[Fulltext] Where was the Enron board? That question is as good a pointer as any to the reason for renewed interest in corporate goverrnance in the US. George Bushâ??s ten point blueprint for reform has been criticised by some commentators for not going far enough but those inclined to take comfort from how much better things are on this side of the Atlantic have been cautioned against complacency by commentators in the business press. Meanwhile on the European markets, where reporting controversies like ABB have made the headlines recently, governance is also emerging as an issue. The European Commission has announced that it is considering whether to prepare proposals to harmonise corporate governance codes across member states. And, in the UK last month, Patricia Hewitt, Secretary at the Department of Trade & Industry announced a review of the role of Non-Executive Directors (NEDs).
Closer to home, the Institute of Directorsâ?? newly established Centre for Corporate Governance at the Smurfit Graduate School of Business in UCD looks like it will have plenty to keep it occupied over the coming months.
Combined Code
Companies listed on the Irish and UK Stock Exchanges must comply with the requirements of The Combined Code (comprising Cadbury, Hampel, and Greenbury), or must state why they do not comply.
Irish companies, according to the Irish Association of Investment Managers (IAIM) have a good level of compliance with The Combined Code. This is good news and underpins the credibility of the Irish market as a place to invest. But then, as Sir David Tweedie has pointed out, neither Cadbury nor Hampel tackled the issue of the appointment of auditors, so the Combined Code is unlikely to end up being the last word on corporate governance. (Sir David Tweedie, Chairman of the International Accounting Standards Board, will be a speaker at the Institute of Chartered Accountants in Ireland General Practitionersâ?? Conference in Malahide on the 11th and 12th of April.)
Turnbull Guidance
IAIMâ??s 2001 Corporate Governance Review did not examine compliance with the Turnbull guidelines - which offer practical guidance on the Combined Codeâ??s requirement for companies to â??maintain a sound system of internal control to safeguard shareholdersâ?? investment and the companyâ??s assetsâ?? - but this will be looked at next time around.
Non-Executive Directors
The Corporate Governance Review raises a number of issues relating to the appointment, role, independence, length of service, and remuneration of NEDs. The question of independence is a particularly thorny one and IAIM is hoping to work with other relevant bodies to arrive at an agreed definition. While boards are sometimes criticised for comprising too many â??chairmanâ??s chumsâ??, there are difficulties in growing the pool of available NEDs. Media reports of investors seeking to sue company directors in the US are being seen as a disincentive there. In Norway, proposals to introduce quotas for female directors have run into hot water. While here, there are worries that ever more onerous directorsâ?? responsibilities could discourage potential NEDs.
In IAIMâ??s view, an independent NED should not be a recent former executive, should not have a business relationship with the company or be a partner or employee in a firm with such a relationship, should not be in receipt of consultancy payments or share options, and should not have significant personal ties to key directors or senior management.
Internal Audit
According IAIM, about 80% of Irish listed companies have an audit committee compring at least three NEDs as recommended by The Combined Code. The Code also requires that companies have an internal audit function - which may be outsourced. The quality of the internal audit function was raised by Professor Ian Percy, the Special Investigator appointed by the Complaints Committee of the ICAI to inquire into matters relating to the DIRT Inquiry. Professor Percy suggested that ICAI, together with the Central Bank and IAASA, should give some consideration â??as to whether any regulations are necessary in respect of the professional qualifications required of internal auditors of the banks, the standards of auditing they apply, and the professional disciplines they should adhere toâ??. Professor Percy also recommended that consideration be given by the ICAI â??as to whether any guidance should be issued by the ICAI for members servicing on boards or audit committees in relation to corporate governanceâ??.
Most of the auditors of Irish listed companies are Chartered Accountants as are many of those who serve on company boards. With so many disparate forces now turning atention to the Corporate Governance question, there is an opportunity for the ICAI and its members to make an effective and unique contribution in a debate that seems set to run for quite a while.
Accountancy ireland Vol 34 No 2 April 2002