What do you believe will be the three most significant issues influencing corporate governance trends over the next two years?
Apart from the impact of the implementation of Directive (EU) 2017/828 on the encouragement of long-term shareholder engagement, we expect the following issues to impact corporate governance over the next years: encouraging Board diversity, sustainability-related risk mitigation and director knowledge. Further, cyber security, digitalization as well as agile methodologies in corporate management will have an impact on the work of the supervisory boards and corporate governance.
We expect the biggest trends for the next few years to include the escalation of proxy voting and the battle over the implementation by listed companies of the practices provided for in the Brazilian Corporate Governance Code, as well as an increase in widely-held corporations in Brazil. Also, it is expected that the government implements an ambitious privatization program that will see many of the current government controlled companies being transferred to private players. The current government also has tried to isolated government controlled companies from political influence, appointing highly regarded market executives to the management of such companies. Moreover, considering the increase on the number of IPOs and follow-ons in the pipeline, we expect that it will be important for companies to pursue the highest level in terms of corporate governance rules in order to be well evaluated by investors and, therefore, be successful in their offerings.
Besides increased compliance with the many corporate-governance rules described above (including gender parity on governing bodies), issues which could be significant in France over the next two years include the following:
- the extent to which factors other than maximising profit for shareholders will be genuinely taken into account in decision-making by publicly traded and other companies;
- continued efforts to curb agency effects (excessive benefits and prerogatives for management), including via executive compensation transparency, accountability and limits;
- whether non-French institutional investors will continue to accept the French corporate-governance model as it evolves.
- Increasing influence of shareholders (e.g. say on pay), shareholder activism and Supervisory Boards under scrutiny
- Focus on sustainability
- Artificial intelligence and its influence on management decisions and liability
The Greek financial crisis brought fundamental changes to the business environment and the structure of the Greek economy. One of these changes is the effort of the Greek businesses to adopt a more sustainable business model. The adversities they faced the previous years showcased the need for a new management and internal audit model that sets clearly the lines between shareholders, the management, the board of directors and other stakeholders. Greek businesses still have a long way to go to reach the international corporate governance standards but they are expected to move steadily towards that direction in the future as the Greek economy is reshaped.
Recent scandals around public companies have caught the attention of the authorities and other organisations which push for stricter corporate governance rules and more scrutiny of public companies. The Hellenic Federation of Enterprises, the Hellenic Bank Association and Athens Exchange Group are some of the stakeholders that support a new stricter corporate governance regime.
Finally, the financing needs of Greek businesses combined with the current situation of the country’s banking sector create the need for alternative sources of funding for businesses. Institutional investors can emerge to cover this financing gap. These much-needed alternative sources, however, will be attracted only by companies with high corporate governance standards.
Upcoming trends of corporate governance in Hong Kong is likely to be influenced by the following three regulatory and legislative changes.
- Permitting weighted-voting rights capital structure: The permission of weighted-voting rights capital structure in Hong Kong as mentioned in Question 18 is expected to bring significant impact to listing applicants, especially for those in the technology or innovative field where founders would wish to hold a class of share that enables them to retain control of the listed company.
- Tightening the independence requirement of non-executive director: The Hong Kong Stock Exchange has announced amendments to the Listing Rules with effect from January 1, 2019 to tighten the independence requirement of non-executive director (Hong Kong Stock Exchange, “Consultation Conclusions – Review of the Corporate Governance Code and Related Listing Rules”, July 2018). After the amendment, the level of independence of a director will be questioned if an individual or his/her immediate family member “is or was a director, partner or principal of a professional adviser which currently provides or has within two years [Note: as compared to the previous one year] immediately prior to the date of his proposed appointment provided services, or is or was an employee of such professional adviser who is or has been involved in providing such services during the same period”.
- Requiring the disclosure of country-by-country report: Pursuant to the standard formulated by the OECD, the Inland Revenue (Amendment) (No. 6) Ordinance 2018 gazetted on July 13, 2018 requires multinational enterprise group to file country-by-country reports if the group has constituent entities or operations in two or more jurisdictions, and where the consolidated group revenue for the preceding accounting period is at least EUR750 million (or HK$6.8 billion). By requiring multinational enterprise groups to disclose financial information relating to the global allocation of the income and the taxes paid, and a list of all the constituent entities for which financial information is reported, including the jurisdiction of incorporation of each of the constituent entities (if different from the tax jurisdiction of residence) and the main business activities carried out by that entity, the level of corporate transparency will be highly increased to prevent tax avoidance.
First, it is very important for listed companies to improve the contents of their disclosures. While the form and requirements regarding disclosure have been expanded or modified year to year, each listed company should keep in mind what information shareholders and investors really want.
Second, the role of independent directors will become more important. Based on recent discussions on corporate governance in Japan, it will be indispensable for them to be actively involved in discussions regarding appointment and dismissal of top management such as CEOs, and remuneration for members of the governing body.
Third, the role of shareholders is becoming more important, encouraging them to review company disclosure material more carefully and to engage in fruitful dialogue with the company for the sustainable growth and the creation of mid- to long-term corporate value.
Over the next years, we expect to witness a growing importance given to board composition, evaluation and remuneration, shareholders meetings rules and supervisory bodies’ and auditors’ role (e.g., on related parties transactions).
(1) Shareholder activism and the Stewardship Code
Shareholder activism and the successful implementation of the Stewardship Code described in Item 23 will be major corporate governance issues in the near future. It has become increasingly important to develop various corporate strategies in response to requests of shareholder activism funds, which tend to be more active when there are important corporate actions such as corporate restructuring. Passive institutional investors should be monitored and in particular, the extent of market intervention of the National Pension Service, which holds a large number of shares in major corporations, is a matter of nation-wide interest.
(2) Amendments to the KCC
In connection with corporate governance structure, a number of proposed amendments to the KCC, which mainly concern matters such as “introduction of the multi-step derivative action,” “mandatory cumulative voting system,” and “separate elections for audit committee members,” is currently pending at the National Assembly. Whether any amendments to the KCC will be passed by the National Assembly and the impact of such amendments on corporate governance will be key issues in 2019.
(3) Amendments to the MRFTL
On August 24, 2018, the Korea Fair Trade Commission issued a pre-announcement on the legislation of the proposal for a major amendment to the MRFTL. This proposal extensively covers past discussions regarding regulations concerning the MRFTL. If passed by the National Assembly, the proposal will significantly affect governance structures of corporate groups as well as overall corporate activities, including internal transactions, holding company structures, and disclosures.
First, new developments are expected to arise from several legal proposals that are currently in parliament. This includes a general corporate law reform, which would fine-tune shareholder rights and the shareholders' meeting process in particular, as well as several proposals in the area of corporate social responsibility (see question 28). Second, we expect that influence of proxy advisors and shareholders activism continues to increase (see questions 23 and 26). Third, and partially as a response to such challenges, the trend towards non-executive, mostly independent boards and towards more sophisticated and formalized governance arrangements is going on (see questions 7 and 15). Finally, we see a certain political pressure to impose foreign investment controls on the horizon. Although such a change is far from being certain and while it would mainly impact the M&A market, it might also give rise to new, creative governance structures to mitigate its consequences.
We believe corporate governance trends will focus on the following issues over the next two years: (1) corporate social responsibility and environmental matters, with a particular emphasis on sustainability, (2) board diversity, (3) management accountability and continued transparency and shareholder engagement from boards of directors, (4) the role of index funds in governance, and (5) a continued focus on long-term perspectives over short-term goals.
In addition to executive compensation, which continues to be a topical issue in the UK, we believe that corporate governance trends over the next two years will focus on (i) board and management diversity, (ii) corporate social responsibility and increased transparency and (iii) shareholder activism and engagement.
Since 2014, the CSA have required TSX-listed issuers to disclose whether they have adopted a written policy relating to the nomination of women directors and executive officers and, if so, how the board or its nominating committee measures the effectiveness of such policy. If no policy has been adopted, issuers must disclose why not. Gender diversity continues to be an important issue for Canadian boards.
To further support diversity on boards and in senior management of federal companies, recent amendments to the CBCA (implementation of these amendments is pending) will require public companies to annually disclose their diversity policies and targets, if any, as well as statistics regarding representation of “designated groups” (such as women, visible minorities and Aboriginal peoples) on the board and at the executive officer level.
“Say-on-pay” is an advisory vote whereby shareholders are provided with the right to approve, on a non-binding basis, the approach to executive management compensation disclosed in the corporation’s management proxy circular for the previous fiscal year. Unlike the U.S. and the U.K., Canadian corporate and securities laws do not obligate companies to hold say-on-pay votes. The Canadian Coalition for Good Governance has recommended that companies hold an annual say-on-pay advisory vote and that the board take the results into account when considering compensation policies, procedures and decisions. The results of a vote can also be useful to determine whether there has been sufficient shareholder engagement.
Recent amendments to the CBCA (implementation of these amendments is pending) will permit shareholders to vote against the election of individual directors (rather than just withholding their voting support) and provide that a director is only elected to the board if he or she receives more votes in their favour than votes against. The imposition of this majority voting standard will be a significant departure from past practice in Canada.
Italian financial markets experienced a significant growth in shareholder activism and engagement in the past years. We expect that the upcoming national implementation of Shareholder Rights Directive 2 will encourage even greater activism and engagement of institutional investors.
Should M&A continue to be as strong as in the past months, corporate governance reshaping and restructuring within newly formed groups will be of pivotal importance, including internal control systems and regulatory/compliance schemes.
Finally, many companies – especially listed and/or supervised – have implemented or are assessing whether to opt-in for the one-tier system, in search for a stronger and more efficient corporate governance. We expect this trend to continue.
Together with the developing of the technology and the use of the Internet, much more attention will be paid to the Information Technology and Governance. Insufficient internal controls may lead to breaches with regards to the privacy, loss of reputation and personal data. Therefore, a mechanism must be established with regards to the IT projects and activities to control the internal records of the company and to ensure the balance between confidentiality and transparency. A special committee can be established for this purpose of managing big data. It is possible for persons who are convicted before to be a member of BoD. This practice has been criticized on the doctrine over the years. A provision preventing these persons to take part in the company must be also set forth in law and BoD must consist of independent members. In compliance with the professional management, diversity to be maintained in the board becomes more important day by day. The scope of the diversity herein includes the gender, ethnical background, experience, social, etc. differences. Within this framework, more criteria can be required in the appointment of the board members such as the education level of them in order to ensure more professional management.
- The European Commission's company law package and the modernization of company law
- Oversight of implementation of an increasing amount of policies
- Transparency and anti-money laundering obligations
- Wider acceptance of independent directors
Although the concept of independent directors appeared in Ukrainian corporate law only 3 years ago, it is slowly but surely becoming accepted in progressive business circles. In the next couple of years, we predict a continuing trend towards the establishment of strong supervisory boards with independent directors. The infrastructure is also being developed. For instance, the Corporate Governance Professional Association (CGPA) and the Ukrainian Corporate Governance Academy hold educational programs for independent directors. The CGPA also maintains a publicly available register of recommended candidates.
- Popularization of shareholders` agreements
Until recently, the idea of a shareholders` agreement existed in Ukrainian legislation only theoretically. In 2018, a major reform in corporate law introduced proper regulation for such agreements both in JSCs and LLCs. Today more and more Ukrainian shareholders opt for this mechanism to govern their internal relations and increase the company`s sustainability. We believe that in the next few years courts will support such practice and shareholders` agreement in Ukrainian companies will become more widespread.
- Harmonization of Ukrainian legislation
Ukraine has been actively harmonizing its legislation and environment with EU standards of corporate governance. The Commission is about to present the new Corporate Governance Code aimed to encourage Ukrainian companies for implementation of the best practice in corporate governance. The new Code was drafted with the participation of interested market representatives (including the authors).
Ukrainian legislation recently allowed the squeeze-out procedure; and more than 200 companies utilized this new opportunity to concentrate ownership structure and facilitate corporate governance.
In parallel, Ukraine strives to integrate with external markets and attract foreign investment. For example, in 2018 the admission requirements to trade foreign securities in Ukraine were substantially simplified and Ukrainian citizens were legally permitted to buy such securities. On the other side, in the same 2018, legislative changes simplified operations with Ukrainian securities between foreign investors. We expect such mutual integration trends to continue, which will have a positive effect, among other things, on corporate governance practice in Ukraine.
At the time of writing, a number of corporate governance initiatives are receiving increased focus following the recent Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry. While the scope of the Royal Commission was limited to the financial services sector, many of the issues highlighted are relevant to other sectors and it is expected that the Royal Commission's impact on corporate governance practices will be far more wide reaching.
- Focus on corporate culture: beginning with a focus on remuneration (see below) and governance structures, we expect to see more corporates making a concerted effort to identify core values use those core values to establish a culture that will determine its approach to corporate governance. The challenge inherent in this focus on culture is how to measure or assess a company's culture, both internally (i.e. by the company themselves) and externally (by regulators). Regardless, we expect to see more guidance and, to a lesser extent, rules requiring companies to underpin their corporate governance with a values-based culture.
- Increased scrutiny of executive remuneration: the Royal Commission was particularly critical of the failure of companies in the financial sector to properly implement executive remuneration arrangements which involve a variable component measured against the company's management of risk. One of the key issues highlighted is the nature of the risk that management should be expected to consider and therefore be compensated in relation to, with a growing focus on non-financial risk (for example, risks to reputation).
- Increased consideration of non-financial risks: More generally, the Royal Commission highlighted the need for directors to give due consideration to both financial matters (such as liquidity, capital and credit risk) and non-financial matters (such as regulatory, conduct, compliance and reputational risks) when discharging their duties Assessing and considering only financial risks and impacts is not sufficient. As a result, we expect to see a greater focus on non-financial risk in risk and corporate governance frameworks in Australia.