CSSA held its 2015 Premier Corporate Governance Conference at the Wanderers Club, Johannesburg on 27 and 28 October 2015. A panel discussion on international corporate governance was held with participation from six member countries of CSIA. The panelists covered a wide range of issues, reflecting common trends in different jurisdictions as well as challenges specific to a jurisdiction.
Katherine Combs from the U.S.A. focused on whether Sarbanes Oxley (SOX) and subsequent legislation has been effective in reducing fraud and corruption. Harvard University undertook a review on SOX and concluded that the initial costs were high but 10 years later disclosure was more reliable and internal processes have improved. However, it did not prevent the 2008 financial crisis from occurring. Criticisms of SOX were that it did not provide for sufficient flexibility and was difficult to systematically measure the cost/benefits of increased regulation.
The Securities Exchange Commission established a disclosure effectiveness initiative. The recommendations included eliminating duplicate disclosures, eliminating “glossy” annual reports, unless an issuer desired them for marketing purposes and reflecting sustainability disclosures in a separate non-financial report.
The 2015-16 National Association of Corporate Directors (NACD) director survey results highlighted that 79% of boards have at least one female director and ethnic minorities remained unchanged at 52%. Other interesting findings included that 44% of shareholders said that directors met with institutional investors in the prior year and that directors wanted more director materials on effective risk management, cyber security, IT risks and technical strategies.
The subsequent promulgation of the Dodd Frank legislation did not address the primary cause of the 2008 crisis, being changes required to government housing policies and agencies. It did however result in significant increased compliance costs for companies.
Dr Nicholas Letting provided a broad overview of the corporate governance problems in East Africa and the responses to the challenges of corruption, weak regulatory enforcement, apathetic shareholders and board weaknesses. He highlighted the progress on corporate governance in Kenya from the time of publication of The Principles and Sample Code of Best Practice for Corporate Governance in the 1990s, to the requirement by The Capital Markets Authority since 2002 that all listed companies comply with principles of good corporate governance to the introduction of a new Companies Act in September 2015. The new Act has a strong emphasis on the role boards play and provides punitive sanctions for directors who do not exercise their oversight role with due diligence.
Corporate Governance was also strengthened by the establishment of a Centre for Corporate Governance in 2002, initiated mainly by the private sector. Its main focus was to review the effectiveness of controls and to promote transparency and accountability. A new Constitution enacted in 2010 has a key objective as the promotion of good governance through transparency, effective leadership and integrity. In April 2015, the Mwongozo Code of Governance was passed, which required every state corporation to appoint a company secretary, have nine board members with diverse skills who are required to undergo induction upon appointment and term limits of two terms, comprising three years each. There was also a strong emphasis on declarations of conflicts of interest.
It was interesting to note that the role of the corporate secretary was included in their Companies Act in 1989 as well as making the board responsible for ensuring a proper governance process was in place. There was a strong focus on the composition of the board, with the position of the chief executive officer and chairman being separate and prohibiting a concentration of a particular profession on a board.
Peter Turnbull from Australia commented that Australia was focusing on the practical aspects of the implementation of risk management. Regulators generally place risk management, risk appetite and associated oversight and the role of the board at the centre of corporate governance thinking.
A key challenge was to move from a “box ticking” approach on risk and governance, to risk management being an effective decision-making tool. The Corporations Act, the main legislation, was largely silent on risk.
Embedding risk management into the culture of a company was a challenge whereas a risk management framework was easy to design following guiding principles of simplicity and cost effectiveness. A proper culture underpins a good risk management framework. Culture needed to be underpinned by strong ethics and accountability. The Australian Securities and Investments Commission was focused on identifying a bad culture. However, in practice this was difficult to judge.
Risk management needed to be integrated with governance. Whilst the board was responsible for risk, in practice it delegated this responsibility to senior management. Accordingly, management and boards must be aligned and work closely together. A key element to ensuring the effectiveness of risk management was to embed risk management in the company culture and to link risk management objectives to KPIs. Key current risks concerning Australian companies were regulatory risk (too much intervention and cost), cyber security, third party risk, corruption, money laundering and reputation consequences following any of these incidences. Company secretaries were uniquely positioned to play a pivotal role in the risk management process.
Grace Tan from Singapore highlighted the benefits of a diverse board, which has become a more prominent issue since the 2008 financial crisis. McKinsey & Co in their annual “Woman Matter” studies concluded that there was a positive correlation between companies with more women on their boards and superior financial performance across all industries. Some of the benefits of having diversity in the boardroom included less “groupthink”, different perspectives considered, greater variety of potential solutions deliberated and better talent leverage. All these issues led to better decisions and better risk management. Institutional investors, particularly, reviewed gender, age, occupational background and ethnicity in the composition of boards.
In August 2014 a Diversity Action Committee was formed to build up the representation of women directors on boards of companies in Singapore. From a company perspective, the challenge was to make the changes at a pace that recognised and was sensitive to the cultural issues that have promoted male dominated boards. At the other end of the spectrum, too much emphasis on diversity could result in a board becoming dysfunctional.
Chua Siew Chuan from Malaysia advised that the 2012 Malaysian Code of Corporate Governance focused on the importance of independent directors. The Code required at least two or one-third of the board of directors to be independent directors. This was a challenge as most companies had promoters and grew from family-owned businesses. Directors were only classified as independent for a period of nine years. Thereafter, they could remain board members but were reclassified as non-executive directors. The board must justify and seek shareholders’ approval if it decided to retain an independent director, who has served on its board for more than nine years. The concern related to long tenure possibly impairing independence. The nine year cap applied to consecutive service or cumulative service of nine years with an interval. The nine year limit was adopted as it aligned with the tenure limit for independent non-executive directors in other jurisdictions. This cap was further supported by a study undertaken by INSEAD Business School on 2 000 companies, which concluded that the optimal average period for independent non-executive directors was 7 - 9 years. This resulted in independent non-executive directors being able to accumulate the benefits of company-specific knowledge without the cost of entrenchment. The Malaysia-Asean Corporate Governance Report findings for 2014 on 873 listed companies found that more than half of 873 listed companies have directors, who have served on those boards for over nine years.
Atul Mehta from India provided a high level overview of India’s Companies Act introduced in 2013. The focus of the Indian regulatory regime was to make it easy to do business in India, which has attained fifth place in the World Bank Doing Business 2015 index for emerging economies. The Indian Stock Exchange has the most listed companies in the world.
The new Act introduced two major changes impacting the company secretary profession, the first being the requirement for a secretarial audit for larger companies. This audit could only be performed by a practising company secretary, and the outcome of the audit must confirm that the relevant company has complied with all the laws of India. The second innovation was that the quorum for a meeting must be in place throughout the meeting and not just at the commencement of the meeting.
The 2013 Act also requires every company to observe secretarial standards specified by the Institute of Company Secretaries of India in regard to general and board meetings.
The presentations gave delegates a good overview of issues that concern boards and the progress made in tackling identified corporate governance challenges in different jurisdictions.
- Joanne Matisonn, Technical Advisor, CSSA
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