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A consultation by the Committee on Corporate Governance

Comments from ACCA
July 2003

General Comments

ACCA is pleased to comment on the draft code of corporate governance issued on 28 May 2003 by the Committee on Corporate Governance.

There is much to be welcomed in the draft code. It covers the important aspects of corporate governance and should be helpful to companies and the business community in demonstrating that Mauritius has good corporate governance. We are concerned however that the draft code may be too prescriptive and demanding for companies. We would prefer the code to show more clearly which sections it is expecting companies to comply with and which are guidance. We suggest it would be helpful to have, in separate sections, principles, best practice provisions and other guidance. We also suggest giving more information on how companies should disclose how they have followed the code, how the code will be monitored and whether or not there will be any mechanisms for its enforcement.

The code lists, in 1.1, statutory corporations and parastatal bodies amongst the list of entities which �shall apply�. It should be noted, however, that directors of statutory corporations and parastatal bodies have some particular statutory responsibilities which may need to be taken into account. For example, members of the Board of most statutory corporations and parastatal bodies are representatives of various Ministries, and not appointed by name in their personal capacity. Hence, a different officer may represent the Ministry at each meeting. In addition, Government usually takes the policy decision, with the parent Ministry taking the lead role in policy implementation.

ACCA suggests that the code be applicable to private sector listed companies and that other organisations, such as statutory corporations and parastatal bodies, should be advised to follow the spirit of the code and apply the principles where they can. Alternatively, the role of directors of statutory corporations and parastatal bodies and applicability of the code to them should be separately defined.

Detailed Comments

For ease of reference, the comments below are arranged in the same order and structure as the consultative document.

Section 1 Compliance and Enforcement

1.1 the term �large� in large public companies and large private companies should be defined e.g. in terms of turnover, asset-base, number of employees, market capitalisation or a combination of these.

1.4 says that Companies shall state in their annual reports the extent of their compliance with the Code, as per section 7.4.6. of the Code, and the Board of Directors may request the auditors to state the extent of the company�s compliance with the Code of Corporate Governance. We believe that as presently drafted companies may find this too challenging.

The draft code contains over 200 paragraphs and sub paragraphs. These contain a mixture directions (using the word �must�), phrases which might either be directions or recommendations (as they include the word �should�) and other statements which provide information (such as most of 2.3 on the role of the board). Unfortunately it is not always clear which parts of the draft code are the requirements with which companies have to comply. We are concerned that this could lead to confusion when companies disclose the extent of their compliance and wide therefore variations in the extent and quality of disclosure.

It is presumably not the intention of the code authors that companies state their compliance or otherwise for each paragraph. We suggest that the final version of the code should show clearly which sections of the code are requirements to be complied with and which sections are advisory or for information.

It may be appropriate to use the approach adopted in the UK Combined Code which contains 2 sections: a set of 17 principles (using the word �should�) and a code of best practice containing more numerous provisions (which also use the word �should�). In addition, the preamble sets out how the code should be used including the 2-part disclosure required.

companies should disclose an explanation that reports on how it applies the principles in the Combined Code. The Code does not prescribe the form or content of this part of the statement so that companies have a free hand to explain their governance policies in the light of the principles, including any special circumstances applying to them which have led to a particular approach. It says it must be for shareholders and others to evaluate this part of the company�s statement.

In the second part of the statement the company is required either to confirm that it complies with the Code provisions or - where it does not - provide an explanation. Again, it is for shareholders and others to evaluate such explanations.

1.7 states that �regulators and stakeholders should be responsible for monitoring the application by these companies of the principles as set out in this Code�. It would be helpful to give more explanationas to how this might happen. What, for example, would be the role of regulator and what should shareholders and other stakeholders do?

Section 2 Boards and directors

This section contains very useful information. As stated above, however, it would be helpful if the guidance could be more clearly distinguished from the code requirements.

2.2.1
we suggest it would be better to refer to an appropriate balance, rather than mix, of directors.

2.2.3
the recommendation that all boards should have at least two executives as members might not achieve what we assume is its intended aim of ensuring a strong executive element. This is because a second officer, junior to the chief executive officer, may be reluctant to vote against his/her superior in a meeting of the board of directors. It would be preferable to call for a strong executive element, which would encourage boards to consider having more executive directors.

2.2.8
the phrase �there is no distinction between directors and alternate directors� is confusing and could be deleted, leaving the rest of this section in place. We suggest a director, or an alternate, should have only one vote rather than two as implied in the code.

2.4.3
we suggest rewording �a director should avoid conflicts of interests, even where these could only be perceived to be as such� to �a director should, where possible, avoid being in a position of having a conflict of interest and situations where others might reasonably perceive there to be a conflict of interest�.

2.4.5
allows a director to debate and vote after having declared a conflict of interest. This is not best practice.

2.5.3.5
lists monitoring and evaluating the board and director appraisals as part of the role and function of the chairperson. The chairperson may not have the required skills and competence to carry out these functions. We suggest that the chairman should ensure that such appraisals take place but not specify who should conduct the appraisal.

2.9.1.3
we consider that the definition of an independent director is too prescriptive. As a set of rules it is also incomplete as, for example, it omits family or close friendships with other directors from the list of prohibitions. We suggest that boards should be allowed to decide whether or not a director is independent after considering a set of criteria and any other matters, which might affect, or might reasonably be perceived by shareholders to affect, independence. The board should then disclose in its corporate governance statement why it considers each director to be independent.

2.9.2.3
this could be said more clearly. The third bullet point seems dealt with more satisfactorily in later clauses so could perhaps be deleted.

2.9.4 and 2.9.2.14
these duplicate the requirement for directors to act in the best interests of the company.

2.9.2.15
it may be better for directors to obtain advice about their duties from other members of the board before seeking independent advice. This clause presumably is about taking advice on ethical or professional matters where outside advice may be needed, if so this should be stated more clearly.

2.10.1
we consider it would be better to refer to a statement of remuneration policy rather than a philosophy.

2.12.3
says that directors should be assessed both individually, and collectively as a board. We suggest that, as best practice, the board should assess itself with input from an external facilitator. We are pleased to see that the code requires board and director appraisal. However we disagree with the statement in 2.12.4 that boards could assess themselves only when there are major changes in strategy or structure.

2.13.9.1.2
it is now considered good practice to include a disclosure in the annual report of the activities of the audit committee. We recommend the list of audit committee activities should include reviewing financial information to be published by the board.

Section 4 Risk Management, Internal Control and Internal Audit

This section includes information as well as provisions. Again it would be helpful to separate these. We recommend that more information is provided, or reference made to suitable sources of information, on internal control and how its effectiveness should be evaluated. This is particularly important as there is much misunderstanding about this. Further misunderstanding may arise as the US SEC has recently defined internal control as being controls over financial reporting. This is a much narrower definition than understood by most people over the last 10 years. Many references consider internal control to be about the means to achieve all an organisation's objectives although there is considerable divergence in definitions.

We suggest that the internal audit section includes a recommendation or requirement that internal audit should be able to work and report independently and objectively.

7 Communication and disclosure

7.2
should be part of 7.1

7.3
the code should make it clear which reports are referred to in 'reports should present a comprehensive and objective assessment of the activities of the company so that all stakeholders can obtain a full and fair view of its performance?'

7.4.6
refers to adhering to the �Code of Corporate Practices and Conduct� or giving reasons for non-compliance. This is a phrase used in the King Report but there is no other use of this phrase in this draft code. As we said above it is not clear in the present draft which sections have to be complied with.

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