Chapter 3 - The importance of good corporate governance practices

Question 1

What does the adoption of good governance leads to?

Answer 1

The adoption of good governance leads to:

• Long term sustainability
• Improved share performance
• Effective decision making
• Lower cost of capital
• Reduced risk of corporate crises and scandals
• Ethical behaviour – anti corruption tool
• Improved access to external financing

Question 2

What are the Consequences of weak governance practices?

Answer 2

Consequences of weak governance practices:

1. Excessive regulation – Many of the laws, regulations, standards and code introduced globally have been in response to the scandals that have resulted from weak governance practices:

Failing companies:

• Account fraud – Enron
• Dominant personalities – Maxwell, Polly Peck
• Failure to understand and manage risk e.g. Global financial crisis – Lehman brothers
Reputational problems:
• Unethical business practices – Volkswagen
• Lack of Transparency – Olympus
• Poor relation between the Board and shareholders – Sports Direct

This has led to compliance burden of organisations especially those listed on the stock exchange. This has led to a compliance culture around corporate governance reflected in the tick box approach adopted by many companies.

2. Lack of investment in capital markets – investors place importance on good corporate governance practices when investing in companies. A lack of those practices can lead to lack of investment.
3. A focus on regulating and disclosing senior executive pay
4. the establishment of powerful regulators such as the US securities and Exchange commission.

Question 3

What are the requirements of a company secretary?

Answer 3

Companies Act 2006 section 271 states that all public companies in the UK must have a company secretary.

No requirement for a private company to have one. However, the work and duties of a company secretary must still be done.

Therefore s270 Companies act 2006 states that directors must take on this responsibility. This way must private companies continue to employ a company secretary in order to reduce the administrative and corporate burdens which would otherwise be placed on their directors.

UK Corporate Governance Code 2018

Provision 16 of the code, which applies to companies with a premium listing states:

‘all directors should have access to the advice of the company secretary, who is responsible for advising the board on all governance matters.

Both the appointment and removal of the company secretary should be matter for the whole board’.

Question 4

What is the Role of the Company Secretary?

Answer 4

1. Governance
2. Statutory and regulatory compliance
3. Advising the board and senior management
4. Being the board’s communicator

Question 5

What are the company secretary’s role and responsibilities under Governance?

Answer 5

ICAS’s guidance note ; the corporate governance role of the company secretary’ set out the following specific duties and responsibilities of the company secretary for governance:

1. Board composition and procedures
2. Board information, development and relationships
3. Accountability
4. Remuneration
5. Disclosure and reporting
6. Relationship with shareholders

Question 6

What is included in the responsibilities under Board composition and procedures?

Answer 6

Board composition and procedures:

• Establishing a formal schedule of matters reserved for the decision by the board and a formal division of responsibilities between the chair and CEO or other layers of management
• Scheduling board meetings, agendas, content, information flows, etc

Question 7

What is included in the responsibilities under Board information, development and relationships?

Answer 7

Board information, development and relationships:

• Planning and organising director induction programme, which are tailored introduction to the board and the business.
• Development programmes to refresh the directors’ skills and knowledge.
• Good information flows between the board and its committees.
• Communicating procedures for directors to take independent professional advise at companies’ expense.
• Developing a proactive relationship with the board members, providing a source of information and advice and acting as the primary point of contact with non-executive directors.

Question 8

What is included in the responsibilities under Accountability?

Answer 8

Accountability

• Financial and business reporting – having a detailed knowledge of, and advising on the board’s responsibility to present a fair, balanced and understandable assessment of the company’s position ad prospects in annual and interim reports, etc.
• Risk management and internal control – assisting the board in an annual review of the effectiveness of the company’s risk management and internal control systems including financial, operational and compliance controls.
• Audit committee and auditors – ensuring that the audit committee is fully conversant to the 2018 Code principles around corporate reporting, risk management and internal control principles.
• Ensuring the implementation and monitoring the effectiveness of the procedure for staff to raise concerns in matters of financial reporting and other matters

Question 9

What’s included in the responsibilities under • Remuneration?

Answer 9

Remuneration

• Ensuring that the remuneration committee is familiar with the 2018 Code principles and provisions on remuneration including the provision on the design of performance related remuneration for executives.

Question 10

What’s included in the responsibilities under * Relationship with shareholders?

Answer 10

• Ensuring the board keeps in touch with shareholder opinion on a continuing basis.
• Managing relations with institutional investors on corporate governance issues and board procedures in accordance with the principles established in the UK Stewardship code.
• Managing the convening and conduct of the AGM win line with stator and regulatory requirements and in the 2018 code and using it as an opportunity to communicate with retail investors.

Question 11

What’s included in the responsibilities under * Disclosure and reporting?

Answer 11

responsibilities under Disclosure and reporting:

• Ensuring that the necessary disclosures on corporate governance and the workings of the board and its committees are included in the annual report.
• Ensuring that the necessary types of the governance info are made available as required for example on the company’s website.

Question 12

2. Statutory and regulatory compliance - what are the company secretary duties of this?

Answer 12

Advising on the following:

1. Directors’ duties
2. Share dealing
3. Protection of inside information
4. Verification of published information
5. Advising the board and senior management

Question 13

Under the directors duties, what what are the company secretary duties?

Answer 13

• Implementing procedures to help directors discharge their duties as under the s 171 – 177 of the CA2006 their specific duties to promote the success for the company taking account of a wide range of stakeholder interests and to avoid conflicts of interest.

Question 14

under Share dealing, what are the company secretaries responsibilities?

Answer 14

Share dealing

• Communicating and implementing procedures for listed company directors and any other ‘person discharging managerial responsibilities to comply with the Market Abuse Regulations in respect of directors’ sharing dealings.

Question 15

Under Protection of inside information, what are the company secretary responsibilities?

Answer 15

Protection of inside information

• Implementing procedures to comply with the provision of the Disclosure Roles on the protection of ‘inside information’ and maintenance of ‘insider’ lists as required by the market abuse regulations.

Question 16

Under Verification of published information, what are the company secretary responsibilities?

Answer 16

Verification of published information

• Implementing a ‘verification and approval’ process to review and confirm the accuracy of all company states prior to publication ad to authorise their release to the market.

Question 17

3. Advising the board and senior management, what should the company secretary advise on?

Answer 17

• Good board practices
• Transparency and disclosure
• Effective control environment
• Relationships with shareholders and stakeholders
• Corporate responsibility, etc

Question 18

under Good board practices, what should the company secretary advise on?

Answer 18

Good board practices

• Clearly defined roles at the board level and delegated authorities form the board to its committees, and to individuals at board level or in senior management
• Directors to understand their duties and responsibilities
• Board to be well structured and have the appropriate composition and skills. There should be a formal board succession plan based on the organisations’ long term strategic goals
• Directors’ remuneration should be in line with best practice. Regular benchmarking against comparable companies followed by a review of the remuneration policy
• Board procedures should be established and maintained
• An annual board evaluation of the whole board, its committees, the chairman and individual directors must take place.

Question 19

under Transparency and disclosure, what should the company secretary advise on?

Answer 19

Under Transparency and disclosure, the company secretary should advise on:

• A formal and transparent procurement policy and procedures should be in place – Procurement manual
• A formal and transparent recruitment policy and procedures should be in place – HR manual
• A process is put in place to ensure that all statutory and regulatory disclosures are reviewed by the board
• Information disclosed by the company, both financial and non-financial should be balanced between positives and negatives.

Question 20

Und Effective control environment, what should the company secretary advise on?

Answer 20

Under Effective control environment, the company secretary should advise on:

o An audit committee comprising of independent members with the appropriate skills and experience. There should be a clear term of reference for the audit committee.

o Risk management and internal controls system should be assessed for their adequacy annually by the internal auditors.

o An internal audit function, internal audit plan and budget for the year being considered by the audit committee, receipts of internal audit reports for consideration and an independent evaluation of the function in line with internal audit standards.

o If no internal audit function exists consideration by the board on an annual basis as to whether one should be established.

o Appointment of an independent auditor.

Question 21

Under Relationships with shareholders and stakeholders, what should the company secretary advise on?

Answer 21

Relationships with shareholders and stakeholders:

o Both can be evidenced through either a well run annual general meeting, agendas, records of face-to-face meetings with major shareholders ad stakeholders and the adoption of electronic communications.

Question 22

Under Corporate responsibility, what should the company secretary advise on?

Answer 22

Corporate responsibility

o Social and environmental issues to be considered and reported on. Agenda items and minutes of board meetings can be evidence that the board is considering the social and environmental impact of its activities and decision making

o Promoting the long-term view – evidenced by an emphasis on long term performance incentives for senior executives as well as the development of a business continuity plan setting out how the organisation intends to stay in business in the long term. KPI’s for the longer term can also show the boards commitment to the long-term sustainability of the organisation

o Caring out activities responsibly. Evidence of this is the establishment of win-win partnerships that benefit both the organisation and society.

Question 23

4. The board’s communicator - what is the company secretary’s responsibility?

Answer 23

The board’s communicator

o Communicating all board decisions to the relevant member of the management team

o Managing the disclosure of the board’s decision to regulators and other stakeholders

o Liaising between the board member sand senior management on logistics for board and board committee meetings, training sessions, board retreats, board evaluation sessions and other board events

o Facilitating good information flows between the board, individual board members, the committees and senior management that foster effectives working relationships between them

o Being a primary point of contact between the non-executives and the company, providing a source of information and advice.

o Ensuring that the board keeps in contact with shareholder opinion and that shareholders are briefed on the reasons behind the board’s adoption of certain governance practices and decision making.

Question 24

Q1. Why might a private company appoint a company secretary?

Answer 24

Although there is no requirement for private companies to employ a company secretary, in practice many still choose to do so.

The important tasks that would normally fall to a company secretary, including shareholder administration and communication, corporate governance, and statutory compliance, must still be done. In the absence of a company secretary s270 of the CA2006 states that directors must take on this responsibility.

Therefore, many private companies continue to employ a company secretary: in order to reduce the administrative and corporate governance burdens which would otherwise be placed on their directors.

Question 25

Q2. Why is the company secretary often referred to as a bridge for information, communications advice, and arbitration?

Answer 25

The company secretary is referred to the as bridge for information, communication advice and arbitration because they play an important role as the board’s communicator. This will differ from company to company.

However, best practice is that the company secretary should be the person responsible for:

1. Communicating all board decisions to the relevant members of the management team. Although CEO’s often intend to do this, evidence shows that due to their other work commitments, CEOs are not very good at doing this in a timely manner
2. Managing the disclosure of the board’s decisions to regulators and other stakeholders. This is because they understand the requirements as far as content to be disclosed and the importance of timely and balanced disclosures.
3. Liaising between the board members and senior management on logistics for board and board committee meetings, training sessions, board retreats, board evaluation sessions and other board events.
4. Facilitating good information flows between the board, individual board members, the committees and senior management that foster effective working relationships between them
5. Being the primary point of contact between the non executives and the company, as a source of information and advice. Without this, management could be distracted by requests from non-executive directors, some of which may be for the same information. Also, non-executive directors could receive conflicting information or advice depending on whom they speak to
6. Ensure that the board keeps contact with shareholders opinion and that shareholders are briefed on the reason behind the board’s adoption of certain governance practices and decision making
7. Ensuring that relevant disclosures on corporate governance and directors’ remuneration are made in the company’s annual report and accounts and that the annual report ad accounts is made available electronically.