Views on improving the integrity of global capital markets
01 December 2011

Corporate Governance Update November 2011: Canada Sets High Bar. Australia Throws First Strikes.

Europe — Corporate Governance Changes in the Midst of the Sovereign Debt Crisis

Given the trajectory of headlines around the European financial crisis, by the time you read this post, the EU may not exist as an economic union. But for the sake of argument, let’s assume that it still exists and take a look at some pretty profound corporate governance changes that may be afoot for the EU.

On 5 April 2011, the European Commission adopted a green paper and launched a wide-ranging public consultation on the EU corporate governance framework that closed in July. In total, 409 answers were received from a range of professional representatives including CFA Institute. Apparently it takes about four months to read and respond to all that commentary, as the EU recently published its feedback statement on the consultation. 

A summary of responses cover some high profile topics:

Comply or Explain — Most of those surveyed prefer the comply or explain model of governance in which a company would have to disclose why it does not follow EU recommended practice.

Separation of Chairman and CEO Positions — There was generally an even split, with investors calling for mandatory separation of the positions and issuers keen on simply a recommendation.

Board Diversity — Most respondents thought issuers should produce a diversity policy, but there was disagreement on what this actually meant, with few supporting quotas for boards.

Pay Disclosure — About 75 percent of respondents felt that disclosure of the remuneration policy, the annual remuneration report, and individual remuneration of directors should be mandatory.

Say on Pay — Although a slim majority favored an annual vote on compensation, most feel such a vote should be advisory only.

Limit to Board Mandates — Only about a quarter of those who responded to the consultation supported prescribed limits to the number of boards on which a director can sit. Most favored a non-binding recommendation of best practice.

If EU leaders figure out how to hold the eurozone together, expect more attention on these governance issues next proxy season.

Australia — Throw the Bums out  … Maybe … in a Year … Maybe

Let us take you back to July 2011, when we reported on a very interesting corporate governance development from the land down under: the Corporations Amendment Bill 2011

The Corporations Amendment Bill 2011 strengthens the non-binding vote on remuneration by giving shareholders the opportunity to remove directors if the company’s remuneration report has received a “no” vote of 25 percent or more at two consecutive annual general meetings. In such an instance, shareowners would vote on whether to “spill” all board members and, if passed with 50 percent or more of eligible votes cast, would require a spill meeting within 90 days to elect directors.

Fast forward to November and 12 Australian companies have received “first-strike” votes, giving those companies a year to appease investors on the issue of compensation, or risk the prospect of losing board members. One concern voiced is that investors may use the spill mechanism to oust directors on issues other than pay. We will have to keep our eyes on governance in Australia over the next year to see if any boards are “spilled,” and if so, what ramifications that will have for corporate governance in Australia.

Canada — Setting the Bar for Good Governance Disclosures

The members of the Canadian Coalition for Good Governance (CCGG) — who collectively manage over $2 trillion in assets — recently published their Best Practices for Proxy Circular Disclosure. The document includes CCGG’s “Governance Gavel Awards” that point out best practices in a number of different categories, including best disclosure of board governance practices and director qualifications as well as best disclosure of approach to executive compensation. Consider this document a primer of corporate governance best-practices and clear, concise disclosure, as well as a measuring stick for markets pushing for higher governance and disclosure standards.

The Philippines — a Governance Dream Deferred

Finally, we check in on a market aiming for better corporate governance practices in order to attract international investors. The Philippine Stock Exchange originally planned to launch its Maharlika Board in the second half of 2011, designed to serve as a separate listing board for companies with superior corporate governance (see Novo Mercado in Brazil — the original separate governance listing board). However, the Maharlika Board has been delayed until 2012 in order to attract a critical mass of companies to adhere to the board’s higher governance standards, such as stronger minority shareholder rights and the “one-share, one-vote” principle.  Here is hoping the delay is only temporary.

About the Author(s)
Matt Orsagh, CFA, CIPM

Matt Orsagh, CFA, CIPM, is a senior director of capital markets policy at CFA Institute, where he focuses on corporate governance, ESG, and climate change analysis. He writes and speaks frequently on these topics on behalf of CFA Institute. His paper, Climate Change Analysis in the Investment Process was named “Best ESG Paper” by Savvy Investor in 2021.

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