The recently published guidelines issued by the Malta Financial Services Authority on good corporate governance for listed companies are “balanced and appropriate for the Maltese corporate scenario” and follow the international trend.
This is the assessment of MARLENE MIZZI, an entrepreneur currently reading for a doctoral degree with a thesis focusing on board effectiveness and corporate governance.
Mizzi, herself a board member of Bank of Valletta and formerly a chairman of the now defunct Sea Malta, argues that any regulations issued by the MFSA should take the form of guidelines rather than mandatory rules.
“The process of change is necessary in any aspect of the economy and it will be wrong to resist it. However, the important thing is for law makers and regulators to keep in mind that overkills of laws, regulations and impositions may stifle and backfire,” she says.
The MFSA have found the right balance with these new amendments, Mizzi argues. “I am glad that they have reconsidered their original proposals published at the end of last year.”
The entrepreneur also insists that good governance should be “the religion by which companies operate.”
The MFSA has issued best practice guidelines and highlighted for which companies they will apply. Are the guidelines enough or should they be construed as a first step in an ongoing process of change?
The process of change is necessary in any aspect of the economy and it will be wrong to resist it. However, the important thing is for law makers and regulators to keep in mind that overkills of laws, regulations and impositions may stifle and backfire.
The guidelines published by the MFSA apply mainly to listed companies. I believe that the new regulations are balanced and appropriate for the Maltese corporate scenario. They follow the international trend where regulators exercise their function of ensuring that listed companies operate within the parameters of good governance in order to minimize the risk of collapse, fraudulent trading and sub-standard accounting, in the interest of all shareholders and stakeholders.
The guidelines issued by the MFSA are on the same level as those found in most of the EU countries and in the US. Compliance with these guidelines is necessary as it is an added attraction to investors, both foreign and local. Studies show that investors are willing to pay a premium for investing in a company known for its compliance to good corporate governance principles than in one which does not.
From your experience as a board director of a listed institution which guidelines should be mandatory?
I believe that the guidelines should be exactly that - guidelines. Institutions who believe in transparency and integrity do not wait for impositions to be levied on them to adopt good governance practices. The BOV, on whose board I sit, has complied with all of the required principles of good governance for a number of years without waiting for laws or regulations. As one of the main financial institutions of the country, the BOV recognizes its accountability to its shareholders and the importance of instilling confidence and trust.
It has done this by adopting the most rigorous of good governance practices even if mandatory compliance was not imposed.
However, having said so, regulators internationally, have had their fingers burnt by companies like Enron and Parmalat, so I do not blame them for trying to impose discipline by making certain guidelines mandatory.
I consider the Audit Committee to be the best candidate for mandatory compliance for listed companies, as in fact, it has become.
Should the guidelines also apply to companies with bonds listed on the stock exchange?
Guidelines for good governance should be followed by each and every company, but particularly so by companies who are handling funds and investments of third party shareholders. This does not mean that guidelines should be made mandatory, as this would not be practicable or advisable in all instances.
An issue raised by the MFSA is that company directors should limit the number of directorships they have. Do you agree with this and should the guidelines be more specific as to the number of directorships a single person can hold?
Diligent participation and time commitment in a board, particularly of listed or large companies, requires considerable time – not only to attend the Board meetings, but also to go through the board papers to be able to formulate opinions for deliberation at the Board. Consequently, a person cannot give quality time to his/her directorships if these are many. The Higgs report is very specific on this issue and recommends prudence where commitment to Boards is concerned.
The guidelines also stress the importance of having non-executive directors. Is there reluctance on the part of listed companies to enlist NEDs?
I am not in a position to know whether there is reluctance or not on the part of listed companies to this concept, but if there is, then it is worrying as it indicates limited vision and obtuse mentality to possible change and innovation - a very serious flaw indeed.
In the UK reluctance is registered by suitable candidates not by companies, as they are not inclined to take on the onerous responsibilities of a directorship and its legal consequences should things go wrong, unless suitably remunerated.
In Malta, many still do not realize the legal implications of being a Board director and the burden of being personally liable for the company and take on directorships as if it were a part time hobby. To add insult to injury, particularly in parastatal appointments, politicians seem to award directorships as a thank you, whereas it is the politician who should be thankful for whoever accepts what is usually a thankless, badly remunerated job with enormous legal a personal responsibilities.
NEDs are very important as they bring in fresh air to the board - or so they should. Directors who are too involved in, and dependent on, the company may be prone to resist change and may miss out on new ideas, wider visions and even expertise and experience. The idea behind NEDs is for the Board to benefit from skills and talents which may be missing from the board, but above all, NEDs bring impartiality of judgment and independence of mind.
A balanced and effective Board is one with a good mix of executive and non-executive directors. Unfortunately, Nomination Committees are not very common in Malta and Board appointments are still subject to the old boys’ network.
NED selection is very important and should only be motivated by the skills brought to the boardroom by the individuals chosen for the post. Political appointees are the greatest hindrance to this principle.
Do you agree with quarterly reporting of accounts to shareholders?
I think that quarterly reporting is a bit of overkill. I think that six monthly reporting should give the shareholders a very good idea of how the company is doing. However, companies of all sizes should have up to date monthly management accounts for the perusal of management and the Board which reflect the performance of the firm. This ensures timely intervention should this be required.
Is there a risk that quarterly reporting can install a short term mentality in company executives?
If a company executive has a short term vision, no amount of regulation will change that. Sack him!
The guidelines make it mandatory for there to be an audit committee. What is the rationale behind such a decision?
The Audit Committee is one of the most important, if not the most important of the board committees - the others are remuneration and nominations committees - particularly for Plcs.
The main function of the Audit Committee is to provide the board with further assurance about the quality and reliability of financial information. The Board collectively, is ultimately responsible for the accuracy and reliability of financial information, but the specialist nature of this area makes it difficult for the boards to properly discharge these obligations without recourse to specialized audit committees. ACs also oversee internal audit functions, monitor financial information distributed externally ensuring that financial reporting complies with the Companies act and other regulatory requirements, as well as liaise with the external auditor to ensure that the statutory audits are conducted efficiently and effectively.
All of these reasons mean that trouble could be identified in time, avoiding damaging the company, shareholders and stakeholders due to lack of financial oversight. For these reason, it is understandable that the AC has become mandatory for listed companies.
What is the cost of good corporate governance?
The benefits of good governance by far exceed the costs of compliance. Good governance should be the religion by which companies operate. Governance is all about transparency, integrity and accountability, whether to thousands of shareholders or to two or three owners. However, regulators must not go over the top with mandatory compliance requirements as these may really prove to be just costs overtaking benefits.
I believe that the MFSA have found the right balance with these new amendments and I am glad that they have reconsidered their original proposals published at the end of last year. Further imposition will encourage a box-ticking mentality in order to avoid penalties of non-compliance. This would go against the spirit of the Code.
Do you agree that the service contracts of top managers and executive directors have to be available for public scrutiny by shareholders?
No I don’t agree that contracts of the executives are made public. Shareholders elect the members of the board in order to provide control, direction and draft policy for the executives to follow. The contract of the company employees is the direct responsibility of the executive and there is no need to extend this to the scrutiny of the shareholders.
The Board is the body which ensures that contracts include suitable conditions and remuneration for its top executives. On the other hand, the shareholders have the right to knowledge about the collective earnings of the Board whom they elect, which information is published in the Annual accounts of the company.
Are the MFSA’s guidelines enshrining the Sarbanes-Oxley principles?
The Sarbanes-Oxley Act 2002 is America’s reaction to corporate scandals such as Enron, WorldCom and Global Crossing. Its objective is to ensure further transparency and disclosure of information, including accuracy in reporting of corporate finances and transactions. The Act applies not only to US publicly traded companies, but also to investment companies and all foreign companies that have securities publicly traded on a national securities exchange or on NASDAQ.
The provisions of the Act are extensive. Not surprisingly, they are mostly intended to prevent further corporate scandals and to punish wrongdoers. The focus of the legislation is on the integrity of financial reporting and the independence of the external auditors, although other issues, such as inside trading in company shares are also covered.
The MFSA regulations are robust enough to ensure that listed companies are as transparent as they can be in their disclosures, while international accounting standards adopted by audit firms assist in ensuring the integrity of the financial reporting of Maltese listed companies. There are also sufficient regulatory mechanisms which ensure that the roles of Board directors and top executives are not abused at the cost of shareholders and company performance. The scope for which the Sarbanes-Oxley act was implemented is being achieved also in Malta under different captions.
How do our guidelines compare with other competing jurisdictions in the EU?
Malta is on the same level as most EU countries particularly the UK. Our governance principles are based mainly on the Cadbury and the Combined Code.
Marlene Mizzi was interviewed by Kurt Sansone