1 / 28

What to look for (and what not to) in a Corporate Governance Report

What to look for (and what not to) in a Corporate Governance Report. Massimo Belcredi Carmine Di Noia London 2006, September 28 th. CG Reports: sources. New self-regulatory code as term of reference ( Comply or explain ).

falala
Download Presentation

What to look for (and what not to) in a Corporate Governance Report

An Image/Link below is provided (as is) to download presentation Download Policy: Content on the Website is provided to you AS IS for your information and personal use and may not be sold / licensed / shared on other websites without getting consent from its author. Content is provided to you AS IS for your information and personal use only. Download presentation by click this link. While downloading, if for some reason you are not able to download a presentation, the publisher may have deleted the file from their server. During download, if you can't get a presentation, the file might be deleted by the publisher.

E N D

Presentation Transcript

  1. What to look for (and what not to) in a Corporate Governance Report Massimo Belcredi Carmine Di Noia London 2006, September 28th

  2. CG Reports: sources • New self-regulatory code as term of reference(Comply or explain) • Italian Stock Exchange listing rules (Borsa Italiana: Regulation, § IA.2.6) • the board of directors of Italian listed companies shall provide information annually on their CG systems; • companies that have not implemented the recommendations of the Code, or have implemented only some of them, shall also provide information on the reasons for such decisions(Comply or explain) • Consolidated law on Financial Intermediation (reports issued in 2007) as amended by law n. 262/05 (on protection of savings): • Italian listed companies shall annually disclose information on their adoption of codes of conduct promoted by companies managing regulated markets or by trade association of market participants… • … and on their compliance with the subsequent obligations, explaining the reasons for any failure to comply (Comply or explain) • … see also amended 4th and 7th Company Law EU Directives

  3. CG Reports: roadmap • CG reports show: • level of compliance with best practices • level of disclosure about deviations from the code • CG reports are NOT tools for the identification of frauds • “comply OR explain”  not “comply AND explain” • CG reports contain relevant information on a number of items, but they are not all-embracing • One should not look for information CG reports cannot provide

  4. The past experience: Cirio • Virtually no disclosure to the market • No corporate information on website • Comply or explain rule + absence of adequate disclosure: • Silence may be a (bad) signal in itself • High risk of bad corporate governance practices • (incentive to conceal the real situation)

  5. The past experience: Parmalat • CG structure disclosed in detail to the market • However: CG not in line with best practices • Comply or explain rule + disclosure of bad governance: • CG transparency is achieved • (“comply or explain” approach); • Full disclosure (bad) CG: who read the report? • Disclosure of (bad) CG and accounting frauds

  6. The past experience: Bpl • Detailed disclosure to the market • How effective were internal and external controls? • Comply or explain rule + fair disclosure: • Fair evaluation of executive/non executive directors • Internal controls apparently aligned with best practice… but how effective?

  7. Information available in CG Reports • Governance structure: • one tier/two tier; board of auditors; committees • power of each board and committee • directors’ classification (executive, non exe, independent) • Quantitative data: • board activity (N. of meetings per year) • members’ activity (attendance to meetings) • number of other positions held

  8. Information available in CG Reports Assonime –Emittenti Titoli standard Table (1 of 3):

  9. Information available in CG Reports An Example: Trevisan Cometal S.p.A

  10. Some data (2005) • Virtually all companies disclose • directors’ classification and info on other offices; (info on remuneration/stock options is mandated by law/Consob) • board and committee composition, N.meetings, data on attendance to meetings • info on the structure of delegated powers(e.g. value limits, approval of important transactions, especially those carried out with related parties)

  11. Some data (2005) • 70% of the companies (virtually all the S&P-Mib issuers) report the Assonime Tables • on average, no significant compliance problem arises from “hard” data… • …although red flags may appear for single topics from single CG Reports (e.g. no meetings; Attendance =Ø): • the market is the judge • a red flag is a stimulus to gather further info • it does NOT necessarily mean non-compliance or a bad CG practice (e.g.: a newly appointed committee/director)

  12. Information NOT in CG Reports • Efficiency and effectiveness of internal audit function andinternal controls • Activism of board and committees members outside meetings CG ratings cannot rely only upon CG reports

  13. A staggered implementation? • 1st step: the new Code as a term of reference • CG report 2006, issued in 2007 • 2nd step: “comply or explain” rule • CG report 2007 • Procedural aspects will be implemented first (comply…) • Structural aspects (e.g. board composition) (… or explain) • may take longer • 3rd step: “comply or explain” rule • Following CG reports

  14. How will CG Reports look like? • A further increase in quality of Reports is expected • qualityand detail, rather than mere quantity of info • especially among smaller firms (outside S&P-Mib) • Some of the most important changes • role of the Board (powers delegated to executives, transactions with related parties) • directors’ classification • appointment of directors/statutory auditors • chairman-CEO and lead independent director (LID) • They should generate additional infoin the CG Reports

  15. The Role of the Board • The crucial point of the Code of Conduct • Goals and modus operandi of the Board are spelled out more clearly • Directors shall pursue the priority of creating value for the shareholders • Consistent with this goal, they shall also take into account group’s directives and policies, as well as the benefits deriving from the issuer being a member of a group

  16. The Role of the Board • The BoD shall (inter alia): • examine and approve the company’s strategic, operational and financial plans, and the corporate structure of the group, if any • delegate powers (to managing directors/executive committee) and specify the limits to delegated powers • examine and approve in advancetransactions carried out by the issuer and its subsidiarieshaving a significant impact on the company’s profitability/assets & liabilities/financial position, paying particular attention to transactions where one or more directors hold an interest and to transactions with related parties • adopt measuresaimed at ensuring that such transactions are performed in a transparent manner and meet criteria of substantial and procedural fairness • issue guidelinesregarding theMAX number of officescompatible with a director’s duties • evaluate board composition and performance

  17. Transactions with related parties • The Board shall, in particular: • establish evaluation and approval procedures for transactions carried out by the issuerand its subsidiaries • define thespecific transactions(or determine thecriteriato identify such transactions) which must be approved: • afterconsulting with the Internal Control Committeeand/or • with the assistance ofindependent experts

  18. The role of the board: disclosure • Additional info expected from future CG Reports: • A more widespread disclosure (especially among smaller issuers) of precise info about: • powers delegated/retained by the Board • timing of Board approval (for transactions carried out by the issuer and its subsidiaries) • Measures and procedures adopted by the Board

  19. Directors’ classification • A general principle:prevalence of substance over form • improveddefinition of executive/non executive/independentDirectors • periodic evaluation by the Board (at least once a year)according toanumber of detailed criteria(covering the main problematic issues) • such criteria arenot binding; • BUT usingdifferent/additional criteriarequires anexplanationas to why they yield a better picture according to the general principle • evaluation process controlled by the Board of Statutory Auditors (BoSA)(Code of Conduct AND art. 149 TUF; therefore indirect control by Consob) • theBoSAwill disclose the result of such controlsto the market (in the CG Report or in its annual Report to the general meeting)

  20. A connected point: Statutory Auditors • Statutory Auditors should meet thesame independence criteriarecommended for independent directors • Statutory Auditors must already meet “independence” criteria established by the law • The Code of Conduct recommends Statutory Auditors meet more stringent independence criteria (on a comply or explain basis)

  21. Appointment of Directors • Slate voting mandated by law for the appointment of BOTH Directors and Statutory Auditors • The usual “rational apathy” argument does not seem to apply to the appointment of Directors • Majority shareholders and significant blockholders (sometimes, participating to shareholders’ agreements) are active • so are (increasingly) mutual funds • while pension funds are still small • Although it may apply to the appointment of Statutory Auditors • Average threshold to present a list of candidates: 2.7% (in 2005) • however, only 72 companies (29.5% of the total) had minority Statutory Auditors

  22. Appointment of Directors • A transparent procedure • Lists to be deposited 15 daysbefore the general meeting • Timely adequate information on personal and professional qualifications of the candidates (including eligibility to qualify as as independent directors according to the Code of Conduct) • Lists and info to be timely published through the Internet site of the issuer • Info on the appointment/voting and disclosuresystem to be published in the CG Report • Boards shall evaluate whether to establish a Nomination Committee (not a comply-or-explain provision) • Functions limited to independent directors’ candidatures/ replacement and/or general issues (e.g. board size and composition)

  23. Chairman-CEO: the issue • Average Board structure in Italy • Non-financial companies (2005): 9.3 directors • 2.7 executives; 6.6 non-execs (3.6 of which are independent) • powers delegated to one (or more) executives (the CEO is not always easily identifiable) • frequently, BOTH an executive chairman AND a separate CEO • Banks/Insurance: 15.3 directors • 1.7 executives; 13.6 non-execs (9.3 of which are independent) • Quite often, no CEO • executive committee + a powerful general manager (not necessarily a member of the board)

  24. Chairman-CEO: the solution • Chairman-CEO separation is NOT mandated • Chairman-CEO situations should bemade explicit • Ifthe Chairmanis also theCEOor the personcontrollingthe issuer, a Lead Independent Director(LID)should be appointed • TheLIDwill: • collaborate with the chairman in order to ensure that directors receivecomplete, timely information flows • convene appropriate meetings of independent directors(at least once a year, without the presence of the other directors) • No CEO + Executive Committee? See revised criteriato identify executive/ non executive/ independent directors

  25. Conclusions • CG reports are useful: • They show the level of compliance with best practices AND disclosure about any deviations from the code • However, one should not look for information CG reports cannot provide • In particular, CG reports are NOT tools for the identification of frauds • New CG reports will improve transparency

  26. Enjoy your reading and… Arrivederci!

  27. Contacts Massimo Belcredi Professor of Corporate Finance Dipartimento di Scienze Economiche e della Gestione Aziendale Università Cattolica del S.Cuore Via Necchi, 5 20123, Milano Tel. +39 0272342457 massimo.belcredi@unicatt.it Carmine Di Noia Assonime Deputy Director General Head, Capital Markets and Listed Companies Via S. Maria Segreta, 6 20123, Milano Piazza Venezia, 11 00187, Roma Tel. +39 0286997450 +39 06695291 carmine.dinoia@assonime.it

More Related