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    ICGN'15: Is it time for a holistic review of financial market regulation?

    Accountability Governance
    The topic of the first plenary of Day #2 of the ICGN conference was whether the time had arrived for an holistic review of the financial market regulatory framework. This question was timely because most of the standard 'hard law' responses (to failure) have done little more than to increase the compliance burden that companies needed to deal with. The panel was quick to acknowledge this. It suggested that an holistic review was needed, and warned that genuine change would only occur if several desirable behaviours (I'd call them 'social commitments') were embraced alongside the hard law responses. The following social commitments were discussed:
    • Trust (between all participants)
    • Ethics and integrity
    • A social compact (to behave well)
    • A positive culture
    This discussion was as interesting as it was disappointing. To the average man in the street, an holistic framework incorporating hard rules and social commitments makes good sense. The disappointment was that the discussion was even needed. Clearly, some boards remain reluctant to make (let alone embrace) the social commitments. Given this, it is little wonder that 'big business' has such a poor reputation amongst the general populace.
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    ICGN'15: On global governance reform

    Accountability Conferences Ethics Governance
    Sophie L'Helias, Senior Fellow, Governance at Governance Board chaired a very interesting panel discussion. The panel was asked to discuss whether corporate governance had progressed or regressed over the last twenty years (since ICGN was formed). The opening observation was that much had changed, yet much remained the same:
    • Investors hold more power now than they did twenty years ago. Shareholders—institutional investors in particular—now know they can exert influence and many are starting to take this role quite seriously.
    • While activism brings its own challenges (including battles during proxy season), the notion of trying to hold a company and its board accountable for company performance is something institutional investors and smaller shareholders are increasingly aware of.
    • Transparency, accountability, fairness and responsibility are four key principles that feature more often now than in the past. However, the application of such principles is by no means universal.
    • The conceptualisation of corporate governance remains, in the main, one of a policy framework within which shareholders seek to exert influence over performance and outcomes. [note: In this regard, the investor community seems to be some distance behind the research that suggests corporate governance is far more than a structure or a process or a policy framework.]
    • Calls for 'responsible investing' and responsible use of the three capitals—financial (money), human (people) and natural (environmental)—are much more prevalent than ever before.
    This first panel session of the conference provided an interesting opening play, upon which later discussants could build (or otherwise!). The main takeaway for me was that shareholders and boards need to 'grow up'. Looking over the fence at each other (and, in some cases, simply ignoring each other) is not a healthy context for either productive ownership or effective control. Boards were created to bridge between owners and managers, yet many boards seem to be far more interested in pursuing their own interests and priorities (than acting in the best interests of the company or the shareholders). While we appear to have come far, we still have much to learn.
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    ICGN'15: integrated reporting update

    Accountability Conferences Governance
    The 20th ICGN conference is underway. While the annual meeting and official welcome signalled the start of the conference, ICGN committee meetings and lunchtime panel discussions were scheduled, to fit everything into the thee-day window. Claudia Kruse chaired a very interesting lunchtime panel discussion on integrated reporting. The IIRC's Corporate Reporting Dialogue (CRD) was launched twelve months ago, and it was the panel's purpose to discuss the progress made and to solicit feedback from the gathered members.
    ICGN has bee an active proponent of 'tidying up' reporting. The aim of integrated reporting is to provide a representative view of how the company is actually performing. After a brief summary provided by the panel, the time was turned over to attendees, to ask questions and discussion:
    • The panel acknowledged the perennial chestnut, of who wants IR was briefly mentioned. Panel members indicated a dichotomy exists whereby some think IR is an investor-led initiative, and others think it is (or should be) management-led. While the question was not opened fully, I found the possibility that any group other than the shareholders or the board might initiate anything. Yet boards hardly rated a mention during the entire conversation. This, despite the board being a proxy representative of shareholders!
    • I found it interesting that 'value creation' was offered as a key driver for integrated reporting, and that "proper reporting leads to better corporate governance". Really?
    While I am a strident fan of transparency and straightforward reporting, I couldn't help but think that the approach the IIRC and ICGN is following has missed the boat somewhat. Integrated reporting has been conceptualised as being management-led activity, and that "proper reporting leads to better corporate governance. Yet the elephant in the room (if I can mix metaphors) is that integrated reported has been conceptualised by the ICGN team as being a management activity. The board was mentioned rarely during the entire panel discussion, even though the board is supposed to be accountable for company performance. Another challenge for the ICGN working group is that the focus is almost entirely on publicly-listed companies. I asked the question and, for my troubles, may have 'volunteered' to working out if and how integrated reporting might apply in a privately-held company context. 
    Notwithstanding these challenges, the fact the ICGN is asking the question and looking for ways to bridge between the different reporting requirements of different jurisdictions is good, really good. I look forward to future updates and, possibly, to contributing the the 'privately-held' part of the discussion.
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    Apparently shareholders do not own corporations!

    Accountability Governance Management Performance
    Please excuse this rather sensationalist title—I have just picked myself up from the floor having read this clause in the recital section of a [draft] directive being prepared in the EU:
    "Although they do not own corporations, which are separate legal entities beyond their full control, shareholders play a relevant role in the governance of those corporations."
    The proposed directive, which encourages long-term engagement and gives voice to shareholders in listed companies and large companies, seems to be well intentioned. However, the statement that shareholders do not own the corporation left me flabbergasted. It raises all sorts of questions:
    • If the shareholders (collectively) do not own the corporation, who does?
    • To whom is the board accountable—the shareholders (who don't own the asset the board is charged with operating); or, the [now unknown] owners; or, some other group?
    • Who benefits from the wealth created by the corporation, the shareholder, the owner or some other party?
    Why anyone would buy an asset if they knew that a condition of purchase was that they did not own what they had just paid for is beyond me. Is this sloppy drafting, or have I missed something in the semantics? Can someone with a legal mind and expertise in this area please elucidate?
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    Selling a major company asset to a director, and doing so properly

    Accountability Ethics Governance Leadership
    Is it ever OK to sell a major company asset to one of the company's directors? One must be careful, very careful. The safe answer is probably 'no', because the proximity of conflict is ever-present and the question of whether the transaction satisfies the director's duties provisions (to act in the best interests of the company) sets a very high bar to clear.
    However, a recent case in New Zealand suggests that such transactions can be completed, and well, if certain provisions are satisfied. In this case, Dorchester Property Trust (DPT) wanted to sell one of its properties the Goldridge Resort Queenstown (GRQ). A DPT director wanted to acquire the asset. The DPT board acted cautiously. The director took no part in determining whether the asset should be offered for sale, and was excluded from the process of assessing acquisition offers. As such the board's handling of the matter satisfied the related party transaction requirements.
    While some investors were a bit scratchy over some some matters (see the article), few if any concerns over the GRQ transaction have been raised. This suggests that the board handled the matter well, in both a legal and a moral–ethical sense. Well done to the DPT board.
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    Executive pay: is Thodey's call a signal that enough is enough?

    Accountability Ethics Governance Performance
    David Thodey, outgoing chief executive of Telstra, has just gone on record: CEO pay is out of control. Swimming against the tide, Thodey said his remuneration was indefensible, and called for change. A cynic might suggest that it is all very well for Thodey to say these things, especially after he pocketed $27M while he was the chief executive. Nevertheless, Thodey's call is not unique. One in four chief executives think that time is more important the money.
    Is Thodey's call, and those of others, a harbinger of change to rein in executive pay? I hope so. History tells us that gross disparities between the 'haves' and the 'have nots' can lead to uprisings and, potentially, bloodshed. The French revolution, Bolshevik Revolution and the Arab Spring are notable examples, although there are many others. To make some adjustments now may be just the pressure release valve that many in society are looking for.