The applicability of a corporate governance index in Maltese listed entities : an assessment

Abstract

PURPOSE: This study set out to establish to what extent, if any, a CGI is suitable and applicable to Maltese Listed Entities (MLEs). DESIGN: Two sets of semi-structured interviews were held with seven financial analysts and thirteen MLEs. This was followed by a CGI survey sent to the same MLEs previously interviewed as well as an analysis of their Annual Reports for the three years 2011/ 2013. A model was then constructed and tested on two MLEs. FINDINGS: Corporate governance in Malta is as yet not given appropriate importance and consideration by MLEs. Respondents agreed to the introduction of a CGI in order to improve current corporate governance practices. While, they considered both the regulator and foreign rating agencies as possible CGI providers and assessors, they preferred the former one after taking into account the relative risks of both bodies. The construction of a CGI in line with the needs of the Maltese market was perceived as a major task involving a high degree of subjectivity, particularly with respect to the areas and attributes to be selected and the application of the relative weightings. Other debatable issues related to the construction of the benchmark, data sources and the score disclosure. The application of such an index was projected to influence positively MLE reporting practices, reputation and access to capital markets. Respondents also saw the benefit of simplicity in applying such an index to corporate governance, yet pointed out its drawback of possible extra costs as well as the limitations mainly emanating from the smallness of the MLE market. CONCLUSION: After testing the model constructed in the work itself on two MLEs, the study concludes that a simple and cost-effective CGI on the lines proposed is suitable and applicable to MLEs. This is because a CGI is an initiative towards higher director accountability and transparency. Yet, prior to the introduction of such a CGI, the promotion of more shareholder awareness of corporate governance needs to be undertaken, possibly by the MFSA as otherwise such an index may be easily misused. VALUE: It is hoped that the recommendations of this work, particularly the CGI model being proposed will help towards the consolidation of corporate governance in MLEs.