Good Governance: Are you still living in a twilight zone?

Notions of “good governance, “proper governance”, are used way too liberally nowadays. Up until recently though, the value and significance of these ideals had been relegated to the realm of scholarly literature, where these key precepts had been effusively discussed. For years, these concepts were merely bookish theories, abstract ideals, their importance enthusiastically discussed, but sadly, (un)willingly misrepresented and applied in practical life.

The concept of good governance was originally coined with reference to governmental bodies. It seeks to describe a way of assessing how public institutions conduct public affairs and manage resources. A number of international bodies, including the OECD, the United Nations and the Council of Europe, amongst others, have attempted to concretise the meaning of good governance by identifying key core principles.

Over the last couple of years, the local media has bombarded readers and listeners with references to principles of good governance, for the most part in reference to the political accountability of elected representatives to the electorate. It would, however, be wrong for any one of us to assume that good governance is a precept applicable exclusively to politicians and government institutions. Whilst the workings of government may have been the cradle for the development of this ideal, the application of this concept has filtered to almost all areas of life.

Indeed, over the years, it has become increasingly evident that good governance principles should permeate all spheres of life, particularly where the interest of the individual could conflict with the greater common good. While the importance of good governance can never, in any way, be diminished in the political and governmental spheres, greater importance has been given to the need to ensure good governance also in corporate and financial institutions. This is the legitimate expectation of a world where corporate entities play a major role in shaping the operations of societies and markets, and whose behaviour systemically impacts various sectors of the economy.

The US ENRON scandal was probably the first case to throw an international spotlight on the serious repercussions which the lack of robust governance arrangements, combined with the correct dose of regulatory oversight, could have on market participants, and consequently, the economy. Other similar scandals followed, including the more recent Deutsche Bank scandal, which was a direct result of inadequate oversight of the transactions the bank processed. Since then, the bank has invested over a billion dollars with the aim of strengthening its internal oversight function, including the recruitment addition of over 1500 employees.

Such real-life examples go to show the importance of seriously implementing principles of good corporate governance. After all, any corporate entity represents the coming together of two or more individuals to create a new legal entity, having its own individual existence and personality – the company – through which to undertake a commercial activity, for the benefit of all its stakeholders.

This shift in focus has thus increased the onus on operators to reconsider their obligations vis-à-vis their employees, counter-parties, authorities, and to a greater extent, to the society in which they operate. Directors, officers and any person with decision making authority in any corporate structure, increasingly feel the need to ensure that their actions and decisions, and the process behind the implementation thereof, reflect good governance principles.

Moving away from the abstract to the concrete implementation of idealistic notions is, not surprisingly, the main challenge organisations face. It is certainly easy to speak about the ideal. It is human nature to chase an ideal. But whilst preaching good governance is (seemingly) a political prerogative, corporate entities do not have the luxury of not practicing what they preach. And this is where a conundrum is created.

This is where the law comes in. Any effective pursuit and implementation of good corporate governance practices must start from a thorough understanding of the legal landscape and the legal obligations imposed on corporate entities. Any entity concerned with implementing good corporate governance practices cannot ignore the primary rules which an organisation and its executive bodies must abide by.

The essence of good corporate governance lies in the way institutions decide to take action, or, not to take action. The Companies Act clearly sets out the manner in which corporate bodies are expected to operate. It establishes the relations between the stakeholders and its directors – being the mandated representatives of the stakeholders and day to day decision makers, and also between the company and its creditors and the general public. The principles enshrined in the law are, however, merely the tip of the iceberg – the minimum expected from any corporate entity. Truly embracing a good corporate governance culture requires a lot more than merely abiding by the book.

This is where regulation, codes of conduct, and other ‘quasi-legislation’ come into play. These attempt to concretise abstract principles by shedding light on what is expected from companies claiming to adhere to sound good corporate governance practices. Such principles emanate both from international proclamations, such as the G20/OECD Principles of Corporate Governance, which can be recognised as the benchmark of all corporate governance frameworks. It identifies the principles which acknowledge the interrelationship between corporate entities and their stakeholders, investors as well as the markets in which they operate, while seeking to achieve a balance between the interests of the various parties concerned. It recognises that sound corporate governance frameworks should not stifle the growth of organisations. Proportionality is key. Operators and regulators must implement the principle of proportionality; this is fundamental to achieve the common good. Stifling the growth of business and organisations is not conducive to a healthy economy and does not allow markets, and their individual participants, to prosper.

On a local level, the soft laws supplementing the Companies Act have to date been sector specific. In fact, corporate governance guidelines have been published for public interest companies, whose aim is to foster public confidence in enterprises and their activities. A corporate governance manual has also been published by the Malta Financial Services Authority and applies specifically to directors of collective investment schemes regulated in terms of the Investment Services Act.   The Listing Rules issued by the Malta Financial Services Authority as the Listing Authority also contain a section setting out the principles of good corporate governance applicable to listed entities.

These various documents have however proved to be too superficial to truly assist regulated entities in identifying the actions these must take to implement the correct corporate governance framework. This deficiency has in fact been noted by the local regulator, which has announced that the review of corporate governance frameworks of regulated and listed entities is a top priority for 2020 and 2021.

In fact, local operators in the financial services industry, specifically those which are regulated by the Malta Financial Services Authority (MFSA) or listed on the Malta Stock Exchange, should note that one of the supervisory priorities set by the local financial regulator for 2021 is precisely the review and assessment of regulated entities’ corporate governance and culture as applied in their day-to-day operations. The MFSA is also expected to scrutinise internal control mechanisms, not least in the areas of regulatory compliance and anti-money laundering and terrorist financing. Anyone familiar with the financial services industry knows that the anti-money laundering frameworks of local operators have come under the regulators’ magnifying glass during 2020…a trend which is expected to extend into 2021 and which will require local operators to review and enhance their systems to ensure compliance with applicable law and regulation.

While such reviews have the effect of triggering operators to take action by reviewing internal policies and implementing the required changes, the ultimate aim of the regulators is to safeguard the reputation of the local market. If local regulators can ensure the transparent, efficient, and effective operations of local financial service providers, market confidence will be enhanced. The benefits of a robust economy, built on solid and wholesome economic foundations, is self-evident.

In addition to the overall benefits to the economy which such regulatory scrutiny will result in, the by-product of these supervisory reviews will be the publication of a code of conduct, which all financial services operators will be required to implement on a day-to-day basis. The principles which will be set out in this code of conduct will reflect the regulator’s findings from the various on-site visits undertaken. This will (hopefully) result in the development of a code of conduct which is practical, direct, clear, and which hits the proverbial nail on the head by focusing on substantial issues. Above all, the industry expects a code of conduct which embraces the principle of proportionality – a fundamental requirement if the regulator truly wishes to secure its successful implementation to the benefit of all market participants.

The ultimate objective of all market operators is to safeguard the integrity of the local market, particularly in the volatile environment many are currently operating in. Fostering investor protection and confidence, and securing the financial soundness of such institutions, is key to managing, and mitigating, systemic risks.

The time has now come for any corporate entity, and especially regulated ones, to spring into action and move out of the twilight zone. It’s time for directors, managers, senior officers to take stock of their organisations’ operations, to recognise the importance of sound corporate governance practices in their operative ambit, and to undertake a serious, thorough, and honest review and assessment of their governance arrangements. The time has come to revamp systems and processes. The time has come to implement sound corporate governance practices.

The time is now.


This article was first published in the Times of Malta, 20 January 2021.