What gets measured gets done; the JSE Corporate Governance Index
Corporate governance encapsulates those processes and systems by which organisations are directed, controlled and held accountable. Corporate governance ensures that the gears of the corporate machine are turning smoothly, and that productivity is achieved.
Corporate governance, amongst other things, requires that the board of an organisation is balanced between independent and non-independent directors, that a Code of Ethics is in place for all members of the organisation, that shareholders and investors are considered and treated fairly, and that the organisation is responsible, giving back to the community in which it operates through Corporate Social Responsibility initiatives.
Corporate governance is also crucial to organisations from a risk management perspective, as it requires ongoing risk evaluation to be conducted. When companies employ proper corporate governance, their ability to access capital is generally enhanced as investors consider strong corporate governance as evidence of a company being run in a sustainable, efficient way.
According to the old cliché, what is measured gets done; enter the JSE’s Corporate Governance Index for listed companies.
WHAT IS A CORPORATE GOVERNANCE INDEX?
A corporate governance index (CGI) is essentially a measure by which corporate governance practices within an entity or institution can be evaluated against set international best practices and legal requirements applicable to that entity or institution. An index assigns a numerical value to indicate overall good or poor performance against certain benchmarks.
Each company’s corporate governance profile will be measured against the Companies Act of Jamaica, the Articles of Association/Incorporation of the company, the JSE Rules, the best practices found in the Corporate Governance Codes of the Private Sector Organisation of Jamaica (PSOJ) and the Organisation for Economic Co-operation and Development (OECD), the International Financial Reporting Standards (IFRS), the annual reports of the company, the company’s website and the JSE’s compliance data for the company over the last three years.
Specific legislation governing the business activity of the company will also be used in the measurement, such as the Securities Act, the Banking Services Act and the Insurance Act. It is hoped that the JSE, in implementing such an index, will not only promote increased corporate governance awareness, but also create a movement within organisations towards more transparency and accountability.
THE RATINGS FROM 1-100
The Jamaica Stock Exchange even more so deserves commendation, as the index will be the first of its kind in the Caribbean region, giving Jamaica yet another edge in Corporate Governance initiatives. Through the numerical scoring system, companies will be assigned scores ranging from 1-100 as an overall evaluation of their corporate governance frameworks and implementation. Each question on the index will be assigned a score between 1 and 3 with 1 being the lowest and 3 the highest. The scores for each question will then be aggregated to arrive at the overall index score.
The scores of companies will serve as useful indicators to investors as well as a means by which companies can evaluate themselves and determine how to improve their corporate governance profile. The main areas which will be assessed are: the rights of shareholders, the equitable treatment of shareholders, the role of stakeholders in corporate governance, disclosure and transparency, responsibilities of the Board and other JSE requirements.
ASSESSMENT: HOW, WHEN AND BY WHOM?
The JSE will establish an independent Monitoring and Evaluation Committee to gather the data to be assessed and to evaluate the information by applying the rules to calculate the CGI scores. The CGI will be updated bi-annually and reviewed at the end of March and September. The CGI will be uploaded on the JSE website 60 days after the end of each review period. It is expected that the CGI will also be a factor in determining the JSE & PSOJ Corporate Governance Award in the future.
THE WAY FORWARD
The JSE has sent each listed company its initial CGI score which was assessed based on 2014/2015 information. A second round of CGI evaluations is currently underway with a view to producing a second score for each listed company. Ongoing consultations between the JSE, the PSOJ Corporate Governance Committee and listed companies have been taking place in this regard. The CGI will be officially launched and uploaded on the JSE website after the March 2017 assessment period.
It is perceived that the Index will be a useful tool in making sound investment decisions and in elevating standards of Good Corporate Governance.
Gina Phillipps Black is a Partner in the Commercial Department at Myers, Fletcher & Gordon and is a member of the Corporate Governance Committee of the PSOJ, assisted by Gabrielle Grant, graduate of the Norman Manley Law School and researcher for the Corporate Governance Committee of the PSOJ. They may be contacted via gina.black@mfg.com.jm, gabrielle.grant@mfg.com.jm or www.myersfletcher.com
This article is for general information purposes only and does not constitute legal advice.