, and first published on, www.internationallawoffice.com - the Official Online Media Partner to the IBA, an International Online Media Partner to the ACC and the European Online Media Partner to the ECLA. Register for a free subscription at www.internationallawoffice.com/subscribe.cfm."