Listed Companies – the Board Composition

The idea to write an article on the composition of boards of directors came about as I attended an annual general meeting (AGM) last month. Typically, during AGM’s, shareholders would be asked to approve (or otherwise) the company’s financial statements of the previous year, confirm the re-appointment of the company’s external auditors, elect a board of directors (should an election be required) and approve their remuneration. It was precisely the resolution on directors’ remuneration that captured my attention during this particular AGM. The aggregate amount for this particular board of directors was, in my mind, too little when taking into consideration the following factors: (i) the number of directors on the board and (ii) the duties of directors and responsibilities and obligations towards shareholders and an array of stakeholders.

In my capacity as a corporate adviser to a number of companies which issue equity or debt securities on the Maltese capital market, I get the opportunity to meet with a number of directors where lengthy discussions and brainstorming sessions take place on the ideal funding strategy of the company which they represent. Invariably, the discussions revolve around whether the company should raise funds through a debt instrument (such as bonds) or issue additional shares to strengthen the equity base and perhaps complement this through additional source of funding such as bank financing. While the team of advisers is engaged merely to advise on the best course of action, the ultimate decision is always one that the directors need to take, taking into account the advice given the strategic direction of the company while at the same time act responsibly towards the shareholders of the company. The premise is that the directors are elected by the shareholders to represent their interest in the company.

It is also expected that the board of directors is composed of people with a certain level of experience, both in the sector where the company operates as well as the general economic environment in Malta (or any other jurisdiction where the company operates). They should be ‘fit and proper’ meaning that they should always conduct themselves with honesty, competence and integrity. Furthermore, directors need to be available for participation at board meetings, which are very much dependent on the type of company such directors sit on. By way of example, if a listed entity has a number of ongoing projects, directors may be required to meet more frequently when compared to directors of other companies which have a more-limited scope.

The size of the board is regulated by the company’s own memorandum and articles of association (M&A), which sets the minimum and maximum number of members on the board. The M&A also indicates the percentage shareholding that is required to elect directors to the board of a company. The number of board members is also related to the type of business the company operates in as well as the size and nature of the company. A larger company operating across a multitude of sectors typically requires a larger number of members on the board. Meanwhile, it is worth highlighting that following changes in the Listing Rules of the MFSA last year, a company’s board cannot have less than three members.

The Listing Rules of the MFSA also stipulate that companies having debt or equity securities listed on the Malta Stock Exchange must also have an Audit Committee. The principal tasks of this committee are to oversee the financial reporting function of the company and evaluate transactions that the board needs to consider, making sure that these are conducted on an arm’s length basis, on a sound commercial basis and in the best interests of the issuer. The changes in the Listing Rules effective as from August 2016 now also dictate the composition of an Audit Committee. It must have at least three directors which need to be acting in a non-executive capacity and the majority of the members are to be independent. While the Companies Act does not distinguish between a non-executive director and an executive director, a circular issued by the MFSA in October 2016 states that a non-executive director is one who is not involved in the day-to-day management of the issuer, thus having no contract of employment with the organisation. On the other hand, the element of independence is referred to in the Listing Rules. The independence test requires that directors are “free from any business, family or other relationship with the issuer, its controlling shareholder(s), or management of either, that creates a conflict of interest such as to impair his judgement”. In fact, following these changes to the Listing Rules, various company announcements were issued informing the market of changes to the composition of audit committees to be in conformity with revised legislation. As such, issuers had to identify candidates that would satisfy the independence / non-executive roles while selecting candidates with the relevant experience. Some issuers also had to change their M&As to accommodate the additional director(s) necessary to abide by the new Listing Rules (particularly if they had a board which was constituted up to the maximum number of directors possible in terms of their existing M&As).

There are other committees that emerge from The Code of Principles of Good Corporate Governance. This Code consists of a set of principles which companies having listed securities on the Malta Stock Exchange are encouraged to follow (the Code is not compulsory but it is good practice for issuers to follow it wherever possible). Companies which are listed on the Malta Stock Exchange are required to include a report in their Annual Report that identifies which principles have been adopted and which were not. In such cases, there would also need to be justification for the reason/s for not complying with the Code. In Malta, some of the companies listed on the MSE also have a Nominations Committee, whose function would typically include the procedure for a formal and transparent nomination of directors to a board. This committee is typically found at the larger (group of) companies and the main task of the directors sitting on this committee would be to review and suggest nomination of directors.

There is much more to say on the composition of the boards of directors and the resultant committee required under the Listing Rules. In my view, it is very evident that the role of a director is a very important one since such an individual is held responsible for the company’s strategic direction, and thus, their remuneration should be reflective of their involvement in the business, the expected contribution and availability to the organisation, and the experience they bring to the table.

Some of the local companies should therefore adequately compensate directors accordingly to reflect the delicate role of the individual.

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