Around the world
- United Kingdom
- United States
- New SEC rules requiring audit compliance with Sarbanes-Oxley Act 2002
- NYSE clarification of independent director rules
- Singapore
- Hong Kong
United Kingdom
A counsel of best practice that can be intelligently applied
The Higgs report into the role and effectiveness of non-executive directors in the UK, sets out a determined yet realistic agenda for change. The report builds on the existing framework of UK corporate governance and envisages a more demanding and important role for non-executive directors.
Derek Higgs, a former investment banker, was appointed by the Secretary of State for Trade and Industry and the Chancellor to lead a short independent review of the role and effectiveness of non-executive directors. The terms of reference required the Review to build and publish an accurate picture of the status quo, to lead a debate on the issues and to make appropriate recommendations.
Rejecting a legislative approach, Higgs' recommendations build on the current framework of UK corporate governance and the 'comply or explain' nature of the existing UK Combined Code. The Financial Reporting Council in the UK has announced that it will take forward the recommendations of the Review for changes to the Combined Code by 1 July 2003.
Three substantial pieces of research were commissioned for the review.
The key recommendations of the Review include:
- A new, clear description of the role of the non-executive director;
- Clarification of the liabilities of non-executive directors;
- That the roles of chairman and chief executive should be separated, and that the chief executive should not go on to become chairman of the same company;
- A new definition of 'independence' that addresses both relationships that would affect a director's objectivity and also those that could appear to do so. At least half the board would need to meet the new test, as would all members of the audit and remuneration committees and a majority of the nomination committee;
- Closer relationships between non-executive directors and major shareholders, including by the appointment of a senior independent director;
- Significantly improved induction and professional development for directors; and
- That the performance of individual directors and of the board as a whole should be evaluated at least annually.
The wide-ranging recommendations in the Review have been welcomed by commentators and interested parties in the UK, its general findings and its positive reception in the UK being indicative of the increasing recognition of the important role of good corporate governance. Whilst it is tempting to compare 'established' practices in the UK and Australia, this results in too little emphasis being placed upon the similar approaches which have recently been followed in both jurisdictions. The fact is that, in both the UK and Australia, the role of the independent non-executive director has become more effective and less cosmetic with the passage of time and is likely to continue to do so in the near future, although the emphasis upon best practice rather than regulation does not result in uniform practices in either country.
The ASX Corporate Governance Council's guidelines by and large also follow the 'comply or disclose' approach recommended by the Higg's report. For more information, see the ASX guidelines.
This article was contributed by Tracey Renshaw, Senior Associate.
Regulating hedge funds
The Financial Services Authority (FSA) has announced in a press release that it will not be relaxing the rules governing the marketing of hedge funds to retail investors. This decision came after feedback on the FSA's discussion paper indicated that the respondents saw no need to change the existing supervisory regime applying to hedge fund managers in London. For information on the discussion paper, see ITM 9.
The FSA reported that hedge funds, investment advisers and retail investors alike held no desire to provide or sell hedge funds as retail products.
The FSA believes that the current regime provides the right balance of consumer protection and access, and will continue to regulate hedge fund managers in the UK, but will not regulate the funds themselves.
United States
New SEC rules requiring audit compliance with Sarbanes-Oxley Act 2002
On 1 April 2003 the Securities and Exchange Commission (SEC) issued a press release revealing that it would adopt rules that direct the national securities exchanges and the national securities associations to prohibit the listing of the securities of any issuer who had not met the audit committee requirements established by s 301 of the Sarbanes-Oxley Act 2002.
According to the new listing rules, which apply to both domestic and foreign listed issuers, the national securities exchanges and the national securities associations must not list securities if the issuer has not satisfied a number of requirements.
One requirement is that each member of the issuer's audit committe must be independent in accordance with s 10A(m) of the Securities Exchange Act of 1934. This section includes two criteria that must be met:
- A member of the audit committe must be barred from accepting any consulting, advisory or compensatory fee from the issuer or any subsidiary, other than in the member's capacity as a member of the board of directors.
- A member of the audit committee must not be an affiliated person of the issuer or any subsidiary apart from capacity as a member of the board or any board committee.
To address the special circumstances of particular foreign jurisdictions, there are also several provisions that apply specifically to foreign private issuers:
- non-management employees are allowed to serve as audit committee members, consistent with "co-determination" and similar requirements in some countries;
- shareholders may select or ratify the selection of auditors, again consistent with the requirements in many countries foreign to the United States;
- alternative structures such as boards of auditors may perform auditor oversight functions where such structures are provided for under local law; and
- the issue of foreign government shareholder representation on audit committees is addressed.
Listed issuers will be required to comply with the new listing rules no later than 31 October 2004 and foreign private issuers will be required to comply by 31 July 2005.
NYSE clarification of independent director rules
At the request of the Securities and Exchange Commission, the New York Stock Exchange (NYSE) filed their recommended provisions relating to director independence on 12 March 2003.
These recommendations were excerpted from the NYSE Corporate Governance Proposals, and were slightly amended in several respects. (Eds: The NYSE Corporate Governance Proposals were considered in ITM 8, when the report was first submitted to the NYSE Board and the SEC.)
Key points of the revised director independence definition are as follows:
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A majority of directors of listed companies must be independent.
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The board must affirmatively determine that an independent director has no material relationship with the company.
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If a director (or his or her immediate family member) receives more than US$100,000 per year in direct compensation from the company, it is presumed that he or she is not independent until five years after he or she ceases to receive more than that amount in compensation. This standard is linked to the amount of compensation and not employment, so a director need not be an employee to fall within this rule. This presumption can be overidden by the board if it is determined that the compensatory relationship is not material.
There are several further requirements that prohibit an independent director from being employed by an entity with which the company trades, employed by the company's auditor, or tied to another company's compensation committee.
The SEC is currently reviewing these rules. All listed companies will be required to comply with the director independence standards within 18 months of SEC approval.
Singapore
Enhanced corporate governance and disclosure framework
In February 2003 the Monetary Authority of Singapore (MAS) issued a consultation paper containing proposed guidelines and regulations to enhance the existing corporate governance and disclosure framework for locally incorporated banks and direct insurers.
The proposed guidelines were constructed from the Code of Corporate Governance that was issued by the Corporate Governance Committee in March 2001. To safeguard the interests of depositors and policyholders, MAS has added to, or enhanced certain principles in the guidelines. There is now a statement of 10 clear principles. Included in the regulations are:
- a clear definition of 'independent director';
- requirements for the composition of the board of directors and board committees; and
- a requirement that the roles of chairman and CEO be separated.
Public consultation closed on 24 March 2003, and MAS is expected to publish on its website a summary of the feedback received.
(Source: MAS press release, 24 February 2003.)
Hong Kong
Securities and Futures Ordinance
The Securities and Futures Ordinance (SFO) came into effect on 1 April 2003 and consolidates and modernises the various laws that regulated the securities and futures markets in Hong Kong for the past 30 years. The SFO is designed to provide more flexibility to effectively regulate the market with standards that are internationally comparable.
One feature of the new legislation is the establishment of the Market Misconduct Tribunal, which will deal with incidents involving insider trading, market manipulation, dissemination of false and misleading information and other forms of market misconduct. The tribunal is able to impose a wide range of sanctions, such as disgorgement of profits. Criminal proceedings are also within its power, with a maximum sentence of 10 years imprisonment or HK$10m fine. Extending this push against market misconduct, investors are now able to exercise a private cause of action against listed companies or their responsible officers to seek compensation for losses caused by market misconduct or false or misleading communications.
Echoing global regulatory trends, several enhancements have been made to corporate governance, including reductions in the disclosure threshold for substantial shareholders from 10% to 5% and the notification period from 5 to 3 days.
The SFO also provides for:
- new licensing guidelines outlining the areas that the Hong Kong Securities and Futures Commission (HKSFC) will consider when granting licences to financial intermediaries;
- a streamlined licensing regime under which brokers and investors need only one licence to carry on all activities;
- additional powers to be given to the HKSFC to obtain documents and seek explanations from parties closely related to a listed company under investigation;
- a 'dual filing' requirement for listing applications and ongoing disclosures that provides for higher quality corporate disclosure; and
- exemption from civil liability for auditors who report fraud or misconduct committed by listed companies to the HKSFC.
(Source: Securities and Futures Ordinance: Frequently Asked Questions, http://www.info.gov.hk, and HKSFC press release, 29 March 2003.)
Listing Rule amendments
The Stock Exchange of Hong Kong Limited recently published Consultation Conclusions on Proposed Amendments to the Listing Rules Relating to Corporate Governance Issues. The Exchange is now drafting revised Main Board and GEM Rules based on the consultation conclusions. Copies of the consultation conclusions, released on 17 January 2003, are available from the Exchange website. The proposed rule changes do not include a requirement for quarterly reporting, the existing continuous disclosure rules seen as providing a timely flow of information to the market. However, it is proposed to adopt Codes of Best Practice and to require each company to have at least three independent directors.
