Round-up of the year’s most important governance newsIntroductionBrexit brings uncertainty to future of European governance standards
Concern is growing that the UK’s departure from the European Union will hinder progress toward stronger governance standards across the EU, with analysts fearing the impact of Britain’s pragmatic approach will be lost amid a shift toward more prescriptive rules that ultimately could favour controlling owners at the expense of minority investors. Nevertheless, work to strengthen standards currently continues on both sides of the English Channel, as new EU guidelines for financial institutions stress the importance of diversity, while a proposed UK code would require companies to take employee views into account during their decision-making processes. The past year has seen significant changes in corporate behaviour in regions such as central Europe thanks to the generalisation of audit committees, a study says, while European shareholders are becoming more confident about challenging executive remuneration arrangements. Indications suggest that businesses increasingly understand the benefits of improving corporate governance, which can affect consumer decisions or, in the case of Chinese companies listing in London, their attractiveness to investors.Key Corporate Governance Developments 2017Governance policy head fears for EU standards after UK exit
The UK’s withdrawal from the EU could lead to a weakening of corporate governance frameworks throughout the continent, according to George Dallas, policy director at the International Corporate Governance Network. He argues that Britain has exerted a significant influence on the formulation of EU governance rules, emphasising shareholder primacy, transparency and disclosure rather than prescriptive requirements. Dallas says that in the future, EU regulators may move away from the UK’s voluntary ‘comply or explain’ approach toward a more codified set of rules, which he fears may place less emphasis on minority shareholder rights and more on the interests of controlling owners and stakeholders.
Financial Times (subscription required)https://www.ft.com/content/1f59c54a-25d7-11e7-8691-d5f7e0cd0a16EU financial regulators highlight diversity in corporate governance guidelines
Diversity in gender, as well as education, age, profession and geography, should be among the factors considered during recruitment by large financial institutions, according to draft corporate governance guidelines issued jointly by the European Banking Authority and the European Securities and Markets Authority and applicable starting June 2018. The proposals say members of the management body of institutions must be able to commit sufficient time to perform their duties and that the number of outside directorships held by executives should be regulated.
Financial Times (subscription required)https://www.ft.com/content/cb115c00-6d52-33da-af5f-8d7f34050d39UK oversight body says companies should consider employee views
The UK’s Financial Reporting Council has issued proposed changes to its corporate governance code designed to reflect the changing business environment, including a requirement on companies to consider the views of employees when taking decisions and greater restrictions on executive remuneration. The revised code would set out detailed standards on consultation in the event of significant shareholder opposition, and seeks to give remuneration committees broader responsibility and discretion in overseeing how remuneration and workforce policies are aligned with the company’s strategic objectives. Other proposals include requiring executives to wait five years to receive share awards, stipulating at least a year’s previous experience for heads of remuneration committees, and treating board members of more than nine years’ standing as no longer independent.
Economiahttp://economia.icaew.com/en/news/december-2017/frc-unveils-shorter-and-sharper-corporate-governance-code Increase in shareholder votes against executive pay
Advisory firm ISS has reported an increase in the average level of voting against executive pay proposals, from 8.3% to 8.6%, at 834 shareholders’ meetings held by 786 European companies so far this year. Credit Suisse, AstraZeneca and Pearson Group are among those companies where shareholders voted in numbers over pay deals. The increase was driven by shareholders in Germany and Switzerland, but investor rebellions declined in the UK.
Financial News (subscription required)https://www.fnlondon.com/articles/european-companies-face-shareholder-anger-at-pay-rises-20171004Audit committees changing corporate behaviour in Central Europe: study
A joint report by the Institute of Chartered Accountants in England and Wales and consultancy Deloitte has found that the introduction of audit committees has made a significant difference both to corporate governance and behaviour in central and eastern Europe over the past 10 years. Committees were found to have a greater impact in areas such as financial reporting and internal controls at private companies than at state-owned entities.
Economiahttp://economia.icaew.com/en/news/june-2017/impact-of-cee-audit-committees-on-corporate-governance-significantGulf businesses face governance and succession challenges
Family-led businesses in the Gulf countries face serious challenges in areas including corporate governance and succession in a highly competitive modern-day business environment, according to a report by Orient Planet Research. The study highlights factors such as increasing numbers of family members in each generation and lack of preparedness for succession issues at a time when businesses are grappling with their growth in size and complexity and the impact of globalisation. Orient says that while family business owners generally recognise the value of sound corporate governance as good business practice, few have fully adopted modern global corporate culture.
Arab Newshttp://www.arabnews.com/node/1194111/business-economyMany boards still failing to focus on corporate culture: survey
Almost two-thirds of European company directors are members of boards that give corporate culture inadequate attention or fail to include culture in formal risk management frameworks, according to a survey of directors across Europe. The study suggests that boards have not responded to political and regulatory pressure about the importance of a sound corporate culture, and many of them do not give it proper consideration during meetings. Often directors see a gap between corporate strategy and culture, or feel they have insufficient access to data on corporate culture.
Board Agendahttp://boardagenda.com/2017/11/06/boards-struggle-corporate-culture-survey-reveals/ Cyber-security looms larger as governance issue after ransomware attack
The WannaCry ransomware attack affecting as many as 200,000 companies and organisations in 150 countries has highlighted the importance of cyber-security as a governance responsibility and the risk that corporate officers may face regulatory penalties as well as shareholder action. New York’s Department of Financial Services now requires financial services firms to designate a senior executive to certify compliance with cyber-security rules, and other states are expected to follow. US regulators and legislators say companies should consider whether to protect themselves with cyber-insurance, raising the prospect of future lawsuits against executives or directors if companies fail to purchase insurance and then suffer an attack.
CFOhttp://ww2.cfo.com/applications/2017/05/wannacry-spotlights-need-cyber-liabilty-coverage/Index funds may sap investor influence on corporate governance
The increasing size and market weight of index funds may be harmful to efforts to improve corporate governance, since few fund providers have an interest in ensuring that standards are met and that executives are held accountable for their actions. Activist investors claim index fund providers do not sufficiently assert their rights as shareholders, although asset managers such as BlackRock, a leading passive fund provider, have challenged companies including ExxonMobil, DuPont and Arconic.
Wall Street Journalhttps://www.wsj.com/articles/index-funds-are-great-for-investors-risky-for-corporate-governance-1498170623Financial Stability Board highlights risk of unclear governance responsibilities
A thematic peer review by the Financial Stability Board, whose membership comprises central banks, financial regulators and finance ministries, has found that while member jurisdictions have comprehensive corporate governance frameworks, their effectiveness can be adversely impacted if the division of responsibility for oversight and enforcement is unclear. The review offers 12 recommendations to member jurisdictions, standard-setting bodies and financial institutions, among them enhancing disclosure requirements, implementing codes of ethics or conduct for company boards, shareholder voting rights on remuneration policies and improving whistleblowing programmes.
Financial Stability Boardhttp://www.fsb.org/2017/04/thematic-review-on-corporate-governance/ Diversity and ESG low priorities for pension schemes: report
Board diversity, ESG investing, and external reviews are relatively low governance priorities for pension scheme trustees and managers, according to a survey of 84 pension scheme trustees and managers plus in-depth interviews with scheme chairs commissioned by peer learning network firm Winmark and law firm Sackers. The study concludes that while many survey participants recognise the need for diversity of skills and perspectives, they do not give characteristics such as gender, age or ethnicity the same importance as other aspects of governance, and often trustee boards lack a wide choice of candidates.
IPEhttps://www.ipe.com/news/pensions/diversity-esg-relatively-low-scheme-governance-priorities-survey/www.ipe.com/news/pensions/diversity-esg-relatively-low-scheme-governance-priorities-survey/10019084.fullarticleLobby group looks to restore governance reputation of Chinese listings in London
The China City Group, a new lobbying organisation, is seeking to encourage more Chinese firms to list in London and boost investment by fund managers by improving governance standards. There were some 110 Chinese listings in London between 1997 and 2016, raising £1.7bn, but 75 of the companies have since been delisted and market capitalisations have fallen by nearly half, leaving investors wary of their ability to monitor and influence the behaviour of Chinese groups.
City A.M.http://www.cityam.com/269616/city-figures-launch-initiative-encourage-more-chinese-firmsNew legislation poses challenges in governance and reporting functions
Corporate governance challenges for independent reviewing officers include a broad range of new rules and legislation dealing with disclosure, reporting and transparency, including the EU’s implementation of the European Single Electronic Format for digital reporting of company information from January 1, 2020. In addition, the adoption last year of new regulatory technical standards under the EU’s Transparency Directive aims to ensure transparency of information for investors through regular disclosure and dissemination of periodic and ongoing regulated information.
IR Magazine (registration required)https://www.irmagazine.com/articles/corporate-governance/21940/corporate-governance-trends-europe/#Corporate governance has bigger impact on reputation and consumer decisions: study
Corporate governance is having a bigger impact on company reputation than ever before, according to a report by UK consultancy Reputation Institute. While a company's products and services are still the main drivers behind its reputation, having a broader positive impact on society has become the third biggest influence in consumer decision-making, and people want to feel they are being treated with authenticity, transparency and fairness by those they spend money with. The firm notes that Samsung, Lloyds Banking Group and Volkswagen have all seen their reputation improve because of their handling of crises.
City A.M.http://www.cityam.com/261351/companies-reputations-hinge-corporate-governance-now-moreDeutsche Bank unlikely to pursue former executives over Libor scandal
A report commissioned by Deutsche Bank has found no evidence that former CEOs Anshu Jain, Jürgen Fitschen and Josef Ackermann were personally at fault in the Libor rate manipulation scandal that has led to the imposition of multi-million dollar fines and sanctions on the bank by regulators. At worst, the enquiry concluded, the former CEOs were responsible from an organisational standpoint but not from a misconduct perspective. The bank’s supervisory board is reported to have sought legal advice as to whether compensation payments can be withheld from the executives’ unpaid bonuses.