Irish Draft Legislation Would Require Mandatory Corporate Governance Code

In a sharp departure from the comply-or-explain corporate governance codes prevalent in the EU, draft legislation In Ireland would create a mandatory corporate governance code with independent directors and audit committees as a hallmark. The Corporate Governance Act would require the Irish Central Bank and Financial Service Authority, as regulators of the Irish Stock Exchange, to draw up a binding good corporate governance code as part of the listing standards for the Irish Stock Exchange. The legislation would be flexible enough to allow different codes to be drawn up for companies of different sizes, measured by market capitalization.

As the financial crisis deepens, it has become clear to policy makers that voluntary codes are no longer adequate in order to provide assurance to investors and others as to the maintenance of the necessary high standards of good corporate practice. The draft attempts a definition of ‘‘good corporate governance’’ as meaning policies and practices relating to the way in which a company is directed that contribute to better company performance by helping a board discharge its duties in the best interests of shareholders; to facilitate effective and entrepreneurial management that can deliver shareholder value over the longer term; and to promote ethical and responsible decision-making, compliance with regulatory requirements and confidence in corporate reporting.

The legislation would require the corporate governance code to prohibit one person from simultaneously holding the positions of chair of the board and company CEO. It must also prohibit a former company CEO from being elected board chair. Another requirement is that companies must establish independent audit committees composed of members with recent and relevant financial expertise. More broadly, the code must charge the chairman and chief executive officer to assume direct responsibility for ensuring good corporate governance and transparency in corporate reporting,

Regarding independent non-executive directors, they would be limited to seven consecutive years on the board. There would also be limited on the number of boards of listed companies on which they could sit. Independent directors would also have to demonstrate the time and skills necessary to contribute effectively to the board. To ensure independence, the code must regulate the appointment of non-executive directors who are connected to the company’s bank or auditors. Finally, the legislation mandates that the code prohibit direct reciprocal cross-directorships between companies where a non-executive director of the first company is an executive director of the second company and an executive director of the first company is a non-executive director of the second. company.