Last April, the European Commission launched a public consultation on ways in which corporate governance of European companies can be improved for listed and unlisted companies. In its Green Paper, the Commission asked whether the EU needs to take action to promote the use of corporate governance guidelines in unlisted companies.
Good governance does not exist separately from the law- Stephanie Sciberras
Over the years, there have been international efforts to set up corporate governance codes. In different countries, laws, regulations and codes of conduct on corporate governance have been adopted. The European approach has so far been to rely on self-regulation by applying the “comply or explain” principle.
Good governance does not exist separately from the law and it is entirely inappropriate to segregate the two. The starting point for corporate governance should be the duty of directors and officers to discharge their legal duties, namely: the duty of care, skill and diligence and the fiduciary duties they are bound to discharge. Corporate governance places a company in a better position to take decisions which will protect and enhance value for the long-term shareholders.
The shareholders play a role by appointing directors and auditors and requesting that an appropriate governance structure is in place.
Corporate governance mainly involves the establishment of structures and processes, which incorporate the appropriate checks and balances that enable directors to discharge their legal responsibilities, and to oversee compliance with the applicable legislation.
Perhaps the most well-known definition is that found in the UK Corporate Governance Code which provides that “corporate governance is the system by which companies are directed and controlled”.
A good corporate governance framework ensures that directors working collectively through an effective board, oversee the management of the business, set the tone from the top, ensure the integrity of financial reporting, set a risk management framework for the company and liaise with shareholders.
A company seeking to adopt a corporate governance framework should ensure that it has an effective board which is collectively responsible for the strategic direction of the company. The role, functions, duties and performance criteria of the board should be determined in a board charter. The board should provide the effective ethical leadership of the company within a framework of prudent controls.
The chairman’s role should be separate from any other role within the executive management of the company and is responsible for setting the tone at the top, for leadership of the board and for the efficient organisation and conduct of the board’s functioning.
This generates effective board debate and allows a diversity of views to be expressed openly and constructively while promoting relations between directors and between the board and management.
The board’s responsibilities include the protection of internal and external stakeholders and act in the best interests of the company. It is to set the values to which the company will adhere, preferably through a code of conduct. It is responsible for the governance of risk through a risk management policy and board-approved plan and for IT governance through an IT charter and policies.
The board should be composed of directors who have a range of skills, competence, knowledge, experience and approach to ensure appropriate discussions. The appointment of non-executive directors strengthens the board’s independence of judgment.
Good practices include at least four meetings held a year with recommendations to the board clearly presented in writing before a meeting and all material information provided in a timely manner. Matters for decision would normally include approval of financial statements, business strategy, annual budget, major capital projects, major changes to management and the control structure, material investments or disposals and risk management strategy.
The board may also appoint committees to assist it in its tasks. These committees should be well-structured with formal terms of reference which are reviewed and approved and they should be appropriately constituted and composed.
The Listing Rules published by the Listing Authority in Malta require every listed company to establish an audit committee. This should be composed entirely of directors.
At least one member of the audit committee must be independent and competent in accounting or auditing. This set-up should allow an audit committee to be effective, independent and capable of focusing on issues relevant to the integrity of the company’s financial reporting. Furthermore, an Audit Committee should be responsible for the oversight of the internal audit function, for recommending the appointment of the external auditor and for overseeing the external audit process.
The board of directors is also responsible for the governance of risk. A system and process of risk management (including compliance risk) should be developed within the company. The plan should describe the roles and accountabilities of the board, audit committee, management and any internal audit function. The implementation of the risk management plan (drawn up by management) should be reviewed annually and monitored continually.
The annual general meeting is a tool to communicate with shareholders. The board should be aware that transparent and effective communication with shareholders leads to trust and confidence. A board should aim to give shareholders timely and clear information about the company; and provide a straightforward mechanism through which shareholders can participate in general meetings.
This process should not be looked upon as a box ticking exercise.
Rather, for a corporate governance framework to be effective and beneficial, it should be implemented and used as a tool to assist in the company’s performance, to provide credibility to its projects and to address investors’ concerns.
The Commission is expected to issue a feedback statement summarising the results of the public consultation in the coming weeks. It will be interesting to see whether the results of this public consultation will lead to legislative proposals for corporate governance in unlisted companies.
ssciberras@jmganado.com
Dr Sciberras is a member of the corporate governance services team at Ganado & Associates Advocates.