Introduction

Investor confidence is essential to the development of a healthy and dynamic market economy.¹ Protecting investors and encouraging long-term economic growth are closely connected goals.² In recent years, Georgia took steps to modernize corporate governance laws and bring them in line with international standards. However, important challenges remain, especially in making sure that corporate boards are truly accountable for their decisions and actions. While legal reforms have introduced new rules on paper, gaps in enforcement and weak oversight continue to undermine trust in companies and discourage investment. ³

Board accountability refers to the legal and institutional mechanisms that ensure directors are held responsible for how they oversee and manage the company. It plays a central role in protecting investors.⁴ When boards fail to act with care, independence, or integrity the risk of mismanagement and unfair treatment increases.⁵ On the other hand, strong board accountability, supported by clear legal duties and effective enforcement, helps ensure that companies act in the interests of all shareholders.⁶ This, in turn, promotes better performance, greater transparency, and easier access to capital.⁷

This paper explores how Georgia can strengthen investor protection and promote sustainable economic growth by improving board accountability. ⁸ It uses the United States as a comparative model, focusing on the U.S. system’s emphasis on fiduciary duties, independent boards, and enforcement mechanisms.⁹ While the U.S. system is not without its own challenges, it offers useful lessons that can help identify where Georgian practice still falls short and how it can be improved.

The paper also offers a broader framework for understanding the connection between corporate governance, investor confidence, and economic development. It emphasizes that effective board accountability is not just a legal concern but a strategic priority for Georgia’s future. The aim is not to copy another country’s system entirely, but to develop practical, locally adapted reforms that reflect international standards and respond to the needs of Georgia’s legal and business environment.

Finally, the goal of this study is to support informed discussion and policymaking on corporate governance reform. By offering legal analysis, comparative insight, and practical recommendations, the paper seeks to serve as a resource for lawmakers, regulators, business leaders, legal professionals, and international partners working to improve corporate accountability in Georgia. Strengthening board oversight is an important step toward building a more trusted, transparent, and investment-friendly economy.

1. Investor Protection, Board Accountability, and Economic Growth
   1. The Importance of Investor Protection

Investor protection refers to the laws, regulations, and mechanisms in place to ensure that those who provide capital to companies are not unfairly disadvantaged by insiders or poor management.¹⁰ In corporate governance, a high level of investor protection typically means that shareholders have clear rights¹¹ and that there are legal avenues to hold directors and managers accountable for misconduct or negligence.¹² Extensive research in comparative corporate law has shown that stronger investor protections correlate with more developed financial markets and higher economic growth rates.¹³ When investors feel confident that their rights will be respected and that they can trust corporate disclosures and governance, they are more likely to invest.¹⁴ This expansion drives job creation and economic development. In contrast, if investor rights are weak or unenforced, markets tend to remain shallow.¹⁵

Georgia, as an emerging market, has recognized the link between investor protection and economic outcomes. Over the past two decades, the Georgian government and regulators have undertaken reforms to strengthen corporate governance in the hope of attracting foreign investment and boosting domestic capital markets.¹⁶ The World Bank’s recent assessment of Georgia’s corporate governance noted that improvements in the legal framework, including a new Company Law (Law on Entrepreneurs) and corporate governance codes, aim to enhance transparency and shareholder rights.¹⁷ Indeed, good corporate governance “contributes to sustainable economic development by enhancing the performance of companies, increasing their access to outside capital and signaling Georgia as an attractive investment location.”¹⁸ This statement underlines that protecting investors is not only a matter of fairness but a strategic economic imperative for the country. However, investor protection is only as effective as the mechanisms that enforce it. This is where board accountability becomes central. Strong laws on paper might grant shareholders rights or set duties for directors, but without effective board accountability, through both internal governance practices and external enforcement, those rights will not be genuine.¹⁹ Therefore, improving investor protection in practice requires ensuring that corporate boards are answerable for their stewardship of the company.²⁰

B. Board Accountability in Corporate Governance

Board accountability means that the board of directors is answerable to shareholders and stakeholders for the company’s management and performance. It encompasses the set of checks and balances that motivate directors to act in the best interests of the company and its shareholders, and mechanisms to remedy situations when they do not.²¹ Key elements of board accountability include: directors’ legal duties, transparent disclosure of company affairs, independent oversight of management, and shareholder rights to influence the board’s composition and decisions.²² Corporate boards are vested with significant power such as setting the company’s strategy, appointing and supervising executives, and making decisions that can have profound impacts on shareholders’ investments.²³ In exchange for this power, the law imposes fiduciary duties on directors, typically the duty of care and the duty of loyalty, to ensure they use their authority responsibly.²⁴ The duty of care requires directors to act with the level of diligence and prudence that a reasonably prudent person would use in similar circumstances, informing themselves of all material information before making a decision.²⁵ The duty of loyalty requires directors to put the interests of the corporation and its shareholders above their interests to avoid self-dealing and conflicts of interest.²⁶

Accountability also implies consequences for failing to fulfill these duties. A cornerstone of board accountability is the ability of shareholders to hold directors legally liable for misconduct or gross negligence.²⁷ In jurisdictions with strong investor protection, shareholders may bring lawsuits to seek redress if directors breach their duties.²⁸ Additionally, the regular election of directors by shareholders provides a democratic mechanism for accountability: if shareholders are dissatisfied with a board’s performance, they can vote to replace those directors.²⁹ Other governance mechanisms, such as independent audits, mandatory disclosure of conflicts of interest, and board evaluation processes, further reinforce the principle that the board must answer to someone other than itself.³⁰ When board accountability functions, it reassures investors that there are safeguards against the abuse of power. This trust, in turn, encourages investment.³¹ Former SEC Commissioner Luis Aguilar emphasized that robust corporate governance oversight is key to restoring and maintaining market trust. He noted that “good corporate governance is essential to the stability of our capital markets and our economy, as well as the protection of investors.”³² In essence, board accountability is the bridge connecting the intent of investor protection laws to the tangible confidence of investors in the market.

C. The Link Between Corporate Governance and Economic Growth

Effective corporate governance has macroeconomic implications. By ensuring that companies are run transparently and efficiently, good governance practices make it easier for firms to obtain financing at lower cost, because investors demand a smaller risk premium when they feel protected. Over time, this leads to broader and more liquid capital markets.³³ Empirical studies have found that countries with stronger investor protections and corporate governance frameworks tend to have higher rates of market capitalization relative to GDP and, importantly, higher growth rates in the long run.³⁴ The logic is straightforward: capital flows to where it is safe and can earn a return. If investors trust that their rights will be upheld, they are willing to supply more capital. This capital fuels business expansion, innovation, and entrepreneurship, contributing to economic growth and job creation.³⁵

In Georgia’s context, improving corporate governance is recognized as vital for attracting foreign direct investment and developing the private sector.³⁶ When Georgia signed an Association Agreement with the European Union in 2014, it committed to approximate many EU standards, including those in corporate law and governance.³⁷ Since then, the country has taken steps to renovate its corporate governance framework: passing a new Law on Entrepreneurs in 2021,38 updating its Law on Securities Markets, strengthening accounting and audit requirements, and even developing voluntary corporate governance codes for certain sectors.39 These changes are informed by international principles such as the OECD Principles of Corporate Governance40 and aim to address past weaknesses. The anticipated payoff of these reforms is greater sustainable economic growth. In practical terms, if Georgian companies adopt higher governance standards, they should become more appealing to investors. This can lead not only to increased investment in individual companies but also to a virtuous cycle: a more vibrant stock market, deeper integration with global financial markets, and a more resilient economy less reliant on any single source of funding. On the other hand, failing to improve board accountability and investor protection could impede Georgia’s growth.41 Companies might remain reliant on a narrow base of insiders for funding, which limits expansion. Investors might prefer other markets seen as safer, which deprives Georgia of capital inflows. Such risks underscore why this paper focuses on board accountability as a lever for both protecting investors and fostering sustainable economic growth. Strengthening board accountability in Georgia is not just a corporate law exercise - it is part of the broader nation- building effort to create a modern, prosperous economy underpinned by the rule of law.42

II. Corporate Governance in Georgia and Evolving Board Accountability

A. Legal and Regulatory Framework in Georgia

The corporate governance framework in Georgia is grounded in several key laws and regulations. The primary legislation is the Law of Georgia on Entrepreneurs, which provides the legal basis for forming and operating business entities, including provisions on management structures and directors' duties. In response to evolving needs and international recommendations, a new Law on Entrepreneurs was adopted on 2 August 2021. This new law represents a comprehensive update. It introduces more detailed regulations on corporate governance processes, including corporate registration, shareholder meetings, minority shareholder rights, and the duties and liabilities of company management agencies. Under Georgian law, companies can choose either a two-tier board structure (with a Supervisory Board and a Management Board) or a one-tier board (a Board of Directors).43 In practice, many large Georgian companies and banks use a two-tier system. In a two-tier system, the Supervisory Board (non-executive directors) oversees the Management Board (executive directors who handle day-to-day operations).44 It also requires Supervisory Board approval for certain fundamental decisions, such as the annual budget and the “general principles of economic policy” of the company. This essentially means the board should approve the company’s strategic guidelines, although the law does not explicitly use terms like “strategy” or “risk appetite” outside the banking context. Other relevant legislation includes the Law on the Securities Market, which regulates publicly traded companies and investor disclosures, and sector-specific laws such as the Law on the Activities of Commercial Banks.45 Additionally, National Bank of Georgia (NBG) regulations influence corporate governance: the NBG, as the central bank and financial sector regulator, has issued rules and guidelines for banks’ governance. Since 2016, with the EU-Georgia Association Agreement in force, Georgia has been aligning its financial regulation with EU standards, which has led to new requirements for transparency and accountability especially in the financial sector.⁴⁶ A significant development in the soft law domain is the creation of Corporate Governance Codes. Georgia now has multiple such codes, which target different segments of the market, developed in cooperation with international institutions. Notably: In 2009, the Association of Banks of Georgia (with EBRD support) issued a Corporate Governance Code for Commercial Banks, operating on a “comply or explain” basis. While adherence was voluntary, it recommended banks maintain a balance of independent board members and provided guidelines on board responsibilities.47 Moreover, In 2021, the National Bank of Georgia, with World Bank/IFC assistance, approved a new Corporate Governance Code for Issuers of Public Securities. This code aims “to promote increased responsibility for companies, active communication with stakeholders, transparency and protection of investors’ rights”,48 thereby helping companies achieve long-term goals and boosting investor confidence. It operates on an “apply or explain an alternative” principle, which requires companies to disclose their governance practices against the code’s principles or explain deviations.49

The regulatory institutions overseeing corporate governance in Georgia include the National Bank, the Central Securities Regulator, and the Service for Accounting, Reporting, and Auditing Supervision (SARAS), which monitors financial reporting and audit quality.50 Enforcement of company law primarily falls to the courts when disputes arise, but regulators can impose sanctions for violations of securities laws or banking regulations.51 Additionally, the Investors Council52 and the Business Ombudsman53 play roles in advocating for investors’ rights and mediating disputes.54

B. Board Structure and Duties under Georgian Law

Under the Georgian corporate governance system, particularly as outlined in the Law on Entrepreneurs, the board’s structure and duties exhibit both similarities and differences with systems like the U.S. This framework reflects Georgia’s gradual shift toward international best practices while retaining features rooted in its local legal and institutional context.

Georgian companies, particularly Joint Stock Companies (JSCs), traditionally follow a two-tier board structure, separating supervisory and management functions to enhance oversight and reduce conflicts of interest.55 In this model, the Supervisory Board oversees a separate Management Board.56 The Supervisory Board is appointed by and accountable to the General Meeting of Shareholders, and in turn, appoints and monitors the Management Board.⁵⁷ The law mandates a Supervisory Board for JSCs above a certain shareholder threshold, while smaller companies and Limited Liability Companies (LLCs) may opt for a single-tier Board of Directors or even no formal board. The typical Georgian Supervisory Board is small and often composed of insiders or major shareholder representatives.⁵⁸ This is a critical contrast with U.S. practice where board independence is a cornerstone of governance for public companies.⁵⁹

The new Law on Entrepreneurs requires Supervisory Board members in Joint Stock Companies (JSCs) to follow the same fiduciary duties as Management Board members. This ensures that both boards are held to the same standards and strengthens overall accountability in the company. This includes the duty to act in good faith and with care in the interests of the company.⁶⁰ The law also imposes a specific duty on directors and supervisory board members in certain circumstances such as the duty to file for insolvency proceedings if the company becomes insolvent.⁶¹ This type of duty is similar to rules in some European countries, where directors are expected to protect creditors by promptly filing for reorganization or liquidation when a company is in financial trouble. However, such duties are not commonly found in U.S. corporate law.⁶² Although the rule was introduced with good intentions, it sparked controversy. Some experts pointed out that it may be a “technical mistake” to hold supervisory board members responsible for starting insolvency proceedings since they usually do not have direct control over the company’s day-to-day operations. This part of the law may need to be revised to ensure that supervisory board members are not unfairly held accountable for responsibilities that properly belong to management.⁶³ The law also attempts to introduce the concept of the Business Judgment Rule (BJR) into Georgian jurisprudence, a doctrine borrowed from U.S. law that protects directors from liability for informed, good-faith decisions that turn out badly.⁶⁴ However, the current law does not extend the BJR protection to Supervisory Board members.⁶⁵ This omission leads to uncertainty. While supervisory board members have fiduciary duties, they may not have the same legal protection as management board members when they act in good faith, which raises concerns about unequal liability standards.⁶⁶ Legal commentators in Georgia argued that the BJR “should also apply to the members of the supervisory board”, and its absence could deter qualified individuals from serving or make them risk-averse.⁶⁷ This part of the law may need to be revised to ensure that all directors and board members are treated equally and receive the same legal protections and responsibilities.

Georgian law assigns boards, particularly Supervisory Boards in JSCs, the responsibility to oversee management decisions, ensuring that executive actions align with the company’s best interests and legal obligations.⁶⁸ This includes reviewing and approving key corporate actions. As mentioned, JSC boards must approve the annual budget and general business policy, which can be interpreted as the board’s role in setting the company’s strategic direction.⁶⁹ For banks and other regulated entities, additional responsibilities are imposed by NBG regulations, for example, bank boards must approve risk management policies, which ensure a proper internal control framework, and comply with NBG’s guidelines for directors. The Corporate Governance Code for Commercial Banks suggests that bank boards should create specific committees to handle important tasks and should include members who have knowledge and experience in finance and risk management.⁷⁰

Georgian law and regulations promote board accountability by requiring transparency and enforcing conflict of interest rules, thereby safeguarding the integrity of corporate decision- making processes.⁷¹ Companies must prepare annual reports with financial and some non- financial information, and disclose material facts to shareholders.⁷² According to assessments, most large Georgian companies, especially banks, do prepare annual reports. However, the quality of information about corporate governance in these reports varies. Many companies include only generic or formal statements instead of offering meaningful details about their actual governance practices.⁷³ The new code for issuers will require companies to provide more detailed information on how they follow corporate governance principles. This may encourage boards to be more transparent about their structure, decision-making processes, and overall operations.⁷⁴ The law also sets rules to prevent conflicts of interest. Directors must disclose any personal interest they have in a transaction and are not allowed to vote on that matter. If these rules are broken, the transaction can be canceled, and the director may have to pay for any harm caused to the company.⁷⁵

C. Current Practices and Challenges in Board Accountability

The current state of board accountability in Georgia demonstrates significant shortcomings in implementation and oversight. These gaps highlight the need for further development to bring governance practices in line with international standards. Various assessments by international organizations⁷⁶ and local experts have identified persistent challenges in how Georgian boards function and how effectively they are held to account.⁷⁷ Despite alignment with international standards, implementation and oversight remain weak. This limits the effectiveness of board responsibilities. In the following text, we will discuss these challenges to understand the underlying issues and explore potential paths for reform.

One of the fundamental challenges in Georgian corporate governance is the insufficient presence of independent directors, which undermines board impartiality and limits the range of expertise needed for robust oversight and sound decision-making.⁷⁸ The EBRD corporate governance assessment noted that “there was no requirement for companies to have any independent directors on their boards”, and that even though a banking sector code recommended independent members, in practice “only very few banks have independent directors on boards.”⁷⁹ Independence is crucial for objective oversight of management; without it, boards may simply rubber-stamp management’s or controlling shareholders’ decisions.⁸⁰

Effective corporate governance depends on strong board committees and internal controls. However, many Georgian companies do not have well-structured committees, which reduces their ability to exercise detailed oversight and maintain proper risk control. In Georgia, the law does not require JSCs to form board committees.⁸¹ Banks are an exception: bank boards are expected to have audit committees, and the corporate governance code for banks recommends other committees.⁸² Outside banking, many Georgian companies have no board committees at all,⁸³ the full board handles all matters, which can dilute the focus on critical oversight areas like financial reporting or executive pay.⁸⁴

Although the law now clearly defines directors’ duties, enforcement remains weak, as there have been few cases in which directors were held liable for breaching their obligations. Derivative lawsuits are rare in Georgian jurisprudence.⁸⁵ Several factors help explain this situation. Until recently, the legal framework for such lawsuits was not well developed. Shareholders may also lack the financial resources or motivation to pursue complex legal action. In addition, the court system is still in the process of developing the necessary expertise to handle corporate cases effectively.⁸⁶ The 2021 reforms aim to “promote establishing a uniform and consistent court practice in resolving corporate disputes”.⁸⁷ However, practical challenges persist. Georgian judges and lawyers are still becoming familiar with key corporate governance concepts such as fiduciary duty and the business judgment rule. Establishing strong enforcement precedents will require time and continued development of legal expertise.⁸⁸ In the interim, directors may not feel a credible threat of being sued or removed, especially in companies where controlling shareholders shield the board from accountability.⁸⁹

Georgian companies often face challenges due to a lack of clear separation between ownership and management, as dominant shareholders frequently hold board or executive positions, which can compromise independent decision-making and oversight.⁹⁰ This high concentration of ownership can result in controlling shareholder entrenchment, where the board tends to prioritize the interests of the controlling owner over those of the company or minority shareholders, thereby weakening overall accountability and fairness.⁹¹ Minority investors often face challenges in influencing company decisions or seeking redress for their concerns. The Business Ombudsman of Georgia has acknowledged the existence of disputes involving minority shareholders, although only a limited number of such cases have been made public.⁹² The new law extends fiduciary duties to controlling persons and introduces requirements for disclosing conflicts of interest. These measures aim to prevent abusive related-party transactions and self-dealing that could harm the company or minority shareholders.⁹³

To enable shareholders to evaluate board performance effectively, companies must provide timely and accurate disclosures; however, many Georgian companies still face significant gaps in transparency and information sharing. Georgian companies, particularly those not listed or thinly traded, often provide minimal disclosure beyond legal requirements.⁹⁴ The World Bank’s Report on the Observance of Standards and Codes for Georgia noted that although legal disclosure requirements align with international standards, the quality of corporate governance reporting is low.⁹⁵ Many companies’ governance statements in annual reports were merely copied from charter documents and did not describe real practices.⁹⁶ Moreover, only a small fraction of companies publish general meeting minutes or detailed voting results, which are tools for investors to see how decisions were made and whether the board considered shareholder input.⁹⁷ This opacity can shield boards from scrutiny. New reporting obligations under the NBG’s code for issuers aim to change this by requiring boards to explain themselves on board composition, risk management, and shareholder relations.⁹⁸

Another key challenge relates to the capacity and culture of boards. In numerous Georgian companies, directors often have limited backgrounds in corporate governance, which can impede their ability to fulfill oversight responsibilities and guide the company effectively. Georgian universities only recently started focusing on corporate governance. Organizations like the International Finance Corporation (IFC) have conducted workshops for Georgian board members, which is a positive step.⁹⁹ The capacity of regulatory agencies is equally important. Institutions such as the National Bank of Georgia and SARAS must have sufficient expertise and resources to effectively monitor and enforce corporate governance standards. The World Bank’s Report on the Observance of Standards and Codes (ROSC) emphasized the need for ongoing capacity building among both regulators and companies to improve governance practices in Georgia. This highlights that legal reforms alone are not sufficient; the individuals responsible for implementation must also be adequately trained and supported.¹⁰⁰

III. U.S. Corporate Governance Standards for Board Accountability

1. Fiduciary Duties of Directors under U.S. Law

The U.S. corporate governance system, while diverse across 50 states, has a well- developed core of director duties and legal doctrines that ensure board accountability. At the heart of U.S. corporate law (exemplified by Delaware) are the fiduciary duties owed by directors to the corporation and its shareholders.¹⁰¹

The primary fiduciary duties in U.S. law are: the duty of care and the duty of loyalty.¹⁰² The duty of care requires directors to act with the care that a reasonably prudent person in a similar position would use under comparable circumstances.¹⁰³ In practice, this means directors should make decisions on an informed basis, they must educate themselves about the relevant facts, deliberate adequately, and exercise oversight of the corporation’s affairs.¹⁰⁴ Directors are expected to attend meetings, review provided materials, and ask questions. If they fail to do so and the company incurs harm, they can be found to have violated their duty of care. However, recognizing that risk-taking is inherent in business, U.S. courts generally do not second-guess business decisions that turn out poorly, as long as the process was careful and honest - this deference is embodied in BJR.¹⁰⁵ Under Delaware law, for instance, “courts applying Delaware law and evaluating board decisions will, in the first instance, apply the business judgment rule”, which presumes directors acted consistent with their duties.¹⁰⁶ To overcome this presumption, a plaintiff must show that directors were grossly negligent¹⁰⁷ or acted in bad faith or with a conflict of interest.¹⁰⁸ The BJR protects directors from being judged unfairly after the fact, as long as they acted in good faith and made careful decisions at the time.

The duty of loyalty is the obligation of directors to put the corporation’s and shareholders’ interests above their interests.¹⁰⁹ This means directors must avoid conflicts of interest and cannot usurp corporate opportunities for themselves.¹¹⁰ If a director is on both sides of a transaction, U.S. law requires full disclosure and usually approval by disinterested directors or shareholders to cleanse the conflict; otherwise, the transaction can be voided and the director held liable.¹¹¹ Delaware courts famously stated that the duty of loyalty demands an “undivided and unselfish loyalty to the corporation” and no betrayal of trust for personal gain.¹¹² As a subset of loyalty, directors owe a duty of good faith, which means that they must act with honesty of purpose and not intentionally shirk their responsibilities. Delaware jurisprudence treats lack of good faith as part of the duty of loyalty.¹¹³ Additionally, the duty of loyalty in the U.S. has evolved to encompass an oversight duty: directors must in good faith ensure that reasonable information and reporting systems exist within the company. In the landmark case court held that a sustained failure to implement any oversight or a conscious disregard of “red flags” of wrongdoing can breach the duty of loyalty (lack of good faith).¹¹⁴ Though this threshold is high, directors are not insurers of corporate success, Delaware decisions in recent years (e.g., Marchand v. Barnhill (2019), In re Boeing Co. Deriv. Litig. (2021)) have shown a willingness to hold boards accountable when they ignored glaring compliance risks, such as food safety in Marchand.¹¹⁵ Thus, U.S. directors’ “rules of the road” are clear: “Act in an informed, disinterested, and loyal manner, in good faith, in the best interests of shareholders”.¹¹⁶ As one synopsis put it, a director must “make an independent, disinterested, informed, good faith decision…with an honest belief that the action is in the best interests of the company and its stockholders”.¹¹⁷ Failure to meet these duties can result in liability. Importantly, most U.S. jurisdictions allow corporations to include exculpation provisions in charters that protect directors from monetary damages for breaches of the duty of care,¹¹⁸ but not for breaches of the duty of loyalty, bad faith, or willful misconduct.¹¹⁹

Enforcement of fiduciary duties in the U.S. primarily occurs through shareholder litigation, which serves as a critical mechanism for corporate accountability. Shareholders may bring derivative suits on behalf of the corporation to redress the harm caused by directors' breaches of fiduciary duties. These suits are subject to procedural requirements such as the demand requirement, as outlined in Aronson v Lewis, where plaintiffs must demonstrate that a pre-suit demand on the board would have been futile.¹²⁰ Derivative actions are especially effective when institutional investors coordinate to challenge managerial misconduct or gross oversight failures, as seen in the Caremark case, which established a standard for oversight liability under the duty of loyalty.¹²¹ Additionally, shareholders can initiate direct suits when their rights are violated as distinguished in Tooley v Donaldson, Lufkin & Jenrette, Inc., which clarified the test for distinguishing direct from derivative claims.¹²² Beyond private enforcement, regulatory bodies like the U.S. Securities and Exchange Commission (SEC) play an indirect but significant role in director accountability by enforcing disclosure obligations under federal securities law. Although the Securities and Exchange Commission does not directly prosecute breaches of fiduciary duty, it can take action against corporate leaders for fraud or material omissions under Rule 10b-5 of the Securities Exchange Act of 1934. Such enforcement can result in both legal penalties and significant reputational damage.¹²³

B. Board Composition and Independence Standards

U.S. corporate governance emphasizes the structure and composition of the board itself as a preventative measure for accountability. In practice, this has meant championing board independence and expertise, especially for publicly traded companies. Companies listed on major U.S. stock exchanges must follow strict listing rules regarding board composition. These rules require that a majority of board members be independent directors, based on definitions set by each exchange, to ensure objective oversight and reduce conflicts of interest.¹²⁴ An independent director is generally someone who has no material relationship with the company other than board service.¹²⁵ This requirement ensures that most of the board can exercise objective oversight over management. Such independent oversight is analogous to a supervisory board function even though U.S. boards are one-tier; it seeks to avoid boards being mere extensions of the CEO or controlling shareholder.¹²⁶

Board committees are another area where U.S. standards lead. The Sarbanes-Oxley Act of 2002 (SOX) and exchange rules mandate that certain critical committees consist entirely of independent directors. The most prominent example is the Audit Committee. Under SOX Section 301 and implementing SEC rules, every public company must have an audit committee composed solely of independent directors, and at least one member should be a “financial expert”.¹²⁷ This committee oversees the company’s financial reporting, internal controls, and the work of external auditors. It has direct responsibility for the appointment, compensation, and oversight of the external auditor, thereby reinforcing auditor independence from management.¹²⁸ Additionally, the audit committee must have the authority to engage its advisors and must establish procedures for handling complaints about accounting or auditing matters. These requirements significantly bolster board accountability, as they force boards to police financial integrity actively - a direct response to scandals like Enron that revealed complacent boards.¹²⁹ Similarly, stock exchange rules require that nominating/corporate governance committees and compensation committees of listed companies be composed entirely of independent directors.¹³⁰ The compensation committee also has the authority to hire independent compensation consultants.¹³¹ These measures place neutral parties in charge of conflicted areas, which protects shareholder interests.

U.S. boards also commonly separate, or at least counterbalance, the role of CEO and Chairperson. While not a legal requirement, many companies have an independent chair or a lead independent director if the CEO is also the chair, to provide leadership for the independent directors and set board agendas that are not solely driven by management.¹³² This practice is another layer of ensuring the board can act independently when needed.

Besides independence, diversity of skills and perspectives on the board is considered a sign of good governance in the U.S. Investors and proxy advisory firms now expect boards to have expertise relevant to the company’s industry and strategy and to include diverse members in terms of gender, race, and background.¹³³ While hard laws do not require specific diversity, the trend is reinforced by market pressure. This emphasis on varied expertise and  independence echoes some of the recommendations now being introduced in Georgia’s governance codes.134 Furthermore, U.S. corporate governance practice requires regular board evaluations and training. Many U.S. boards conduct annual self-assessments of their performance and that of their committees, often facilitated by external consultants, to identify areas for improvement.135 Directors frequently attend governance seminars or even formal education to stay current on their duties and emerging risks like cybersecurity or ESG issues.

The net effect of these composition and structure standards is a board that is structurally equipped to be more independent. A majority-independent board with key committees of all independents, led by someone who is not part of management, is far more likely to question management, insist on adequate information, and, if necessary, oppose or correct management decisions that are not in the shareholders’ best interests. These structural features are, in a sense, ex-ante accountability mechanisms - they attempt to ensure accountability by design, reducing the need for ex-post remedies. Georgia’s reforms, which now encourage independent directors and require disclosure of governance practices, are a step in this direction, but the U.S. system provides a more mature model where such practices are mandatory and ingrained.

C. Enforcement Mechanisms and Shareholder Rights in the U.S.

One of the defining strengths of the U.S. corporate governance system is the multiple avenues available to enforce board accountability. These range from shareholder activism in governance matters to regulatory enforcement and market-driven pressures.

In the United States, shareholders hold considerable influence through their voting rights, with directors of public companies generally subject to annual elections. This system supports accountability and enables shareholder activism as a check on board performance.136 Most companies now require directors to receive a majority of votes cast to be (re)elected, and some have adopted proxy access bylaws.137 If shareholders are unhappy with the board’s performance, they can wage proxy fights.138 Such proxy contests, while costly, have become more common with the rise of activist hedge funds and institutional investors willing to intervene in underperforming companies.139 Even the threat of a proxy contest can spur a board to make changes to placate investors.140

As previously noted, U.S. shareholders have the right to bring derivative lawsuits against directors for breaches of fiduciary duty, providing a powerful mechanism to enforce accountability and protect the interests of the corporation.141 They can also sue the company via securities class actions if there are material misstatements or fraud in securities offering documents or periodic disclosures.¹⁴² The United States has a highly active plaintiffs’ bar that monitors companies for signs of wrongdoing and is quick to file lawsuits when stock prices plunge on bad news, alleging that boards failed to disclose problems or allowed misconduct.¹⁴³ For example, if a company collapses due to an accounting scandal, shareholders may sue the board for failing to oversee financial reporting¹⁴⁴ and for securities fraud if prior financial statements were misleading.¹⁴⁵ Directors found to have engaged in misconduct can be forced to pay damages or at least face settlements.¹⁴⁶ The prevalence of litigation means that directors in the U.S. operate in an environment where there is a real risk of legal consequences for not performing their duties diligently or honestly. This risk is a powerful motivator for boards to establish good processes and document their decisions.¹⁴⁷

The U.S. Securities and Exchange Commission plays a key role in the oversight of public company disclosures and corporate governance. It acts as a regulatory authority that promotes transparency, protects investors, and ensures the integrity of the financial markets. While the SEC does not police fiduciary duty breaches, it can take action against companies and directors for violations of federal securities laws, for instance, false disclosure, insider trading, or failing to implement adequate internal controls.¹⁴⁸ The SEC can impose fines and bar individuals from serving as public company directors or officers if they are found to have engaged in egregious misconduct.¹⁴⁹ The mere prospect of an SEC investigation can prompt boards to tighten oversight.¹⁵⁰ Additionally, the Department of Justice can bring criminal charges for serious fraud.¹⁵¹ Post-financial crisis, regulators also gained some say in governance matters; for example, under the Dodd-Frank Act, bank regulators can veto directors or officers at large financial institutions deemed not fit,¹⁵² and all public companies must hold periodic Say-on-Pay votes.¹⁵³

Shareholders in the United States have relatively broad legal rights, including access to corporate information and the ability to express their views on important company matters through voting and other mechanisms. They can inspect certain books and records of the corporation if they suspect mismanagement.¹⁵⁴ They have the right to approve or reject major transactions like mergers or charter amendments, which indirectly disciplines boards to negotiate in shareholders’ best interests.¹⁵⁵ Shareholders holding a sufficient stake (usually 10% or lower if stated in the charter/bylaws or under state default rules) can call special meetings or act by written consent to address urgent matters, including the removal of directors in some cases.¹⁵⁶ These tools vary by company, but where available, they empower shareholders to respond relatively quickly if a board’s actions are harmful. In aggregate, these enforcement and rights mechanisms make the U.S. system quite unforgiving of egregious governance failures: a negligent or self-interested board can expect lawsuits, regulatory probes, and shareholder revolts.¹⁵⁷ This environment has contributed to making U.S. capital markets among the deepest and most liquid in the world, as investors generally believe that, while not every loss can be prevented, there are remedies if things go seriously wrong.¹⁵⁸

IV. Board Accountability Differences between Georgia and the U.S.

Comparing the corporate governance systems of Georgia and the United States reveals several important structural and regulatory differences. These gaps often reflect shortcomings in Georgia’s legal and institutional framework, especially when measured against the more developed and predictable standards of U.S. corporate law. As a result, investor confidence may be weakened, and the effectiveness of shareholder protection diminished. The following analysis outlines the key areas where these differences are most apparent.

A. Legal Duties and Standards

U.S. corporate law, particularly in Delaware, offers a well-developed case law that defines and continuously refines directors’ fiduciary duties. This judicial evolution provides strong guidance on standards of conduct and accountability for corporate directors.¹⁵⁹ Terms like “duty of care,” “duty of loyalty,” “good faith,” and “oversight” have specific meanings backed by precedent.¹⁶⁰ Georgia’s approach to fiduciary duty, by contrast, is newer and codified in statute. While the principles are similar, Georgian law lacks the depth of interpretative guidance that U.S. directors and courts have.¹⁶¹ The U.S. BJR provides directors a broad latitude absent gross negligence or conflict,¹⁶² whereas Georgian board members might fear liability even for well-intentioned decisions because the boundaries are not clearly delineated.¹⁶³ This difference means that Georgian directors could either be too cautious or, if they assume courts will not enforce the vague duties, too careless.¹⁶⁴ In either scenario, the level of predictability that U.S. corporate law provides to both directors and shareholders has not yet been fully established in Georgia.

A defining feature of the U.S. corporate governance system is the availability of enforceable remedies for shareholders. When directors breach their duties, shareholders can seek compensation for losses or push for the removal of those directors.¹⁶⁵ In Georgia, enforcement is uncertain. The law might say directors are liable for damages to the company caused by their fault, but there have been few if any examples of successful shareholder litigation on such grounds.¹⁶⁶ U.S. directors, mindful of lawsuits, often document their decision processes carefully;¹⁶⁷ Georgian boards may not feel the same pressure, possibly leading to more casual or opaque decision-making. Moreover, U.S. companies often purchase Directors’ and Officers’ insurance to cover legal expenses and liability, which reflects the reality of enforcement;¹⁶⁸ in Georgia, Directors’ and Officers’ insurance is not common which reflects the lower perceived risk of legal action.¹⁶⁹

2. Board Independence and Oversight

The lack of independent directors on Georgian boards often results in insufficient checks on management or controlling shareholders, reducing the likelihood that potentially harmful decisions for minority investors will be questioned or opposed.¹⁷⁰ For instance, if a controlling shareholder wants the company to engage in a related-party transaction that favors his other businesses, a Georgian board with no independent directors is less likely to resist or demand fair terms than a U.S. board with independents and an audit committee that oversees related-party deals.¹⁷¹ In the comparative context, this gap in independence contributes to a broader gap in minority shareholder protection. The U.S. reliance on independent directors and audit committees helps guard against the misuse of company assets by insiders;¹⁷² Georgia must rely on ex-post controls, which are less effective without strong board advocacy for minority interests.173

Unlike their U.S. counterparts, which typically include specialized committees such as audit, compensation, and nomination composed of independent directors, Georgian boards often operate without such structures, which limits their ability to conduct focused oversight and ensure accountability in key governance areas.174 The committee structure in the U.S. allows deeper focus and accountability.175 In Georgia, financial reporting may receive less rigorous board-level scrutiny, which can increase the risk of misstatements or fraud, which goes undetected.176 Even if Georgian law now allows or encourages forming committees, without a requirement or strong incentive, many companies may not do so, which perpetuates a weaker oversight environment.177

U.S. boards adopted formal evaluation processes and introduced term or age limits to encourage board refreshment and bring in new perspectives, thereby strengthening overall governance effectiveness.178 In Georgia, boards have often been static, which means that the same individuals can occupy seats for many years.179 There is little in law to force turnover except perhaps the market. This can entrench habits and groupthink, whereas U.S. boards more regularly consider whether their composition is still optimal for the company’s needs.180

Georgia’s two-tier board structure is designed to ensure independent oversight by separating executive management from the supervisory board. In theory, this arrangement promotes accountability by assigning strategic supervision to non-executive members distinct from those involved in day-to-day operations. However, if the supervisory board is not independent of the major shareholder or CEO, the two-tier structure does not guarantee effective oversight.181 The U.S. one-tier system, paradoxically, might yield more independent oversight in practice because of the independent rules and culture of non-executive directors asserting themselves. Therefore, Georgia’s formal structure could mislead one into thinking oversight exists, when in practice an “independent” supervisory board member might still be beholden to those in power. The gap here is in true independence and empowerment of the non-executives.182

C. Enforcement and Investor Remedies

In the United States, shareholders regularly turn to litigation as a means of holding directors and officers accountable. This legal recourse serves as a critical mechanism for enforcing fiduciary duties and protecting shareholder interests.¹⁸³ Georgia does not yet have a culture or infrastructure for this.¹⁸⁴ There are few specialized lawyers or established case precedents for suing directors; minority shareholders might also be deterred by the cost and length of legal proceedings, or fear retaliation in a close-knit corporate community.¹⁸⁵ This means that some wrongs that would be challenged in U.S. courts might go unchecked in Georgia. For example, if a Georgian company’s management and board were suspected of self- dealing that hurt the company’s value, U.S. shareholders would likely file suit (or threaten to) to investigate and seek remedy.¹⁸⁶ In Georgia, the minority might simply sell their shares (if they can) at a depressed price and exit, since suing might seem futile.¹⁸⁷

Although Georgia has established regulatory bodies, their track record in enforcing corporate governance standards remains limited, highlighting the need for stronger implementation mechanisms and more consistent oversight.188 The NBG has been effective in supervising banks, but for the general corporate sector, enforcement of governance standards is untested.189 The U.S. SEC and other regulators provide a backdrop of enforcement; even if they are not always directly intervening in governance, the possibility of an investigation is a shadow that looms over U.S. boardrooms.190 Georgia’s Securities regulator has historically been less assertive, partly due to limited resources and a smaller market.

In the United States, the market for corporate control is highly developed. When a company performs poorly because of ineffective management or weak governance, it may attract interest from other corporations or private equity firms that seek to take over the business and replace the board to drive improvement and restore accountability.191 Georgia’s market for corporate control is very thin; hostile takeovers are practically unheard of.192 Companies are smaller, and there may be government influence or informal barriers to such actions. Therefore, the external corrective mechanism present in the U.S. is absent in Georgia. That allows underperforming management to persist longer.193

D. Implications for Investor Confidence and Growth

For investors, particularly for foreign investors, these differences are significant. An investor evaluating opportunities in Georgia must consider that, in the event of corporate governance failures, the mechanisms available for redress and accountability are relatively limited.194 They cannot easily replace the board or win a lawsuit, and the regulators might not step in promptly.195 This higher risk often translates into a higher required return or a decision not to invest at all.196 In contrast, when investing in a U.S. company, one takes comfort that there are checks and balances, and if things go wrong, at least one can seek remedy.197 Moreover, the perceived weakness of institutional enforcement in Georgia increases reliance on informal governance practices or personal relationships, which may further deter investors insider influence, which leads to concerns about fairness and predictability. These perceptions directly affect the pricing of risk and may result in reduced capital inflows. The cumulative effect of the above gaps is directly tied to the core concern of this thesis: investor protection and economic growth.¹⁹⁸ Georgia’s governance gaps can hinder its ability to attract the level of investment needed for rapid, sustainable growth. When comparing to the U.S., one finds that many investors operate with checklists or minimum governance criteria for emerging markets. These often mirror U.S./UK standards.¹⁹⁹ If a Georgian company or the market as a whole scores poorly on these criteria, those investors might limit their exposure.²⁰⁰

V. Strategies for Strengthening Board Accountability in Georgia

Closing the governance gaps identified above and aligning Georgia’s corporate governance more closely with U.S.

standards will require a multi-faceted approach. Below are recommended strategies, organized into key areas, to strengthen board accountability in Georgia, thereby strengthening investor protection and fostering sustainable economic growth.

accustomed to rules-based environments. In the absence of clear and enforceable rules, investors may perceive higher political or

A. Enhancing Laws and Regulations

Georgia should consider amendments or official commentary to the Law on Entrepreneurs to refine and clarify directors’ fiduciary duties, which address existing ambiguities and ensure greater legal certainty.201 In particular, the BJR should be explicitly recognized by both the management board and supervisory board members. This could be done by adopting a provision that mirrors Delaware’s BJR: a presumption that a director’s decision was made in good faith, on an informed basis, and in the company’s best interest, unless evidence shows gross negligence, bad faith, or conflict.202 Clarifying this in law or through a high court decision would guide directors and judges, which encourages diligent decision- making while protecting honest business decisions.203

Georgia should introduce mandatory independent director requirements for public interest entities by establishing board independence standards for certain categories of companies, possibly through legislation or binding regulation.204 For listed companies and large public interest entities, a rule could require that a minimum percentage of the board, say one-third initially, moving to a majority over time, be independent directors.205 Independence criteria should be defined to exclude recent employees, significant suppliers or customers, family of executives, etc., that could impair unbiased judgment.206 This would formalize what is currently just recommended in codes.207 Upholding independence in law signals to investors that Georgia is serious about credible oversight.208

Georgia should require the establishment of key board committees in qualifying companies to enhance oversight and strengthen corporate governance practices.209 An Audit Committee should be compulsory for listed companies and large financial institutions, composed mainly or entirely of independent directors.²¹⁰ Similarly, Compensation Committees and Nomination Committees comprising independent members should be required or at least strongly encouraged for listed companies.²¹¹ These committees can be stipulated in either the law or a binding corporate governance code. Even when initial compliance rates are low, the existence of such a requirement compels companies to justify their non-compliance and fosters peer pressure within the market. This dynamic was evident in the case of the Bank Code, which, by recommending the establishment of independent audit committees, gradually influenced broader governance practices. The end goal is to embed in Georgian corporate governance the structural checks that U.S. companies have, which prevent many problems before they arise.²¹²

Georgia should ensure that its laws remain aligned with the G20/OECD Principles of Corporate Governance to promote international best practices and foster investor confidence. The principles cover shareholder rights, equitable treatment, stakeholder roles, disclosure, and board responsibilities.²¹³ Georgia’s participation in global  forums and the implementation of recommendations should be ongoing.214 By codifying key elements of these principles, Georgia can meet the expectations of international investors.215

B. Improving Oversight and Enforcement

To strengthen oversight, the capital market regulator should be granted explicit authority and adequate resources to monitor and enforce corporate governance compliance.216 For example, NBG should review the annual governance reports that companies will submit under the new code and follow up on obvious shortcomings or failures to explain deviations. There should be consequences for non-compliance, perhaps fines or public censure for companies that ignore governance disclosure requirements or that disregard best practices without justification.217

Enhancing the judiciary’s capacity to handle complex corporate cases is essential, as courts play a pivotal role in ensuring board accountability and upholding governance standards.218 Georgia could establish specialized benches or chambers for commercial and corporate law cases with judges trained in corporate governance matters. Continuous legal education for judges on topics like fiduciary duties, complex financial disputes, and international case comparisons will build the judiciary’s confidence in handling shareholder suits or director liability cases. The goal is to ensure that when shareholders seek justice, the courts can deliver timely, well-reasoned decisions.219

Georgia’s Investors Council and the Business Ombudsman represent important informal enforcement mechanisms that can complement formal regulatory oversight. These platforms offer avenues for addressing corporate governance concerns and for promoting more responsible business conduct. The Business Ombudsman, which already plays a mediating role in resolving investor grievances, could expand its mandate by systematically identifying recurring governance deficiencies across cases and issuing evidence-based policy recommendations. Such an evolution in its role would strengthen feedback loops between the business community and policymakers, which would contribute to more responsive and investor-friendly reforms.220 The Investors Council, comprising representatives from the private sector and government, should keep corporate governance as a standing agenda item, that tracks improvements and calls out any resistance. If big investors coordinate to insist on better governance in the companies they touch, that pressure can be significant.²²¹

Improving transparency and ensuring accessible corporate governance data can significantly facilitate more effective enforcement and informed stakeholder oversight. Georgian companies’ disclosures should be made easily accessible, for example, through an online portal maintained by the regulator or stock exchange. When information is public, civil society and the media can also play a watchdog role.²²² Georgia’s media and NGOs could investigate and report on governance. Supporting a culture of investigative journalism in business and protecting it is indirectly a governance enforcement strategy.²²³

C. Promoting Independent and Effective Boards

Encouraging the establishment of a Georgian Institute of Directors would help foster a professional community dedicated to promoting best practices, ongoing education, and ethical standards among corporate directors.²²⁴ Such an institute can maintain a database of qualified independent directors, provide training certifications, and set a code of conduct for directors. It can work with educational institutions to run courses on corporate governance.225 The objective is to strengthen the supply side of the market for independent directors by fostering the development of qualified candidates who can meet the growing demand for board independence and expertise.226

Boards should be encouraged to conduct annual self-assessments and establish transparent, performance-based remuneration policies to strengthen accountability and enhance overall governance effectiveness.227 Additionally, to attract and retain skilled independent directors, companies must offer reasonable remuneration.228 If pay for board members is too low, it will not draw seasoned professionals. While pay levels are a company decision, policymakers can share guidelines or surveys to help companies calibrate competitive director fees. It may also be worthwhile to allow equity-based compensation for independent directors,229 giving them a stake in the company’s success and aligning with shareholders, as is common in the U.S.230

Boards should improve transparency by regularly communicating with shareholders about their activities, decisions, and governance practices to build trust and ensure accountability. For example, companies could voluntarily start publishing an annual corporate governance report or a letter from the Chair describing the board’s focus areas.231 At shareholder meetings, allow time for Q&A with the board, not just management. These practices, while soft, create a culture of accountability- directors who must explain their decisions to shareholders are likely to be more conscientious.232

Conclusion

Georgia stands at an important period in its economic development. With a strong desire to attract investment and integrate into the global economy, the country has recognized that robust corporate governance is essential to achieve these goals. This paper has explored how improving board accountability can strengthen investor protection and thereby promote sustainable economic growth in Georgia. Using the United States corporate governance standards as a comparative benchmark, we have identified both the advancements Georgia has made and the areas where further reform is needed. The analysis shows that Georgia has made notable improvements in updating its legal framework. The enactment of a modern Law on Entrepreneurs and the introduction of corporate governance codes aligned with OECD principles indicate a clear intent to raise the bar. These changes have laid the groundwork by defining directors’ duties, enhancing minority shareholder rights, and encouraging transparency. However, as revealed, implementation gaps remain.

Comparatively, the U.S. model highlighted the importance of a holistic governance ecosystem: one that combines clear legal duties, proactive enforcement, and market-driven accountability. The U.S. experience underscores that accountability is achieved not by law alone, but through a culture of governance supported by active shareholders, diligent regulators, and professional directors who understand their fiduciary roles. Georgia’s challenge and opportunity lie in cultivating a similar ecosystem. This does not mean transplanting every

U.S. rule indiscriminately, Georgian solutions must be tailored to its market size, ownership structures, and legal tradition, but the underlying principles of board accountability are universal. Transparency, fairness, and responsibility are pillars that can support investor confidence anywhere.

Implementing the recommendations outlined in Part V will require cooperation: lawmakers to pass needed amendments, regulators to enforce rules impartially, companies to embrace changes not as burdens but as improvements, and investors to reward companies that govern themselves well. There may be resistance from those comfortable with the old ways, but the global trend is unequivocal - markets with weak governance eventually pay a price, and those with strong governance reap dividends in growth and investment.

Strengthening board accountability in Georgia is both a means and an end. It is a means to protect investors, which ensures that those who entrust their capital to Georgian enterprises can do so with confidence in fair treatment and recourse. It is also a means to stimulate economic growth, by creating conditions where capital is mobilized efficiently and businesses are managed for long-term success rather than short-term gain of insiders. And finally, it is an end in itself - reflecting Georgia’s aspiration to reinforce the rule of law and modernize its economy consistent with the best international standards. By learning from the U.S. and other models while crafting its path, Georgia can strengthen the accountability of its corporate boards and, in doing so, lay a durable foundation for prosperity and development in the years ahead. The reforms recommended herein aim to support that journey, moving Georgia closer to a business environment where good governance is established and the benefits are shared broadly, through increased investment, trust in markets, and sustainable economic growth.