US frustrated in streamlining Audit Practices Abroad

James Doty, chair of the Public Company Accounting Oversight Board (PCAOB), reiterated his concern on Chinese audit inspection, according to Reuters report on Nov 11(EST). He observed that some auditors merely follow existing business controls and fail to perform their monitoring roles. In the past weeks, he had proposed to have companies rotate their audit firms to avoid conflict of interest issues.  

Prior to these ongoing developments, talks between US and China on streamlining audit procedures for US-listed Chinese companies have been stalled since Oct 24, as Chinese representatives have put off meetings on the matter. Citing past meetings with Chinese counterparts, Doty then expressed worries that any Chinese moves to restrict the flow of audit work papers would go beyond keeping inspectors of his agency out of China.

There have been renewed concerns lately about the audit practices of Chinese companies particularly about their opacity and some investors are losing confidence in the prospects of Chinese companies with questionable corporate governance, such as in the case of Longtop. Chinese regulators are asking the Chinese arms of the world’s largest audit firms to review their audit work on Chinese-listed companies and the information which they might have provided to overseas, including US, regulators.

Doty believes that “U.S. markets and investors have been unfairly taken advantage of by those who want the benefits of American markets but not American rules." The US seems likely to consider implementing rules to apply to the Chinese arms of audit firms in their conduct and the standards used in reviewing companies with US investors. This may limit the phenomenal growth enjoyed by these audit firms in their Chinese operations in the years to come. 

The Reuters Nov 11 report can be accessed from here.

The Reuters Oct 24 report on the stalling of Sino-US talks on audit practices can be accessed from here. 

Summary of the Olympus drama and the Japanese Economic Fate

No one would disagree that the Olympus drama has spiraled out of control. Some weeks ago Michael Woodford was fired from the company management for forcing an investigation of the company by releasing to media internal documents about investments that appeared to have gone wrong and demanding the entire board to resign. Since then the company has appointed an outside panel to investigate a hidden loss involving some USD687million, which had been paid as fees for acquiring British medical equipment maker Gyrus. This intriguing payout has invited joint investigation efforts by the FBI and SEC.

Olympus was also acquiring companies with little to do with their own business. They include a facial cream maker named Humalabo and a plastic container manufacturer News Chef. Credit agency Tokyo Shoko Research reported that both had not made money before being acquired. The external panel investigating Olympus losses reported that these acquisitions may be used to mask entrenched investment failures originating from the 1990s.

The scale of the Olympus fraud could turn out to be of behemoth size in the end. The anticipation of such has already unnerved investor confidence in the company and the wider Japanese equities market. The poor corporate governance displayed within Olympus is closely entwined with the economic fate of Japan. Japan’s economic stagnancy today was partly caused by lax accounting standards in the private sector from the bubbly late 1980s. Accounting reports for many Japanese companies during the early 1990s still used outdated but better-looking figures from late 1980s which poorly reflected reality. It wasn’t until the mid-1990s when the government stepped in to rectify the practice and admitted that Japan was entering long-term economic stagnation. Two decades have been lost in Japan but issues of corporate governance have seen little improvement to date.

Olympus stock fell from 1300 to 600 Yen from 11/2 to 11/9. Intriguingly, Nomura stock also fell 15 percent on November 8 alone in Tokyo. Investors suspect that Nomura was somehow involved in the Olympus rout. 

The Dealbook New York Times round-up can be found here. 

Bloomberg's report on Olympus, Nomura and the Japanese market can be found here. 

MAS Corporate Governance Consultation

On 14 June 2011, the MAS Corporate Governance Council (“Council”) released a consultation paper on proposed revisions to the Code of Corporate Governance (“Code”) which applies to Singapore listed companies on a ‘comply or explain’ basis.

The consultation paper sets out the key proposals recommended by the Council, as summarized in the Annex. The key proposals focus on director independence, board composition, director training, multiple directorship, alternate directors, remuneration practices and disclosures, risk management.

Comments on the proposals are due by 31 July 2011.

Further details, including link to the consultation paper are available here.

Another MAS Corporate Governance Speech

On 10 May, Senior Minister Goh Chock Tong of MAS gave a speech at the Singapore Corporate Awards. The focus of the speech was on good corporate governance, which continues the trend of MAS this year to emphasise this to the business community.

Highlights from the speech included the relationship between good corporate governance and fiscal responsibility; corporate governance and competitiveness; and the role that the MAS Corporate Governance Council would play in order to ensure Singapore’s international leadership in corporate governance.

Mr Goh focused on substance over form, emphasising that not only must businesses comply with regulatory rules and requirements, but also they must understand and enact the spirit and values behind the corporate governance principles. The board, through their leadership and skills must ensure that the culture within the business is such that there is balance between profitability and being good corporate citizens in the broader sense.

For the full text of the speech, please use the following link, Singapore Corporate Awards

MAS issues Corporate Governance Consultation Paper

On 18 March 2010 MAS issued a consultation paper that sets out proposed enhancements to the MAS Corporate Governance (CG) Framework which comprises the Regulations and Guidelines for locally-incorporated banks, financial holding companies and direct insurers.

The proposals focus on the importance of the role of the Board (and specifically independent directors) and the need for directors to be equipped with the appropriate skills and have the commitment to oversee the operations of the financial institutions. Key proposals in the consultation paper include, but are not limited to: 

(i) Continuous Development
Assessment of the current skills of the Board on an annual basis and establishment of a continuous development programme for its directors.

(ii) Director Independence
 A director will be considered non-independent after he/she has served on the Board for a continuous period of nine years.

 (iii) Composition of Board and Board Committees
To raise the number of independent directors on the Board, and major committees from one third to a majority.

 (iv) Governance over Risk Management
The Board must establish a dedicated risk management committee and financial institutions must seek MAS’ approval for the appointment of the Chief Risk Officer.

Detailed proposals relating to the Regulations and Guidelines of the CG Framework are contained in the consultation paper.

Comments are due to MAS by 19 April 2010.

To view the press release from MAS please use the following link Corporate Governance Consultation Paper Press Release

FSA Announces Appointment of Senior Advisers on Governance & Authorisation

by Karl Hindle - London, UK

The FSA announced the appointment of five senior advisers on governance and competency late last month.  In the hurly burly of the politically driven financial news, this "minor" piece has slipped by the radar of many observers, but when a list of names which reads as the "Who's Who" of corporate governance is retained by the largest financial regulator in the UK, it demands more than passing attention to what is going on.

At the same time as the announcement on the appointments, the FSA issued a statement on the release of the Walker Review on corporate governance in UK banks and financial institutions - one of the recommendations is the focus upon corporate governance and the FSA has clearly picked this up as one to focus upon. 

Hector Sants, FSA Chief Executive, announced the appointment of Sir Dominic Cadbury, Baroness Hogg, Lord Marshall, Sir Brian Pitman and Sir David Scholey, amidst changes to the individual fitness regime as applies to providing authorisations.  Sants said:

"These new advisers have extensive experience acting on boards of major companies and in senior policy positions and will bring valuable insight to the work the FSA is pursuing on governance.

In adding this board expertise to our SIF interview panel, we can continue to ensure those taking up top jobs are the right calibre to lead and challenge the management of the UK's top firms."

 The new appointees will sit upon the SIF panels for interviewing the proposed candidates for senior authorised positions in the largest of the UK's financial companies.  While these advisers will have input in the interview and can forward recommendations, they have no veto on the appointment and the FSA panel makes the final decision.

Any candidate for the board chair, chief executive, senior independent director and the chair of the audit, risk and remuneration committee will be subject to the scrutiny of at least one of the new appointees.

The appointees represent a very heavy bias towards experience and expertise in the corporate governance field, and this represents a new front for the FSA.  The FSA has previously stated it would start focusing on corporate governance in the past, but as this has been the purview of the Financial Reporting Council, an organisation with little in the way of sanctioning authority, it represents a further mechanism for the FSA to control financial firms.  

If a specific violation cannot be demonstrated by the FSA, it will be simpler for them to demonstrate a cavalier attitude, or wanton disregard, for the extremely widely drafted Combined Code on Corporate Governance.  Perhaps this is running ahead, but the scope for firms to now be scrutinised for failing to establish appropriate corporate governance policies and controls, particularly as applies to say, risk management, is a huge leap closer to reality.

Baroness Hogg is deputy chair of the Financial Reporting Council (tasked with the Combined Code on Corporate Governance and the promulgation of a Stewardship Code for relations between institutional investors and companies); Sir Dominic Cadbury hails from a line of Cadbury executives with strong influence on the UK's development of corporate governance policy (Cadbury is also a former Misys non-executive director); Sir David Scholey is a former member of the Board of Banking Supervision and also Court of the Bank of England; Sir Brian Pitman is a former Chief Executive of Lloyds TSB; and Lord Marshall is a former non-executive director of Nomura.

All the appointees are due to commence their duties January, 2010.

The FSA appointment announcement can be found here.

The FSA statement on the Walker Report can be found here.

FRC Publishes Final Review on UK Combined Code on Corporate Governance and Issues Consultation Draft for Revised Code

by Karl Hindle - London, UK

On December 1^st, the Financial Reporting Council (FRC) published its final report on the review of the Combined Code dealing with Corporate Governance and has issued a new consultation draft in respect of the UK Corporate Governance Code (the Revised Code).

A copy of the Final Review is available here.

A copy of the Consulation draft for the Revised Code is here.

Banks and regulated companies may let out a sigh of relief however; as the opening paragraph of the Executive Summary states:

“The purpose of the Code is to promote good governance in the belief that this will support the long-term success of the company. It should not be viewed as a compliance exercise by companies or investors. A prime objective of this review has been to refocus attention on the underlying principles.”

Broadly, the FRC continues to promote a management-by-exception approach to corporate governance compliance, i.e. comply with the Code or explain why there is a departure from it. As the report states:

“While the Combined Code and its related guidance require some updating, it remains broadly fit for purpose.”

Brave words in the wake of the recent global crisis.

In essence, there are very few changes to the underlying Code and certainly nothing that can be viewed as radical.

 The final report does incorporate the results of the Final Review consultation process as well as the Walker Report recommendations, but many of the Walker Report recommendations have not been adopted by the FRC as they believe they only impact upon banks specifically.  As the review states:

“It is important to maintain the integrity of a single Code for companies, so no sector-specific provisions should be added to address the issues that have arisen with respect to the governance of banks and other financial institutions.”

In any event, the FRC Combined Code still applies to banks and regulated entities if they are listed but it cannot be regarded as an onerous regulatory burden.

The key aspects of the review relevant to banks and regulated entities are: 

• New principles are adopted which cover the board’s responsibility for risk management; 
• External assessment of board performance on a three-year basis; 
• Performance-related pay is “emphasised” by the Code – it should be in keeping with the long-term interests of the business (however, nothing is mandated); and
• New rules relating to the leadership function of the Chairman and the role and qualifications of non-executive directors.

Broadly, this is a very “generic” report; there is nothing of major substance which impinges on banking activities or within the boardroom which a well-managed company has not already implemented.

Further work which is envisioned by the FRC includes the promulgation of a Stewardship Code handling how institutional investors and companies communicate.  Consultation can expect to commence in 2010 and is likely to have some impact the regulated sector, but not in any significantly material manner.

The FRC has called for submissions in respect of the final Revised Code by March 5^th, 2010 and intends to publish the Revised Code in April/May 2010.  Any company with a Premium Listing is eligible to make submissions irrespective of whether they are a UK company or not.

e. 

Philippines Corporate Governance Leader recognised with prestigous award

On November 29, the Manila Bulletin reported that Dr Jesus P. Estanislao had been jointly awarded the Management Association of the Philippines’ Management Man of the Year. Dr Estanislao is a leader in promoting and focusing on good corporate governance. By recognizing his work with such an award, it highlights the current global focus on corporate governance and the failures that have lead to the current financial crisis; and the need to better protect investors, creditors, employees, customers, and taxpayers.

The article, by Dr Jaime Laya, clearly outlines where the failures of Corporate Governance have historically been, with an emphasis on management and Boards putting self interest over company interest. It is this very sentiment which has led to many regulators, including those in the Philippines, to issue more regulations focused on integrity, fairness, accountability and transparency in corporate operations.

The Philippine's Code of Corporate Governance and the related annual scorecard are good examples and provide a solid foundation for Corporate Governance regulation. However, as reported in the World Bank's Corporate Governance Country Assessment undertaken in 2006 and in Dr Laya’s article, enforcement and consistency of the regulator appear to be an area for improvement to ensure the Code is complied with and its importance recognised.

It is vital that such work continues to be awarded, to ensure that the importance of Corporate Governance is acknowledged on an ongoing basis.

To review Dr Laya’s full article please use the following link. Dr Jesus P Estanislao

MAS Speech on Corporate Governance

On 19 November 2009 Mr. Heng Swee Keat, Managing Director, Monetary Authority of Singapore delivered the key note address at the 2009 Asian Investors' Corporate Governance Conference in Singapore. His speech focused on corporate governance as an ongoing concern; corporate governance and the financial crisis and the Code of Corporate Governance (‘the Code’).

Mr Heng gave a timeline of the development of the Code in Singapore with MAS and the SGX now having responsibility for listed companies under the Code. He also highlighted that during a review in 2007 there were significant gaps found in audit committees, their training and effectiveness in particular, resulting in the release of audit committee guidelines in 2008. To complete this section of his speech, Mr Heng proudly remarked that Singapore is ranked first in corporate governance standards in Asia according to The World Economic Forum's Global Competitiveness Report 2009.

Mr Heng then commented on risk management, in particular risk appetite, and remuneration, noting that they have been the most significant aspects of corporate governance that have contributed to the current financial crisis.  He said that remuneration had been so closely tied to short term gains and under such circumstance it is inevitable that there would be high risk taking. He highlights that some jurisdictions considering the empowerment of shareholders in the remuneration of executives to aid in reducing the high risk levels. Mr Heng reports that MAS is undertaking its own review of Corporate Governance frameworks for locally incorporated banks and insurers with focus on risk management and remuneration alignment.

However Mr Heng believes there is no time for Singaporean companies to become complacent even though there are generally good corporate governance practices. He announced that there will be a Corporate Governance Council (‘the Council’) formed, made up of public and private sector members, which will be charged with promoting “a high standard of corporate governance in companies listed in Singapore so as to maintain and enhance investors' confidence”. The Council’s responsibilities will include, but not be limited to, professional development and guidance for Board members and review of the Code. Further details would be released in early 2010.

Mr Heng concluded his speech by encouraging advocacy bodies, such as the Securities Investors Association of Singapore, to continue to demand good corporate governance and emphasize ethical and responsible corporate cultures. 

For the full text of Mr Heng’s speech please refer to MAS Corporate Governance Speech