Over the past decade, the global corporate governance landscape has changed dramatically. Every capitalist economy has been through a period of self-examination resulting in either new legislation or a best practice code.
As corporations have grappled with the complexity of doing business internationally, boards have had not only to adhere to high standards of governance at home but also familiarise themselves with regulations and best practices abroad.
The third edition of the Spencer Stuart Governance Lexicon, published in December 2006, continues the Firm’s commitment to helping board directors understand major governance issues and navigate through the intricacies of international codes and regulations.
The Lexicon is a practical guide to the patchwork of laws, requirements and guidelines governing the role of the director in 19 key markets. This edition includes four new entries – China, India, Russia and Singapore. The remaining entries– Australia, Austria, Belgium, Brazil, Canada, China, France, Germany, India, Italy, Netherlands, Russia, Singapore, South Africa, Spain, Sweden, Switzerland, the United Kingdom, and the United States of America – have been updated. There is also a summary of corporate governance initiatives at key supranational organisations such as the European Union (EU), the Organisation for Economic Cooperation and Development (OECD) and the World Bank.
Each chapter contains a brief history of corporate governance activity in the given country and a section entitled “Hot topics in governance”, which raises some of the issues currently under discussion in that country. There is a summary of the structure, role and composition of the board and its committees and information on independence, terms of service, compensation and the nominations process. Where requirements or recommendations are laid down by legislation or governance codes, these are noted in the text.
Finally, Appendix 1 contains the codifed/legal dinifitions of director independence for each country, grouped together for the purpose of comparison.
Different markets, common themes
Despite the differences in governance around the world many believe there is a steady convergence of models internationally. The following are common themes and issues.
- The increased presence of independent directors in board rooms is the result of governance reforms combining with shareholder pressure to change board behaviour. Boards are being forced to look further afield for suitable candidates.
- Top quality director recruitment is high on the agenda. The desire for diversity and “new blood” in the boardroom is tempered by the need for experienced directors. More value is being placed on specialist knowledge. In markets where state- or family-owned businesses tend to dominate, the introduction of independent directors has been slow, made harder by the lack of qualified, available candidates.
- Board membership is increasingly the focus of shareholder activitism but attention has shifted from the audit committee to the compensation (or remuneration) committee, with pressure building to tighten the link between reward and performance and avoid excessive executive pay. Calls for disclosure and transparency in compensation have seen many countries make it law that companies declare individual director compensation in the annual report.
- Non-executive director fees are under the spotlight but the main concern is ensuring that non-executive directors are aligned with the shareholders they represent. Non-executive director pay is steadily rising in most markets as a reflection of the ever-increasing workload and risk associated with the role.
- Investors are making their views felt. Where single-tier boards operate there is debate over whether it is preferable to split the roles of chairman and CEO. This leads to the question of chairman independence. In the UK, the chairman must be independent when appointed but is no longer deemed independent once in position. There is also debate over whether the former CEO should be allowed to become chairman of the board (or supervisory board).
- Director liability and the impact of high-profile lawsuits on the availability and cost of directors’ and officers’ liability insurance is of great concern. The threat of disqualification, punitive fines and lengthy prison sentences, as well as reputational risk, is focusing directors’ attention on the need for adequate insurance coverage.
- In many countries boards must submit to a process of evaluation. Most are conducted internally but external reviews are becoming more common.
While there is evidence that national codes are converging, dramatic differences do still exist between countries in practice and in principle. The aim of the Lexicon is to act as a reference guide, explaining the structure, remit and scope of boards in various countries.
Read about Hot topics in corporate governance in the UK.
For more information on the Spencer Stuart Governance Lexicon 2007, please contact Alastair Rolfe in London, Cyndy Reid in Chicago, or the manager of your nearest Spencer Stuart office.