Innovation and Digitalization in Company Law: Risks for Corporate Governance?

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The 20th European Corporate Governance Conference took place in Malta on 4 May 2017 and I was the opening speaker. These were the key findings from the relevant parts of the conference:



Innovation and Digitalization in Company Law: Risks for Corporate Governance?


  • Introduction / Foreword


  • Opening remarks


  • Long-term value creation: Determining the future of our economic and political systems





People have conducted business for thousands of years. By contrast, the widespread acceptance that corporate governance is vital to promoting ethical, sustainable and profitable business practice is a recent phenomenon. It dates back to the late Sir Adrian Cadbury’s pioneering report, published in 1992.


This report contained a number of recommendations for improving corporate governance, including separating the roles of the chairman and the chief executive and appointing high-caliber non-executive directors to boards. It set out a code of best practice and introduced the principle of ‘comply or explain’ – companies could choose either to comply with the code or explain to shareholders why they hadn’t.


More than two decades later, the influence of the Cadbury Report lives on – not only within Europe, but globally. During that time, a host of national corporate governance codes have been produced and corporate governance is a subject that has increasingly attracted the attention of shareholders, politicians, journalists and the public at large. Why? A string of corporate scandals in the years immediately following the millennium and the global financial crisis of 2008-9 thrust board directors firmly into the spotlight as stakeholders demanded to know – with good reason – whether they had been fulfilling the serious responsibilities that they had.


Today, scrutiny of directors remains intense and the obligations on them are continually increasing. Not only are they expected to guarantee the financial stability of their organizations, they are also expected to provide an extremely high level of challenge to management, draw up balanced remuneration policies that allow the company to attract the best talent without antagonizing its shareholders, and provide assurance that the company is fit to face a wealth of challenges from cyber attacks through to natural disasters and the outbreak of war.


In an era when public trust in large organizations, including big businesses, has been severely damaged, directors also have an important role to play in rebuilding this trust. That means understanding where their company fits in to the broader geopolitical landscape and the impacts that it has on the economy, the environment and society more generally.


The notion that companies exist purely to deliver profits to shareholders now seems very outdated. It has been replaced by a belief that companies have a symbiotic relationship with society, so they must create long-term value for a range of stakeholders that includes customers, employees, investors, subcontractors, suppliers and tax authorities, among others.


The European Corporate Governance Conference that place in Malta on 4 May 2017 was a milestone in that it marked the 20th occasion that such a conference had taken place. The first conference was held in October 2004 at The Hague. Besides discussing some key corporate governance themes, such as supporting long-term value creation, rebuilding public trust, promoting corporate social responsibility and using digitalization to enhance competitive advantage, we also used the recent conference as an opportunity to look back on the past 13 years and explore how the business landscape has evolved over time.


What we found is that while many familiar corporate governance challenges remain, new challenges are emerging, particularly in response to technological advances. Just over a week after the conference took place, the WannaCry cyber attack wreaked havoc on IT systems around the world, highlighting the full scale of the cyber threat and the fact there is probably worse to come.


The European Corporate Governance Conference is a valuable opportunity for directors, governance experts and regulators to come together to exchange ideas and best practice. I hope that this report, on the findings of the 20th conference, offers some valuable insight that you can use to enhance governance practices within your own organization.


Andrew Hobbs, Partner, EMEIA Public Policy Leader, EY





It is my pleasure to welcome you to this report, which outlines the key findings of the 20th European Corporate Governance Conference. The conference took place in Malta on 4 May 2017 as part of the Maltese Presidency of the EU with the support of ecoDA, EY and other sponsors. While it was the first time that we have hosted this important event, I feel sure it will not be the last.


Malta, with its population of just over 430,000 is the smallest, southernmost member state of the EU. Nevertheless, we do not allow our size or our geographical location stop us from playing an active role in European politics or from taking on our fair share of financial commitments. A good example is the fact we contributed 3% of our GDP to support the European Financial Stabilization Mechanism and the European Central Bank’s monetary stimulus measures. At the same time, we have close relationships with our neighbors in the Middle East and North Africa. Maltese, which is one of our two official languages, is of Semitic origin and makes the country an attractive investment destination for the Arab region.


As a small nation, Malta is inevitably impacted by what’s going on in the wider world, which is why we have been following recent elections in the US and Europe closely. Today we are feeling the fall-out from the wave of regulation that followed the global financial crisis: banks are de-risking and we are losing correspondent banking services as a result.


It is not particularly well known that Malta continued to grow throughout the crisis, as businesses were attracted by the archipelago’s economic and business stability. Today, the country continues to grow fast – we have seen an average of 6% real growth over the past four years. We have the second lowest unemployment rate in EU and the fastest rate of employment growth – 2.5 times the EU average. Much of the investment into Malta is in services such as aircraft maintenance, health, logistics and tertiary education. The country is increasingly regarded as a service center in the middle of the Mediterranean.


Since we are committed to doing business with the outside world, we understand the importance of strong corporate governance and we appreciate its vital role in giving confidence to companies’ customers, employees, investors, suppliers and other stakeholders, including politicians and the media. We believe corporate governance is a topic that should be frequently discussed and debated, with useful conclusions being reported back to the wider business community. The latter is what this report seeks to achieve. I hope you enjoy reading it.


Hon Edward Scicluna MP, Minister for Finance, Malta


Opening remarks


The 20th European Corporate Governance Conference opened with a speech delivered on behalf of James J. Satariano, Chairman of the Institute of Directors (IoD) Malta.


He highlighted that the responsibilities of corporate directors are growing at a dramatic rate, saying. “The expectations for how corporate governance can fortify our economic system through vigilance, risk management and transparency have never been higher. Our responsibility as directors is to ensure that European corporate governance allows us to work effectively to make our businesses prosper.”

Shareholders do not just expect directors to know how their business can compete in a global marketplace while controlling the associated risks, continued Satariano. They also expect directors to manage the impact that their businesses may have on the financial system.


He noted that the regulatory framework within which European businesses operate is changing fast, with new rules appearing frequently. “Rules likely to be introduced over the next few years will profoundly impact both how your boards fulfill their responsibilities, and how you communicate those activities to your shareholders,” he noted.
There have been significant changes to technology, investors’ attitudes, trust in boards and the way financial markets work over the last five years, Satariano explained, adding: “The way we work today, and in future, must therefore change. That’s why conferences like this must be supported – so we directors can take best practice and knowledge back to our boardrooms.”


Inclusivity, innovation and responsibility


In a video message, Věra Jourová, Commissioner for Justice, Consumers and Gender Equality at the European Commission, emphasized the need for “responsible, innovative and inclusive approaches to corporate governance” amid global challenges such as ageing populations, climate change, digital transformation, growing inequalities and migration. She called on companies and investors to “favor long-term value creation and act with full consciousness of the impact on the society and the planet”.


Board members and investors need to develop expertise in sustainability issues, she remarked, while regulators need to reflect on how they can help to trigger the right change in attitudes, which will benefit companies and their investors. “We know that companies with higher environmental, social and governance rankings have a lower cost of capital and tend to attain better financial performance,” she added.


Jourová also observed that the revised Shareholder Rights Directive should support a longer-term focus on investments and address a number of governance shortcomings. “Institutional investors and asset managers will be encouraged to make more long-term investments and to consider their environmental and social impact,” she said. “Shareholders will have a say on pay so companies should be more transparent and accountable for directors’ pay and transactions with related parties. Finally, the revised Shareholder Rights Directive will facilitate engagement between companies and their shareholders. For example, the new rules will make it easier for shareholders to exercise their rights, particularly in cross-border situations.”


The next stage is to ensure consistent implementation of the new directive, Jourová commented. Hence the European Commission will adopt implementing acts that guard the flow of information between companies and shareholders and produce guidelines on the presentation of the remuneration report.



Long-term value creation: Determining the future of our economic and political systems


[Intro] Businesses are under pressure to generate wealth for the many as well as the few in what is an increasingly complex and volatile economic and political landscape. During the opening panel session, panelists discussed what long-term value creation means in practice and how it can be achieved.




  • Mark Goyder, CEO, Tomorrow’s Company
  • Florence Bindelle, Secretary General, EuropeanIssuers
  • Marcello Bianchi, Chairman, OECD Corporate Governance Committee and Deputy Director General of Assonime
  • Kiyomi Saito, President, JBond Totan Securities CO., Ltd
  • Peter Swabey, Policy & Research Director, ICSA: Governance Institute
  • Edwin Ward, Director, IoD Malta (moderator)



“We are talking more and more about shareholder value and delivering it less and less.”


Mark Goyder, CEO, Tomorrow’s Company


“It is important that there is diversity of corporate governance thought… Competing models of corporate governance create a movement toward better corporate governance.”


Marcello Bianchi, Chairman, OECD Corporate Governance Committee and Deputy Director General of Assonime


Main copy


Today’s businesses are increasingly expected to create value for a wide range of stakeholders, from investors and employees through to customers, suppliers and society at large. The opening panel session, moderated by Edwin Ward, Director of the Institute of Directors (IoD) Malta, debated what value means, how companies can create it, whom they should mostly be creating it for and which businesses are presently leading the way in value creation.


Do we have sufficient value creation today?


When businesses create value, they drive economic growth, explained Marcello Bianchi, Chairman of the Organization for Economic Co-operation and Development (OECD) Corporate Governance Committee and Deputy Director General of Assonime, the association for Italian joint stock companies. Yet regulatory changes since the global financial crisis have acted as barriers to growth creation because they have deterred some businesses from investing and made it harder for growth companies to access the capital markets.


As a result, he said: “We probably have to develop a new approach to regulation of financial markets because we have to balance the safeguarding of financial stability while allowing financial markets to support economic growth.” The revised OECD Principles of Corporate Governance, published in 2015, include “a number of ideas for enhancing the regulatory and policy-making framework”, he added.


“A company creates value when it generates the return required by the providers of the capital – the ones that provide the financial means to run the corporate activity,” said Florence Bindelle, Secretary General of EuropeanIssuers, which represents listed companies in Europe. “Depending on the cost of this capital, a business will grow, but it can generate value or not.  For instance, value for shareholders is not critical when the company’s cost of capital is higher than its earnings or if the returns in a similar business environment could have been higher.”


For this reason, she continued, it is essential that companies and shareholders communicate with each other around the business’s long-term strategy and how it is creating long-term value for shareholders. “We believe the Shareholder Rights Directive is a move in the right direction,” she said. “We think it will enhance the dialogue between companies and shareholders.” She also called for a cost-effective system of shareholder identification that would allow companies to communicate better with their investors.


Mark Goyder, CEO of UK-based think tank Tomorrow’s Company,
warned against regulators assuming that they could create a culture for businesses to be successful. “I have never believed that it is regulators who create culture,” he commented. “I believe that it is entrepreneurs, directors and societies that create cultures in which businesses either thrive or don’t thrive. Sometimes the best thing that regulators can do is to keep out of the way.”


Emphasizing that “wealth is created in companies and companies are started by entrepreneurs”, he observed that the corporate governance industry had unintentionally  – with the best of intentions – created a series of obstacles to the focus on wealth creation. Research by Tomorrow’s Company has found that over the past 20 years, shareholders have received less shareholder value in crude value and lower returns on capital than at any time since the years of the Great Depression. “We are talking more and more about shareholder value and delivering it less and less,” he suggested.


Goyder proposed three improvements to the current business landscape. Firstly, governance arrangements should acknowledge that companies are at the heart of value creation and regulation should also reflect that fact. Secondly, there is a strong need for investment institutions that act as pools of patient capital. Thirdly, the gap between business and society must be closed, potentially through greater use of employee share ownership plans.


Japanese businesses have similar difficulties to their European counterparts, said Kiyomi Saito, President of Japanese online bond trading company JBond Totan Securities. In particular, short-term thinking is a problem. “Companies have to think about quarterly performance, which is not contributing to value creation.”


She did, however, cite a construction company where she sits on the board as an example of a business that creates value. The company rebuilt a bridge at its own expense after it identified a potential safety risk due to a subcontractor using inferior-quality cement. “I am very proud that they made the right decision for the long term,” she said.


Peter Swabey, Policy & Research Director at ICSA: Governance Institute, agreed that too much short-termism exists in business, on both the corporate and the investor side. “Both sides tend to drive each other in the short-term direction,” he said.


He also noted that businesses are mistrusted. “There is a widespread public perception that companies only do things that are in the interests of the company and not in the interests of their other stakeholders. I’m not sure that’s right. I think there are a lot of companies that do an awful lot to engage their stakeholders and take their interests into account, but we don’t seem to be very good at getting that across.”


Culture could be a way of addressing the problem, he continued. “There’s a feeling that the more we can improve that, the more trust will grow in business. And as trust grows in business, we will have the sort of market we need in future.”


What good corporate governance looks like


When asked to define good corporate governance, Bianchi said: “Good corporate governance is corporate governance that provides confidence to investors and gives incentives to companies to invest and grow.”


Nevertheless, he said good was a static definition and he preferred to talk about “better corporate governance”, which would emerge from a system where companies would be free to evolve and innovate in the field of corporate governance and where regulatory standards would be limited to areas where market failures are clearly identified. He added: “What can be considered good now may not be considered good in a few months since corporate governance practices must adapt to new challenges presented by the financial markets.”


Regulators can play a part in developing this new system by devising corporate governance policy that takes a more “flexible and proportionate approach”, Bianchi suggested. “Flexible in order to allow companies to adapt rules and standards to their features and proportionate to establish standards that can be different for different classes of companies.” He revealed that the OECD has embarked on a new, ambitious project to study the different experiences between countries with regard to using flexibility and proportionality in corporate governance policymaking. Once the project has concluded, the OECD expects to issue guidelines to policy makers.


“It is important that there is diversity of corporate governance thought,” Bianchi commented. “That is not just diversity within the board, but diversity of corporate governance models. Competing models of corporate governance create a movement toward better corporate governance.”


Goyder offered his own definition of corporate governance as follows: “The company is a living system. Employees are its lifeblood. Management is the heart that keeps its blood pumping. Strategy is its brain. Measurement and communication are its central nervous system. Culture is its DNA. Leadership and continued entrepreneurial energy are its soul and spirit. Governance and accountability are its rhythms and disciplines – like exercise, a means of keeping this living organization fit and lean. Unless we understand governance in this wide context, we will continually fail to manage risk, sustain performance and earn trust.”


Saito explained that Japan is a latecomer for corporate governance, having introduced its first corporate governance code in June 2015. That had not stopped the country from becoming an economic superpower, however, she pointed out. By introducing the code, the government is emphasizing the importance of shareholders’ interests, something that the country was accused of neglecting in the past. “We don’t know if it’s been effective and created value yet,” she said. “We do not know if it’s right for Japanese corporations.”


There is a place for people looking at governance and looking critically at how we do things, observed Swabey. “For me, governance is about the structures that are in place to manage the relationship between owners, managers and the business itself.”


A powerful concept that should be the foundation of corporate governance is the principle of stewardship, observed Goyder. “It is the principle that I have an obligation, as a director of the company, as an asset manager, as a pension fund trustee, even as an EU commissioner, to hand over an asset, a legacy or a relationship to my successors in a better state than I received it.”


He also called on board directors to consider the important issue of the mandate and ask themselves these key questions: What is the mandate of the board I’m sitting on? Who has put me here? To whom am I accountable? “If you have a mandate, it gives the company the freedom to lead,” he said. “If we want corporate governance to be effective in the future, every board should go through the process of saying: What is our mandate? What do we stand for? Who has put us here?”


The role of regulators


Discussing whether it is possible to have good corporate governance without regulators and policymakers, Bianchi said: “I think there is a necessary interaction between practices and rules. But regulators should avoid the huge risk of trying to know what is good for everyone.” He suggested that sunset clauses (provisions that cease to have effect after a certain date) could be useful in certain regulations where “the intention was to create the incentive to overcome specific obstacles, not to create a model for eternity”.


Goyder cited the UK’s 1974 Health & Safety at Work Act as an example of a smart piece of legislation. “It required every company to say what its policy was, but it did not say what it had to have in its policy,” he said. “It had a number of prescriptive areas, such as protection of eyes, but, in general, the company had to define its own policy. This created a mechanism of accountability within the company with trade union safety representatives operating in trade union environments and safety committees taking responsibility in other environments.” The same principles apply to the UK’s 2006 Companies Act, which tells directors that they owe their duty to the company, but not how to execute that duty.


Ultimately, said Goyder, “We need to move from ‘comply or explain’, which many people regard as ‘comply or else’, to ‘apply and explain’. Board papers are 900 pages long. But how many of those are about whether the company should be in investing in R&D? How many of those are about how the company is going to improve its employee culture or invest in the things that society needs? We’re spending our time on compliance.”


In Japan, companies do their best to comply with the corporate governance code, including promoting diversity, because they will be accused of making excuses if they don’t. “We put a lot of effort into complying with all these principles,” said Saito. “I do not think it’s the right thing to do because many companies hired women who do not know anything about business as directors. Japanese companies that try to hire women as directors ask for photos with the résumés. We are complying, but in a real sense we are not complying.”


Swabey said he liked the simple Australian approach to applying corporate governance principles: “If not, why not? I think that sums it up quite well.” He added: “When I’m looking at companies’ annual reports, I like looking at places where people have diverged from corporate governance principles and explained their reasoning. Very often that shows a degree of consideration that you perhaps don’t get when it’s: ‘Yes, that’s what we have to do to tick the box.’”


A one-size-fits-all approach is not appropriate in corporate governance, Swabey observed, because individual companies should consider their individual circumstances and their individual stakeholders.


Value creation stars


The panel debated which of today’s businesses could be considered ‘value creation stars’. Saito picked out Masaru Ibuka and Akio Morita, the founders of technology giant Sony, because of their vision and their commitment to building a business that was primarily focused on building good products rather than achieving huge profits.


Japan is known for the longevity of its companies, said Goyder, quoting research by Professor Haruo Funabashi that found the country has over 20,000 companies that are more than 100 years old, 30 companies that are more than 500 years old and five companies that are more than 1,000 years old. He said these companies have many qualities in common, including a long-term viewpoint, leadership that is driven by clear values, respect for people, continuous innovation, frugality, prudence, legacy and a customer-oriented and socially minded attitude that focuses on building both the economy and the nation. Taking the example of Toyota, he said: The way in which Toyota today is approaching the hydrogen cell vehicle, thinking of vehicles not as transport but as mobility, and looking at the way the city works, embodies what we see as being admirable.”


Another example of a value creation star is UK-based marketing company the Linney Group, which started out as a Victorian bookshop. While the business has changed significantly since it was founded in 1851, it continues to be run by the same family – now in its sixth generation, which shows the importance of consistent ownership and values over time. Goyder explained: “The chairman personally takes the induction for new employees on the corporate values.”


Bindelle agreed that the companies most committed to long-term value creation tend to be differentiated by their ownership structure. “For me, the stars are the ones whose shares are owned by families or individual shareholders,” she said. “The companies that are more focused on short-termism are the ones that are mostly owned by pension funds and investment funds.”


Querying whether listed companies would continue to be an important form of ownership in the future, Goyder said: “Listed companies are declining. Because of the combined pressures of impatient shareholders, regulators, governments and society I think the listed company format is the format that is least likely to generate our retirement income in years to come. I think we will see new hynrids emerging.  “


Bianchi believed that it is dangerous to identify value creation stars because they can change. “As with the stars, what you are seeing now may be something that happened in the past because the transmission of light has influenced your vision,” he said.


“It is very difficult to pick out stars in terms of value creation and corporate governance because few of us know what the future will bring,” agreed Swabey. “I went to a conference many, many years ago when we were just starting to talk about corporate governance. A company called Enron was held up as a shining star in corporate governance terms.”


He added: “The right approach to governance, and the right approach to pretty much everything else, changes over time in accordance with the maturity of the company. The governance structure of a start-up company or a family-run company that is right at the beginning of its life will need to be very different from a mature company that is listed on the market and has been running for over 50 years. We also have to be aware that what we view as corporate governance has changed over time as well. When the Cadbury Committee was established 25 years ago, it was looking at the financial aspects of corporate governance – a very specific, tightly focused role. Now what corporate governance is attempting to achieve in terms of reclaiming trust in business is very, very different.”



[Audience poll] Would the compulsory presence of employee representatives on boards help strengthen long-term value creation?*


  • Yes – 1.8
  • No – 1.5
  • Only on a voluntary basis – 1.4


*0 to 5 where 5 is very important



[Audience poll] How can independent directors be more engaged with the long-term success of companies?*



  • By acting as advisors –2.7
  • By acting as monitors – 2.8
  • By being more numerous – 0.9
  • By having specific responsibilities towards stakeholders – 1.9


*0 to 5 where 5 is very important