Presentation on the Corporate Governance Awareness Workshop, Kurumba Island, Maldives (August 2007)

Fathimath ShafeegaChief Executive OfficerCapital Market Development Authority

Government ownership Conflicts of Interest Related party transactions Directors mandated under Companies Act to hold shares in

Company Lack of capacity for enforcement purposes Lack of qualified professionals in accounting and legal fields Lack of training and awareness Enhancement of Public Governance Desire to use CG as tool for economic development

Main Provisions

• Board Matters

• Remuneration Matters

• Accountability And Audit

• Communication With Shareholders

What Code Says – Key Items• Integrity in personal and professional dealings

• Wisdom and ability to take appropriate decisions

• Ability to read and understand financial statements

• An acknowledged record of business expertise and achievement so as to effectively contribute to the company’s management

• Ability to deal with others with a sense of responsibility, firmness, and cooperation

• Ability to interact with and consult with the company’s employees in order to achieve high management standards

• A track record of a range of skills and experience as well as the ability to think strategically and with foresight

• Each director must be able and prepared to devote sufficient time and effort to his duties as a director

Stand-alone and given legislative bite through Listing Manual and Securities Act?

Compulsory for listed companies, but with some voluntary

Voluntary for public unlisted, private

More prescriptive approach

At a minimum, Governance involvesorganisational structures rules of conduct that acts as a check on insiders misusing their position or

knowledge against the interest of other stakeholders

The idea is to have GOAL POSTS

R = Responsibility

A = Accountability

F = Fairness

T = Transparency

R = Responsibility

A = Accountability

F = Fairness

T = Transparency

RAFT contributes to effectiveness!

RAFT contributes to effectiveness!

Board Issues

Composition – executive, non-executives, independents – numbers of each - Appropriate definitions

Independent directors – Importance & Sufficient numbers

Leadership Chief Executive Officer separate from chairman Qualifications Role

Sub-committees of the board: Nominating Committee Remuneration Audit

Training Attendance at meetings / Quorum Evaluation of board performance Access to information Tenure

• CG Code provides:

• Should be a formal and transparent process for the appointment of new directors to the Board

• Recommends that key information and the names of the directors submitted for election or re-election be disclosed to enable shareholders to make informed decisions

• Disclose the process for the selection and appointment of new directors to the Board as this ensures greater transparency in the nomination process

Who To Appoint? And How?

Executive and Non-Executive Directors

• Executive directors are the employees of the company. – Paid salary

• Non-Executive directors (‘NEDs’) are not the employees of the company and they do not hold any other office of profit in the company or in a related company. – Paid directors’ fees

Who Is An Independent Director?

• Have not held, or whose immediate family members have not held, during the last one (1) year, a key position in the company, such as CEO, general manager, or any immediate employment position;

• Have not, and their immediate family members have not, during the last one (1) year had any substantial financial dealings, including the receipt of remuneration, commissions, professional fees, payment for goods and services, etc with the company;

• Definition of Family Member - spouse and children

• Role• Constructively challenge and help develop proposals on

strategy; and• Review the performance of Management in meeting

agreed goals and objectives and monitor the reporting of performance.

Independence = State of Mind!!

Independence = State of Mind!!

Who Is A Nominee Director

• Person appointed to board of directors by an appointor:– Substantial shareholder– JV Partner– Investor– Creditor

• Right to appoint contained in:– Articles of association– Contractual documents – JVA

ChairmanChairman

Executive Directors

Non-Executive Directors

Independent Directors

• Recruiting the right team

• Guidance in CMDA Code

• Recruiting the right team

• Guidance in CMDA Code

CEO

• Size of Board = large enough to include directors with diverse expertise and experience to suit the specific requirements of a company and its business.

• Guide = board sizes range from 7 to 10 directors, depending on the size of the company.

• Rotate the Board – maximum 6 years

• Size of Board = large enough to include directors with diverse expertise and experience to suit the specific requirements of a company and its business.

• Guide = board sizes range from 7 to 10 directors, depending on the size of the company.

• Rotate the Board – maximum 6 years

Main duties of the Board

The Board must always act in the best interests of the company and shareholders as a whole.

Provide leadership, set strategic aims, direction to the Management, and ensure that the necessary financial and human resources are in place for the company to meet its objectives;

Establish a framework of prudent and effective internal controls which enables risk to be assessed and managed, and monitor and assess the effectiveness of the internal controls established;

Review Management performance and determine its remuneration; and

Set the company’s values and standards, and ensure that obligations to shareholders and others are understood and met.

Chairman’s Role

Lead the Board to ensure its effectiveness on all aspects of its role and set its agenda;

Ensure that the directors receive accurate, timely and clear information;

Encourage constructive relations between the Board and Management;

Facilitate the effective contribution of non-executive directors

Encourage constructive relations between executive directors and non-executive directors;

Not to unilaterally issue policies without consulting with the Board as a whole with full frank and discussions being completed

Ensure effective communication with shareholders; Promote high standards of corporate governance.

Audit Nominating Remuneration

No of Members

3 3 -

Chairman Independent Independent Independent

Composition Entirely non-executive, majority including chairman independent

Entirely non-executive, majority including chairman independent

Entirely non-executive, majority including chairman independent

Qualifications Min 2 with accounting or financial expertise or experience

- -

Ensure that level and composition of remuneration is sufficient and reasonable

Ensure that its relationship to corporate and individual performance is defined

Means companies need to adopt remuneration policies that attract and maintain talented and motivated directors and employees so as to encourage enhanced performance of the company

Important that there be clear relationship between performance and remuneration

Important that policy underlying executive remuneration be understood by investors.

Remunerate Fairly And Responsibly

• Identification of performance indicators

• Evaluation against performance indicators

• Evaluation should be conducted at least once a year

Performance Appraisal

To disclose in Annual Report collectively: the remuneration of directors during the year as:

▪ Director fees▪ Other benefits, including share options, long

term incentive schemes, pension benefits and preferential entitlements

To disclose voluntarily each director’s and top management remuneration

Disclosure Of Remuneration

The primary duties of directors include the following: good faith; acting without conflict of interest; not competing with the company care and skill; disclosure; prohibition of lending to director; filing returns; keeping proper records and preparing financial reports;

and obligations under the Listing Manual.

Key Duties And Liabilities

Roles

Duties & Responsibilities

Accountability

Same Duty For All Directors?

Definition – The management must comprise the CEO, executive directors & key managers of the company involved in day to day activities.

Role Relationship with board Access to information

Necessary? YES Qualifications

Understanding of compliance Imply accountants, lawyers etc can play impt role

Scope of functions Board Management Committees

How to engage Information to provide Electronic participation Resolutions on substantially separate issues to be kept

separate Requirement for effective shareholder remedies

Financial statements to comply with Accounting Standards Non-financial statements:

Conflict of interest Compliance with CG measures implemented Director remuneration Companies operating procedure Risk management concerns

Format for disclosure

• Absolutely essential

• Train the trainers

For board & management Legal (including duties and liabilities) and accounting

concerns Roles and specific functions to gain better understanding Business and strategic issues Economic issues and changing conditions, and impact on

company’s businesses For employees:

Details of policies of company Specific roles and duties and responsibilities, including

liabilities

Criteria for CG Award

• Work undertaken to adopt governance principles

• Contribution to significant development of corporate governance practices

• Promotion of initiatives for the enhancement of future corporate governance practices

Main scope: Fraudulent financial reporting Misstatements arising from misappropriation of

assets Improper or unauthorized expenditures (including

bribery and other improper payment schemes) Self-dealings (including kickbacks) Violations of laws and regulations (including those

that expose the company or its agents to regulatory or criminal actions, e.g. securities frauds, signing false audit confirmations)

• Market maturity & level of sophistication

– Level of awareness of directors of their duties

– Shareholders of their rights and

– Presence of reputatable intermediaries

• The presence of enforcing institutions

– Integrity and efficacy of regulatory agencies

– Judicial system

• The supporting legal framework

– Relevant laws in the corporate and financial system must be firmly in place

Pre-requisites For Enforcement

Timelines

Challenges Ahead

Change of cultureLegal reformMore training & awarenessShareholder activism Independent Directors

Initiatives for Implementation

A series of training workshops have been held

2002 1st Seminar on CG2005 Training Programme on CG Code 2006 Seminar on CG2007 Corporate Governance Awareness

WorkshopMore workshops to be

arranged….

Thank You!

For more information

Log onto: www.cmda.gov.mv