On January 1, 2019, the largest companies in the UK must begin applying corporate governance principles, or explain why they are not doing so. At large private companies, company secretaries will have to drive this effort.
Private Company Secretary Assumes New Role
On January 1, 2019, the largest companies in the UK must begin to apply corporate governance principles (or explain why they are not doing so), the role of the company secretary at these companies will take on a new role and importance.
Part of the new legislation on UK corporate governance calls for large private companies to show whether the board is effective – and where and how it is not effective. The regulations require that this exposition be detailed, and should also consider individual board members, as well as the chairman. Governance risk is an issue here, as the Financial Reporting Council is authorised to mete out heavy fines for non-compliance. And there isn’t much precedent to work from, as obligatory corporate governance compliance for private companies is completely new.
The company secretary is likely to be charged with coordinating this task. Conscious that boards are under increasing pressure to perform, the company secretary’s task is three-pronged:
- Determine where the board has been effective in the past year
- Show how it will continue to be effective
- Show where it is likely to need improvement to become more effective
Evaluating Board Effectiveness
How will the company secretary evaluate effectiveness?
“The continuing challenge for boards is ensuring the right balance of discussion between value protection and value creation activities given the respective organisation’s strategy and regulatory environment. The right discussion in the boardroom ultimately drives better results,” explains Grant Thornton in a recent report.
Learn more about the best practices for board assessments and see how you can improve the board evaluation process for your board of directors.
Company secretaries should ask questions about leadership, as the report notes. For example:
- How well do the executives make decisions aligned with realising the organisation’s purpose?
- Are they able to inspire and motivate employees to realise the organisation’s purpose?
- Are they themselves good representatives of the values of the organisation?
How well does the board manage its activities?
- Does the board set clear goals, creating plans and allocating resources to achieve them?
- Do they effectively assign roles and responsibilities?
- Can the board focus on the day-to-day tasks and resources needed to deliver on strategic aims?
How well do the non-executives:
- Monitor financial, compliance and business indicators?
- Ensure appropriate processes are in place to manage risk?
- Maintain oversight of the executive team?
Experts generally agree that strategy leadership on boards should be left to the executive members, while non-executives should concentrate on risk management and providing support in their areas of skill.
“It’s the role of the executive to design and make proposals on future strategy; the role of the non-executive director is to critique and shape that vision. It is the role of the board collectively as a unitary board to decide that future,” Grant Thornton notes in the report.
Company secretaries should keep this in mind as they evaluate executive board members for their contribution to defining the future goals of the organisation, while non-executive members should be driving concerns about cyber risk, or financial reporting. A healthy committee structure, of course, makes defining these roles easier, and also makes it easier for the company secretary to evaluate contributions.
Research suggests that boards generally have a strong future focus, and that they tend to be more concerned about future strategy than about present issues. The audit committee, however, should be focused on internal controls and the overall risk-control mechanism – this means that a different type of board member should probably be chosen for this role.
The same caveat applies to a board’s overall management of corporate governance. It is easier to make plans for the application of rules than to focus on what is hiding in the now – this is a point that company secretaries should take to heart.
Evaluating Board Achievement
Company secretaries may find evaluating board achievement equally as challenging as determining leadership or risk management scrutiny.
The chairman is likely to want to weigh in on the subject of how well things have gone in the past year, whereas the company secretary must play devil’s advocate, defining the board’s achievement in terms of the company’s overall performance and the effect, or lack thereof, that the board has had on it.
But there are other areas to board achievement. For example, there may be internal reorganisation led by the board that has a positive effect, or the institution of safety measures such as cybersecurity controls.
It is up to the company secretary to decide where value has really been added in any sense, and to take that into account in writing the board performance evaluation for corporate governance reporting.
Equally ticklish, from the point of view of the company secretary, is the evaluation of the chairman’s role, which is an intrinsic part of this corporate governance report. The core role of the chairman is to lead and create the conditions for the board and its committees to be effective. As boards are changing over time, so is the role of the chairman. This evolution is underlined by the chairman’s position as the lynchpin of many of the areas examined in this report – not least of which are diversity, succession planning and information flows. The chairman also plays an important part in engaging with investors on corporate governance issues. Evaluating the board and its chairman is indeed ticklish in many ways, particularly if the company secretary has never attempted to lead such an effort before – which is the case for those at UK large private companies this year.
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Company secretaries seeking to practice good corporate governance for the first time should rely on the Diligent’s Governance Cloud.
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The Governance Cloud, the only integrated enterprise governance management solution that enables organisations to achieve best-in-class governance, is an ecosystem of software tools that digitises the various activities and tasks for the board of directors. As organisations grow more complex and regulations more stringent, the scope of governance responsibilities evolves. The Governance Cloud allows boards of directors to meet the demands in the boardroom and beyond with the ability to select the products they need that help them perform at their best and work within their allotted budgets.
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