Abstract
The European Commission has put forward an interesting set of questions about how to improve corporate governance, within its ‘Green Paper: The EU Corporate Governance Framework’ (Green Paper, 2011). The following provides analysis and the responses by a working group of authors in Canada to these questions based on the experience and research of the group (academics and practitioners) and the relevant literature.
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Notes
King III, for example, applies to ‘all entities regardless of the manner and form of incorporation or establishment and whether in the public, private sectors or non-profit sectors. We have drafted principles so that every entity can apply them and, in doing so, achieve good governance’. See page 16 of ‘King Code of Governance Principles for South Africa 2009’ (Institute of Directors Southern Africa, effective March 2010). The King III Code and Report have comprehensive principles and cascading practices that companies can choose to adopt, to achieve the objectives of the principles, based on a ‘comply or explain’ approach. The key to comprehensiveness and providing choice and flexibility for companies is in the drafting of principles and, in particular, the recommended practices. The UK Code (2010) also does a good job of this (through cascading main principles, supporting principles and code provisions), although the drafting of King III, in respect of its flexibility to small and mid-cap and private companies, is exemplary, in our view.
See, for example, Bova et al, ‘The Sarbanes-Oxley Act and Exit Strategies of Private Firms’, available online at http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1730242. This article shows that post SOX, the propensity to do an IPO has reduced. In general, the literature, according to one author, documents that SOX has imposed unintended costs on US firms (not disputing the benefits). Other relevant papers: (i) Leuz et al (2008): documents the going dark phenomenon, http://papers.ssrn.com/sol3/papers.cfm?abstract_id=592421; (ii) Doidge et al: other foreign exchange listings instead of the United States: http://papers.ssrn.com/sol3/papers.cfm?abstract_id=982193&rec=1&srcabs=956987; (iii) Leuz, 2007: costs of SOX: http://papers.ssrn.com/sol3/papers.cfm?abstract_id=990016&rec=1&srcabs=592421; and (iv) Zingales, 2007: http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1028701&rec=1&srcabs=982193.
See, for example, Leblanc (2011b).
See, for example, Mandate of the President and CEO, Chair of the Board and Committee Chair, available online at the Canadian Imperial Bank of Commerce: (www.cibc.com/ca/inside-cibc/governance/board-of-directors/mandates.html); and Chair's Role and CEO's Role, available online at Cameco Corp.: (www.cameco.com/responsibility/governance/chairs_role/) and (www.cameco.com/responsibility/governance/ceos_role/), respectively.
Available online at Nexen Inc.: (www.nexeninc.com/en/Governance/BoardofDirectors/AreasofExpertise.aspx); and at page 133 of ‘Section 5 Corporate Governance Statement 2010’, available online at BHP Billiton: www.bhpbilliton.com/home/aboutus/ourcompany/Pages/governance.aspx, respectively.
These attributes may be affirmed and published, for example, ‘All of our board members have these …’, which limits the utility of such a statement. Directors may possess these attributes to varying degrees, and such possession contributes to individual effectiveness and overall board dynamics. These attributes and director behaviours should therefore comprise part of a competency matrix, and be assessed for prospective and incumbent directors.
For example, ‘Enterprise Leadership’ as a competency could have sub-competencies of CEO/GM of large organization, CEO/GM of small organization, Other Experience with Small/Medium Organization, Active Professional, Volunteer/Community Organization, Leading/Managing Growth, and Experience ‘Under Fire’.
We use the example above of women, visible/racial minorities, Aboriginal Peoples and persons with disabilities, as examples of designated diversity groupings. The Green Paper speaks to (in this order) professional diversity, international diversity and gender diversity. Diversity groupings may also include, in no particular order, age (explicitly identified in Australia), socio-economic diversity, sexual orientation and military service.
See, for example, Aguilar (2010):
‘Unfortunately, while some companies provided useful information in the spirit of the SEC rule, many other companies provided only abstract disclosure – often times limiting their disclosure to a brief statement indicating diversity was something considered as part of an informal policy. Many companies did not include any discussion of any concrete steps taken to give real meaning to its efforts to create a diverse board. By leaving out the steps taken and how those efforts are evaluated, these companies fail to provide investors with useful information, and it deprives investors of information they have demanded. I have asked our staff to follow up with some of these companies and I expect this disclosure to improve’ (emphasis added).
In the United States, failure to disclose at all may result in a comment letter for which the company has 10 days to reply. See, for example, letter from the SEC to Republic Airways Holdings Inc., dated 24 September 2010, at page 1: ‘Please confirm that in future filings you will disclose whether, and if so how, you consider diversity in identifying nominees for director. Refer to Item 407(c)(2)(vi) of Regulation S-K. …’. It is not known if a failure to respond, in respect of this diversity disclosure requirement, could ultimately result in de-listing.
Therefore we disagree with the EU that ‘any evaluation statement to be disclosed should be limited to explaining the review process’ (page 8 of Green Paper). See, for example, Institute of Chartered Secretaries and Administrators, ‘Board Performance Evaluation: Review of 2008 Annual Reports of UK Listed Companies’ (February 2009), wherein substantive outcomes of board evaluations are disclosed for numerous companies. See also the Ontario Securities Commission, ‘Canadian Securities Regulators Seek Comments on Revised Corporate Governance and Audit Committee Regimes’ (proposal, 19 December 2008, after which it was withdrawn shortly after the height of the Global Financial Crisis in September 2008), at Principle 4(a): ‘Describe any practices the board uses … including (iii) the assessment process and outcomes …’ (emphasis added). See also, as a third example, ‘Annex 5: Illustrative statement on a BOFI's [Board of a Financial Institution's] evaluation process’, within ‘A review of corporate governance in UK banks and other financial industry entities’ (Draft report), Walker et al, 16 July 2009, at page 114, wherein five ((a)–(e)) board evaluation outcome-oriented items are discussed.
Publicizing these items would increase transparency and may address professionalism of offerings and providers, including viewing external board evaluations as a viable business model by professional service firms and independent advisors.
Before the publication of COSO 2004, the terms ‘risk appetite’ and ‘risk tolerance’ were used interchangeably by risk managers and the attendant literature. However, COSO 2004 attempted to define these terms differently: the former as being a higher level single view of risk, with ‘risk tolerances’ being a lower level more specific definition of tolerable risks. Attempting to define a single statement for an organization for its ‘risk appetite’ has proven difficult or impossible, often leading organizations to define numerous sub definitions for each of the many types of risks.
ISO 31000 Risk management – Principles and guidelines were issued in 2009 by the International Organization for Standardization. This is the first true international standard for risk management and has been widely adopted. It encompasses much of the concepts and practical reality of the well accepted AS/NZ 4360 Risk Management Standard.
ISO 31000 describes ‘risk criteria’ (section 5.3.5), which represent the definitions and means by which an organization's management (and board) would evaluate how critical the various sources of risks are as part of their risk assessments and treatment processes.
An example of regulatory requirements for a board regarding risk oversight is the Ontario Securities Commission ‘National Policy 58-201 Corporate Governance Guidelines’, section 3.4, which requires:‘The boards should adopt a written mandate in which it explicitly acknowledges responsibility for the stewardship of the issuer, including responsibility for: …(b) adopting a strategic planning process and approving, on at least an annual basis, a strategic plan that takes into account, among other things, the opportunities and risks of the business;(c) the identification of the principal risks of the issuer's business, and ensuring the implementation of appropriate systems to manage these risks’.
‘The oversight of the enterprise risk management process employed by an organization is one of the most important and challenging functions of a corporation's board’. See page 51 of Fraser and Simkins (2010). See also ‘Effective Enterprise Risk Oversight: The Role of the Board of Directors’ (2009) COSO.
Other definitions of a risk profile include: ISO defines a risk profile as ‘a description of any set of risks’ and risk as ‘effect of uncertainty on objectives’ (ISO 31000 2009). HM Treasury's The Orange Book: Management of Risk Principles and Concepts (October 2004) defines a Risk Profile as ‘the documented and prioritized overall assessment of the range of specific risks faced by an organization’. The 2002 Risk Management Standard produced by the Institute of Risk Management (UK) and the Institute of Insurance and Risk Managers (UK) defines a Risk Profile thus in section 4.5: ‘The result of the risk analysis process can be used to produce a risk profile which gives a significance rating to each risk and provides a tool for prioritizing risk treatment efforts. This ranks each identified risk so as to give a view of the relative importance’.
The word ‘functional’ is deliberately chosen and stems from spending hours surfing various Canadian institutional investors’ websites and not being able to locate their voting records. First, not all institutional investors have websites. Almost all do, but not all. Second, it was found during the course of research that many institutional investors’ websites were not functional, for two reasons:Links Not WorkingSometimes, the websites were simply not working. This was the case for example for an institutional investor whose website was powered by a proxy advisor. The company was contacted and the website is now working (that is, the links displaying the proxy voting records now work). The company was certainly not alone.Not User FriendlyWhat was found throughout the course of research is that many websites were not well-designed. It was not easy for someone to try to find out how an institution voted on a given matter without getting lost or spending an inordinate amount of time. Where do you find the proxy record? Is it under an investor relations tab on the company's website? Is it under a corporate governance link? If you do find the proxy voting record … . Do you search by issuer name? By date? By subsidiary of the institutional investor? Certain institutions may as well not have proxy voting records on their websites because the information is so poorly organized.
See Katten Muchin Rosenman (2010), at page 1: ‘Both “over-voting” and “empty voting” refer to types of errors that can occur in the way that proxy votes are counted. Over-voting refers to a situation where a bank or broker communicates to the vote tabulator more votes than its clients are technically entitled to register. (The tabulator is hired by the issuer to make a final tally of the votes that are submitted.) Empty voting refers to a situation where a shareholder has voting rights in the shares to be voted, but lacks full economic interest in those shares.Over-voting differs from empty voting in one important respect. While the former is a processing issue that is always – or virtually always – corrected before a final outcome, when the latter occurs, it could undermine the legitimacy of a final outcome’.
This proposal was later withdrawn, given the financial crisis 2 months earlier. See (www.osc.gov.on.ca/en/26274.htm).
In the Ontario Teachers Pension Plan board of directors, for example, four of nine directors are elected by the Ontario Teachers Federation (an association of employee/retiree teachers), with the chair of the board of directors jointly selected by the employee group and the provincial government. In the Ontario Municipal Employees Retirement System, another large pension fund, equal representation on the board of directors occurs between employer and employee/retiree members (seven members each).
Financial and non-financial cooperatives have well-developed democratic processes enabling members to participate, via election, on the board.
Medical staff, and faculty, staff and students often have board level representation within hospital and university boards of directors.
The above examples offer the opportunity to address board diversity (gender, ethnicity, age), as these types of boards (with employee member representation) are recognized for being diverse; and may bring skill sets such as human resources, community representation, industry knowledge and information technology, onto the board.
See, for example, Risk Metrics Group et al (2009) at page 14, where ‘[o]nly 39 per cent of all explanations on the reference corporate governance code are classified as sufficiently “informative”’. See also, ‘Canadian Securities Administrators (2010), at page 3, where non-compliance with the disclosure requirements of the Corporate Governance Instrument was termed ‘unacceptable’. See also the Green Paper, at page 19, where the overall quality of companies’ corporate governance statements when departing from a code recommendation is ‘unsatisfactory’, according the study (ibid.).
(Ibid.), item one, ‘Study on Monitoring and Enforcement Practices in Corporate Governance in the Member States’, at pages 17–18.
(Ibid, p. 13). UK Treasury Minister Lord Myners had described investors as ‘absentee landlords’ (21 April 2009, in a speech to the Association of Investment Companies).
(Ibid, p. 16).
Monitoring bodies should have arms-length relationships from listed companies, including personnel, and rigorous conflict of interest guidelines. This might mean a cooling off period for former listed company employees working for monitoring bodies.
Monitoring bodies should be staffed and compensated appropriately.
The Green Paper refers (at page 20) to there being ‘great potential’ for improving and extending the current exchange of best practices developed by monitoring bodies. We agree.
See, for example, Green Paper at page 20. The Commission might also consider that sanctions (monetary) in the most serious cases of non-compliance (as identified in the Green Paper as being done in Spain) be directed to funding of the monitoring body, rather than general revenue. Funding of monitoring activities could also be provided by listed companies, on an aggregate basis, providing strict conflict of interest guidelines were in place.
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Leblanc, R., Bankes, J., Fok Kam, A. et al. General commentary on European Union corporate governance proposals. Int J Discl Gov 9, 1–35 (2012). https://doi.org/10.1057/jdg.2011.24
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DOI: https://doi.org/10.1057/jdg.2011.24