IOSCO Examines Corporate Governance Regulation

The Corporate Governance Task Force (“CGTF”) of the IOSCO Growth and Emerging Markets (“GEM”) Committee issued a final report in which it analyzed the following “key topics” of corporate governance: (i) board composition, (ii) remuneration and incentive structures, and (iii) risk management and internal controls. The CGTF based its conclusions on a survey of GEM Committee members, and of relevant institutions and market entities in over 30 jurisdictions.

In the report, the CGTF emphasized that “[c]orporate governance is a work in progress,” and stated that its recommendations are intended “to help regulators consider possible ways for improvements in their corporate governance regulatory frameworks” (emphasis in original). The CGTF also stressed the importance of the role of the regulator in incorporating jurisdictional best practices into larger regulatory frameworks:

Capital markets regulators should take a relevant role in ensuring the regulatory frameworks consider the best governance practices within their jurisdictions. Accordingly, their views should be an increasingly important reference on the subject in global debates.

Additionally, the CGTF recommended that regulators:

  • require companies to indicate as concisely as possible the “main risks resulting from the risk identification methodology adopted by the company[ies],” and to describe how those risks “affect the business”;
  • emphasize social and cyber risks, and sustainability, proportionately when regulating risk reporting and management;
  • encourage companies to adopt integrated reporting by interacting with their stakeholders, as well as through other means;
  • encourage periodic self-assessment reports by companies’ boards that address the “efficiency and appropriateness of companies’ systems and controls, including identified deficiencies and the appropriate corrective action to be taken”;
  • compare analyses of internal controls and systems reported by external auditors with companies’ descriptions and their boards’ self-assessment reports;
  • encourage companies to establish specialized subcommittees in order to support board performance; and
  • “consider market conditions and characteristics, segments and scale of companies, so that they do not impose excessive or unnecessary regulatory costs” in mandating specialized risk committee requirements.

Lofchie Comment: One of the more interesting parts of the CGTF’s report is the discussion of “diversity” in corporate boards of directors, since regulators from different countries expressed contrasting views on the meaning and significance of diversity, and the degree to which it should be treated as a governmental goal.