The MFSA Corporate Governance Code – Avoiding a tick-box approach!

In its efforts to further raise the bar for corporate governance standards, the Malta Financial Services Authority (‘the MFSA’) has recently issued a revamped Corporate Governance Code for authorised entities (‘the Code’).?Through the new Code, the MFSA encourages entities to adopt a prudent and consumer-focused corporate culture which in turn enables enhanced protection for investors and consumers and promotes stability and integrity in local markets.?Fundamentally, the Code serves to strengthen (or instil in certain instances) the compliance culture within authorised entities.

While applicable to all legal authorised entities (except those that fall within the scope of the Capital Markets Rules), the MFSA clarifies that the application of the code is based on the principle of proportionality and is to be applied on a best effort basis.?The MFSA further notes that the Code is not legally binding or tied to any reporting obligations.?In doing so, the regulator therefore recognises that there is no single path to an effective corporate governance structure and that a single approach cannot be applied to all authorised entities.?

The Code has been widely debated pre- and post-publication by industry practitioners with most emphasis being made on the fact that the Code is principles-based and to be applied on a best effort basis and proportionately.?So, how do we strike a balance?

Piecing up the corporate governance puzzle is no mean feat particularly in a financial services sector characterised by high staff turnover amongst a limited pool of experienced professionals.?However, caution should be exercised on the grave pitfalls of engaging in a ticking-the-box compliance exercise. ??

While it is widely acknowledged that progress has been made over the recent years in enhancing governance structures and controls, in many cases a thoughtful approach to corporate governance is lacking, often a result of a tick-box approach and an anything goes mentality. ??

One of the key pillars of the revamped Code is The Effective Board.?The use of the word ‘effective’ by the MFSA is fitting in this ambit in view of the noticeable gaps in the effectiveness of Boards which persist to date:

-???????Non-executive directors – serve a key role in providing checks and balances to the Board of Directors.?Notwithstanding efforts in various fora, including the Institute of Directors – Malta and the MFSA itself, there is still little appreciation of the importance of the role of non-executive directors in the corporate structure;

-???????The role of the Chair – the pivotal role of the Chair is generally underestimated, often considered to be a figure-head rather than the leader of the board of directors;

-???????Collective suitability of the Board of Directors – performing a regular assessment of the collective suitability of the board remains a sore point for directors;

-???????Diversity, inclusion, and succession planning – fundamental aspects especially for small boards, remain overlooked.

-???????Outsourcing – there remains the falls sense of comfort in outsourcing key functions.?The Board is fundamental in selecting the right outsourcing service provider (which should be able to offer the right skill set and time commitment) and overseeing the effectiveness of the outsourcing partner.?Most importantly, the Board retains accountability for the outsourced service.

The MFSA has issued clear expectations on how authorised entities are to strengthen their corporate governance structures.?It is now up to the industry to take advantage of this long-awaited revamp of the Code and strive towards achieving compliance in a smart and effective way.?Key to this is understanding your current position (gap analysis) and devise a medium-term plan on how to reach the regulatory bar.?Financial and operational failures normally result from inappropriate governance and oversight.?On the other hand, demonstrating effective corporate governance builds trust that is necessary to attract business and investment towards the company. Embedding such an effective culture before being subject to either listing requirements or regulation, renders the adoption of sound governance principles less painful.

Embark helps embed a corporate compliance culture that adds value. We can assist you in developing an effective corporate governance framework. Contact us on 21360011 or on [email protected] for more details and assistance.