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Time To Raise The Bar In UK #CorpGov ?

Posted on August 25, 2013 at 10:05 AM

I find that a great deal of what is written and discussed in the name of Corporate Governance is crashingly boring and/or archaic in tone.

So it was good to come upon an exciting paper by Andreas D Grimminger and Pasquale di Benedetta for the World Bank/International Finance Corporation (beautifully) written in June 2013: Raising the bar on Corporate Governance: A Study of Eight Stock Exchanges . The introduction is by Peter Montagnon, who was at the time senior investment adviser to the UK watchdog, the Financial Reporting Council (FRC). So I'm guessing they know about it.

The paper needs to be read in its entirety. But given my mention here the other day of Ken Olisa's mooted idea for a new governance index in the UK , I thought I would highlight some points it makes as a 'speed read.'

Since 2001 eight stock exchanges around the world have launched corporate governance indexes. They are: Brazil, China, Italy, Mexico, Peru, South Africa, South Korea - and Turkey. They offer a market solution to address any shortcomings in governance.

"CGIs have proven that they can elevate the legal and regulatory 'ceiling' for governance, can allow companies to differentiate themselves in the market, and can increase their access to capital" says the report - my emphasis. They also "enhance voluntary national codes of corporate governance."

All this may be particularly relevant for emerging market companies - or companies from such markets that choose to list in the UK, say - (my thoughts, not in the paper). 

On foreign investors here is just one interesting example: in Italy Borsa Italiana launched FTSE Italia STAR, a segment for SMEs in 2001. That year 54% of investment was by foreign investors. Ten years later, in 2011 that figure had risen to 88%. 

The paper explains there are two types of indices - those in which companies meet a rating threshold, and Listing TIers - which require a higher level of commitment from the constituent companies. 

It offers a thorough and thought-provoking look at the various ways in which corporate governance indices have been set up, and how they are run. In China, Peru and Turkey, for example, they rely on voluntary application by companies. On STAR and Brazil's Novo Mercado, mandatory governance criteria are provided for listing rules.

Criteria used to develop a new index  can be governance-based as well as market-based (free float and liquidity requirements). Only two indices - Turkey's ISE CGI and China's SSE CGI - rely solely on governance criteria as benchmarks and do not have free float or liquidity requirements. Such requirements "significantly reduces the number of eligible companies in the case of some stock exchanges" says the paper.

"When setting up a CGI, particularly in markets of concentrated ownership structures, ensuring the availability of a sufficient number of shares for trading is critical for an index's marketability" it adds.

It reveals considerable variation in what constitutes 'independent' directors in different countries. It makes the important point that 'board criteria' dominate in the construction of indices but shareholder rights are also addressed, by countries such as Brazil and China in theirs  (where such rights are otherwise considered to be rather weak).

Finally, some abbreviated food for thought for anyone considering setting up a Corporate Governance index:


  • Criteria for inclusion must be clear and transparent
  • Supervision is essential/compliance must be monitored/there must be a credible process for the immediate expulsion of companies that violate criteria of index
  • The evaluation process is critical - who does it ?


Consistent with their objective approach throughout the analysis, the authors say that the performance of eight indices in the study ranges from those closely tracking the benchmark to those clearly outperforming it. While the study does not control for variables other than governance that might affect the performance of companies in CGIs, "nevertheless, outperforming the benchmark over a longer period, as is the case in Brazil, can probably be attributed to the positive impact of the governance factor."

I'm excited. What are we waiting for in the UK? It's time to put a bit more spine into 'comply or explain.'

And as Peter Montagnon writes in his introduction:

"Once an index is available all companies should be assessed for inclusion automatically rather than being allowed to decide for themselves whether to join..." By that standard, I can think of one spectacular example of a FTSE100 miner listing that would not still be bleeding all over its earlier friends as well as UK corporate governance, can't you ? 

PS: A new UK corporate governance index could also be an opportunity to do a great deal for diversity, in the widest and best sense of the word.

Categories: Stewardship, Accountability, Scrutiny