Global Development – Importance and Impact of Sustainable Development Goals

Table of Contents

1. Modernization of Company Law for Global Competitiveness
2.  Recent Corporate Governance Developments in United Kingdom
3. Overview of new requirements: 12 principles/reporting requirements for asset owners
4. Legislative Developments of Corporate Governance in USA
5. Recent Corporate Governance Developments in Australia

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1.Modernization of Company Law for Global Competitiveness

• • In today’s world including UK, Hong Kong, Singapore, Australia and Canada are at various stages of the process of modernizing their company law.
  • A fair, modern, efficient and effective framework of company law is one of the most crucial prerequisite for the performance of any economy and the society.
  • To achieve competitiveness, it is essential that while the law must balance the interests of different stakeholders like shareholders, the Directors, the employees, the creditors (financial and operational) and the customers.
  • In the current national as well as international scenario of complex business operations, there is definitely a need to simplify corporate laws so that they are amenable to clear interpretation and provide a framework that would facilitate faster economic growth.
  • Growing emphasis on good Corporate Governance, the concept of Corporate Social Responsibility (CSR) and good Corporate Citizenship is predominantly influencing company law reforms the world over.
  • Modernization of company law has in fact become a part of the drive to facilitate enterprise, enhance the attractiveness of the country as a preferred destination for domestic as well as Foreign Direct Investment to do business, and foster business competitiveness.
  • The ultimate objective is to have a simple, consolidated and accessible company law.
  • Simultaneously over the world, Company Law reforms are focusing on aspects like ‘transparency’ through enhanced disclosures and increased accountability on the part of corporate owners (promoters) while at the same time providing a flexible regime for small and medium businesses. The reforms aim at cutting back on overly regulatory intervention. Thus, providing companies operating flexibility to tune in conformity with changing environment.

2. Recent Corporate Governance Developments in United Kingdom

2.1 Application of the UK Corporate Governance Code

• • The Listing Rules continue to require all Premium-listed companies to disclose how they have applied the principles of the Code in a manner that would enable shareholders to evaluate how these have been applied.
  • All provisions should be complied with or an explanation should be given. With the current Code, some provisions have specific reporting requirements.
  • Companies have focused on the ‘comply or explain’ aspects of the provisions rather than a description of their application of the principles.
  • When reporting on the principles, the Code requires companies to demonstrate to shareholders why the board has implemented certain structures, policies and practices and how these aspects meet the relevant Code principle.
  • The Introduction also includes a new requirement on the boards of parent companies with a premium listing whether incorporated in the UK or elsewhere. They should ensure that there is adequate co-operation within the group to enable the parent company board to discharge its governance responsibilities under the 2018 Code effectively and this includes communicating the parent company’s purpose, values and strategies.

Note: The new Code is applicable to all companies with a premium listing of equity shares for periods commencing on or after 1 January 2019.

2.2  Five Sections of New UK 2018 Code

The new Code has five sections:

• •  Board leadership and company purpose.
  • Division of responsibilities.
  •  Composition, succession and evaluation.
  • Audit, risk and internal control.
  •  Remuneration.

2.3 Aim and Objective of UK 2018 Code

• • Designed to set higher standards of corporate governance in the UK so as to promote transparency and integrity in business and at the same time attract investment in the UK in the long-term, benefitting the economy and wider society.
  • Definition of governance has been broadened in the 2018 Code. It emphasizes the importance of positive relationships between companies, shareholders and stakeholders, a clear purpose and strategy aligned with healthy corporate culture, high quality board composition and a focus on diversity, and remuneration which is proportionate and supports long-term success.

2.4 UK Stewardship Code 2020

• • The UK Stewardship Code 2020 is a substantial and ambitious revision to the 2012 edition of the Code which takes effect from 1 January 2020.
  • The Code consists of 12 Principles for asset managers and asset owners, and six Principles for service providers.
  • These are supported by reporting expectations which indicate the information that should be publicly reported in order to become a signatory.
  • Organisations wanting to become signatories to the Code will be required to produce an annual Stewardship Report explaining how they have applied the Code in the previous 12 months.
  • The new Code sets high expectations of those investing money on behalf of UK savers and pensioners.
  • The new Code establishes a clear benchmark for stewardship as the responsible allocation, management and oversight of capital to create long-term value for clients and beneficiaries leading to sustainable benefits for the economy, the environment and society.
  • There is a strong focus on the activities and outcomes of stewardship not just policy statements. There are new expectations about how investment and stewardship is integrated including Environmental, Social and Governance (ESG) issues.
  • The Code asks investors to explain how they have exercised stewardship across asset classes.

Example 1: For listed equity, fixed income, private equity, infrastructure investments and in investments outside the UK.

2.5 Revised Guidance on Board Effectiveness

• • The revised Guidance on Board Effectiveness is considerably longer and includes new commentary on areas such as culture, relations with the workforce and wider shareholders and diversity. Also, it incorporates new sections on the workings of board committees notably the remuneration committee.
  • The Guidance includes questions for boards to ask themselves or in some cases to ask management about effectiveness in key areas.

3. Overview of new requirements: 12 principles/reporting requirements for asset owners

Principle 1

Signatories’ purpose, investment beliefs, strategy, and culture enable stewardship that creates long term value for clients and beneficiaries leading to sustainable benefits for the economy, the environment and society.

• •  Signatories are required to explain both the purpose of the organisation and to give an outline of its culture, values, business model and strategy as well as their investment beliefs, i.e. what factors they consider important for desired investment outcomes and why.
  • The Code requires signatories to explain the actions they have taken to ensure their investment beliefs, strategy and culture enable effective stewardship.
  • Signatories’ disclosure should make clear how their purpose and investment beliefs have guided their stewardship, investment strategy and decision making and include an assessment of how effective they have been in serving the best interests of clients and beneficiaries.

Principle 2

Signatories’ governance, resources and incentives support stewardship.

Signatories should explain how:

• • their governance structures and processes have enabled oversight and accountability for effective stewardship within their organisation and the rationale for their chosen approach; and
  • they have appropriately resourced stewardship activities including:

1. 1. 1. their chosen organisational and workforce structures;
      2. their seniority, experience, qualifications, training and diversity;
      3. their investment in systems, processes, research and analysis;
      4. the extent to which service providers were used and the services they provided; and

• • Performance management or reward programs have incentivised the workforce to integrate stewardship and investment decision making.

Principle 3

Signatories manage conflicts of interest to put the best interests of clients and beneficiaries first.

Signatories should both:

• • Disclose their conflicts policy and how this has been applied to stewardship; and
  • Explain how they have identified and managed any instances of actual or potential conflicts related to stewardship.

Disclosure should include examples of how they have addressed actual or potential conflicts.

Principle 4 

Signatories identify and respond to market-wide and systemic risks to promote a well functioning financial system.

Signatories should explain:

• • how they have identified and responded to market-wide and systemic risk(s), as appropriate;
  • how they have worked with other stakeholders to promote continued improvement of the functioning of financial markets;
  • the role they played in any relevant industry initiatives in which they have participated, the extent of their contribution and an assessment of their effectiveness, with examples; and
  • how they have aligned their investments accordingly.

Disclosure should include an assessment of their effectiveness in identifying and responding to marketwide and systemic risks and promoting well-functioning financial markets.

Principle 5

Signatories review their policies, assure their processes and assess the effectiveness of their activities.

Signatories should explain:

• • how they have reviewed their policies to ensure they enable effective stewardship;
  •  what internal or external assurance they have received in relation to stewardship (undertaken directly or on their behalf) and the rationale for their chosen approach; and
  • how they have ensured their stewardship reporting is fair, balanced and
    understandable.

In addition, the Code requires signatories to explain how their review and assurance has led to the continuous improvement of stewardship policies and processes.

Principle 6

Signatories take account of client and beneficiary needs and communicate the activities and outcomes of their stewardship and investment to them.

Signatories should explain either:

• • how they have evaluated the effectiveness of their chosen methods to understand the needs of clients and/or beneficiaries; and how they have taken account of the views of beneficiaries where sought, and what actions they have taken as a result; OR
  • how they have taken account of the views of clients and what actions they have taken as a result; and where their managers have not followed their stewardship and investment policies, and the reason for this; OR
  • Where they have not managed assets in alignment with their clients’ stewardship and investment policies, and the reason for this.

Principle 7

Signatories systematically integrate stewardship and investment, including material environmental, social and governance issues, and climate change, to fulfil their responsibilities.

The revised Code requires that signatories explain how information gathered through stewardship has informed acquisition, monitoring and exit decisions, either directly or on their behalf, and with reference to how they have best served clients and/or beneficiaries.

Principle 8

Signatories monitor and hold to account managers and/or service
providers.

Signatories should explain:

• • how the services have been delivered to meet their needs; OR
  •  the action they have taken where signatories’ expectations of their managers and/or service providers have not been met.

The revised Code gives as an example (among others) that asset managers monitoring data and research providers should ensure the quality and accuracy of their products and services.

Principle 9

Signatories engage with issuers to maintain or enhance the value of assets.

Signatories should describe the outcomes of engagement that is ongoing or has concluded in the preceding 12 months, undertaken directly or by others on their behalf.

The Code includes a number of examples including (among others): how outcomes of engagement have informed investment decisions (buy, sell, hold); and how outcomes of engagement have informed escalation.

Principle 10

Signatories, where necessary, participate in collaborative engagement to influence issuers directly or by others on their behalf.

Signatories should describe the outcomes of collaborative engagement. For example:

(a) any action or change(s) made by the issuer(s);
(b) how outcomes of engagement have informed investment decisions (buy, sell, hold); and
(c) whether their stated objectives have been met.

Principle 11

Signatories, where necessary, escalate stewardship activities to influence issuers.

Signatories should describe the outcomes of escalation either undertaken directly or by others on their behalf. Including (for example): any action or change(s) made by the issuer(s); any action or change(s) made by the issuer(s); any action or change(s) made by the issuer(s); and any changes in engagement approach.

Principle 12

Signatories actively exercise their rights and responsibilities.

For listed equity assets, signatories should provide examples of the outcomes of resolutions they have voted on over the past 12 months.

4. Legislative Developments of Corporate Governance in USA

 Sarbanes-Oxley Act, 2002

4.1  Four Principle Areas

The new law set out reforms and additions in four principal areas:

• •  Corporate Responsibility.
  • Increased Criminal Punishment.
  •  Accounting Regulation.
  •  New Protections.

4.2 Primary Objectives of SOX Act, 2002

• • Fairness to Shareholders: SOX requires or promotes governance provisions that protect shareholder rights and allow shareholders to exercise those rights through governance procedures such as shareholder meetings.
  • Fairness to Stakeholders: SOX requires or promotes governance provisions that take into consideration the interests of employees, suppliers, buyers, and the local community.
  • Heightened Director and Board Responsibilities: SOX places specific requirements on the composition of boards of Directors including skill and independence requirements.

Example 2: SOX requires boards appoint an audit committee where all members are independent of corporate operations (not officers of the corporation) with at least one financial expert as a member of the committee.

• • Director and Officer Ethics: SOX imposes additional obligations on corporations to establish and maintain ethical standards for officer and Director conduct and decision-making.

Example 3: SOX prohibits the corporation from making personal loans to corporate executives or their families.

• • Disclosure and Accountability: SOX places requirements on boards to increase transparency in corporate governance practices. This includes implementing procedures for ensuring accurate accounting practices and public disclosure mechanisms.
  • Accounting and Disclosure Procedures – SOX imposed a number of reforms on the accounting and financial reporting requirements of public companies.
  • Public Company Accounting Oversight Board (PCAOB) – SOX established the PCAOB to regulate auditors charged with reviewing the accounting procedures and disclosure statements of public companies.
  • External Auditing Firms – SOX now requires that a firm in charge of auditing the corporation refrain from serving as independent consultants to that same firm. This includes refraining from bookkeeping, system designs and implementation, appraisals and valuations, actuarial services, human resources functions, and investment banking services for the audited company. Further, the corporation must change auditing firms at least every 5 years. There are also restrictions on the ability of company executives to have worked for the auditing firm within the prior year.
  • Securities Regulations: Much of the regulatory process prescribed by SOX is carried out by the Securities and Exchange Commission. SOX include provisions that strengthen the ability of the SEC to oversee corporate governance matters and enforce violations.

Example 4: SOX established a criminal charge for conspiring to commit securities fraud. It also increased the criminal and civil penalties for committing securities fraud. SOX provides additional protections against discrimination for those reporting conduct that violates the securities laws (“whistleblower protection”).

NYSE Corporate Governance Rules

4.3 Four Principal NYSE Corporate Governance Rules

As a foreign private issuer, we must comply with four principal NYSE corporate governance rules:

• • We must have an audit committee meeting the independence requirements of Rule 10A-3, subject to specified exceptions.
  • Our CEO must promptly notify the NYSE in writing after any executive officer becomes aware of any non-compliance with the applicable NYSE corporate governance rules.
  • We must provide the NYSE with annual and interim written affirmations as required under the NYSE corporate governance rules.
  • We must provide a brief description of any significant differences between our corporate governance practices and those followed by U.S. companies under NYSE listing standards.

4.4 NYSE Corporate Governance Standards on Independent Directors

• • The majority of the members on the Boards of Directors of U.S. companies must be independent.
  • A Director qualifies as independent when the Board affirmatively determines that such Director does not have a material relationship with the listed company (and its subsidiaries) either directly or indirectly.
  • In particular, a Director may not be deemed independent if he or she or an immediate family member has a certain specific relationship with the issuer, its auditors or companies that have material business relationships with the issuer (e.g. he or she is an employee of the issuer or a partner of the Auditor).

Note: A Director cannot be considered independent in the three-year “cooling-off” period following the termination of any relationship that compromised a director’s independence.

4.5 NYSE Corporate Governance Standards on Meetings of non-executive Directors

Non-executive Directors, including those who are not independent, must meet on a regular basis without the executive Directors. In addition, if the group of non-executive Directors includes Directors who are not independent, independent Directors should meet separately at least once a year.

4.6 NYSE Corporate Governance Standards on Audit Committee

Listed U.S. companies must have an Audit Committee that satisfies the requirements of Rule 10A-3 under the Securities Exchange Act of 1934 and that complies with the provisions of the Sarbanes-Oxley Act.

4.7 NYSE Corporate Governance Standards on Nominating/Corporate Governance Committee

U.S. listed companies must have a Nominating/Corporate Governance Committee (or equivalent body) composed entirely of independent Directors whose functions include, but are not limited to, selecting qualified candidates for the office of Director for submission to the Shareholders’ Meeting as well as developing and recommending corporate governance guidelines to the Board of Directors. This provision is not binding for non-U.S. private issuers.

4.8 NYSE Corporate Governance Standards on Remuneration Committee

U.S. listed companies must have a Remuneration Committee composed entirely of independent Directors who must satisfy the independence requirements provided for its members. The Remuneration Committee must have a written charter that addresses the Committee’s purpose and responsibilities within the limit set forth by the listing rules. The Remuneration Committee may in its sole discretion retain or obtain the advice of a compensation consultant, independent legal counsel or other adviser and shall be directly responsible for the appointment, compensation and oversight of the work of any compensation consultant, independent legal counsel or other adviser retained by it.

Note: These provisions are not binding for non-U.S. private issuers.