Good governance in the Maltese corporate sector

The importance of companies adopting proper corporate governance practices has grown significantly over the last decade in Malta. In general, effective corporate governance practices are said to provide proper incentives for the board and management to pursue objectives that are in the interests of a company and its shareholders. Corporate governance principles are therefore intended to facilitate entrepreneurial, prudent and effective management, with the aim of bringing about the long-term success of a company.

Corporate governance of limited liability companies

In Malta, good corporate governance practices apply to all entities, with the main source of corporate governance being the Companies Act (Chapter 386 of the Laws of Malta), which regulates the division of authority between the Board of Directors and general meetings of shareholders and also sets out transparency obligations. The memorandum and articles of association of companies also act as an important source of corporate governance practices, by regulating internal management and administration practices of companies.

In general, duties of directors include, among others, the duty to act honestly and in good faith in the best interests of the company, the duty to remain within their powers and not to act ultra vires, the duty to have no conflict of duty and interest, the duty to not make secret or personal profits without the consent of the company, the duty not to misuse information, the duty not to engage in insider dealing, the duty not to compete with the company and the duty to not obtain benefits from third parties. The Companies Act provides that directors of a company shall be obliged to exercise the degree of care, diligence and skill which would be exercised by a reasonably diligent person.

The general governance of a company as well as its proper administration and management and the general supervision of its affairs is vested in the board of directors, and hence, shareholder activism is not common practice in Malta. The only exception to this is where the articles of association of the company provide for shareholders’ reserved matters, in which case, the board of directors must obtain approval by the shareholders before proceeding to take certain decisions. Aside from shareholders’ reserved matters, shareholders can exert influence on a corporate entity’s management either during the annual general meeting of the company, or else by calling an extraordinary general meeting by requisition.

In terms of Maltese law, an annual general meeting is to be held once in every year. The annual general meeting shall be held at such time and place as the directors shall appoint and such meeting serves as an opportunity for company shareholders to discuss the affairs of the company as well an opportunity to hold the directors of the company accountable to the shareholders. During the annual general meeting, the board of directors are to present the company’s annual accounts to the shareholders, who shall proceed to vote on the annual report and audited accounts for the year ended.

Publicly listed companies

Publicly listed entities are subject to the Code of Principles of Good Corporate Governance set out in the Capital Markets Rules (the Code). The Code lists 12 principles of good corporate governance, which publicly listed companies should endeavour to adopt.

In a nutshell, the main principles outlined in the Code include: (a) the requirement of every listed company to be headed by an effective board; (b) the requirement of a clear division of responsibilities at the head of the company between the running of the board and the running of the company’s business; (c) the size of the board (which should not be too large so as to be unwieldy), but which should be of sufficient size; (d) the responsibilities of the board, namely the four basic roles of corporate governance (accountability, monitoring, strategy and non-executive directors); (e) the frequency of board meetings; (f) the board’s responsibilities in relation to information and professional development (namely, the appointment of the CEO, the active participation of the board in the appointment of senior management, and ensuring adequate training for company directors, management and employees); (g) the self-evaluation of the board’s performance and that of its committees; (h) the establishment of a remuneration committee and of a nomination committee; (i) the board’s responsibility to manage relations with shareholders and with the market; (j) specific responsibilities of institutional shareholders; (k) the directors’ responsibility to act in the interests of the company and its shareholders as a whole; and (l) directors’ responsibility to adhere to accepted principles of corporate social responsibility in their day-to-day management practices of their company.

If a company chooses not to comply with one or more of the provisions of the Code, it must give a careful and clear explanation with respect to the reason for such non-compliance (comply-or-explain). Specifically, issuers shall include a corporate governance statement within a specific section of their Annual Financial Report, which shall include an explanation as to which parts of the Code a company has departed from (if any) and the reasons for doing so. Furthermore, while it is expected that listed companies will comply with the Code’s provisions, it is recognised that departure from the provisions of the Code may be justified in particular circumstances.

Sector-specific corporate governance guidelines

Apart from the Code of Principles of Good Corporate Governance, other sector-specific guidelines have been published by the Malta Financial Services Authority (MFSA), these being the Corporate Governance Manual for Directors of Investment Companies and Collective Investment Schemes, and the Corporate Governance Guidelines for Public Interest Companies.

MFSA’s Code of Good Corporate Governance

Aside from the MFSA sector-specific guidelines referred to above, it is to be noted that the MFSA has set out several proposals to promulgate a comprehensive high level, principles-based, cross-sectorial Corporate Governance Code, which will be applicable to all entities authorised by the MFSA and listed companies. While the said Corporate Governance Code has not been promulgated to date, it is expected to be applicable to all authorised persons on a ‘best effort basis,’ and supplemented by sector-specific rules and complementing guidelines. Once introduced, the Corporate Governance Code is expected to significantly raise the bar with respect to standards of corporate governance and is further expected to set the tone in so far as the MFSA’s expectations in relation to good corporate governance.