In fostering good standards of corporate governance, stock exchanges play a “pivotal role” in the international debate on board independence (Price Waterhouse, 1997b). As second tier regulatory agencies, stock exchanges have the unique power to amend listing rules related to the governance structure of listed corporations. The New York Stock Exchange (NYSE) - for example - first started to recommend the formation of audit committees in 1939. The NYSE extended its regulatory regime when it required listed domestic corporations to establish audit committees in 1978. In response to the publication of the “Treadway Report of the National Commission on Fraudulent Financial Reporting” in the US in 1987, the London City initiated the well-known “Cadbury Committee on the Financial Aspects of Corporate Governance” in 1992 to improve corporate governance standards in the UK.
The Hampel committee (“Cadbury II”) was formed in 1996 to evaluate the response from the business community to the recommendations of Cadbury. Many other exchanges followed the early initiatives in the US and the UK. The Hong Kong Stock Exchange introduced the requirement to name at least two independent directors to the boards of listed corporations in 1993 (Far Eastern Economic Review, April 15, 1993).
The Toronto Stock Exchange (TSE) published “Where Were the Directors? Guidelines for Improved Corporate Governance in Canada” in December 1994. Inspired by an extensive number of financial failures in Canada, the Toronto Stock Exchange Committee on Corporate Governance issued 14 recommended guidelines in the so-called Dey Report (Rosen, 1995). The committee advocated, amongst other things, that a majority of the directors should be “unrelated” to management. The committee also promoted the formation of a board committee on the nomination of directors and advocated the separation of the role of chairman of the board from the CEO role. In March 1995, the TSE adopted the recommendations of the Dey Report. Since June 30 1995, all corporations on the TSE are required to disclose their governance structures vis-à-vis the TSE guidelines (Conner, 1995).
The diffusion of self-regulation in corporate governance has also become visible in continental European countries and financial regions in Africa, Asia and the Pacific. Headed by Marc Viénot, the CNPF (Conseil National de Patronat Français) and the AFEP (Association Française des Entreprises Privées) established a committee to discuss the role, the composition and the procedures of boards of directors of listed French corporations. The 1995 “Viénot Report” stimulated directors to reduce the number of cross-directorships and stimulated the appointment of at least two independent directors to boards of listed corporations. In Australia, the 1995 Bosch Report on Corporate Practices and Conduct resulted to a new rule from the Australian Stock Exchange that requires listed corporations to include a statement on corporate governance in annual reports. Also the Johannesburg Stock Exchange revised its listing requirements in 1996. Since 1997, listed South African companies are required to disclose in annual reports the extent of compliance with the recommendations of The King Report on Corporate Governance (Chapman, 1996).
The King Report of March 1996 recommends that different individuals should hold the positions of the chairman and chief executive. “The Code of Corporate Practices and Conduct” also addressed the responsibilities of executive and non-executive directors, worker participation on the board and the disclosure of board compensation in South Africa. Other corporate governance initiatives came from the Helsinki Stock Exchange Corporate Governance Committee in 1996, the Stock Exchange of Singapore in 1996 and the Botswana Stock Exchange Committee in 1997. More recently, the Brussels Stock Exchange established the Belgian Commission on Corporate Governance in 1998. As with most initiatives from stock exchanges, the Belgian commission based its code of best practices on three principles: transparency, integrity and responsibility.
Directly related to the one-tier board structure of Belgian corporations, the voluntary rules recommend that when the chairman is also the CEO, a “strong and independent element” should be included in the board. The code also recommends that the board and its remuneration, nomination and audit committees, where such exist, should be composed of a majority of non-executive directors. Although not related to one-tier boards, the Amsterdam Stock Exchanges also introduced “Forty Recommendations for Corporate Governance” in the Netherlands. The guidelines were established in 1997 to start a national debate on the effectiveness of the Dutch two-tier board model.
The Unification of the European Equity Market
Another development that may have an impact on the formal independence of corporate boards is the role of stock exchanges have in the creation of a unified European equity market. The first step to a single European stock market was officially set by the London Stock Exchange and the Deutsche Börse on 7 July 1998. These two leading exchanges signed a "Memorandum of Understanding" to form a strategic alliance that undoubtedly will contribute to the development of a joint electronic trading platform in Europe and the harmonization of market rules and other conventions related to large stocks (www.stockex.co.uk, Jan. 1999). According to these exchanges, the participation of other European exchanges is welcomed to form a pan-European market for some 300 blue chip equities around the beginning of the year 2000. Especially the harmonization of market rules may have an impact on the formal independence of boards of directors of listed corporations. During the process of harmonization, exchanges will probably adapt their rules to the Combined Code in the Yellow Book of the London Stock Exchange after they have decided to participate in the pan-European project.
Self-Regulation and the Transformation of Board Models
Self-regulation is essential to the initiatives of stock exchanges that aim at the amendment of listing rules and the adoption of codes of best practices and other guidelines on the governance structure of listed corporations. According to Conner (1995:16), disclosure, and not compliance, is at the heart of these self-regulatory initiatives: “Companies are not required to structure their governance activities around the guidelines, but they will be expected to explain how their board has addressed the issues raised in the guidelines.” The Cadbury Code - for example - assumes that a voluntary code coupled with disclosure is the best strategy to improve corporate governance standards in the UK (Finch, 1994). The first compliance reports indeed suggest that self-regulatory initiatives to improve corporate governance standards are increasingly being adopted by directors.
In England, the Cadbury Committee published a compliance report that found that ninety percent of the top one hundred corporations had issued a statement of full compliance with the code between September 1993 and December 1994 (Samuels et al., 1996). In Canada, KPMG (www.kpmg.ca/vl/other/cgdissrv.htm, Jan. 1999) found in a survey that 64 percent of the TSE 300 corporations had made changes to their corporate governance structures by the beginning of 1997 as a result of the recommendations of the Dey Report. Other compliance reports have been initiated in the Netherlands (Maassen, 1998a, 1999a; VEB, 1998; AEX, 1998; Weimer 1998), Canada (Conner, 1995) and France (www2.atelier.fr/ciec, Jan. 1999), and more initiatives that measure the effectiveness of voluntary guidelines on corporate governance will possibly follow. Although it is too early to indicate that these self-regulatory initiatives will result in changes in the formal independence of corporate boards, the first compliance reports may indicate a positive contribution of self-regulation to the transformation of board models (Pahn, 1998).
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- 5.6 Summary
- 5.5 A Theoretical Model of Board Model Convergence
- 5.4 The Role of Institutional Investors
- 5.3 The Draft Fifth Directive on Company Law