The applicability of the newly proposed corporate governance provisions to Maltese listed companies

Abstract

Purpose: Recent corporate scandals have exposed the failure of accounting and auditing systems leading to a diminishing confidence in capital markets. Such a situation has led the Commission to issue a proposal where it declared the intention to introduce and harmonise the Corporate Governance Statement [Statement] at EU level and presented the intended form and content of such a Statement in its proposal. This study sets out to establish the applicability of such a proposal to Maltese listed companies [MLCs]. Design: The objective of this study was achieved through an observation of the current corporate governance reporting practices of MLCs, a series of semi-structured interviews with professional staff members of MLCs and an interview with a representative of the Regulator [MFSA]. Findings: From the study it emerged that the Commission's proposal will increase disclosure requirements for MLCs. Although such additional disclosure requirements are expected to improve the company's image and to provide better information for the users of financial statements, a number of barriers remain. The impositions of such additional disclosures should increase compliance work and training costs. Apart from the cost-benefit dilemma, there is the danger that increased regulation may oppress companies into developing the Statement into a pro-forma statement for compliance sake, consequently adding no real value to annual reports. Value: This study has set out to establish the applicability of the Commission's proposal to MLCs. The study concludes that MLCs are already in line with the major disclosure requirements brought forward by the Commission. Nevertheless, changes in the current MFSA Listing Rules are expected in order to provide for the additional disclosure requirements relating to internal control [IC] and risk management [RM] systems, shareholders' key powers and rights and on the composition and operation of the Board and Committees. The 'comply-or-explain' principle is already being put into practice by MLCs. Compliance costs are expected to increase in the first year of implementation of the Commission's proposal especially due to the additional disclosure requirement relating to IC and RM systems. Such disclosure requirement will presumably lead to the introduction and regulation of IC and RM benchmarks. The added disclosure requirement regarding shareholders' key powers and rights is not expected to create any significant threats to MLCs. MLCs seem willing to provide additional information on controlling shareholders and are not particularly affected by cross-border investments due to the lack of foreign shareholders. Furthermore, MLCs seem willing to provide information relating to the composition and operation of the Board and Committees even though such added disclosure requirement should lead to additional training for semor staff. Consideration should he given to the fact that by providing information which is already contained in national jurisdictions, such a Statement would lose value.