Ethical Boardroom Feeds

Red Eléctrica Corporación discuss their best-in-class governance practices

Red Eléctrica Corporación aspires to the highest standards of corporate governance as they believe that good governance supports long-term value creation. To this end, Red Eléctrica has in place a set of well-defined policies and processes to enhance corporate performance and accountability, as well as protect the interests of stakeholders. The company was crowned the “The Best Corporate Governance – Electric Power Transmission – Europe 2018” earlier this year.

Here to talk about Red Eléctrica’s corporate governance policies and what makes them a sustainability leader in Spain is Mr Jose Falgado – Chairman of Red Eléctrica, Mr Juan Lasala – CEO of Red Eléctrica and Mr Rafael García de Diego – Genreral Counsel of Red Eléctrica.

Opening boardroom doors to women

By Jayne E. Juvan – Partner, Co-chair of the Corporate Governance Practice Group and Chair of the Private Equity Practice Group at Tucker Ellis LLP



“Diverse boards make better decisions, so every board should have members with complementary and diverse skills, backgrounds and experiences,” state the US Commonsense Corporate Governance Principles.[1]

Much attention has been devoted to the number of women (or lack thereof) in C-suite and director positions, especially in the context of public companies. Despite the well-known benefits of having a diverse set of decision-makers in the boardroom, women continue to hold a disproportionately low number of director positions compared to men.

Although the number of women in leadership positions is increasing slightly, women still have not come close to having equal opportunities with men. This article discusses four possible techniques for opening the doors of the boardroom to women so that they are no longer shut out from director opportunities. But first, we examine some current statistics about female directors and discuss the challenges that are holding women back.

Glass ceilings and walls

In the fifth edition of Women In The Boardroom: A Global Perspective, the Deloitte Global Center for Corporate Governance reported that in 2016, 15 per cent of all board seats globally were held by women. The same statistic measured at 12 per cent in 2014. An increase of three percentage points over two years is certainly progress, but the numbers remain staggeringly disproportionate.

Deloitte partially attributes the sluggish growth in diversity to the slow turnover among board seats. If companies are not given a reason to refresh their boards and replace their current directors (such as through term limits or pressure from investors), the statistics will be unlikely to change at a more rapid pace. Another impediment to increased gender diversity is the preference for directors to be current or recently retired CEOs. Given that women hold a low number of CEO positions, they are disadvantaged when this has become, in essence, a prerequisite to holding a board seat.

In addition to being at a disadvantage with respect to the preferred experience for a board position, a large number of director seats are filled by references from other directors and CEOs (positions dominated by men) and by recruiting firms, some of which may not be diversity-minded and continue the trend of placing experienced CEOs, directors and those in their networks in open board seats. This ‘club atmosphere’ makes it exceedingly difficult for women to break into these roles.

“Although the number of women in leadership positions is increasing slightly, women still have not come close to having equal opportunities with men”  

The challenges experienced by women often start very early in their careers, when they are still in the stage of career development. The 2015 Global Report On Women In Business And Management from the International Labour Organisation described the ‘glass walls’ that keep women siloed in specific management functions that do not give them access to general management experience. Companies are more likely to have 100 per cent women or greater than 50 per cent women working in the areas of human resources, public relations and communication, and finance and administration. Other management areas, such as research and product development, sales and operations, and general management are more likely to be disproportionately male. When women are more concentrated in areas such as human resources and less in areas such as operations and general management, they are less likely to be seen as viable candidates for a more general management position later in their career.

In addition to these trends, though shareholder activist campaigns unlock value on some fronts, these campaigns may also be a setback for gender diversity in the boardroom. A recent study conducted by ISS indicated that, in the S&P 1500, there were zero female dissident nominees and directors appointed via settlements with shareholder activists in 2011, two in 2012 and three in 2013. While the study showed the rate of women who served as dissident nominees or board appointees increased slowly over time, it still lagged behind the gains made in the broader S&P 1500 index.

Another study conducted by the W.P. Carey School of Business at Arizona State University found that female CEOs are more likely to be targeted by activists. In a statement about the study published in Fast Company, Christine Shropshire, an associate professor of management at the school, stated: “All else held equal, female CEOs have a 27 per cent likelihood of facing activism, while their male counterparts have a near zero predicted likelihood of being targeted.”  Shropshire has theorised that women are more likely to be targeted because they are perceived as ‘weaker and thus easier to push around’. On the other hand, an article published by Quartz at Work titled Activist Investors Are Making Corporate Boards Whiter And More Male referenced a source that indicated that activists will attack the lack of diversity as a weakness when they are targeting a company with an all-male board.

While female representation globally is quite low, Spencer Stuart recently released data concerning the S&P 500 that does provide promise. According to the recruiting firm, among new S&P 500 directors, women comprised a total of 36 per cent, or 142, of incoming directors. The total number of female directors on the S&P 500 stood only at 22 per cent, up a modest one per cent in 2016.

1. Technique 1: Adopt company-specific initiatives designed to enhance female participation

In PwC’s Governance Insights Center’s report, A Look At Board Composition: How Does Your Industry Stack Up, PwC noted that mandatory retirement ages and term limits can be effective tools to ‘refresh’ a board. According to Spencer Stuart, 48 per cent of boards on the S&P 500 did not appoint a new director in 2017. Limiting the amount of time that a current (and possibly male-dominated board) can stay in office gives women the opportunity to break into the boardroom more quickly. The retail industry has been particularly effective in this arena. Ninety-one per cent of retail companies in the S&P 500 have mandatory retirement ages, compared to 73 per cent for the S&P 500 as a whole. Further, 18 per cent of retail companies impose term limits on their directors, as compared to four per cent of the S&P 500 as a whole.

Many companies have diversity initiatives and mentoring programmes aimed at increasing gender diversity throughout the organisation. Helping women position themselves early in their career can make them even more qualified candidates for top leadership positions down the road. While the jury may still be out concerning the impact of traditional women’s initiatives, Deloitte has taken a more innovative approach to these groups that, in time, could prove effective. Rather than continuing with affinity groups geared solely to women, Deloitte has replaced its women’s initiative, known as WIN, with ‘inclusion councils’ that also provide men (including powerful men who have an ability to sponsor women for opportunities) with an ability to participate.  In an article for Bloomberg Businessweek, Deepa Purushothaman of Deloitte said: “By having everyone in the room, you get more allies, advocates and sponsors.  A lot of our leaders are still older white men and they need to be part of the conversation and advocate for women. But they’re not going to do that as much if they don’t hear the stories and understand what that means.”

While inclusion networks may move the needle over the long-run, these likely will not present immediate positive results. In the interim, however, companies can bring more women into the fold by using tools such as mandatory retirement ages and term limits to refresh their boards.

2. Technique 2: Expand the pool of individuals recruited for board seats

In order to provide a pathway to women to obtain board seats more quickly, companies should look beyond the traditional C-Suite, which is largely comprised of men. Recruiting firms also need to be open-minded when presenting candidates to ensure their actions do not further the ‘club atmosphere’ and they should proactively help to drive a conversation around diversity. In Nudging Companies to Look Beyond The C-Suite For Women Directors, The Wall Street Journal recently reported that this approach is starting to gain traction, writing: “Though many boards seek current or former CEOs, CFOs or COOs, who still tend to be men, there’s a growing trend to look for division managers, which opens the door for more diverse candidates. And as more women get on boards, they can also vouch for each other to limit the old boys’ club cycle.”

Some firms engaged in the recruiting process have demonstrated – by sharing actual data – that they are recommending female candidates for open board seats. According to the Wall Street Journal, J. P. Morgan Chase & Co’s Director Advisory Services Group has given more than 700 director recommendations since inception, 65 per cent of which were for women candidates.

3. Technique 3: Apply the weight of institutional investors

Just before International Women’s Day in 2017, in celebration of the first anniversary of its Gender Diversity Index (SHE), State Street Global Advisors made a bold statement when it installed ‘Fearless Girl’ across from the ‘Charging Bull’ in the heart of the Financial District in lower Manhattan. The bronze statue includes a plaque that states ‘Know the power of women in leadership. SHE makes a difference’. In a speech at the Weinburg Center for Corporate Governance about the arrival of Fearless Girl, Ronald P. O’Hanley, the president and CEO of State Street, stated: “She is a daring and confident girl celebrating the ‘can-do spirit’ of women – who are taking charge today and inspiring the next generation of leaders. She stands as a reminder to corporations across the globe that having more women in leadership positions contributes to the overall performance and strengthens our economy.”

“In order to provide a pathway to women to obtain board seats more quickly, companies should look beyond the traditional C-Suite, which is largely comprised of men”

In the beginning of 2017, State Street announced that it will engage with the companies it invests in about the importance of adding female directors. For those that fail to do so, there will indeed be consequences, as State Street is prepared to vote against the chairs of the nominating committees of these companies.

Similarly, BlackRock announced its focus on achieving gender diversity in the boardroom in March 2017. Citing the Commonsense Corporate Governance Principles quoted at the beginning of this article, BlackRock expressed its intention to engage with companies
on the topic of gender diversity and hold nominating and governance committees accountable for lack of progress.

 4. Technique 4: Establish quotas

Given the glacial pace of change, some rejected the notion that the market will self-correct and instead have turned to mandatory quotas to balance boardrooms. According to a Harvard Business Review article, What Board Directors Really Think Of Gender Quotas, action pertaining to quotas began more than 10 years ago when countries in Europe started adopting them.

In 2004, Norway adopted a 40 per cent quota for female directors and other countries, such as France and Italy, followed suit with similar goals. Recently, The Guardian in the UK reported that the European Commission is taking strong action and is seeking to establish a quota for women on boards. For those companies in which the non-executive directors total more than 60 per cent men, female candidates of equal merit being considered for a post would have to be prioritised. Germany, the Netherlands and Sweden previously blocked the EU’s goal of having 40 per cent of women fill the top positions in listed companies due to concerns that these proposals overstep into domestic territory. The Guardian has also reported that women’s participation had grown to 22 per cent in 2015, up from 10 per cent in 2005, when evaluating the largest listed companies.

The US, however, has never established quotas, whether voluntary or mandatory. If pressure from institutional investors does not bring results, or does not bring results quickly enough, should the US consider adopting quotas as well?

According to the article cited above, quotas are often criticised on the basis that they will result in less qualified directors. Women in particular have also expressed concern that they will be ‘second-class citizens’ if they achieve their board seats through quotas. Nevertheless, others have indicated that the market is unlikely to fix the issue in the near term, with some saying that, ‘[w]ithout quotas, it will be a pretty long, slow journey’. Men interviewed for the article were not in favour of formal targets, stating that they “wanted qualified and strong directors first and foremost”. Whether that implicitly signals that those interviewed still do not recognise the value women bring to the table is ripe for discussion.


About the Author:

Jayne Juvan is a partner, co-chair of the Corporate Governance Practice Group, and chair of the Private Equity Practice Group at Tucker Ellis LLP.  She also serves as vice chair of the American Bar Association’s Corporate Governance Committee. Jayne has a broad practice that touches upon a variety of disciplines and advises investors, boards of directors and management teams on corporate transactions, regulatory compliance and fiduciary duties. She frequently can be found in the boardroom with directors as they make highly impactful, potentially transformative, and confidential decisions. She is also often tapped to assist corporate boards to maximize effectiveness and institute best practice.


Ethics: Leading from the top

By Richard F. Chambers – President & CEO, The Institute of Internal Auditors




There is never a right time to relax on ethical behaviour. Recent headlines provide ample proof of the consequences of leaving open even a tiny window of opportunity. Human nature has shown time and again that, in the right (or wrong) circumstances, even smart people can do dumb things and good people can behave badly.

Commitment to ethics must be more than a once-a-year ‘ethics day’, with a picnic and a brief chat from the CEO. It requires constant attention, regular activities and ongoing follow-up, all focussed on expectations of zero defects in ethical behaviour. It starts with setting the tone at the top: ethical conduct modelled by the board and senior management and expected of employees at all rungs of the organisational ladder. So important is tone at the top that I believe a tone that is strong but inappropriate can undermine even valid, well-crafted internal control processes and policies.

Boards and executives have a leading role to play in ensuring the right plans are in place before and after an ethical misstep and internal audit can provide strong support.

Why internal audit?

It is no surprise that I would advocate for the benefits that internal audit can bring to many facets of business, including ethics. I am an internal auditor by training and experience and I now lead The Institute of Internal Auditors (IIA), the world’s largest organisation of internal audit professionals.

The IIA takes ethics seriously; in fact, the organisation requires adherence to a Code of Ethics to be a member and to hold its certifications. The IIA’s Code of Ethics is built on four pillars that define the behaviour expected of those engaging in internal audit activities: integrity, objectivity, confidentiality and competency. Internal auditors who perform their duties in alignment with these pillars build trust with audit clients, inspire confidence in the validity of their findings, avoid conflicts of interest and communicate the results of their work with transparency and empathy.

This standard of behaviour is critical because of the role internal audit plays in most enterprises’ whistle-blower programmes. In many cases, internal auditors uncover evidence of ethical breaches during regular or management-requested audits. In addition, internal audit is often responsible for the enterprise’s whistle-blower programme, a duty sometimes shared with the legal and/or compliance functions. Even in enterprises where internal audit does not manage the whistle-blower programme, it generally receives copies of all complaints (the most common exception being HR-related issues).

An efficient and effective internal audit function is crucial for enhancing and protecting organisational value – value that can be quickly and, potentially, permanently eroded by ethical breaches.

Before an ethical breach

Establishing an ongoing ethical awareness and response programme is similar to holding certain insurance policies: we buy them and keep up the payments in the hope we will never need them, but appreciate their value when we do. Waiting until after a breach happens to get started on creating an ethics programme is, at best, too little, too late. At worst, it may reflect a dereliction of governance responsibility.

Ethics programmes vary by organisation, but they generally specify a need for board oversight, management responsibility, written policies and procedures, risk assessments, training, monitoring, reporting and corrective actions. The following are some activities that can underpin the ethics programme and support enterprise preparedness.

Set up a defence-in-depth structure Organisations that are serious about addressing risks, including those that accompany ethical breaches, know better than to rely on only one safeguard. They implement risk-based controls designed to prevent the occurrence of ethical misbehaviour (the first line of defence is business line management, responsible for setting, communicating and modelling desired behaviour). If those controls break down, internal monitoring should detect it (the second line – the management and oversight function, which monitors risk and compliance and provides advice to the first line). Finally, internal audit (the third line, which evaluates adherence to the organisation’s standards and its corporate culture) must have the authority to report the issue directly to the board. Some enterprises consider senior management and the audit committee as fourth and fifth lines because of their responsibility for ensuring the other three lines are established and working smoothly.

When the three (or more) lines work together effectively, the enterprise has a fighting chance to avoid a whistle-blower situation.

Ensure a relationship of trust between the audit committee and the chief audit executive (CAE) The CAE is the ranking staff member responsible for internal audit and the audit committee is the board’s eyes and ears relative to audit issues; therefore, their relationship must be built on complete trust. In other words, the audit committee must feel secure that the CAE will bring forward any significant risk and the CAE must believe that problems surfaced will receive appropriate attention and action by the audit committee. They must share the conviction that no part of the organisation is off limits to internal audit.

“Boards and executives have a leading role to play in ensuring the right plans are in place before and after an ethical misstep and internal audit can provide strong support”

This may seem obvious, but it is not universally practiced. A recent Internal Audit Foundation survey of nearly 15,000 internal auditors worldwide, from staff to CAEs, reported shocking evidence of a betrayal of trust: a global average of 23 per cent reported receiving pressure at least once to modify or suppress audit findings (an additional 11 per cent ‘preferred not to answer’). Especially dismaying was the fact that, among those who reported being pressured to change an audit report, 43 per cent indicated that the pressure came from the CEO, the board, the audit committee, or legal/general counsel.

Build employees’ trust of internal policies (especially the whistle-blower policy) Most organisations would prefer that employees report suspected issues internally for investigation and remediation, rather than marching straight to an external agency with whistle in hand. Yet, companies sometimes overlook a defining factor in ensuring that outcome: building employees’ trust in the company’s policies. When employees trust the company, they feel confident that their concerns will be heard, respected and acted upon and they will suffer no negative ramifications for speaking up. If they sense they will not be heard or their career growth will be affected, they may feel the need to go public.

So, how can employee trust be fostered? First, ensure that the whistle-blower policy clearly treats whistle-blowers as concerned, diligent employees, not ‘snitches’. Second, make it a regular practice to talk about ethics. Board members, executives and management should openly discuss ethical complexities that may arise in a work environment, treat ethical behaviour as non-negotiable, show respect for differing opinions and acknowledge examples of ethical conduct.

Go beyond hotlines While company hotlines are a common means by which employees can report a concern, they are not the only way to uncover potential ethical issues. Watch for comments posted on Facebook, Twitter, or other platforms. Investigate relevant remarks made by employees in their exit interviews. Pay attention to anonymous emails or calls that suggest the existence of an ethical issue. Make it easy and comfortable for employees to walk into the internal audit department, or security, or human resources to discuss a problem.

Communicate the whistle-blower process When the whistle sounds, the response plan must be executed immediately, effectively and entirely. This happens only when all parties understand the process well in advance. Employees should be informed how to report, to whom to report and what will happen after the report. Responders must know what to do and whom to involve. Boards need to know there is a programme in place to protect the enterprise and they should be provided with periodic reporting on the status of investigation and remediation activities.

After an ethical breach

Despite the most thorough and well-vetted plans, the most open and consistent communication and the most effective training, an ethical issue may still arise. So, policies must clearly outline what happens next. The following are a few suggestions.

Start strong Any process that involves multiple steps, departments and individuals is likely to contain many critical junctures at which something can go wrong. The first and perhaps most important of these junctures in an ethics response plan is triage, in which the organisation hears a new allegation, sorts through the details and decides how to respond. Making good decisions requires an understanding of the legal, accounting and reputational implications of the reported misdeed – a breadth of knowledge that may be beyond the capacity of just one person. For that reason, some enterprises appoint a committee to perform triage, bringing a more diverse perspective to the decisions needed.

Call in internal audit Because of their everyday activities, internal auditors generally have a working understanding of all parts of an organisation. Couple that with their independence and objectivity and they are well-suited to handle allegations competently and confidentially. As mentioned earlier, in many organisations internal audit ‘owns’ the whistle-blower programme or is engaged in its review and evaluation, so it is a natural fit for the board to rely on internal auditors for assurance that the programme’s policies and procedures are applied appropriately when an instance occurs.

Remain alert Despite the natural desire to breathe a sigh of relief and relax after an ethical incident is remediated, it is critical to continue diligently executing the programme. There are many things a board can do to ensure a continued focus. Ensure that the whistle-blower programme’s policies are reviewed on a regular basis and updated as needed to reflect changes in the enterprise’s culture, industry, technology, business model, or laws and regulations. Demand frequent reporting on ethics programmes and activities (perhaps a dashboard that reports information, such as ethics violations, hotline calls and customer complaints). Ensure that ethics and other culture-related issues appear regularly on board and audit committee agendas. Build executive compensation packages and reimbursement policies that discourage ethical breaches. Review selected messages the CEO sends to the employees; do they emphasise the importance of ethical behaviour and assure a blame-free environment for those who raise concerns?

Addressing ethics through a focus on culture

In addition to the suggestions I have already described, I have a recommendation I feel certain will improve every enterprise’s ethical position and it is an activity that boards can single-handedly bring about: charge internal audit with the responsibility to audit organisational culture. The culture within an enterprise is the petri dish in which ethical failures grow or wither. Assessing it is a proactive step to ensure behaviours match expectations – from the corner office to the loading dock.

Many internal audit teams include a review of culture as part of the annual audit plan’s scheduled activities. However, in cases where a risk-based evaluation has identified an area of special concern, internal audit may perform a specific audit outside the annual plan. Regardless of the approach, the effectiveness of culture audits depends on the board’s and audit committee’s vocal support of internal audit’s efforts and expectation of full staff cooperation.

Surveys can be useful inputs to culture audits. A survey may consist solely of ethics and culture-related statements, such as ‘I have received ethical training for my position’, to which employees respond using a scale from ‘strongly agree’ to ‘strongly disagree’. Or, an organisation may simply include some culture and/or ethics questions in an already existing enterprise-wide employee survey.

“The culture within an enterprise is the petri dish in which ethical failures grow or wither. Assessing it is a proactive step to ensure behaviours match expectations — from the corner office to the loading dock”

Negative survey responses should be investigated by internal audit to determine whether there is corroborating evidence. Evidence found should be reported to the board, along with recommendations for improvement. If no corroborating evidence is found, the outcome should be reported to appropriate management. The negative response may reflect a misunderstanding of the processes in place, which management can correct via clear, direct communication.

Sadly, it is unlikely that an organisation can eliminate ethical missteps entirely, but awareness, engagement by the board and audit committee, preparedness and a well-crafted response plan can certainly create a hostile environment for them.


About the Author:

Richard F. Chambers, CIA, QIAL, CGAP, CCSA, CRMA, is president and CEO of The Institute of Internal Auditors (IIA), the global professional association and standard-setting body for internal auditors. Chambers has more than four decades of internal audit and association management experience, mostly in leadership positions. Accounting Today named him one of the Top 100 Most Influential People in Accounting and he has been named one of the most influential leaders in corporate governance by the National Association of Corporate Directors (NACD). Chambers has authored two award-winning books: Trusted Advisors: Key Attributes of Outstanding Internal Auditors in 2017 and Lessons Learned on the Audit Trail in 2014.

The secret life of shell companies

By Steve Goodrich & Ben Cowlick – Members of the Corruption Research Team at Transparency International UK


The Paradise and Panama Papers have given us an unparalleled insight into how fake businesses – often known as ‘shell companies’ – have been used globally to conceal illicit assets, evade sanctions and allow corrupt individuals to enjoy their ill-gotten gains with impunity.

When a luxury London pad or house in the Home Counties is bought with illicit funds, you’re almost certain to encounter a business registered in a secrecy jurisdiction – places where the names of company owners are kept behind closed doors. Many of these can be found in the palm-fringed paradises of the UK’s Overseas Territories and the charming isles of its Crown dependencies. However, recent research by Transparency International UK shows many of these criminal schemes are made possible by those far closer to home.

Through an analysis of 52 major global corruption scandals involving more than £80billion, we identified 766 different UK-registered shell companies playing a key role in transporting illicit funds. Based on what we found, there could be thousands more of these fake businesses being used to move tens of billions in corrupt wealth worldwide. Although this might seem strange at first, the prevalence of UK companies in these schemes is no coincidence. They have been hand-picked by criminals and here’s why.

Scratching the surface

Companies registered in the UK offer instant legitimacy. Its reputation as a respectable international business hub is well known. Because of this, companies registered here are often deemed lower risk by banks and other businesses interacting with them. Without proper due diligence checks, this can allow them to cause some serious damage. In one scheme alone, uncovered by the Organised Crime and Corruption Reporting Project (OCCRP), 17 UK banks handled more than half a billion pounds worth of suspicious wealth emanating from Eastern Europe, which was being channelled by hundreds of UK-registered shell companies.

With the aid of British banks, these companies were able to disperse the money through investments spanning fine furs to private school fees, sometimes to unsuspecting recipients. When talking about the funds it received from the scheme, Millfield School – a prestigious private school in Somerset – said: “The payment was made from a UK bank account and did not appear in any way suspicious at the time.”

Businesses failing to understand their clients and customers allow this mistake to be repeated.

Swift incorporations

Far from being an indicator of respectability, anyone can form a UK company from anywhere in the world. And it’s cheap. While a Panamanian company will set you back around £1,000, you can go online and form a UK company yourself for £12 in a matter of minutes. If you incorporate direct through Companies House there are no due diligence checks on who you are – you’d encounter less ID checks than boarding a flight.

In theory, registering via a regulated agent – otherwise known as Trust and Company Service Providers (TCPSs) – is more secure as they are required by law to undertake money-laundering checks on all customers. However, recent studies have shown that these rules are often ignored or applied sporadically by the sector.

Company factories

We have found a number of formation agents who have been creating secretive corporate structures using UK companies on an industrial scale without even being registered with a money-laundering supervisor – a legal requirement. Indeed, a quarter of the agents listed on Companies House’s website as bulk incorporators were unregistered. Even a handful of these rogue agents can help shift billions of illicit funds in a relatively short period of time.

Lax supervision

Even those TCSPs that are registered with a money-laundering supervisor are not sufficiently incentivised to carry out thorough checks on their clients. The last available information published by HMRC showed its fines for non-compliance in 2014/2015 averaged just over £1,100, peanuts compared to the profits to be made moving illicit money around the globe. This could explain why the sector has been so poor at reporting suspicious activity – which is required by law – to the UK’s National Crime Agency (NCA). According to the latest available data, as a whole the sector submitted just 74 reports over 12 months between 2015 and 2016. Based on the evidence we have, this is likely to be only a small fraction of potential suspicious activity within this industry.

“We have found a number of formation agents who have been creating secretive corporate structures using UK companies on an industrial scale without even being registered with a money-laundering supervisor — a legal requirement”

To make matters worse, money launderers are not confined to choosing a UK-based TCSP. Thanks to the ease of online incorporations, UK companies can be set-up from anywhere in the world. This global activity has not been accounted for in law, with non-UK TCSPs not bound by UK money-laundering regulations, but by those of the jurisdiction in which they operate. Relying on other jurisdictions to enforce money- laundering rules poses significant risks. Whilst the UK’s performance in this area has been poor, other countries’ has been worse.

Less than a quarter of countries assessed by the Financial Action Task Force – an international body that assesses countries’ money-laundering defences – had sufficient systems to prevent the setting up and abuse of shell companies. This means that the UK is relying on weak money-laundering systems to protect the integrity of its own company register.

To compound all of the above is the wholesale trade of companies between agents, which makes it unclear who should have undertaken due diligence checks and at what point in the process. Recent revelations have shown how this trade works, with agents buying ‘off-the-shelf’ packages of companies from each other, depending on their client’s needs. This explains why UK agents were the second most popular intermediaries of choice for Mossack Fonseca – the infamous law firm at the centre of the Panama Papers scandal.

Although the size of this wholesale market is unknown, based on our research we think it could involve thousands – if not tens of thousands – of UK companies. As long as these practices continue, the risks carried by companies formed and sold in this way continue to be significant.

What is being done

From 2017, most legal entities incorporated in the UK have to reveal the names of their ultimate beneficiaries to Companies House. This is published on the persons of significant control (PSC) register. Available via the Companies House website, PSC has added an essential insight into who might be hiding behind the corporate veil.

“While giving the appearance of a UK legal entity, tens of thousands of firms registered here represent little more than secretive offshore companies within a UK ‘wrapper’”

As with all new things, there are some teething problems. Currently, just six people at Companies House are tasked with tackling non-compliance with company law and it does not verify what it is submitted. Despite this, the benefits of a public register mean that the business community and civil society can interrogate the data and provide feedback to Companies House which can then make changes to improve the quality of data. In partnership with investigative journalists, we at Transparency International UK have submitted details of hundreds of companies we think are trying to evade these new transparency rules.

To help navigate and interpret what is currently being published, there are a number of characteristics that can help identify if a UK company might be involved in money laundering. Based on what we have seen from our research, here are some tips and pointers on what to look out for.

Offshore via the UK

While giving the appearance of a UK legal entity, tens of thousands of firms registered here represent little more than secretive offshore companies within a UK ‘wrapper’. In the past, Limited Liability Partnerships (LLP) and Scottish Limited Partnerships (SLPs) have been popular vehicles for money launderers because they can be controlled by two secretive offshore corporate partners – for example, companies based in the British Virgin Islands or Belize (thus hiding the ultimate owner) – and their minimal reporting requirements.

In recent years, both LLPs and SLPs have been brought within the scope of the UK’s PSC register, making it harder for money launderers to hide using UK companies without lying to Companies House and breaking the law. However there are still those who are intent on ignoring these rules by not reporting a PSC or putting the name of some unsuspecting individual as their beneficial owner. So if something doesn’t seem right about a company, there are a number of details to check in order to give you peace of mind.

Location, location, location

Mail forwarding and virtual offices are an essential and legitimate part of many businesses. They are also a constant feature of companies we found to be involved in financial wrongdoing. Providing a superficial layer of legitimacy, as well as distance from the ultimate owner of the company, certain addresses appear repeatedly in Companies House data. Half of the 766 UK companies we identified in our research were registered at just eight addresses, with 105 based at a single rundown office in Potters Bar. The concentration of these shell companies in a relatively small number of places clearly show hotspots of poor due diligence, which allow money laundering activity to go unchecked.

Often these addresses house hundreds, if not thousands, of other companies whose purpose or real owners are not immediately apparent. So, if you aren’t sure about a potential business client, it might be worth checking their registered address and the background of other companies based there. These ‘company factories’ are often semi-permanent fixtures, with batches of entities dissolved en masse, often after a big corruption scandal has been exposed. With this in mind, it’s worth using data from Companies House or third-party tools like OpenCorporates to identify the rate of incorporations and dissolutions at suspicious addresses. Cross-referencing this data with your list of clients might produce some red flags for further investigation.

Nominee directors

Whilst nominee directors don’t technically exist in the UK – with directors legally responsible for the actions of a company – this has not deterred money launderers from using proxy directors to keep their names off the paperwork. Some of these proxies have become synonymous with wrongdoing, such as Ian Taylor, infamous for – among a myriad of money-laundering schemes – directing a company used to help North Korea evade sanctions.

If enforced properly, the UK’s PSC register mitigates the threat of proxy directors, but there is still a long way to go for Companies House to ensure these rules are implemented in practice. A quarter of the firms we identified in our research remain active today and have found a variety of ways to flout company law. If you come across companies with a suspicious director on the UK register, it is worthwhile checking as many sources as possible – from elsewhere on Companies House to the ICIJ’s Offshore Leaks database – to try and identify if the name on the screen you are dealing with is likely to be the real person controlling the company.

Follow the money

Where a company does its banking can tell you as much as anything you find on Companies House, possibly more. Our research found that money launderers based in Eastern Europe have taken advantage of the relationships between some TCSPs and Baltic banks specialising in ‘financial logistics’ (in layman’s terms this means moving money around the world). As a result, lots of UK companies – particularly LLPs and SLPs – have been sold with Baltic Bank accounts as a package. By doing this, those who control these firms gain access to the global financial system without undergoing the same level of due diligence carried out at UK banks.

Becoming a beacon for responsible business

Companies based in the UK might not be as clean as we would like to think. The 766 firms we identified are likely to be just the tip of the iceberg in terms of the widespread abuse of UK legal entities. Thousands of other suspicious firms are still active, which share the same address, proxy directors and corporate partners as those we identified. These companies and the system that allows their creation represent an ongoing threat both to the UK’s international reputation as a clean and safe place to do business, as well as those around the world who suffer from the corruption and other crimes facilitated by these firms.

With Brexit just around the corner, the UK can ill-afford to develop a reputation as a place to do business for money launderers and crooks. To address this threat and become a beacon of responsible business around the world, we need data at Companies House that can be relied on and a well-regulated company service sector that can guard against criminal elements looking to hijack our financial system.


About the Authors:

Steve Goodrich works in the Transparency International UK research team, looking into both corruption within the UK and the role the UK plays in overseas corruption. This work includes research into how corrupt wealth from overseas can be hidden within the UK, in particular the UK property market, as well as the complicity of the UK’s professional services and financial institutions in moving and concealing this ill-gotten wealth.

Ben Cowdock works in the Transparency International UK research team, looking into both corruption within the UK and the role the UK plays in overseas corruption. This work includes research into how corrupt wealth from overseas can be hidden within the UK, in particular the UK property market, as well as the complicity of the UK’s professional services and financial institutions in moving and concealing this ill-gotten wealth.

Corporate governance in Italy: Behind the scenes

Marcello Bianchi & Mateja Milič – Marcello is Deputy Director General at Assonime and Chair of Technical Secretariat, ICGC, Mateja is Assonime and Staff at the ICGC


The 2017 Italy Corporate Governance Conference, hosted once more by the Italian Corporate Governance Committee (ICGC), provided an opportunity for an open dialogue between public institutions, issuers and investors about the evolution of corporate governance in the country and beyond.

Organised by Assogestioni and Assonime, in cooperation with the OECD and with the support of the Italian Stock Exchange, the conference represents the long-standing commitment of the Italian system, which began with a corporate governance meeting in December 2014 during the semester of the Italian Presidency of the EU Council and has carried on with conferences since.

The attendance of policymakers and key market players testifies to the importance of such an event in promoting a stronger development of the Italian capital markets, through candid and constructive debate on main corporate governance issues.

Corporate governance provides investors with confidence and encourages companies to open their capital to the market. This delicate mechanism faces important challenges raised by a rapid and deep evolution of financial markets, with new forms of intermediation, new trading platforms and techniques, as well as new business models.

All developed economies, particularly after the financial crisis, have experienced a structural and deep decline in the ability of capital markets to attract new companies and to support their growth – and this problem is particularly relevant in Italy. Although there are some positive signals that this trend can be reversed, there is still a big gap between the increasing amount of savings and the growing need for investments (especially
for SMEs) that are necessary to support growth that can meet demand for long term economic sustainability on a global scale.

Collaboration of key players

This is the reason why the Italian Corporate Governance Committee, which represents all the main actors of our capital markets (issuers, financial intermediaries, institutional investors and the Stock Exchange), brings together experts from Italian and international sides to discuss the main issues and the way ahead. And, for this reason, the OECD’s active engagement at this event is very important. The role of corporate governance in creating value and supporting growth is well acknowledged by the main international fora, such as the G20, whose endorsement of the OECD Principles, revised in 2015 to face those new challenges and first presented to an international audience at the first Italy conference here in 2015, represents a milestone for economic policymaking.

“Corporate governance provides investors with confidence and encourages companies to open their capital to the market. This delicate mechanism faces important challenges raised by a rapid and deep evolution of financial markets, with new forms of intermediation, new trading platforms and techniques, and new business models”

On the first day of the Conference, the participants focussed on the need for a flexible and proportionate approach to policymaking on corporate governance in order to support growth, with a particular nod to small and recently listed companies. The panel also considered a more specific issue regarding the role of the board in changing ownership structures of listed firms, especially in larger Italian companies, where the growing weight and activism of institutional investors and some peculiar features of the Italian framework are challenging the traditional distinction between controlling and minority shareholders.

In this regard, Professor Stella Richter, considering the effects of legal provisions regulating the composition of Italian boards, affirmed that expert, independent, plural and diverse boards require more leeway for self-regulation, which would ‘enable each listed company to adopt its own proper organisational solutions, finally doing away with a ‘one-size-fits-all’ approach’.

Board effectiveness

The second day of the conference addressed the role of corporate governance in creating incentives for a more responsible business, with particular regard to a board’s effectiveness and accountability. Sustainability issues are of growing importance for all listed companies, inasmuch they are carefully considered by a number of investors and companies face increased expectations by civil society for higher standards of ethical behaviour.

Regulation and self-regulation meet those expectations through increased disclosure duties, new and more detailed recommendations on long-term strategies, company’s culture and core board’s responsibilities (e.g. G20/OECD Principles).

“Such sustainability issues put into question many of the pillars of traditional corporate governance culture: the purpose of corporation, the nature of fiduciary duties of both companies and institutional investors, the information to be provided on the impact of business activity on the social and environmental framework”, said Stefano Micossi, director general of Assonime. On this regard, Micossi pointed out that such challenges ‘need to be faced with a substantial but balanced and flexible approach, providing for an adequate and suitable system of incentives for companies and investors’.

Finally, the debate addressed the key function of the board of directors in developing an appropriate, efficient and long-term management of the company.
The corporate governance scandals and the financial crisis have cast doubts on the effective functioning of corporate boards and on their ability to ensure an effective management of the different tasks they are called to perform to set the strategies and to monitor their implementation. International standard setters highlighted the fundamental responsibility of the board in guiding corporate strategy, monitoring managerial performance and the effectiveness of internal control and risk management systems (OECD Principles core recommendations).

Innocenzo Cipolletta, chairman of Assonime, highlighted that also in Italy ‘an increasing attention is given to some aspects of board effectiveness, such as the disclosure about the effective completeness and promptness of the pre-meeting information and the role of the board in ensuring adequate skills and competences of its members’.

These areas of further improvement are, together with other aspects, clearly highlighted in Assonime-Emittenti Titoli’s analysis of the corporate governance of Italian listed companies, an in-depth annual study, issued since 2002, on their compliance with Italian Corporate Governance Code recommendations.

According to the Assonime-Emittenti Titoli analysis, “The Italian Corporate Governance Committee recognises the board evaluation process as a key tool for dealing with board’s effectiveness and the goal of smooth but thoughtful decision-making.’ In fact, in its 2017 annual report, the Committee calls upon issuers to carefully consider the opportunity to widen the board assessment on its effective performance, considering, among other tasks, the adoption of strategic plans and effective board oversight, especially with regard to an appropriate system of internal control and risk management.

Italian Governance Code

As in the past, the Conference included the Italian Corporate Governance Committee’s meeting and the approval of its 5th Annual Report on the compliance with the Italian Corporate Governance Code.

The Committee, promoted by main issuers’ and investors’ association and the Italian stock exchange, pursue the promotion of good corporate governance of Italian listed companies, either by a constant alignment of the Corporate Governance Code for listed companies with best practices or through other initiatives which would enhance the credibility of the Code. Assonime is actively engaged in the Committee’s activities, providing data analysis on the evolution of corporate governance in Italy, which is the main basis for the Committee’s annual report.

This year, the report provides a general overview on the Committee’s activities, updates on national and international developments in corporate governance and an in-depth analysis of Italian corporate governance and the compliance of Italian listed companies with main Code recommendations. Such analysis gave the Committee the chance to identify main areas of weak compliance or scant disclosure in order to ask Italian listed companies for a better implementation of the Code but also to have a detailed overview of the new challenges for Italian corporate governance, identifying current standards and practices that could be further improved in order to meet investors’ requests and to settle on market developments.

The Committee monitors corporate governance trends and evolutions at European and international level, in order to detect the evolution of new best practices and assess market expectations toward listed companies. To this aim, the report analyses the debate and initiatives regarding corporate governance codes, as a primary self-regulatory standard for listed companies in the main countries and the evolution of rules and regulations that affect the corporate governance of Italian listed companies.

At the same time, the report provides information about the Committee’s active involvement in the corporate governance debate in Europe and internationally through: (i) the active involvement of its chair through the organisation of meetings with the representatives of other corporate governance committees in France, Germany, the Netherlands and the United Kingdom and the publication of common statements regarding national and European legislators’ approach to corporate governance issues; (ii) the contribution, through the chair of its technical secretariat, to the OECD international standard setting on corporate governance; (iii) the participation through its representatives in the European Corporate Governance Codes Network.

Considering such developments, the Committee observed some general trends that are developing all over Europe and at international level, pointing out the increasing interest of policymakers in: (i) developing flexibility and proportionality in corporate governance ruling, both at self-regulation and mandatory regulation levels, in particular to encourage smaller and growth companies’ access to capital markets; (ii) enhancing institutional investors’ stewardship responsibilities, to be discharged also through the development of an open dialogue with investee companies, with the provision of adequate procedures from both investors’ and companies’ side; (iii) promoting sustainability as a key principle in defining a company’s corporate governance model, long-term oriented strategies and remuneration policies and overall company culture.

As to the Italian framework, the report provides a global overview on the compliance rate of all Italian listed companies with main Corporate Governance Code recommendations. The adoption of the Corporate Governance Code is voluntary, but once companies opt in to such a governance system, their non-compliance with one or more Code recommendations must be clearly disclosed in their Corporate Governance Report. As to 2017 data, 90 per cent of Italian listed companies have adopting the last edition of the Corporate Governance Code and their compliance rate is generally high.

Compliance and disclosure

Considering the most important CG Code recommendations, the Committee observed that, on average, companies implement effectively about 75 per cent of these – with a significant size-related effect: overall compliance picks up to 90 per cent among larger firms, while it is about 80 per cent for medium-sized ones and around 65 per cent for smaller companies.

According to the Code’s requirements, companies mostly always explain individual cases of non-compliance, but the quality of such explanations should be improved to enable investors to assess a company’s governance and take their own decisions, both for trading and engagement purposes.

The main areas of weaker compliance and disclosure, where the Committee calls on issuers for a stronger implementation of the Code, are: (i) the promptness and completeness of the board pre-meeting information; (ii) the role of the nomination committee (in companies with a more concentrated ownership structure and the quality of disclosure regarding their effective activity); (iii) aspects of the remuneration policy – having particular regard to the long term-orientation of variable components for executives, the provision of claw-back clauses and a clear governance of possible severance payments.

“The Committee monitors corporate governance trends and evolutions at European and international level, in order to detect the evolution of new best practices and assess market expectations toward listed companies”

At the same time, the Committee identified further areas for evolution of corporate governance, where companies reached a high compliance rate with individual Code recommendations, but their governance model might still be improved in order to meet market expectations and evolve in the international governance framework. In this regard, the Committee suggested listed companies consider: (i) the adoption of well-structured succession plans for executive directors, in order to ensure continuity and stability in the company’s management; (ii) a thorough evaluation and disclosure about effective directors’ independence, considering also the appropriateness of their remunerations; (iii) the enhancement of the board evaluation process, through the assessment of a board’s effectiveness and performance, considering, among other tasks, the adoption of strategic plans and a board’s oversight on company’s management and on the appropriateness of the internal control system.

In this respect, the Committee will continue with its aim of enhancing the evolution of corporate governance standards and the behaviour of Italian listed companies, as well as promoting stronger engagement by investors. These goals will be pursued through the strengthening of code recommendations on the main critical issues highlighted in the Committee’s monitoring activity and more generally to support companies to develop strong corporate governance that focusses on sustainability of business activity.


About the Authors:

Marcello Bianchi is Deputy Director General at Assonime (Association of the Italian joint stock companies), in charge of Corporate Governance and Capital Markets Area from March 2016. Prior to this position he has held various offices in Consob (the Italian Securities Regulator) where he has been working since 1990. Among others he was Director of the Regulatory Strategy Division and of the Corporate Governance Division.

Mateja Milič – Assonime and Staff at the ICGC

Re-evaluating shareholder voting rights in M&A transactions

By Afra Afsharipour – Professor of Law and Martin Luther King, Jr. Hall Research Scholar, UC Davis School of Law



The management and finance literature exploring the causes and consequences of acquisition transactions is vast – the focus in part because acquisitions are likely the most important corporate decisions made by managers. Empirical studies consistently find that public company bidders often overpay for public company targets, imposing significant losses on bidder shareholders. Not only do shareholders of public company bidders lose, but losses from the worst-performing deals can be staggering.

From a corporate governance standpoint, there is much debate about how to address the bidder overpayment problem. Shareholders have three major tools at hand: selling, suing or voting. To determine which of these tools may be best suited to address bidder overpayment, it is important to understand what contributes to overpayment and the role of the various decision-makers – boards, management and shareholders – in the acquisition process.

Bidder overpayment and its causes

Empirical research indicates that the bidder overpayment problem varies by type of bidder and the bidding scenario. Private acquirers tend to pay less in acquisitions than public bidders, and private companies that make acquisitions tend to outperform their public peers. Bidder overpayment is particularly acute when public company bidders acquire public company targets.

“Acquisitions tend to highlight conflicts of interest between managers and shareholders in large public corporations”

The disastrous combination of firms, such as America Online and Time Warner, or the problem-laden acquisition of Countrywide by Bank of America, are often touted as examples of deals that proved disastrous for the acquirer. More recently, the 2011 acquisition of British company Autonomy for $10.3billion by Hewlett Packard (HP), a venerated Silicon Valley firm, similarly falls in the same vein. The acquisition was controversial with HP shareholders who claimed that HP was overpaying for Autonomy. Only a year later, HP announced a write-down of $8.8billion related to the Autonomy acquisition with more than $5billion due to accounting irregularities at Autonomy. Not only did HP fail to realise the gains it expected from the Autonomy acquisition, but the transaction led to various lawsuits between HP and Autonomy management and resulted in a large securities class action against HP. The Autonomy deal was just one in a string of questionable acquisitions by HP during a busy acquisition spree.

Why do public company bidders overpay? Numerous empirical studies have connected bidder overpayment with managerial agency costs and behavioural biases. These reasons are not mutually exclusive explanations for the overpayment problem in public company acquisitions.

Acquisitions tend to highlight conflicts of interest between managers and shareholders in large public corporations, presenting opportunities for managers to obtain personal gain at the expense of shareholders. Several studies provide evidence that management, particularly CEOs, can gain increased power, prestige, and additional compensation in connection with an acquisition. Studies find that CEOs are financially rewarded for acquisitions, but are not similarly rewarded for other types of major capital expenditures.

Behavioural biases, such as overconfidence and ego gratification, also play an important role in acquisitions. Managers may overestimate their ability to price a target accurately or their ability to integrate the target’s operations and generate synergies. Managers may also be flawed in their decision-making regarding targets by other factors, such as extensive social ties (for instance educational background or employment history) between managers of bidders and targets, or a desire to keep up with peers undertaking acquisitions.

There is reason to think that deal advisors can magnify the effects of managerial agency costs and reinforce management biases. Financial advisors receive significant fees for advising on M&A transactions; and these fees are based primarily on the size of the deal, with a significant portion contingent on closing. Advisors also gain prestige from working on successful deals. In cases where management stands to benefit from a deal, the often-close relationship between management and advisors can induce advisors to recommend transactions to avoid upsetting management’s plans. Once management and its advisors begin to feel committed to a deal and have expended significant resources to move forward on a transaction, abandoning plans can be quite difficult.

The role of the board in acquisitions

The empirical evidence on various soft conflicts on the part of bidder management and advisors necessarily raises the question: where is the board of directors in all of this? A central fiduciary duty of the board is the protection and promotion of the interests of the company and its shareholders. The board’s advisory and monitoring roles should result in directors playing an important decision-making role in major corporate transactions, especially transformative acquisitions. Nevertheless, in some public company acquisitions, boards may fall short in effectively supervising management.

In virtually all significant acquisitions by public companies, some level of board involvement is the norm. While boards are generally not involved in identifying acquisition targets, once a target has been identified and significant efforts are made to move forward with an acquisition, boards often become more involved in the acquisition process. As part of their role as fiduciaries, directors must undertake sufficient investigation and obtain all reasonably available information regarding the acquisition. For many boards, their primary involvement in the acquisition process is an advisory and oversight role to ensure ‘a reality check’ on management’s plan. Moreover, in almost all public company acquisitions, seeking the approval of the bidder’s board is the corporate norm.

Experts caution that boards are at times reluctant to be deeply involved in acquisitions or to challenge management’s often optimistic assumptions about a deal’s value. A survey of directors about the board’s role in M&A found that at least one-third of directors believe that their boards ‘could be more involved in shaping M&A strategy and in evaluating deals proposed by management’.[1] Given challenges with integration of public company acquisition targets, experts also recommend that boards closely monitor post-merger integration plans.

The acquisition of Autonomy by HP exemplifies how boards can fall short in overseeing management’s acquisition zeal. The failure of the Autonomy transaction was not unexpected. HP’s then-CFO had allegedly opposed the CEO’s pursuit of Autonomy. Moreover, the HP board had sounded some alarm about the Autonomy acquisition. According to reports, HP’s then-board chair had raised concerns about the Autonomy acquisition, but then-CEO Leo Apotheker was reluctant to back away. Unfortunately, the board did not press any further.

The reluctance to abandon an acquisition can be strong, even in the face of significant shareholder opposition. For example, in Kraft’s $19billion acquisition of Cadbury, Kraft shareholders, including Warren Buffet who owned 9.4 per cent of Kraft’s then outstanding stock, warned against the acquisition and claimed that he would vote against the share issuance necessary to close the deal. Kraft’s response was to restructure the acquisition to avoid the ability of its shareholders to vote on the transaction, an option that is available under US corporate law.

Shareholders and the bidder overpayment problem

What role do shareholders have in acquisition decisions? Two structures – a one-step triangular merger, or a two-step transaction involving a tender offer followed by a merger – are often used to acquire publicly traded firms in the US. Under both structures, target shareholders are commonly provided a say, either through a vote or through the decision to sell their shares. Target shareholders may access courts to address any harm they have suffered by bringing fiduciary duty claims against the board and management, and/or securities fraud cases related to corporate disclosures on the transaction. Furthermore, in some transactions target shareholders may bring appraisal proceedings where shareholders ask the courts to determine the ‘fair value’ of their shares.

US law, however, provides much fewer rights to bidder shareholders. Transactions can be structured so that under state corporate law or stock exchange listing rules, bidder shareholders are denied voting rights in acquisitions. Even in transactions where bidder shareholders have voting rights, under the structures used to undertake public company acquisitions, bidder shareholders do not receive any appraisal rights.

Neither the right to sell nor the right to sue effectively addresses the bidder overpayment problem and the underlying factors contributing to it. Selling serves as a weak monitoring mechanism for bidder stockholders who often can only sell their shares after the share price has fallen following announcement of the signing of the acquisition. Once an acquisition agreement has been signed, even if bidder shareholders react negatively to the announced deal, the opportunity for the bidder to walk away is low. Furthermore, even the spectre of a share drop following an acquisition announcement does little to deter bidder management, given weaknesses in the market for corporate control.

Suing is currently unlikely to protect bidder shareholders. Theoretically, bidder boards’ decision-making role in major acquisitions could make them vulnerable to shareholder lawsuits. Unlike the vast number of fiduciary duty cases against target boards, however, fiduciary duty cases against bidder boards are rarely brought and even more rarely successfully litigated. Not only do suits entail significant costs and delays, but for bidder shareholders the barriers to a successful suit are quite high, given that fiduciary duty cases likely will be subject to the deferential business judgement review.

The value of the shareholder vote

Shareholder voting plays a central role in corporate governance. Yet, for many US public company acquisitions, only the target firm’s shareholders can exercise voting rights. Is it time to re-examine voting for bidder shareholders given the existing, relatively low voting incidences and shortcomings with selling and suing?

In general, voting by shareholders has become an increasingly important tool in US corporate governance. Several important developments have led to the rise of shareholder voting: (1) government regulations that require many institutions to vote their stock in the best interests of their beneficiaries; (2) the emergence and increasing importance of proxy advisory firms that can help coordinate shareholder action; and (3) the increasingly significant corporate governance role played by activist investors, such as hedge funds, which has led to greater use of the ballot box and the accompanying result of greater institutional shareholder engagement with voting rights.

Shareholder voting, at least with respect to significant corporate decisions, could lead to better governance of the company. Shareholder voting can serve a complementary monitoring role to that played by the board and discourage opportunistic behaviour by management. This supplemental monitoring role is particularly important when there are management conflicts of interest or biases, and when the opportunity for management to obtain private gains at the expense of the firm is high. These soft conflicts, agency problems, and biases are the exact types of situations that research indicates are implicated in significant public company acquisitions.

Recent research shows that compulsory shareholder voting reduces the problem of bidder overpayment. A study by Becht et al. addresses head on the value of voting on acquisitions, looking at the UK market where shareholder voting on large acquisitions is mandatory and binding under the UK listing rules.[2] The study of acquisitions made by UK companies between 1992 and 2010 shows that mandatory bidder shareholder voting increases firm value. Moreover, the results of the study suggest that mandatory voting, which cannot be avoided by management in the UK as it can be in the US, changes the incentive of acquirers and constrains management’s pricing decisions in acquisitions.

Another recent study by Li et al. similarly finds value in bidder shareholder voting.[3] The study investigates the effects of bidder shareholder voting by comparing deals subject to a vote with those not subject to a vote in a hand-collected sample of US stock deals over the period 1995-2015. The study finds that bidder management substitutes stock with cash to avoid a shareholder vote, especially when there are high agency costs, high deal risk and lower bidder institutional share ownership. The study also shows that in deals where the vote of bidder shareholders was avoided, bidder announcement returns were three per cent lower than in deals with a shareholder vote. The study suggests that a shareholder vote incentivises management to offer lower premiums and to acquire targets with greater synergies.

Studies also indicate that powerful shareholders, such as institutional investors, value voting rights. For example, a study examining institutional investor voting in merger transactions finds that although the votes are still overall in favour of the merger, shareholders solely invested in the acquirer are generally four times more likely to vote against a merger as a cross-owner.[4]

Two arguments against bidder shareholder voting rights in acquisitions relate to the cost of the vote as well as to concerns about the value of shareholder decisions. Voting is expensive and uncertain, especially in a significant transaction, and could potentially lead to additional deal risk. Voting rights may also not result in shareholders making an informed decision, especially if shareholders are apathetic and/or suffer from collective action problems.

“Shareholder voting plays a central role in corporate governance. Yet, for many US public company acquisitions, only the target firm’s shareholders can exercise voting rights”

The above arguments against shareholder voting are tempered by the rise of institutional investors. Institutional investors have significant voting power since they own large stakes in publicly traded companies. The change in ownership of US public companies, resulting in a greater concentration of ownership in the hands of institutional shareholders, makes voting by bidder shareholders in large public company acquisitions much more palatable. Their large ownership stake coupled with the increasing influence of other market participants, such as hedge funds and proxy advisory firms, may mean that institutional investors have strong economic and political interests in monitoring management’s decisions via voting. Moreover, voting rights may invite interference from activists who focus on deals that may be risky or more prone to overpayment. Studies suggest that even the threat of monitoring by institutional shareholders may be enough to address the bidder overpayment problem, and may play an important role in management calculations about an acquisition.

The argument for shareholder voice in significant public company acquisition decisions is not an argument for shareholder voting rights in all transactions, but rather an argument for shareholder voice in situations of high importance to firm value and share price, and where empirical inquiry seems to consistently demonstrate agency problems and shortcomings in the board’s monitoring role.

This editorial is based on a symposium article in the Oklahoma Law Review Symposium, Confronting New Market Realities: Implications for Stockholder Rights to Vote, Sell, and Sue. The article, Reevaluating Shareholder Voting Rights in M&A Transactions, is available at

About the Author:

Afra Afsharipour researches in the areas of comparative corporate law, corporate governance, mergers and acquisitions, securities regulation, and transactional law. In 2014 she was selected for the Lawyers of Color’s 50 Under 50 list, a comprehensive catalog of minority law professors making an impact in legal education. Prior to joining the Davis faculty, Professor Afsharipour was an attorney with the corporate department of Davis Polk & Wardwell in both New York, NY and Menlo Park, CA. There she advised clients on domestic and cross border mergers and acquisitions, public and private securities offerings, and corporate governance and compliance matters. She also served as a law clerk to the Honorable Rosemary Barkett of the Eleventh Circuit Court of Appeals.

Professor Afsharipour received her J.D. from Columbia Law School, where she was a Harlan Fiske Stone Scholar, and served as an articles editor of the Columbia Law Review and a submissions editor of the Columbia Journal of Gender and Law. She received her B.A. (magna cum laude) from Cornell University, where she studied government, international relations and women’s studies. Professor Afsharipour blogs on legal developments in mergers & acquisitions at the M&A Law Prof Blog.


1.See KPMG, The Board’s Perspectives On M&A: From Due Diligence To Day 1 And Beyond (2013), available at

2.Marco Becht et al., Does Mandatory Shareholder Voting Prevent Bad Acquisitions?, 29 REV. FIN. STUD. 3035, 3037 (2016).

3.See Kai Li et al., Vote Avoidance and Shareholder Voting in Mergers and Acquisitions 1-2 (European Corp. Governance Inst. Working Paper Series in Fin., Paper No. 481/2016),

4.See Gregor Matvos & Michael Ostrovsky, Cross-Ownership, Returns, and Voting in Mergers, 89 J. FIN. ECON. 391, 399 (2008).

Anti-corruption and GDPR: A collision of galactic proportions

By Alexandra Wrage & Illya Antonenko – Alexandra is the President and Founder and Illya is Privacy Counsel at TRACE International

‘Corruption is at the heart of so many of the world’s problems. It erodes public trust in government, undermines the rule of law and may give rise to political and economic grievances that may, in conjunction with other factors, fuel violent extremism. Tackling corruption is vital for sustaining economic stability and growth, maintaining security of societies, protecting human rights, reducing poverty, protecting the environment for future generations and addressing serious and organised crime.’
Communiqué. Anti-Corruption Summit, London, 2016

‘Everyone has the right to the protection of personal data concerning him or her. Such data must be processed fairly for specified purposes and on the basis of the consent of the person concerned or some other legitimate basis laid down by law. Everyone has the right of access to data which has been collected concerning him or her and the right to have it rectified.’ Article 8 of the EU Charter of Fundamental Rights

Scientists warn us that the Milky Way galaxy, which we call home, is on a collision course with the neighbouring Andromeda galaxy. The two galaxies will collide in about… four billion years.

Just like the two galaxies, two worthy causes – combatting transnational bribery and protecting personal data – have been on a collision course for some time. However, unlike the predicted Milky Way-Andromeda encounter, we do not have to wait long to witness the clash between the requirements of international anti-bribery laws and those of personal data protection laws. The first effects of this may be seen in May 2018, when the enforcement of the European Union’s General Data Protection Regulation (GDPR) will have arrived. There is even a convenient countdown clock at for those of us who are fascinated with recurring doomsday predictions.

One of the most spectacular effects to watch for is the GDPR Article 10’s prohibition on reviewing criminal background information of individuals, which is squarely opposed to the need to review criminal background information on individuals as part of anti-bribery due diligence. There is still time to resolve this potential conflict. TRACE International and McCann FitzGerald have prepared a position paper on the GDPR Article 10’s potential obstacles to anti-bribery due diligence, advocating for a coordinated implementation by EU member states of laws authorising companies to continue with robust anti-bribery due diligence reviews of third parties. Only a prompt coordinated legislative effort across the European Union may prevent the most spectacular aspect of the clash between the GDPR and international anti-bribery laws.

Anti-bribery requirements

Everyone reading this magazine is familiar with the international anti-bribery regime, which has coalesced around the US Foreign Corrupt Practices Act of 1977. Although the post-Watergate (FCPA) was all but dormant for more than two decades after its inception, with only occasional prosecutions of egregious cases, it was revived in the early 2000s. Since then, each successive FCPA enforcer has kept up the momentum. FCPA penalties against companies (often those based in the EU) have reached hundreds of millions of dollars. The combined penalties of the top 10 FCPA enforcement actions exceed $6billion and six involve companies headquartered in the EU. Despite President Trump’s criticism of the law, Attorney General Jefferson Sessions has offered assurances that FCPA enforcement will continue apace. Indeed, the latest mega-FCPA enforcement action came down in September 2017 against Telia Company of Sweden, whose combined penalties and disgorgement were just shy of $1billion. Smaller FCPA enforcement actions against companies and individuals are announced most months.

“Just like the two galaxies, two worthy causes — combatting transnational bribery and protecting personal data — have been on a collision course for some time. However, unlike the predicted Milky Way-Andromeda encounter, we do not have to wait long to witness the clash between the requirements of international anti-bribery laws and those of personal data protection laws”

The FCPA is not alone. The UK has its Bribery Act of 2010, which in some aspects is even stricter than the FCPA. In fact, all EU member countries have adopted analogous transnational anti-bribery legislation to implement the international treaties they signed: the Organisation for Economic Co-operation and Development Convention of Combating Bribery of Foreign Public Officials in International Business Transactions, the European Union Convention Against Corruption Involving Officials and the Council of Europe Criminal Law Convention on Corruption.

All these laws prohibit bribery of foreign public officials to obtain or retain business, including through the use of third parties. The prohibition against indirect bribery of foreign officials is broad. Even if a company contractually forbids its sales representatives, distributors, intermediaries, consultants, customs brokers, freight forwarders or similar service providers to pay bribes on its behalf and further avoids giving them any explicit authorisations or directives concerning bribes, actions of such third parties in foreign countries may still lead to criminal or civil liability for the company. This may occur if the company is found to have ignored or failed to exercise reasonable efforts to discover indications that the third party would or was likely to engage in bribery. The UK Bribery Act is even more explicit in making it an offence for a company to fail to prevent bribery on its behalf.

Anti-bribery due diligence is the only effective countermeasure that companies can deploy against potentially crippling enforcement actions for misconduct of their service providers abroad. Over time, statutory provisions, prosecutions, enforcement actions, official guidance documents and less official pronouncements from law enforcement agencies and relevant intergovernmental organisations have combined to ensure that anti-bribery due diligence is a very invasive inquiry into the reputation, qualifications and background of third parties, their owners, managers, key employees and relatives. Nothing of any importance or relevance is left unturned in the search for a potential clue that the third party or associated individuals may engage in bribery. Are they qualified to provide the services in question? Where did they work in the past and what else are they doing now? Are they related or otherwise connected to government officials? Does anyone involved have official authority or influence over government decision-making? And, most importantly, is there anything in the background of the third parties or associated individuals that may indicate proclivity to engage in corrupt behaviour? In other words, anti-bribery due diligence processes corporate and personal data – lots of data.

EU data protection requirements

With all the talk about the GDPR, the EU data protection regime is not new. While the Americans have their ‘inalienable rights’ such as life, liberty and the pursuit of happiness, the Europeans have ‘fundamental rights’, among which is ‘the right to the protection of personal data’. The GDPR is the result of the progression from the European Convention on Human Rights of 1950 (which guaranteed the right to privacy), to the OECD Guidelines on the Protection of Privacy and Transborder Flows of Personal Data of 1980, to the EU Data Privacy Directive of 1995 and the EU Charter of Fundamental Rights of 2000.

For the most part, the EU Data Privacy Directive of 1995, as implemented by member states, has not been unduly burdensome for companies and any violations have not been punished too severely. The approaching GDPR exhibits all the signs of a major change. The GDPR may even one day rival the FCPA in the onerousness and the complexity of its many compliance requirements, the worldwide reach and the size of potential penalties.

First, unlike the EU Data Privacy Directive, the GDPR’s provisions will have immediate binding legal force in every EU country. Second, the 99 articles on 88 pages of the GDPR will impose numerous complex rules and require evidence-based demonstrable compliance. Third, data protection authorities will wield significant ‘corrective powers’, including:

  • Administrative fines of up to €20million or four per cent of the total worldwide annual revenue, whichever is higher
  • The power to restrict or ban processing of personal data
  • The power to suspend personal data flows outside the EU or to an international organisation

Like the EU Data Privacy Directive, the GDPR will require EU-based companies to apply GDPR protections to personal data of all individuals whose data they process, regardless of whether those individuals live in the EU. However, the GDPR will cover not only EU-based companies, it will also apply to non-EU companies that sell their products or services to EU residents and non-EU companies that ‘monitor [EU residents’] behaviour as far as their behaviour takes place within the Union’. This means that conducting anti-bribery due diligence on a third party that may be associated in some way with EU residents may fall within the GDPR’s purview, regardless of where the principal or third-party companies are located because such due diligence would involve monitoring behaviour of EU residents as it relates to corruption.

Although these features of the new EU data protection regime are untested and the degree of the enforcement vigour remains to be seen, there is little likelihood that the EU data protection authorities will choose to exercise significant restraint in using all of the tools now available to them, especially given the proliferation of private data breaches in recent years and the calls for the governments to do something. To prove this point Helen Dixon, Irish Data Protection Commissioner, has stated that she is ready to impose fines to the GDPR’s limit in appropriate cases and that there will be no ‘amnesty or first or second chances’ for GDPR violators. Moreover, large potential fines destined for national coffers may prompt governments to allocate more resources to the GDPR enforcement efforts.

The coming collision

Now that we have established that the two legal regimes – combatting transnational bribery and personal data privacy – are of comparable size in terms of their potential business impact and thus should both attract attention from corporate management and boards, this article’s title no longer appears so far-fetched – any conflict between anti-bribery laws and the GDPR should raise alarm.

Even apart from the specific language of the laws, the two regimes have conflicting goals. One seeks to bring transparency to international transactions, uncover shady deals, expose corrupt actors, reveal bribes camouflaged as commissions or service fees. To do so, it needs to bring out into the open what some wish to hide. The other regime is all about regulating, restricting, minimising and at times prohibiting the processing of personal data and making sure that the companies, still willing to process personal data after all that, treat personal data as a valuable asset belonging to individuals and account for the use of this asset to these individuals and supervising authorities. In the opinion of EU data protection authorities, ‘even individuals engaged in illegal activities should not be subject to disproportionate interference with their [privacy] rights and interests’.

Companies will have to find ways to reconcile the opposite goals of the two regimes. At the very least, the GDPR will require companies conducting anti-bribery due diligence to articulate the legal basis for processing personal data, justify the scope of personal data collected, be transparent about such processing, be prepared to facilitate data subjects’ exercise of their data protection rights listed in the GDPR, ensure that IT systems used for data processing are secure and implement a myriad of other safeguards, technical and organisational measures, controls and compliance mechanisms.

“A prohibition to inquire into individuals’ criminal backgrounds will effectively eviscerate the anti-bribery vetting process”

However, the most troubling part of the GDPR for anti-bribery due diligence is its Article 10, which provides that the processing of personal data relating to criminal convictions and offences ‘shall be carried out only under the control of official authority or when the processing is authorised by Union or Member State law providing for appropriate safeguards for the rights and freedoms of data subjects’.

To the author’s knowledge, there is currently no such law in the European Union that specifically authorises the processing of personal criminal background information for purposes of anti-bribery due diligence and includes appropriate safeguards.[1] A prohibition to inquire into individuals’ criminal backgrounds will effectively eviscerate the anti-bribery vetting process. If this legislative gap is left unresolved by May 2018, companies may face a dilemma between complying with their international anti-bribery due diligence obligations or with the GDPR, with each option presenting a risk of an enforcement action and significant fines.

Please contact the authors if you are interested in finding out more about the GDPR Article 10’s potential obstacles to anti-bribery due diligence or to join TRACE’s working group exploring solution to these obstacles.


About the Authors:

Alexandra Wrage is the president and founder of TRACE, an international anti-bribery business organization. She has written and edited several books on bribery and innovative compliance solutions and she hosts the popular financial crime podcast, Bribe, Swindle or Steal. Ms. Wrage, a Canadian, read law at King’s College, Cambridge.

Mr Illya Antonenko is Privacy Counsel at TRACE International, Inc. His fifteen years in legal practice have been focused on helping companies keep their cross-border business operations compliant with various applicable laws such as anti-corruption and data protection.



1.The current EU and EEA data protection regime features a patchwork of approaches, where some countries have come up with a case-by-case authorisation or licensing mechanism for processing of personal criminal data, while others have no basis for such processing in the context of anti-bribery due diligence, and yet another group of countries treat criminal data as other ‘sensitive data’. While this issue may have existed all along, the arrival of the GDPR with its sizable penalties has brought it into the open

Changing times

By Helen Pitcher OBE – Chairman, Advanced Boardroom Excellence




To quote Bob Dylan: “the times they are a-changin”. As we enter a new year there is a significant shift in the corporate governance landscape ahead of us. The proposed new UK governance code is published for consultation with a target of the finalised version being available in summer 2018, for implementation in January 2019.

“Corporate governance is concerned with holding the balance between economic and social goals and between individual and communal goals. The governance framework is there to encourage the efficient use of resources and equally to require accountability for the stewardship of those resources. The aim is to align as nearly as possible the interests of individuals, corporations and society,” wrote Sir Adrian Cadbury in the 1992 UK Commission Report: Corporate Governance.

Twenty-five years ago, the Cadbury Report laid down the challenge to companies and boards to reach into the future. There are some great boards who responded to this call and saw an effective governance process as the hallmark of a world-class company with innovative thinking and the board holding the culture and reputation of the company as a tangible asset.

As we enter a new era for UK Plc we are greeted by a major revision of the Combined Governance Code which seeks to take that best practice developed in our leading companies and evolve it more assertively across the corporate landscape. The Code, while still maintaining the flexible advantages of ‘comply and explain’, is becoming more assertive and, in particular, the proposed revision of the guidance on board effectiveness which accompanies the Code, while still not mandatory, provides a much more strident and clear view of what makes an effective board based on best practice and experience. This in turn will be the driving framework for external, independent board evaluators in undertaking their reviews of the board.

The guidance also extends board effectiveness to include a much more prominent role for the board and nominations committee, the ‘Cinderella’ of the board committees, in achieving sustainable outcomes.

For example, the nominations committee ‘brief’ is being ramped up in the Code’s guidance on board effectiveness to specifically include;

  • Values and behaviours “The nomination committee should be clear about the values and behaviours expected when recruiting new directors and senior management and build a proper assessment of this into the recruitment process”
  • A direct focus on diversity “The nomination committee should take an active role in setting and meeting diversity objectives and strategies for the company as a whole and in monitoring the impact of diversity initiatives” and
  • Optimising talent management “nomination committees should consider taking a more active interest in how talent is managed throughout the organisation”

All this extends the board’s active oversight and engagement into widening the board’s stakeholder oversight, with a major focus on employees – “The Code requires boards to establish a method for gathering the views of the workforce and suggests three ways this might be achieved”.

Focussing on boards

There is a clear determination by the Financial Reporting Council (FRC), heavily encouraged by cross-party parliamentary support (Green Paper Consultation on Corporate Governance Reform August 2017), to take a more active and proactive focus on boards. Many discussions having taken place about the FRC having binding powers and regulation of boards, similar to its role with auditors, accountants and actuaries. The FRC published its annual report on corporate culture against what it called a ‘backdrop of falling public trust in business’. The watchdog is looking to expand its oversight powers – particularly around requirements for directors of public and private companies to ‘focus on generating and preserving value for shareholders for the long-term, taking account of the interests of the company’s workforce and the impact on other stakeholders such as customers, suppliers, the community and the environment’.

This will have a significant impact on the shape of the non-executive director (NED) of the future, with clear and accountable pro-active responsibilities for ensuring the sustainability of the company, outside the interests of short-term shareholder considerations. It will require an artful board that is able to engage beyond the CEO and CFO and occasional presentations from the leadership executives. It brings some reality and accountability to the omnipresent statements from boards of ‘people being our business’. as the board will be required to both articulate and report on what this means and how they are achieving the same.

Will this ‘new’ enhanced approach have any impact, or does it only affect the landscape of the FTSE 100 ‘super stars’? There is an interesting perspective to consider when looking at the board effectiveness guidance, where many of the core new interventions have been placed, in order to keep the main Code simple. This has the impact of ‘beefing up’ the guidance in line with other Code guidance, such as the guidance on audit committees et al. The guidance on board effectiveness comes with a series of ‘ready-made’ checklist/suggestions for governance of an effective board, which will undoubtable be picked up by the rating agencies to update their current corporate governance effectiveness indexes. This will in turn inform the investor community and fuel the obsession of companies to get ‘good’ governance rating, especially where they are looking for inward investment.

An additional influence is the cadre of new, ambitious and increasingly professionalised NEDs, who are seeing the NED role as part of their ‘corporate career cycle’ and engaging with their new, expanding responsibilities and accountabilities zealously, keen to use the ‘career ladder’ of the FTSE 250 as a positive and reputation-enhancing experience. This in turn ups the pressure on these FTSE 250 chairmen and women to respond to their desire for an appropriate corporate governance framework, as these talented and aspiring new NEDs perform their due diligence. If your corporate governance is not ‘up to scratch’, these talented NEDs will be told from various network sources to avoid you.

“We have been building towards these shifts as an evolving process over 25 years, spurred over the last 10 years by the decaying trust in the corporate leadership environment, which called in to question the motivations of our companies and vicariously their leaders”

This changing landscape is well illustrated by the multi-faceted pressure on gender diversity on boards. In addition to the new code being very specific about the board’s responsibility for action on diversity, the government-backed Hampton-Alexander Report provides a specific of 33 per cent female board membership target for chairmen and boards to achieve by 2020. The Report also targets the FTSE 250 executive committees and their director reports, to achieve a similar 33 per cent female participation. This is rigorously supported by diversity lobbying groups, the increasing number of new female NEDs on boards and the annual diversity progress report from Cranfield University. This creates a corresponding annual media frenzy on the ‘worst performers’, with a reinforcing maelstrom of the new gender pay gap reporting. You feel almost sorry for the poor chairman who achieves the accolade of the least diverse, highest paid male executives with widest gender pay gap!

This expanding landscape for boards will require a new profile for NEDs, who will need to be increasingly diverse themselves, not just around gender, but also in their thinking and strategic horizons. There is little point in replacing a bunch of pale, male and stale accountants with pale, female and stale accountants. The INSEAD Governance Institute talks of the increasing speed and complexity of business and the need for NEDs who bring a multiple ‘triple’ range of capabilities to the board, from expertise and experience across at least two core functional areas of expertise, with a third contribution from an alternative sector, culture or nationality perspective, in order to achieve a truly diverse international NED.

We have been building towards these shifts as an evolving process over 25 years, spurred over the last 10 years by the decaying trust in the corporate leadership environment, which called in to question the motivations of our companies and vicariously their leaders. We have also seen over that 25 years a dramatic reduction in the tenure of CEOs, with UK CEOs averaging 4.8 years in the top job (with a five-year global average), reducing from 8.3 years in 2010. This has handed the baton of corporate continuity and sustainability firmly into the hands of the board and NEDs. This requires a definition and strengthening of the boardroom culture and accountability, with a clear set of sustainable ‘values’ and ‘principles’ that can be carried across corporate generations.

There is also a continuing pressure on boards to increase the coherence, integration and alignment of the board’s strategy, policies and initiatives with CEO and executive reward in a more meaningful way. The board discussion and consultation forums are increasingly strident on the simple process of targeting CEO remuneration to include the delivery of the company’s behavioural and stakeholder objectives. As the CEOs become targeted to ‘move the dial’ on the diversity and gender balance of the executive pipeline, it will increasingly motivate their attention.

If we are to remain the global leaders and the standard bearer in effective corporate governance, with the assurance this brings to investors and stakeholder communities, we should seek to get this transition right and demonstrate that an evolutionary self-reflecting process can work and is not hijacked by vested interests.

While this has not been an exhaustive review of all the Code changes, which are many and various, we should finish as we started with the words of Bob Dylan, “You better start swimmin’ or you’ll sink like a stone, For the times they are a-changing”.


About the Author:

Helen is an experienced Board member, Chairman, Board facilitator and Coach. She works across the range of Professional Service firms, FTSE 100, Private Equity and Family firms. She has led some of the biggest Board Evaluations conducted in the last few years – many of which are listed on the Advanced Boardroom Excellence website. Helen is also coach to many leading CEOs, Chairman and NED’s across a range of sectors. She was awarded an OBE for services to business in 2015. Her Board roles are; Chairman of Advanced Boardroom Excellence, Senior Independent Director of pladis (United Biscuits, Godiva, Ülker Bisküvi), Board member CIPD, and Chairman of a number of Committees across these Boards (Audit, Remuneration, Nominations). Chairman of KidsOut a National Children’s Charity and on the Advisory Board for Leeds University Law Faculty and INSEAD IDP-N.

Helen is the most recent former Chairman of the Queens Counsel Selection Panel after having served an unparalleled 8 years. Helen holds an MA, LLB (Law), IDP-C (INSEAD International Director’s Programme – Corporate Governance Certificate). She is the only Consultant in the UK Board Effectiveness arena to hold this INSEAD qualification. She is also an alumnus of the ground-breaking INSEAD Challenge of Leadership Programme. She features on the INSEAD Leading from the Chair programme. Helen is an APECS accredited coach, a Fellow of the IoD, CIPD, CIM, RSA and a Member of the European Corporate Governance Institute.

Corporate governance codes: Not an end in themselves

By Gian Piero Cigna, Milot Ahma & Pavle Djurić – Gian Piero is Associate Director, Senior Counsel, Milot is an Associate and Pavle is Counsel at the European Bank for Reconstruction and Development


Reliable disclosure is an essential element of good corporate governance and the concept of comply or explain is at the heart of European corporate governance codes. Contrary to strict binding provisions, the recommendations of a corporate governance code applied on a comply or explain basis allow companies to deviate from the code’s recommendations, provided they clearly state the reasons for doing so.

Besides increased transparency, this approach promotes companies’ accountability, as it incentivises boards to reflect on companies’ corporate governance arrangements and engage in discussions internally and externally with relevant stakeholders on the need for improvements.

This approach, first conceived in the UK in 1992[1] has been institutionalised in the European Union with the adoption of the Audit Directive in 2006[2] (and its revisions of 2013)[3] and has also been accepted by other jurisdictions worldwide. While the approaches ‘on paper’ that companies should take to implement the codes are very similar, the actual implementation and monitoring vary greatly across countries.

The lack of active monitoring on how codes are implemented has brought about a misunderstanding that the codes are an end in themselves, forgetting that the real value is instead in their implementation.

There are a few examples of this active monitoring. For example, in Spain, the securities market regulator Comisión Nacional del Mercado de Valores (CNMV) actively monitors how the Spanish Corporate Governance code is implemented by analysing the annual corporate governance reports published by listed companies and contacting them when inconsistencies are found. The CNMV issues a regular monitoring report, which includes both statistical information and references to companies’ practices.[4] In July 2016, the CNMV also published a technical guide on good practices for the application of the comply or explain principle, designed to improve the quality of companies’ reporting by advising them on how to frame the explanations provided in annual corporate governance reports for not following code recommendations.[5]

The French regulator Autorité des Marchés Financiers (AMF) goes a step further, ‘naming and shaming’ companies with questionable governance practices in its annual report and building its own considerations upon the analysis undertaken by AFEP-MEDEF (the ‘owner’ of the code), which evaluates the status of corporate governance in the French market.[6]

In the United Kingdom, the Financial Reporting Council (FRC) is the owner of the UK Corporate Governance Code and UK Stewardship Code. The FRC publishes an annual monitoring report on the level of company compliance with the Code, based on the analysis undertaken by Grant Thornton every year. In each theme, the FRC report summarises the most relevant changes in the national corporate governance framework during the year, company practices, and sets the agenda for the coming months. The agenda includes expectations and future targets, as well as a timeframe for future code revisions or other initiatives. The FRC is active in providing guidance to market participants, selecting and sharing what is considered best practice through the publication of guidance notes and has also adopted the UK Stewardship Code for institutional investors, which deals, inter alia, with improving the investors’ engagement with investee companies.

There are about 300 asset managers, asset owners and service providers that have signed up to the Stewardship Code. Signatories are encouraged to publish a statement on their website of the extent to which they have complied with the Code (comply or explain), to notify the FRC when they have done so and whenever the statement is updated. The FRC soon realised that in some cases, the signing of the Code was just a mere declaration, with no material action. Hence, it started reviewing the quality of the compliance statements and ‘name and shame’ or ‘name and shine’ asset managers, asset owners and service providers, by including them into tiers based on the quality of their code statements. It seems that this approach is bringing good results.

However, despite these and a few other good examples, corporate governance codes remain scarcely implemented in many countries and the explanations provided for non-compliance leave much to be desired. We try to draw conclusions on steps needed to enhance the application of corporate governance codes by examining the cases of Croatia, Hungary, Romania and Russia – each chosen for specific reasons outlined below.


The Croatian Corporate Governance Code was adopted in 2007 (and revised in 2010) jointly by the Zagreb Stock Exchange (ZSE) and Croatian Financial Services Supervisory Agency (HANFA). The Code is to be implemented on a comply or explain basis by all listed companies, who must submit their answers annually to the stock exchange by way of a questionnaire (attached to the code), disclosing their compliance with the code and explaining reasons for any deviations.

“Corporate governance codes do not exist in a vacuum – they need to be based on the rules of the corporate law in force in order to complement them. However, there are cases where the law and the code are not fully aligned”

Both the ZSE and HANFA are monitoring corporate governance statements made by listed companies and both publish annual reports on corporate governance practices.[7] The reports made by HANFA are predominantly statistical and do not analyse the quality of companies’ disclosure. The report by ZSE is more explicit in this respect and provides useful recommendations on how companies can improve their disclosures. In addition to disclosing the total average percentage of non-compliance for the reviewed sample of listed companies (which was 31.4 per cent in 2016), the ZSE report recognises that companies often do not reveal the full reasons for non-compliance and resort frequently to formal responses, thereby failing to provide any information of value. It does not, however, contain granular information on compliance with the individual code recommendations, but is based on the analysis of the code’s chapters instead. It should be noted that HANFA and ZSE are undertaking efforts to enhance their monitoring and are working on an expanded toolkit that will enable them to highlight poor disclosure practices where necessary.

In 2017, one of the biggest corporate scandals ever to happen in Central and Eastern Europe took place in Croatia. The accumulation of Croatian retail giant Agrokor Group’s debts to its creditors and suppliers of more than €5.5billion left the group of more than 70 companies with negative capital and in dire need of restructuring.

In well-functioning markets, poor corporate governance disclosure might serve as a signal of inherent weaknesses in the issuer’s operations. However, this does not seem to have been the case for Agrokor despite numerous disclosed departures from the Code by a number of ZSE-listed Agrokor subsidiaries, whose explanations for deviating from very important recommendations – such as those on independent directors, board evaluation, internal controls, nomination and remuneration committees –  were at times either non-existent or very superficial.


Corporate governance codes do not exist in a vacuum – they need to be based on the rules of the corporate law in force in order to complement them. However, there are cases where the law and the code are not fully aligned. Such is the case of Hungary, where new company law-related provisions were adopted in 2013, whereas the current version of the corporate governance recommendations was issued by the Budapest Stock Exchange in 2012.

The substantial changes in the 2013 Civil Code left supervisory boards in the two-tier system with rather vague responsibilities, which caused corporate governance to look more like a “hybrid” system, than a real two-tier system. Under the current Hungarian framework, the supervisory board has no real power – especially when it comes to strategic responsibilities, including the authority to appoint/dismiss senior management – and all decision-making is essentially retained by the management board and general shareholders’ meeting.

When the new legislative framework is compared with the Code’s recommendations, some peculiar outcomes arise. For example, the corporate governance recommendations suggest that the management body – which in the two-tier structure is the management board – should be comprised of both executive and non-executive directors.

In a standard two-tier board structure, this recommendation seems awkward, as we would expect the management board to be made of executives only. In order to comply with the code, companies now tend to have non-executive members on both their management board and supervisory board. This adds another layer to the already complex governance structure, whose value is still to be proven.

Finally, it is unclear which body (if any) is responsible for monitoring listed companies’ compliance with the corporate governance recommendations. According to expert reports, the corporate governance committee of the stock exchange is responsible for this function, but we could not locate any monitoring reports.[8]


The Romanian Corporate Governance Code was adopted in 2001 and reviewed first in 2008 and then in 2015 by the Bucharest Stock Exchange. The Code is based on the comply or explain approach, and the listing rules of the Bucharest Stock Exchange require companies to disclose their compliance with the Code according to a template, which includes 34 items.[9]

In order to help companies disclose corporate governance information as accurately as possible and in order to facilitate the explanations of deviations from the code, the Stock Exchange has also introduced a manual for reporting corporate governance and a compendium of corporate governance practices.[10]

Despite the fact that no monitoring report has been yet issued, it seems that the Bucharest Stock Exchange has started to monitor the practices of the issuers listed on its main market, especially as regards the information disclosed on the investor relations section on companies’ websites. In October 2017, the Stock Exchange published the third edition[11] of the Whitebook on Communication of Listed Companies the purpose of which is to evaluate the quality and accuracy of information provided to the investor community.[12] Such assessments – albeit limited in scope – are good steps ahead in providing good pressure to companies for better disclosure.

Based on our review of annual reports published in 2017, it seems that most companies listed on the Premium Tier of the Bucharest Stock Exchange have improved both their compliance with the code and the quality of explanations when compared to their 2016 disclosure. On average, those companies exhibited non-compliance with about 16 per cent of the code’s provisions, down from almost a third when compared to the previous year.[13] However, despite the improvements, we found the quality of explanations for deviations from the code to still be largely not satisfactory i.e. the companies have either not followed-up on their “promises” to comply with a certain provision within a specific timeframe, made in the previous year’s disclosures, or they have provided explanations which are neither verifiable, nor meaningful or complete. What is equally (or even more) concerning is that we found, upon a cursory review, that many companies declare to be compliant with a certain CG Code provision, when in fact they are not.

A more comprehensive and robust monitoring report assessing both how the code is being implemented and the quality of explanations would be a natural step further in challenging companies over their disclosure and – in turn – improving corporate governance practices in the country.

While there are positive developments on the corporate governance framework for listed companies, concerns remain on corporate governance of state-owned enterprises, where there are legislative initiatives to dramatically limit the positive effects of EO 109/Law 111.


In Russia, a new Corporate Governance Code was adopted in 2014 by the Bank of Russia (CBR) thus replacing the Code of Corporate Conduct that was adopted in 2002.[14] The new Code is divided in two main sections: (i) the Principles of Corporate Governance (the actual code); and (ii) the Recommendations on the Principles of Corporate Governance, intended to facilitate practical implementation of the principles. All listed companies are required to present a comply or explain statement in their annual reports.

With the adoption of the Code, the Bank of Russia committed to oversee its implementation, to develop standards for the disclosure of information on compliance with the code and provide guidance for the application of those standards, with the goal of eliminating the ‘formal’ approach taken by companies when disclosing compliance with the previous Code.[15]

The Bank of Russia (CBR) kept its commitment and following the code’s entry into force and a publication of a manual for issuers in February 2016 – to provide guidance ahead of preparation of their annual reports – the CBR issued the first ever monitoring report in April 2017.[16] The report served two main purposes: (i) it helped the CBR to have a clear understanding of the practices in place versus the code’s recommendations; and (ii) it triggered a new level of dialogue between the ‘owner’ of the code and market participants. Following the issuance of the monitoring report, the CBR also sent a few letters to various issuers asking for clarifications over their disclosure. Soon companies started realising that the framework had changed. They realised that their disclosure was monitored and scrutinised and consequently became more conscious about what they were publishing in their annual reports. The active role of the regulator also made other players more proactive in engaging with companies, which all added to a better governance framework. During the recent OECD-Moscow Exchange Russian Corporate Governance Roundtable, it was striking to see that most of the discussion was centred on companies’ practices – a dialogue unimaginable a few years ago.

In its first report, CBR analysed corporate governance statements of listed companies for 2015 and found that the overall level of code compliance of companies listed on the top two segments of the Moscow Exchange was 58 per cent. No single company reached full compliance, although one company came close by implementing 97.5 per cent of all code’s principles. When it comes to explanations, the CBR found that in a rather large number of cases their quality left much to be desired. Many companies did not provide exhaustive explanations in case of non-observance of certain of the Code’s Principles. According to the CBR, this level of quality of these explanations indicates the inability of many companies to pay serious attention to conducting an in-depth analysis of the reasons for the deviation as well as to provide meaningful information to investors. At the time of writing this article, the CBR published its second monitoring report, thus reinforcing its objective to promote the implementation of the Corporate Governance Code.[17]

The path to better explanations

Determined to raise the quality of listed companies’ corporate governance statements and explanations of departures from corporate governance codes, in 2014 the European Commission issued a recommendation on the quality of corporate governance reporting (comply or explain).[18] The recommendation focusses on the quality of information to be provided in corporate governance statements and elaborates that the information on how a company has applied a corporate governance code should be ‘sufficiently clear, accurate and comprehensive to enable shareholders, investors and other stakeholders to gain a good understanding of the manner in which the company is governed’. When it comes to the quality of explanations in case of departure from a code, the recommendation sets out the elements of an explanation that should be clearly provided for all specific recommendations a company has departed from.

In order to achieve the desired quality of information, there needs to be a consensus on what constitutes a good explanation. In this process, the input from investors is essential, as any further guidance needs to be tailored to the expectations of the market. Those expectations, coupled with appropriate guidance can then form a solid basis from which companies can be expected to nurture a ‘culture of explanations’ that goes beyond a box-ticking exercise and provides real meaning and value to stakeholders.

Maintaining good pressure

An effective comply or explain approach requires efficient monitoring to motivate businesses to comply with a code and to give meaningful explanations for non-compliance. As the comply or explain approach is essentially a dialogue between companies and the market, it is essential that there is feedback on the basis of companies’ reporting. In many of the mentioned cases, it is the owner of the corporate governance code that comes back to the market with a monitoring report, so to provide pressure on companies and guidance to the market. The EC recommendation also supports this by stressing that ‘efficient monitoring needs to be carried out at national level, within the framework of the existing monitoring arrangements’.

International Organization of Securities Commissions (IOSCO) is advocating for an active role of regulators in promoting corporate governance,[19] which reflects the trend that saw an increasing number of regulators “owning” the corporate governance code and monitoring its implementation. However, despite many good examples from developed markets, many regulators still do not really look at corporate governance. Maybe a problem in this regard is that many of them are confined to what is prescribed by law and do not have a qualitative, holistic approach necessary for corporate governance.

We believe that increased focus of national regulators and other code owners on corporate governance practices of listed companies can be instrumental in raising both the companies’ and investors’ awareness of the need for good governance and appropriate transparency. Institutional investors also have a part to play in this and should strive toward enhanced engagement with their companies. The UK approach, with a stewardship code for institutional investors and its separate monitoring mechanism implemented by the FRC might be a good example to follow.

The opinions expressed are the authors’ only and do not necessarily represent the views of the European Bank for Reconstruction and Development (EBRD).


About the Authors:

Gian Piero, who is an Italian qualified attorney, is the corporate governance specialist in the EBRD Legal Transition Team. Prior to joining the EBRD, he worked on company law, corporate governance and capital markets related issues at the European Commission and at the Italian Ministry of Economy. He practiced law in an international law firm in Italy, Albania and Romania and acted as consultant to international organizations and various state institutions and ministries in Eastern Europe. In Albania he was advisor at the Ministry of Economy for the privatization of state owned enterprises in strategic sectors. In the Czech Republic he worked as “Pre Accession Advisor” at the Ministry of Justice and the Securities Commission for the approximation of the Czech legislation with EU standards.

He graduated in law in Italy and attended postgraduate studies in the Netherlands and US focusing on European and International business law. He has been responsible for the EBRD Corporate Governance Legal Reform Projects since 2004, and led projects in a number of jurisdictions (Albania, Armenia, Kazakhstan, Kyrgyz Republic, Romania, Russia, Slovenia, Serbia, Turkey and Ukraine) especially on corporate governance code and company law development and implementation as well as a number of research and standard-setting projects.

Milot Ahma is an Associate in the EBRD’s Legal Transition Team (Financial Law Unit) primarily focused in corporate governance, insolvency, debt restructuring and access to finance matters. Prior to joining the EBRD, Milot was a Senior Associate at Pallaska&Associates in Kosovo where he was focused in contract law, mergers and acquisitions, banking law and property law. In addition to this, Milot was also engaged in several legal reform-related projects in Kosovo. Milot graduated at the top of his class in the University of Prishtina, Faculty of Law. In 2014 he was awarded a full scholarship, which enabled him to complete his LL.M. degree at Duke University, School of Law. Before this, in 2011 he was the recipient of another scholarship, which facilitated his one semester of studying international commercial law at the University of Groningen, Faculty of Law in Netherlands.

Pavle Djurić is a counsel in the Legal Transition Team (LTT) of the European Bank for Reconstruction and Development, the EBRD’s initiative to contribute to the improvement of the investment climate in the Bank’s countries of operations by helping create an investor-friendly, transparent and predictable legal environment. Pavle is actively involved in the EBRD’s work on corporate governance in the Bank’s countries of operations, which encompasses both working directly with investee companies in order to strengthen their governance arrangements and policy dialogue with country authorities to assist development of effective legal and regulatory frameworks that support sound corporate governance. He also participated in the 2016 Assessment of Corporate Governance Legislation and Practices in the EBRD Countries of Operations, the results of which are published on the EBRD website. A citizen of the Republic of Serbia, Pavle graduated from the Faculty of Law, University of Belgrade, where he also obtained a master’s degree in business law.


1.The first Corporate Governance Code that included this approach was the Cadbury Code.

2.Directive 2006/46/EC required all companies listed in EU to ‘include a corporate governance statement in its annual report, which shall include (…) an explanation by the company as to which parts of the corporate governance code it departs from and the reasons for doing so’.

3.Directive 2013/34/EU

4.The most recent report in English is available at:

5.The Technical Guide is available at:

6.The most recent report is available in French at: per cent3A per cent2F per cent2FSpacesStore per cent2Fca40eea2-a001-4733-8829-251472fff252

7.The reports are available at: (in Croatian only) and

8.See e.g. ecoDa, ‘Corporate Governance Compliance and Monitoring Systems Across The EU’, available at:

9.11 items in Section A ‘Responsibilities of the Board’; 12 items in Section B ‘Risk management and internal control system’; 1 item in Section C ‘Fair rewards and motivation’; 10 items in Section D ‘Building value through investors’ relations’

10.Available at: per cent206.01.2017.pdf & per cent206.01.2017.pdf

11.First edition of the Whitebook was published in June 2016. Second edition of the Whitebook was published in May 2017.

12.Bucharest Stock Exchange ‘The Whitebook on Communication of Listed Companies’ (2017). Available at:

13.On average, Premium Tier companies in 2016 were compliant with 28.5 Code’s Recommendations and not compliant with 5.5 Code’s Recommendations. By comparison, in 2015 Premium Tier companies were compliant with 24 Code’s Recommendations and not compliant with 10 Code’s Recommendations.

14.Besides being the country’s monetary authority and banking supervisor, CBR is also the Russian securities regulator.

15.See, Central Bank of Russia, ‘Guidelines for the Development of the Russian Financial Market in 2016–2018’, available at:

16.The report is available in Russian at:

17.Second monitoring report, the Central Bank of Russia (available in Russian):

18.Available at:

19.See, e.g. IOSCO: Report on Corporate Governance, October 2016, available at:

In pursuit of effective corporate governance

By Dr Peter R. Crow CMInstD – Acknowledged expert on strategy, corporate governance and board effectiveness



From hardly rating a mention 20 or 30 years ago, boards are now newsworthy. Questionable practices and failures of various kinds have seen boards become topical; often targets of criticism in the eyes of the business media, regulators and, increasingly, the wider public.

In addition, the previously little-used term that describes what boards do – corporate governance – has become ubiquitous, hackneyed even, to the point now of being invoked as a perpetrator or panacea for all manner of corporate activity, regardless of whether the board is involved or not. Further, many well-intentioned directors do not seem to understand their duties and responsibilities particularly well; they say they have become confused about the appropriate role of the board, what corporate governance is and how it should be practised.

This article discusses some of the issues boards face as they seek to govern, before suggesting an alternative approach for more effective outcomes.

A challenging context

Modern boards face many challenges and complexities. Seismic geo-political shifts, the rise of populism and the diversity agenda, changing shareholder expectations, and risks of many types, especially terrorism and cyber risk mean boards cannot take too much for granted in a dynamic marketplace.

Yet guidance to assist boards achieve ‘best practice’ is not in short supply. In fact, a surfeit of recommendations has now pervaded academies, directors’ institutes and boardrooms, some of which has sought to redefine corporate governance. Also, codes and regulations have been introduced in many countries to both limit malfeasance and provide boundaries and guidance to boards. Among them, a clear separation between the functions of governance and management, diversity of various forms, say-on-pay, and independent directors have been promoted at various times, as precursors to effective board practice. Many boards and shareholders have been enthralled by these recommendations as they have searched for a definitive board configuration to suit their purposes.

But what of their efficacy? Despite the best of intentions, the plethora of recommendations and codes produced to date have yet to have the intended effect. In fact, the seemingly endless stream of corporate failures and significant missteps emanating from boardrooms suggests that contemporary ‘best practice’ recommendations provide little assurance of board effectiveness, much less company performance. Studies of company and board failures reveal a consistent pattern of contributory factors, including hubris and overconfidence among directors; low levels of board-management transparency; assertive CEOs that ‘take over’; lack of a critical attitude, genuine independence, appropriate expertise and relevant knowledge in the boardroom; and, tellingly, low levels of commitment by directors.

It’s little wonder regulators are active and public confidence is low. The evidence indicates that corporate governance has entered troubled waters. First-hand observations of boards in action show that the dominant focus is compliance; monitoring historical performance and checking regulatory requirements are satisfied. The protection of professional and personal reputation is clearly a more powerful motivation for many directors than the performance of the company they govern. Something is amiss, clearly.

Focus on what actually matters

In sport, it’s well known that rules define boundaries not outcomes and teams that focus on the rules rarely win. The correspondence to boards and governance is direct. ‘Best practice’ recommendations and codes are, essentially, rules. To focus strongly on them, without also considering the function of boards and behaviours of directors holistically, is short-sighted.

If boards are to become more effective in fulfilling their value-creation mandate, directors need to focus on what actually matters, especially discovering how best to work together in pursuit of agreed performance outcomes, with the best interests of the company to the fore.

This was made plain recently in an article by Bob Tricker, a doyen of corporate governance. Tricker reminded his audience that the purpose of the board is to govern, which includes overseeing the formulation of strategy and policy, supervision of executive performance and ensuring corporate accountability. Ultimately, the effectiveness of any board in this pursuit is a function of what the board does and how directors behave, not what it looks like. The structure and composition of the board is, in relative terms, less important. Directors take their eyes off this distinction at their peril.

An alternative approach, for more effective contributions

That the ultimate responsibility for company performance lies with the board places it at the epicentre of strategic decision-making and accountability. Consequently, if the board is to have any effect on business performance at all, it needs to maintain an active and sustained involvement in strategic management in some form.

“Best practice’ recommendations and codes are, essentially, rules. To focus strongly on them, without also considering the function of boards and behaviours of directors holistically is short-sighted”

Some commentators (and many directors and managers) have argued against the board becoming actively involved in strategic management tasks. High levels of involvement are frequently perceived by managers as interference and close involvement can lead to a loss of objectivity in oversight. Yet boards have duties to fulfil. Clearly, if boards are to contribute well, they need to navigate a fine line between detachment, involvement and meddling. For that, trust, cooperation, teamwork, cohesion and consensus-building – both among the directors and with the chief executive – are vital.

Recently published research provides new insights as to how this might be achieved. It demonstrates that if corporate governance is conceptualised as a multi-faceted mechanism that is activated by competent, functional boards, then different (improved) outcomes are possible.[1] The mechanism itself is straightforward: an integrative assembly comprised of strategic management tasks, relationships and behavioural characteristics of directors (discussed below).

Strategic competence: Directors need to possess competencies and cognitive abilities to exercise sound judgement on specific issues – both individually and as a group. Big-picture, long-term and impartial, inquisitive thinking and a strategic mindset are particularly important if the board is to be strategically capable.

Active engagement: This enables directors to gain insights to make informed decisions, monitor the implementation of prior decisions and the performance of the company effectively and focus on future performance. Indicators include adequate preparation by directors before board meetings; close and supportive interaction between directors during meetings (read teamwork); and an established framework within which to make strategic decisions (an approved long-term strategy).

Sense of purpose: This describes the motivation and resolve of directors to contribute to the work of the board (formulation of strategy, making of strategic and other decisions; monitoring and verification of actual performance; application of controls; and provision of accountability) with the agreed long-term purpose of the company as a guiding principle.

Collective efficacy: The ability of the board to make informed decisions together is an antecedent of effectiveness and performance. A board’s performance is the product of not only shared knowledge and skills, but also of cooperation, empathetic interactions between directors, vigorous debate and the situational awareness and emotional intelligence of each director as alternate points of view are explored and debated.

Constructive control: Decisions made by the board in response to various inputs should be consistent with the agreed strategy and long-term goals. The mindset should be that of a coach, providing guidance rather than making punitive responses, the likes of which are more commonly associated with boards seeking to minimise perceived agency problems.

The mechanism-based proposal described here outlines how functional boards can ‘perform’ corporate governance. In so doing, it marks a return to seminal understandings of shareholder-board-management interaction (the board as a proxy) and corporate governance (the functioning of the board, the means by which companies are directed and controlled) that have been lost among the cacophony of more recent contributions.

The harmonious exercise of the five behavioural characteristics within the mechanism provides a platform for directors to interact well and the board to make forward-looking, informed decisions in a timely manner. Unsurprisingly, the core elements are not dissimilar to the antecedents of effective teamwork (compelling direction, enabling structure and supportive context) and integrative models of mission achievement (purpose, strategy, values and behaviour standards) described elsewhere. It follows directly that effective corporate governance is a product of meaningful teamwork, synergistic interactions and a commitment to action among competent, functional directors acting with an agreed strategy and the long-term best interests of the company in mind.

Implications for boards

The concept of corporate governance is both straightforward and stable (the root word is kybernetes, meaning to steer, to guide, to pilot). In contrast, the practice of governance (i.e. what boards do and how directors behave) is inherently complex and quite dynamic – even more so when the incessant march of new ideas and technologies, and the miscreant motivations of some directors are considered.

A mechanism-based understanding of corporate governance provides an alternative pathway to achieve more effective outcomes from those promoted by conventional wisdom. Specifically, it provides an integrative framework; outlining the tasks, interactions and behavioural characteristics that are conducive to effective contributions. However, it also challenges orthodoxy by setting structure and composition recommendations and constraints to one side, as well as any notional physical or task separation between the board and management.

“In the end, boards should hold tight to their core responsibility, which is to govern in accordance with both prescribed duties and the long-term purpose of the company in mind”

The close working proximity of the board and management that is a feature of this proposal is not without its challenges. Complex group dynamics and the inherent difficulty of separating shareholder, board and manager roles (especially in smaller shareholder-managed businesses or boards with so-called executive directors) can have a negative impact on decision-making objectivity in particular.

Similarly, the temptation to embrace operational detail inadvertently confuses the roles of the board (corporate governance) and managers (business operations, including strategy implementation) and shorten the view remain very real challenges for directors around the world – especially in times of crisis or disruption. If boards are to fulfil their governance responsibilities well, a clear sense of purpose supported by a coherent strategy and a well-defined division of labour is essential – regardless of the company’s size, sector or span of operations.

Early agreement on terminology, culture, the purpose of the company and the board’s role in achieving the agreed purpose provides boards with a much-needed foundation upon which to assess options, make strategic decisions and, ultimately, pursue high levels of performance. Increasing numbers of boards are starting to realise that material benefits are available if they take these steps.

More generally, directors need to ensure that they thoroughly understand both the business they are charged with directing and the wider operational and strategic context within which the company operates, so their contributions in the boardroom are both contextually relevant and effective. A programme of continuous learning and discovery is recommended. Although not yet commonplace, increasing numbers of directors are now reportedly allocating as many as five hours outside the boardroom for every hour in board meetings. In addition to reading and understanding board papers, these directors say they read widely about emerging ideas, trends, technologies and practices to ensure a sufficiency of knowledge about both the practice of governance and the market/sector the company they govern operates in, as well as the new opportunities it offers.

In the end, boards should hold tight to their core responsibility, which is to govern in accordance with both prescribed duties and the long-term purpose of the company in mind. Necessarily, effective steerage and guidance requires the board to be discerning and committed to the task at hand, using reliable governance practices in pursuit of better outcomes, lest they be diverted by spurious (and often discordant) recommendations that appeal to symptoms or populist ideals. The mechanism-based proposal introduced here provides a useful option for boards to consider as they strive to realise the full potential of the companies they govern.


About the Author:

Peter Crow, an accredited company director (CMInstD), advises boards and directors internationally on corporate purpose, strategy and corporate governance.


1. Doctoral research conducted by the author, a long-term study of boards in action.

The path to robust non-financial information

By Richard Karmel – Partner, Mazars LLP




Corporate reporting fatigue is becoming widespread. Given the ever-increasing size of annual reports and the plethora of reporting requirements, there has been an increase in focus on the purpose of these reports.

Who are they actually serving? Why do they contain so much information, which isn’t meaningful to most stakeholders? Can anyone but a highly trained accountant actually understand them? These questions are all valid and have particularly come to the fore ever since the global financial crisis of 2008. Many of the companies that went under at that time, or banks that needed to be rescued, had annual reports with clean audit reports. So if they were compliant, why didn’t we see the crisis coming?

As annual reports were the main window that external parties had on the performance of these companies/banks then maybe the reporting rules weren’t fit for purpose. A tough pill for regulators and standard setters to swallow!

There is now a groundswell of opinion that indicates that if these annual reports had more non-financial information and less financially detailed information then maybe, just maybe, we would have had some inkling as to the incoming crisis. Even regulators are acknowledging this, as demonstrated by the UK’s Financial Conduct Authority – it is requiring certain companies in the financial services sector to have their cultures reviewed and reported on. The premise is simple: if the regulators had a better idea as to the ‘profit-above-all-else’ cultures that existed at the time, then maybe certain companies would have been called to account before disaster struck and the lives of employees, customers and wider society were so profoundly impacted.

However, culture is only one aspect that could have helped the regulators and other interested parties better understand the potential future performance of companies. And it is these other areas that the EU has picked up on through its Non-Financial Reporting Directive (NFRD), which is required to be enforced in the EU’s 28 states (including the UK – Brexit won’t help companies avoid its requirements).

Specifically, the NFRD requires the EU’s publicly listed companies with more than 500 employees to report on the steps they are taking to respect the environment, human rights (i.e. people) and to prevent bribery and corruption. In this case, reporting is being used as a tool to improve performance and to enable external parties, like you and I, achieve a better understanding of how companies deal with a wider range of risks, including those that affect all stakeholders and society. At another level, it helps us to better understand which companies are actively contributing to society, i.e. producing more with less, eradicating discrimination, widening the payment of living wages, etc. Put another way, this directive is actively helping companies regain a measure of trust within society.

We mustn’t forget that companies are the primary levers within capitalist societies. Without successful companies, there is no income for employees, no taxes to pay governments who use these funds for our public services and no innovation to help society evolve and progress.

With stock markets currently on a bull run, it has been estimated that 80 per cent of the value of companies are intangible assets most of which haven’t been audited as they’re not on the balance sheet. That means the audited part of annual reports only really inform us on 20 per cent of the value of companies; and even then, it is historical information and rapidly out of date. So, back to the question posed at the beginning of this article: what is the purpose of annual reports?

Moving forward

Leading companies are beginning to follow the International Integrated Reporting Council’s more meaningful reporting framework that is formed around integrated thinking. It is based on the premise that every company has six capitals (financial, manufactured, intellectual, natural, human and ‘social and relationship’) and that it should report holistically covering all these areas in order to give the reader a fair picture of not only past performance but also future prospects and wider strategic intent.

“We mustn’t forget that companies are the primary levers within capitalist societies. Without successful companies, there is no income for employees, no taxes to pay governments who use these funds for our public services and no innovation to help society evolve and progress”

One consequence of the increase in the above reporting is the independent assurance of such non-financial information. Previously, this wasn’t a major issue because the quality of non-financial disclosures was often poor and drafted by marketing departments that naturally only wanted to portray the company in the best light. However, as many regulators have pointed out, there was little in there that was fair and even less that could be considered balanced. How many companies do you know previously reported on their negative environmental and human rights impacts?

Now that companies are having to approach this form of reporting more objectively, they are wanting this information to be independently verified. This not only demonstrates the seriousness with which they are addressing these areas but it gives their reporting more credibility and increases the reader’s confidence in what they are being told.

Recently, my firm Mazars, together with Shift – the leading not-for-profit organisation on the UN Guiding Principles – published its follow-on guidance to the widely adopted UNGP Reporting Framework[1], the UNGP Assurance Guidance on human rights performance and reporting.[2]

This guidance was as a result of the previously widely held view that human rights auditing was not fit for purpose following several tragedies linked to multi-national companies. The aim of this guidance is to help those professionals either working in internal audit within companies or external assurance providers better understand the roadmap and principles to be followed when reviewing this form of non-financial performance and/or reporting. The guidance includes a suite of indicators showing the types of evidence they should look for when assessing the appropriateness and effectiveness of these non-financial policies and procedures.

A key issue is whether there are suitably qualified teams to undertake such assignments. Corporate understanding of how to respect human rights is relatively new; the result being that education and training is lagging the market.

Non-executive directors who sit on audit committees are quite rightly asking more questions about non-financial disclosures included in their annual reports. The key one being ‘how can we be confident that the processes that lead to non-financial disclosures are as robust as those that lead to the financial disclosures?’ These non-execs are looking firstly for comfort from the internal auditors, and then secondly from the external assurance providers. The follow-on key question to these teams is ‘what skills do you have to actually perform such engagements?’.

So, while we are in the midst of a transition in the move to more non-financial reporting, it would appear that the internal and external audit professions are playing catch-up. But catch-up they will as this is what their clients are asking for. So maybe market forces can be a force for good; enhancing the trust that the corporate sector has within society.

And what of that previous question posed ‘what is the purpose of annual reports?’. If companies understand that their reporting should be to serve all their stakeholders, not just their shareholders, then I am confident they will find the answer.


About the Author:

Richard Karmel is a Chartered Accountant and responsible for Mazars’ award winning business and human rights service. Richard was the co-leader of the initiative which designed a UK government and United Nations recommended Reporting Framework, a guide for companies on what good reporting of their human rights performance looks like. In September 2017, the team published their related Assurance Guidance to act as a guide for both internal auditors and external assurance providers. In 2014, this Initiative was officially supported by the UN.

Boardroom diversity critical for institutional investors

By Raj Tulsiani – Chief Executive Officer and Co-founder, Green Park



We operate in a time when boardroom practices are increasingly scrutinised and impact customer satisfaction, as well as trust in company performance. The recent tribulations faced by the likes of taxi firm Uber represent a paradigm shift that will be repeated across the corporate world.

We live in an age of the potential activist – be it an investor trying to shape the board, such as at the London Stock Exchange, or activist consumers reacting to the views of the board, as with John Schnatter at Papa John’s. The composition and behaviour of company boards is under focus and it’s a trend that is only set to increase as investors, customers and employees demand greater accountability.

The transparency movement is also underpinned by increasing regulatory scrutiny. The UK government’s Race Disparity Audit highlighted differences in the treatment of people from different ethnicities across the country’s public services, while the government-commissioned Hampton-Alexander Review looked at ways to ensure that talented women at the top of businesses are recognised, promoted and rewarded equally. Even the Financial Reporting Council has included diversity as part of its view on good governance.

The government is now seriously examining how to increase Hampton-Alexander’s remit to the number of women in senior positions in all FTSE 350 companies. A boardroom that is male, stale and pale will simply create difficult brand risks in the future.

How diversity is perceived

Against this backdrop, Green Park commissioned research examining institutional investors’ perceptions of boardroom diversity. It revealed that investors believe that by 2022 the ethnic composition of company boards will be an important consideration when determining investment strategy, while more than half (56 per cent) believe the diversity of company boards will be a key factor in determining an investment case.

Although we can identify cultures and factors driving change and reinforcing the need for diversity of board composition, many firms remain intransigent. Despite working with companies for more than 20 years to improve the way businesses think about talent and diversity, I still regularly see this problem and wonder sometimes if we are dealing with organisations that have ‘group-think’ so deeply engrained in their culture that they will never allow successful or sustainable change in the composition of their leadership, regardless of how customers change.

It was exciting to see our research reveal investment professionals are anticipating a significant shift in the position of the industry. However, when only six per cent of the researched investors thought that ethnic diversity is currently a major consideration, this is obviously not seen as an important, immediate issue – and that’s not good enough. Almost four in 10 institutional investors felt boards do not fully appreciate or understand the financial value of having a diverse board and therefore change is not being instituted now. Regressive companies with mono-cultural leadership approaches are not representative of their employees, business partners or customers and act as a barrier to future inclusion. But why would investors ignore the opportunity for advancement?

Unlike initiatives designed to move towards gender parity, those in control of increasing ethnic diversity cannot simply turn the dial up to tackle the perceived issue. Instead, a new equation needs to be formed whereby people understand both supply and demand. Boards will need to look outside the internal talent pipeline and beyond their current parameters if this is to be delivered, as the pipelines just aren’t as developed after years of failing to tackle the issue. This is largely due to a decade of being a net importer of BME (black and minority ethnic) board talent to the UK.

Sluggish approach

The lack of urgency for the investment industry to value diversity is further reinforced by our findings that show one in five investment managers believes their own company board lacks diversity. If the industry is not addressing the challenge internally, the wider approach required to properly solve the issue is perhaps a long way off.

“Diversity is only one method of making businesses sustainable and ensuring they have the relevance needed to survive, but it is one that can be leveraged right now by all”

Green Park undertook further research to understand what would have the biggest impact on diversity. Of course, we all have our own opinions on this, but inside, unique industry insight is always the most efficient way for combatting intransigence and identifying barriers to change and developing meaningful co-created interventions to counter them.

Proactive lobbying (36 per cent) was perceived to be the most likely way forward to change opinions of the board, followed by direct action using the threat of reduced, or complete removal of, investment accounting for a quarter (25 per cent) of responses. A further 13 per cent believed that voting against remuneration reports is a strategy that would affect business change.

Our research shows a need for greater education among sections of the investment management community when it comes to existing global benefits realised through diversity. Only half (52 per cent) thought a diverse board helps people understand the requirements of a diverse customer base, while only 39 per cent believe they are better placed to understand the changing requirements of an international customer base.

Despite results that explicitly show companies in the top quartile for racial, gender and ethnic diversity are 35 per cent more likely to have financial returns above their respective national industry medians, a quarter (25 per cent) of institutional investors did not necessarily think that boards need to be more diverse – and almost a third (30 per cent) believe that an ethnically diverse board has no bearing on a firm’s commercial success. So, while these investors know boardroom diversity will be a key future consideration, they don’t appear to fully understand why themselves.

Stepping outside the boundaries of the investment industry, last year’s Hampton-Alexander Review, which established a target of 33 per cent women on FTSE 100 boards by 2020, found that the number of women sitting on the boards of the country’s largest companies has more than doubled since 2011. However, this adds up to only 28 per cent of all board positions; for the 33 per cent target to be met within the deadline set out by the report, 40 per cent of all senior appointments made in FTSE 350 companies will have to be filled by women for the next three years. While, at first, this sounds achievable it must be put in context: according to the annual Green Park Leadership 10,000 study, statistically, female representation went backwards in more than half of industries in 2016.

In addition, the report, looking at the diversity backgrounds of those in leadership positions within FTSE 100 companies, revealed that, despite a net average increase in diversity since the previous report, there is still a ‘concrete ceiling’ stopping many talented minority candidates reaching the upper echelons of management.

It also found that gender diversity is moving backwards at the pipeline level beneath the board in some sectors – worryingly, previous progress and momentum seems to be reversing.

Time to take action

Of course, the issue of boardroom diversity is not just limited to the institutional investment industry – we all need to pull together and turn future intentions into immediate action. Diversity is only one method of making businesses sustainable and ensuring they have the relevance needed to survive, but it is one that can be leveraged right now by all. The UK has a fantastic opportunity to open itself to the world post-Brexit, but our claims to be outward-looking and open to expanded trade with the non-European world are hardly enhanced by closing our own pathways to talent.

Committing to increasing board diversity is a choice, but it is a choice all business leaders should be considering, if for nothing other than self-interest. How quickly will diversity impact future decisions on funding, debt facilities, analyst ratings and board performance?

Investors are obviously coming around to the importance of diversity and those that have future-proofed against governance or brand backlash may avoid the potentially damaging impact of activist investors and marginalised customers alike. The firms likely to thrive are the ones that are ahead of the diversity curve, not lagging behind it.


About the Author:

Raj Tulsiani, co-founder of Green Park, advises seven boards across the public and private sectors on diversity and talent, including the Met Police and The PM’s Implementation Office. Green Park helped shape the most diverse board in the history of Transport for London ( Before co-founding Green Park, Raj was the first ethnic-minority manager at Michael Page, growing a start-up team to £10 million and was on the executive board at Penna, growing a start-up function to £14.5 million. Raj is a founding partner of the National Equality Standard (NES) a ground-breaking initiative developed for business, which sets clear equality, diversity and inclusion (EDI) criteria against which companies are assessed.

Governance policy in Japan: Kicking the can down the road?

Nicholas Benes – Representative Director, The Board Director Training Institute of Japan



Japan recently held an election that was essentially a confirmation referendum on ‘Abenomics’ – a growth policy for which corporate governance reform is the poster child of the most important policy theme, ‘structural reform’. Especially in the absence of labour market reform, it alone can lead to a significant increase in productivity and growth.

Unfortunately – unbeknown to the man on the street – specialists sense that Japan’s governance reform train is in danger of losing its momentum, when much still remains to be done.

To some extent this was inevitable. Most politicians don’t understand the deeper issues and what to propose next. Bureaucrats are always happy to declare victory, so they can get promoted to new positions. Despite all the hoopla over Japan’s Stewardship Code, most Japanese domestic institutional investors still have not acquired the courage to voice concrete, specific opinions in the policy arena. Talk about ‘constructive engagement’ and more proactive proxy voting makes most investors in any country worry about ‘more costs… and less profit’. So, they hold back all the more.

In the absence of more (and more detailed) pressure from investors, most executives only make the superficial changes in governance practices that will least disturb their organisation and the stability of their careers, regardless of the impact on long-term profitability, growth and even sustainability. Judged by their actions, many of them are hypocrites, who talk about long-term thinking, but ‘kick the can down the road’ as they wait to retire and move on to cushy jobs as ‘advisors’ that carry no legal liability. As with policymakers, it is just so much easier to do little and move on.

While significant progress has been made, Japan’s corporate governance problem, and the low productivity that comes with it, is not going to be optimally solved tomorrow at many firms. Quite simply, there is still a lot to fix here. Conversely, that means that the potential benefits are huge, but it will take time for them to be realised in full and more significant progress will require specific demands from investors. But if those benefits do not become more visible in the next few years, foreign investors will surely move on… by moving out. This would not bode well for the future of Japan’s economy, which needs their continued market participation and voice.

If you sit on a board, talk with investors and extrapolate the government’s own policy logic, the most important ‘next reforms’ that the government should take are not all that mysterious. They are:

1. Use the Company Law amendment process, now under way, to prescribe fiduciary duties for the many shikkou yakuinn ‘executive officers’ who do not sit as elected directors but manage the company at a senior level alongside executive directors and are often later ‘promoted’ to director status.

“Unfortunately — unbeknown to the man on the street — specialists sense that Japan’s governance reform train is in danger of losing its momentum, when much still remains to be done”

There is clear precedent to do this, as executive officers in one form of corporate governance in Japan, the ‘three-committee-style company’ already bear the same fiduciary duties as directors per the company law and can be sued by shareholders for violating their duty of due care. However, unsurprisingly, only about three per cent of Japanese listed companies use the ‘three-committee-style company’ governance format, which is voluntary. At the other 97 per cent of listed companies, most so-called ‘executive officers’ are nothing other than employees under the labour law, who have to obey orders (or nonverbal ‘expectations’) from their ‘seniors’ on the board and cannot be sued by shareholders for malfeasance. ‘Shikkou yakuin’ is just a title; it is a phrase that does not appear anywhere in the company law.[1] The result is that when such persons are later appointed to the board, they not only have no prior board experience (and usually, no governance training), but they also have no prior familiarity with the concept of fiduciary duty owed to the company and shareholders. To quote from a recent article by a compliance expert writing recently in the Nikkei Newspaper: “Japanese companies are based on the practice of hiring all of their employees out of university and employing them for the long term… In the process, directors are promoted and advance in a ‘community’ and come to feel that they are the ‘selected few’ in that community… Senior executives have advanced for so long as ‘employees’ that it is difficult for them to be aware that they have fiduciary contracts with the company based on the company law and that they are subject to its rules.”[2]

Obviously, directors need to be made aware of such rules prior to their appointment as directors, not ‘after, if at all’. For this reason, I have suggested the codification of fiduciary duty for executive officers for years. And in fact, last April the Ministry of Economy, Trade and Industry (MET) proposed the exact same thing in a memo submitted to the Company Law Advisory Council, but it appears to have been completely ignored by the other members of the Council. Japan’s political leaders should not let METI’s good work go to waste in the final stages of the amendment process.

2. Similarly, use the company law amendment process to harmonise key aspects of the confusing array of three different corporate governance models that listed companies can adopt. By doing this, the Ministry of Justice could move Japan towards a more consistent version of the monitoring model for governance that has become internationally accepted, is now frequently mentioned here, and is reflected in Japan’s own corporate governance code. A more consistent version of monitoring, reflected in the law, would have a beneficial impact on the mindsets actions of both executive and non-executive directors.

3. Consistent with the monitoring model, revise the Corporate Governance Code next year (as is now scheduled) so that the criteria for claiming full compliance with the code requires a majority of independent directors on a company’s board and if there is not compliance, an explanation of the company’s reasons for not appointing them. Research shows that in most countries of the world, including Japan, companies with a majority of independent directors tend to out-perform those without them, especially when the shareholder base is fragmented and there are no large holders who drive governance.[3]

4. Adopt policies that will strongly encourage companies to further reduce unnecessary cross-shareholdings, which are usually just a not-so-subtle way of buying approval votes at the AGM from stable shareholders – something that technically is a punishable crime under the company law and wastes valuable capital or puts it at risk. A combination of tax incentives and enhanced disclosure would work nicely. Unsurprisingly, an increasing body of research shows that the level of such ‘policy holdings’ correlates with slower restructuring, less entrepreneurial investment and lower financial performance by Japanese companies, rather than raising profitability, as is often claimed.[4]

5. Set forth clearer guidance regarding the allowable topics and exact procedures that will provide institutions with bright-line sanctuary when they seek to coordinate their views and ‘collaboratively engage’ with Japanese companies. The Financial Services Agency (FSA) should work with institutional investors and respected law firms to bring this about, as was done in the UK by The Investor Forum when it fashioned its Collective Engagement Framework last year. As things stand now, investors fear that they may be reprimanded for not filing – or not updating – a bothersome large holders’ report (as a group) every time they attempt to communicate with a company in their portfolio. Given Japan’s continuing cross-shareholder problem as described above, this is an increasingly obvious issue that needs addressing.

6. Create strong incentives for corporate pension funds to sign the Stewardship Code, for example via disclosure to their employees and pensioners regarding their stewardship policies. Although hundreds of institutions (mainly fund managers) have signed the voluntary stewardship code, the signatory list includes only two non-financial corporate pensions. As huge asset owners, pensions are the biggest customers of fund managers and as such are best-positioned to influence their analysis, engagement and proxy voting practices by switching funds to the managers who are most dedicated. Oddly, Japanese companies pride themselves on how much they value employees, yet neglect employees’ pension assets by failing to sign the stewardship code and report how they have handled those funds. Why? Japanese companies are afraid that if their pension funds become more proactive, those same governance and proxy voting practices might boomerang on them at their own shareholders meeting.

Recently, a study group set up by the Ministry of Health, Labor and Welfare (MHLW) and the Pension Fund Association for the express purpose of encouraging corporate pension funds to sign the stewardship code, issued its report. As a result, it is rumoured that the huge pension funds of two iconic companies, Toyota and Panasonic, are now considering signing the stewardship code. (And as of this writing, it appears that Panasonic’s pension fund will sign.) If such firms sign, others will follow, because it would be embarrassing in front of employees not to sign. A little push from the government, via required disclosure, would be very easy to put in place and likely to be highly effective.

7. Enable more convenient ESG analysis by investors by improving disclosure data formats and databases so that data can be used free of copyright concerns and in machine-readable form, and can be easily analysed using artificial intelligence and text-mining methods. Japan has an open data national policy that professes to do this for all public data, but it seems that so far corporate disclosure has not been considered public data for purposes of this policy, even though it is in the public domain, is intended for unhindered public consumption and is provided to and by government agencies (such as the FSA) or stock exchanges that they regulate.

Thus, the result of the corporate governance code that I initially proposed for Japan has been that (as I intended) there is now much more disclosure about governance practices at each company to analyse, but: a) data providers are afraid of infringing copyrights held by corporations if they provide the full text of reports in a database; and b) sadly, not enough of the new data is being analysed and compared. Moreover, the TSE is not policing the quality and formatting of disclosure. As one simple example, TSE has, by its own hand, taken 11 completely separate disclosure categories in its corporate governance reports and lumped them under a single XBRL identifying tag: ‘disclosure items’. This makes it impossible for a computer to automatically find and separate the 11 disclosure items into the categories to which they pertain – for example, compensation policy, nominations policy, director training policy and the like. It would be a simple matter for the FSA, as regulator of the TSE, to order the latter to correct this mistake, which makes a mockery of the use of XBRL.

At this point, without strong, steadfast political guidance emanating from the Prime Minister’s office and the LDP, these policies are unlikely to be put in place. If they are not, the biggest contributor to productivity enhancement will fail to achieve its potential.

Because the LDP won the November elections by a wide margin, one of the following will occur: 1) either the Prime Minister, the LDP and government officials will be even more tempted to declare victory and will become preoccupied with amending the constitution; or 2) they will view their election victory as the clearest possible mandate to double-down and maintain momentum on corporate governance reform. Let’s hope it will be the latter that history records.


About the Author:

Mr. Benes is representative director of the The Board Director Training Institute of Japan (BDTI), a “public interest” non-profit certified by the Japanese government. A lawyer and MBA who worked as an investment banker at JP Morgan and then led his own M&A advisory boutique, Mr. Benes has served on a number of Japanese boards. He has also advised the Japanese government as a member of various government committees. In 2013, he proposed that the creation of a corporate governance code be included in the Japanese government’s growth strategy, to be implemented under the auspices of the Financial Services Agency (FSA). He then advised members of the diet and the FSA, with regard to the drafting process and the content of Japan’s first corporate governance code.


1.Amazingly, given that a literal translation of the word would be “executive board member”, which fact makes the title rather misleading and even raises legal concerns about “apparent authority”.

2.The Cause of Scandals is the Influence of a Sense of Unity, by Juichi Watanabe writing in the Nikkei Newspaper, Dec 22, 2017.

3.See Corporate Governance Codes on Board Composition and Firm Value, by Michele Catano, Naoshi Ikeda, 2016.

4.See Enjoying the Quiet Life: Corporate Decision-Making by Entrenched Managers, by Naoshi Ikeda, Kotaro Inoue, and Sho Watanabe (NBER Working Paper No. 23804, Sept 2017).

Social media and shareholder activism

By Steve Wolosky, Andrew Freedman and Ron S. Berenblat – Members of Olshan Frome Wolosky’s Activist & Equity Investment Group


As shareholder activism continues to spread across the globe, activists are becoming more creative and sophisticated in deploying their investment strategies to maximise shareholder value.

As part of this trend, we have recently seen activists begin to utilise multiple social media platforms as part of a comprehensive digital strategy for their campaigns. In the US, notable examples of social media action during the 2017 proxy season included Elliott Management’s successful activist campaign at Arconic and Pershing Square’s proxy contest at Automatic Data Processing. Outside the US, Elliott Management used Facebook in its campaign to maximise value at BHP Billiton.

This article discusses the reasons why we should expect to see social media usage become more prevalent in proxy contests all over the world. We also delve into the legal considerations for utilising social media in proxy solicitations that are conducted in the US. It is important to note that the use of social media in proxy solicitations outside the US will be subject to the laws of the applicable local jurisdiction.

Social media has gained tremendous popularity not only as a news source but as a means of communicating any type of mass messaging with the click of a button. While a number of prominent investors have used social media for years (e.g. Carl Icahn with Twitter), it was only a matter of time before other activists followed suit. Today, other developments have made social media platforms more appealing and accessible to shareholder activists.

Shareholder activists have the ability to gain a significant advantage in election contests by hitting social media to communicate with shareholders and solicit votes. Specifically, a shareholder activist can embrace social media as follows:

Social media communications Brief topical digital communications through platforms, such as Twitter and Facebook, can quickly and directly keep a target audience, including shareholders, informed on an ongoing campaign and communicate important developments in ‘real time’

Links within social media communications Links embedded within digital communications can drive traffic to shareholder activists’ campaign websites. These websites, which are now commonly used in election contests, provide dynamic and impactful content, including graphics and videos, and help to maximise engagement with the target audience

Social media advertisements Paid social media advertisements relating to an election contest can target an audience, including shareholders, based on interest in the company, geography and other attributes. Such advertisements can also ensure that communications will be prioritised and not buried beneath other posts. Social media advertisements can also be deployed in conjunction with search engine marketing

Data analytics Data analytics can allow shareholder activists to measure interest in particular content viewed on social media platforms and help them refine their communications to optimise results

For less digitally savvy activists, who wouldn’t know the difference between a Tweet and a Snap, there are now advisors who specialise in building digital and social media platforms for activist campaigns.

It behoves shareholder activists to utilise social media in their election contests as there is a strong likelihood their targets will already be able to do so through existing social media capabilities. Publicly traded companies are increasingly using social media platforms on a regular basis as part of their ordinary-course marketing strategies and investor relations efforts. As a result, many companies are already well-positioned to leverage an established digital and social media presence, as well as knowledge of their shareholder base, to help solicit votes in proxy campaigns. This requires shareholder activists to make up ground to build a social media presence and compete for the attention of a large audience of social media users.

A few examples of social media communications by high-profile activist shareholders are included (right) for reference.

Addressing concerns

In the US, shareholder activists and their legal counsel are becoming more comfortable utilising social media in proxy contests from a compliance standpoint. Most of the disclosure and anti-fraud provisions of the US proxy rules applicable to shareholder communications were enacted well before the advent of social media, initially raising questions and concerns regarding the applicability of these rules to various forms of digital communications.

“Many companies are already well-positioned to leverage an established digital and social media presence… This requires shareholder activists to make up ground and compete for attention”

However, guidance from the US Securities and Exchange Commission (SEC) regarding the applicability of the proxy rules to communications through social media and digital platforms has assuaged concerns regarding inadvertent proxy rule violations. Constant dialogue and coordination between shareholder activists and their legal counsel is still strongly recommended to ensure continuous compliance with SEC rules or the rules of the applicable local jurisdiction for proxy contests outside the US.

The US has strict rules governing the ‘solicitation’ of proxies. The SEC broadly defines solicitation to include the furnishing of any communication to shareholders under circumstances reasonably calculated to result in the procurement, withholding or revocation of a proxy, subject to certain exceptions.

In the context of the solicitation rules, the term ‘communication’ is interpreted broadly and covers electronic communications made over social media platforms. As a result, social media posts and advertisements generally are subject to the same rules as traditional written communications, such as press releases, letters and newspaper advertisements.

All soliciting materials must be filed with the SEC no later than 5:30pm Eastern time on the date they are first disseminated to shareholders. This filing requirement applies to the text of any social media posts or advertisements. Transcripts of any audio or video content used in a solicitation must also be filed.

In our experience, the process for preparing and formatting an SEC filing disclosing the content of solicitation materials often takes longer for graphic-intensive communications and audio or video content that is required to be transcribed. As a result, shareholder activists and their legal counsel must coordinate closely to ensure that these types of soliciting materials are timely filed. Experienced shareholder activists and their counsel have become particularly adept at responding to events in ‘real time’ during the course of a proxy campaign utilising social media while acting quickly to satisfy this strict filing requirement.

The SEC rules generally prohibit any solicitations unless the person solicited is or has been furnished with a proxy statement containing the information required under the federal proxy rules. There is an exception to this rule under Exchange Act Rule 14a-12(a) that permits solicitations made before a proxy statement is furnished to shareholders if any such written communication includes a legend containing the following information: (i) specified information regarding the participants in the solicitation, or a prominent legend advising shareholders where they can obtain that information; and (ii) a prominent legend advising shareholders to read the proxy statement when it is available and that they can obtain the proxy statement, and any other relevant documents, for free at the SEC’s website, and describing which documents are available for free from the participants.

The Rule 14a-12 legend can become lengthy, especially when there are numerous participants in the solicitation. The requirement to include lengthy Rule 14a-12 legends in social media communications could be problematic as a result of the particular social media platform’s applicable space and character constraints (e.g. Twitter’s 280-character limitation). These technical constraints could make the legend obtrusive or impossible to include in full.

The SEC addressed this particular complication in an interpretation of Rule 14a-12 first published in 2014. In that interpretation, the SEC acknowledged that limitations on the number of characters or amount of text that may be included within a social media communication may make the inclusion of the Rule 14a-12 legend impossible.

In those instances, the SEC stated that it would not object to the use of a hyperlink to the Rule 14a-12 legend that prominently states that important or required information is provided through the hyperlink. From a technical standpoint, compliance is achieved by styling the hyperlink as ‘important information’ or ‘SEC legend’. Posts on social media platforms that do not have such limitations must include the full legend.

In our experience, the technical issues created by the applicability of the Rule 14a-12 legend to social media communications typically do not arise as shareholder activists infrequently take their campaigns to social media platforms prior to filing a definitive proxy statement. This is a strategically driven approach that will likely evolve as the use of social media in activist situations becomes more commonplace. Nevertheless, there is precedent for shareholder activists relying on the SEC’s interpretation to utilise social media prior to filing a definitive proxy statement.

Cautionary legends

A trickier question counsel to shareholder activists have grappled with is the applicability of the SEC’s interpretation to social media advertisements and search engine marketing. By their very nature, the character and spatial limitations associated with most social media advertisements and search engine marketing make the inclusion of a legend impossible.

“As long as the global shareholder activism phenomenon continues to grow, we expect to see activists around the world expand their use of social media to communicate with shareholders”

For a conventional newspaper or magazine advertisement, where sufficient space always can be purchased, having enough room to insert the requisite legend is not a practical concern. However, for advertisements on social media platforms and search engine marketing that would be otherwise effectively off-limits prior to the filing of a definitive proxy statement due to the inability to include the full legend, a reasonable argument can be made that the SEC should permit the advertisement with a hyperlink to the legend.

Solicitations utilising social media are also subject to the anti-fraud provisions of the proxy rules. These anti-fraud rules prohibit any solicitation containing any statement which, at the time and in the light of the circumstances under which it is made, is false or misleading with respect to any material fact, or which omits to state any material fact necessary in order to make the statements therein not false or misleading.

The following statements are strictly prohibited under the anti-fraud rules: (i) predictions as to specific future market values; (ii) statements directly or indirectly impugning character, integrity or personal reputation, or directly or indirectly making charges concerning improper, illegal or immoral conduct or associations, without factual foundation; and (iii) claims made prior to a meeting regarding the results of a solicitation.

The anti-fraud rules also extend to third party information re-transmitted, linked to or otherwise endorsed in the shareholder activist’s communications. Therefore, shareholder activists are often advised to refrain from hyperlinking to third party websites and to exercise caution when taking any other action that can be considered as an endorsement of third party content.

The rules discussed above apply to proxy solicitations conducted in the US. Proxy solicitations outside the US will be subject to the rules of the local jurisdiction. Because the use of social media platforms by shareholder activists has been more prevalent in the US than in foreign jurisdictions, the applicability of the proxy rules of the foreign jurisdiction to social media may be uncertain and not as well developed as in the US. Nevertheless, as long as the global shareholder activism phenomenon continues to grow, we expect to see activists around the world expand their use of social media to communicate with shareholders.


About the Authors:

Activist & Equity Investment Practice Chair Steve Wolosky is a nationally recognized corporate and securities lawyer who counsels clients in the areas of proxy contests and mergers and acquisitionsA pioneer in shareholder activism, Steve spearheaded Olshan’s Shareholder Activism Practice more than 20 years ago. Today, he is one of the leading lawyers in the country advising hedge funds and investment partnerships on activist situations in the United States and worldwide. Steve advises on some of the most high-profile activist campaigns year-in, year-out. Most notably, Steve led the pre-eminent proxy contest of 2014 representing Starboard Value’s unprecedented, “extraordinary,” and “historic” victory in its election contest against Darden Restaurants, Inc. In 2015 Steve led client H Partners to an unprecedented withhold campaign victory at Tempur Sealy and is currently advising Elliott Associates on its campaign at Arconic. In international news-making cases, Steve represented foreign clients who successfully obtained board representation for the first time in both Japan and South Korea. Steve has led over 500 proxy contests for board representation in his career.

A Partner in the firm’s Activist & Equity Investment Group, Andrew Freedman is one of the leading attorneys in the nation practicing in the area of shareholder activism and advises some of the nation’s most prolific activist investors, including Starboard Value. Andy’s practice focuses on shareholder activism, mergers & acquisitions, hostile takeovers and hedge fund strategies such as merger arbitrage and distressed investments. Andy has represented activist investors in connection with hundreds of major shareholder activism campaigns that have led to the replacement of approximately 700 public company directors. Andy is frequently quoted as an industry expert in the area of shareholder activism in national publications and news outlets, including The Wall Street JournalCorporate Secretary Magazine, Law360Activist InsightActivism Monthly, and The Deal. Andy also speaks on activist panels throughout the country and contributes articles on shareholder activism to notable media publications.

Ron S. Berenblat’s practice concentrates on shareholder activism, proxy contests, corporate and securities law matters and mergers and acquisitions. Ron has advised numerous public and private entities in a variety of industries in connection with proxy contests, hostile takeover bids and defenses and corporate governance matters. He represents hedge funds in the preparation and filing of their Schedule 13D and Form 13F filings. He also counsels public companies on a day-to-day basis, preparing and filing their Securities Exchange Act reports and advising them on corporate governance and securities law issues.

Global audit committee issues in 2018

By Timothy Copnell – Chairman of KPMG’s UK Audit Committee Institute



Financial reporting, compliance and the risk and internal control environment will continue to be put to the test in 2018 by slow growth and economic uncertainty, technology advances and business model disruption, cyber risk, greater regulatory scrutiny and investor demands for transparency, as well as dramatic political swings and policy changes in the UK, US and elsewhere.

Focussed, yet flexible audit committee agendas – exercising judgement about what does and does not belong on the committee’s agenda and when to take deep dives – will be critical.

In the Audit Committee Institute’s 2017 Global Audit Committee Survey, nearly half of the 800 audit committee members who responded said it is ‘increasingly difficult’ to oversee the major risks on the audit committee’s agenda in addition to the committee’s core oversight responsibilities (financial reporting and related internal controls and oversight of internal and external auditors). Aside from any new agenda items, the risks that many audit committees have had on their plates for some time – cybersecurity and IT risks, supply chain and other operational risks, legal and regulatory compliance – have become more complex, as have the audit committee’s core responsibilities.

Issue #1 for 2018 is staying focussed on the basics – including financial reporting integrity – and then reassessing whether the committee has the time and expertise to oversee these other major risks. Does cyber risk require more attention at the full-board level – or perhaps the focus of a separate board committee? Is there a need for a compliance committee? Keeping the audit committee’s agenda focussed – and its eye on the ball – will require discipline and vigilance in 2018.

“The risks that many audit committees have had on their plates for some time — cybersecurity and IT risks, supply chain and other operational risks, legal and regulatory compliance – have become more complex”

Issue #2 is recognising that financial reporting quality starts with the CFO and the finance team. In the Audit Committee Institute’s 2017 Global Audit Committee Survey, 44 per cent of respondents were not satisfied that their agenda was properly focussed on CFO succession planning. Furthermore, few were satisfied with the level of focus on talent and skills in the finance team. Given the increasing demands on the finance team and its leadership – financial reporting and controls (including the implementation of new accounting standards), risk management, analysing mergers and acquisitions and other growth initiatives, shareholder engagement and more – it is essential that the audit committee can devote adequate time to the finance talent pipeline, training and resources, as well as succession plans for the CFO and other key executives in the finance team. Audit committees are thinking about whether finance teams are incentivised to stay focussed on long-term performance and looking to internal and external auditors to share their thoughts about the talent and skills in the finance organisation, including the organisation’s leadership.

Impact of change

The new accounting changes on the near horizon are just one of the increased demands facing finance teams – but an important one. Issue #3 for the Audit committee for 2018 is monitoring the company’s implementation plans and activities for major accounting changes, particularly the new revenue recognition and leasing International Financial Reporting Standards. The scope and complexity of these implementation efforts and the impact on the business, systems, controls and resource requirements, should be a key area of focus. While the impact of the new revenue standard will vary across industries, many companies – particularly those with large, complex contracts – will need to make many critical judgements and estimates. Audit committees will want to understand the underlying process and how judgements and estimates are reached. Under the new leasing standard, many companies will face significant implementation challenges during the transition period. Implementation of these two new standards is not just an accounting exercise; audit committees will want to receive periodic updates on the status of implementation activities across the company (including possible trouble spots), the adequacy of resources devoted to the effort and the plan to communicate with stakeholders.

Issue #4 in a similar vein, audit committees need to ensure appropriate attention is given to non-GAAP financial measures within corporate reports. Following the European Securities and Markets Authority’s (ESMA) final report on alternative performance measures (APMs), other regulators have expressed concern about the undue prominence given to APMs over the equivalent generally accepted accounting principles (GAAP) measures. While APMs can provide valuable insight into a company and the extent to which its business model is successful, audit committees should be having a robust dialogue with management about the process and controls by which management develops and selects the APMs reported upon, their correlation to the actual state of the business and results, and whether they are being used to improve transparency rather than to distort the balance of the annual report. The committee should be questioning what broader drivers of value contribute to the long-term success of the company and how they should be disclosed. Think about what sources of value have not been recognised in the financial statements and how are those sources of value managed, sustained and developed (for example, a highly-trained workforce, intellectual property or internally-generated intangible assets, where these are relevant to an understanding of the company’s development, performance, position or impact of its activity).

Issue #5 for the audit committee in 2018 is increased transparency around audit processes. This is now high on the agenda for both internal regulators and the investment community. Under International Standards on Auditing (ISA 701), auditors are now required to describe in the audit reports of listed entities the key areas they focussed on in the audit and what audit work they performed in those areas; and in the US, the Public Company Accounting Oversight Board (PCAOB) issued a final standard on the auditors’ reporting model, which requires a description of ‘critical audit matters’ in the auditor’s report.

Auditors may have the primary responsibility for implementing the requirements, but they are relevant to and affect other stakeholders as well, in particular the audit committee. Audit committees will need to interact comprehensively with the auditor from the audit planning stage through to the finalisation of the audit report. In particular, think about whether disclosures in the financial statements, or elsewhere in the annual report and/or in other investor communications, need refreshing, otherwise the auditor might be disclosing more information about an item than the company. Engaging in early and open communication with the auditor is crucial in this regard.

Issue #6 is the quality of the audit committee’s report – an issue around which both regulators and investors and increasingly focussed. This is particularly important when it comes to any disclosures relating to the audit committee’s consideration of the significant financial reporting issues and the external audit relationship – including the committee’s role in the appointment, reappointment or removal of the external auditor.

Audit committees should consider providing investors with more insight into how they carry out their oversight responsibilities, particularly their role in helping to maintain audit quality. Consider how the committee can engage with investors to help enhance investor confidence in audit and the oversight discharged by the committee. Does any audit committee/investor dialogue focus on matters specific to the company and the current year, or explain what the committee actually did and how it added value using active, descriptive language? Is the audit committee transparent as to the key issues it considered during the year, their context, the relevant policies and processes, the conclusions drawn and their consequences for the company and its reporting? Is the committee transparent as to the key judgements it made and the sources of assurance and other evidence drawn upon to satisfy it of the appropriateness of its conclusions?

“Failure to manage key risks can potentially damage corporate reputations and impact financial performance”

Issue #7 relates more broadly – as recent headlines suggest it should – to failure to manage key risks – tone at the top, culture, legal/regulatory compliance, incentive structures, cybersecurity, data privacy, global supply chain and outsourcing risks and environmental, social and governance risks, etc – that can potentially damage corporate reputations and impact financial performance.

A key task for the audit committee is ensuring the company is focussed on identifying those risks that pose the greatest threat to the company’s reputation, strategy and operations, and helping to ensure that internal audit is focussed on these key risks and related controls.

Audit committees are spending more time looking at audit plans and ensuring they are both risk-based and flexible. Does the audit plan adjust to changing business and risk conditions? What has changed in the operating environment? What are the risks posed by the company’s digital transformation and by the company’s extended organisation – sourcing, outsourcing, sales and distribution channels? Is the company sensitive to early warning signs regarding safety, product quality and compliance? What role should internal audit play in auditing the culture of the company? Audit committees should be setting clear expectations and helping to ensure that internal audit has the resources, skills and expertise to succeed; as well as helping the head of internal audit think through the impact of new technologies on the internal audit function.

Issue #8 on the audit committee agenda – and of particular importance is that the EU Public Interest Entities (PIEs) is reinforcing the audit committee’s direct responsibility for the external audit. Overseeing the auditor selection process including any (mandatory) tender process, and auditor independence, should be a key part of any audit committee’s role. Regular audit tendering and rotation is already ‘business as usual’ for EU public interest entities (PIEs), but the new regulatory regime includes some requirements that are difficult to navigate and, in some cases, will significantly impact the way audit committees operate in practice. To ensure the auditor’s independence from management and to obtain critical judgements and insights that add value to the company, the audit committee’s direct oversight responsibility for the auditor must be more than just words in the audit committee’s charter. All parties – the audit committee, external auditor and senior management – must acknowledge and continually reinforce this direct reporting relationship between the audit committee and the external auditor in their everyday interactions, activities, communications and expectations.

Monitoring behaviour

In recent years, a number of highly publicised corporate crises that have damaged corporate reputations were due, in part, to failures to manage key risks posed by the company’s culture, tone at the top and incentive structures. Issue #9 for 2018 is monitoring the impact of the tone at the top and the corporate culture on the company’s compliance programmes, as well as the wider business and regulatory environment. This is particularly true in a complex business environment as companies move quickly to innovate and capitalise on opportunities in new markets, leverage new technologies and data, engage with more vendors and third parties across longer and increasingly complex supply chains and, as a result, face heightened compliance risks.

As a result of the radical transparency enabled by social media, the company’s culture and values, commitment to integrity and legal compliance and brand reputation are on display as never before, so audit committees need to use all the tools at their disposal – including internal audit and other assurance functions to assess whether the desired culture is the culture that actually persists throughout the organisation.

Issue #10 finishes this round-up of audit committee issues for 2018, and it is around making the most of the audit committee’s time together. Audit committees should look at streamlining committee meetings by insisting on quality pre-meeting materials (and expecting them to have been read), making use of consent agendas and reach a level of comfort with management and auditors so that routine financial reporting and compliance activities can be ‘process routine’ (freeing up time for more substantive issues). Think about how the committee can best leverage the array of resources and perspectives necessary to support its work. Does the committee spread the workload by allocating oversight duties to each member, rather than relying on the committee chair to shoulder most of the work? Does the committee spend time with management and the auditors outside of the boardroom to get a fuller picture of the issues? Take a hard, honest look at the committee’s composition, independence and leadership. Is there a need for a fresh set of eyes? Is it time for a rotation?


About the Author:

Timothy Copnell is the Chairman of KPMG’s UK Audit Committee Institute. Timothy qualified as a chartered accountant in 1989 and joined KPMG’s Department of Professional Practice in 1993 where he took responsibility for corporate governance matters and KPMG’s non-executive programme. His role includes advising on private sector corporate governance and responding to major UK corporate governance developments. In 2004/5 Timothy was awarded the Accountancy Age ‘Accountant of the Year’ for his work with audit committees. Timothy writes regularly for various publications and is the Author of the Audit Committee Guide (ICSA 2010) and Shareholders Questions and the AGM (ICSA 2007).

ISO 37001: A year on

By Michele La Neve – Managing Partner at Whitecotton Law International



Attention towards compliance is constantly growing. Consequently, data protection, anti-money laundering and anti-corruption have witnessed many businesses offering certifications to organisations and individuals.

This ‘certification-mania’ reached a new peak in October 2016 when the International Standard Organisation issued the ISO 37001 anti-bribery management system. Naturally, this system has been abundantly advertised by ISO providers, who also happen to be its strongest supporters.

The anti-corruption management system is meant to help organisations in minimising their corruption risks as ‘specifies requirements and provides guidance for establishing, implementing, maintaining, reviewing and improving an anti-bribery management system. The system can be stand-alone or can be integrated into an overall management system’.

Repetita iuvant — corruption is a serious crime

To be awarded ISO 37001 certification, auditors, who are normally private persons, should certify an organisation’s adherence to the principles above. That said, I am afraid the ISO 37001 does not specify any requirements on the aforementioned regard, for two reasons:

  • It’s not the law – therefore, it lacks any authority whatsoever to specify any requirement, and its application is completely on a volunteer basis
  • The anti-corruption principles mentioned in the standard were made available long before publication in October 2016

Regarding the latter point, it is worth pointing out that back in 1991, the Federal Sentencing Guidelines considered the adoption of a compliance programme as a mitigating factor in sentencing – the very same approach was echoed in the Sarbones-Oxley Act in 2002.

Moreover, the importance of a well-functioning compliance programme has also been stressed by the UK Bribery Act Guidance, issued by the UK’s Ministry of Justice and by the OECD in Recommendation for Further Combating Bribery of Foreign Public Officials in International Business Transactions.

A thorough dissertation on international guidelines would be beyond the scope of this article, nonetheless, all have been published by public or international organisations sources and are available for free to the public. Consequently, commonly recognised best practices on anti-corruption can be retrieved, used and implemented by any organisation, regardless its geographical location. I will now examine ISO 37001 limitations.

It is not new

This is the first critique to the ISO 37001; as mentioned above, its principles were made available publicly years before its publication, therefore, its application is unlikely to represent a valuable asset for any organisation genuinely committed toward compliance and anti-corruption. No more likely than any well-drafted, implemented and reviewed compliance programme, anyway.

It could not be otherwise, as the standard is not the law and the fight against international corruption requires political, legislative and judicial efforts, which go well beyond the powers of a non-governmental organisation.

Therefore, a question arises, why pay for a set of best practices that are publicly available and easily accessible with an internet search?

The auditors

International corruption is a multifaceted issue, which, to be tackled effectively, may need the involvement of several professionals, from a proactive (drafting or updating a compliance programme) or a responsive (internal investigations) perspective:

  • Legal experts to understand the local-legal framework and interact with regulators and relevant authorities
  • Forensic accountants to identify any off-the-books or concealed payment or disproportionate or incongruous intermediary fees. Their role is also quintessential in financial due diligence, particularly when extraordinary operations, such as mergers and acquisition or joint ventures, are foreseen
  • Investigators, since workers, particularly in high-risk countries, may be victim of extortion or may be blackmailed by criminal organisations. Very often, in fact, we imagine that bribes are only paid to secure an advantage like signing contracts for which others are more qualified or, in general, to gain an undue advantage

While this may certainly be true, it cannot be denied that sometimes bribes are paid to save one’s reputation or personal safety. It goes without saying that private investigators cannot be a substitute for law enforcement agencies but their function is supporting those facing such unpleasant situations in not feeling alone.

“Only a serious compliance programme can exclude or mitigate liability and the fact that an external auditor has approved an organisation’s anti-bribery management system does not represent an asset in this regard as the adoption of the standard does not — per se — exclude nor mitigate corporate responsibility”

It is worth remembering, in fact, that the workforce normally dealing with these challenges is very far away from a company’s headquarters and must face a completely different legal and business environment, oftentimes weak institutions as well. In my opinion, the most common mistake they can possibly make is pay out of their pockets. That is why, as part of a broader compliant corporate culture, no one should be afraid nor ashamed to speak up and should expect appropriate support.

All the problems outlined can be tackled efficiently and effectively with mutual collaboration to ensure that no one is ‘left behind’.

IT and cybersecurity specialists

Being that most of our professional, and I would say also personal, lives are related to computers, tablets and smartphones, these specialists’ role is acquiring more and more importance as wrongdoers usually leave digital fingerprints of their misconducts, be it emails, SMS, instant messaging chats, databases, intranets, archives, basically anything could be relevant evidence.

However, IT and cyber security specialists’ activity should be directed only in retrieving relevant data, leaving  aside personal or unrelated documents. It is a delicate task since there must be compliance with applicable privacy laws, which should be completed having data protection specialists on board as well.


It should not be assumed that everyone is fluent in English or another European language because it is not always the case, rather the opposite, in my experience. Codes of conducts must be widely understood and acknowledged group-wide to be effective, and it is essential that everyone, everywhere understands them.

Moreover, internal investigations require significant work on the ground, which means interviewing local stakeholders able to provide useful information, in local dialects sometimes. Translators make sure that nothing gets ‘lost in translation’ and words are taken for their true meaning. It would be a shame to miss important red flags for a misunderstanding, wouldn’t it?

Furthermore, labour and safety experts may also be needed to ensure, for instance, that a foreign workforce to which part of the production has been outsourced is safe in the workplace. Besides being a moral responsibility, this would protect a foreign company from legal and reputational liabilities as there are human lives at stake.

We just outlined how diverse and professionally qualified the compliance team has to be; advanced degrees (issued by recognised universities, of course), state exams and professional accreditations released by public bodies are necessary to perform such duties.

An ISO 37001 auditor may very well possess the aforementioned qualifications and skills, that is beyond discussion. However, it is important to mention that the auditor qualification is awarded by private bodies.

Lastly, auditors do not know your company, its culture, its employees, its challenges and its strengths. Why not then empower the internal legal/compliance team to fortify anti-corruption? It might be an excellent lead to create and develop robust and trustworthy relationships across all the business areas.

ISO 37001 is not a defence in case of corporate misconduct

As pointed out above, only a serious compliance programme can exclude or mitigate liability and the fact that an external auditor has approved an organisation’s anti-bribery management system does not represent an asset in this regard as the adoption of the standard does not – per se – exclude nor mitigate corporate responsibility.

For instance, the US Department of Justice, in its recently released Evaluation of Corporate Compliance Programs has not even mentioned the ISO 37001 or other certifications. The French anti-corruption Agency had the same approach. It is also crucial to understand that contracting with an ISO 37001 certified counterparty does not exempt a company from due diligence duties, which have to be carried out regardless. Any ‘light’ due diligence must be avoided for the same reasons.


Any thorough audit implies the knowledge of confidential information about the target organisation and anti-corruption audits are no different. Financial statements, possible participation in public tenders, names of agents and consultants and their role in securing contracts, are just a few examples of the priceless information that should be released to the auditor (to whom the attorney-client privilege may not apply).

Most likely confidentiality clauses will be signed, but the ISO 37001 audit nevertheless poses unnecessary risks.

Companies under investigation

Past episodes of corporate misconduct do not impede a shift toward compliance; conversely, oftentimes, these episodes trigger an interest toward ethical business, however, the situation is slightly different when organisations are under investigation or trial.

Anyone with a legal background knows the golden rule ‘innocent until proven guilty’. However, issuing an anti-corruption certification while a corruption trial is pending is problematic for three reasons:

Judgement ascertains responsibilities A judgement defines if a misconduct actually took place. What would be the purpose of certifying a company prior to this assessment?

Judgement identifies weaknesses If bribes were paid, something went wrong and only a final judgement can say where and when; lack of training or communication, business goals too ambitious or unrealistic business goals and lack of due diligence are the most common root causes. A ruling is normally the result of a complex trial where responsibilities are ascertained; this may throw light on where internal controls or managerial guidance were lacking, and a company should acknowledge such findings to strengthen its anti-corruption initiative and implement appropriate corrective measures for the future. At this point the question is, So, how is it possible to certify that an entity is able to deter, prevent and respond appropriately to corruption while still under trial?

Certification undermines respect for the judiciary Without quoting Montesquieu, anyone familiar with public and constitutional law knows that, along with executive and legislative power, judicial power is autonomous and its autonomy is fundamental for any democracy. Acknowledging its decision, it’s an act of respect for the institutions.


What happens if a doctor certifies that a person is healthy, but it turns out he isn’t. What happens if a chief engineer establishes that a building is safe to live in or a bridge can carry daily commuters when, in reality, they are not?

“Anyone with a legal background knows the golden rule ‘innocent until proven guilty’, however, issuing an anti-corruption certication while a corruption trial is pending is problematic”

The aforementioned are obviously oversimplified examples, but the point is, certifying implies some degree of responsibility. What responsibility and what accountability is there for the auditor if a certified entity is found responsible for corruption?

More than year after the publication of the ISO 37001, this question remains unanswered; even though it might be possible to foresee some kind of contractual liability under which the organisation and its management would be held accountable.

Being ISO 37001 certified is not a guarantee of absolute absence of corruption nor best practices and the auditors cannot be held responsible for others wrongdoings. So, what is the purpose of being certified other than for the certifiers’ benefit?

In conclusion, this ‘new’ anti-bribery standard is very unlikely to represent a real step forward in fighting corruption since, as we have shown, it contains some serious pitfalls. More importantly, it cannot harmonise the international efforts in fighting corruption; the ISO 37001 is not the law.

For the same reason, it cannot strengthen the anti-corruption initiative in developing countries, the most affected by international bribery. These nations would rather need a serious political commitment, which cannot be substituted by external initiatives.

Rather, compliance must be embedded with an organisation’s culture at a local level in order to function properly. This means that those responsible for corruption are held accountable for their actions; that the management collaborates proactively with internal and external stakeholders to identify transgressions without trying to cover them up; that whistle-blowers are not afraid to speak up because they do not fear retaliation or humiliation (sadly, this is sometimes still the case).

Besides being favourably perceived by relevant authorities, a compliant attitude brings several advantages; corruption is almost never a stand-alone offence, oftentimes bribes are paid to gain an undue advantage that can negatively (sometimes tragically) affect others; an authorisation released without having the requisite controls in place in practice and not just on paper is an example of how corruption can seriously jeopardise a company’s reputation in the market, adding economic consequences to the legal ones.

Finally, one last consideration. Compliance serves the business purpose but it should not be a business per se.


About the Author:

Michele La Neve began working for the Spanish Law firm “Molina y Asociados” in 2012. He has advised corporate clients on Anti-Bribery, Anti-Money Laundering and Data Protection issues. Michele provides training on these Compliance topics to global organizations operating in the pharmaceutical, engineering and financial industries. He speaks English, Spanish, Italian and French. His articles about Compliance are regularly published by the leading online resource “Anti-Corruption Digest.” Michele holds a J.D. (summa cum laude) from Universita di Bari, an L.L.M. from the Universidad de Cordoba and a Master in Business Management from the University of Monaco.

Strengthening governance during crisis

By Merima Zupcevic Buzadzic – IFC’s Corporate Governance Lead for the Europe and Central Asia region



Of all the critical needs facing countries dealing with fragility, violence or conflict, you may not expect corporate governance to top the priority list. But, in fact, the opposite is true.

Nowhere is the link between lack of private sector growth, investment and economic opportunity and extreme poverty more direct than in nations torn by conflict. Indeed, many of the world’s poorest countries are also those affected by conflict or violence. In these very tough places, good governance practices can form the front line of defence, helping companies stay in business and enabling pushback against an all-too-frequent economic spiral downward into extreme poverty.

Of course, corporate governance cannot fix every problem faced by these nations. But it can make a real difference in preventing further economic destruction and setting a solid course for recovery and growth. Here are five reasons why.

1. Corporate governance helps companies manage through crisis Studies have shown that strong and experienced boards, following clearly-defined protocols, are better positioned to make good decisions. At a time when speed is of the essence, such as when a country is in the grips of open conflict, empowered boards and capable leaders can act quickly and decisively, sustaining the business, even in the midst of the worst. Once the conflict subsides, well-governed companies stand a better chance of survival, with a more rapid return to normal business operations.

One such Yemeni firm has shown remarkable resilience, despite the ongoing civil war. Helmed by strong leaders and a strategically focussed board, the company expanded into Dubai as projects dried up at home. Not wanting to pull out of Yemen altogether – which would have meant a loss of precious jobs in a nation already burdened with high unemployment due to the war – the company retained its Yemeni team. This resulted in a competitive advantage for the firm: the lower cost of the company’s Yemeni services meant that they could offer lower prices to the Dubai market, thus attracting new clients and sustaining the firm, even as business opportunities in Yemen declined.

2. Corporate governance strengthens the institutions that are critical to rebuilding fractured economies Corporate governance underpins sound legal and regulatory infrastructures, which are foundational aspects of well-functioning markets. Strengthening these institutions helps jump-start market recovery, enabling new investment, economic growth and job creation. They also contribute to the overarching goals of stabilising the political environment and restoring a sense of normality for society at large. The International Finance Corporation’s (IFC) work in Sierra Leone bears this out.

“In fragile and conflict situations, one cannot overestimate the intensity of political pressure faced by companies. This pressure comes from multiple sources, including local and regional power players and national level influencers”

A country that had started on a path to recovery following the end of the civil war in 2002, Sierra Leone faced devastating economic setbacks in 2014 – the combination of the drop in global commodity prices and the ebola outbreak. Here, we are working with the country’s Corporate Affairs Commission to draft a national corporate governance code. A collaborative effort that involves key market players, regulators and business leaders, the code is designed to increase regulatory control, enhance compliance, boost investor confidence and encourage more investment. Of note: the broad-based support from among those who would be most impacted by the new guidance was a good indication of the appetite for sound corporate governance as a tool to enhance economic growth.

As with Sierra Leone, we have found that companies in other fragile or conflict-affected countries are eager for broader institutional improvements. Such was the case in Kosovo, which has made real progress in the years since the end of armed conflict, although significant gaps in the nation’s regulatory structure remain. For one company, these gaps meant that it could not legally diversify to the extent that would support future growth plans. IFC worked with company leaders to devise an internal corporate governance solution that became a good work-around. We are hopeful that the positive outcome will trigger action on legislative fixes.

3. Corporate governance reduces the risk of political interference in extremely volatile environments In fragile and conflict situations, one cannot overestimate the intensity of political pressure faced by companies. Pressure comes from multiple sources, including local and regional power players and national level influencers.

Companies in these markets cannot afford to completely disassociate from the political forces. But they can mitigate the pressures. Bringing together a strong and experienced management team gives them access to outside market leaders and influencers who are not affiliated with a political party. Adding capable and independent directors can balance out undue political influence on other board members, who may have ties to the ruling party or other conflicting interests.

Businesses in challenging markets are coming to understand that such changes can help them navigate difficult political waters. In Iraq, for instance, we have seen demand grow for professional directors. The recent launch of the country’s first independent institute of directors – created with IFC’s support – is helping to meet this demand, providing training for potential directors and building a database of qualified candidates.

4. Corporate governance gives companies a path out of the grey economy Opacity is a huge challenge in fragile and conflict markets. Following the money trail of capital accumulated during wartime can frequently lead nowhere. Companies that have found ways to operate in the midst of war or upheaval – a time when formalised market structure and adherence to the rule of law are often among the casualties – may not be able to provide a completely clear or historically accurate asset picture.

For potential investors, this lack of transparency raises major red flags. In general, investors are reluctant to provide financing for a firm that may have accumulated capital through uncertain means. Putting in place a strong information disclosure policy, along with other transparency safeguards, sends a positive message to investors that the company intends to address the information gaps going forward.

5. Most importantly, corporate governance sends a powerful message to a demoralised country and the outside world Beyond the news stories that rightfully call attention to the human cost of conflict and fragility, the under-reported reality in many unstable places is that life goes on. Companies and financial institutions continue to operate, albeit in severely curtailed form.

Stabilising such firms is a critical lifeline for countries in trouble. Adherence to governance policies and procedures offers direction for company boards and executives who may have suddenly ascended to leadership as others with more experience depart for safer circumstances. A systematic approach to corporate governance can instil a much-needed sense of business-as-usual. Meanwhile, clear protocols enable flexibility to quickly change course at a time when the external environment is definitely not business-as-usual.

When the immediate crisis is over and the economy begins to show signs of life, companies that have attended to governance fundamentals can move quicker to rebuild. They have in place tactics and strategy along with leaders who can move quickly to implement such plans. They also have greater ability to comply with new laws and regulations that will form the foundation of a revitalised economy.

Because IFC’s work takes us to some of the most difficult markets in the world, we understand the challenges faced by companies just trying to survive. We have experienced first-hand how difficult it is to sustain progress. But we also have been heartened by the perseverance of our clients, such as a prominent Afghan financial institution that is pushing ahead with major corporate governance improvements, despite so many other conflicting priorities. The reason? The bank is hoping to attract foreign investors who might otherwise not want to engage, given the instability of the market. Corporate governance is a key to unlocking that door.


About the Author:

Merima Zupcevic Buzadzic is IFC’s Corporate Governance Lead for the Europe and Central Asia region. Merima joined IFC in 2008, and has since been advising IFC and private sector stakeholders on company-level corporate governance risks and potential for improving company access to finance using good corporate governance principles. She has also worked with multiple regulators and government institutions throughout the region advising on Corporate Governance Codes and listing requirements.

Merima holds Master degrees from King’s College London and La Sapienza University in Rome. She is also a holder of INSEAD’s Certificate in Corporate Governance and is a published author on corporate governance and post-conflict political economy.

The new rise of ESG

By Abe M. Friedman – Chief Executive Officer, CamberView Partners



In early January, activist hedge fund JANA Partners and the California State Teachers’ Retirement System (CalSTRS) announced a remarkable partnership. Together, the two investors sent a letter to the board of Apple Inc. asking the company to take steps to combat what they termed the ‘unintentional negative consequences’ of the overuse of technology by children and teenagers.

What makes this new shareholder campaign unique is not the actual request, but what it signifies – the fully-fledged emergence of environmental, social and governance (ESG) topics into the mainstream of almost all areas of investing, including activism. Understanding the forces that helped to create this phenomenon, and how it has grown alongside the rise of passive investing and shareholder engagement, is instructive in determining where this trend may go next.

ESG and the rise of passive investing

While the origins of incorporating ESG factors, such as climate risk, diversity and human capital management, into investing, lie in the world of socially responsible investing, it is the emergence of index investing that has catapulted these topics into the mainstream. Here’s why: as assets shifted into passive strategies over the last decade, shareholder registers have been reshaped. According to a recent Morningstar report, global assets under management in traditional index funds and electronically traded funds (ETFs) have grown to $8.1trillion, up from $1.8trillion a decade ago. This has corresponded with a dramatic rise in total market share of passive funds over the same time period: 17 per cent to 36 per cent in the United States, 17 per cent to 42 per cent in Japan and seven per cent to 16 per cent in Europe.

This market shift has led to a concentration of assets under management within passive strategies of three major global players – BlackRock, State Street Global Advisors and Vanguard – which now collectively manage more than $14trillion. These large passive funds, which take in hundreds of billions in new assets annually, are in an ever-present fight for market share amid downward pressure on fees. Because competing solely on costs has become increasingly difficult, index investors must continue to differentiate themselves by identifying topics that matter to the asset owners deciding which index asset manager can be trusted as the best steward of capital.

ESG and shareholder engagement

It is this competitive dynamic that has helped to jumpstart one of the main drivers of the rise in prominence of ESG topics in investing: the growth of shareholder engagement. The current push for more disclosure and engagement on governance in the US can be tied to a series of external events that brought the importance of risk management into stark relief. The oversight failures of accounting firms and a handful of public companies in the early 2000s followed by the financial crisis spurred increased investor interest in understanding how boards were overseeing business risks. Importantly, Dodd-Frank reforms brought about the advent of say-on-pay, a new platform for annual votes on executive compensation.

It was the sensitivity of boards and management teams to votes on compensation that triggered an uptick in outreach by issuers seeking to understand the perspectives of their investors. Over time, those conversations became more frequent (in 2017 nearly three-quarters of the S&P 500 disclosed that they engaged with shareholders in their proxy statement) and also more robust. Discussions also began to include other issues of interest to investors, such as board independence and composition, climate risk, political spending and employee working standards.

The evolving landscape

The landscape of engagement and ESG matters has continued to evolve. Today, index investment firms hold increasingly prominent positions in shareholder registers. With no option to sell the shares they hold as long as a company remains in the index, index investors are facing pressure from regulators and the markets to demonstrate that they are looking out for investors’ interests. The past several years have seen an uptick in CEO letters and other communications from the big three investors on the importance of managing ESG risk topics as well as commitments to enhance the size and breadth of investment stewardship teams. As these engagement strategies have become ‘best practices’, the impetus for smaller asset managers to beef up their own engagement efforts on ESG topics has also increased.

“As activists have become increasingly focussed on winning the support of proxy voting teams at institutional investors in their campaigns, they have become more adept at incorporating messages that speak to the concerns of this bloc of voters”

With several years of engagement now under the belts of many issuers and investors, the equation has begun to shift yet again. In instances in which issuers’ response to engagement is viewed as ineffective by investors, there are now consequences at the ballot box. For example, while shareholder resolutions on environmental topics for many years failed to garner more than 20 per cent of votes cast, in 2017 climate change disclosure resolutions passed for the first time at several major energy companies.

Large institutional investors are making their voices heard in other ways, too. Last year, State Street Global Advisors voted against directors at 400 companies it believed had not made efforts to increase board diversity and the New York City Pension Funds began a new campaign seeking enhanced disclosure of the diversity, traits and skills of board directors. In 2018, issuers can expect even greater support for these types of disclosures from investors across the spectrum.

ESG goes beyond mainstream investing

To better understand what new directions ESG topics in investing may take, the JANA/ CalSTRS example is illuminating. Hedge fund activists have traditionally focussed almost exclusively on economic issues in their campaigns. However, most activist campaigns are also driven by a ‘hook’ – an easy-to-grasp reason why a company would benefit from that investor’s intervention. Over the past several years, one trend in activism has been the rise of governance topics used as hooks – excessive CEO compensation, voting thresholds and the independence of directors are common issues that are layered on top of existing economic criticisms. As activists have become increasingly focussed on winning the support of proxy voting teams at institutional investors in their campaigns, they have become more adept at incorporating messages that speak to the concerns of this bloc of voters.

While several activist campaigns in recent years have focussed on criticisms of board oversight of environmental and social topics, the JANA/CalSTRS partnership signalled the opening of a new front. Not only was this an activism campaign co-led by an institutional investor focussed solely on a social topic, but it also served as the launch of a first-of-its-kind sustainability-focussed activist fund. As activist market participants come under pressure to satisfy commitments to clients and organisations, such as the Principles for Responsible Investment, around ESG goals, and seek to more effectively position themselves and build relationships with a broader group of investors, these tactics may become increasingly common.

With the 2018 proxy season fast approaching, a few trends are clear. Institutional investors will continue to put ESG topics front and centre with their portfolio companies. Issuers will need to be prepared for further escalation of this pressure by clearly demonstrating the rigour with which management and the board evaluate, disclose and manage ESG risks through proactive engagement. Activists will continue to explore new avenues to gain leverage over companies while satisfying the demands of their own investors. Where the sustainability trend heads next will be determined by the dynamic intersection of passive investing, engagement and activism.


About the Author:

Abe M. Friedman is the Chief Executive Officer and a founder of CamberView Partners. Before founding CamberView, Mr. Friedman was Managing Director and Global Head of Corporate Governance and Responsible Investment at BlackRock, served as Global Head of Corporate Governance at Barclays Global Investors and was a founder of Glass Lewis.

To speak or not to speak?

By Professor John Coffee is the Adolf A. Berle Professor of Law at Columbia University Law School and Director of its Center on Corporate Governance



How should public corporations behave when they perceive that democracy is failing and their government simply does not have a clue as to the consequences of its actions? That is, assume that the business community feels not just that the government’s policies are wrong (a standard perception), but that the government in general has become paralysed, confused and dysfunctional.

After populist revolts in both the US and the UK in 2016 produced Trump and Brexit, this perception of government as dysfunctional (to the point of derangement) is now common in both nations. Once, the sound answer to the opening question was that corporations – at least in their public statements – should steer clear of political issues and remain neutral. But that default rule may no longer make sense today.

In the US, populism has produced a reckless and unpredictable style of leadership in which the chief executive might, on any given day, say or do almost anything (often preceded by a late-night outburst on Twitter in lieu of a formal position paper). In the UK, populism has resulted in Brexit, as interpreted by a government that declines to say what Brexit means. Both styles pose problems for corporations that expect governments to behave, well, like governments: consistent, rational and mature.

So, what should a large corporation do that will be impacted by these decisions (or non-decisions)? The old rule was to suffer in silence (and perhaps lobby intensively in private). But that rule is under pressure in different ways. In the US, a public corporation may find itself attacked without warning by the President in a late-night ‘tweet’. The most recent example in December (and there have been a host of others) involved Wells Fargo, a much-troubled and criticised US bank, which awoke to find that overnight the President had tweeted that he wanted an independent administrative agency to impose far tougher penalties than it had in fact imposed, because he thought the bank had cheated its customers. Although the President has a general responsibility for law enforcement under the US constitution, the President does not run independent administrative agencies and never functions as judge or jury. After recurrent such episodes, corporations (and their boards) that are in the public spotlight have to plan in advance how to respond to these now foreseeable attacks.

“Politics tends to produce polarised positions. But major business institutions could play a more statesmanlike role — especially if they can form a coalition that offered white papers and carefully substantiated estimates of the costs of various options”

In the UK, where manners matter more, personal attacks from the Prime Minister remain unthinkable, but the problem for the UK is that time is running out. Procrastination may make political sense, but it invites economic disaster. Many major corporations – whether US, UK, or European – face approaching deadlines. By some point, perhaps as early as the end of the first quarter of 2018, they have to decide whether to shift assets and personnel outside of the UK. Their decisions may depend in large part on whether they see a ‘hard’ or a ‘soft’ Brexit coming. But on this topic, Prime Minister May’s government is less than forthcoming and apparently deeply divided. Meanwhile, the EU is sending ‘be prepared’ memos to targeted UK companies, warning them that their UK operating licences will not be valid in the EU after March 2019. Obviously, pressure is being applied.

If the problem in the US is a government that is reckless, the problem in the UK is one that is indecisive (and even self-contradictory). Nonetheless, the position of public corporations in both the US and the UK is remarkably analogous. In both, the corporate sector generally favours free trade and liberal immigration policies (particularly in hi-tech industries where the need to import skilled employees is pressing). But opposition to immigration and (to a lesser extent) free trade was at the core of both Trump’s election and the Brexit vote. The quandary thus becomes what a major corporation dare say in public without sounding as if it is disdaining the decision of a democratic majority.

This will require some diplomacy and finesse. In all likelihood, anything perceived as a ‘threat’ will backfire (i.e. ‘unless the UK stays in the single market, we will move 8,000 employees to Frankfurt and Paris’ – that’s a threat, even if veiled). However, a major corporation or financial institution can and should be transparent. Thus, it may be appropriate to say: ‘Our current contingency plans require us to reposition at least 2,000 jobs to Europe by 30 June and probably more later, up to a total redeployment of 5,000 employees, depending upon the course of the continuing Brexit negotiations’. The latter disclosure focusses on the cost of a ‘hard’ Brexit and provides real information. It thus counters the ‘alternative facts’ that some Eurosceptic proponents of a ‘hard’ Brexit have offered (namely, that a net migration of jobs from the UK will not occur).

Some industries in both countries face acute problems. In the US, the North America Free Trade Agreement (NAFTA) has for a quarter of a century spurred economic activity on both sides of the Mexican and Canadian borders. But if Trump cancels it (as he has threatened), the investments that American firms have made on the far sides of both borders are imperilled and American agribusiness simply cannot operate without migrant labour. None of this has yet been recognised by a President who rarely descends beneath broad generalities.

In the UK, some industries – most notably pharmaceuticals, chemicals and aviation – have come to depend on industry codes and standards, as specified by European agencies and interpreted by the European Court of Justice. If the UK leaves this single market, these industries face regulatory chaos. Still, publicly asking for continued regulation by EU agencies (and the much-disliked European Court) remains politically unacceptable – at least until the consequences of a ‘no deal’ departure from the single market are made clear.

Both sides, of course, should share the blame. In contrast to the indecision of UK political leaders, many EU political leaders have openly indicated a desire to retaliate against the UK, in part by requiring that certain trading and clearing operations now based in London (for example, Euro currency trading and related derivatives) move to the Continent. Although politically attractive, this policy would be economically very costly to the international banking system. That cost and the resulting inefficiency needs to be stressed to Europe (both its leaders and its led, with the point being clearly made that it would drive up costs to European users). None of this may stop politically motivated leaders, intent on playing symbolic politics. But such efforts might help achieve at least one short-term goal: obtaining the longest possible transition period. As the costs of Brexit begin to be borne over this period, compromise may become more feasible.

More generally, the old consensus that corporations should ‘stay out of politics’ (except for quiet lobbying) must be updated. To be sure, it is prudent to avoid endorsing or offending specific political leaders, but the corporate sector (and particularly non-UK companies) should stress to both UK and EU audiences the policies that are critical to it (e.g. free trade, relatively open immigration and a ‘soft’ Brexit) and the adverse consequences that will fall on both sides if those policies are abandoned. Some sceptics will retort: ‘who trusts corporations (and banks in particular)?’ But, in a world of ‘fake news’ and ‘alternative facts’, well-known corporations and financial institutions could become gatekeepers for honest and accurate information, in effect playing the functional role of an auditor of facts and the likely impact of policies. Yes, this role has its risks, but if no credible gatekeeper exists to undertake this role (and if the once authoritative role of the media has been weakened in this post-digital era), then an underinformed public is left to choose between overstated alternative scenarios offered (with much passion but less objectivity) by rival political parties and factions.

Necessarily, politics tends to produce polarised positions. But major business institutions could play a more statesman like role – especially if they can form a coalition that offered white papers and carefully substantiated estimates of the costs of various options. Predictably, significant coalitions will form only around significant issues. In the US, such efforts could focus on the cost of abandoning NAFTA, which most US businesses strongly support, but which is a favourite Trump target. In the UK, the need to stay in the single market (by whatever semantic compromises work to achieve this end) should be the primary goal. A ‘no deal’ Brexit is the least acceptable option. None of this rejects the majority’s right to decide, but rather helps inform future decisions. To be credible, these coalition papers would need to use and consult with respected experts (inside and outside academia) and be endorsed by a broad cross-section of firms. Ultimately, these efforts might prove futile, but continued silence in the face of an impending crisis makes no sense. Silence implies consent, but consent is hardly what the corporate world should signal today. Rather, it should sound the alarm.


About the Author:

John C. Coffee Jr. is the Adolf A. Berle Professor of Law and director of the Center on Corporate Governance at Columbia Law School. He is a fellow at the American Academy of Arts & Sciences and has been repeatedly listed by the National Law Journal as among its “100 Most Influential Lawyers in America.” Coffee has served as a reporter to The American Law Institute for its Corporate Governance Project; has served on the Legal Advisory Board to the New York Stock Exchange; and as a member of the SEC’s advisory committee on the capital formation and regulatory processes.

Coffee is the author or editor of several widely used casebooks on corporations and securities regulation, including Securities Regulation: Cases and Materials, (with Hillary Sale), 2015, (13th edition); Cases and Materials on Corporations (with Jesse H. Choper and Ronald J. Gilson), 2013, (8th edition); and Business Organizations and Finance, (with William Klein and Frank Partnoy), 2010, (11th edition). His scholarly books include Entrepreneurial Litigation: Its Rise, Fall, and Future, Harvard University Press, 2016; Gatekeepers: The Professions and Corporate Governance, Oxford University Press, 2006; Knights, Raiders, and Targets: The Impact of the Hostile Takeover, (with Louis Lowenstein and Susan Rose-Ackerman), Oxford University Press, 1988; and The Regulatory Aftermath of the Global Financial Crisis, (with Ellis Ferran, Niamh Moloney, and Jennifer G. Hill), Cambridge University Press, 2012.

Shareholder primacy: Is this concept fit for purpose?

By George Dallas – Policy Director at the International Corporate Governance Network



Why do companies exist and for what purpose? The Anglo-American model of corporate governance has traditionally maintained a simple formulation to these questions: for the benefit of shareholders, also known as shareholder primacy.

This concept was articulated by the academic lawyer Adolf Berle and the economist Gardiner Means in their classic book, first published in 1932: The Modern Corporation and Private Property. Berle and Means are commonly regarded as having established the foundation for modern corporate governance, in an era in which listed companies and the development of public stock markets led to the separation of ownership and control of listed companies – and in particular gave rise to the phenomenon of dispersed company ownership by large numbers of minority shareholders.

The thesis

This doctrine of shareholder primacy has a simple and, in many ways, intuitive, logic. It holds that companies exist first and foremost to promote the welfare of their shareholders as owners of a company’s stock – and hence as owners of the company itself. After all, it is shareholders who provide risk capital to companies with the goal of generating returns on invested capital. It is also shareholders who have ownership rights to elect (or potentially fire) a company’s directors to oversee management, and presumably to protect shareholder interests from potential self-dealing by company management or other social pursuits which could distract the company in its mission of profit generation. It is therefore incumbent on company management and boards of directors to serve as agents of shareholders and to promote their interests by generating, if not maximising, profits for the purpose of shareholder wealth creation.

“It is easy to understand how equity investors take comfort in shareholder primacy and might feel threatened by other models of governance that may challenge their place in the corporate pecking order”

This concept has a legal foundation through an oft-cited 1919 Michigan Supreme Court decision, Dodge v. Ford Motor Company, in which the court stated that ‘a business corporation is organised and carried on primarily for the profit of the stockholders. The powers of the directors are to be employed for that end’. This shareholder-centric perspective was further popularised in a 1970 New York Times article by the University of Chicago-based economist, and Nobel Prize laureate, Milton Friedman, titled The Social Responsibility Of Business Is To Increase Its Profits.

Fast forward to the 21st Century and the shareholder primacy torch still shines brightly in many circles, and is a convention of what is known as the ‘law and economics’ school of corporate governance, with its ideological roots well-established in both the US and the UK and other so-called Anglo-Saxon jurisdictions. This approach is commonly taught in leading law and business schools globally and it continues to have intellectually formidable proponents, including the Chief Justice of the Delaware Supreme Court, Leo Strine. Strine has suggested in various writings that the challenge to shareholder primacy is a ‘tired debate’, promulgated by naïve proponents of corporate social responsibility leading a ‘fantasy life’, without proper understanding of corporate law as it was written and intended. Under the shareholder primacy model, those who advocate broader social or environmental corporate objectives or prioritise the needs of stakeholders who are not shareholders, are often dismissed as ‘special interests’ who could potentially distract corporate managers and boards from their overarching fiduciary responsibility to a company’s shareholders.

In turn, the orthodoxy of the shareholder primacy principle is, not surprisingly, well-established in capital markets – particularly among equity investors and investment bankers domiciled in the Anglo-American markets. Indeed, it is easy to understand how equity investors take comfort in shareholder primacy and might feel threatened by other models of governance that may challenge their place in the corporate pecking order.

The antithesis

Yet challenges to shareholder primacy do exist. This is particularly so in continental Europe and Japan, where the purpose of the company does not centre exclusively on generating wealth for shareholders.

This approach is often called a stakeholder model and in this wider view of corporate governance, shareholders are simply one of several key stakeholders, together with a company’s employees, customers, suppliers and even broader societal interests, including communities and the environment. The objectives of the firm involve seeking to find an optimal balance of stakeholder interests, of which shareholder wealth creation may be one of many variables in the equation. This stakeholder approach views the company as a social construct, not simply a means of wealth generation for shareholders. The respected UK economist John Kay has expressed support for this view, stating that ‘the economic success of the corporation is essentially bound up with its success as a social organisation’.

A particular concern about the shareholder primacy model is that there is no single shareholder for companies and boards to focus on. While many institutional investors are investing on behalf of pension plans and long-term savers, implying a long-term time frame, these shareholders are often viewed as overly focussed on short-term profitability – which may in fact have the effect of impacting negatively a company’s longer term performance and sustainability. This is a particular concern with hedge fund activism, where ownership horizons are often intrinsically short-term in nature. Critics of the shareholder model often point to this short-term orientation contributing to the recent financial crisis and argue that companies maintaining a short-term shareholder focus may pay insufficient attention to social, environmental and ethical externalities that have longer term systemic implications.

It is therefore of interest to observe that the UK government’s recent review on corporate governance in the UK concluded that ‘strengthening the employee, customer and wider stakeholder voice’ is one of the three main areas targeted for reform. To some extent this may reflect a degree of ‘German envy’ by the UK, given Germany’s strong manufacturing economy and the prominence of stakeholders (or at least employees) in German governance and decision-making.

The UK government went so far as to suggest in a forthcoming review of the UK Corporate Governance Code that the Code be amended for companies to consider and report on one of three mechanisms to promote better stakeholder relations: a designated non-executive director, the establishment of a formal employee advisory council, or appointing to the board a director representative from the workforce.

Scope for synthesis: company primacy?

It is unlikely that staunch advocates of either shareholder or stakeholder models of corporate governance will be persuaded to abandon one approach for the other. But can we use a dialectic approach to propose a synthesis that might include the best features of each model, while avoiding the worst?

A recent Harvard Business Review article by academics Joseph Bowers and Lynn Paine presents a possible model for compromise, which they label as ‘company centric’, as opposed to shareholder centric. It effectively focusses on prioritising the success of the company as a whole, rather than on prioritising shareholders or any other stakeholder. It suggests that a successful company requires successful stakeholder relations and that this is the best way for sustainable wealth creation for shareholders. In many ways this is a compelling formulation and to some extent it is already reflected in Section 172 of the UK Companies Act, which defines the role of company directors in the first instance as promoting the long-term success of the company itself. This Act does focus on benefits to company shareholders, but it also requires directors ‘have regard’ for stakeholder interests.

In this approach there are no short cuts around respecting legitimate stakeholder needs in the management and governance of companies. That should help to meet objections and concerns of those favouring the stakeholder model. And for those who still insist on a shareholder model, the UK’s Section 172 goes part of the way there. But it is effectively a model of constrained optimisation, not profit maximisation. This aspect of the UK Companies Act is vague to many and has really not been tested in law. But given that one of the aims of the UK’s corporate governance reform is to flesh out what a balancing of shareholder and stakeholder interests means in practice, there may be broader scope in using this company-centric approach as a wider model to square the circle of the shareholder/stakeholder debate.


About the Author:

George Dallas is Policy Director at the International Corporate Governance Network, where he coordinates ICGN’s governance polices and policy committees. George is also a Visiting Lecturer at Cass Business School in London, where he teaches courses in corporate governance. Previously George served as Director of Corporate Governance at F&C Investments (now BMO Global Asset Management), where he led F&C’s global policies relating to corporate governance. Prior to joining F&C George was a Managing Director at Standard & Poor’s, where he held a range of managerial and analytical roles in New York and London. George holds a BA degree, with distinction, from Stanford University and an MBA from the Haas School of the University of California at Berkeley.


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