The New Code of Corporate Governance
“Corporate Governance is concerned with holding the balance between economic and social goals, and between individual and communal goals…the aim is to align as nearly as possible the interests of individuals, corporations and society.”
Sir Adrian Cadbury Corporate Governance Overview, 1999 World Bank Report
The publication of the New Code of Corporate Governance (the “New Code”) is undoubtedly an important step for the Mauritian Business community and will definitely be an opportunity for Mauritius to maintain its reputation as being a leader in the field of Corporate Governance and keep its first place in the Mo Ibrahim Index for Governance in Africa.
The Survey conducted by the National Committee of Corporate Governance in 2014 demonstrated that the 12 years old Code issued in 2003 needed to be revised in order to align with international standards and for Mauritius to learn from the corporate governance crisis faced with the collapse of the BAI and Bramer Bank in 2015.
The implementation of the New Code is a significant step towards protecting minority shareholders, enhancing the quality of information investors received from listed companies and will strengthen transparency of capital markets.
One of the key changes is that there is a move from a mandatory and prescriptive approach that focused on compliance requirements towards a more adaptable approach which provides organisations with the flexibility to adopt systems and procedures that suit their individual circumstances.
The old code applied the traditional mandatory “Comply or Explain” methodology based on a rigid set of rules. It was the “minimum consideration” that had to be applied by all enterprises. With the New Code, Mauritius will be one of the first countries in the world to use the “Apply-and-Explain” approach.
Every Board of Director, within which the responsibility for applying and implementing the principles lies, should decide how to apply each principle and should focus on the annual report’s explanations on how an entity has applied the said principles.
As indicated in the New Code, the explanations for deviation from any guidance contained in the Code may be affected by “individual circumstances and, in particular, by the size, sector and complexity of the organisation and the nature of the risks and challenges it faces. Such explanations should not be evaluated in a mechanistic and box-ticking way, and departures from the guidance should not automatically be treated as breaches.”
The New Code encourages flexibility and puts emphasis on the fact that its application has to be adapted taking into account the type of sector, the sophistication and scale of the organisation.
The New Code of Corporate Governance lays the foundation of 8 principles which have been designed to be applicable to all organisations covered by the Code. The following principles emphasize that different types of organisations can take different ways to achieving good corporate governance.
Principle 1: Governance Structure
Principle 2: The Structure of the Board and its Committees
Principle 3: Director Appointment Procedures
Principle 4: Director Duties, Remuneration and Performance
Principle 5: Risk Governance and Internal Control
Principle 6: Reporting with Integrity
Principle 7: Audit
Principle 8: Relations with Shareholders and Other Key Shareholders
Among the new notions introduced, the 2016 Code encourages the Board to have a non-discrimination policy that covers its senior governance positions which includes gender equality, disability, sexual orientation, gender realignment, race, religion and belief, and age.
Moreover, the New Code initiates an objective test with regards to Directors who are required to exercise all degree of care, skill and diligence which a reasonably prudent and competent director in his or her position would exercise.
With regards to Information Technology, the New Code introduced the organisation’s website as a tool to report compliance with the Code. The Code stated that static information, where appropriate, should be put on the website rather than in the annual report.
Furthermore, regarding Integrated Reporting, the New Code recommends that organisations have a policy on carbon reduction schemes and that the Board of organisations reports on Corporate Social Responsibility (“CSR”).
In addition to the general guidance provided under the new Code, specific guidelines have been issued for application of the good governance principles to Banks, Stock Exchange Listed Companies, Family Companies (unlisted), State Owned Enterprises, Groups and Subsidiaries, Holders of Category 1 Global Business Licence and Management Companies.
The 2016 Code gives a complete guidance to corporations on how to implement the said principles and how to effectively report compliance in their annual report through implementation guidance and recommended disclosure. The corporations are also provided with narrative reports which propose wording to include in their annual reports.
The paradox lays in the fact that these companies receive guidance with respect to the very foundation of principles that should apply but remain flexible on the ways to achieve good corporate governance. The New Code gives the choice to adapt for reasons such as size, board composition and costs.
However, the law and regulatory framework take precedence over the Code in cases involving inconsistencies or conflicts. The New Code is effective for the financial year ending 2017 and should therefore be implemented as from 01 July 2016.