The 15 most important Governance stories of 2018
Corporate scandals underline business-critical nature of governance issues
The past 12 months have seen a series of corporate scandals across Europe that underlined the perils of poor corporate governance standards, from the downfall of Pierin Vincenz, the long-time CEO of Switzerland's Raiffeisen Bank, to the collapse of UK government outsourcing contractor Carillion. Around the world, jurisdictions that in the past paid less attention to governance issues, including Singapore and Hong Kong, have tightened the rules applicable to listed companies, pushing for a greater role for independent directors and restrictions on the number of board mandates individuals can hold. Not all the changes underway or under consideration involve increased transparency - US businesses are starting to rebel against quarterly reporting requirements, which they say lock in a short-term mindset. While corporate governance is an increasing preoccupation for policy-makers and regulators, their initiatives may take longer than expected to deliver concrete results. Evidence suggests that even mandatory quotas to encourage greater director diversity have yet to produce any significant shift in boardroom gender balance.
Boardroom quotas seen failing to improve corporate gender balance
The imposition of mandatory quotas for the number of women on company boards does little to improve the prospects for women further down the corporate ladder, reports suggest. In Norway, which requires 40% of its board seats to be held by women, women represent only 7% of CEOs. In the UK, France, Germany and the Netherlands, men still hold between 80% and 90% of senior management jobs, although the proportion of female board members has increased fivefold over the past decade in Belgium, France and Germany.
Best source: The Economist (registration required)
UK regulator tightens fund management governance rules
The Financial Conduct Authority has told asset management companies to improve the governance of fund boards and to be prepared to move investors to cheaper versions of the funds they offer. It also requires changes to performance fees and disclosure of investment objectives to stop closet tracking by funds that charge higher fees for active management. Under rules to be rolled out over the next 12 to 18 months, the regulator will require executives and asset managers to assess the value of the company’s funds, take responsibility for recruiting independent directors and act in the best interests of investors. This additional requirement is part of the senior managers and certification regime accountability rules for all financial services companies, which will come into force toward the end of next year.
Best source: Financial Times (subscription required)
Rating agencies step up focus on ESG corporate risk factors
Credit ratings agencies are incorporating environmental, social and governance considerations into their methodology, with the UN-backed Principles for Responsible Investment particularly influential in the systematic integration of ESG factors in credit-risk analysis in Asia, and facilitating dialogue between regional and global agencies to identify risks to creditworthiness. Environmental elements are the most critical input into rating methodology because of the risks of events associated with environmental degradation, regulatory measures that leave companies with stranded assets, and disinvestment by sustainability-conscious investors. Analysts point to the downgrade of Volkswagen by S&P after revelations of diesel emission test manipulation in the US in September 2015, partly reflecting evidence of the group's inadequate environmental and social risk management framework.
Best source: Global Finance
Widespread business support in US for abolition of quarterly reporting obligation
The Trump administration's proposal to end quarterly reporting obligations for listed companies in favour of a half-yearly system has been applauded by US business leaders, including Berkshire Hathaway's Warren Buffett and JPMorgan Chase's Jamie Dimon, who argue that quarterly earnings guidance can result in an unhealthy focus on short-term profit at the expense of long-term strategy, growth and sustainability, as well as being a factor behind a decline in the number of American public companies over the past two decades. Quarterly reporting obligations were introduced in the wake of the 1929 stock market crash, and reverting to a twice-yearly system would bring the US back into line with Europe, which abolished quarterly earnings reporting rules after the financial crisis to reduce the bureaucratic burden on businesses.
Best source: The Guardian
Hong Kong exchange seeks to clamp down on multiple board mandates
Hong Kong Exchanges and Clearing is to implement a new set of listing rules on January 1 incorporating a 'comply and explain' provision requiring companies to seek shareholder approval if any director holds more than six board mandates at the same time. There are 65 directors in Hong Kong who sit on more than six boards, accounting for 499 out of 7,564 listed company board seats in the territory, according to corporate governance activist David Webb. On average, each director of a Hong Kong-listed company sits on two boards, putting the jurisdiction in fourth place globally for directorship density, according to Institutional Shareholder Services.
Best source: South China Morning Post
Two-tier board structures blamed for Volkswagen and Deutsche Bank problems
Scandals leading to legal and regulatory sanctions and to senior management changes have highlighted the governance issues faced by Volkswagen
Recent scandals leading to legal and regulatory sanctions and to senior management changes have highlighted the governance issues faced by Volkswagen and Deutsche Bank. While both companies have two-tier board structures designed to ensure a significant level of staff representation and involvement in strategic direction, this approach leaves little room for genuinely independent voices that can be heard when companies run into problems.
Best source: Financial Times (subscription required)
Shareholders force Unilever to abandon plans for single Dutch structure
Unilever has abandoned its plan to end its dual Dutch and British structure in favour of a single base in the Netherlands. Unilever's board reversed its position after growing shareholder opposition made it unlikely that the proposal would receive sufficient support from UK institutional investors, who feared being obliged to sell the group's shares once it was no longer part of the FTSE100 equity index. As a result, the Dutch government subsequently dropped its controversial proposal to scrap dividend withholding tax, which was intended to protect the foreign shareholders of Dutch companies from having to pay tax in the Netherlands.
Best source: Reuters
See also: Bloomberg
ECB warns auditors that banks could use accounting change to hide losses
The European Central Bank has told auditors that banks could try to use the transition to new IFRS9 accounting standards to defer losses on non-performing loans over five years rather than incorporate them into their 2017 financial results. The ECB's Single Supervisory Mechanism raised the issue in early 2018, also alerting the European Banking Authority, and its board has agreed it can impose additional capital charges on institutions that it determines are seeking capital savings that are not justified.
Best source: Bloomberg
Irish central bank seeks criminalisation of reckless financial decisions
The Central Bank of Ireland has called for new legislation that would criminalise egregious recklessness on the part of senior executives or board members of banks, insurers and other financial institutions in the event that the company collapses. The regulator’s proposals are tougher than the corporate governance reforms proposed by the government. The central bank has also called for core common standards, including a requirement on firms and individuals to behave with honesty and integrity and possess competence and capability, to be enshrined within a legal framework.
Best source: Irish Times
UK opposition sets out plans for compulsory employee directors
According to Jeremy Corybn, future UK Government will introduce legislation requiring businesses to reserve a third of board seats for employee representatives.
A future Labour government in the UK would introduce legislation requiring businesses to reserve a third of board seats for employee representatives, who would be elected by the workforce and paid the same as other board members, according to party leader Jeremy Corbyn. The rules would apply to companies with a workforce of 250 or more, regardless of whether they are listed or not, with a minimum, regardless of board size, of two employee representatives who would have to be members of a trade union. Corbyn blames governance that prioritises shareholder interests for a corporate culture focused on short-term gains at the expense of longer-term growth. Labour has also floated the idea of companies' customers having a say on executive remuneration.
Best source: City A.M.
German companies face clawbacks on executive bonus packages
The government appointed-commission that oversees the Deutscher Corporate Governance Kodex has proposed a revised corporate governance code that would for the first time authorise clawbacks on executive bonuses. The revised standards would give companies' supervisory boards the power to suspend or reclaim variable remuneration from managers. The commission also wants to end provisions in employment contracts that allow executives to claim large severance payments when a company is taken over.
Best source: Financial Times (subscription required)
Danish regulator rejects Danske Bank’s choice for new CEO
Denmark's Financial Supervisory Authority has blocked the board's choice of Jacob Aarup-Andersen as Danske Bank's CEO in the wake of the money-laundering scandal that caused the resignation of Thomas Borgen. The regulator says Aarup-Andersen, head of wealth management and the bank's former chief financial officer, lacks sufficient experience in the bank's business areas. The board vote was unanimous, although chairman Ole Andersen says directors also thought longer experience in some sectors would have been desirable.
Best source: Financial Times (subscription required)
Smaller UK listed companies required to adopt governance code
As of June 2018, the approximately 960 entrepreneurial businesses listed on the London Stock Exchange’s AIM junior market are required to comply with the UK’s standard corporate governance code for listed companies, drawn up by the country’s Financial Reporting Council, or a code created for smaller companies by the Quoted Companies Alliance. If they cannot or will not comply with either code, companies must explain why. Key elements of both standards include the requirement for executives to explain their strategies and how they identify and manage risk, as well as motivate and reward executives and employees, and stress the independence of non-executive directors.
Best source: Financial Times (subscription required)
BlackRock CEO calls on companies to play bigger role in society
Larry Fink, CEO of the world’s largest asset manager, BlackRock, has written to the CEOs of the world’s leading corporate groups calling on them to play a greater and more positive role in society, including creating a diverse workforce while planning for a more automated future. Fink says companies must demonstrate their positive contribution to society, as well as delivering strong financial performance.
Best source: Washington Post
Raiffeisen chairman resigns over scandal involving former CEO
Johannes Rüegg-Stürm resigned as chairman of the board of Swiss bank Raiffeisen following the arrest and launch of criminal proceedings against former CEO Pierin Vincenz, with Guy Lachappelle elected as his successor at a delegates' assembly in November. Prosecutors are examining allegations of wrongdoing during Vincenz's 16-year tenure relating to his personal stakes in Aduno and Investnet, two investment firms acquired by Raiffeisen. Regulator Finma continues to examine corporate governance issues at Raiffeisen, where Vincenz's wife Nadja Ceregato has long been chief counsel.
Best source: SWI Swissinfo