Global trends in corporate governance
Increasingly, corporate governance is being looked at as the measure of a company’s future prospects, writes Board Dynamics CEO Henri Eliot.
“Corporate governance is now widely established as a measure of how well companies are run. Investors use corporate governance as a bellwether for determining the quality of a company’s management and the effectiveness of its board” – so says a report published earlier this year by the Global Governance and Executive Compensation Group (GECN) and Farient Advisors.
The 2017 study covered 17 countries across six continents that gathered insights into corporate governance practices and trends to determine their implications for corporate governance.
The report highlights a few interesting trends summarised below.
First, there is a heightened focus on corporate governance around the world.
“While governance is generally intensifying around the world, countries still differ significantly on their level of focus on corporate governance. The current focus on governance is rated as intense in most developed countries, particularly in the U.S. and Europe, and moderate in many Asian countries and Brazil. Mexico is viewed as having a weak focus on governance, while China is viewed as weak but improving. In particular, China is attempting to raise its profile in the corporate governance arena. For example, some Chinese State Owned Enterprises (SOEs) are addressing governance issues by establishing external boards, giving greater authority to these boards, and promoting mixed ownership structures.
Not only is the focus on governance intense in most venues, it is expected to increase in about two-thirds of those countries surveyed, including those with a currently weak or moderate focus. This means that common standards for good governance are likely to rise as well.
The heightened focus on corporate governance is influenced, among other things, by countries trying to make their capital markets more attractive and safe for investors. The U.S. led
the charge with the Dodd Frank Wall Street Reform and Consumer Protection Act in 2010, followed by regulatory actions on remuneration in the U.K., Australia, and Switzerland.
Most striking from the study is that these phenomena tend to be global in a way that respects the local cultural attributes of the country”.
Second, there are new emerging governance trends in executive compensation.
“Governance” of the corporation is defined by a patchwork of statutory requirements, investor voting rights, and an array of practices and standards to which corporations voluntarily adhere.
For executive compensation, i.e., “Say on Pay,” statutory requirements typically lead the change process, although these requirements vary considerably from country to country. Not a trend we are saying at this stage in New Zealand.
“Belgium and India have the broadest requirements, followed by the United Kingdom and Australia, while Mexico, Brazil, and Singapore have fewer types of requirements.
Disclosures and equity plan provisions are commonly driven by statutory requirements, while pay levels and stock ownership guidelines are most often determined on a voluntary basis. There is no evidence that ownership guidelines have statutory backing. Instead, they are generally adopted on the basis of shareholder preferences”.
Third, governance trends in board structure and composition are often marked by best practice.
Unlike executive remuneration, “which tends to be driven by a multitude of statutory requirements, board structure and composition tend to be driven by best practices. The legal framework and the stock exchanges have statutory requirements in the areas of committee structure and director elections, followed by board member and Chair independence. However, the majority of countries in our study do not require their exchanges to adopt requirements in the areas of the board’s ability to control its advisors, director diversity, director term limits, director attendance, and director age limits. On these matters, investors often voice their preferences through organised efforts (such as through the Council of Institutional Investors), adopting investment principles that cover board structure and composition, and/or through engagement and dialogue with issuers. As a result, non-statutorily driven “best practices” have emerged across a broad cross-section of venues”.
In summary, corporate governance is now in “higher regard among governments, investors, and often, the public. This is because good governance is a prerequisite for robust capital markets and is indicative of the quality of corporate management and board effectiveness”.
The report concludes that “companies want to be an attractive vehicle for investing capital. As a result, boards themselves are volunteering for stronger, more shareholder-friendly governance mechanisms. Being aware of what these mechanisms are globally and how they are likely to build and converge is becoming part of the job for today’s progressive board members”.