During an information seminar held last March by The Executive Events, in association with the Malta Associate of Henley Business School (University of Reading), Dr Francis Zammit Dimech discussed The Code of Principles of Good Corporate Governance issued by the Malta Financial Services Authority (MFSA), which lays down the basic rules of good practice in ensuring proper corporate governance in registered companies.
This article presents a summary of the key points mentioned by Dr Zammit Dimech during the seminar, which focused mainly on the importance of social corporate responsibility, as well as how well the code reflects the realities faced by small, private and family-run businesses in Malta.
The first point Dr Zammit Dimech touched upon concerned the need for companies to ensure that they appoint people of high calibre in positions of responsibility and trust, and that people occupying these roles have the necessary skills and experience to contribute effectively to the decision-making processes of a company.
Moreover, Zammit Dimech emphasised the importance of having a non-executive element as an integral part of the board of directors in a company. The role of this arm of the board is to ensure balance by serving an independent control on the executor of the company affairs. He also pointed out that a non-executive director should be someone who is not engaged in the daily management of the company.
The board as a whole, comprised of its executive and non-executive elements, has a number of responsibilities which the MFSA clearly enumerates in its code under four key rules of proper corporate governance, namely: 1) accountability; 2) monitoring; 3) strategy formulation; and 4) policy development.
Opening Up To Institutional Shareholders
After briefly explaining the importance of abiding by the principles of meritocracy and transparency when appointing new directors to the board, as well as the usefulness of having a nomination committee that ensures that there is adequate information on the candidates involved, Zammit Dimech shifted the focus of the discussion on the role of institutional shareholders.
Institutional shareholders represent an external component of control that interacts very closely with the board of directors within a company. Also commonly known as stakeholders, these include: custodians, banks, financial institutions, fund managers, stockbrokers and investment managers among others, all of which greatly influence the decision-making processes of a company.
These stakeholders represent in the literal sense of the term the people who hold a stake in the company. Therefore, according to Zammit Dimech, any mention of these institutions should instantly bring to mind the concept of corporate social responsibility and what a company that operates in the contemporary socio-economic landscape ought to do to keep them satisfied.
A Misalignment Between Code And Reality
Upon giving the floor to the attendees, a member of the audience raised the point that in many cases the clauses in the present code are specifically directed to listed companies and do not adequately cover the needs of the small, family-run businesses that are the predominant type of enterprise in Malta.
In fact, these companies are often forced to be more selective in abiding by the code: tailoring certain aspects of it to their particular way of operating. This naturally raises legitimate questions about the usefulness of the code itself and whether it serves its purpose in encouraging good practice among companies in its present state.
Additionally, this apparent misalignment between the clauses in the code and reality for most small to medium sized businesses in Malta challenges such enterprises to pick out the most critical components that help them grow, as well as develop a form of corporate governance which adapts to their needs. This, however, is a difficult task which unfortunately also undermines the ability of the code to create a common standard in corporate governance in Malta.
More Fine-Tuning Is Necessary
Zammit Dimech expressed his agreement with the points raised during the questions session, claiming that indeed the code in its present state is first and foremost addressed to listed companies.
Applying the provisions of the code to private and family companies would prove to be a difficult task, even though abiding with the clauses in it should ensure the best possibility of ensuring that directors do not abuse of their position of trust vis-à-vis shareholders.
As the situation currently stands, the code actually allows for exceptions to be made in various instances as long as there is consent from the shareholders through a general meeting or through an extraordinary resolution of the general meeting. In the case of small companies, the ideal alternative for them is to discuss matters of governance with their bank.
According to Zammit Dimech, the focus of the code will obviously need to be better aligned in order to distinguish the specific challenges faced by the type of businesses that are most commonly found in Malta. However, at present, trust matters for small companies are inherently linked to their reputation and branding, a situation which highlights the importance of social corporate responsibility regardless of the size of the company in question.
Companies Bending The Rules
A second member of the audience expanded on this issue by pointing out how confusing corporate practice guidelines lead several small companies to fail to distinguish the separation between their directors’ personal lives and income from the company’s identity and accounts. This anomaly ranges from the use of petty cash in groceries to buy personal items to much larger infringements that constitute misappropriation of funds.
This situation can be attributed to the lack of sufficient education to help the involved parties understand that the separation of owners and the directors from the company is an essential aspect of corporate governance.
The Role Of The Mfsa In Education And Enforcement
Institutions like the MFSA should focus on enforcing more thoroughly those regulations pertaining to other aspects of a company, such as those ensuring that company accounts are kept updated and filed in a timely manner.
Zammit Dimech defended the role of the MFSA by emphasising that the institution takes the Trust Act very seriously. He explained that in regards to the company registry section, the MFSA issues regular notices to companies when accounts filings are due unless they are exempt. Typically, companies have two filings a year: the first is the annual report and the second is the annual accounts.
Companies that do not comply with this procedure risk severe penalties which include fines and, in very serious cases, the possibility of being struck off the company register. But as a matter of fact, small companies do tend to get by by adapting to the current regulations and coming up with solutions that enable them to operate in the current legal environment in a way that is advantageous to their specific situation.
The present code on good corporate governance is a solid stepping stone towards implementing balanced and proven business practices. But a concentrated effort to adapt aspects of the code to the specific needs of small, private and family-run businesses is indeed required. In so doing, the largest chunk of Malta’s business operations would benefit as much from proper corporate governance practices as do their larger counterparts.
Hon. Francis Zammit Dimech carries vast experience in dealing with different Government entities, and has since 2008 been acting as Consultant to the private sector on various major projects. In 2009, he also set up the Law Firm: Francis Zammit Dimech Advocates, and is a Visiting Lecturer at the University of Law.