Curmi & Partners

Good governance, Bad governance

Article by David Curmi

When a company seeks approval for listing on a regulated market, e.g. the Malta Stock Exchange, it must adhere to Chapter 5 of the Listing Rules.  This chapter deals with the Continuing Obligations that Listed companies shoulder when they are listed.  Essentially this requires companies to act in a transparent way and to publish information on a regular basis in order to allow investors to continually assess the attractiveness or otherwise of investing in each company.  In this chapter you will also find the “requirement” that listed companies should “endeavour” to adopt the Code of Good Corporate Governance set out in the Appendix to chapter 5 of the Listing Rules.

According to the ICSA UK, Corporate Governance is defined as “the system of rules, practices and processes by which a company is directed and controlled”. It is there to help promote trust and integrity in the way companies are managed, making individuals accountable to their decisions, by those who are interested stakeholders, in particular, but not exclusively, shareholders.

In my humble opinion, we do not collectively pay sufficient attention to corporate governance in Malta.  Yes we pay lip service to the code and report on how well we abide by its principles, but we treat abiding by the rules of corporate governance as a means to an end, and not the end itself. With shareholders not active in holding their management to account, this approach to corporate governance is becoming endemic. Yet empirical studies carried out by a variety of large investors in the UK, namely the Association of British Insurers indicate a clear link between good corporate governance and improved investment performance.  In fact members of the ABI actively confirm that analysis of the levels of corporate governance is an ongoing and integral part of their investment analysis.

Perhaps what needs to be done is to foster a greater debate on the subject with listed companies, with a view to ultimately overhaul and modernise the rules of corporate governance.  The Malta chapter of the Institute of Directors recently held an interesting seminar on this subject as they seek to reinvent themselves and reignite the promotion of good corporate governance.  It would be useful if listed companies, representatives of investment and asset management firms as well as the regulator formed part of a working group to update the code of conduct to actively promote better standards of corporate governance.  If shareholders are very weak in holding their companies to account, an alternative mechanism must be in place to counter this.

A few ideas that could be part of the agenda would be the following. 1) Promoting greater involvement of fund and asset managers in the AGM process.  This would include full transparency of voting policies and voting decisions.  A common practice amongst local asset managers appears to be that of not actively using their vote at an AGM.  Instead this is given to the chairman of the company they are invested in.  Fund managers have an obligation and a duty to protect their clients’ assets and therefore engaging with management of their target investments is a critical part of this. 2) Widening the full scope of corporate governance beyond equity and to entities that only issue fixed income securities. 3) Promoting better investor relations including perhaps requiring companies to disclose how they have gone about this. 4) Increasing the powers of regulators to assess and promote compliance with the code.  5) Promoting an entity that analyses and monitors levels of good corporate governance, and providing this to asset managers as well as the public at large, to use as a tool for better investment analysis.  In the UK there is an entity called the Investment Association that is active in promoting good governance as a means of achieving more efficient capital markets.  It would be tremendously useful if we could have such a body in Malta. 

The idea that good corporate governance leads to better investment performance does not appear to have taken a strong enough grip in Malta.  Perhaps because good corporate governance does not translate easily or immediately into cash at the bank? This is surprising, yet it is a reality.  As our capital markets continue to grow we need to invest in a stronger framework to make this critical aspect more effective.

 The information presented in this commentary is solely provided for informational purposes and is not to be interpreted as investment advice, or to be used or considered as an offer or a solicitation to sell/buy or subscribe for any financial instruments, nor to constitute any advice or recommendation with respect to such financial instruments. Curmi and Partners Ltd. is a member of the Malta Stock Exchange, and is licensed by the MFSA to conduct investment services business.