Nurturing Effective Corporate Governance

 

Corporate governance plays a crucial role in facilitating effective management and operations of companies, promoting transparency, accountability and responsible conduct. Corporate governance encompasses the responsibilities of the Board of Directors and their relationship with the company’s shareholders, management, external auditors, regulators, and other stakeholders. Corporate governance is distinct from management, which refers to how a company’s ordinary business affairs are conducted, even though the lines between governance and day to day management are not always clearly defined. In recent years, numerous reports on corporate governance have been published across different jurisdictions, such as the OECD Principles of Corporate Governance issued in 1999 and the EU Action Plan on European Company Law and Corporate Governance issued in 2012.

 

The Importance of the Memorandum and Articles of Association in Corporate Governance: Enhancing the framework established by the Companies Act

In Malta, the Companies Act serves as the fundamental basis for corporate governance practices, establishing the legal framework that governs companies incorporated within the jurisdiction. In addition to the Companies Act, the Memorandum and Articles of Association of a company holds significant importance in terms of corporate governance as they serve as a supplement to the corporate governance provisions specified in the Companies Act. The Memorandum and Articles of Association define and regulate the internal structure, operations and relationships within the company and outline specific rules and procedures pertaining to matters such as shareholders rights, decision making processes, appointment and removal of directors, share transfers and other crucial aspects of corporate governance.

 

The Role of the Board of Directors and the Shareholders of the Company

In terms of the Companies Act, the general meeting of the shareholders and the board of directors hold a pivotal role in the governance structure of the Maltese companies. Article 137 of the Act states that “The business of a company shall be managed by the directors who may exercise all such powers of the company… as are not by this Act or by the memorandum or articles of the company, required to be exercised by the company in a general meeting”. This provision combines the roles of the shareholders, the company itself and the directors, without explicitly defining the legal relationship between them. However, Maltese Courts have emphasised the principle that directors should be treated as agents of the company in their dealings with third parties and as mandatories or representatives of the company in their internal dealings.

 

The Companies Act imposes several corporate governance obligations on the directors to ensure proper management and accountability, which include:

• Fiduciary Duty: Directors owe strict fiduciary duties to the company and, therefore, directors are required to act bona fide in the best interests of the company. They must exercise their powers and perform their duties with utmost care, skill and diligence, taking into consideration the long-term success and sustainability of the company.
• Duty to Act for Proper Purposes: Directors must exercise their powers for the purposes for which they are conferred. The directors must not exercise their power for an improper purpose, and they cannot without the consent of the company, fetter their future discretion. They must avoid placing themselves in a position in which there is a conflict between their duties to the company and their personal interests. 
• Duty to Promote Success: Directors have a duty to promote the success of the company while considering the interests of shareholders and stakeholders. They should consider the long terms consequences of their decisions, the company’s reputation, and the impact on its employees.
• Duty to Exercise Independent Judgement: Directors should always utilise their own independent judgement and refrain from being excessively influenced by external pressures. Their decision making should be well informed, drawing upon their knowledge and expertise.
• Duty to Maintain Proper Accounting Records: Directors need to ensure that that company maintains accurate and up-to-date accounting records. These records must provide a true and fair view of the company’s financial position and enable the preparation of reliable financial statements.
• Duty to Ensure Compliance with Laws and Regulations: Directors must ensure that the company complies with all applicable laws and regulations. This includes adherence to corporate governance standards, industry-specific regulations and other applicable statutory requirements.

 

Although the Board of Directors is central to the concept of corporate governance, the shareholders’ role should not be overlooked. The Companies Act recognises and protects the rights of shareholders, allowing them to exercise their influence in key company decisions. Shareholders have the right to attend and vote at general meetings, appoint and remove directors to or from the Board of Directors, approve significant transactions and receive timely and accurate information about the company’s affairs. The Companies Act also promotes shareholder engagement as all shareholders have the right to raise questions, express concerns and provide input during general meetings. Further, shareholders can propose resolutions and requisition extraordinary general meetings under certain circumstances.  

 

The Requirement of Financial Statements

The Companies Act mandates the preparation of financial statements in accordance with generally accepted accounting principles. This holds significant importance for corporate governance.  By requiring companies to prepare and present financial statements to shareholders at the annual general meeting, the Companies Act promotes transparency and accountability within corporate governance practices. It also provides the shareholders with a clear understanding of the company’s financial position, performance, and cash flows. Additionally, the requirement for independent auditors to audit the financial statements adds further credibility and assurance to the information presented. 

 

The MFSA’s Corporate Governance Code issued in 2022

Good corporate governance is also perceived as fundamental for maintaining financial stability, upholding market integrity and protecting consumers of financial services. In August 2022, the Malta Financial Services (the ‘MFSA’) introduced the Corporate Governance Code (the ‘Code’) for all entities authorised by the MFSA to enhance corporate governance practices within the Maltese financial services sector. This Code applies to all entities licensed by the MFSA to provide financial services within or from Malta, with the exception of entities governed by the Capital Market Rules, which follow a separate code issued in 2006.

 

The Code emphasises the importance of adhering to its principles to the best of each entity’s abilities, aiming for a proportionate approach that considers the diverse nature of entities falling under its scope. The Code comprises several guiding principles, which:

• Ensure the effectiveness of an entity’s Board of Directors, ensuring their maximum contribution
• Address the need for adequate internal controls and oversight systems that an entity should establish and incorporate into its governance structure
• Identify principles aimed at nurturing the relationship between the authorised entity and all stakeholders, including employees, consumers, and public authorities
• Emphasize the integration of environmental, social and governance (ESG) factors and corporate social responsibility (CSR) factors into an entity’s business strategy and model, encouraging senior management to operate with an ethical corporate culture that promotes trust integrity and sustainability

 

Effective corporate governance practices not only benefit individual entities but also have a broader positive impact on the financial sector as a whole. By upholding strong corporate governance standards, Malta’s financial services industry can maintain its reputation as a reliable and trustworthy hub for businesses and investors. Nevertheless, it is understood that continued efforts to refine and evolve corporate governance practices will be essential to adapt to the ever-changing landscape of the financial services industry.

 

Concluding remarks

In conclusion, effective corporate governance is crucial for the success and sustainability of any entity as it provides a framework that guarantees transparency, accountability and ethical behaviour. The dynamic business environment, marked by technological advancements, globalisation and increased stakeholder expectations requires continuous enhancements in corporate governance practices. Companies must give importance to the establishment of independent and diverse boards, robust risk management systems and effective internal control mechanisms. Additionally, promoting a culture of integrity and embracing sustainable practices are essential to ensure effective corporate governance.

 

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