Our ACI Topics cover: Corporate Governance, Risk Management & Compliance and Corporate Reporting
One of the core tasks of the board of directors is to establish a good corporate governance. This a prerequisite not only for balanced decision-making at the strategic level, but also for setting the frame for sound business operations and the necessary checks and balances.
In Switzerland, discussions around good corporate governance often focus on the following aspects:
So far the principles of corporate governance have, apart from a few individual regulations included in the Swiss Code of Obligations, mainly been set by the regulations of the SIX Swiss Exchange and self-regulation developed by relevant business associations. While the corporate governance framework is largely determined by the legislator and a company’s owners, its concrete structure is the responsibility of the board of directors. The board must ensure that a balance exists between the owners and the management, regardless of whether this balance is achieved through internal regulations designed for that purpose or the tone at the top.
An effective risk management system enhances the reliability of forecasts and planning. As an integral part of executive management, it helps identify unexpected deviations from corporate goals at an early point in time, focus on the future and enable the board of directors to reduce complexity to the essential issues.
Stock Corporation Law demands that the board of directors take the necessary steps to ensure that laws, articles of incorporation, regulations and directives be followed within the company. However, a search for more guidance as to how these measures should look like in concrete terms would be in vain.
More information can be found in the “Swiss Code of Best Practice for Corporate Governance” of economiesuisse, Switzerland’s economic umbrella organization. When it comes to risk management, it is the board of directors’ obligation to set up an internal control system that is adequate in terms of the company’s size, complexity and risk profile. Depending on the special attributes of a company, this system must also cover risk management with regard to both financial as well as operational risks. The board of directors may also embed the compliance function within the internal control system. The board must structure this in line with the specific characteristics of the company and, at least once per year, give an account as to whether the awareness of the compliance principles set by the board and the company is sufficient and whether or not these principles are adhered to at all times.
Transparent reporting engenders trust. Trust facilitates access to the capital market and promotes a company’s good reputation. The past few years have brought constant growth in terms of stakeholders’ needs for information and corporate reporting has become increasingly multifaceted. Most of the elements of corporate reporting such as the management report, the financial statements or information related to corporate governance are compulsory for listed companies while others, such as the sustainability or risk reports, are voluntary. The sheer wealth of information, however, comes with a risk that readers might be overwhelmed and presents companies with the challenge of ensuring that the various elements of the report remain consistent and coherent.
International financial reporting (IFRS, US GAAP) has become remarkably complex over the past few years – not least as a result of efforts to create a globally-recognized set of rules and regulations for listed and other companies of public interest. This initially prompted smaller companies in Switzerland and, increasingly, medium-sized corporations to switch back to the Domestic Standard Swiss GAAP FER and, in doing so, change from the Main Standard to the Domestic Standard of the SIX Swiss Exchange. In relation to the advantages it would bring, a growing number of companies consider the cost of financial reporting based on international standards as well as the risk of making mistakes or omitting required disclosures as too high. It is therefore possible that over the longer term only very large global corporations in Switzerland will continue to apply either IFRS or US GAAP. What that means with regards to Switzerland’s attractiveness as a financial center remains to be seen.
From a global perspective and in light of interconnectedness of capital markets, a single “accounting language” is indispensable. The International Accounting Standards Board (IASB) also seems to be aware of growing criticism and, under the leadership of Hans Hoogervorst, is striving to focus its accounting standards on relevance, and to put a stop to excessive disclosure requirements.
Another challenge is the question of how to blend the various dimensions of the report to facilitate interested readers’ access to relevant information. Here the magic phrase is “integrated reporting”. That is the general heading under which the International Integrated Reporting Council (IIRC) is working to develop an integrated report that focuses on a company’s business model with the aim of explaining how it intends to generate value in the short, medium and long term.