Wide global divergence in corporate governance requirements 

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Adequate and effective corporate governance (CG) is critical in supporting boards and management to navigate uncertainty in the international business arena.

Yet, a joint study by ACCA Singapore and KPMG in Singapore reveals a wide divergence in CG requirements across 25 markets, including Singapore, Australia, Thailand, China and Brazil.

Titled Balancing Rules and Flexibility, the study also calls for governments to work towards meeting global CG standards, which are based on the Organisation for Economic Co-operation and Development (OECD) principles.

Said Irving Low, Head of Risk Consulting at KPMG in Singapore which spearheaded the study: ‘When implemented well, corporate governance builds confidence in capital markets. This is especially important in the context of high anticipated growth rates in many emerging economies such as those in the ASEAN region.

‘Given the disparity in corporate governance requirements across the markets we have studied, there is still a long journey ahead of us. We hope this study can contribute to raising the standard of corporate governance requirements globally.’

Developed markets have clearest CG requirements

The study analysed CG requirements in terms of the clarity, degree of enforceability and number and type of instruments used by the 25 markets.

The top three highest scoring markets with the clearest and most comprehensive CG requirements are, in descending order, the UK, US and Singapore. Australia, India and Malaysia jointly ranked fourth while Hong Kong and Russia tied for the next position. Brazil and Taiwan round up the top 10 highest scoring markets.

The markets with the lowest scores, in descending order, are the Philippines, Indonesia, Canada, China, Cambodia, Japan, Vietnam, Myanmar, followed by Brunei and Laos.

Six of the ten highest scorers are developed markets, indicating that the maturity of the economy and capital markets influences, to some extent, the need for well-defined CG requirements. Commenting on the rankings, Mr Low said: ‘The results are broadly in line with expectations, particularly at the top end and bottom end of the markets we examined.

‘There were some interesting insights: India and Russia performed strongly, and this could be due in part to recent revisions in their Corporate Governance Codes and a desire to build confidence in their growing capital markets. Japan and Canada, on the hand, received lower than expected scores.’

He clarified that low scores do not necessarily indicate the lack of CG requirements in these markets.

‘What low scores do reflect is that some of the corporate governance requirements were not reflected in the actual Corporate Governance Code of the market, although they might be present in other corporate governance instruments. This means that stakeholders who are unfamiliar with a specific market’s corporate governance requirements may find it challenging to quickly and easily understand what the requirements are, and when, where, and how these requirements interact with one another’ said Mr Low.

Strong alignment with OECD principles; some exceptions noted

The study found that the most frequently mentioned CG requirements related to OECD principles, which highlights their significance in shaping a market’s CG requirements.

A majority – 16 out of the 25 markets studied – have adopted more than 80 percent of OECD-related principles. While this is encouraging, the study found that there were some markets such as Myanmar, Brunei and Laos that did not contain any requirements for more than half of the OECD Principles.

Sue Almond, ACCA, External Affairs Director said: ‘The OECD Principles set out the basic tenets of corporate governance which market regulators should reflect upon at the very least. However, it is clear that many markets have gone beyond the principles so we welcome the OECD’s current review of these principles and hope they will continue to be relevant and reflect good practice.’

The study also identified an additional 32 areas of better practice requirements that were not captured in the OECD Principles. Some of these areas include risk governance, board diversity and disclosures across a number of governance aspects.

CG Codes in some markets have not kept pace with changing CG requirements

Most markets introduced their CG Codes between 1992 and 2004. On average, the markets studied revised their CG Codes 2.4 times. The highest scoring markets, on average, revised their CG Codes 3.4 times, compared to the lowest scorers revising them 1.8 times.

While most markets – 76 percent – have revised their CG Codes since the Global Financial Crisis in 2008, the following markets have not updated their CG Codes for a significant period of time. They are Indonesia (since 2006), Korea (since 2003) and China, which has not revised its CG Code since 2001.

Russia, India, Australia and the UK revised their codes in 2014.

Said Ms Almond: ‘Frequent and timely CG Code revisions are an indication of active and engaged regulators and policy makers, a factor in driving enhanced CG requirements.

‘Corporate governance is evolving and requirements should not remain static over time. This is particularly so as lessons learned from corporate failures and/or financial system collapses identify gaps and opportunities to improve.’

Other key findings:

  • While CG Codes provide clarity, they are not a ‘one-stop shop’ for CG requirements as additional requirements exist in other instruments.
  • At the same time, there is a risk that utilising multiple CG instruments to capture more details can lead to inconsistencies and misalignment among different requirements.
  • More support is required for developing markets and emerging economies to raise CG standards.
  • Well-defined CG requirements on paper may lack enforceability in practice – 56 percent of the 1,800 requirements reviewed were principles-based while the remaining were mandatory.
  • ‘Structural’ CG requirements are better defined than ‘behavourial’ ones such as performance evaluation and board diversity.

In conclusion, Mr Low said: ‘Just as boards set the ‘tone at the top’ for the companies they govern, market regulators and policy makers do the same with the corporate governance instruments and requirements they set.’

‘Regulators and policy makers must continue to review corporate governance requirements to ensure they remain relevant, adequate and effective. At the same time, greater awareness and transparency of mandatory, principle-based and supporting guidelines and their interaction is critical in improving corporate governance standards’ he added.

Ms Almond said: ‘We believe that the wide divergence of CG requirements introduces unnecessary complexity and generates a friction that hinders and impedes cross-border capital flows. The gradual standardisation of CG requirements across different countries may be an ideal that governments can orientate themselves to; despite challenges relating to different cultures and regulatory systems. We believe that the findings from this study will go some way to facilitate a realisation by governments and regulators about the enormous divergence in CG requirements and encourage them towards alignment for the greater economic good.’

The reports relating to this study are available at the websites of KPMG in Singapore and ACCA.

Source: ACCA – Wide global divergence in corporate governance requirements 

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