The revised Corporate Governance Code in Montenegro marks a significant advancement in the country’s corporate governance landscape. This initiative aligns with Montenegro’s broader strategy to harmonize its company law with European Union standards, focusing on investor protection and enhancing board accountability.
The Code adopts an “apply or explain” approach, requiring companies to report their compliance starting from the financial year that begins on 1 January 2025. Firms will need to complete questionnaires provided by the Capital Market Commission, which will also publish an annual report on corporate governance for those adhering to the Code.
Key recommendations outlined in the Code emphasize that boards should consist of an odd number of members, predominantly non-executive, with a majority being independent. Furthermore, it stipulates that the roles of chairperson and CEO must be held by different individuals. Companies are also encouraged to form nomination, remuneration, and audit committees, each comprising at least three members who are mostly independent and led by an independent non-executive director.
Notably, the Code includes provisions for gender balance, mandating that the underrepresented gender must comprise at least 40% of non-executive directors or one-third of all director positions, which encompasses both executive and non-executive roles.
This represents a cultural shift within Montenegro’s corporate environment. Traditionally, boards have often functioned as extensions of ownership or political influence. The new governance framework calls for a clearer distinction between oversight and management responsibilities, improved documentation of decisions, better conflict management, and enhanced consideration for minority shareholders.
Improved governance practices are expected to bolster investor confidence among publicly listed companies. For state-affiliated enterprises, this could mitigate risks associated with political management. Family-owned businesses may benefit from enhanced readiness for succession and professionalization, while foreign investors will find a more defined structure concerning board control and minority protections.
However, challenges remain in implementing these changes effectively. The availability of experienced independent directors in Montenegro is limited, which may lead some companies to comply superficially without substantive changes. Additionally, deviations from the Code may be justified with vague explanations rather than robust reasoning.
The significance of the “explain” component is critical; well-articulated justifications for alternative arrangements can demonstrate how they safeguard shareholder interests and enhance oversight. Conversely, weak justifications may serve merely as excuses for non-compliance.
Montenegro’s corporate landscape requires more than mere compliance; it necessitates boards that critically evaluate risks related to transactions, capital allocation, debt management, executive compensation, and long-term strategic planning.
The introduction of this Code is a pivotal step towards achieving these objectives. The extent to which the market embraces these changes will depend on the collective demand from investors, regulators, banks, and company owners for genuine governance practices over superficial adherence to regulations.
