Montenegro is advancing its corporate governance framework with the introduction of a revised Corporate Governance Code, which aims to enhance investor protection and board accountability in line with European Union standards. This initiative reflects a broader commitment to improving company law within the country.
The new Code employs an “apply or explain” model, requiring companies to report their compliance starting from the financial year that begins on 1 January 2025. Firms will need to complete questionnaires submitted to the Capital Market Commission, which will also publish an annual report on corporate governance for those adhering to the Code.
Key recommendations within the governance framework emphasize the composition of boards, suggesting that they should consist of an odd number of members, primarily non-executives, with a majority being independent. Additionally, it mandates that the roles of chairperson and CEO must not be held by the same individual. Companies are also encouraged to form nomination, remuneration, and audit committees, each comprising at least three members, predominantly independent and chaired by an independent non-executive director.
Significantly, the Code addresses gender balance by stipulating that the less represented gender must make up at least 40% of non-executive directors or one-third of all director positions, including both executive and non-executive roles. This provision marks a substantial shift in corporate culture within Montenegro.
Historically, boards in smaller markets like Montenegro have often acted as extensions of ownership or political influence. The new governance guidelines advocate for a clear separation between supervision and execution, improved documentation of decisions, better management of conflicts of interest, and enhanced treatment of minority shareholders.
For publicly listed companies, adopting these governance practices could bolster investor confidence. State-linked enterprises may experience reduced political risks associated with management, while family-owned businesses could benefit from improved succession planning and professionalization. For foreign investors, the revised Code establishes a more transparent framework concerning board control and minority protections.
However, challenges remain in implementing these changes effectively. Montenegro faces a shortage of experienced independent directors, and many companies might comply superficially without making substantive changes. Furthermore, some firms may provide vague justifications for deviations from the Code rather than offering meaningful explanations.
The importance of the “explain” aspect is as critical as adherence itself; a robust explanation should clarify how alternative arrangements safeguard shareholder interests and enhance oversight. Conversely, weak justifications may merely serve as compliance cover.
Montenegro’s corporate landscape requires more than mere compliance; it necessitates boards that engage rigorously with issues such as risk management, related-party transactions, capital allocation strategies, debt management, real estate exposure, executive compensation, and long-term strategic planning.
The revised Corporate Governance Code represents a significant step forward. Its successful adoption will depend on the collective efforts of investors, regulators, banks, and company owners who prioritize substantive governance over mere formalities.
