Chapter 1: Corporate governance vs risk management

The OECD (Organisation for Economic Co-operation and Development) defines corporate
governance as “the system by which business corporations are directed and controlled”

Different approaches to Corporate Governance

The fundamental divide in a policy sense is really between:
1. Rules-based approaches-The US approach has been to a large extent a rules-based
approach (mandatory) resulting in the Sarbanes-Oxley laws (passed by Congress)
2. Principles-based approaches-The UK approach is a principles-based approach
(comply or explain) initiated by private and government sector i.e. FRC & DTI
1.1 Rules-based approaches-(‘one size fits all’).
Codes with legal enforceability are rules-based approaches. Rules-based control is when
behaviour is underpinned and prescribed by statute of the country’s legislature. Compliance
is therefore enforceable in law such that companies can face legal action if they fail to
comply.

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The US tends to favour a rules-based Securities and Exchange Commission (SEC), the
agency responsible for administering federal securities laws in the approach to corporate
governance, since its markets are regulated by the US.
1.2 Principles-based approach
Principles essentially have no minimum standard of practice prescribed in law.
In a principles-based jurisdiction, compliance is required under stock market listing rules but
non-compliance is allowed based on the premise of full disclosure of all areas of non-
compliance. It is believed that the market mechanism is then capable of valuing the extent of
non-compliance and signalling to the company when an unacceptable level of compliance is
reached.
UK Corporate Governance Code 2018

The UK Corporate Governance Code, 2018 is the current edition of the Combined Code.
The Stock Exchange Listing Rules require annual reports to state how the company has
applied the principles, where it has complied with the Code - and where it has not..
Corporate Governance Code (Irish)
1. 2014 Companies Act

Primary source of CG for all Irish companies

•Comply or explain basis to adopt appropriate compliance measures and to prepare a
statement of compliance with company and tax law in their annual financial statements.
•The Act also provides a basis for related EU directives, such as the EU antimoney
laundering and market abuse regulations, EU Accounting Directive.
2. Irish Listing Rules

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Applies to public listed companies in Irish Stock Exchange (Euronext Dublin)
•Include key requirements on corporate governance
•Ruling guided by UK CG Code as UK CG Code applies to all public listed companies
•Listing rules (Irish CG Annex) and UK CG Code = Combined CG Code, companies listed
on the principal Irish securities market Euronext Dublin, are required to comply with both
Corporate Governance Code (EU)
Word “Europe” may be used to describe several different entities.
More frequently, the word is used as a collective term to describe the 28 member states of the
European Union
European Commission an independent supranational authority separate from the member
states’ governments
a) Developing strategies
b) Drafting legislation and arbitrating in the legislative process
c) Representing the EU in trade negotiations
d) Making rules and regulations
e) Drawing up the budget of the European Union
f) Scrutinizing the implementation of the treaties and legislation
Part of driving forces of the European Commission were:
a) to cement the single market by creating common standards in governance as in other areas;
and
b) to bolster market and public confidence in the wake of the dotcom and other scandals.
Distinct characteristics of EU??
a) Single currency Euro
b) Single labour market work within member states
c) Single market for goods and services abolish trade controls, no tariff?
d) Single capital market capital moves freely
e) Legal standardisation 28 member states have different legal systems, but binding
agreements set out legal principles that all EU governments are required to apply.
f) Focus on human rights
g) Focus on corporate governance

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European Union Regulations
CG approach adopted by the EU is very similar to the corporate governance regimes in the
UK and Ireland, as the EU reforms were influenced significantly by the UK Corporate
Governance Code
•Adoption of a ‘comply or explain’ approach
•Governance practices vary in respective countries, but developing degree of consistency
across the EU is necessary to facilitate the operation of the single market.
•EU Action Plan 2003 on CG reforms
a) modernising Board of directors –composition, responsibilities and remunerations
b) CG disclosures
c) strengthen shareholders rights
d) coordinate CG practices of member states
EU Action Plan 2012 envisages new provisions for reporting on board diversity, risk
management, and executive remuneration as well as for improving the quality of corporate
governance reports, especially explanation on comply and explain approach
Once an EU directive is agreed, individual member states must take steps to make this
directive law in their own jurisdictions. Any EU regulations are adopted into the relevant
domestic frameworks for corporate governance and risk management
As a result, the sector risk management regulations that apply to an organisation in an EU
member state may differ slightly from those included in the directive
Member states must ensure that organisations comply at a minimum with the rules in an EU
directive but they can choose to go beyond these rules
Corporate Governance Code (G20/OECD and World Bank)
OECD
The Organisation for Economic Co-operation and Development (OECD) is an international
organisation that works to build better policies for better lives. The goal is to shape policies
that foster prosperity, equality, opportunity and well-being for all. Generally, OECD
members are high-income economies –37 countries
•The G20 is an international forum, made up of 19 countries and the European Union,
representing the world’s major developed and emerging economies.
•The OECD acted as a strategic advisor to the G20. The OECD participates in all G20
Working Group meetings and provides data, analytical reports and proposals on specific
topics, often jointly with other relevant international organisations.
•The G20/OECD Principles of Corporate Governance help policy makers evaluate and
improve the legal, regulatory, and institutional framework for corporate governance, with a
view to supporting economic efficiency, sustainable growth and financial stability.

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•The Principles were originally developed by the OECD in 1999 and last updated in 2004.
•The 2015 version addresses developments in corporate governance and the rapidly changing
corporate and financial landscape.
World Bank
•The World Bank is like a cooperative, made up of 189 member countries. These member
countries/ shareholders, are represented by a Board of Governors, who are the ultimate
policymakers at the World Bank. Generally, governors are member countries' ministers of
finance or ministers of development.
•Provide wide array of financial products and technical assistance, and help countries share
and apply innovative knowledge and solutions to the challenges they face. It provides
knowledge sharing through policy advice, research and analysis.
•World Bank’s work on governance focuses on 2 key areas:
1) Promoting transparent and accurate financial reporting. From a risk management
perspective, this should ensure that stakeholders have reliable information on which to assess
the longer term performance of an organisation.
2) Improving the governance of state-owned enterprises, -are accountable for the quality of
the products and services that they provide, as well as being free from corruption.
Corporate Governance Code (Malaysia)
Introduced in 2000, revised in 2007, 2012, 2017.
•Latest revision in April 2021
•Adoption of a ‘comply or explain’ alternative approach
•COMPREHEND understand and internalise the spirit and intention behind the principles and
practices including its intended outcomes.
•APPLY the principles and practices of the MCCG is not merely a matter of compliance in
form with a set of rules. It is about meaningful application in substance of good corporate
governance practices. This involves a mindset and culture change, moving away from a box-
ticking approach to corporate governance.
•REPORT provide informative disclosure on their application of the MCCG practices. Take
the corporate governance disclosures as an opportunity to demonstrate to stakeholders that
they have holistic and effective corporate governance arrangements.

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PART E –CORPORATE GOVERNANCE DISCLOSURE [BURSA MALAYSIA MAIN
MARKET LISTING REQUIREMENTS]
15.25 Disclosure of corporate governance related information
(1)A listed issuer must ensure that its board of directors provides an overview of the
application of the Principles set out in the MCCG, in its annual report.
(2)In addition, the listed issuer must disclose the application of each Practice set out in the
MCCG during the financial year, to the Exchange in a prescribed format and announce the
same together with the announcement of the annual report. The listed issuer must state in its
annual report, the designated website link or address where such disclosure may be
downloaded.
Para 6.3:
Companies must provide meaningful explanation on how it has applied each practice. Where
there is a departure from a practice, the company must–
provide an explanation for the departure; and
disclose the alternative practice it has adopted and how the alternative practice achieves the
Intended Outcome.
In addition to the above, where Large Companies depart from a practice, they are also
required to disclose–
actions which they have taken or intend to take; and
the timeframe required for them to achieve application of the prescribed practice.
•In doing the above, companies must carefully consider and be closely guided by the
Guidance.