Board secretary – gatekeeper of compliance of listed companies
Xie Jilong, Board Secretary, CRRC Corporation Ltd, discusses the role of the board secretary. He stresses that board secretaries must fulfil their roles, be accountable and be able to communicate well to protect the interests of various parties.
It is said that the board secretary is a labourer who survives between the cracks, a chivalrous swordsman dancing on the edge of a sword, a diplomat who has to please various parties, and a lubricant that maintains good relations on various fronts. Having been a board secretary for eight years, I have mixed feelings about this role. In my opinion, the ultimate status of the board secretary should start with the recognition of the roles of the board secretary in the laws of China.
The board secretary was first legally recognised in China by the Special Provisions of the State Council Concerning the Floatation and Listing Abroad of Stocks by Limited Stock Companies (1994) made by the State Council pursuant to Articles 85 and 155 of the Company Law. Article 15 of the Provisions makes it clear that the senior management personnel of a company includes the board secretary. It was not until the promulgation of the Guidelines for Articles of Association of Listed Companies by the China Securities Regulatory Commission on 16 December 1997, with a special chapter on the ‘board secretary’ requiring the setting up of a board secretary position in all listed companies, that the status and function of the board secretary in a listed company was established. Subsequently, stock exchanges formulated and amended rules on the specific duties of the board secretary. I believe the purpose of specifying the duties and roles of board secretaries in rules and regulations is to affirm their position in listed companies and allow them to perform their duties smoothly, adhere to professional standards and ensure compliance of listed companies. From this perspective, the board secretary should be the gatekeeper of compliance of listed companies.
Know your role and duties
The board secretary is in the midst of a host of relationships among the regulators, the board of directors, the management team and shareholders. As a gatekeeper, board secretaries should stick to their principles and uphold rules and regulations. To do this well, not only do board secretaries need the support of the law, rules and regulations, they should also be able to balance various types of relationships. They should provide good support to at least three bridges of relationships.
1. Bridging the company and management
This bridge is between the three bodies of the company (that is the shareholders, the board of directors and the board of supervisors) and the management team. A properly functioning governance structure of a listed company is made up of the body of company power, the decision-making body and the supervisory body with clear delineation of powers and responsibilities, each performing their respective duties, resulting in effective checks and balances, rational decisions and well-coordinated operations. The decisions of the three bodies have to be executed by the management team ultimately, while matters beyond the scope of decision of the management team that come up during daily operations have to be duly submitted to the three bodies for discussion and decision. This forms an execution lane and a reporting lane. To ensure that these lanes on the bridge between the three bodies and the management team are unobstructed, the board secretary should function well as support to this bridge. In the first place, board secretaries should participate in important meetings of the management team and keep abreast of major issues. They should monitor the execution and progress of implementation of board decisions, and keep an eye on major emerging issues that require decisions by the three bodies. Good communication should be maintained by reporting problems and difficulties faced by the management team to the board of directors in a timely manner.
2. Bridging the company and regulators
From the point of view of the regulators, board secretaries are responsible for monitoring a listed company’s compliance with the law and regulations. They help publicise the policies, rules and regulations in relation to listed companies promulgated by regulators, and have the duty to explain laws, rules and regulations relevant to the operations of the company to the board of directors, the board of supervisors, the management team and controlling shareholders, educating them on the legal basis of decisions. In this way, they will enhance the knowledge of the decision making and executing departments about relevant law, standardise individual actions in the operations of the company, and raise individuals’ awareness of the need and their ability to conform to standards. In respect of major undertakings of the company such as financing, share incentives, mergers, acquisitions and reorganisations, the board secretary should ensure good communication with the regulators and solicit regulators’ recognition of and support for the company’s development.
3. Bridging the company and investors
Board secretaries of an A+H company have to tell general investors a good story about the company, and tell overseas investors a good story about China. They should explain to investors the operations, developments and strategies of the company, and solicit investors’ support and facilitate a long-lasting, stable and interactive relationship between investors and the company.
Be steadfast and accountable
As the gatekeeper of compliance, the board secretary should focus on three basic areas of work.
1. Ensuring due process as the basis of rational decisions
A clear and fair decision-making process must be backed by a proper system. A sound system ensures the lawful operations of a listed company. With the development of the capital market, regulatory policies are continuously refined and the mode of regulation is changing. This places new demands on listed companies to adapt changes in regulatory policies in order to raise the governance standards of the companies and adapt to the development of the capital market. Rational and efficient decisions can only come about through the establishment of comprehensive systems and procedures in the company, continuous improvement to the systems in compliance with relevant laws, rules and regulations, and monitoring by the board secretary of the implementation of the company’s decisions.
2. Ensuring true, accurate and complete disclosure of information as the basis of compliance
Information disclosure is a window of the company to the capital market, a platform to showcase the company’s governance standards, as well as a risky area for compliance. The breach cases attracting penalties imposed by regulators in recent years are mostly related to delayed disclosure or leakage of inside information. In this regard, the board secretary must be prudent in his words and actions when speaking to investors or the media, and remind directors, supervisors and senior management to keep inside information confidential and prevent its leakage. In this media age where information thrives, the role of board secretaries as diplomats is highly challenging. They must be ready to be accountable before they can handle information disclosure well. The internal management of the company should be transparent, and disclosure of information should be timely and accurate and compliant with the law, rules and regulations. When facing investors, the board secretary should be open while having a clear understanding of the limit to disclosure, tactfully declining the release of information that is not disclosable.
3. Ensuring proper connected transactions as the basis of fair treatment of all shareholders
Connected transactions should be a fair and normal market activity between equal legal entities. Owing to the special relation between connected parties, however, one party to the transaction may influence or control the other party and render the transaction unfair. In recent years, some listed companies made use of connected transactions to boost their results and channel profits to specific parties, seriously undermining the interests of medium-sized and small shareholders. So connected transactions have been the focus of attention in the securities market and are the target of enhanced supervision by regulators. As the compliance gatekeeper of listed companies, the board secretary should ensure that connected transactions are conducted properly and at arm’s length. This forms the basis of protection for medium-sized and small shareholders, and is the root of compliance of listed companies. In the daily operations of the company, the board secretary should constantly remind the company to reduce and avoid connected transactions through various means and, where connected transactions cannot be avoided, to follow a stringent decision and approval process and to make proper disclosure.
Communicate well and frequently
Communication is an art that requires knowledge and skills. It is important that the board secretary, as a link and a bridge among various parties, possesses good communication skills. The board of directors makes decisions on major issues, and the management team is tasked with implementing these important decisions. If there are difficulties in implementation, the board secretary must facilitate communication between the board of directors and the management team. Sometimes there appears to be conflicts between the operations of the company and the law, rules and regulations. This may be due to different interpretations of the rules, and sometimes it is out of an intention to protect the interests of the company. To tactfully communicate with the directors on the relevant legal provisions and rules and convince the directors requires very strong communication skills on the part of the board secretary. In the dialogue between the management team and the shareholders and investors, the board secretary has to communicate frequently and communicate well. Investors and the management team share common interests and do not have fundamental conflicts. Timely communication serves to enhance investors’ trust in the management. Meanwhile, collecting and collating the views of investors and reporting regularly to the management is conducive to the healthy development of the company.
The role of the board secretary seems to be more diverse than that of other positions. While board secretaries may have broad functions, the key is to ensure that the company complies with and follows relevant laws, rules, regulations and requirements. It is only when the listed company is compliant, that the interests of various parties are not impaired, whether they be the interests of the regulators, board of directors, board of supervisors, senior management or those of the shareholders. Therefore, every board secretary should become the gatekeeper of compliance of listed companies.
CRRC Corporation Ltd