Corp Gov Roundup: Post-Petrobras Scandal Reforms, Clawbacks of Exec Bonuses

Corp Gov Roundup: Post-Petrobras Scandal Reforms, “Clawbacks” of Exec Bonuses

ByMatt Orsagh, CFA, CIPM

Categories:Corporate Governance

It’s time to span the corporate governance globe to review important developments in July.

Brazil

The Brazilian Stock Market (BM&FBOVESPA) publishedproposed new governance guidelines for State-Run Companiesin early July that are meant to tighten up corporate governance at such firms in the wake of recent scandals at state-run oil giant Petrobras.

The measures have been divided into “mandatory” and “optional,” covering areas of transparency, internal controls, and management. Some of the mandatory measures include an integrated sustainability report (transparency), a risk management and related-party transactions policy (internal controls), and 30% independent directors (management).

Final rules will be adopted after a 60-day comment period that ends in early September.

Canada

Canada may be moving one step closer to having one national securities regulator. On 24 July the government’s Council of Ministersnamed a chair to the Capital Markets Regulatory Authority.

The Council of Ministers also established the Capital Markets Authority Implementation Organization, which will assist in the transition to the Capital Markets Regulatory Authority.

The Council of Ministers stated that it intends to issue revised consultation draft provincial/territorial and federal legislation, along with draft initial regulations, for public comment this summer regarding the powers and duties of the Capital Markets Regulatory Authority.

European Union

The European Parliament voted in July on a number of currentrevisions to the Shareholder Rights Directive. The European Commission originally decided to revise theShareholder Rights Directivein April 2014 to overcome perceived shortcomings in the corporate governance of European listed companies.

The issues addressed in the text of theproposed changes to the Shareholder Rights Directiveinclude:

• Insufficient engagement of institutional investors and asset managers
• Insufficient link between executive pay and performance
• Lack of shareholder oversight on related-party transactions
• Inadequate transparency of proxy advisers
• Difficult and costly exercise of rights flowing from securities for investors

The proposed changes, still winding their way through the European Parliament were listed as follows:

1. Mandatory transparency of institutional investors and asset managers on their voting and engagement and certain aspects of asset management arrangements
2. Disclosure of the executive remuneration policy and individual remunerations, combined with a shareholder vote
3. Additional transparency and an independent opinion on more important related-party transactions and submission of the most substantial transactions to shareholder approval
4. Binding disclosure requirements on the methodology and conflicts of interests of proxy advisers
5. Creating a framework to allow listed companies to identify their shareholders and requiring intermediaries to rapidly transmit information related to shareholders and to facilitate the exercise of shareholder rights

The most recent draft of the proposal was voted on at the plenary session of the European Parliament on 8 July. The plenary approved the proposal butrejected some of the amendments to the original text of the Commission. Some of the highlights are below:

• An emphasis on long-term shareholding has been taken out of the draft, perhaps quieting some calls for the adoption of dual-class share structures that benefit long-term shareholders,
• A comply-or-explain option for engagement and investment strategy for asset managers was maintained in the draft. This simply means that asset managers are encouraged to develop and publish an engagement policy.
• An employee vote on executive “say on pay”isno longer in the draft.
• Member States can endorse shareholders’ vote on the executive remuneration policy, but such votes are to be merely advisory, not binding, unless the Member State wishes to make such votes binding.

Watch this space for more information on future developments in the Shareholder Rights Directive.

Middle East and North Africa

The Department of Economic Development (DED) in Dubai and the Institute of Corporate Governance (Hawkamah), have set up anIslamic Management and Governance Centrein Dubai. The Centre will develop best practices for Islamic financial institutions, along with implementation and monitoring mechanisms, and training and education on governance.

New Zealand

TheNew Zealand Corporate Governance Forumwas launched in July to promote good corporate governance in New Zealand companies. Forum members include New Zealand-based institutional investors who collectively hold more than 15% of the total New Zealand equity market.

The forum has produced a set of corporate governance guidelines for New Zealand investors and companies. The forum supports the principles and guidelines developed by theFinancial Markets Authority (FMA), published in itsCorporate Governance in New Zealand Handbook for Directors. The FMA principles apply to a wide range of entities including unlisted, listed, governmental, and not-for-profit organisations.The FMA guidelines form the basis for the Forum’s Guidelines.

United States

The Securities and Exchange Commission (SEC) recentlyproposed tougher clawback ruleson executive bonuses than those currently on the books.

Thenewly proposed clawback ruleswill call on national securities exchanges to establish listing standards requiring companies to adopt and disclose policies that require executive officers to pay back certain incentive compensation that was awarded erroneously. The proposed rule looks back over three years of compensation awarded in error. Current rules only call for clawbacks in instances of executive malfeasance, such as fraud. The new rules — if adopted as proposed — would also claw back some incentive compensation awarded due to accounting restatements and other errors.

CFA Institute is currently reviewing the proposed rule and will submit comments to the SEC.

The public comment period ends 14 September.