Transcript Code of Corporate Governance
Presentation on the Corporate Governance Awareness Workshop, Kurumba Island, Maldives (August 2007) Fathimath Shafeega Chief Executive Officer Capital Market Development Authority
Government ownership Conflicts of Interest Related party transactions Directors mandated under Companies Act to hold shares in Company Lack of capacity for enforcement purposes Lack of qualified professionals in accounting and legal fields Lack of training and awareness Enhancement of Public Governance Desire to use CG as tool for economic development
Main Provisions
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Board Matters
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Remuneration Matters
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Accountability And Audit
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Communication With Shareholders
What Code Says – Key Items
• Integrity in personal and professional dealings • Wisdom and ability to take appropriate decisions • Ability to read and understand financial statements • An acknowledged record of business expertise and achievement so as to
effectively contribute to the company’s management
• Ability to deal with others with a sense of responsibility, firmness, and
cooperation
• Ability to interact with and consult with the company’s employees in
order to achieve high management standards
• A track record of a range of skills and experience as well as the ability to
think strategically and with foresight
• Each director must be able and prepared to devote sufficient time and
effort to his duties as a director
Stand-alone and given legislative bite through Listing Manual and Securities Act?
Compulsory for listed companies, but with some voluntary Voluntary for public unlisted, private More prescriptive approach
At a minimum, Governance involves organisational structures rules of conduct that acts as a check on insiders misusing their position or knowledge against the interest of other stakeholders The idea is to have GOAL POSTS
R = Responsibility A = Accountability F = Fairness T = Transparency RAFT contributes to effectiveness!
Board Issues
Composition – executive, non-executives, independents – numbers of each - Appropriate definitions Independent directors – Importance & Sufficient numbers Leadership
Chief Executive Officer separate from chairman
Qualifications
Role Sub-committees of the board:
Nominating Committee
Remuneration
Audit Training Attendance at meetings / Quorum Evaluation of board performance Access to information Tenure
Who To Appoint? And How?
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CG Code provides:
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Should be a formal and transparent process for the appointment of new directors to the Board
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Recommends that key information and the names of the directors submitted for election or re-election be disclosed to enable shareholders to make informed decisions Disclose the process for the selection and appointment of new directors to the Board as this ensures greater transparency in the nomination process
Executive and Non-Executive Directors
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Executive directors are the employees of the company.
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Paid salary
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Non-Executive directors (‘NEDs’) are not the employees of the company and they do not hold any other office of profit in the company or in a related company.
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Paid directors’ fees
Who Is An Independent Director?
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Have not held, or whose immediate family members have not held, during the last one (1) year, a key position in the company, such as CEO, general manager, or any immediate employment position;
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Have not, and their immediate family members have not, during the last one (1) year had any substantial financial dealings, including the receipt of remuneration, commissions, professional fees, payment for goods and services, etc with the company;
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Definition of Family Member - spouse and children
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Role
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Constructively challenge and help develop proposals on strategy; and Review the performance of Management in meeting agreed goals and objectives and monitor the reporting of performance.
Independence = State of Mind!!
Who Is A Nominee Director
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Person appointed to board of directors by an appointor:
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Substantial shareholder
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JV Partner
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Investor Creditor Right to appoint contained in:
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Articles of association
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Contractual documents – JVA
CEO • Size of Board = large enough
to include directors with diverse expertise and experience to suit the specific requirements of a company and its business.
• Guide = board sizes range
from 7 to 10 directors, depending on the size of the company.
• Rotate the Board – maximum
6 years
Executive Directors Chairman Independent Directors Non-Executive Directors • Recruiting the right team • Guidance in CMDA Code
Main duties of the Board
The Board must always act in the best interests of the company and shareholders as a whole.
Provide leadership, set strategic aims, direction to the Management, and ensure that the necessary financial and human resources are in place for the company to meet its objectives;
Establish a framework of prudent and effective internal controls which enables risk to be assessed and managed, and monitor and assess the effectiveness of the internal controls established;
Review Management performance and determine its remuneration; and
Set the company’s values and standards, and ensure that obligations to shareholders and others are understood and met.
Chairman’s Role
Lead the Board to ensure its effectiveness on all aspects of its role and set its agenda; Ensure that the directors receive accurate, timely and clear information; Encourage constructive relations between the Board and Management; Facilitate the effective contribution of non-executive directors Encourage constructive relations between executive directors and non executive directors; Not to unilaterally issue policies without consulting with the Board as a whole with full frank and discussions being completed Ensure effective communication with shareholders; Promote high standards of corporate governance.
No of Members Chairman Composition Qualifications Audit 3 Independent 3 Nominating Independent Entirely non executive, majority including chairman independent Min 2 with accounting or financial expertise or experience Entirely non executive, majority including chairman independent Remuneration Independent Entirely non executive, majority including chairman independent
Remunerate Fairly And Responsibly
Ensure that level and composition of remuneration is sufficient and reasonable Ensure that its relationship to corporate and individual performance is defined Means companies need to adopt remuneration policies that attract and maintain talented and motivated directors and employees so as to encourage enhanced performance of the company Important that there be clear relationship between performance and remuneration Important that policy underlying executive remuneration be understood by investors.
Performance Appraisal
• • •
Identification of performance indicators Evaluation against performance indicators Evaluation should be conducted at least once a year
Disclosure Of Remuneration
To disclose in Annual Report collectively: the remuneration of directors during the year as: ▪
Director fees
▪
Other benefits, including share options, long term incentive schemes, pension benefits and preferential entitlements
To disclose voluntarily each director’s and top management remuneration
Key Duties And Liabilities
The primary duties of directors include the following: good faith; acting without conflict of interest; not competing with the company care and skill; disclosure; prohibition of lending to director; filing returns; keeping proper records and preparing financial reports; and obligations under the Listing Manual.
Same Duty For All Directors?
Accountability Roles Duties & Responsibilities
Definition – The management must comprise the CEO, executive directors & key managers of the company involved in day to day activities.
Role Relationship with board Access to information
Necessary? YES Qualifications Understanding of compliance Imply accountants, lawyers etc can play impt role Scope of functions Board Management Committees
How to engage Information to provide Electronic participation Resolutions on substantially separate issues to be kept separate Requirement for effective shareholder remedies
Financial statements to comply with Accounting Standards Non-financial statements: Conflict of interest Compliance with CG measures implemented Director remuneration Companies operating procedure Risk management concerns Format for disclosure
• Absolutely essential • Train the trainers For board & management Legal (including duties and liabilities) and accounting concerns Roles and specific functions to gain better understanding Economic issues and changing conditions, and impact on company’s businesses For employees: Business and strategic issues Details of policies of company Specific roles and duties and responsibilities, including liabilities
Criteria for CG Award
• Work undertaken to adopt governance principles • Contribution to significant development of corporate governance
practices
• Promotion of initiatives for the enhancement of future corporate
governance practices
Main scope: Fraudulent financial reporting Misstatements arising from misappropriation of assets Improper or unauthorized expenditures (including bribery and other improper payment schemes) Self-dealings (including kickbacks) Violations of laws and regulations (including those that expose the company or its agents to regulatory or criminal actions, e.g. securities frauds, signing false audit confirmations)
Pre-requisites For Enforcement
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Market maturity & level of sophistication
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Level of awareness of directors of their duties
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Shareholders of their rights and
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Presence of reputatable intermediaries The presence of enforcing institutions
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Integrity and efficacy of regulatory agencies
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Judicial system The supporting legal framework
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Relevant laws in the corporate and financial system must be firmly in place
Timelines
Voluntary Compliance Mandatory Compliance Corporate Governance Award 1 January 2007 1 January 2008 From 2009 1 January 2008 Some provisions will remain voluntary
Change of culture Legal reform More training & awareness Shareholder activism Independent Directors
A series of training workshops have been held
2002 2005 2006
1
st
Seminar on CG Training Programme on CG Code Seminar on CG
2007