New Challenges

The New Challenges initiative provides resources and tools to help listed company board members deal with the challenges presented by modern capital markets. The initiative will help to articulate the new principles of corporate governance.

As well as helping boards, it will also promote the public interest objective of ensuring that capital markets are efficient in allocating savings to those businesses where they will earn the highest returns.

New Challenges and Corporate Governance

New Challenges aims to re-position corporate governance as a dynamic and vital activity. Effective corporate governance is imperative if listed companies are to access capital at the lowest cost.

Capital market innovation, alignment and transparency

The New Challenges initiative will focus on three key areas:

Innovation

The New Challenges initiative will identify major changes affecting listed companies in response to pressures in competitive capital markets.

Market Pressures

Pressures include the:

• development of new products and services
• entry and growth of new market participants and gatekeepers
• new forms of regulatory intervention

New Challenges will:

• focus on developments that seem not to be satisfactorily addressed by current corporate governance frameworks
• identify the challenges that they present to listed company boards in trying to fulfil their responsibilities
• seek to identify ways in which boards have adapted to the challenges

Changes in capital markets

Changes in capital markets have implications for the sustainability of the ‘comply or explain’ approach to corporate governance. The approach was developed in relation to the Cadbury Code and is still applied in relation to the UK Combined Code.

The ‘comply or explain’ approach works best when there are active institutional investors and so, despite its popularity, the approach is threatened in the longer term by the declining proportion of UK listed company shares owned by institutional investors.

The increasing tendency for companies’ governance to be scored on the basis of a box-ticking exercise performed by gatekeeper intermediaries (such as sponsors, brokers, audit firms, legal advisors, ratings agencies) also threatens the existing approach.

The major changes that the New Challenges initiative will focus on include:

• the market entry and increasing importance of hedge funds, private equity funds, sovereign wealth funds and activist investors
• new products such as hybrid instruments that combine features of debt and equity, and derivatives contracts that are linked to aspects of the performance of corporate debt and equity instruments
• stock lending and other return enhancing offerings
• changes in the services offered by sponsors, brokers, audit firms, proxy advisory services, legal advisers and credit ratings agencies
• new regulatory initiatives particularly in the form of international harmonisation and co-ordination in the face of increasing cross-border activity.

Alignment

There are a host of relationships that matter from a public policy standpoint involving a wider range of market participants, gatekeepers and regulators. It is no longer enough for corporate governance frameworks to focus on the principal-agent relationship between shareholders and boards.

Inspiring confidence in public investors

The public policy objective of effective behavioural alignment is to inspire confidence and trust among the investing public that capital markets are efficient in allocating savings to businesses where they will be put to best use.

Incentives

The New Challenges initiative will consider the means by which market participants, gatekeepers and regulators seek to motivate boards, managers and each other to act in the interests of those they are meant to serve.

Particular attention will be paid to the reasons why certain types of incentive are falling out of favour, how different stakeholders compete to ensure that incentives serve their particular interests and the challenge that private equity incentives present to publicly listed equity markets.

Transparency

Transparency is important in current corporate governance frameworks.

There is an expectation of timely and accurate disclosure of all material matters affecting the company, including its:

• financial situation
• performance
• ownership
• governance

Conventionally, transparency obligations are seen as falling mainly on the boards of listed companies but this needs to be questioned and the potential obligations of other parties need to be considered.

If transparency obligations are to be seen as extending more widely to capital market participants, gatekeepers and regulators, how will such new obligations be agreed and enforced?

The New Challenges initiative will analyse how the overall objective of transparency – which is essential for building confidence and trust – should be interpreted in practice.

Our work will be conducted in an impartial and inclusive way in line with the ICAEW's Royal Charter obligation to work in the public interest.

International outlook

New Challenges will be international in its outlook. This is not to suggest a single global governance model for listed companies. Rather we propose that all listed company governance models share common points of weakness in adapting to the realities of modern capital markets.

ICAEW has launched the Dialogue in corporate governance initiative to challenge commonly held assumptions, identify fundamental questions, set challenges for future research and generate practical proposals. This will include work on:

• Differing share ownership models in Europe
  
• Governance of remuneration and human capital
  
• roles of reputational intermediaries in changing capital markets
  
• Enforcement of governance practices - comparison of differing models

In exploring ways of addressing these points, we will be interested to learn of differences between markets and national regimes.

Related thought leadership programmes

By concentrating on how boards relate to the various faces of the capital markets, the New Challenges initiative will complement other ICAEW thought leadership programmes.