You are a lawyer specialising, among other, in capital markets law. It’s a tough field, you have to understand not only the law but also best practices that make up corporate governance. This is what we will talk about today, focusing on audit committees. Let us first explain to our readers what an audit committee is and how it is empowered in the supervisory board? Should every company listed on the Stock Exchange have one?

The audit committee in principle should be an internal body of the supervisory board. As an exception, however, it is permissible to entrust the audit committee with the supervisory board acting in corpore with regard to, inter alia, so-called small PIEs (public interest entities).

As far as public companies are concerned, the status of a PIE applies only to corporations whose shares are admitted to trading on a regulated market. However, public companies whose shares are admitted to an alternative trading system are exempt from the obligation to establish an audit committee.

The supervisory board autonomously determines the composition of the audit committee. This body should be composed of a minimum of three members. However, legal regulations do not specify the maximum number of audit committee members. Yet, the number of members of the audit committee should take into account the size of the supervisory board, the need to ensure efficient functioning of the audit committee, the effectiveness of the control functions and the obligation to comply with statutory requirements, especially the condition of independence.

In addition, the provisions of the Act on Statutory Auditors provide for the function of chairman of the audit committee, who is appointed by the members of the audit committee or by the supervisory board.

Why were audit committees created in our law and why are they so important? What tasks are they to perform?

The institution of audit committees is standardised at the EU level in Directive 2006/43/EC of the European Parliament and of the Council of May 17, 2006 and in Regulation No 537/2014 of the European Parliament and of the Council of April 16, 2014. In turn, the regulation of the audit committee in Polish law is contained in the Act of May 11, 2017 on Statutory Auditors, Audit Firms and Public Supervision.

Pursuant to these regulations, the entities obliged to establish an audit committee are PIE, which results from their special systemic and economic importance in the economy.

The audit committee is, in principle, a professional body, independent from the main decision-makers of the company, whose task is to identify irregularities that may occur e.g. in relations with a related party (watchdog).

The primary responsibility of the audit committee of a PIE that is a public limited liability company is to prepare and advise the supervisory board on the necessity for the supervisory board to assess the annual management reports.

The catalogue of tasks under the responsibility of the audit committee includes in particular: 1) monitoring: the financial reporting process, the effectiveness of internal control systems and risk management systems and internal audit with regard to financial reporting, as well as the performance of financial audit activities, in particular the performance of audit by an audit firm; 2) controlling and monitoring the independence of the statutory auditor and the audit firm, in particular if services other than audit are provided to the PIE by the audit firm; 3) informing the supervisory board on the results of the audit; 4) assessing the auditor’s independence and approving the auditor’s provision of permitted non-audit services to the PIE; 5) developing a policy for the selection of the audit firm to perform the audit; 6) developing a policy for the provision of permitted non-audit services by the audit firm performing the audit, by entities affiliated with the audit firm and by a member of the audit firm’s network; 7) determining the procedure for the selection of the audit firm by PIE; 8) presenting the recommendation to the supervisory board or the general meeting referred to in Art. 16(2) of Regulation 537/2014, in accordance with the policy for the selection of the audit firm to carry out the audit and the policy for the provision of permitted non-audit services by the audit firm carrying out the audit; 9) making recommendations aimed at ensuring the integrity of the financial reporting process in the PIE.

Due to the importance of audit committees, the legislator has prescribed the required composition of these committees. Please explain these requirements to us.

According to the legislator’s instruction, the members of the committee should collectively meet the requirements of competence, independence and industry experience (Article 129 of the Act on Statutory Auditors).

First, according to statutory requirements, at least one member of the audit committee must have knowledge and skills in accounting or auditing. These competence requirements should be fulfilled by, among others: a certified auditor, an accountant or a person with significant professional experience gained as a financial director, director of internal audit or director of internal control department, preferably held in an entity of a similar size and profile to the PIE in which he is to act as a member of the audit committee.

As regards the required industry experience, members of the audit committee should have knowledge and skills in the industry in which the PIE operates. This condition shall be deemed to be fulfilled if at least one member of the audit committee has knowledge and skills in this industry, or individual members within specific scopes have knowledge and skills in this industry.

It is worth noting that the articles of association, the supervisory board bylaws or the audit committee bylaws may specify the above mentioned statutory requirements or provide for additional criteria to be met by candidates for audit committee members. In particular, internal corporate documents may specify how knowledge and skills in accounting or auditing or competencies relating to industry in which the relevant SPE operates will be verified.

In addition to knowledge and skills requirements, the Act on Statutory Auditors also talks about the independence of an audit committee member – tell us how it is defined in our law.

The majority of the audit committee members, including its chair, should be independent of the relevant PIE. It is worth clarifying that the condition of independence is met if the relevant member of the said committee: 1) is not, or has not been within the last five years, a member of the board of directors or any other governing body of the relevant PIE or does not belong, or has not belonged within the last five years, to the high-level management of the relevant PIE or its affiliate; 2) is not, or has not been within the last three years, an employee of the relevant PIE or its affiliate, except when a member of the audit committee is an employee not belonging to the top-level management, who was elected to the supervisory board as an employee representative under separate regulations; 3) does not exercise control, within the meaning of art. 3 sec. 1 item 37 let. a – e of the Accounting Act or does not represent persons or entities exercising control over a given PIE; 4) does not receive or did not receive additional remuneration, in a significant amount, from a given PIE or an entity affiliated with it, with the exception of remuneration received as a member of the supervisory board or another supervisory body, including the audit committee; 5) does not have, nor has had within the last year, a significant business relationship with a given PIE or an entity affiliated with it, either directly or as an owner, partner, shareholder, director or employee belonging to the high-level management staff of an entity having such a relationship; 6) is not, and has not been within the last two years (a) an owner, partner, shareholder of the current or previous audit firm auditing the financial statements of the relevant PIE or an entity related to it, or (b) a member of the board of directors or other supervisory body of the current or previous audit firm auditing the financial statements of the relevant PIE, or (c) an employee or a person belonging to senior management including a member of the board of directors or any other governing body of the present or previous audit firm that audits the financial statements of the relevant PIE or any affiliate thereof, or (d) any other natural person whose services were placed at the disposal or under the supervision of the present or previous audit firm or any auditor acting on its behalf; 7) is not a member of the board of directors or any other governing body of an entity in which a member of the board of directors or any other governing body of the relevant PIE is a member; 8) has not been a member of the board of directors or any other governing body of the relevant PIE for more than twelve years; 9) is not a spouse, a person staying in cohabitation, a relative or a relative in a straight line, and in the collateral line to the fourth degree – of a member of the board of directors or another managing body of a given PIE or a person referred to in points 1 – 8; 10) is not in an adoption, custody or guardianship relation with a member of the board of directors or another managing body of a given PIE or with a person referred to in points 1 – 8 of the cited regulation.

The legislator has taken great pains to enshrine independence in law. In addition, in the Best Practice of Listed Companies 2021 we have an additional provision stating that there should be no ties with a shareholder above 5%. Why is this independence so important?

The condition of independence of the majority of audit committee members, including the chair, is intended to make this body objective, capable of making decisions in opposition to the majority shareholder and exercising its functions in the interests of the company. This requirement with respect to the chair of the audit committee may in practice lead to a separation of the functions of the chair of the supervisory board (usually appointed by the majority shareholder in public limited companies) and the chair of the audit committee, who must be independent.

In spite of so many requirements to be fulfilled with regard to independence, there are still, in my opinion, gaps in it. Looking at the LinkedIn profiles of members of supervisory boards and audit committees or checking their related entities in the National Court Register (KRS), one can doubt the declarations of independence that are being made. Will the following persons meet the independence criteria according to our law: i) a long-time friend of the key shareholder, ii) a good colleague of the CEO from a previous job, or iii) employee of a university which the main shareholder supports through his other businesses?

From the point of view of strictly interpreted legal provisions, these persons meet the requirements of independence. Nevertheless, one may have doubts as to whether such close intimacy and community of interest does not constitute an obstacle to the impartial performance of the function of a member of the audit committee. In my opinion, this is a matter of best practice, decency and judgement on the part of investors, including minority investors. It is best to clarify the issue of impartiality in internal corporate documents, e.g. audit committee bylaws, procedure or policy to prevent conflict of interest, etc. Substantive support may also be offered by institutions such as the WSE (by updating the Best Practice or publishing explanations), as well as by organisations associating investors or supervisory board members.

And now another set of situations, is it lawful to have an audit committee whose chair is 'independent’, has neither knowledge of financial reporting nor of the sector in which the company operates and where the only person meeting the knowledge and industry experience criteria is a dependent member of the audit committee? Can such an audit committee fulfil its statutory activities?

Formally, such an audit committee will fulfil the criteria of the system. Nevertheless, we return to the answer to the previous question. What is important is the professionalism, impartiality and operability of the committee as a whole, which should be assessed not only from the point of view of legal restrictions, but also from the point of view of best practice, the interests of the company, the absence of conflicts of interest, the requirements of business transactions, the specifics of the industry, etc.

Do our law or corporate governance code specify a body responsible for verifying independence? If an investor or board member has a reasonable suspicion that a person who has declared himself ‘independent’ does not meet the statutory criteria, what can such a person do?

The PFSA (Polish Financial Supervision Authority) is the supervisory authority over the PIE in terms of compliance with the regulations concerning, inter alia, the appointment, composition and functioning of the audit committee.

Responsibility for breach of the provisions of the Act on Statutory Auditors or Regulation No. 537/2014 lies in particular with the PIE, members of its management board and supervisory board (including members of the audit committee).

The administrative penalties imposed by the Polish Financial Supervision Authority are: a fine and a ban on being a member of the management board or a member of the supervisory board for a period from one to three years.

A fine imposed on an PIE may not exceed 10% of the net revenue from the sale of goods and products achieved by that entity in the previous financial year.

A pecuniary penalty imposed on members of governing bodies may not exceed PLN 250,000.

There are supervisory boards and audit committees where there are few independent members. They are often in the minority and are not likely to be the majority owners’ favourite board members. On the capital market, it is quite common to hear about the various ways in which the major shareholders have tried to make the lives of independent members of the supervisory board and the audit committee miserable, particularly if they have dared to have a different opinion than the only one that is right and acceptable. So, please tell us how an audit committee member you can and cannot be deprived of his or her position?

A member of the audit committee may be removed from the audit committee by the supervisory board on a collegiate basis. In addition, a member of the audit committee may be dismissed from the position of a member of the supervisory board (and thus a member of the audit committee) by the general meeting.

In line with the PFSA’s position, a member of the audit committee (especially its chair) may not be dismissed by, for example, the chair of the supervisory board, even if such a right has been incorrectly reserved in internal corporate documents (e.g. in the supervisory board bylaws).

There are a number of arguments in support of the PFSA’s position, mainly derived from the systemic and objectivist interpretation.

Firstly, such a power of the chair of the supervisory board is in conflict with the principle of collegial operation of the supervisory board stipulated in art. 390 of the Commercial Companies Code. In accordance with its content, the supervisory board performs its duties collectively, but it may delegate its members to carry out certain supervisory activities independently. The aforementioned exception concerning delegation of supervisory board members does not include dismissal of audit committee members.

The essence of the principle of collegiality is to assign competencies (and thus duties) to a body and not to its individual members.

Secondly, such a solution is contrary to Article 128(1) of the Act on Statutory Auditors, according to which members of the audit committee are appointed by the supervisory board. By way of inference from analogy and in line with the mirror principle, it should be assumed that also the dismissal of a member of the audit committee should result from a resolution of the supervisory board.

The criterion of independence enforces not only the selection of audit committee members who meet the prerequisites listed in Article 129(3) of the Act on Statutory Auditors, but also the provision of institutional guarantees that will enable the functions of a committee member (mainly the chairman) to be exercised autonomously from, among others, the company’s management board and the majority shareholder.

Therefore, a provision in the bylaws granting unfettered arbitrary power to dismiss a member of the audit committee by the chair of the supervisory board is a denial of the essence of the functioning of this body.

Are audit committee members subject to different liability from supervisory board members? Does our law provide for different liability for dependent and independent board members?

Legal regulations do not directly differentiate between responsibility of audit committee members and responsibility of supervisory board members who are not members of this body.

Nevertheless, the fact whether a given member of the supervisory board was a member of the audit committee may be taken into account when the PFSA imposes an administrative penalty under the prerequisites for the penalty and when determining the gravity of the infringement.

It is often colloquially said that sitting on a supervisory board is a light, easy and pleasant way to spend one’s time. In recent months, the PFSA has imposed several penalties on supervisory board members – so let us tell you what picture of board work and activities emerges from these penalties?

PFSA is increasingly reaching for instruments to sanction supervisory board members.

The authority believes that the supervisory board should actively exercise continuous supervision over the company’s activities, including the management board. It is excluded that the supervision should be of incidental nature. The supervision may not be selective and limited e.g. only to the verification of the company’s financial statements or not performed at all.

The supervisory board is also required to act to remedy any irregularities discovered during its day-to-day control of the public limited liability company’s activities.

Supervisory board members must exercise due diligence and vigilance.

Moreover, it is not possible to avoid administrative liability by invoking the division of responsibilities for ongoing supervision and control between individual board members – these are borne equally by all board members, even though there is a division of tasks in the internal regulations governing the board’s activities.

ESG criteria are increasingly gaining on importance in decision-making on capital markets. We devoted our entire conversation to the fascinating letter G which stands corporate governance. For me, it is very important and I do not want my savings to be invested in companies that disregard corporate governance. How can institutional and individual investors find out about breaches of corporate governance when members of the audit committee and the supervisory board are bound to secrecy? Is it not worth changing the law in this regard?

The law does not impose a strict confidentiality obligation on audit committee members. However, members of the audit committee should be guided by loyalty to the company, the duty to observe good manners and the prohibition on violating personal interests (of the company or other members of its bodies) when publicising issues concerning the company. In my view, evident dysfunctions (especially documented ones) should be publicised (e.g. under the counter-option of permissible criticism). Sometimes disclosure of bad practices and public reaction (also informal) may be sufficient to eliminate the irregularities much faster than in the case of initiating administrative proceedings by the authorities.

The effectiveness of corporate governance should also be ensured from the bottom up (by informed and aware investors), using all instruments of social control, not only formalised ones. Supervisory mills – also due to code requirements – tend to grind more slowly, which also translates into their effectiveness. However, they usually have the advantage of informal instruments – a deterrent nature.

Iwona, thank you very much for your time and your valuable answers! I think they will be a kind of guide for all those who want to delve into the letter G of ESG.