The US governance framework has been reinforced through new legislation – the Sarbanes-Oxley Act 2002 – and revised Securities and Exchange Commission listing rules.
The US regime is tougher than the UK’s as it carries significant financial penalties and personal criminal liabilities for individual directors who are responsible for their companies’ non-compliance with the laws.
However, the reach of the new US governance framework also extends to non-US companies that have a US listing, and therefore cannot be ignored.
The Sarbanes-Oxley Act introduces two significant reporting requirements for listed companies. Section 302 requires that the company’s chief executive officer or chief financial officer attest to the veracity of the financial statements. Section 404 requires an annual certification by the board affirming that it is responsible for establishing and enforcing effective controls and procedures that mitigate risk.
HR departments of companies affected by this legislation may need to undertake a comprehensive review of their systems to ensure that their controls are sufficiently effective.
The revised listing rules of the New York Stock Exchange (NYSE) include several new requirements. Listed companies must now have a majority of independent directors and, for these purposes, the definition of an ‘independent director’ has been tightened by requiring the disclosure of the board’s verification that the individual has no material relationship with the company.
Non-US companies that are listed on the NYSE must disclose any significant ways in which their corporate governance practices differ from those followed by domestic companies under NYSE listing standards.
The UK corporate governance framework comprises the UK Listing Authority’s Listing Rules, the Combined Code appended to the Listing Rules, institutional investors’ best practice guidelines, and certain provisions contained in company law.
Although compliance with those provisions that are contained in Companies Act legislation and the Listing Rules is mandatory for UK-listed companies, compliance with the Combined Code is on a ‘comply or explain’ basis. This means it is permissible for companies not to comply with the code, providing they can justify non-compliance.
Enlightened investors are beginning to recognise that the explanations for non-compliance often provide a better insight into the company, and may even reflect a better-governed one, than those that indicate full compliance by ‘ticking all the boxes’.
The focus of the most recent developments in corporate governance in the UK has been on the constitution and processes of the board, and the structure and disclosure of directors’ pay.
The new Combined Code, following Derek Higgs’ review published in July 2003, introduced more stringent processes for the appointment, training and performance evaluation of non-executive directors.
This aims to ensure an appropriate mix of skills on the board of a listed company, and that non-executive directors are in a position to provide sufficient time and independent judgement to guard against potential self-interested activity by executive directors.
The new corporate governance regime in the UK and the US will mean greater transparency, but it may not necessarily guard against corporate disasters.
In theory, the structures should make it easier for directors outside of the organisation to identify possible areas of risk, and provide the authority and channels to exercise their responsibilities as members of the board.
From an HR perspective, the new legislation has caused a significant increase in workload. Listed companies will need to put procedures in place to assess board performance and ensure that all aspects of directors’ remuneration are disclosed and substantiated.
For smaller listed companies, this could represent an unacceptable burden of additional cost which may lead them to consider resuming the relative obscurity that private companies enjoy.
Roz Crawford specialises in the corporate governance aspects of executive remuneration in the Human Resource Services division of Pricewaterhouse-Coopers in the UK