Countries move to legislate on corporate governance

Paris, 28 April 2004

There has recently been a surge of corporate governance legislation worldwide, reports a new ICC investigation today noting "it is evident that voluntary codes are slowly being transformed into binding legislation".

In a paper Global Corporate Governance Snapshot, presented at the meeting of the Commission on Financial Services and Insurance, the ICC examines the state of play in 20 countries and notes that all have legislation in place or legal initiatives under way.

Says the report: "Basic corporate governance law sets the standard for the decision system of a corporation. Laws may dictate how rights and responsibilities are distributed between the general assembly, the board of directors and management.

"In many countries legislation outlines the compensation, evaluation, and composition of the board of directors, as well as the directors' responsibilities. These governments seem to believe that the board, and its decisions, has a direct effect on the governance standard of the company. If the board is well managed, and the interests of both employees and investors are properly represented, the company will perform efficiently."

The most common legislation under corporate governance addresses accounting practices and financial reporting, with the aim of protecting shareholder rights. Laws that ensure shareholder representation on the board, and those that regulate auditing practices, have been created to safeguard investor interests.

The ICC says of the rationale for legislation that many governments feel the "public will be more likely to invest in corporations if they feel the companies have good governance standards. In this way the governments feel that they are helping investors, individual companies, and the economy.

Charles Heeter, principal in Deloitte Touche and Tohmatsu, introducing the report, pointed to problems in countries which expect auditors to sign off on consolidated reports which incorporate the results of subsidiaries. In some countries where there is a requirement that auditors be changed every few years, an auditor with one major firm may be asked to accept an audit conducted by another company.

"If the consolidating auditor has to accept additional liability and responsibility, he will want to have an additional audit", said Heeter, " and this will involve extra cost for companies"