The Irish Stock Exchange is considering whether there should be a stand-alone Irish corporate governance code following revelations of governance shortcomings in the market. According to a new report by accountants Grant Thornton, Ireland has seen a sharp decline in compliance with the Combined Code with just over just over one third (36%) of companies claiming full compliance; in 2009 the figure was closer to a half.

Despite the decline, the quality of disclosures has improved but a number of key improvements are needed:

More Meaningful Disclosures: companies need to make a greater effort in transposing the Code’s requirements into  meaningful disclosures in financial statements;

Performance Evaluation: A third of companies fail to disclose if they have reviewed the chairman’s performance, and 28 per cent of companies do not properly explain how the roles of chairman and chief executive are divided.

Board Independence: a notable decrease in the number of companies reporting that the board is comprised of a majority of independent non-executive directors (down 10 per cent to 77 per cent), and over a third of companies are not properly disclosing the terms of appointment for their non-executives.

Regulatory Simplification: the regulatory system governing Irish listed companies is inappropriate to their needs and the needs of shareholders. There are currently several bodies involved in regulating listed entities and the country lacks a single, strong regulator. The regulatory system gives rise to overlapping and confusing rules, late and poorly planned transposition of EU directives and a lack of enforcement of existing regulations.

Internal Controls: although reported levels of compliance with internal control and risk management guidelines are high, with most companies claiming to have the necessary structures in place,  explanations continue to be brief, with companies providing shareholders with little detail on the specifics of how their risk and control functions operate.

In a response to Grant Thornton’s findings, the Irish Stock Exchange has admitted that “there is a need for listed companies to examine and enhance the meaningfulness of their corporate governance disclosures”.

Companies with their ordinary shares listed on the Irish main are currently required by the Exchange’s Listing Rules to state whether they have complied with the UK Combined Code on Corporate Governance and, if not, to explain why. This has caused problems in the past, most notably when the UK introduced stand-alone Say on Pay legislation. Until the new UK regulations came into force, say on pay was handled via the Combined Code. After the new laws were enacted, the FRC removed references to remuneration report resolutions leaving the Irish market without any requirement to either comply or explain on this key issue.

It was a busy day on Friday for the Irish Stock Exchange when its own review of governance, published in association with the Irish Association of Investment Managers was also published. This too found evidence of a high dependence on boiler plate disclosures and in the words of the reports chairman, Professor Niamh Brennan, recent corporate governance issues in both listed and state-owned companies “have undermined confidence in corporate culture in Ireland”.

While both reports will be useful background for a tightening of the Irish governance framework, governance veterans may well be taken aback by the IAIM’s suggestion that say on pay is an “emerging” governance practice. The EU Recommedation on directors remuneration came into force in December 2004 and in June 2009, Manifest wrote to a number of leading Irish companies tabling a shareholder resolution to request compliance with this long-standing best practice across the rest of the EU.

Commenting on the IAIM review, the Irish Times notes: “The mixed messages coming from the reports this week are indicative of the inherent shortcomings of a code which, in attempting not to over-regulate or restrict independent corporates, ends up generating more questions than answers about Ireland’s corporate governance practices.”

In a statement, Mike Duignan, Head of Market Supervision at the ISE, said: “In the coming weeks the ISE will be considering the findings and recommendations in the Report and how these can best be implemented in the Irish market. The ISE will then engage in a market-wide consultation in relation to the recommendations of the Report and this consultation will also consider amendments to the Code currently being proposed by the Financial Reporting Council in the UK. In addition, we intend to use the consultation process to address some broader governance issues, such as whether there should be a stand-alone Irish corporate governance code.”

Links

Grant Thornton Review of Irish Corporate Governance >>

Irish Fund Managers Association Review of Corporate Governance >>

Last Updated: 8 March 2010