To what extent is CGI is suitable and applicable to Maltese

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‘’Behind every kick of the ball there

has to be a thought’’

Denis Bergkamp



In recent years the world witnessed some of the greatest corporate disasters of all times, mainly Enron and Arthur Anderson in the USA and Parmalat in Italy. In the majority of cases these and other corporate collapses were a result of bad corporate governance and it is therefore a direct consequence that as time went by corporate governance has become increasingly important (Khancel, 2007). In literature there are various definitions of corporate governance which generally refer to ‘’the process and structure by which a company is directed and controlled’’ (Sant, 2003, p.2 as cited in Cadbury Committee, 1992). During the first International OFEL Conference on Corporate Governance held in Croatia, Professor Tipurić andMešin (2013, p. 1) defined corporate governance as;

‘’ A sort of ‘management of management’ or ‘metamanagement’, since it incorporates the set of relations between the management, board, shareholders and stakeholders of a firm, and defines the framework for setting goals and determining the means to achieve those goals, as well as monitoring the performance and efficiency of the firm’’

This definition is a comprehensive one as it incorporates all the main elements that if they are properly synchronized with each other can lead to achieve good corporate governance. It is the Board of Directors that is vested with the responsibility of corporate governance as it shall act as the channel between the internal mechanisms, being the management of the company and the external mechanisms being the major stakeholders.

Varuna (2009) recapitulated that all definitions of Corporate Governance are concerned with the control and monitoring of activities, shareholder protection, Board of Directors structuring and its monitoring.

The Code of Principles of Good Corporate Governance

Corporate governance started to be given importance in 1992 when the Cadbury Report was issued with the aim to strengthen control and public accountability of Listed Companies (Cadbury Committee, 1992). It is assumed to be the first code to be issued regarding corporate governance in the world. In recent years most countries worldwide have introduced corporate governance codes encouraging and helping public companies to have a proper corporate governance structure (ECGI, 2006). In Malta we have the ‘Code of Principles of Good Corporate Governance which was introduced in 2001 and subsequently revised in 2005 and 2011. This code forms part of Chapter 5 of the Listing Rules issued by the Listing Authority within the Malta Financial Services Authority (MFSA). The most important section of this chapter is Section 5.94 which basically implies that registered entities in Malta that have shares listed on the Maltese Stock Exchange should endeavour to adopt the Code of Principles of Good Corporate Governance and shall prepare a statement to reflect compliance with such a code (MFSA, 2013).

Obligatory disclosures and the role of the auditor

Two other important sections in Chapter 5 of the Listing Rules are Sections 5.97 and 5.98. These explicitly say that the Corporate Governance Compliance Statement shall be endorsed in the Annual Report of the Company together with an Auditors’ report that ensures that this statement is prepared in accordance with the code (ibid.). It has to be noted that in the case of Malta there is no obligation in the law for Listed Entities to disclose in the Annual Report assurance that reflects the quality of corporate governance. Furthermore as clarified by the auditors themselves in the report they are not required to perform any additional work in order to express an opinion on the effectiveness of corporate governance. Nevertheless auditors are still considered as an important part of the corporate governance structure of a company as they act as a monitoring devise ensuring that the entity complies with the Code of Principles of Good Corporate Governance and adopts proper financial reporting. Thus, governance and audit services together help in reducing asymmetry of information by extenuating agency problems between those charged with governance and investors (Willenborg, 2011 as cited in Fooladi, 1999)



Standard and Poor’s (S&P’s) (2004, p. 5) defined a CGI as; ‘’an independent opinion, based upon transparent criteria and a standardized analytical process’’ that assist interested parties in clearly analysing relevant characteristics of good corporate governance (Strenger, 2004). Moreover Bhagat et al. (2008) highlighted that a CGI is a governance rating mechanism acting as a standard that is constructed with the aim to benchmark an entity’s governance characteristics against what is considered to be best practice by its developer. This benchmark acts as an instantaneous measure of governance quality which will be useful for comparative purposes with CGIs of other countries and companies (ibid.).

In the past decade countries were starting to give more priority to corporate governance with the aim to improve business performance and assist entities to attract outside investment (Grimminger & Di Benedetta, 2013). An important priority was to depart from the Code of Best Practice and try to take ‘’a quantitative evaluation approach’’ (Strenger, 2004, p.11) by providing a mathematical measurement capable of showing the quality level of corporate governance and at the same time reflecting its efficiency and effectiveness. This was confirmed by Barrett et al. (2004, p.1) as they stated that, ‘’the current focus on corporate governance has led many to seek information on the quality of governance practices at specific companies.’’ It is eminent that stakeholders are becoming more sensitive to the degree of governance quality a company possesses before making an investment decision where investors tend to go for the best governed entities. In response to this a number of organizations, stock exchanges and group individuals around the world are offering Corporate Governance Indices (CGIs) with the aim of reflecting governance quality and performance of Listed Companies.

A CGI becomes a motivation for company managers to perform better in order to try to achieve optimal corporate governance, better than that of their rivals. On the other hand if a company is experiencing a poor index it would be easier for investors to pin point it before investing their money in it. A poor index may be a signal that the company is engaged in improper and fraudulent practices. Eventually authorities will become aware of such eventualities and can apply the appropriate corrective actions.

Assumptions to the index

In their study Aguilera and Desender (2012) pointed out three underlying assumptions of CGIs. These authors argue that such assumptions may affect the construct validity of the index;

  1. The behaviour of the firm is reflected through the corporate governance structure. Here the challenge would be on how to show the firm behaviour, either through governance quality or simply through disclosure quality. Aguilera and Desender argue that disclosure quality in itself shows governance quality and it is reflected in the entity’s value. Moreover governance quality depends also on the current legal structure where it varies from country to another, making one structure more effective than another (ibid.).
  2. A higher index is an indication of better corporate governance. It is true that companies with a higher index look more attractive. Yet it is argued that shareholders may disregard corporate governance practices as they may prefer to invest in companies incorporated in jurisdictions that provide better investor protection.
  3. It is ‘a one-size-fits-all index’. However Black (2010) criticized this assumption as he emphasised the fact that optimal governance is likely to differ between developed and emerging markets that is between large and small markets. Thus the assumption of one size fits all those not hold for all entities in all countries.

Areas and Attributes of the index

There are many important steps involved in constructing a CGI and every country has its own approach to constructing it by tackling different areas. The main goal would be that the areas chosen would reflect superlative governance with which to benchmark governance performance. According to Varuna (2009) CGIs have some common areas being, Shareholder Rights, Board Structure, Transparency and Board Committees including the Audit Committee, being the major element of this area. Normally these areas together with other areas will be in line with those principles addressed in the respective Code of Governance of the country where the company is incorporated. Otherwise a country may decide to use a specific CGI model constructed by a professional rating organization designed to cater for different countries. Subsequently after identifying the areas one shall consider certain attributes that describe the state of governance in respect of each chosen area. Attributes shall be those criteria that best determine strong corporate governance in that particular country (Khancel, 2007).

Additionally Strenger (2004) highlighted the fact that sometimes included in the index there are other important criteria not covered by the Code of Principles of the country where such criteria relates to a particular governance area already included in the index.

Market view of a CGI

According to the FTSE ISS (2005) international investors require a standard to gauge governance practices which is reliable and cost- effective. A CGI may be an ideal tool to measure corporate governance risk of an entity (ibid.), where such tool would act as a standard with the aim to bring convergence of governance awareness around the world. This was confirmed by the FTSE ISS (ibid.) themselves as from their study resulted that, most respondents consider corporate governance practices in their day-to- day duties. Market players in fact, ‘’increasingly stress the importance of effective governance, claiming that it improves firm performance, shareholder welfare and the health of the public market’’ (Aguilera & Desender, 2012, p.310). However there are others who are sceptical and contrary to the adoption of a CGI. Bhagat et al. (2008) concluded that governance indices are highly imperfect instruments and investors and policymakers should exercise a degree of caution in attempting to take investment decisions that are based on a CGI.


A Listed Entity is a public limited entity quoted within a stock exchange capable of issuing share capital and other financial instruments to the general public. In Malta currently there are twenty companies registered with the Malta Stock Exchange (MSE) that are able of issuing share capital to the public. Such companies operate in different sectors like Banking, Insurance, IT, Accommodation, Telephony and Aviation. In Malta there are twenty Listed Entities that can issue share capital as listed in Appendix 1.1.


There is a substantial amount of Corporate Governance codes around the world (ECGI, 2006) showing that nowadays compliance with a Code of principles of good corporate governance is something ordinary to do for most entities (Albert- Roulhac, 2008). On the other hand a change from compliance to performance based structure will certainly change the operational habit of many Boards. This is because it will modify the responsibility extent and openness of the Board, provided that those charged with governance will be involved in a more dynamic job (ibid.).

Many states around the world, especially major ones have used the CGI as a means of measuring governance performance of their corporations in order to have a system capable of showing quality through efficiency and effectiveness (Grimminger & Di, Benedetta, 2013). Given that in Malta there is still no such opportunity of utilizing the CGI; an interesting prospect was felt to launch a study that verifies whether such index is applicable and useful to Maltese investors. Even though in Malta there is only twenty Listed Companies, a CGI may provide a new tool for investors to use in order to answer questions concerning governance performance. Furthermore the use of a CGI in a small state like Malta may have a greater effect as results are more easily reachable within the whole market.


This study aims to discover to what extent, if any a CGI is suitable and applicable to Maltese Listed Entities. The objectives of this study are therefore to:

  • ascertain the construction of the index including its attributes while determining its benefits and limitations for Maltese Listed Entities.
  • determine the institution or agency to be responsible for applying and assessing the Index in Malta.
  • examine the application of the Index on a restricted number of Maltese Listed Entities.


  • This study captures information up to 31st March of 2014. Any information after this date is not considered in the extent of this research.
  • It is not the scope of this exercise to consider Maltese Listed Entities that issue other types of financial instruments other than share capital.
  • Moreover this study did not take into perspective all the current adopted CGIs around the world as this goes beyond the scope of this study provided that there is an infinite amount of such indices.


Chapter 1 has introduced the concept of a CGI by going through the definitions of corporate governance, CGI and Maltese Listed Entities. It then went on with the other subheadings involving; The Need for the Study, Objectives, Limitations of Scope and Chapter Overview.

Chapter 2 is divided into five parts where they provide pertinent literature on various aspects that need to be taken into consideration for the build-up of a CGI and its assessment. As it goes along, this chapter highlights certain benefits and limitations that will be faced during the application of this index.

Chapter 3 deals with the resources used to capture the relevant information as it explains how such information was attained and evaluated.

Chapter 4 presents the findings that have materialized from the research done.

Chapter 5 involves a discussion on the findings being presented in Chapter 4 and the information obtained in Chapter 2.

Chapter 6 concludes the dissertation where it includes final recommendations and other areas of further research regarding the CGI

Figure 1.1: Dissertation Skeleton

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