Wake-up call for Cypriot companies
Cypriot companies that apply corporate governance in practice as well as in theory should get cheaper finance, have better access to institutional investors and enjoy a higher share price, especially once the common trading platform with the Athens Stock Exchange takes off. These are some of the main conclusions one could draw from the event hosted by the Institute of Directors Cyprus at the Hilton on Thursday which included speakers from both Cyprus and abroad.
Bigger exposure to institutional investors
Incentives of Cypriot companies to apply corporate governance in the spirit and not just the letter are coming from several directions.
First, in the next few weeks, assuming everything goes to schedule, Cypriot listed companies will soon have a great deal more exposure to foreign institutional investors via the common trading platform with Athens.
The Chairman of the Cyprus Stock Exchange, Akis Kleanthous, said that with the advent of the common trading platform, it makes it “more important for our listed companies to be able to take advantage of the exposure they will get through the strategic alliance with the Athens Stock Exchange”.
Kleanthous added that many Cypriot companies will now be on the “watchlist of foreign institutional investors”.
Cypriot shares will also be listed in euro, allowing foreign investors to invest in the Cyprus Stock Exchange “at minimal cost”.
However, Kleanthous also noted that getting to the common trading platform is “the easy part”.
“The hard part is to become competitive. … regardless of any strategic alliances we implement in the future if we are not competitive that will not add any value to the Cyprus Stock Exchange or to listed companies,” he said.
Foreign investors asking more searching questions
Second, as previously reported by the Financial Mirror, there is evidence to suggest–from the respected McKinsey consultancy firm among others–that good corporate governance can add 7% to 10% to a company’s share price.
And what is beyond doubt after scandals such as Enron is that the cost of corporate governance failure is immense.
With this in mind, foreign institutional investors are asking much more searching questions about how corporate governance operates in practice and not just in theory.
“Large institutional investors are quite good at seeing behind the form”, Patricia Peter, the Institute of Directors Head of Corporate Governance who also spoke at the IoD seminar, told the Financial Mirror.
In fact, they are less interested in a company implementing the code to the letter than in proper information about why it is or is not implementing it.
“A lot of institutions say that a good explanation is sometimes more valuable than the tick in the box, because you are actually getting towards the reality of how the board works,” she explained.
Due diligence by large investors can be very detailed, therefore, and include interviewing non-executive directors separately from other board members.
Large investors will “going to crawl quite closely behind the prospectus,” noted Peter.
Non-listed companies also affected
Third, even non-listed companies will be affected by perceptions of their corporate governance, because the advent of Basel II (affecting bank regulation).
This will affect the way financial institutions such as banks view debtors and how they are safeguarding their own companies.
“Basel is going to have quite a big effect,” Peter noted, while the SEC Chairman Marios Clerides said it is becoming “an inextricable part of proper supervision under the new Basel II capital adequacy requirements”.
Wake-up call for Cypriot companies
The chance to raise more capital from foreign institutional investors who will ask more searching questions than the average Cypriot about how a company is governed should be a wake-up call for Cypriot companies.
Although 24 companies apply the Cyprus Corporate Governance Code in theory, as hinted by the SEC Chairman, not all of them are following it in practice.
For example, he said the idea that what belongs to the company belongs to the owner is a mentality that applies “to the main or majority shareholder of most new public companies and a few old ones” too.
“Personal relationships come in the way of true ‘independent’ directors,” he said.
Need for a country-specific approach
One area where all speakers agreed was that an approach of “one size fits all” is not appropriate.
“The legal systems are so different,” said Peter, noting that corporate governance also has a great deal to do with personalities and how people behave with one another, “so the things that might be an issue in one country might not be an issue in another”.
Clerides also spoke of the need of a code that “should fit with ‘local’ culture, customs or the country’s special circumstances.”
This explains why the recommendation to separate chairman and CEO was not so strictly enforced in Cyprus. As CSE chairman Kleanthous explained, “Remember that we had to deal with family businesses that went public and then listed on the stock exchange in only a few years, so most of the chairmen of the board were also the CEOs of the company. It was only reasonable for us not to enforce in just a very short time such a very important article.”
IoD helping Cyprus
The Institute of Directors is a longstanding organisation that advocates director professionalism across the globe through professional development, information and, more recently, a Chartered Director qualification.
Its influence over the Cypriot corporate governance culture is set to increase, as in late February a member of the Cyprus branch who was appointed the new chairman of the Cyprus IoD last week, Evdokimos Xenophontos, was appointed to sit on the Corporate Governance Committee of the Cyprus Stock Exchange.
