Corporate Governance enhances asset values

— CFAs, CSE may organise workshop in Cyprus

 

The CFA Institute Centre and the Cyprus Stock Exchange are exploring the possibility of organising a workshop on Corporate Governance, with the CSE keen to draw on the vast experience and know-how of the CFA Institute in good governance rules and practises.

Since the CSE Corporate Governance code closely resembles that of the UK, officials hope that through constant workshops, seminars and lectures they will be able to convince the boards and majority owners of CSE-listed companies to embrace the code and implement it as much as possible.

The state of a company’s corporate governance can tell the investor a lot about the health of his investment. It is the system of internal controls and procedures by which companies are managed.

“These systems are designed to align the interests and behaviour of the corporate management to the long term benefit of shareholders,” said Charles Cronin, Head of the CFA Institute Centre for the EMEA region on Corporate Governance.

Cronin, who was in Cyprus as the guest speaker of the local CFA Society at the awards ceremony told the Financial Mirror that failure in corporate governance can cost the investor dearly.

“Weak corporate governance can lead to management inappropriately using company assets and expropriating cash flows for personal benefit. Many studies have shown that companies with strong governance polices are able to raise funds more cheaply and earn superior returns over those with weak controls. Quite simply good governance reduces shareholder risk, and that has value.”

 

— Key features

Key features of good governance are independent and qualified directors ‘check definition’ composing ideally the majority of the board, executive management that has adopted and practices a code of ethics, and strong minority shareholder rights (particularly with regards to voting on board members, compensation, corporate actions, takeovers, and changes in bylaws).

Signs of poor governance in action are related party transactions that ingratiate management, personal use of corporate assets such as corporate jets, and persistently lower returns than the competition.

 

— Changes on the way

Cronin told the Financial Mirror that the corporate governance code in the UK is due to undergo a number of changes, which may have an immediate impact in Cyprus. The call for modifications involves allowing the chairman of a FTSE100 company to also be the Chairman of more companies, even though Cronin, who is actively involved in the deliberations is against the modification.

He also opposes a suggestion to allow the Chairman to sit on the audit committee, arguing that there are many qualified accountants, auditors who can fulfil the task.

Cronin adds that another trend fast catching on in the UK is to reduce the number of directors sitting on boards. “In the UK, nowadays, the preference is to have the CEO and the CFO acting as executives and the rest independents, plus the non-executive Chairman.”

Cronin also favours limiting the number of directors sitting on the important audit, remuneration and nominations committees to three each and where there is a need, to hire outside professional help, so that the committees and the boards become more functional.

 

— Corporate failures

In response to the spectacular corporate failures at the beginning of this millennium, CFA Institute Centre of Financial Market Integrity researched and published ‘The Corporate Governance of Listed Companies: A Manual for Investors’ [free to download at www.cfainstitute.org/centre/cmp]. 

In researching this document the CFA Centre assembled a panel of international experts, tapping into their past experiences, and focusing on governance aspects that panel members thought most important. The resulting publication is a global discourse on corporate governance, created by investors for the use of investors. The manual alerts investors to commonly occurring governance issues, the associated risks, and the factors they should consider. It does not advocate best practices or a single system.