Global Developments in Corporate Governance – Part 1

Something to write home about: Global corporate governance developments. Part 1 – Asia and India.


In this article, we explore major corporate governance changes in Asia as a whole and India in particular over the second quarter of 2018. In Part 2, we will look at developments in Europe and North America here.

Globalisation has shrunk the world but expanded regulations across borders. Australian company secretaries, management and directors need to pay attention in order to meet their ever-increasing responsibilities. They are relevant in two ways:

  1. Establish a low-water mark – As corporate governance standards evolve, particularly in emerging markets and developing economies, they set the minimum expectations of global investors. While our local conversations about good governance will often have moved well beyond these levels, it’s a useful reminder of the core foundation we must make sure is in place.
  2. Demonstrate best practice – Corporate governance is becoming increasingly sophisticated and diverse, addressing a wider range of stakeholder concerns and business structures. New standards and practices in other markets can help us improve closer to home. Emerging focus areas may also signal the direction of future local reform.

A range of new reforms affecting public companies in Japan and India challenge widespread local business practices and seek to drive cultural change.

In India, changes seek to lessen the influence of promoters and their associates, while in Japan, cross-shareholdings between listed companies are in the crosshairs.

These situations often relate to founding families continuing to exert strong control over companies after they cease to be their sole owners, and investments that are made to cement significant business and personal relationships.



Updated Corporate Governance Code

The Tokyo Stock Exchange released its Revised Corporate Governance Code for listed companies on 1 June 2018, reflecting the first changes since it was introduced in 2015.

The code increases the accountability and transparency of Japanese companies to their shareholders. This is part of boosting their appeal to international investors and increasing their alignment with global corporate governance practises.

The revisions focus on:

  • Unwinding cross-shareholdings, with boards required to assess them individually each year and to determine whether to retain each one, based on their purpose and the effects of their risks and benefits on the company’s cost of capital.
  • Increasing the board’s role in the CEO succession process, including appointments and dismissals.
  • Expanding board responsibility for management remuneration linked to business outcomes.
  • Encouraging the establishment of independent board committees to advise on remuneration and nomination matters when the board doesn’t have a majority of independent directors.
  • Encouraging greater board diversity, including gender diversity and international experience.
  • Broadening the focus on cost of capital as part of business strategy and planning.
  • Strengthening engagement with companies’ corporate pension funds in order to encourage better governance practices.

The updated code is accompanied by newly introduced guidelines for engaging with institutional investors.



Stronger corporate governance for listed companies

The Securities and Exchange Board of India (SEBI) has updated the Listing Rules to reflect a raft of corporate governance changes. They come in response to recommendations by the Kotak Committee, which was charged in 2017 with reviewing and improving corporate governance practises. They also follow India’s largest banking fraud, discovered earlier this year, wherein hackers exploited systems integration issues for more than five years to the tune of US$1.8 billion.

SEBI has wholly or partly adopted the majority of the Kotak Committee’s 80 recommendations. They will be introduced over three years, with a handful taking effect from 1 April 2018 and the bulk following in 2019 and 2020.

The changes are wide-ranging and affect numerous aspects of board composition and operation, related party transactions, disclosures, investor engagement and external audits. Some of the key changes include the following:

  • Related party transactions – Increased scrutiny including additional disclosures and shareholder approval
  • Board structure and composition
  • Larger minimum board sizes (from three directors to six).
  • Separation of the chair and CEO or managing director roles.
  • Expanded director independence criteria. These include restricting interlocking directorates, in which the same directors sit on multiple common boards. They also prevent a company’s promoters from being its independent directors.
  • Reducing the maximum number of permitted listed company directorships (staged introduction over 2019 and 2010, ultimately from 10 to seven). However, this is only expected to affect a handful of directors.
  • Increased gender diversity. The previous requirement for boards to have at least one female director has been strengthened to one independent female director. This will apply to the top 500 listed companies from 2019 and the top 1,000 from 2020.
  • Expanded board committee More companies will require a risk management committee which specifically tackles cybersecurity.
  • Financial reporting and audits
  • Quarterly reporting, including consolidated financial results which must be audited or reviewed.
  • Audit of the secretarial function.
  • Increased requirements for audit report qualifications.
  • Disclosures
    • Additional disclosure requirements include board evaluations, directors’ skills and experience, audit and non-audit fees, credit ratings, strategy and key financial ratios.
    • Disclosures to the stock exchange and on companies’ websites need to be easily searchable.
  • Annual general meetings
    • There is an earlier deadline to hold AGMs, and the top listed companies must webcast the proceedings.

Other recommendations from the Kotak Committee have been referred to separate regulators and government bodies, and may lead to further changes.

Development of voluntary corporate governance codes

The Confederation of Indian Industry (CII) plans to develop a number of voluntary codes to strengthen corporate governance practises. These will be tailored for small businesses, large companies and the financial services sector.

Adding weight to these developments, the CII’s voluntary code developed for listed companies back in the late 1990s was India’s first major corporate governance initiative. This paved the way for SEBI’s corporate governance code, which is embedded in the Listing Rules.


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