Principles and Issues

Question 1

Which approaches see boards taking a longer-term view in decision-making?

Answer 1

Enhanced shareholder value, stakeholder, and inclusive stakeholder approaches tend to take a longer-term view than the shareholder value approach.

Question 2

How does it differ from the ‘apply and explain’ rule in King IV?

Answer 2

The term ‘apply or explain’ was adopted in the South African King Code for two main reasons.
all companies - less harsh than “comply or explain”- to avoid mindless response
Firstly, the code, for the first time, applied to all types of entities egardless of their form of establishment or incorporation. These entities under a ‘comply or explain’ regime would only have had the option of complying or not. As many of the entities were not listed companies, which the corporate governance practices had originally been designed for, it was felt that that regime would put off many entities from adopting good corporate governance. Asking them how they were ‘applying’ the principles within the code was a less harsh way of reporting on what they were doing as they did not have to give a yes or no answer, they could tell a story of how corporate governance was being adopted in their organisations.
Secondly, to avoid a ‘mindless response’ to the corporate governance recommendations contained within the code. There was a feeling amongst many stakeholders that the ‘comply and explain’ regime was leading to companies adopting a tick-box approach to corporate governance, adopting the provisions without considering whether they were suitable for their companies or not.

Question 3

What is the ‘comply or explain’ rule for listed companies?

Answer 3

‘Comply or explain’ refers to the system whereby a company is asked to comply with a voluntary principles-based code of best practice. Where the company believes that it is not in its best interests to ‘comply’ with a provision of the code it is required to ‘explain’ to shareholders why they have not complied.
The company’s shareholders and shareholder representative bodies are then expected to assess whether the explanation is acceptable or not. The UK corporate governance code works on the premise of a ‘comply or explain’ code.

Question 4

Why is the company secretary often referred to as a bridge for information, communications advice and arbitration? (7)

Answer 4

The company secretary is often referred to as a ‘bridge’ for information, communications, 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:
- communicating all board decisions to the relevant members of the management team. Although CEOs 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;
- managing the disclosure of the board’s decision’s 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 disclosure;
- 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; and
- facilitating good information flows, between the boa d, individual board members, the committees and senior
management that foster effective working relationships between them;
- 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. The company secretary can collate the information and/or advice in a format which is more appropriate for the non-executive directors;
- 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; and
- ensuring that relevant disclosures on corporate governance and directors’ remuneration are made in the companies annual report and accounts and that the annual report and accounts is made available electronically on the company’s website.

Question 5

Which approaches see boards taking a longer-term view in decision-making?

Answer 5

Enhanced shareholder value, stakeholder, and inclusive stakeholder approaches tend to take a longer-term view than the shareholder value approach.

Question 6

Which corporate governance code(s) applies to UK listed companies and UK unlisted companies

Answer 6

UK listed companies - the 2018 UK Corporate Governance Code applies to listed companies. Many AIM listed companies adopt as their corporate governance standards the Quoted Companies Alliance (QCA) Corporate Governance Guidelines 2018.
UK unlisted companies -
the Wates Corporate Governance Principles for Large Private Companies 2018 can be applied to any large private company.
Many private companies have selected to follow the Institute of Directors Corporate Governance Guidance and Principles for Unlisted Companies (2010) for their corporate governance arrangements. The guidance is voluntary and seeks to ensure the long-term survival and sustainability of the company as it develops and matures.

Question 7

What is the difference between principles and provisions in the UK Corporate Governance Code?

Answer 7

The Principles state what a company should be aspiring to. The Provisions provide guidance on how the principles could be achieved.
Listed companies are required to make a statement in their annual report and accounts on how they have:
- applied the spirit of the Principles;
- complied with, or explain why they have not complied with, the provisions and supporting guidelines for the Code.

Question 8

What is the difference between the enlightened shareholder value and inclusive stakeholder approaches to corporate governance?

Answer 8

The enlightened shareholder value approach proposes that boards, when considering actions to maximise shareholder value, should look to the long term as well as the short- term, and consider the views of and impact on other stakeholders in the company, not just shareholders. The views of other stakeholders are, however, only considered in so far as it would be in the interests of shareholders to do so.

This differs from the stakeholder and stakeholder inclusive approaches where boards balance the conflicting inte ests of stakeholders in the best interests of the company.

Question 9

What relevance does knowing the historical development of corporate governance have for advising on today’s governance practices?

Answer 9

It is important to know the historical development of corporate governance as only by knowing why the practices have developed can a company decide whether to comply or explain with the practice, and also to know what structures, polices and processes to put in place to ensure the spirit of the practice is achieved.

For example, the practice of separating the roles of the chair and CEO is in response to individuals dominating decision- making and using the company’s resources in their interests, not in the best interests of the company. It is assumed that by having two individuals in senior positions and separating the responsibilities between them this domination can be avoided. If a company decides to combine the roles, other checks and balances need to be put in place to ensure that one individual does not dominate. A senior independent director could be appointed, for instance.

Question 10

Why might a private company appoint a company secretary?

Answer 10

private company is not required
is absence - director, so
in order to reduce the administrative burden

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, s.270 of the CA2006 states that directors must take on this responsibility.

This is why 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 11

Which approaches put shareholders first?

Answer 11

The shareholder value and enhanced shareholder value approaches put shareholders first

Question 12

Why is it important for a company secretary to have interpersonal skills and commercial and business acumen?

Answer 12

Many company secretaries face the following key challenges:
- being considered traitors by the executive team;
- supporting chairs exhibiting poor performance;
- acting as the third person in a CEO-chair relationship;
- becoming a pivotal contact for unsurmountable problems; and
- maintaining independence from other executives and board members.
To overcome these challenges company secretaries, in addition to their technical skills, needed commercial and business acumen and interpersonal skills, which many considered the most important.
In 2012, a study by the All Party Parliamentary Corporate Governance Group criticised many company secretaries for not being ‘commercially minded’ or aware. They saw this as being an important feature of the job, especially as they advise the board on governance issues. To be commercially aware, an individual must understand the business they are in, and make good practical decisions as a result. In the case of the company secretary, this means being able to advise the board on this basis so that they can make the decisions.
‘The Company Secretary: Building trust through governance’ highlighted the importance that the majority of company secretaries acknowledged that ‘commercial awareness and abilities are critical to ensuring their understanding of what is right for the organisation, what information means and to whom relevant questions need to be passed’.

Question 13

Why does a company secretary’s position need to be one of seniority?

Answer 13

In order for the company secretary to carry out their duties and responsibilities effectively, they need to hold a position of seniority within the organisation. It is debated whether they should be a member of the executive team. Some think this compromises their independence. Whether or not they are a member of the executive team, they should attend meetings of the executive team.
This will enable them to advise the executives on governance issues arising out of any proposals as they are being formulated. They can also advise on how the board might react to a particular proposal and what questions the executive should be prepared to answer when the proposal is considered by the board. Attending executive meetings also helps the company secretary get an understanding of the executive’s positioning and reasonsfor suggesting the proposal which may help the company secretary if the proposal needs to be ‘sold’ to the chair.
Remember that the company secretary can often fill the ole of mediator or arbitrator between the CEO and the chair.

Question 14

What are the pros and cons of a rules-based approach versus a principles-based approach to corporate governance?

Answer 14

Critics of the rules-based approach argue that it only works:
- where the challenges faced by companies under the purview of the regulation are substantially similar, justifying a common approach to common problems; and
- if the rules and their enforcement efficiently and e fectively direct, modify or preclude the behaviours they are aimed
at affecting.
The benefits of such a system is that it sends a message out to owners, potential investors and other stakeholders that the country takes seriously their protection from nefarious practices by those managing and overseeing the organisation’s they are investing in or dealing with. In reality, it is the enforcement of the rules that achieves this and in many countries, enforcement is weak.

Question 15

Who enforces the requirements of the UK Corporate Governance Code?

Answer 15

The company’s shareholders enforce the requirements of the code through dialogue with the company and voting at general meetings.

Question 16

How can a business ensure it assimilates corporate governance practices into its culture?

Answer 16

If an organisation gets its governance right then it reaps the benefits of success. To ensure that this is happening an organisation should define what its critical success factors are so these can be measured. This will usually be done as part of the strategic planning process.

Question 17

What is the difference between a public and a private company in the UK?

Answer 17

The main difference is that public companies are able to offer their shares to the public whereas private companies are not.

Question 18

What new requirements are included in the UK Corporate Governance Code 2018?

Answer 18

The 2018 UK Corporate Governance Code includes new requirements for boards to consider the needs and views of a wider range of stakeholders (employees, customers and suppliers), integrity and corporate culture, diversity and how the overall governance of the company contributes to its long-term success.

Question 19

Is it appropriate for the company’s in-house lawyer to carry out corporate governance responsibilities?

Answer 19

If the company secretary role is combined with another role such as that of the in-house lawyer or accountant, care should be taken to see that the governance role is not compromised.

A general counsel who is also given the role of the company secretary, in fulfilling their legal role will often have to take sides to represent the particular interests of the company. And although they may be complying with the letter of the law and in the interests of management, they may not be acting in the best long-term interests of the company. This would be inconsistent with the company secretary’s governance role which requires impartiality when advising on governance issues.

It may also prevent a company secretary from speaking out against bad governance or unethical practices, or proposals that are not in the long-term interests of the company, especially if to do so was costly or against the wishes of the CEO. The company secretary, in their governance role, should also be considering the reputational impact of the board’s decision. This again may require the board to consider more than just complying with the laws and regulations.

Question 20

Why have different countries’ corporate governance best practices developed in different ways?

Answer 20

Corporate governance has developed in different ways in different countries to reflect their distinct legal systems and also the specific issues that they e dealing with.

Question 21

Explain why companies may not want to outsource the role of the company secretary. (6)

Answer 21

An in-house company secretary acquires an in-depth knowledge and understanding of the company and its history,
and also develops relationships with the board and management that an external firm lacks.

An in-house company secretary is available at all times to discuss corporate governance issues. A law firm may be
much slower in p oviding assistance or responding to questions.

A qualified in-house company sec etary offers a wide range of services and is able to take on other responsibilities
in a start-up or smaller company.

An in-house company secretary may provide support that is difficult for an external firm to p ovide; for example,
assisting the chair to prepare for meetings.

An in-house company secretary can truly act as the ‘conscience of the company’ and has no conflict, in that they do
not do other work for the company such as providing legal or accountancy services.

An in-house company secretary can be relied upon to maintain confidentialit . In-house corporate secretaries can in many cases be held liable for any breaches in confidentialit , whereas this may be problematic in cases of an outsourced service.

Question 22

What is the difference between compliance and governance?

Answer 22

Compliance answers ‘what is required’. It leads to an organisation adopting the appropriate structures, policies and procedures. On its own it is a purely box-ticking exercise.

Governance answers ‘how do we make this effective’. The company secretary needs to ensure that the infrastructure is appropriate for the organisation, that people are focused and work well together, resources are used effectively, and information flows smoothl .
Decisions are then made effectively, and this all contributes to a successful, sustainable organisation. If the infrastructure is not appropriate for the organisation, then the anticipated ‘cultures’ will not be developed.
Those within the organisation will develop their own cultures which, as they are not being managed, often leads to bad practices, such as failure to follow policies, the misuse of resources, breakdown of important relationships, etc. This in turn threatens the performance and long-term sustainability of the organisation.

Question 23

What is the main difference between the agency and stakeholder theories?

Answer 23

Agency theory deals with the relationship between shareholders and directors where there is a separation between ownership: the shareholders playing the part of the principal and the directors and managers playing the part of the agent. Challenges associated with the agent-principal relationship occur. These relate to conflicts of inte est and the costs associated with avoiding/managing those conflicts
The stakeholder theory, in direct contrast to the agency theory, states that the purpose of corporate governance should be to meet the objectives of everyone that has an interest in the company.

Question 24

What are the major challenges to independence of the company secretary?

Answer 24

The two main challenges to the independence of the company secretary are caused by:
- reporting lines, especially when the company secretary reports to a member of management; and
- dual roles – there may be conflict between the esponsibilities of the other role with those of the company secretary.

Question 25

How can a company manage conflicts of interest between shareholders and directors and managers?

Answer 25

Agency theory says that companies should use corporate governance practices to avoid or manage these conflicts. Examples of how companies can achieve this are as follows:
- the use of long-term incentive share award or stock option schemes based on total shareholder return to align the interests of shareholders and management; and
- adoption of conflict of interest and related party transaction policies.

Question 26

Why is knowing your purpose important for an organisation?

Answer 26

Knowing the organisation’s purpose is very important as everything stems from it: the organisation’s vision, mission, strategic goals and governance framework, including risk management. It is only through knowing the purpose of the organisation and focusing efforts and resources on achieving that purpose that organisations can be successful in the long run.

If an organisation has clarity of purpose then its employees know what they are working towards, investors know what they are investing in and boards and management know how to focus their resources and manage their risks.

For the company secretary, knowing the organisation’s purpose helps set up the organisation’s governance framework of structures, policies and procedures.

Question 27

What new requirements are included in the UK Corporate Governance Code 2018?

Answer 27

The 2018 UK Corporate Governance Code includes new requirements for boards to consider the needs and views of a wider range of stakeholders (employees, customers and suppliers), integrity and corporate culture, diversity and how the overall governance of the company contributes to its long-term success.

Question 28

Name five interpersonal skills a company secretary should have and explain why each one is important to the company secretary in fulfilling their responsibilities.

Answer 28

Empathy and relationship management – it is important for company secretaries to be able to build relationships to enable them to remain independent and to carry out their roles as conscience of the company and the governance adviser.

Respectful, diplomatic and effective communication – to build relationships, especially with senior people within an organisation, the company secretary will need to be respectful and diplomatic. The communications with these senior people will have to be brief and clear as they may not have the time for a long-winded explanation.

Active listening – the company secretary should look interested in what they are being told. This is part of being respectful. It will also help the company secretary to build relationships and obtain the information they need to do they job.

Bringing issues to the surface, especially those relating to reputational risk – managing reputational risk is now seen as an important part of governance. As the governance adviser, the company secretary will therefore be required to raise with the board, at meetings or on other occasions, matters that are relevant to the reputation of company.

Personal and social awareness – company secretaries need to be able to read the body language of the board members to help with interpreting what is said and meant at board meetings. This enables them to write the minutes. Company secretaries also need to be personally aware of how their own behaviours may effect the decision making of the board.

Being able to summarise common concerns and interests – the company secretary may have to summarise a decision within a board meeting so that it is clear to all board members what decision they have taken. They may also have to highlight the concerns of management or external stakeholders during a board meeting to ensure that the board has all the information to make an effective decision.

Generating alternative solutions – in order to help the board make a decision, it may be necessary for the company secretary to come up with an alternative solution. For instance, they could suggest a decision is delayed whilst more information is collected, or that there is additional reporting on the implementation of a proposal to give the board members reassurance on a decision.

Respecting confidences – the origin of the wo d ‘secretary’ is the keeper of secrets and confidentiality is still an important part of the ole. To be able to discuss and advise the board and management, the company secretary needs to be trusted with information.
Independent mindset – the company secretary has to be impartial as they work between the board and management, and the board and shareholders. To ensure that these relationships between the different governance parties work effectively, the company secretary will have to work with an open mind and see both sides of the arguments.

Strength of personality – the company secretary needs to have the strength to stand up to the strong personalities in the organisation and present good governance practices. Sometimes the board and management may not want to hear what the company secretary has to say, and the company secretary needs the strength to be persistent in a respectful way.

Appreciating the views of all parties – as mentioned above, it is important that company secretaries keep an open mind and appreciate the views of all parties when carrying out their role.

Effective team-working – company secretaries are often required to lead or be members of teams producing major company projects, whether this is production of the annual report and accounts, being part of an M&A team or in the event management of the annual general meeting.

Disagreeing constructively – often the company secretary may have to inform the chair or the CEO that they cannot do what they want to do. Being able to do this in a constructive way, and offering alternatives is better than just saying no.

Emphasising commercially minded approaches – the benefit of an in house company secretary is that they should know their business. They should therefore be able to suggest commercially-minded solutions and approaches to problems and issues that arise.

Integrity – as the conscience of the company it is important that the company secretary has the highest levels of integrity.

Question 29

What type of UK companies can be listed?

Answer 29

Only public limited companies can be listed.

Question 30

What are the arguments for and against the application of corporate governance codes of best practice to large private companies?

Answer 30

The owners of private companies are often their managers, so the issue of protecting the investor does not tend to exist. As corporate governance in the UK was traditionally aimed at creating and protecting shareholder value where there was a separation of ownership and control, it was argued that it was not appropriate for private companies where this separation did not exist.
Recent high-profile corporate scandals, relating to large private companies, for example at British Home Stores (BHS), have raised a different concern to that of protecting the investor for private companies. This is the protection of a wider stakeholder group, which includes employees, former employees and suppliers of the company. The enhanced shareholder value approach to governance has led to arguments for large listed companies following corporate governance requirements.

Question 31

How can an organisation maintain the independence of the company secretary?

Answer 31

Best practice is that company secretaries should be appointed and dismissed by the board as a whole.
Boards have a right to expect the company secretary to give independent, impartial advice and support to all the directors, both individually and collectively as a board.

reporting lines
dual roles

Question 32

How do they affect the objectives of the companies? (agency theory and stakeholder theory)

Answer 32

(non)financial objectives
conflicts

A company whose governance is based on the agency theory will be focusing on creating and maintaining shareholder value through managing conflicts of interest and the costs associated with avoiding/managing those conflicts. This is usually reflected in a focus on financial objectives such as return on investment, sales and profit targets. Objectives also tend to be short-term.

In contrast, stakeholder theory requires boards to balance the interests of the different stakeholder groups when making decisions, deciding on a case-by-case basis which interests should take priority in a particular circumstance. This means that non-financial objectives, such as employee relations or limiting environmental impact would be considered. Objectives tend to be longer-term.