Governance standards in public listed companies – where are we?

The Companies Act, Chapter 386 of the laws of Malta, regulates all public companies in Malta. Public companies must have a minimum of two directors and the Memorandum and Articles of Association would principally not restrict share transfers nor limit the number of shareholders a company may have. A listed public company therefore invites the general public to subscribe to shares (capital) or bonds (debt) of the company at any time for various reasons introducing it to a varied mix of stakeholders using the capital market.

Although legal principles and matters related to corporate governance emanate principally from the Companies Act and there is no major distinction in terms of governance principles between private and public companies, Appendix 5.1 to Chapter 5 of the MFSA Listing Rules provide the code of principles of good corporate governance for public companies listed on the Malta Stock Exchange. In the preamble, one can find a clear overview of the code’s objectives. Quoting from the code, “the adoption of these principles is expected to provide more transparent governance structures and improved relations within the market which should enhance market integrity and confidence”. Furthermore, these principles are expected “to ensure proper transparency and disclosure of all dealings or transactions involving the Board, any Director, senior managers or Officers in a position of trust or other related party”. Finally, and to my mind, most importantly, the code aims to “protect shareholders from the potential abuse of those entrusted with the direction and management of the Company by the setting up of structures that improve accountability to them”.

The significance of the importance of corporate governance becomes more evident if one were to consider the parties that are involved in its proper function. Governance is a combination of processes and structures implemented by a Board of Directors principally to monitor, manage and enhance an organisations’ activity in order to ensure that it meets its objectives – the creation of shareholder value. Therefore, fundamental to the core importance of corporate governance are a company’s stakeholders, principally shareholders. Shareholders appoint a Board of Directors to act on their behalf and in their best interests at all times. The main scope is for a Board to constantly ensure that any action or decision is taken in the interests of ALL shareholders equally. This is a key point.

The role of shareholders and other stakeholders is becoming more and more important as companies increasingly resort to the public for part of their financing and growth plans. As such, over time, a larger number of stakeholders are becoming more significant in the corporate structure and as a result, protection measures are increasingly fundamental.

As indicated in the code and highlighted above, a critical component of good governance is transparency. How confident are we that publicly listed companies in Malta are indeed adhering to this key principle in its widest context? We have been following listed companies in Malta for over twenty years now and admittedly, standards have improved over the years especially in the recognition of the importance of the need for good governance structures and in so far as transparency and disclosure with respect to publication of results, selected market communication and dealings are concerned. Although improvements have indeed been registered, much more can be done in certain instances. There are a good number of experienced, skilled and respectable individuals handling key roles within governance structures of public companies. However, in my opinion, we are regrettably still lacking and nowhere near fully appreciative of being accountable on matters related, for example, to related party transactions, acquisitions or disposals of material assets and relevant detailed communication in this regard. Furthermore, and principally as a result of a lack of active minority shareholder engagement, it is evident that a number of companies are happy to provide the bear minimum information merely in compliance with the rules rather than be open, detailed and totally transparent in these instances. In other words, regrettably the ‘box-ticking’ attitude still prevails over genuine detailed and transparent follow through. Why?

Unfortunately, announcements that quite obviously lack the necessary information and value add especially to minority shareholders still occasionally stand out. This is where clear differences between the effectiveness of governance structures vary between public companies that should be following the same rules and principles. Over the years this does catch up though. Companies that are not totally transparent in all areas and on all matters will see trust and faith in it dwindle. At this point, companies should not resort to ‘blaming’ the market for not appreciating what is (apparently) being done to “enhance shareholder value” (a favourite phrase among executives) but rather, perhaps value would be enhanced were it to ask itself whether the quality of information (or total lack of it), the effectiveness of its structures especially if these haven’t changed for a number of years, the drive and ability of persons handling key roles in this regard, the amount of time some people have occupied key sensitive roles (such as audit committee members), is/are indeed the reason/s why there is a lack of follow through in “value creation” in the secondary market for a company’s shares. Most people (whether company executives or several shareholders) frankly believe that it is all about the bottom line and dividends! It may well be for some, but certainly not for all and over the years, the appreciation and identification of key determinants used/considered in assessing companies has extended far beyond its ability to pay dividends. This is a good sign and it is pleasing to see an increasing number of market followers, participants and opinion formers comment about company structures and related relevant risks and threats when assessing.

Given the characteristics of our country and our culture, the risk of complacency in respect of continuously ensuring that ALL shareholders (whether minority or otherwise) are treated equally at all times increases dramatically. Is it time to make changes to the code that, for example, limit the number of years key individuals in important governance roles hold position? How can potential conflicts of interest be better managed? It can only be beneficial for the continued long-term interests of the domestic capital market to at least debate these issues and understand whether improvements can be made if we collectively aim to add value in a genuine manner. Only then can we really ensure that the enhancement of market integrity and confidence remain at the forefront of good corporate governance objectives.

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