Some ongoing corporate governance concerns
It has been a while since I contributed to OUP’s corporate governance blog, which I share with Professor Chris Mallin. So I thought that, rather than focusing on a single theme, I would comment on issues that are currently concerning directors and their professional advisers around the world.
In particular I will address shareholder communication, shareholder engagement, executive compensation, cyber security, and the challenges of cronyism and corruption.
Listed companies need to communicate with their shareholders. Market analysts, potential investors, regulators, and others in the market also need ongoing knowledge about the company. Formal requirements for such information are found in company law and stock exchange rules. But companies need to go beyond these regulatory, financially-orientated demands.
In the original model of the joint-stock, limited-liability company shareholders were individuals, their numbers small, and their needs for information tended to be similar. Directors could communicate quite easily with them; indeed in many cases they knew them personally. But that was 150 years ago!
Today, shareholders are no longer homogeneous. The shareholders of a listed company could include institutional investors actively involved in the company’s corporate governance issues, passive institutional investors, such as index-tracking funds with little interest in corporate information, dominant investors, perhaps the company’s founders or their family trusts, hedge funds, private equity investors, state owned corporations, sovereign funds, and of course retail shareholders – individuals, usually with relatively small holdings.
Clearly, the expectations of such investors, their levels of business sophistication, and their need for information differ. However, company law and stock exchange rules seldom recognize such differences.
Moreover, some listed companies may not be sure who some of their shareholders actually are. In the old days, details of a new investor were duly recorded in the share register and a hand-written share certificate provided. But in today’s scripless system, holdings are recorded centrally and may be deposited with brokers. So the shares may be held in the name of the broker or custodian participant, with the actual investor not registered as the shareholder. Ownership information can also get buried in the string of intermediaries.
So what information should a company provide?
In many jurisdictions today, the call is for narrative information to supplement the classical, financial reports. For example, the Hong Kong Companies’ Ordinance, which came into effect in March 2014, calls for the publication of a directors’ report for the financial year containing a business review including:
- a review of the company’s business;
- a description of the principal risks and uncertainties facing the company;
- particulars of important events affecting the company that have occurred since the end of the financial year;
- an indication of likely future development in the company’s business.
Further, to assist the understanding of the development, performance, and position of the company, a business review must also include:
- an analysis using financial key performance indicators, which are factors that effectively measure the development, performance or position of the company’s business;
- a discussion of:
- the company’s environmental policies and performance;
- the company’s compliance with the relevant laws and regulations that have a significant impact on the company;
- an account of the company’s key relationships with its employees, customers and suppliers and others that have a significant impact on the company and on which the company’s success depends.
In the United States and the UK, calls are also continuing for more information on companies’ environmental, social, and governance policies and performance (frequently referred to as ‘ESG issues’).
However, the decision on exactly what information to provide and in what detail is challenging. Too little and commentators might register disapproval; too much and the company’s competitive position could be eroded or ongoing negotiations, for example over an acquisition, could be jeopardized. The danger is that, in meeting the regulatory and other expectations, companies’ statements contain more public relations commentary than hard fact.
The Hong Kong Institute of Chartered Secretaries (HKICS) is currently undertaking a survey (in which I am involved) exploring shareholder communications in companies listed on the Hong Kong Stock Exchange. The results are due to be published later this year, and will be linked to this blog in due course.
The HKICS published guidance notes in 2009, emphasizing the discretionary opportunities available to companies to communicate with their investors and the market. They cited press releases, corporate websites with dedicated investor relations pages, company presentations, group briefings, and meetings ‘one-on-one’ with individuals. Such opportunities could be used, the notes suggested, to ‘provide background to support the already publicly disclosed information, as well as to articulate:
- long-term strategy;
- organization history, vision, and goals;
- management philosophy and the strength and depth of management;
- competitive advantages and risks;
- industry trends and issues;
- key profit drivers in the business’
But there is an inevitable dilemma in discretionary communication. One-on-one communication is fraught with difficulty. To protect the integrity of their market, stock exchanges require information which might affect share prices to be given to the entire investment community at the same time. So, can meaningful information be given to one, or a few, shareholders without giving them undue advantage by disclosing price-sensitive information?
Companies need policies on the conduct of meetings with analysts and how to respond to questions about future earnings, if necessary correcting forecasts they might have made about the company and its prospects. Companies could consider publishing their formal disclosure policy, which needs to be in line with their overall corporate governance strategy.
Bob Tricker, May 2016
(for more on Professor Tricker’s publications and videoed lectures see www.BobTricker.com)