Most directors of large companies struggle to properly understand their business, according to Roger Barker, director of corporate governance at the Institute of Directors in the UK.
Dr Barker, who was addressing a well-attended Institute of Directors Malta event, explained that a lack of expertise among directors is a perennial problem. He said that today’s companies are engaged in wide-ranging operations, do business in far-flung locations with global partners, and operate within complex political and economic environments.
Some businesses, retailing, for one, are relatively easy to fathom, but others such as aircraft manufacture, drug discovery, financial services and telecommunications, for instance, are technically very challenging.
He related the anecdote of catching up with a friend who had served for many years as an independent director of a technology company. The CEO had suddenly resigned, and his friend was asked to step in.
“I thought I knew a lot about the company, but was I wrong,” the friend told Dr Barker. “The knowledge gaps between the directors and the executives are huge.”
To close those gaps, argued Dr Barker, large companies need independent directors who have the expertise to properly evaluate the information they get from managers. He stressed that directors must know what questions to ask about information they are not getting.
Dr Barker then went on to outline 10 emerging and important trends on EU corporate governance and how these would impact on all EU nations, including Malta. He singled out the main issues in European corporate governance across five key areas: board structures, co-determination, differences in legal duties, ownership structures and cultural differences, particularly in business norms and practices.
The knowledge gaps between the directors and the executives are huge
He said the three most important issues in EU corporate governance currently are cyber-security, governance in sport and charity, and preventing scandals through enlightened governance within the existing governance frameworks.
He also suggested that everyone involved in governance thinking should be looking at the impact of digitalisation on company law and corporate governance, as well as assessing the role that innovation has in the modern enterprise.
Louis de Gabriele, who heads the corporate and finance practice group at Camilleri Preziosi Advocates, gave a presentation on ‘The Maltese dimension’.
Dr de Gabriele argued that issues of corporate governance are as much cultural in nature as they are functional. He stated that transposing rules or guidelines of best practice from one cultural background to another is indeed a challenge that cannot be underestimated if we want to have rules and guidelines that are effective.
In a wide-ranging address Dr de Gabriele covered the role of corporate governance in small local firms, major local firms and in locally listed companies. He also covered features of Maltese company law dealing with directors’ duties and the impacts that the government and the main retail banks have on governance issues within local firms.
He made two recommendations at a forum moderated by European Confederation of Directors’ Associations policy committee member Edwin Ward and Dr Barker.
The first was for institutional and professional investors to take a more active role in the debate on corporate governance and to take new initiatives in this respect, acting as a check on public companies. The second was for Maltese business to professionalise the board of directors, enabling them to understand better their role within the company and their authority and power.
Closing the workshop, IoD Malta chairman James Satariano said many stakeholders have forgotten the competitiveness aim of corporate governance. He said: “Governance is not only about compliance, it’s about acting with honesty and integrity in our business lives. Too much regulation runs the risk of a check-the-box exercise, which can be dangerous. It is important to draw conclusions from past regulation, to challenge whether they were useful in practice, whether regulations are compatible with our international environment and if they reinforce our competitiveness.”