6 May 2011
Irish listed companies have a lot of work to do to keep pace with changes to corporate governance regulations according to a major new report released today.
Grant Thornton’s 2011 Corporate Governance Review of Irish listed companies’ compliance with the Combined Code comes at a time when numerous new requirements for companies are being introduced. The Irish Stock Exchange has adopted the new UK Corporate Governance Code and added its own supplementary requirements for listed companies, which come into effect in the current financial year. Complying with the Combined Code, or disclosing and explaining non-compliance, is a condition of listing with the Irish Stock Exchange.
The level of companies claiming full compliance remains low at 26% (2010: 36%, 2009: 51%), as companies chose to take a stricter interpretation and disclose more information on what provisions they have not complied with, an option with the current ‘comply or explain’ regime. There were 82 disclosed instances of non-compliance across 26 companies. This compares to the United Kingdom, where 51% of FTSE 350 companies claimed full compliance.
The Central Bank has introduced a new mandatory corporate governance code which, though restricted to companies in the financial services sector, has set a new benchmark for such codes, introducing additional requirements and making the entire code mandatory with a legally enforceable sanctions regime.
The Corporate Governance Review 2011 reveals that:
- there is a significant decrease in the number of companies reporting that the board is comprised of a majority of independent non-executive directors (down 15% to 62%; 2010: 77%, 2009: 87%). Only 20% of companies provided informative explanations as to why their boards do not comply. Just 7 companies met all the independence criteria for directors.
- a third of companies failed to disclose if they reviewed the chairman’s performance, and of the companies that did appraise performance, just four companies gave any detail on how the appraisal was conducted.
- only 43% of companies explicitly disclose that their audit committee contains at least one member with both "recent" and "relevant" financial expertise, as required by the code. Furthermore, only seven companies provide informative descriptions of the work of their audit committees.
- only four companies provided informative descriptions of the work of their nominations committees, with a further 16 providing limited information. The new requirements under the 2010 Irish Corporate Governance Annex will require detailed descriptions of the nomination process for each new director.
- reported levels of compliance with internal control and risk management guidelines are high, with 91% of companies claiming to have the necessary review structures in place (2010: 88%, 2009: 79%). However, explanations of weaknesses identified by the review and the remedial actions were taken are low, with 60% of companies providing minimal information (up from 53% in 2010).
- while 100% of companies claimed to be compliant in understanding the views of major shareholders, just 4 companies demonstrated a proactive approach to engaging and communicating with shareholders, by disclosing details of their shareholder engagement programme and initiatives.
Cian Blackwell, Partner in Grant Thornton, said, 'This report represents a snapshot in time because companies are in transition between the existing regulations, and the introduction of the new codes.'
'However, compliance with the existing code remains relatively low, and the new codes place much stricter obligations on companies, so there is significant work to be done by companies to put their house in order.'
'The new requirements mean that companies must provide much more detailed and informative descriptions of a wider range of governance mechanisms, and they are prohibited from using the "boilerplate" text that is currently used in most annual reports.'
'This comes at a time when the importance of good governance practices continues to be highlighted, particularly in the recent Nyberg report which found that governance failures in Irish banks, particularly in board oversight, while not the sole cause of the banking crisis, allowed the crisis to happen.'
'The focus of the debate should now be on what companies need to do to strengthen boards, and what structures need to be in place to produce optimal corporate governance practices. The debate also needs to examine the role of directors and the audit profession in the collapse of the banking sector, and what changes are required to restore public confidence in how public interest entities operate.'
Blackwell urged all companies to look seriously at the requirements under the new regulations.
'The new Central Bank code is mandatory, making it probably the only corporate governance code in existence where a breach of the requirements could result in criminal prosecution.'
'What was formally “a nice to have”, is now a need to have for companies. It is abundantly clear from the qualitative analysis of the 2010 disclosures against the standards, that companies still need to make significant changes in order to comply.'
ENDS
Download the report