Wednesday, August 24, 2011

Corporate Secretaries Int’l Assoc. Sets Forth Twenty Principles for Better Corporate Governance

The Corporate Secretaries International Association has issued 20 principles to foster better corporate governance. The principles center on the role of independent directors, the broader duty of the entire board to achieve sound corporate governance and the crucial role of the board chair, and the roles of the outside auditor and the audit committee. The principles also deal with the role of the corporate secretary and the company’s relationship with its regulators, its shareholders, and its stakeholders.

The first two principles center on the important role of the board and the board chair. Corporate governance needs to be distinguished from management, said the Association, management runs the enterprise, while the governing body ensures that it is being well run and is heading in the right direction. Also, the company must confirm the leadership role of the board chair. In his seminal work on board chairmanship, Sir Adrian Cadbury, who drafted the first UK corporate governance code and helped to develop these principles, said that board chairs should be open to ideas and open in explaining the company’s actions and intentions. Balance is also important since the chair has the duty to weigh the consequences of decisions on all those who will be affected by them, and to hold the scales between the demands of today and the needs of tomorrow.

Principles 3, 4 and 5 deal with non-executive directors. Companies must ensure that the independent outside directors have sufficient intelligence, integrity, personality, and knowledge to stand against an over-powerful CEO and other directors from the executive suite. In addition, companies must review the role and contribution of non-executive directors. Sir Adrian Cadbury said that the role of independent directors is the most significant general issue to arise from the financial crisis. Outside directors were criticized for not restraining headstrong CEOs and failing to question the risks their companies were taking.

Principles 6 through 11 deal with the key role of the board of directors in achieving sound corporate governance. The company must ensure that all directors have a sound understanding of the company and confirm that the board’s relationship with executive management is sound. Companies must also ensure that directors can access all the information they need.

The directors must agree on the strategic direction of the business, said the Association, and every director needs to understand, accept, and be committed to the company’s strategic direction. Board chairs need to ensure that every director understands the company’s strategic profile, fully appreciates the strategic risks to which the company is exposed, and is committed to the companies’ strategies.

Boards need to accept that the governance of risk is a board responsibility. Board-level policies for enterprise risk management are needed, with appropriate systems in place. The board may delegate the main effort to a risk management standing committee of the main board or to a subcommittee of the audit committee.

Principles 12 ad 13 deal with shareholder relations. They posit that the crucial element of corporate governance is the responsibility of the governing body to be accountable to its shareholders, regulators and other legitimate stakeholders. Company law, supplemented by listing rules and corporate governance codes, determines the nature and extent of that accountability. Companies belong to their shareholders for whom the directors act as stewards.

Boards need to assess their performance critically, and those assessments need to be taken seriously by shareholders, particularly institutional shareholders who can take action when necessary. Companies’ corporate governance policies should confirm the board’s commitment to be accountable to shareholders, balancing what the Associaiton called the ``siren song’’ of short-term profits with longer-term corporate growth, while ensuring compliance with regulatory and stock exchange requirements.

Principle 14 seeks to ensure that directors’ remuneration packages are justifiable and justified. This is a corporate governance issue that will have to be addressed in many regulatory jurisdictions. Some corporate governance codes call for performance-related pay to be aligned to the company’s long-term interests and its policy on risk. Expectations are running high in many countries for greater transparency and confirmation that top-level remuneration packages are justified.

Principles 15 through 18 deal with the company’s relationships with outside auditors, regulators and stakeholders. The outside auditor needs to be, and be seen to be, independent of the audited company. It is vital that external auditors provide a genuinely objective judgment on the report of the directors.

Modern corporate governance codes place a major responsibility on the audit committee. The audit committee’s original function was to provide a link between the board and external auditor to ensure that the inevitable close relationship between the finance function and the auditor did not mean that issues of valuation, reporting, and control were resolved without the directors being aware. More recently, the role of the audit committee has been expanded to make audit committees a dominant feature in the corporate governance process. Some companies have given the responsibility for enterprise risk management to the audit committee.

Since audit committees are comprised of independent outside directors, it has been suggested that they have become more like a European supervisory board. However, a contrary view suggests that, provided all directors have access to the minutes of audit committee meetings and can raise questions in full board meetings, the board is fulfilling its responsibilities.

Nevertheless, a best governance practice is for all the directors to see the routine auditors’ management letter, which reports on their audit in detail. The board also needs to confirm that directors have sufficient knowledge about the relations between the finance function and the internal auditors to meet their duties to shareholders. The external auditors should
meet with the main board periodically and be available at meetings of shareholders.

Society allows companies to be incorporated and operate with limited liability. In response, all companies are regulated by the state. Public companies, in addition, have to ensure that they fulfill the demands of the securities regulators and the listing requirements of the stock exchanges on which their stock is listed.

In the past, relationships with company registrars and stock exchange listing committees tended to be left to specialist functions, such as the company secretary, the finance department or the lawyers. Following the global financial crisis, boards need to recognize that these relationships can have strategic importance. Directors need to be aware of the thinking of their regulators and ensure that their own corporate processes and reporting practices are evolving appropriately. The board also needs to be aware of changing expectations of their stock exchange authorities, ensure that they are able to respond to new demands and, perhaps, develop a closer relationship.

Corporate social responsibility and sustainability have been added to the corporate governance portfolio. Companies should develop written board-level policies covering relations between the company and the societies it affects. Some jurisdictions now require companies to recognize their social responsibilities. The UK Companies Act
2006, for the first time, specifically included corporate social responsibilities within the formal duties of company directors.

As a practical step towards better corporate governance, boards might review their social responsibility policies covering relations between the company and the stakeholders affected by its activities. Written board-level policies can help to promulgate these polices throughout the organization and among the stakeholder groups As another step towards better corporate governance, directors might review their company’s attitude towards ethical behavior and consider whether any changes are needed in the light of recent developments.

Finally, Principles 19 and 20 deal with the role of the corporate secretary. The original Cadbury Report suggested that the corporate secretary has a key role to play in ensuring that board procedures are both followed and regularly reviewed. The chairman and the board will look to the company secretary for guidance on what their responsibilities are under the regulations to which they are subject and on how those responsibilities should be discharged. All directors should have access to the advice and services of the company secretary and should recognize that the chairman is entitled to the strong support of the company secretary in ensuring the effective functioning of the board

Boards should consider the role currently played by their corporate secretary and whether it should be expanded. Similarly, boards should consider how the corporate secretary’s function might be developed.

The demands and opportunities for better corporate governance, following the global financial crisis, reinforce the important contribution that the company secretary can make to the company and the board.

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