France, Japan, and Saudi Arabia, are all experiencing a rise in scrutiny of corporate governance, according to a new report, 2018 Global Trends in Corporate Governance, published by Farient Advisors in conjunction with the Global Governance and Executive Compensation Group (GECN). These three countries were only added this year to the survey, which looks at three major categories of governance: executive pay, board structure and composition, and shareholder rights.
Developments in these three countries include, in France, possible mandatory Say on Pay. In Japan, the adoption of corporate governance code, introduced in 2015, is glacial, but the report says the number of actually independent directors is climbing. In Saudi Arabia, in March 2017, the Saudi Capital Market Authority (CMA) approved new corporate governance regulations for companies listed on the Saudi exchange, Tadawul. These rules “strengthen oversight by the CMA, enhance shareholder rights, clarify board, committee, and executive roles, and increase disclosure requirements.” It is likely Saudi is strengthening its governance requirements, says the report, because of its intention to list Saudi Aramco, the sovereign oil company, on a foreign exchange. Other countries where governance is on the move include Australia, whose Banking Executives Accountability Regime is an example of government response to poor corporate conduct in that sector.
The report does not attempt to cover each of its subject areas comprehensively, but rather picks those areas that are most in flux. It notes that regulations generally “lead the change process” regarding executive pay, and gives the example of Say on Pay – although these vary considerably from country to country. “Belgium and India have the broadest range of requirements, followed by Australia, France and the UK, while Brazil, Mexico, and Singapore have fewer.” The survey adds that more than a quarter of the countries included do not have Say on Pay votes, but that there are internal debates about whether they have any impact on executive pay. Countries without Say on Pay include China, Mexico, Hong Kong, Saudi Arabia, Singapore and South Africa. As these markets open up to outside capital, however – and this is a general conclusion of the report – the increased desire on the part of these shareholders to be able to evaluate pay programmes and overall corporate governance will begin to influence practice and regulations.
In the area of board structure and composition, the report says that limits on director tenure tend to be company specific. “In some countries, such as the UK, investors deem long-tenured directors (those with greater than nine years of service) to be less independent than newer arrivals,” it says. But in Saudi Arabia, independence requirements are far more stringent: directors with over nine years’ service do not qualify as independent for purposes of meeting quotas on a company’s board and committees.The varied approach to tenure among countries is unlikely to change much, since there is little agreement among investors about director term limits. Some see limits as “helping to refresh the board with new skills and perspectives; others argue that tenure is not really indicative of true independence and that each director should be evaluated on his or her merits, regardless of tenure”.
On shareholder rights, the report notes that best practice globally is to either have a single class of shares or limit the voting power of the preferred class.
On shareholder rights, the report notes that best practice globally is to either have a single class of shares or limit the voting power of the preferred class. But that best practice is not adopted universally. While the majority of US companies have a single-class of share, family-owned or controlled companies and many tech IPOs are structured with dual or multiclass shares. And there are many countries where concentrated ownership is the norm, such as Brazil and Mexico, which have a high prevalence of dual-class shares. In Brazil, however, says the report: “their use is restricted in proportion to total capital”. While majority voting standards for directors are used by approximately 90% of the S&P500, the practice is less common elsewhere. But, says the report, proxy advisors and activists are beginning to influence companies in other countries to adopt this standard.
Global governance trends, says the report, generally, are moving towards better governance because capital can cross borders more easily and that capital often expects good governance. This trend does face roadblocks in some countries – particularly those with a high concentration of ownership, such as Mexico, and China. Nevertheless, governance improvements are likely to continue because they are a “prerequisite for robust capital markets”, also shareholders are becoming more adept at forcing change and capital is ‘borderless’ so, although it’s unlikely that there will be a worldwide governance standard, governance practices will coalesce to an extent. And companies themselves are agreeing to governance improvements in order to attract shareholders.
The report also recommends three ‘action steps’. The first is to understand and keep current on global governance trends. The second is to determine whether your company adheres to best practices – not just locally, but globally. The third is to “determine an evolutionary roadmap”. The report notes that governance change is evolutionary and a governance structure that may not make sense now, may make sense in the future. If boards are active in this way, then they are less likely to be simply reactive to whatever the latest governance trend is.