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1. What is corporate governance?

Corporate governance refers to how a corporation is governed. Corporate governance ensures that companies are directed and managed at board and management level in a fair and transparent manner. It provides guidance on how the objectives of the company are achieved, how risk is monitored and assessed, and how performance is optimized. It makes the boards and management accountable to the shareholders as well as other stakeholders.

In other words, corporate governance refers to internal disciplines or systems which govern the relationships among 'key players' or entities that are instrumental in the performance of the organization.

2. Why is corporate governance important?

Corporate governance is important for the following reasons:

• It lays down the framework for creating long-term trust between companies and the external providers of capital
• It improves strategic thinking at the top by inducting independent directors who bring a wealth of experience, and a host of new ideas
• It rationalizes the management and monitoring of risk that a firm faces globally
• It limits the liability of top management and directors, by carefully articulating the decision making process
• It has long term reputational effects among key stakeholders, both internally (employees) and externally (clients, communities, political/regulatory agents)

3. Why is corporate governance important to Maldives?

Good corporate governance practices have an impact in determining the cost of capital in a global capital market. Companies in the Maldives must be equipped to compete globally and to maintain and promote investor confidence both in the Maldives and internationally. This means that the companies in the Maldives must put in place good corporate governance practices.

Good corporate governance is also grounded in Islam where transparency, disclosure, and accountability are important tenets in doing business.

4. How does Corporate Governance help investors?

Corporate governance principles include within itself, board and management accountability as well as disclosure requirements which help in transparency. This enables the investors to gain confidence in the company and stocks that they are investing in. Through the disclosures of board composition, director remunerations, annual financial accounts, shareholders can know who and how their investments are being managed within the company and if not, to exercise their shareholder rights. In addition to this, a board with a good corporate governance structure will always act in the best interest of the shareholders.

It is interesting to know that a recent survey revealed that more than 48% of investors are willing to pay additional premium over stock prices for companies known to implement sound corporate governance practices as opposed to other companies which may have same level of profitability but characterized with inefficient management or a record of poor governance practices (Reference: 1).

Reference 1: Abou-El-Fotouh, Hany. (2009), ‘Importance of Corporate Governance for SME’s”, Articlesbase, retrieved 21 January 2010 from http://www.articlesbase.com/small-business-articles/importance-of-corporate-governance-for-smes-917533.html

5. What are corporate governance codes?

Corporate governance codes set forth rules for the governing of the company, especially relating to Board of Directors matters, in a regulatory context. In Maldives, the Corporate Governance Code is mandatory for all listed companies on the stock exchange with effect from 1 January 2008. Other public companies are strongly encouraged to comply with the provisions of the code. The code comprise of mandatory requirements such as board, management and remuneration matters, internal audit and external audit, internal control, shareholders rights and disclosure requirements.

6. Who has to abide by the Corporate Governance Code?

The Corporate Governance Code set by CMDA applies to all listed companies, regardless of the nature of their business.

Other public companies are strongly encouraged to comply with the provisions of the code. Likewise, private companies, and especially those that intend to be listed, are encouraged to comply with the provisions of the Corporate Governance Code.

 

 7. Is corporate governance only important to listed companies?

Under the listing rules, the CMDA requires that all listed companies comply with its Corporate Governance Code. This is mainly because shareholders of the public have some part of the companies’ ownership. Corporate governance ensures that the board of directors’ manages the company in a fair and transparent manner as well as makes the board accountable to its shareholders.

But corporate governance is important not only to listed companies. The principles of good corporate governance can be applied to non-listed public and private companies as well. By incorporating the corporate governance principles into the company, it facilitates the board to set rules, regulations and structures which aim to achieve optimum performance by implementing appropriate effective methods in order to achieve the corporate objectives and hence contributing to the overall value of the firm. Moreover, it supports the organization's sustainability on the long term and establishes responsibility and accountability.

In cases where such a company goes public and lists in the stock market, this would enable the potential shareholders to have confidence in the structure, management and direction of the company and boost their confidence to invest in that particular company. Having a good corporate governance structure helps to attract foreign investments and partnerships as they will have more confidence in a business that is well managed and is transparent.

8. How does the Corporate Governance Code help to make the board of directors accountable to shareholders?

Corporate Governance helps to make boards of directors accountable through the disclosure requirements in annual reports and by requiring the board of directors to be composed of executive directors, non executive directors and most importantly, independent directors.

9. Why do listed companies need to adopt the Corporate Governance Code?

Listed companies need to adopt the Corporate Governance Code because it is a listing requirement on the Maldives Stock Exchange. Apart from this, adopting the corporate governance code encourages the board to be more accountable to the shareholders. As listed companies have public shareholdings, accountability, transparency and efficiency of the board is very important for implementing shareholders rights.

10. Why does board composition play a prominent role in Corporate Governance?

Board composition plays an important role in Corporate Governance because it encourages the board to include both executive directors, non-executive directors and independent directors. By having a mix of all of these types of directors, it enables the board direction to be more goals oriented, unbiased and independent which will help in the fairness, accountability and transparency. In other words, the board of directors will provide a varied pool of knowledge and expertise to the company’s strategic management and direction.

Executive directors have knowledge about the industry and most importantly, the company itself. There will be no better person on the board who will be versed in the company’s affairs internally and externally than the company’s executive directors.

Non-executive directors can include persons who are knowledgeable about the industry requirements, scope and competition, or even a specialist field that is significant to the company’s success. The board can make an informed decision concerning different matters based on the information provided by the non-executive directors.

Independent directors must have no pecuniary relationship with the company apart from receiving the board remuneration. This means that they can be impartial and independent in their views.

11. How can boards be made more responsible and accountable?

The principles of corporate governance encourage the board of directors to be objective, independent and accountable to their shareholders. It goes beyond than just referring to independence from management of the company. As the duties and responsibilities of the board are fiduciary in nature, it is vital that boards manage potential conflicts of interest. They should be responsible for the compliance of laws, regulations and standards, overseeing the internal controls systems of the company such as accounting and financial reporting as well as the application of corporate ethics in the company.

12. What is the importance of independent directors in board composition?

Independent directors are directors who apart from receiving director’s remuneration do not have any other material pecuniary relationship or transactions with the company, its promoters, its management or its subsidiaries, which in the decisions of the board may affect their independence of judgment.

Having truly independent and active directors on the board of directors creates trust between the company and its investors. Investors look closely at the company’s corporate governance practices, especially the board composition and independence of directors to ensure the quality of the board, before they make their investment decision.

In addition to this, competent and independent directors play an important role in strategy formulation and the stewardship of the company.

13. What is the importance of non-executive directors in the board of directors?

Non-executive directors are members appointed to the board of directors but who are not a part of the executive management team of the company. They are not involved in the day to day running of the business. Non-executive directors should constantly challenge and contribute to the development of the company strategies, should monitor the management performance to see whether they meet agreed goals and objectives and also provide independent views regarding resources, appointments and standards of conducts of the company.

 

A non-executive director is one who does not hold, or who no longer holds, an executive position in the company. However he may not be independent. As an example, a former CEO who has been succeeded as a CEO by another may stay on as a Board member, but he is not independent.

According to the CMDA’s Corporate Governance Code, independent directors are persons who are appointed to the Board and (the relationships set out below are not intended to be exhaustive):

• Have not held, or whose immediate family members have not held, during the last one (1) year, a key position in the company, such as CEO, general manager, or any immediate employment position; or
• Have not, or their immediate family members have not, during the last one (1) year had any substantial financial dealings, including the receipt of remuneration, commissions, professional fees, payment for goods and services, etc with the company.

 

The voluntary requirements are: