Other governance issues
G20/OECD Principles of Corporate Governance
- help policy-makers, investors and other stakeholders assess and develop the legal, regulatory and institutional framework for corporate governance within a country. - They do not provide detailed provisions on how the principles should be applied in practice. - Many countries and bilateral organisations use the G20/OECD Principles as the basis for their corporate governance frameworks. The Reporting on Observance of Standards and Codes (ROSC) for Corporate Governance, administered by the International Monetary Fund (IMF) and The World Bank, also uses the principles as the basis for their reports. ROSCs are also carried out in accounting, auditing and anti-money laundering.
The SEC under s.302 SOX introduced requirements for...
...the CEO and CFO to certify the quarterly and annual reports including financial statements filed with the SEC. False certifications under Section 302 resulted in SEC penalties and potential civil liability. Section 309 of SOX added a potential criminal liability for false certifications.
What can result from a reliance on expatriate management?
- Reliance on expatriate management, due to the lack of capability of local managers, can lead to a cultural issue and a lack of communication and trust between expatriate managers and local boards. An example of this led to the tobacco crisis in Malawi in 2011 (see case study 4.3).
Key issues in corporate governance (shareholder dialogue)
a) There is a requirement for greater communication between a company and its shareholders. b) The amount companies are required to disclose to their shareholders appears to grow by the year. c) The challenge is that the profile of shareholdings in UK listed companies is changing with increased short-term holdings, a fall in retail shareholders and higher foreign ownership. d) It is therefore difficult for companies to have the dialogue intended through the UK's corporate governance framework of physical annual general meetings and engagement with institutional shareholders through one-on-one meetings with the chairman on governance or executive management on operational performance. e) Companies therefore appear to be exploring technology and electronic communications.
The SEC under section 406 introduced...
requirements for codes of conduct and ethics governing the CEO, CFO, principal accounting officer or controller, or persons performing similar positions. It did not require a company-wide code of ethics, which has now become common. The New York Stock Exchange and NASDQ, however, did bring in requirements for a company-wide code of ethics, which included directors, officers and employees for companies listed on their exchanges.
What did section 806 SOX create?
A civil action for employees of listed companies who were subject to retaliation by their employers for whistleblowing
What other corp governance issues can arise in emerging markets?
- Conflicts of interest arising from cross-share ownership (companies owning shares in each other), cross-directorships (where directors sit on each other's boards) and the influence of government or financial institutions over the affairs of companies are also issues that investors look out for. - Many organisations in developing and emerging countries are either state or family owned and/or not listed and this brings with it its own governance challenges: a) Lack of ownership control by government, no monitoring of management which is often lacking in capability and boards filled with inexperienced directors who would rather be somewhere else. b) Conflict in family-owned businesses between controlling family members, informal governance structures and often inexperienced boards and management teams.
Should governance frameworks from established markets be adopted in developing/emerging markets?
- Corporate governance issues are different in different countries and this is why countries should adopt governance practices to deal with their specific issues, not just cut and paste governance frameworks from other countries. a) This has been practiced in many developing and emerging market countries where practices designed in developed countries for large listed companies have been adopted in an attempt to attract foreign investment.
Why do some institutions dismiss corporate governance practices? What consequences can result from this?
- The term corporate governance often means that many organisations that could benefit from some aspects of corporate governance best practice dismiss it as not being applicable to them because they are not corporate. For example, much of the service and product delivery in developing countries is by organisations in the public and not-for-profit sectors, many of which are not accountable for or transparent about their activities. - Non-corporates therefore lose out on the benefits of adopting good governance practices, such as sustainability, cheaper capital, less risk, and so on. For organisations in developing countries, this is particularly important since for sustainable economic development, organisations across all three sectors (private, public and not-for-profit) are needed.
What aspect of corporate governance does each chapter in the G20/OECD Principles deal with?
1. Ensuring the basis for an effective corporate governance framework: 'The corporate governance framework should promote transparent and fair markets, and efficient allocation of resources. It should be consistent with the rule of law and support effective supervision and enforcement.' 2. The rights and equitable treatment of shareholders and key ownership functions: 'The corporate governance framework should protect and facilitate the exercise of shareholders' rights and ensure equitable treatment of all shareholders, including minority and foreign shareholders. All shareholders should have the opportunity to obtain effective redress for violation of their rights.'. 3. Institutional investors, stock markets and other intermediaries 'The corporate governance framework should provide sound incentives throughout the investment chain and provide for stock markets to function in a way that contributes to good corporate governance.' 4. The role of stakeholders in corporate governance 'The corporate governance framework should recognise the rights of stakeholders established by law or through mutual agreements and encourage active co-operation between corporations and stakeholders in creating wealth, jobs and sustainability of financially sound enterprises.' 5. Disclosure and transparency 'The corporate governance framework should ensure that timely and accurate disclosure is made on all material matters regarding the corporation, including the financial situation, performance, ownership, and governance of the company.' 6. The responsibilities of the board 'The corporate governance framework should ensure the strategic guidance of the company, the effective monitoring of management by the board, and the board's accountability to the company and the shareholders.'
The SEC under s.404 SOX introduced requirements for management to...
1. Establish and maintain an adequate system of internal controls and procedures for financial reporting; 2. Include in the company's annual report a report on the effectiveness of the company's internal controls over financial reporting. The original implementation of the Section 404 requirement to review the system of internal controls was seen as very draconian and costly, and was blamed for discouraging foreign companies from listing in the US. In 2006, the provisions were reviewed, and the SEC issued new guidance which allowed management more discretion on how the annual review of internal controls is carried out.
What are the six principles of the Corporate Governance Framework for US Listed Companies (2017)?
1. Principle 1: Boards are accountable to shareholders. 2. Principle 2: Shareholders should be entitled to voting rights in proportion to their economic interest 3. Principle 3: Boards should be responsive to shareholders and be proactive in order to understand their perspectives. 4. Principle 4: Boards should have a strong, independent leadership structure. - 5. Principle 5: Boards should adopt structures and practices that enhance their effectiveness. 6. Principle 6: Boards should develop management incentive structures that are aligned with the long-term strategy of the company.
What are the six principles of the Stewardship Framework for Institutional Investors?
1. Principle A: Institutional investors are accountable to those whose money they invest. 2. Principle B: Institutional investors should demonstrate how they evaluate corporate governance factors with respect to the companies in which they invest. 3. Principle C: Institutional investors should disclose, in general terms, how they manage potential conflicts of interest that may arise in their proxy voting and engagement activities. 4. Principle D: Institutional investors are responsible for proxy voting decisions and should monitor the relevant activities and policies of third parties that advise them on those decisions. 5. Principle E: Institutional investors should address and attempt to resolve differences with companies in a constructive and pragmatic manner. 6. Principle F: Institutional investors should work together, where appropriate, to encourage the adoption and implementation of the Corporate Governance and Stewardship principles.
What other standards applicable to directors and officers were brought in by SOX/SEC?
1. Prohibition of personal loans; 2. Reporting of trades in the company's securities; 3. Insider trading blackout periods around the release of material information, such as a company's financial reports; 4. And - clawback of bonuses and incentive or equity-based compensation where financials have to be restated due to the misconduct of the individual.
Section 101 of SOX introduced...
An independent, non-governmental board, the Public Company Accounting Oversight Board (PCAOB) to oversee the audits of public companies.
Corporate governance frameworks in China
China's listed companies have a concentrated ownership structure, unlike the UK, US and Japan where ownership and control are separated. The focus of their corporate governance regime is, therefore, on protecting minority shareholders, regulating controlling shareholders and disclosure and transparency. China follows the two-tier board system originating in continental Europe, whereby Chinese companies have: • a board of directors which is responsible for the management of the company including the oversight from an operational perspective of the management who run the company on a day-to-day basis; and • a supervisory board which is responsible for ensuring that the board of directors and management do not violate laws or the company's articles of association. It is also entitled to inspect the company's financial records. China's corporate governance framework is rules based and consists of: • Laws, such as Accounting Law (2000), Companies Law 2006, Securities Law 2006, and the Law on State-owned Assets of Enterprises (2009); • Code of Corporate Governance for Listed Companies (2018); and • Listing Stocks and Trading Rules made by the individual stock exchanges. The Chinese Code, which was first published in 2001, is based on the OECD Principles of Corporate Governance. It was revised in 2018. The 2001 edition of the Chinese Code contained provisions on shareholders and shareholders' meetings, listed companies and controlling shareholders, directors and board of directors, supervisors and the supervisory board, performance assessment and incentive and disciplinary systems, stakeholders, and information disclosure and transparency. The 2018 version includes greater emphasis on environmental, social and governance (ESG) disclosure, the role of institutional investors as stewards, the accountability of board directors, and board member skills and diversity.
Nolan's seven principles of public life
Corporate governance in the public sector in the UK is based on the Nolan's seven principles of public life, which were developed by the Nolan Committee on Standards in Public life in 1995. The Nolan Committee was set up in response to concerns that the conduct of some politicians was unethical. The Nolan Principles now form the basis of corporate governance codes in the voluntary, as well as the public, sector in the UK. Nolan's seven principles of public life 1. Selflessness. Holders of public office should take decisions solely in terms of the public interest. They should not do so to gain financial or other material benefits for themselves, their family or their friends. 2. Integrity. Holders of public office should not place themselves under any financial or other obligation to outside individuals or organisations that might influence them in the performance of their duties. 3. Objectivity. In carrying out public business, including making public appointments, awarding contracts or recommending individuals for rewards and benefits, holders of public office should make choices on merit. 4. Accountability. Holders of public office are accountable for their decisions and actions to the public and must submit themselves to whatever scrutiny is appropriate to their office. 5. Openness. Holders of public office should be as open as possible about the decisions and actions that they take. They should give reasons for their decisions and restrict information only when the wider public interest clearly demands. 6. Honesty. Holders of public office have a duty to declare any private interests relating to their public duties and to take steps to resolve any conflicts arising in a way that protects the public interest. 7. Leadership. Holders of public office should promote and support these principles by leadership and example
Corporate governance frameworks in Germany
Germany, unlike the UK, South Africa and the US, operates what is called a two-tier board system. It also has a concentration of share ownership in large listed companies. Franks and Mayer (2001) reported that, in 1990, 85% of a sample of 171 large listed industrial companies in Germany had a single shareholder with an ownership stake of more than 25% of the share capital, and 57% had single shareholder who owned more than 50%. The concentration in ownership would appear, as we will see for China later in the chapter, to give the majority shareholder complete control of the company. This is not the case in Germany, however, as safeguards have been put in place in Germany's Stock Corporation Act, last amended in 2016, to protect the minority shareholders. The Act provides that the supervisory boards of large listed companies, that is, companies of with 2,000 or more employees, are elected 50% by the company's employees and 50% by the company's shareholders. The supervisory board is then responsible for appointing and dismissing the management board. It is the management board who has responsibility for managing the company. The Act also contains provisions that stop unfavourable contracts being imposed on the company by its major shareholder.
King IV
King IV assumes application of the principles set out within it, this is why it has adopted the 'apply and explain' regime. The disclosure is an explanation of the practices that have been implemented and how these support achieving the associated governance principle. The governing body can choose where and how to make the disclosures, which should be publicly accessible. King IV also aligns best practices in corporate governance to shifts in the approaches to: • capitalism - financial capital to inclusive capital market systems; • reporting - 'silo', that is by capital: financial, human, intellectual, manufactured, social and natural to 'integrated' reporting; and • capital markets - short-term to sustainable capital markets. The focus of King IV is on outcomes-based governance. It places accountability on the governing body within an organisation to attain four governance outcomes: • ethical culture and effective leadership; • performance and value creation in a sustainable manner; • adequate and effective controls; and • trust, good reputation and legitimacy with stakeholders King IV also introduces a principle applicable to institutional investors. The King Reports have repositioned corporate governance in South Africa as a method of achieving sustainability of organisations rather than just a method of protecting investors. The integration of corporate responsibility and ethics into the definition of corporate governance is also seen as essential in a region struggling with issues such as corruption, health issues and lack of much needed skills. It is hoped that through this repositioning, more organisations will see the appropriateness of corporate governance to their sustainability with the consequential economic development it should produce.
What is the main issue in corporate governance in emerging markets?
Listed companies often have more concentrated ownership structures, where a small number of shareholders hold a significant portion of the companies' shares and therefore are able to exercise considerably more control over their boards and management. - The corporate governance issue here is about protecting the minority shareholders.
Governance for family-controlled companies
Many businesses start out as family businesses. The successful ones go through different stages in their lifecycles, each stage presenting its own challenges for the family owners. In the first stage, the founder will probably be the owner of the company. In addition to being the owner, they will also be the decision-maker and the implementer (manager). Challenges with other family members who may have different views as to the future direction of the company will be non-existent at this stage. As the business passes to the next generation and the next, mechanisms will need to be found to manage what could potentially become value-destroying conflict between different family members. Moving to future stages in the business's lifecycle, the organisation may want to consider the following governance in an attempt to keep conflict at a minimum. At the shareholder level: • Agreeing and documenting what the family's vision, mission and values for the organisation are. This allows those running the company, whether family members or outside managers, to be aware of the direction the business should be moving in and under what ethical framework. • Setting up a structure through which family members can interact with those running the business. This may be a family assembly or council. The terms of reference for this body will have to be agreed and documented, in the company's articles of association, again so expectations can be set on this relationship. • Agreeing the process for appointing and the number of family members to be on the company's board of directors. Again, this will need to be documented in the company's articles of association. • A mechanism for family members to sell their shareholding and exit the company. Most company's articles of association include pre-emption rights, that is, the requirement that shares will need to be offered pro rata to the existing shareholders first before they can be sold to outsiders. Some family businesses establish a fund to allow family members to cash in their stock at a fair price. Where such a fund exists, a committee is usually established to manage this fund. The constitution and terms of reference of this committee will have to be agreed and documented.
What rules did the SEC introduce under s.208 of SOX?
New rules on auditor independence, restricting the non-audit services an auditor could provide to the company, introducing a 'cooling off' period for auditors, audit partner rotation and expanded disclosure by the company relating to its auditors.
How are regulatory institutions in emerging and developing markets different from those in more developed markets?
Regulatory institutions in both emerging and developing markets are often newer, less-experienced and under-funded in comparison to their counterparts in more developed markets. This leads to less enforcement of laws and regulations. In 2002, a World Bank Study found evidence that companies in countries with weak legal and regulatory systems could, by improving their corporate governance practices, have a proportionally greater impact on investor protection
The SEC, as required by Section 307 of the Sarbanes-Oxley Act, adopted a rule that:
Required all stock markets to adopt standards in their listing rules governing the composition and functions of audit committees, and the independence of directors.
Is the Sarbanes-Oxley Act 2002 rules-based, principles-based or does it adopt a hybrid approach
Rules-based In response to the corporaye collapses in the US in the early 2000's, among them Enron and WorldCom, and the stock market collapse following the burst of the dot.com bubble. The Sarbanes-Oxley Act of 2002 (SOX) was enacted, the Securities and Exchange Commission (SEC) adopted many new rules and the New York Stock Exchange and Nasdaq Stock Market changed their standards governing listed companies.
Corporate governance frameworks in Scandinavia
Scandinavian law is distinct from other contemporary legal systems which tend to be based on the Anglo-Saxon or German models. Scandinavian law is adopted by five countries: Denmark, Finland, Sweden, Norway and Iceland, known as the Nordic countries. Companies adopting this legal system maintain the one-tier board of directors from the AngloSaxon model, but have inserted beneath it a management structure which can be either the CEO on their own or a group of senior executives including the CEO. The management structure is subject to the instructions of the board of directors. A member of the management structure can also be a member of the board of directors but cannot be its chair and they must be in the minority. The liability of the management is for the day-to-day affairs of the company; anything outside of this must be submitted to the board of directors for a decision. Like the unitary board of the Anglo-Saxon model, the board of directors in the Scandinavian model enjoys both executive and oversight powers. In the traditional two-tier German model, the executive powers are vested solely in the management board and the oversight powers in the supervisory board. Shareholders in the Scandinavian model sit above the internal structures of the board of directors and management structure creating a hierarchical system. Only those in the level directly above can appoint and dismiss the members of the body beneath them. Shareholders therefore appoint and dismiss the members of the board of directors and the board of directors appoints and dismisses the members of the management structure. Share ownership in Scandinavia is concentrated but is not seen as problematic. Scandinavian law supports the supremacy of a dominant majority shareholder, giving them the power to appoint all of the board of directors and as such control the company. This is countered, however, by the potential for a dominant shareholder to be held liable under Scandinavian law for any reckless behaviour in their decision making or where the dominant shareholder is seen to be coercing either the board of directors or management into a particular action for the benefit of that shareholder. Despite having the same legal systems, the Nordic countries developed their own self-regulating corporate governance codes which had significant differences within them. In 2007, there was an attempt to bring the regulators responsible for these codes together to see if they could be brought closer together in an attempt to help foreign investors understand the Scandinavian model.
Corporate governance frameworks in Japan
Shareholding in Japan is dispersed and held predominantly by financial institutions and businesses, like the UK and the US. There is therefore a separation of ownership and control, with managers running the day-to-day affairs of the company. However, historically, the corporate governance model in Japan has been more like the European model with management giving a strong priority to the interests of employees rather than the shareholder focus of the AngloAmerican corporate governance model. In recent years, it appears that Japan, with its new corporate governance regime, is becoming more market-orientated and adopting its own hybrid approach to corporate governance, which contains elements of both the European and Anglo-American corporate governance models The change to a more market-orientated corporate governance regime is predominantly government driven as part of the reforms brought in as a response to Japan's long-running economic problems.
How many chapters are there in the G20/OECD Principles?
Six chapters - each chapter includes a principle and several sub-principles
Governance in the not-for-profit sector
The Charities Code was published in 2017 and refreshed In 2020. It replaced 'Good Governance: a Code for the Voluntary and Community Sector', which was first published in 2005 and revised in 2010. The Code is split into two, providing a set of guidelines and a diagnostic tool for larger charities, whose income is over £1 million a year, and a separate set for charities whose income is less than £1 million per year. The Code is made up of principles, outcomes and recommendations under the following seven headings: • Organisation purpose • Leadership • Integrity • Decision-making, risk and control • Board effectiveness • Equality, Diversity and Inclusion • Openness and accountability The CGI issued a Guidance Note in April 2021 'The virtuous circle of good charity governance' which seeks to meet the challenge of those sceptical about the real benefits of good governance and provide those new to governance in the charity sector with a better understanding of the 'virtuous circle of good governance' and how it can enable a charity to achieve its goals.
Corporate governance frameworks in the Netherlands
The Dutch model of corporate governance accommodates both the two-tier German model, which is followed by the majority of Dutch listed companies, and the one-tier Anglo-Saxon model. This is because of the Anglo-Dutch companies, such as Unilever and Shell, that were required by their listings in the UK and the US to adopt a one-tier system. Chapter 5 of the Dutch Corporate Governance Code 2016 applies specifically to one-tier board companies, with the rest of the code focusing on two-tier companies. In January 2019, the Dutch Stewardship Code 2018 came into force providing Principles and Guidance for institutional investors in Dutch Companies. The Code operates on a 'comply or explain basis'.
The German Code
The German Government set up the Cromme Commission to look at the corporate governance regime for listed companies in Germany. The Cromme Code was published in May 2003. It recommended that a maximum of two former executives could sit on the supervisory board of a listed company at any one time. Historically, many executives saw as part of their retirement a place on their supervisory board. The Cromme Code was replaced in 2017 by the German Corporate Governance Code, which applies to all listed companies. The German Code consists of three types of provisions: • Legal stipulations that oblige the company to follow applicable law. • 'Shall' recommendations, which follow the comply or explain regime. • 'Should' suggestions, where companies do not need to disclose their deviation from them. The commitment of companies to corporate governance practices are judged by their application of the 'shall' recommendations The German Code was updated in 2019. Compared to the 2017 Code the 2019 code had five major changes: • Introduction of a new category of 25 principles, in addition to the recommendations and suggestions mentioned above, which according to the 2019 code should 'reflect essential legal requirements for responsible corporate management and serve to inform investors and other stakeholders'. • Recommendations on the remuneration of the management board. • Definition of the independence of shareholder representatives In the supervisory board • Independence of supervisory board members from a controlling shareholder • limitation of the number of supervisory board members.
South Africa and the King Codes
The King Committee on Corporate Governance was established in the early 1990s and has issued four versions of the King Code of Corporate Governance in 1994 (King I), 2002 (King II), 2009 (King III) and the latest version (King IV) in 2016. The King Code is the responsibility of the Institute of Directors in Southern Africa (IoDSA). Compliance with the King Code is a requirement for all companies listed on the Johannesburg Stock Exchange. The King Codes are interesting for the following reasons: • They created and still adopt the 'stakeholder inclusive' approach to corporate governance discussed in Chapter 1. • Corporate responsibility and ethics form part of the King Code definition of corporate governance. • They are well-established, having been first introduced in 1994 - only two years after the Cadbury Code in the UK. • They provide for a single corporate governance framework in that they apply to all types of organisation, not just listed companies. • King III adopted the 'apply or explain' regime to be followed by the 'apply and explain' regime in King IV.
The South African corporate governance framework as a hybrid regime
The South African corporate governance framework is often described as a hybrid corporate governance regime, as some of its provisions follow the principle-based approach, King IV, and others are rule-based, being found in a number of laws that apply to companies and directors, including the Companies Act of South Africa of 2008. In addition, further enforcement takes place by regulations such as the JSE Securities Exchange Listings Requirements.
Governance in other sectors
The recognition that there have been benefits of good corporate governance for the private sector has led to organisations in the public and not-for-profit sectors taking an interest in how they can improve their own governance practices. This has led to the adoption of corporate governance guidelines or codes by these types of organisations. We saw earlier that since King III, the corporate governance codes in South Africa have applied to all types of organisations. The UK, in contrast, has taken the route of developing different corporate governance codes and guidelines for different sectors within the economy. This is because, although the principles of corporate governance apply in all sectors, the governance challenges are different sector by sector so to ensure that the practices deal with the particular challenges different codes or guidelines are applicable.
Remuneration of directors and senior executives
a) The remuneration of directors and senior executives is still a major corporate governance topic in the UK. There is evidence, reflected in fewer remuneration policy and report voting rebellions, that companies are taking into account the guidance of institutional investor representative bodies when putting together the content of their remuneration policies. Feedback is also being sought from their major shareholders. b) The issue of pay equality between men and women has again been in the news, with high-profile cases such as the pay practices of the BBC in 2017. Again, this poses a reputational risk for many organisations. Boards should be reviewing their pay policies and ensuring that their remuneration practices are fair.
What listing rules did NYSE and NASDAQ adopt following s.307 of SOX and the consequent SEC rule?
a) Both NYSE and NASDQ adopted listing rules requiring that companies listed on their markets to have: 1. A majority of independent directors on their boards. Controlled companies, that is, where 50% or more of their capital is held by one individual, a group or another company, were exempted; 2. Regular executive sessions of the independent directors, that is where the independent directors meet on their own; 3. An audit committee, compensation committee and a nominating committee; and - shareholder approval for all equity compensation plans.
Key issues in corporate governance (stakeholder relations)
a) Directors of all UK companies now have a statutory duty under s.172 to take into consideration the interests of employees and foster business relationships with suppliers, customers and others. b) The Companies (Miscellaneous Reporting) Regulations 2018 have introduced reporting requirements for companies on their compliance with s.172. Companies will have to disclose how their directors have engaged with employees and other stakeholders and how they have taken stakeholder interests into consideration in their decision-making. c) For listed companies, the UK Corporate Governance Code 2018 has suggested methods of workforce engagement that boards could adopt. They include: i) A director appointed from the workforce; ii) A formal workforce advisory panel; or iii) A designated non-executive director.
Key issues in corporate governance (tax planning)
a) The tax planning of organisations, especially multinationals, has been in the spotlight since the Starbucks tax avoidance case in 2012. Google, Amazon and Apple, among others, have all come under attack for their tax planning practices. Boards need to consider the reputational risk associated with their tax planning and other accounting policies.
Key issues in corporate governance (financial reporting)
a) Every company under the CA2006 is required to keep accounting records which enable the directors to prepare accounts which comply with the appropriate accounting standards. The accounts should show with reasonable accuracy the financial position of the company at that time. b) Evidence shows, however, that directors and senior managers for many reasons produce accounts that disguise the true financial position of their company. This may be to: a) Enhance their own rewards b) Cover up a fraud c) Cover up poor performance due to their own lack of experience and understanding of the business. c) Concerns about misleading company financial information that led to the setting up of the first corporate governance committee, the Cadbury Committee, in 1992. It also led to the introduction in the US of the Sarbanes-Oxley Act in 2002. d) Despite all of the corporate gov regs since then we still see governance scandals that relate to accounting issues. E.g. Tesco reporting it had overstated its half-year profits in 2014, the Patisserie Valerie case in October 2018 (when it was announced there was a material shortfall between PV's reported accounts and its true health.
In May 2018 the IFC (International Finance Corporation, a member of the World Bank Group) announced its Toolkit for Disclosure and Transparency...
a) It stated that strong local capital markets are essential for a thriving private sector. In developing countries, capital markets - many still in their infancy - hold great potential to channel private capital toward priority development needs and help companies obtain long-term financing. b) Before capital can flow to emerging markets, however, investors need to better understand and trust these markets. They need robust information that is complete, accurate, and reliable in accordance with accepted international practices so they can make sound investment decisions. c) The reason? Adhering to high standards of disclosure and transparency can mitigate some of the inherent risk in investing in emerging and frontier markets - weaker public institutions and governance, heightened social and environmental risk, and smaller companies with controlling shareholders. In turn, this can encourage more investors to consider adding well-governed emerging market companies to their investment portfolios.
Key issues in corporate governance (composition of boards)
a) More representative boards: there are quotas for women on boards and growing requirements for more social and ethnic diversity on boards and within the pipelines for board succession. b) Independence of board members to ensure that is challenge to a dominant chairman or CEO: one of the issues highlighted by Equiniti in its annual review (Sep 2020) of trends and developments from the 2020 AGM season was independence of directors.
Key issues in corporate governance (risk management)
a) Since the global financial crisis (2008-09) there has been a growing expectation that the boards of listed companies focus more on risk management. Previously this had been delegated to management and the board played a small role in it. The FRC 'Guidance on risk management, internal control and related financial and business reporting', issued in 2014, made it clear that the board has a primary role in the identification and management of risk.
Key issues in corporate governance (technology and information governance)
a) The King III Corporate Governance Code, in South Africa, was one of the first to recognise the importance of 'technology and information governance' in 2009. Both aspects of governance are now receiving focus by boards of companies internationally b) Due to the ever-greater reliance on technology, organisations are required to manage the risks associated with technological disruptions within their organisations as well as an often 'insatiable' desire by management in many organisations to keep up with the latest technological developments. This requires governance. c) The governance of information is also becoming critical for organisations. The management of both information and knowledge can offer competitive advantage, and many organisations are increasing their focus on both areas. Boards are increasing being expected to ensure that information and knowledge are managed effectively within their organisations and that they are protected. d) Recent global cyber-attacks have highlighted the importance of cyber security risk management for board directors. Companies no longer have a choice as to whether they mitigate against cyber-attacks. In future, this should be an important part of their risk management process. Countries are starting to look at whether they need to regulate with respect to cyber security. For example, the SEC has expanded its focus on cyber security already, taking action against corporations for not protecting customer data against cyber-attacks.
Key issues in corporate governance (social responsibility and sustainability)
a) The focus on an organisation's social responsibility activities has grown over recent years. One of the main reasons for this appears to be the millennial generation entering the workplace. Millennials want to be heard and have a voice in both contributing and making a difference in a broader community. They constantly share their views and opinions through social media platforms. b) This characteristic of the millennial generation has led to an overwhelming demand for social responsibility as the potential workforce and consumer base look to do business only with those whom they feel are making a positive impact on society and pillorying those through social media who appear to be negatively impacting society. c) An increase in non-financial reporting largely due to regulatory changes and the expectation of investors and stakeholders is also occurring. Boards are having to justify their activities more on the long-term sustainability of their organisations rather than the previous short-term view of meeting quarterly and half-yearly targets.
Key issues in corporate governance (sexual harassment in the workplace)
a) The recent development of the 'Me Too' movement, which has now spread to corporates, has highlighted the issue of sexual harassment in the workplace. The Equality Act 2010 states that sexual harassment is a behaviour that is either meant to, or has the effect of: • violating your dignity; or • creating an intimidating, hostile, degrading, humiliating or offensive environment. b) Boards need to ensure that policies and procedures within the organisation create behaviours that do not leave them open to condoning sexual harassment.
Key issues in corporate governance (performance of directors)
a) The time commitment and capacity of directors to give the required attention to the companies whose boards they sit on is also becoming a topic of interest for investors b) Institutional Shareholder Services (ISS) and Glass Lewis both recommend voting against 'overboarded' directors, which they define as: i. executive directors sitting on more than two public company boards; and ii. non-executive directors sitting on more than five public company boards. c) One of the issues highlighted for by Equiniti (September 2020) in its annual review of trends and developments from the 2020 AGM season was concern with overboarding in votes against the Chairs of Audit and Nomination Committees. d) The 2018 Code recommends that executive directors should have no more than one FTSE 100 board non-executive directorship. i. There is no limit for board chairman or other non-executive directors. ii. The 2018 Code only requires that nonexecutive directors should provide constructive challenge and strategic guidance to management in addition to holding them to account. To do this effectively, the directors need time. e) Listed companies, in the FTSE 100, are also required to hold annual evaluations, using an external evaluator, of the whole board, its committees, the chair and individual directors. f) For FTSE 350 companies this should be at least every three years.
Key issues in corporate governance (corporate culture)
a) There is growing focus on corporate culture and the importance for the long-term sustainability of the company on getting the right culture embedded within the business practices of the company. b) The UK Corporate Governance Code 2018 has introduced for the first time a provision requiring boards to 'assess and monitor culture'. c) Guidance is provided by the FRC, in the 'Guidance on board effectiveness' on how boards may be able to accomplish compliance with this provision, but individual boards are still going to have to work out how they are going to do this and make disclosures about it effectively based on their individual circumstances and challenges.
