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International aspects of corporate governance

The European Corporate Governance Institute (ECGI) through its website makes available the full texts of corporate governance codes and corporate governance reforms both in Europe and elsewhere.

ECGI aim to maintain the most comprehensive and up to date database on governance codes both in Europe and internationally.

There are a considerable number of EU led corporate governance initiatives ongoing. ICAEW through its consultation and representation work responds to many of the public consultations.

If you are interested in a country by country analysis of corporate governance practices in Europe a good source of information is: ‘Corporate Governance in the European Union’ by Chris Pierce ISBN 978184426748-4 is a good source of information on corporate governance in Europe. This book also contains a useful chronological outline of the key initiatives in company law and corporate governance and provides an overview of recent proposals by the Commission.

US Dodd-Frank Act: issues for UK companies

On 21 July 2010 the Dodd-Frank Wall Street Reform and Consumer Protection Act 2010 (the Act) became law.

The Act puts into place reforms of the US financial regulatory system. It includes reforms in the areas of corporate governance, executive compensation, private equity, the authority of the US Securities and Exchange Commission (SEC) and selected federal securities law provisions.

The full impact of the Act on non-US entities will not be known for some time. Some aspects of the Act are limited in application to US entities or activities, but other provisions may be read to apply extraterritorially and there are implications for accessing the US capital markets.

It is possible that some of the provisions of the Act may affect non-US companies who have banking or other financial operations in the US. Also, the Act may impact the following non-US corporate entities:

  • non-US companies that are US reporting companies (such as UK companies listed on a US securities exchange or that have sold securities to the US public in the past);
  • private equity and hedge funds;
  • companies accessing the US capital markets (on a public or private placement).

Some provisions of the Act became effective on enactment but many other provisions allow the relevant regulators a period of time, during which they will conduct studies and consult widely, before they must issue new rules or implement regulations.

The Act may impact in the following areas:

  • Compensation claw-back: companies listed on US securities exchanges must implement clawback policies to allow recovery of incentive compensation if an accounting restatement is necessary due to material non-compliance with financial reporting requirements.
  • Internal controls attestation for smaller issuers: an exemption became effective 22 July 2010 for smaller issuers from having to obtain an auditor attestation of the internal control assessment required by section 404(b) of the Sarbanes-Oxley Act 2002.
  • Compensation committee independence: US securities exchanges will have to implement rules by 16 July 2011 relating to compensation committees and the definition of independence and the ability of compensation committees to retain consultants and other advisers. 
  • Beneficial ownership reporting and broker discretionary voting: changes to the rules in these areas need to be noted by investors: see sections 957and 766 of the Act.
  • Enhanced whistleblower protections: the Act enhances whistleblower protections in various ways and significantly extends protections to employees of subsidiaries from 22 July 2010. The whistleblower provisions are found in section 922 of the Act.
  • Extraterritorial application of the US securities laws: the Act extends the extraterritorial reach of the antifraud provisions under the Securities Act, Exchange Act and Advisers Act for actions brought by the US Department of Justice or the SEC but it will not apply to private rights of action. Non-US issuers need to be aware that conduct outside the US but which affects the US, or improper conduct in the US by issuers who are only listed outside of the US, may still subject them to US securities fraud in actions brought by the SEC or US Department of Justice.

The following high-profile changes brought about by the Act should not affect non-US companies:

  • Say on pay (requiring a non-binding shareholder vote on executive compensation).
  • Say on golden parachutes (information on compensation arrangements affected by a change of control).

The full impact on non-US entities will become clearer as more of the studies and regulations are implemented over time. Non-US entities may be able to influence the rules to be adopted by participating in the relevant consultations as they arise. This is definitely an area where both dual listed companies and non-US companies need to watch carefully.