Are women on boards positively associated with tighter audit committee controls and thereby improved internal control?

There is evidence that gender diversity is associated with tight financial control and tougher monitoring practices, thereby also with improved risk management governance (Adams & Ferreira, 2008). Women are also more likely to enter monitoring committees while men enter other committees for example the committees that are dealing with compensations etc. Men that have entered the audit committee also have greater attendance problems than female colleges (Ibid). Furthermore research also shows that there is a link between feminine traits, gender diversity and more honest governance practices especially in relation to corruption (Sung, 2003). As women are elected to corporate boards in Denmark and Sweden it is expected that they will find their way into roles which is supported by their talent and their traits. The audit committee has the function of overseeing the governance of the board and act as an internal corporate control mechanism. Both of these roles are supported by feminine traits and research has shown that these committees are positively influenced by women participation. In this context a higher than average representation of women in the audit committee would support the argument that traits are important in relation to board behaviour and that women contribute to effective risk and audit management on Swedish and Danish boards.

The process of finding empirical evidence for the claim that gender has influence on audit committee performance is somewhat different for Swedish and Danish companies. The governance structure of Swedish companies is disclosed in a separate report, in most cases called the Governance report. In some cases the report can be found as part of the annual report. In the governance report, companies disclose their organisational structure, financial information about the board members, ownerships structure and the work done in different committees. The audit committee is part of this structure and normally have a separate section where the composition, processes and a recapitulation of the work done is disclosed. The governance structure is not always as transparent in Danish companies as seen in Sweden. Even though the companies disclose the same information it is less structured and there are more sources that one that has to investigate in order to get an overview of committees, composition and processes. Most of the information is, however, disclosed in the annual report. In cases where the structure was not totally clear I used other sources such as corporate website and greens online database.

The results show that the average size of a audit committee in Denmark is 5.1 (ranging from 2 to 13 members) while the same for Sweden is 3.4 (ranging from 3 to 7). For four of the Danish companies the whole board were part of the audit committee in practice making the audit committee and the board one and the same. The gender composition in Danish audit committees is 9% for highly diversified while it is 11% for low diversified compared to the 16% women on Danish boards in total. Compared to the overall average including all Danish companies in the survey the average female representation was 12 % making both high and low diversified companies below average. This indicates that women are not represented to a significant degree in the Danish audit committees. The average number of women in the Swedish companies in the survey is 32% indicating a significant gender impact compared to the total percentage of women on Swedish boards, which is 23,9%. Companies considered low diversified have significant lower than average women on the audit and the numbers indicates that women do not find their way in to the committee if there is an overrepresentation of men on the board.

In Denmark, companies have only recently been required to create an audit committee, which should function as a control body of the internal audit. The legislation is part of a general tightening of controls that have followed in the wake of several great financial scandals abroad and domestically. The Danish regulations are especially influenced by the practices in USA where audit committees have been in place for a longer period as an integrated part of the Securities and Exchange Commission (SEC) regulation (Collier et al., 2003). The short time that the legislation has been in place can explain why companies in Denmark have audit committees where the number of members’ range 2 to 12 and in some cases encompasses the whole board. As there are no rules on the size or composition of the committee the board can decide to elect the whole board as the audit committee. While this can be viewed as complying with the law, the practice is not a representation of “the intend” of having an independent review committee, that can supervise and improve the decision making process of the board in total.

The results from the audit committee gender representation from Denmark show that the differences in relation between the highly and low diversified are not significant. A contributing factor to this could be that the Danish legislation on the establishment of audit committees is not very old and therefore not an established practice on Danish boards. As boards get more acquainted with how the audit committee can be used and what competencies is needed for it members I would expect that more women will be represented as time passes. Another factor can be contributed to the fact that since Danish boards have fewer women in general it makes them less likely that women would be part of the audit committee. In contrast to Danish performance is the representation seen in Swedish boards significant different, where women have can be found to have taken almost half the seats on the audit committee. Swedish boards have more women on their boards than Danish ones but this alone cannot explain the 45% women on the audit committees. A possible explanation can be found in the traits of women and male behaviour.

As I have shown is there research that suggest that women on monitoring committees have better attendance and performance that their male colleagues (Adams & Ferreira, 2008). The reason why women have improved attendance can be explained by the trait of collective thinking. Women are associated with taking ownership of processes and creating working environments, which includes more stakeholders in problem solving (Yukel, 2010:468). In order to be seen as legitimate in the eyes of the collective, and maybe themselves as well, women tend to put more emphasis on own attendance. Men on the other hand will tend be more concerned with own opportunities and development of their career and will not look up on attendance as a way to advance their career. Male traits could lead them in the direction of careerism and informalism in order to develop their own opportunities rather than the aims collective as a first priority.

One of the major functions of the audit committee is to reduce the risks that the corporation is subjected too. It is therefore imperative that the members display behaviour, which strives to meet this goal. As women are associated with being more risk averse (Jianakoplos & Bernasek, 1998) it is more likely that they will be in groups where this trait can be utilized. The reason is that women over time will find a place on the board where they have the most impact and in this case it is the audit committee. As time passes and corporate boards distribute different roles to its members there will under ideal circumstances be a situation where the members’ talents and competencies will determine what function they will have. As Swedish companies have since 1st of January 2006[1] have been compelled to formulate audit committees as part of their structures, it is also more likely that women would have found their way into this committee given their unique traits.

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Dynamic CSR Reporting the future of stakeholder engagement – Introducing the CSR Sustainability Index

Here is an idea… What if we reported on the ability of organisations as a Corporate Citizen Live? Corporations are already evaluated on a minute-by-minute basis through the stock market so why not transfer this basic idea to the realm of CSR and Sustainability.

The idea would be to have a series of indicators on which a corporation can be evaluated through social media and other ways of interacting with their stakeholders. Some areas would have a lot of activity while others would only be changed on a weekly or monthly basis. Just like volatility on the stock market which looks at how much a certain stock is traded the indicator for sustainability would only change when somebody evaluate or leaves a comment.

Like the Flameindex that looks at poor or critical media coverage the CSR Sustainability index would look into how certain companies did on a overall sustainability agenda. But it would incorporate an extra layer which would cover the individual areas of some of the well knows measurements of sustainability and governance.

My suggestion would be to monitor individual companies on several social media channels, coupled with the company’s own PR communication, NGO reporting, College and University Students reports analysis and professional analysts evaluation of corporate performance. The idea is to cover as many of the organisational stakeholders as possible while at the same time creating an easy point of access for further analysis and investigation.

For example, if a Professional analyst raises a red flag in the area of governance in a company a further investigation by other stakeholders might uncover problems in the area of labour law and corruption within the same company. The problem area would not have been uncovered if there had not been a red flag warning in the first place in a area normally not covered in conventional sustainability reporting.

On the other hand if a company had a best practice on how to combat child labour in their supply chain this knowledge could be flagged and other organisations could learn and adapt this knowledge to their own operational practices.

The platform would of cause be web-based providing live data on the largest companies in the world who are also the most exposed to global sustainability issues. Using the Global Compact as a starting point it would be the ten guiding principles that would form the basis of the index.

Human Rights

Principle 1: Businesses should support and respect the protection of internationally proclaimed human rights.

Principle 2: make sure that they are not complicit in human rights abuses.

(These principles could be monitored through tapping into local/global news channels were the company is active, monitoring local NGO activity, Whistleblowing on social media and own corporate reporting.)

Labour

Principle 3: Businesses should uphold the freedom of association and the effective recognition of the right to collective bargaining;

Principle 4: the elimination of all forms of forced and compulsory labour;

Principle 5: the effective abolition of child labour; and

Principle 6: the elimination of discrimination in respect of employment and occupation.

(Labour unions could be provided with an excellent channel for reporting abuses they cant communicate through the corporate pipeline but would like to have attention on. The CSR Sustainability index would provide an up to date indicator on how the company performed right now so that action can be taken in order to remedy the issue. Under normal circumstances it could take weeks, months or even years before an issue makes the media. But though the index it would be possible to raise awareness a lot faster just because it is linked to so many other channels of communication and organised in a way that makes it possible to get a fast overview of issues of concern.)

Environment

Principle 7: Businesses should support a precautionary approach to environmental challenges;

Principle 8: undertake initiatives to promote greater environmental responsibility; and

Principle 9: encourage the development and diffusion of environmentally friendly technologies.

(Environmental reporting has been around for many years and there are several channels, which can provide information on corporate environmental performance. There is of cause the organisations own reporting, which will be important, but this information should be seen in the light of what NGO say, municipalities, news channels and whistleblowers have to say. This would create a reasonable way of evaluating a company environmental impact and if that how this measures up against the expectations of its stakeholders. In many cases we tend to look upon environmental issues disconnected from the specific industry meaning that we look upon the carbon emissions of a clothing manufacturing company measure up against a producer of computer components, but who says that this is a important factor for the stakeholders? So, the reporting should of cause reflect the expectations of the people who have the most interest in the performance of the organisation and not some universal agreed standard that tells one close to nothing.)

Anti-Corruption

Principle 10: Businesses should work against corruption in all its forms, including extortion and bribery.

(One of the least transparent areas of the Global Compact and the one in my mind with the most potential. While the issue of corruption is less salient in the developed world it is a problem that affects all companies who work in an international context. The problems that corporations faced are backed by the resent publish annual report by transparency international that documents the impact of corrupt behaviour. As Huguette Labelle, Chair of Transparency International states, “During 2010 we continued to see the terrible cost of corruption. Sixty-four million more people were pushed into poverty since the financial crisis struck, according to the World Bank. Such tragedies make us ever more resolved to make a difference through our work.”. But as we all know these things are interconnected and one cannot look upon corruption without also taking into account, at least at some level, human and labour rights, environmental issues and not least education and gender. So the complexity of anti-corruption is difficult to comprehend and get a real overview of without some kind of systematic approach with the CSR sustainability Index such a platform would be provided at least in the form of information that can feed more in-depth investigations.

A think a unifying approach is appealing as I for one have a difficult time finding out what is PR, Spin and lobbyism from all the channels out there wanting my attention. I think it would also be appealing as It would provide a more “true” picture of who is really the leaders on the “goodness” market and how is just good at talking about how good they are. How would not be voted the best when some of your worst critics is on the voting panel?

When Governments operate through Tax havens

Logo of the African Development Bank (AfDB), p...

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Should the market emulate the state or should the state act more like the market? This has become a hot issue as the became apparent that the new African Guarantee fund will be established in the tax haven rather than in Kenya were it will operate in practice.

The African Guarantee Fund or AGF is supported by Denmark, Spain and the African Development bank and contains around 50 million USD at the moment this figure is however expected to grow to 300 million in three years time. It is expected that AGF will invest in small and medium size companies (SMEs) who need access to credit. The back will operate through other banks in the region and not have direct relations to the customers.

The controversy comes from the way that the bank is going to e operated as AGF is set up as a company limited by shares under the business law of Mauritius, a country that have no urgent need for a access to the bank services. A branch of AGF will be established in Nairobi, Kenya, from where the staff of the company will conduct the business. A second branch is likely to be set up in a West African francophone country within a few years. AGF will operate as a non-bank financial institution with a Board of Directors responsible for the overall management and a Chief Executive Officer heading the operations.

With its headquarters in Kenya it would be natural that the bank would be a legal entity there but this is however not the case. The reason is that the corporate tax on Mauritius is 3% while it in Kenya is 25% (inline with the Danish tax on companies) and therefor it is cheaper to operate offshore maximising the return.

These types of legal set-ups are not uncommon in the world of global business were there the boundaries of companies are fluent and business is conducted on a global scale. Companies have for years been criticised for their tax practices as they often avoid high-tax countries for regions that have lower tax and a more relaxed approach to legislation. The most famous (or infamous) tax havens are Bermuda, The Bahamas, Cayman Islands, Panama, Monaco and Switzerland. The companies that are currently operating through tax havens are big multinationals like Citigroup, Pepsi, Morgan Stanley, Bank of America and Oracle.  Quite a few of these were heavily involved in the financial scandals that lead to the global recession that we are currently experiencing.

The main question is if a Civil Society organisation like AGF, should operate the same way and under the same ethical codex as multinationals that politicians frequently criticise?  One government official from the Danish Liberal Party Integration Spokesman Karsten Lauritzen has rejected criticism that Denmark, which regularly complains about the use by international companies of tax havens, should itself choose to place a financial institution where it pays least tax.

As he puts it “We are not in Mauritius to earn money. The goal is to channel as much money as possible to poor people in Africa, so I cannot see that there is a problem,” He added that the predominant reason for the location was because it was easier and less bureaucratic to set up a financial institution in Mauritius. Which goes without saying when one of the main income sources for the country is to provide cheap and easy access to building offshore companies.

At the same time he basically stamps the Kenyan government and business environment as corrupt and unnecessary bureaucratic.

While some of the stakeholders continue to support the bank project there are critical voices starting to be heard, who really does not like to be associated with this form of speculative thinking. The NGOs are more critical of the banks lack of focus on the poor and people in real need of aid rather than credit than the more complicated tax system in which it will operate though.

But the central dilemma remains the same. If AGF is going to operate on market terms it needs to function as everybody else on the market basically levelling the playing field so to speak. And in this line of business it means that one operate through places were the tax is low and the relative bureaucracy is small translating into less cost and more profit.

On the other hand if one wants to do the ethical ‘thing’ it means that AGF needs to operate outside the market and therefor will not be subjected to the conditions that a only a market can provide. This means that it will not be able to have the same return on investment that other investment banks will be able to provide and therefor it will properly not be financially sustainable in the long run.

The ethics is clear to most. There is a huge difference if a company pays 3% or 25 % in tax and most of us have been critical of big corporations that for years have paid minimum tax while at the same time having huge profits. So when the government does the same by operating a company through a tax haven we perceive this as being unethical and to some extend hypocritical. On the other hand we would like to see that our tax money is put to good use and not eaten up by taxes and other forms of fees along the way.

I think this case highlights a huge dilemma that we are faced with. To what extend should we have an overlap between Government and Private business. With CSR we have already seen a move from regulation by law to self-regulation, self-monitoring and self-reporting. This case shows that the move also goes the other way when governments and CSO starts to operate like business and under the same conditions. While we ‘expect’ companies to some extend to be unethical and hypocritical we maybe in the future that even governments will act in much the same way. The question is if this is really what we want? and does the aim really justify the means even when its for the ‘greater good’?

Greed is just reorganising so be aware

I have seen several articles about the demise of greed and that we are now in a new age where we have learned of our mistakes. However, there are several signs that ‘greed’ might have taken a few blows but it is by no means dead.

There are different perspectives on why people are what we would call greedy. One would be that greed is the same as being evil or bad, another is that we as people wants what is best for ourselves and the people that we care about. But that sometimes the accumulation of wealth just gets the upper hand and we can’t control the process anymore.

Greed is part of human nature we all want something either in the form of capital, power, social standing, recognition by our peers or by the public. Greed has many forms and it is not only a matter of monetary accumulation but can be any number of efforts to acquire more of something. Sometime we call greed something else when we see it such as ambition, dreams, entrepreneurship or aspiration but in essence it is the same thing.  

Our financial system is fine-tuned into greed. If people did not have ambition, had hunger for more or were not curious as what happens in other parts of the world our global financial system would collapse. We are simply relying on that other people want to have more even though they might have enough.

But because greed is branded as something bad the financial system call it other things. When business students around the world go to class they are never thought what greed is or how to identify greed in one of its other forms. In the business discourse we call it Profit margin, Earnings Per share, remuneration or compensation plans or maybe stock options incentive schemes. The child has many names.

In the recently released FCIC report greed was mentioned nine times in the over 660 pages of document while agreed (which is striking a deal or making an agreement between two parties for mutual benefit) featured 76 times. So what really put the whole system under pressure were not people who were evil but rather two people who could see a mutual benefit in agreeing and making a deal. The word bonus was used 34 times and profit or profitable was used 106 times in the document.

In Denmark the Amager bank just failed after it had to take a loss of around 3 billion Danish kronor (around 400,000,000 €). The bank really had it coming after it had have endeavoured into the world of high risk real estate investments. In the struggle to survive the bank tried again and again to raise capital flashing one attractive stock proposal after another. And people bought it. They thought that what the bank told people was the truth that they did not have any other agenda than the well being of the bank while they in reality was just pouring water on a already stranded whale. If the investors had taken the opportunity to take a walk around Copenhagen and looked at the projects that the bank had invested in it would be obvious that what was claimed and what was happening in the real world did not match. I wrote a piece a few weeks ago on the bubble building up in China and one can see that if reality and the proposal on paper does not match it is properly because something is about to go terrible wrong. The same lesson goes for the Amager bank. Its financial proposals defied common sense, but because of greed and the unwillingness to identify if there were any connection with the real world investors lost all their money.  

So when reading the news or when you are going through the financial statements of the companies in your pension fund ask yourself if you can find greed. Among all the big numbers that companies toss around ask yourself if the management of this particular company, have left planet earth and gone to another system where reality does not really matter. Because if there is something that greed really hates it is the use of common sense.

Watch out for the Chinese dragon she is about to burst

China, China, China it seems to go on and on but what about the rest of Asia? Research done by the China Briefing found that if you are looking for low labour costs there are actually better places to set up shop in the neighbourhood.

The research was done on 15 countries in the region comparing minimum labour and mandatory welfare costs to business. As the there is no established norm for minimum wage in China the average was calculated using 40 cities across the country.

 Asia_wage_overview

The results are quite surprising as China comes in on third place just after Malaysia and Thailand. It is surprising as the china is a manufacturing country exporting for some 1,58 trillion USD in 2010. (That is 1,580,000,000,000,000,000 USD for those weak on math) and having uncompetitive wages could cause problems for China in the long run, especially if they are unable to control their own growth. The up-side is for the rest of us that Chinese consumers will experience a growth in purchasing power being able to spend more on luxury consumer goods of which some are produced in Europe and the US.

And it is actually the growth issue that I’m concerned about and I see signs that there is a massive bubble building in China which could create problems for the whole world when it bursts.

First, there is massive housing projects going one all over china that are only being build for investment purposes. Whole cities are empty of people even though all the homes have been sold. As we have see in the US and Europe where we had housing bubbles before can investing in a “ever” growing housing market create a house of cards that when they fall take much of the financial institutions with them. One of the questions that they need to be faced is how much of this is real growth due to supply and demand and how much is pure speculation. In Beijing the real-estate price is 22 time the disposable income while it was only 6,4 when the bubble cracked in the US. Furthermore is the lack of transparency in the Chinese financial (because of multiple financial systems working at the same time) making it impossible to know how fare we are from the edge. 

Second, the Chinese have not been able to control growth it seems. Some cities have reported growth as high as 30 %. Especially one thong about this that concerns me is that much of the local economy is being very tight with local business. 

“Many governments are hand in hand with local businesses, especially developers, with both in tandem striving to make large returns,” Chris Devonshire-Ellis, principal of Dezan Shira & Associates, points out. “Much government investment is actually tied up in commercial activities, especially property, and many gains being made are recognizable on paper only. Property prices are being driven up yet many of them still lie empty. Old habits die hard, and while the Central Government has for nearly twenty years focused on GDP growth, an entire mechanism has developed that is only really capable of feeding theoretical growth and lacks any real resale value or flexibility to manage growth in any other way. China is going to have a tough time in taking down a reporting and target structure that is increasingly in part looking to having encouraged the building of castles in the air.”

Third, there is a huge gap between the poor and the extremely wealthy and it is expanding at an explosive rate. At this time there are some 130 billionaires in China compared to the 359 in the US and there are some 825,000 Chinese people who have a net worth of over 1,5 million USD. Compared with the table above they seem to be living in different worlds. When things go from good to worse and finally to “big problems” there will be very strong tensions in the Chinese society that will be released with devastating effects.

A fourth problem is corruption as one commentator, Chen Pokong, put is “Loud words, little action. This is typical of the central government. Not only do they lack the determination, they also have no intention to fight corruption at all. A year ago, a survey showed that 90 percent of the public wanted the government to require officials to publicize their wealth, but 97 percent of the officials were against establishing such a requirement.” Nothing has happened in terms of legislation on corporate and governmental transparency so there is no reason to think that the issue has become even slightly smaller.

With an economy run amok and nothing to stop it, in terms of responsible government at all levels of society the Chinese are in real trouble. There is however no indication that any serious steps are being taken to counter this forth coming disaster.

New approach to bank bonuses in the UK

We might all agree that the lesson learned from the financial crisis is that greed is not always as good as we might have wished but there have only been a few real legislative changes made in order to really confront some of the central issues.

The Financial Services Authority (FSA) is the governing body who is tasked with regulating the financia services in the UK and they have taken an important first step. Until the 31st of January 2010 financial institutions could pay bonuses only based on share price, earning per share or other stock related performance. This meant that the only incentive for bank and financial instruction executives to do better was to nurture this one stakeholder namely the shareholder and in many instances this meant themselves to a large extend.  

In the code that the FSA have issued it has been put this way “Long-term incentive plans should be treated as pools of variable Remuneration. Many common measures of performance for long-term incentive plans, such as earnings per share (EPS), are not adjusted for longer-term risk factors. Total shareholder return (TSR), another common measure, includes … dividend distributions, which can also be based on unadjusted earnings data. If incentive plans mature within a two- to four-year period and are based on EPS or TSR, strategies can be devised to boost EPS or TSR during the life of the plan, to the detriment of the true longer-term health of a firm.”

And it continues

“Firms that have long-term incentive plans should structure them with vesting subject to appropriate performance conditions, and at least half of the award vesting after not less than five years and the remainder after not less than three years.”

I see this as a important first step for the financial institutions to confront the root cause issues that they for so long have been unwilling to tackle. While the 13 principles of the code in many ways resemble what we have seen in other governance codes such as descriptions of Risk and Governance control functions it goes new ways in forcing executive to think about what is going to happen to the company in five or ten years from now.

As we saw during the crisis it was not a one person greed that led to the down turn and destruction of capital it was structures build up ten or fifteen years ago that formed the cornerstones of a disaster waiting to happen. And while much of the blame can be put on the governments of the world in not understanding the ramifications of their own laws there is no doubt that a lot can be done in the area of governance and better business control systems.

There are especially two things that spring to mind when I see the code. First is the Exceptional government intervention which applies to companies that have been getting government assistance and have to apply to a special set of norms. The principles effectively put a cap on the amount that can be given in reunification to be limited to a percentage of the net revenues and the elimination of variable bonuses.

 The second is principle number eleven that states that “A firm must ensure that variable remuneration is not paid through vehicles or methods that facilitate the avoidance of the Remuneration Code.”. This means that companies no longer can hide money in the books in order to pay extra funds to executives and high ranking managers. While there might be a public outcry about bonuses there it has been less obvious that money have been channeled through alternative streams in order for companies to avoid public scrutiny. One could say that companies that just paid bonuses, however high, were in fact more honest as they actually showed on their books what they were doing.

Below you find the FSA 13 principles as they are outlined.

Code Principle Handbook references (SYSC)

1: Risk management and risk tolerance

2: Supporting business strategy, objectives, values and long-term interests of the firm

3: Avoiding conflicts of interest

4: Governance

5: Control functions

6: Remuneration and capital

7: Exceptional government intervention

8: Profit-based measurement and risk adjustment

9: Pension policy

10: Personal investment strategies

11: Avoidance of the Remuneration

12: Remuneration structures

13: Effect of breach of the Remuneration Principles (voiding and recovery)

New approach to bank bonuses in the UK

We might all agree that the lesson learned from the financial crisis is that greed is not always as good as we might have wished but there have only been a few real legislative changes made in order to really confront some of the central issues.

The Financial Services Authority (FSA) is the governing body who is tasked with regulating the financia services in the UK and they have taken an important first step. Until the 31st of January 2010 financial institutions could pay bonuses only based on share price, earning per share or other stock related performance. This meant that the only incentive for bank and financial instruction executives to do better was to nurture this one stakeholder namely the shareholder and in many instances this meant themselves to a large extend.  

In the code that the FSA have issued it has been put this way “Long-term incentive plans should be treated as pools of variable Remuneration. Many common measures of performance for long-term incentive plans, such as earnings per share (EPS), are not adjusted for longer-term risk factors. Total shareholder return (TSR), another common measure, includes … dividend distributions, which can also be based on unadjusted earnings data. If incentive plans mature within a two- to four-year period and are based on EPS or TSR, strategies can be devised to boost EPS or TSR during the life of the plan, to the detriment of the true longer-term health of a firm.”

And it continues

“Firms that have long-term incentive plans should structure them with vesting subject to appropriate performance conditions, and at least half of the award vesting after not less than five years and the remainder after not less than three years.”

I see this as a important first step for the financial institutions to confront the root cause issues that they for so long have been unwilling to tackle. While the 13 principles of the code in many ways resemble what we have seen in other governance codes such as descriptions of Risk and Governance control functions it goes new ways in forcing executive to think about what is going to happen to the company in five or ten years from now.

As we saw during the crisis it was not a one person greed that led to the down turn and destruction of capital it was structures build up ten or fifteen years ago that formed the cornerstones of a disaster waiting to happen. And while much of the blame can be put on the governments of the world in not understanding the ramifications of their own laws there is no doubt that a lot can be done in the area of governance and better business control systems.

There are especially two things that spring to mind when I see the code. First is the Exceptional government intervention which applies to companies that have been getting government assistance and have to apply to a special set of norms. The principles effectively put a cap on the amount that can be given in reunification to be limited to a percentage of the net revenues and the elimination of variable bonuses.

 The second is principle number eleven that states that “A firm must ensure that variable remuneration is not paid through vehicles or methods that facilitate the avoidance of the Remuneration Code.”. This means that companies no longer can hide money in the books in order to pay extra funds to executives and high ranking managers. While there might be a public outcry about bonuses there it has been less obvious that money have been channeled through alternative streams in order for companies to avoid public scrutiny. One could say that companies that just paid bonuses, however high, were in fact more honest as they actually showed on their books what they were doing.

Below you find the FSA 13 principles as they are outlined I have also attached a link to the final report here.

Code Principle Handbook references (SYSC)

1: Risk management and risk tolerance

2: Supporting business strategy, objectives, values and long-term interests of the firm

3: Avoiding conflicts of interest

4: Governance

5: Control functions

6: Remuneration and capital

7: Exceptional government intervention

8: Profit-based measurement and risk adjustment

9: Pension policy

10: Personal investment strategies

11: Avoidance of the Remuneration

12: Remuneration structures

13: Effect of breach of the Remuneration Principles (voiding and recovery)