Corporate Governance Code in a country usually is a non-binding soft law, but it is still very important to every entrepreneur and investor because it entails the emphasis of business values in a country and business certainty that follows. This short article will briefly introduce some highlights of the corporate governance codes in China, Germany, and Netherlands.
China started with its contemporary corporate governance code as of 2001 and recently upgraded it in July 2018 in convergence to international standards due to more market accessibility presented to global investors. The newest governance code provides for encouragement of board diversity and establishment of Environment, Social and Governance requirements (ESG). The code also emphasized the importance and promotion of audit committee functions. Cash dividends distribution to shareholders is encouraged. Last but not least, a ‘Chinese Characteristic’ is in place in form of required establishment of a Party organization in companies to ensure political adherence.
Encouraging board diversity is designed to partly overcome the shortcoming of the uncertain independency of board members. Because the older version revealed a risk of lacking independent board majority. The ESG is set to promote green and society-friendly companies, which can be interpreted as going closer to the triple P bottom line: People, Planet, Profit. The main components of the ESG are requirements on information disclosure, evaluation and rate, and investment guidance. Enhancement on audit committee functions is one of the solutions to prevent and to fight against financial fraud. More cash dividends distribution to shareholders is highly recommended than other forms of dividends payment such as stocks. This move is to go further with shareholder protection, especially smaller shareholders, as the older version has shown insufficient protection on minority shareholders. Implementing the required Party organization within a company looks unique in the Chinese corporate governance code because no other codes have such a special government involvement.
Nowadays, many Chinese businessmen speak English. The knowledge on German corporate governance should not be underestimated because corporate governance in German looks quite different from the English-based disciplines. Having the distinction and some key points in one’s knowledge will help to predict business certainty. The current code is the 2017 version, and some notable updates and key points are presented below.
In the past years, German companies had a big deviation on the board structure suggested by the governance code which recommended two-tier structure consisted of a supervisory board and a management board. The compliance rate to this recommendation was barely 58% after the code introduced in 2002 with difficulties on supervisory board composition and management board compensation. In general, Germany adopts the principle of ‘comply or explain’ whereas reasonably explainable deviations are acceptable. But the current compliance on board structure suggestion reached 94% by the end of 2017. This change reflects a custom that many listed German companies are family-owned without the necessity of having two boards and the value that people take it very seriously about compliance even for soft laws. This current two-tier board structure is nowadays more common than English countries in which one board is still popular.
Another distinction is the role of employees in decision-making. Labour or employee representatives in German companies are a part of the decision-making process. Feedback or requests are sent to the boards by the representatives to voice for the employees. At present, work councils representing the rights of employees are introduced in companies. Employees are able to nominate a member or two of the supervisory board to safeguard their rights and conditions.
For Chinese businesses that have already been established in Germany, expanding into the Netherlands looks convenient and easy. What could be helpful is some notes on the corporate governance in the Netherlands, in particular in contrast with the German version. Apart from that, Dutch governance code also has its originality.
The Dutch corporate governance code is not a hard law but with some significant influences for listed companies in the Netherlands. Netherlands adopts the same principle of ‘comply or explain’ in conformity to the requirements contained in the code as Germany does. The two-tier board structure in Dutch public companies is quite common because the origin of two-tier board was dated back in 17th centuries in the Netherlands itself. Even in smaller companies, a (quasi-) two-tier board structure is observed. The latest Dutch corporate governance code was updated in 2018. There is a notable shift of emphasis onto the long-term value creation of a listed company and stronger risk management. For instance, the long-term value creation should be realized by vesting more responsibility and involvement of the supervisory board in company remuneration policy. Such changes according to the new code should also be properly disclosed in their annual reports.
Importance of Corporate Governance Code
Why is the corporate governance code important to everyone? The first reason is that a governance code helps with the organization and management of a company, which will greatly contribute to the operations and development of a business. The second reason is to improve on the weakest link in a process, which is the human factors. The third reason is to bring up the level of trust of the public and foreign investors and trustworthiness of the company information. In other words, prevention of fraud is part of the purpose to develop a governance code national-wide and suggest listed company to adhere to it. The fourth reason is the reflection of national customs, cultures and values in the governance code that enables global investors to glimpse into the business atmosphere of a country in general. It is worthy of attention that the corporate governance code in a country often is applicable to listed companies only. Hence any plan to interact or join a private business in the above countries is suggested to follow local cultural values and industrial regulations.
Global Connect Admin | Xuan Hao