Corporate governance refers to the way in which companies are governed and to what purpose. It ensures that businesses have appropriate decision-making processes and controls in place so that the interests of all stakeholders – shareholders, employees, suppliers, customers and the general public, as well as with the jurisdiction as a whole – are balanced.
Governance at a corporate level is effectively a toolkit that enables management and the board to deal more effectively with the challenges of running a company. It identifies who has power and accountability, and who makes decisions, and is concerned with the practices and procedures for ensuring that a company is run in such a way that it achieves its objectives.
Good corporate governance is conducive to value creation for all stakeholders, ensuring the financial soundness of firms, the protection of investors, as well as the integrity of the market. It is also considered a key enabler for entities to generate business benefits, shareholder value and higher trust, enhancing their strategic competitive advantage.
The Malta Financial Services Authority (MFSA) launched a new Corporate Governance Code for MFSA-authorised entities on 5 August, following a long consultation process. The Code provides a list of guiding principles, complemented with supporting provisions and its application is based on the principle of proportionality.
These principles are designed to enhance the legal, institutional and regulatory framework for good governance and are applicable to all unlisted entities authorised by the MFSA across all sectors to:
- Set out best practice in corporate governance for entities falling within the MFSA’s regulatory remit.
- Enhance governance structures, improve relations, and strengthen trust with stakeholders.
- Ensure the effective operation of authorised entities’ boards and management.
- Assist directors and senior management to fulfil their duties, including in advancing the growth and development of the entities they are entrusted to direct and manage.
- Ensure that authorised entities have adequate and effective internal controls and procedures to discharge their responsibilities and monitor outcomes.
- Enhance stakeholder and public confidence in the financial services sector in general.
- Assist entities to put in place improved governance standards to achieve enhanced resilience and sustainable operations going forward, as well as ensuring ethical behaviour.
The Code provides a set of principles, complemented by supporting provisions, which are to be applied on a ‘best effort basis’ and in a manner that is commensurate with the nature, size and complexity of an entity. These are organised into four main sections, as follows:
- The Effective Board
- Internal Controls
- Stakeholder Engagement
- Corporate Culture, Corporate Social Responsibility (CSR) and Environmental, Social and Governance (ESG)
Entities should endeavour to adopt these principles, thereby fostering an environment of trust, transparency, and accountability necessary for long-term investment, financial stability and business integrity.
The MFSA believes that this approach will ensure efficacy and proportionality in the Code’s application and is in line with corporate governance policies and approaches advocated by international bodies such as the European Commission and OECD.
“The Authority considers good corporate governance as being fundamental for investor protection, market integrity and financial soundness,” said Clare Farrugia, MFSA Head of Strategy, Policy and Innovation.
“Furthermore, the Authority believes that the increased supervisory focus and the policy initiatives that the MFSA is implementing in this area, such as this Code, are conducive to steering board members and practitioners alike, to adopt good judgement and in guiding entities in the right direction to achieve a strong corporate governance ethic,” she said.
The Code will serve as a benchmark for future policy alignment in evaluating any changes that may be required in the MFSA Rules and existing codes and guidelines, with an overall aim of retaining a balance between prescriptive regulation and ‘soft law’, applicable to the various entities.
“Quality leadership is essential to performance,” said Sovereign Trust (Malta) Managing Director Stephen Griffiths. “The Board’s primary role is to set the strategy and to provide leadership for the entity, directing and supervising its affairs, enabling it to meet its strategic and sustainable aims, and enhancing value for shareholders. Directors are also expected to provide leadership, integrity and judgment in directing the entity, both collectively and individually.
“This is particularly relevant because it is something that our regulator asks about during site inspections. The MFSA is interested to see what we discuss at board meetings and how decisions are made by the board on a day-to-day basis. We have been working to make our board meetings more informative and have recently included members of the administrative team to present reports to the board. The information flow from board to staff has also been improved over the past months as well as our documentation regarding policies and procedures.”
The MFSA’s full Corporate Governance Code can be accessed here.