David Jackson
company’s governance practice has diverged from the principles and provisions of the Combined Code, and to engage with shareholders appropriately to discuss and explain those divergences.
There are those who advocate the strength of the UK system of corporate governance and the adoption of the comply-or-explain principle as being an excellent example of ‘one size not fitting all’. This is a reasonable and proper approach to take when compared with some of the more legally based systems found in the USA and elsewhere. If only more boards would take the opportunity to think outside the box and put in place the appropriate governance structures relevant to their own circumstances and their position in their industry. It is a sign of weakness that a number of boards default to complete compliance with the Combined Code and thereby accept that indeed one size should fit all.
From the board’s perspective, there is no one system of governance which will fit all companies. The Chairman should lead discussions with the other directors as to the nature of governance in the organisation. The governance system should be kept under review for its effectiveness and relevance, and the board should be prepared to allow the system to evolve as the governance needs change. This does not mean that governance should become an issue for debate at every board meeting. The opportunity should be taken, at the time when the board’s performance as a whole is evaluated, to seek the views of all the directors on the board’s governance system.
At the end of the day, the governance system which a board will describe is really just that: a system or a process represented by words on paper. The regulators, and those who place requirements on companies to have such systems, are putting their faith in the fact that once systems exist they will operate effectively. Determining the system of governance is only the first step. Operating the system at board and committee level, and ensuring that appropriate behaviours occur, is the next major challenge.
So what of the Company Secretary in all of this?
The Company Secretary
On reflection, I have been particularly fortunate in the experience that I have had as a Company Secretary. I have worked under two very different regimes: at PowerGen, I was General Counsel and Company Secretary reporting, latterly, to a combined Chairman and Chief Executive. I was a member of the executive committee. It was all too easy to see oneself in an executive role trying to determine with the executive team just how we were going to get certain decisions through the board.
At BP, the environment is different. I am the Company Secretary of only one company, BP plc, and I have no executive responsibilities other than certain limited functions related to the operation of the share register, the annual report and the annual general meeting. I am not the General Counsel and I report
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The role of the Company Secretary
solely to the Chairman. My role is clearly focused on supporting the board and on ensuring that BP’s governance system operates at the highest level and that every opportunity is taken to try and improve the performance of that system. What is not different is the personal relationship I have with the Chairman. Again, I have a very independent Chairman but I believe our relationship is based on trust and reliability. The breadth of the role of Company Secretary is critically dependent on the quality of the personal relationship he builds with his Chairman. The role of Company Secretary at BP is more akin to that of Chief of Staff or Head of the Chairman’s Office. It is seen not as merely a compliance role or that of a servant to the board, but rather as that of a board adviser, particularly to the Chairman and non-executive directors. The Company Secretary is also the agent for the non-executive directors in ensuring their rights to put items onto the board agenda or raise issues that concern them are respected.
These very different regimes highlight the challenges for the Company Secretary today.
When clarity of roles is not a key issue, governance may be seen as a higher form of management with all the attendant consequences. At BP, it is all about clarity. Clarity as to the role of the board as opposed to that of the executive; clarity around the role of the Chairman compared with the Chief Executive; clarity over the expectations of the non-executive directors and of the board committees, and clarity over who will support this system of governance and what resource is going to be put behind that person. The Company Secretary ensures the board processes run smoothly and the governance system is rigorously applied. Board business needs to be handled efficiently and the committees need to be serviced. At BP, the Company Secretary also ensures that the self-evaluation of the board and its committees is carried out effectively, and that the induction of newly appointed directors takes place.
The Company Secretary is important for the nominations committee in ensuring that recruitment and appointment procedures for all board positions are followed. The board carries out regular reviews to identify what skills are needed on the board flowing from the agreed business strategy. The time needed to find appropriate non-executive directors and bring them onto the board can be very long. A Company Secretary who enjoys the confidence of the board will be a key participant in the recruitment process.
At BP, board evaluation is done in-house but the process is rigorous. Although a full evaluation is not carried out every year, an annual check is done to ensure that the recommendations from previous evaluations are being followed up. The Company Secretary assists the Chairman in carrying out the evaluation and writes the report for the board to discuss. Similar evaluations are made for most board committees. Those who advise the committees or who appear before them are all spoken to.
I posed a number of questions. What is the role of the Company Secretary in twenty-first-century quoted companies? Has the role been reinvigorated by the focus on corporate governance? Is there now a greater role to support the
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board, in particular the Chairman and non-executive directors? Is all that we have seen in terms of advances in corporate governance really another layer of regulation that has turned the Company Secretary into a compliance officer?
These questions need to be seen against the developments in the governance framework that I have endeavoured to describe above. Boards are responding to the challenges of the revised Combined Code. Questions are being asked about the role of the board. Is it there to deal with strategy or is it a corporate policeman fixed with a monitoring role? The fact that many boards see governance only as compliance may be as a result of the piecemeal way in which governance in the UK has evolved. The focus on committees and codes has come about because of the need to repair something that has gone wrong and to ensure that bad conduct or behaviour is not repeated.
There has been little effort, despite much academic work on both sides of the Atlantic, to come up with a conceptual framework of governance. Boards of directors are assumed to know what is their purpose and what are their individual tasks because they are directors. It is not clear that there is appetite in the boardroom for some of the conceptual thinking that underpins a framework of governance for UK companies. This may be a result of the fact that it is not yet proved that well-governed companies create more value for their shareholders. What is clear is that badly governed companies certainly destroy value.
Because boards are themselves only now coming to terms with the new regime, and because the Company Secretary’s role is critically dependent on the views of the Chairman, there will be no one universal job description for the Company Secretary. What is clear is that the Company Secretary is going to have to spend more time addressing how he is going to support the board in adding value and becoming high-performing. This may be a challenge for those Company Secretaries who are also General Counsel. As described earlier, those who wear two hats frequently delegate the secretarial responsibilities. This is arguably acceptable when they amount only to administrative tasks. Not so easy when there are real governance issues to be dealt with. No matter what view a board takes on governance, it is likely that non-executive directors will have greater expectations of the services required from the Company Secretary, particularly when they serve on other boards that approach governance in a different way.
It is unlikely that there will be an early move away from combining the roles of Company Secretary and General Counsel. Companies may not wish, having become used to one lawyer both giving the executive legal advice and also serving the Chairman, then to incur the additional cost of recruitment. Lawyers will always, quite reasonably, want to find a place in the boardroom. If ‘double heading’ is the only way to do this, it is unlikely that the Company Secretaries will vote for splitting the roles.
I believe that the advances that we have seen in governance have unfortunately resulted in changing the Company Secretary’s office in many companies into a compliance rather than a true governance or board performance position.
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Ask those Company Secretaries employed by a number of UK corporations in governance roles what they do, and all too often the tasks they perform are essentially related to compliance.
Should we be surprised by this? Not really. It is only in the last year or two that the governance environment has started to settle down. The events in the US which led to the Sarbanes-Oxley Act, and the ripple effect into the UK and Europe, were of seismic proportions. The turbulence created by Enron, WorldCom and the other major failures, coupled with the robust US response, was bound to lead both to those companies wishing to avoid US-style regulation washing up on these shores, and to a desire to deal with whatever regulation came along and to move on.
The challenges
I believe that the enhanced focus on governance and performance presents a major challenge to the Company Secretary but also an opportunity. Whatever the views of Chairmen now, the role of the board will come under increasing scrutiny in the coming years. There is an increasing interest in what business does and in what is the role of corporations in society. This interest will be heightened by the new Companies Act, which has, as one of its key themes, the implementation of the concept of enlightened shareholder value through provisions codifying the duties of directors. The possibility of more shareholder resolutions and derivative actions will also concentrate directors’ minds and require rigorous documentation procedures to maintain proper audit trails.
Shareholders will, over time, become more demanding in their engagement with companies, and more searching in their desire to understand companies’ explanations for non-compliance with governance provisions. Boards will find that shareholders will come to realise that the governance systems that have been put in place to comply with the Combined Code are just systems. There will be a greater focus on board behaviour and performance which will be seen, initially, through greater scrutiny of board evaluation reports.
Boards will need to rise and meet these challenges. The Company Secretary will need to move into this space. It will not be a very different role from that described by Lord Shepherd, but there will be a greater focus on understanding what the board does and how the governance system of the company really operates. While the role might have changed from that of Chief Administrative Officer, as tasks have been transferred to other functions in the organisation, the focus on governance is seeing the re-emergence of the Company Secretary as a key official rather than a mere bureaucrat or servant of the board.
The role will need to be seen as one that adds value. While the ‘doubleheaded’ model of Company Secretary and General Counsel is unlikely to disappear, boards will wish to have advice from an independent person who is focused on ensuring that the board is delivering on its unique tasks, rather than having to work with a member of the executive team. Given the right kind of relationship
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with his Chairman, the Company Secretary can act as the Chairman’s chief of staff and help him to run an effective board.
UK boards have now mostly developed corporate governance frameworks that comply with the Combined Code. Where they do not comply they are explaining their reasons. The focus now is on board performance. Are boards effective? Are the non-executive directors adding value? The Company Secretary truly has a part to play here but his role needs to be redefined. This is what I foresee will be the main change over the next five years, though it has already started in larger companies. Governance must not be viewed as an end in itself or it risks being reduced to box-ticking, and the Company Secretary will be seen as a bureaucrat whose job it is to see that all the right boxes are ticked. The more important task for boards is to decide how they will operate within the corporate governance framework they have constructed. The chosen way of operating will determine if they are high-performing and effective. This is the area in which the Company Secretary will increasingly be expected to contribute in support of his Chairman.
Investors will be monitoring board performance more closely and they will receive more information to help them. Although the Operating and Financial Review was abandoned, the enhanced Business Review, sitting within the Directors’ Report in the annual report, will give investors more non-financial information than they have ever had before. The Company Secretary is likely to regain from the communications specialists his authority for preparing much of the annual report and accounts. It will be more important than before, once the Business Review is a feature, to ensure that the board’s messages and communications are consistent. The Company Secretary is well placed to safeguard consistency and ensure appropriate transparency.
This greater transparency and disclosure will result in investors asking more questions about the board’s affairs. It will cause boards to review the bright lines between the authorities and responsibilities of Chairman and Chief Executive on the one hand, and between executive and non-executive directors on the other. This has been a key part of the development of the corporate governance approach in BP. This need for clarity is especially important for companies operating in the USA, where regulators look to pierce the corporate veil. Governance systems need to take this sort of threat into account as companies become more global.
The Company Secretary will help to ensure the board does only what the board needs to do: focusing on articulating the board’s values, approving and monitoring strategy, oversight of management, and determining board and senior management succession. The board should resist getting involved in business operations and making decisions that should be taken by the executive.
The opportunity is there. Company Secretaries can again play the pivotal role that they performed in the past. Governance and board performance lie at the heart of all that they should be focusing on in the future. It’s up to them to walk into that space.
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