Developments in corporate and market regulation: implications for the treasurer

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Treasury professional
Treasurers Handbook
Theresa Dunne University of Dundee
Christine Helliar University of Dundee
Bruce Burton University of South Australia


Treasurers across the globe are continuing to face a fast-changing regulatory environment as governments attempt to deal with both pervasive and particular areas of need for substantive improvements in corporate (and market) governance. It is clearly impossible to cover regulatory details and priorities in every part of the world in a review such as this. Here, we concentrate on recent developments in the UK where historical propensity (on the corporate side) and the continued dominance of London’s international money markets (on the market side) point to changes in its extant regimes as being more likely than any others to have international impact. However, as in previous versions of this article, we attempt to set the developments in the context of international norms and practices and thus make the discussion of relevance to treasurers across the globe.

In the UK the FRC’s second (2012) UK Corporate Governance Code is just beginning to be embedded within companies’ financial reports, while the revised Stewardship Code of the same year requires investors to take their ownership obligations seriously. One of the main changes in the newest draft of the former is tightening up of the requirements on gender balance and audit firm tender, with much fuller discussion of gender mix and a 10-yearly process respectively now set out in the code.

Notwithstanding the code provisions on gender-related issues, there remains a marked difference between the UK Government’s policy of a 25% gender mix target and the EU’s 2020 goal of 40%. However, at the time of writing the British government is softening its prior strong resistance to quota imposition as UK firms appear to be moving in a direction that makes even the 25% figure seem unlikely on a voluntary basis.

Clearly treasurers can play a key role as non-executive directors on other boards with the knowledge and experience of risk, risk management and treasury operations countering the fact that non-executive directors often form a “cosy club” and do not spend enough time on their board appointments. Nevertheless, it may impossible for individuals to hold a full time executive position within a major company and be a non-executive on other boards, or be a non-executive on multiple boards. But if non-executives need to have the expertise to act as an independent director then treasurers need to try to work out how they can do this, although they need to recognise any reputational risks on taking such appointments, and ensure that they are ethical, profitable companies.

Treasurers should also examine who the non-executive directors are on their own boards and make representations to the chairman if they think that the skills, diversity or time spent by individuals on board matters are not up to best practice. For example, does any non-executive on the board have the expertise or qualifications to understand the risks and risk management practices of the group for which the treasurer is usually responsible?

Many of the key elements in the code that are most relevant to UK treasurers have remained largely unchanged, despite the now bi-annual re-drafting of the code. One change which, on the surface, appears minimal, but may yet prove non-trivial in impact is the addition in the 2012 code of the word “fair” to the requirements for the board’s report on the company’s “positions and prospects”. That “balanced and understandable” (as per the 2010 Code) did not apparently imply fairness in the regulators’ view suggests a particular concern about the content of these reports and in so far as treasurers have impact on their content, the need to address this issue should not be ignored.

A separate Stewardship Code (as opposed to being tacked onto the end of the main Corporate-focused Code) now seems to be an established part of the UK’s regulatory regime. Institutional investors often do not consider corporate governance practices enough and do not know the right questions to ask. Ownership is often fragmented and dispersed and companies are labelled as “ownerless corporations”. In the US some business groups have been against the rule that allows shareholders to directly nominate board members under the SEC’s proxy access proposal, approved in August 2010, after the Dodd-Frank Act gave the SEC this power; shareholders with at least 3% of the votes held for at least 3 years can now nominate up to a quarter of board directors. The 3 year requirement is because of the influence of arbitrage based hedge funds or other major groups such as high frequency traders and foreign investors that have interests that are very different from long term shareholders. This proxy access rule may result in shareholders doing a better job of monitoring management; investor engagement can change boards’ decisions as evidenced by Prudential’s bid for AIA that was thwarted by investors who considered the price too high. As noted above, in the UK a Stewardship Code was published in 2010 that requires institutional investors to take a more active role in the monitoring of management. Treasurers should thus pay regard to the shareholder base of their own companies and assess whether investors are taking governance seriously.

The concept of corporate governance

It is now widely accepted that modern corporations have to balance many competing considerations, reflecting material obligations to shareholders, employees, customers, suppliers, creditors, and others, as well as wider social responsibilities to the communities in which they operate. However, the need to reflect the owners’ – or shareholders’ – desires has typically been the focus for debate regarding corporate governance reform; the impact of the credit crisis on the conceptual dimension of the governance debate may not be fully evident yet, but clearly paradigms may shift in coming years.

The protection of investors from agency risks deriving from the separation of ownership and control has been the central preserve of corporate governance recommendations throughout the world. The mechanisms of corporate governance are seen as integral tenets in the operation of modern corporations; “good” corporate governance is seen as essential in terms of safeguarding company assets and maintaining and enhancing investor confidence, thus, providing greater access to funds and reducing the potential risks associated with fraud.

The Sarbanes-Oxley Act

Many of the measures adopted in the UK since the early 1990s reflected existing best practice in the US, as defined by the Securities and Exchange Commission (SEC), but in the wake of the difficulties at Enron, WorldCom and elsewhere, the Sarbanes-Oxley Act (SOX) was signed into law by President Bush in July 2002. This Act is considered to be the most comprehensive corporate governance legislation to date and has significant implications for publicly traded companies. This legislation dramatically increases corporate management’s governance role and accountability relating to the reporting of financial results and maintenance of sound internal controls. It clearly defines a host of rigid responsibilities and requirements, as well as consequences for non-compliance. The SOX runs to 130 pages and includes provisions for:

  • the establishment of the Public Company Accounting Oversight Board (PCAOB);
  • guidelines to ensure auditor independence;
  • increased requirements for corporate responsibility and accountability;
  • enhanced accurate financial disclosures; and
  • a clear definition of enhanced penalties for corporate fraud and white collar crime.

The certification provisions of the Act are much more rigorous than those previously in existence. The CEO and CFO are required to acknowledge in each annual or quarterly report their responsibility for internal controls, and to present their conclusions as to the effectiveness of those internal controls. With respect to treasury operations, the Act places emphasis on control maintenance and fraud/error detection. Four areas where the SOX affords treasury departments opportunities for improvement can be highlighted:

  • The identification of key control points or issues, such as accounting, technology, risk management, transactions and so on.
  • The establishment and improvement of treasury process controls by means of preventative measures such as the segregation of duties, transaction limits, and detective controls such as technology alerts and mandatory job rotation.
  • The provision of validation support in the financial reporting process.
  • The provision of ‘global governance’ to ensure decentralised organisations are kept informed by means of effective information reporting systems.

2010 US Dodd-Frank Act

The Dodd-Frank Act has paved the way for new regulations setting up a consumer protection agency to guard against “predatory” business practices and greater transparency regarding derivatives trading, provisions to make companies disclose executive pay and give investors greater say in nominating directors.

Other international norms and on-going convergence trends

Most developed countries retain unique elements within their domestic corporate governance systems. Europe is trying to develop a model for all countries of the EU with the launch of its green paper in 2011 but all EU countries have their own national Codes now that Greece has issued its Code in March 2011 and was the last EU country to do so. However, across the globe, most of the key differences are reflected in three distinct types of model.

First, there is the US/UK (or “Anglo-Saxon”) model, based around widely dispersed share-ownership, with significant shareholder activism (in terms of voice and/or exit) and a vigorous market for corporate control. Amongst countries operating within an Anglo-Saxon framework, concentrated ownership patterns are rare; often the extant structure reflects tradition and prior practice, although in some cases (such as in the US prior to the repeal in 1999 of the Glass-Steagall Act) banks and other financial institutions have been excluded by law from undertaking such investment activity. However, this model is causing concern, particularly in the UK where the protection of minority interests is becoming an issue. UK governance is not designed to deal with dominant shareholders and concentrated ownership and thus the protection of minority interests that is lacking in the UK may need to be considered.

Second, there is the model operating in Germany and elsewhere in continental Europe, where banks’ cross-holdings of equity, and concerns regarding social responsibility are the dominant influences on the operations and internal control mechanisms of major firms.

One common factor in the German (and Japanese models) is the tradition of banks to provide a large amount of the finance (both debt and equity) for industrial firms, but the extent of their influence differs in the two systems. In Germany, the largest firms have a bank representative on the supervisory board and in addition, despite typically holding no more than 10-20% of the shares of major German companies, the ability to cast proxy votes on behalf of absent shareholders results in banks having significant voting power, equivalent, on average, to 80% of the votes cast at German AGMs. In Japan, board structures are very different, with outside representation on boards more restricted; banks and other lenders are often still represented, but with a relatively low level of practical influence. In both Japan and Germany, recent legislation has sought to use the tax system to encourage the unwinding of cross-holdings of equity, although within Keiretsus the portion of equity held by non- members and related financial institutions typically remains around 20-30%. While moves to unwind the German system are underway, the 25% threshold for disclosure of equity holdings is still in place and may mitigate against a move to US/UK levels of dispersion.

The German system is notable for the two-tier board structure (or “Mitbestimmung”) that has been enshrined in law and practice for many years. The Managerial board (or Vorstand) looks after day to day business matters, but is accountable to the Supervisory board (or Aufsichtsrat), one-third to one-half of which is elected by employees. Controversial appointments are rare, however, as the employee and non-employee groups have rights of veto and both boards are ultimately accountable to shareholders through the Annual General Meeting (AGM). However, the supervisory boards are too big, may lack competent members and those appointed may have loyalties and interests outside the board and the accountability of the company is not their main focus. However, the 2009 German law now bans executives from moving to the supervisory board for a period of two years, unless at least 25% of shareholders propose it as it had been common practice for CEOs to then become chairmen. German boards are required to issue a statement outlining the extent of compliance with the Corporate Governance Code and any reasons for departures; the notes to the financial statements should then indicate that such a statement has been issued and made available to shareholders. Other measures include: requirements for a one share, one vote structure at AGMs, to prevent abuse of proxy voting by banks; the prevention of the use of “poison pills” by target companies; age limits for directors; and greater openness regarding pay, bonus and incentive schemes.

While there are a number of widespread characteristics in continental European governance systems that differ from those found in the Anglo-Saxon model (notably the prevalence of a large controlling shareholder), many elements of the governance systems have, in appearance at least, closer ties to the UK/US model than is sometimes assumed; for example, amongst the 15 pre-2004 members of the EU, the two-tier board structure is found in only four (Germany, Austria, Denmark and the Netherlands).

Gradual movement towards a Europe-wide regime is taking place (notwithstanding any seismic shifts in the corporate governance debate that may yet follow in the wake of the credit crisis), but the movement in this direction is slow-paced, and the EU continues to allow individual countries to incorporate directives in a manner consistent with national practices in terms of regulatory structure. For example, despite the recent issue of an EU green paper as noted above, in the UK parts of three EU directives (Article 6 of the Market Abuse Directive; Articles 2 and 3 of Commission Directive 2003/124/EC; and Articles 5 and 6 of Commission Directive 2004/72/EC) are reflected in the FRC’s “Disclosure and Transparency Rules (DTRs).” Whilst the de facto effect of those requirements relating to corporate governance (primarily DTR 7) might appear somewhat labyrinthine, the UK Corporate Governance Code continues the practice of providing (in the Appendix on pages 34-35) to point to the manner in which compliance with specific code provisions maps directly to full compliance with particular parts of DTR 7.

Third is the Japanese model, where national culture is reflected directly in the governance and ownership structures in place. Despite recent changes, the inter-relationships among Japanese firms continue to extend beyond equity ownership to encompass working industrial relationships and the supply of raw materials; shareholder activism in the Western sense is still extremely rare. Changes in Japan are proving to be slower than in Europe, notwithstanding the steady year-on-year growth in collective investment that has occurred since the crisis of the late 1990s. The days of the “closed-shop” Keiretsu, largely impenetrable to both investors and potential industrial partners, are running out, although evidence suggests that the nation’s largest firms have generally chosen not to take advantage of new rules allowing a move away from a “statutory auditor”-based system to one that reflects the Anglo-Saxon model. Notably, a change made to the Securities and Exchange Law of 2006 (known informally as the “J S-Ox”) became effective in April 2008; the primary implication of this piece of legislation relates to a requirement for a review (and statement regarding the effectiveness) of internal control systems.

Other countries reflect different versions of the above models. In China, rapid economic growth and consolidation of the A and B share markets has recently been accompanied by moves to develop a more formal and transparent system of corporate governance. In particular, the issue in 2001 of the “Code for Corporate Governance for Listed Companies in China” places “the protection of investors’ interests and rights” at its heart, and contains detailed requirements that closely resemble the most prominent Western frameworks in several key respects. For example, companies are required to establish Remuneration, Audit and Nomination committees (amongst others), and operate these within a dual board structure. As in continental Europe, day-to-day events in China, suggest movement in the general direction of the Anglo-Saxon model, with market norms and pressures increasingly dominating firms’ activities and internal structures. Indeed, both CNOOC and China Mobile, two of China’s largest State Owned Enterprises (SOEs) have recently split the roles of chair and CEO. China’s State Owned Assets and Administration Commission is trying to integrate independent boards into all SOEs and this seems to be gradually taking place.

Corporate governance and the treasurer

The ACT has published its “Contingency planning for a downturn in the economy: A treasurer’s checklist” and treasurers should make themselves aware of the steps to be taken in this document to ensure that their companies adopt best practice.

The need for taking such steps is evidenced by the cases of Satyam in India, Madoff and Sandford in the US and the high-profile LIBOR scandal, which show the catastrophes that can occur when effective systems of corporate governance and internal control are lacking. In any organisation the treasurer should be part of an effective governance structure to prevent such occurrences happening. To be effective treasurers are expected to be knowledgeable about the five pillars that underpin a treasurer’s training: the three technical areas of cash management, corporate finance and capital markets, as well as operations and risk management.

Technical competence

To conduct business with professional competence, treasurers need to be aware of, and adhere to, all the statutory and regulatory requirements that affect treasury activities such as the Companies Acts, Stock Market Rules and FSA requirements in the UK, and Basel II, ISDA 2006 definitions, SEC rules and the 2002 Sarbanes-Oxley Act internationally. From an accounting viewpoint, treasurers should be familiar with IAS 32, IAS 39 and IFRS 7 on financial instruments and pensions accounting on IAS19. The increasingly important requirements for corporate pension schemes should also be part of the treasurer’s competence. Pension scheme finances are beginning to affect the success of corporate mergers and acquisitions, and the Pensions Regulator and Pension Protection Fund requirements in the UK have become important considerations.

In addition to the legal requirements and voluntary recommendations it is also important that treasurers keep up to date with professional issues and technical guidance from the ACT, maintain their CPD and read relevant articles in professional journals including The Treasurer.

Treasury operations

Operationally, treasurers need to manage daily flows of information and ensure that there is clear communication within treasury, and between treasury and other parts of the business. It is often easier to manage this by establishing a central treasury operation where all workflows can be managed more easily.

Particular issues to consider include:

  • Are there any manual systems operating within treasury where manual processes could be over-ridden and easily changed?
  • Are there many disparate systems operating, which are either difficult to reconcile or require the use of many spreadsheets?
  • Can controls and limits be breached?
  • What are the communication channels within treasury and with other parts of the business?
  • How large is treasury and is there adequate segregation of duties?
  • What are the resources and skills of offshore staff?

Risk management

A fundamental role of the treasurer with regard to corporate governance is to reduce risk. Risk is not only protecting against bad events that might happen but also protecting against the chance that positive events, such as winning a tender for a contract, do not happen. Risk may arise from factors such as rapidly rising or falling commodity prices including oil, gold, iron and copper and basic food stuffs or deteriorating economic conditions in the aftermath of the credit crisis and recession. Treasurers need to use all the information available, including financial data, sales budgets, economic forecasts, news and the media to understand the impact and likelihood for future business prospects.

Ethical codes

To be part of effective governance structure the treasurer should follow the professional code of conduct as in the IGTA code of best practice or the ACT’s ethical code. The treasurer should ensure that these principles are embedded at every level, from basic cash management operations to dealing with complex capital market transactions. The ACT code, for example, sets out seven fundamental principles:

  • integrity;
  • independence;
  • courtesy and consideration;
  • professional competence;
  • confidentiality;
  • compliance with laws and regulations; and
  • compliance with laws and regulations of other professional bodies to which a member belongs.

In following these principles the treasurer should consider the employer, the public, bankers, other professional business associates, and colleagues. To prevent unethical behaviour, organisations should ensure that there is an effective whistle-blowing system.


Whistle-blowing is an effective safeguard to corporate governance and is the most successful way to detect fraud. In the UK whistle-blowing is covered by the Public Interest Disclosure Act 1998 to protect potential whistle blowers from reprisal. In the US, SOX (2002) requires:

  • an anonymous procedure to be put in place for employees to report any concerns;
  • ethical codes and codes of conduct to be established; and
  • a system of effective controls to be implemented.

An open door policy on potential malpractice is recommended, and such concerns should be brought to the board or senior management’s attention. Staff must be comfortable about making any accusations; they should not have to report their concerns to a person whom they suspect. Some companies outsource their whistle-blowing service to a third party, confidential hotline such as Safecall in the UK.

Treasury policy and internal control

Corporate governance frameworks require a system of internal control to be established that is operational and effective. The precise nature of what is required differs from nation to nation, and the example for the UK discussed above suggests that the regulatory response to the credit crunch is starting to have an impact on requirements. Generally, however, the internal control system can be characterised as a process that includes: (i) policies, such as the remit of the audit committee or the fixed/floating interest rate profile of the debt structure; (ii) IT systems, such as treasury management systems; (iii) tasks, such as cash management; and (iv) culture, which should facilitate communication and transparency.

The internal control system includes the whole system of controls, financial and otherwise, to ensure adherence to management policies, safeguard assets and secure the completeness and accuracy of the records. The system of control must include procedures for reporting immediately, to appropriate levels of management, any significant control failings or weaknesses that are identified together with details of corrective action being undertaken. This requires that systems of control be embedded in the operations of the company and form part of its culture. To help management ensure that an effective system of internal control operates, treasury departments should check that policies and internal controls are adequate as follows:

Treasury policy:

    • satisfies corporate governance requirements;
    • requires reporting to a relevant board committee such as an audit committee;
    • establishes subcommittees such as a treasury committee;
    • is understood and approved at board level;
    • is reviewed on an annual basis;
    • delegates responsibility at an appropriate level;
    • defines treasury activities, such as derivatives usage parameters, and how these are communicated throughout the organisation;
    • sets risk analysis and reporting procedures; and
    • is disclosed in the Annual Financial Statements.

Internal controls should ensure that:

    • there is an acceptable audit trail of transactions;
    • separate front, back and middle office controls are established where necessary;
    • limits are set, such as dealing limits;
    • attention is paid to control procedures at board level;
    • risk registers are maintained and used as a way of managing operations;
    • risk registers are regularly reviewed and become part of the performance appraisal system;
    • controls are implemented relating to the nature and extent of derivative activities, including limitations on their use, fair value procedures, adequate reporting processes and operational controls;
    • that operational controls exist over approvals and authorisations, confirmations, settlements, verifications, reconciliations, performance reviews and segregation of duties;
    • electronic web dealing and electronic payment controls are set;
    • new technology systems are vetted and adequate acceptance testing and parallel running are undertaken;
    • adequate staff cover exists for each member of the treasury department;
    • relevant processes are implemented in subsidiaries and operations across the globe such as remitting cash, undertaking foreign exchange transactions or raising working capital finance;
    • information, such as derivatives activity, is identified, captured and communicated in a suitable form and in a timely manner;
    • treasury activities are reported on a timely basis up the organisational hierarchy to senior management; and
    • internal audit regularly review the controls in operation.

The audit committee

A key part of the corporate governance process is the appointment of an independent audit committee. Members of this committee need the skills necessary to understand treasury activity and ensure that a culture of control is implemented in an organisation, with risks assessed on a regular basis. In addition, the audit committee needs to understand the strategies adopted by treasury departments in order to mitigate risks and the derivative products being used; this will be especially true if more exotic products are being used where the factors associated with each strategy and product should be fully understood. It should also ensure that: (a) controls such as segregation of duties exist; (b) pressure cannot be exerted over less-extrovert and less aggressive junior colleagues by senior personnel; and (c) in-built checks and balances are not by-passed. The audit committee must also review the arrangements for staff to raise concerns and make arrangements for following this up. The use of an independent internal audit function can help in this regard.

The audit committee needs to be aware of:

    • the central treasury department’s remit;
    • any local treasury operations that report directly to a country or non-financial head rather than to the centralised treasury department;
    • the potential financial, operational and business risks that exist within the organisation;
    • treasury reporting lines and levels of authority which make clear the identity of those responsible for particular risks;
    • the products, markets and business strategy of treasury;
    • the controls that are in place;
    • the procedures that exist for agreeing the use of new instruments;
    • any potential tax or legal implications of treasury activities; and
    • the need for timely reporting of treasury positions and hedging transactions.


At the time of writing, a number of key live issues exist in terms of corporate governance in the UK that treasurers will need to keep abreast of. The Enterprise and Regulatory Reform Act (2013) came into effect in October 2013, with a three-yearly binding vote on the remuneration report part of the legislation. As ever, the devil remains very much in the detail of this type of proposal. In addition to a more pro-active position on gender balance mentioned earlier, the UK Business Secretary has also signalled a desire to scrap quarterly reporting as part of an attempt to reduce short-termist pressures on UK firms.

Finally, but perhaps most significantly of all – and not just for firms in the banking sector – is the decision in June 2013 of the UK’s new Financial Conduct Authority to request detailed information from several large banks regarding their behaviour in the foreign exchange markets. This suggests, as did the FSA’s approach to insider dealing in the last two years of its existence, that the UK market authorities are taking a much more pro-active stance on perceived market manipulation than was otherwise the case, with the LIBOR controversy one, but no means the only, catalyst for the change.


Members of the ACT should carry out their duties, under the five pillars, to enhance the corporate governance of their companies. By embedding an ethical culture and a strong internal control structure within treasury departments, treasurers become an important element in the corporate governance process. More generally, the spiral in the credit, commodity, product and financial markets has implications for treasurers in maintaining their up-to-date knowledge of developments and ensuring sound governance practices. As changes occur in regulatory regimes treasurers should ensure that their organisations are fully cognisant of and responsive to the new environment.

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