Company secretaries are both employees and officers of companies as well as being gatekeepers tasked with giving independent advice on regulatory and corporate governance matters. This month CSj looks at the unique position of the company secretary in the corporate structure and at the importance of preserving the independence of the role so that practitioners can fulfill their full potential as the board’s trusted adviser.
In May last year the All Party Parliamentary Corporate Governance Group (APPCGG) in the UK brought out a report that will be of special interest to readers of this journal. The report – Elevating the role of the company secretary (www.appcgg.co.uk) – looked at the role the company secretary is playing, and can play, in ensuring effective corporate governance in UK companies.
‘The breadth and importance of the role of the company secretary has increased markedly over the past five years,’ writes Alun Michael, Chairman of the APPCGG in his foreword to the report. ‘It is a unique role as the company secretary is often neither part of “line management” nor a member of the board itself. There are endeavours to move the profession beyond that of being the “administrative servant of the board” to one which encompasses the broader role of “board adviser”.’
The report points out that company secretaries ideally should provide an interface between the board and management. They can be the ‘voice of the board’ within the business as well as being the key liaison between nonexecutive directors and management.
While the APPCGG report highlights the huge potential of the company secretarial role, is this potential realised in Hong Kong companies? Susie Cheung, the General Counsel and Company Secretary of the HKMC, points out that it is still fairly common for company secretaries to be perceived as fulfilling a primarily administrative role. ‘Company secretaries were originally employed to do filing and form filling; it’s a historical package from which we will gradually move,’ she says.
April Chan, Company Secretary of CLP, points out that the amendments made to Hong Kong’s Corporate Governance Code in 2011/ 2012 have helped to highlight the potential of the role. ‘Things are getting better with the support of Hong Kong Exchanges and Clearing (HKEx). There is a new section on the company secretary in the Corporate Governance Code. This has enhanced the importance and status of the company secretary. As more and more complicated listing rules and price-sensitive information compliance requirements are imposed on directors, the concern about liability that comes with these requirements increases. As a result, directors and CEOs are relying more on company secretaries to advise them of the regulatory requirements, compliance issues and corporate governance matters,’ she says.
Paul Moyes, Executive Director and Head of Practice Development of Tricor Group, believes the key issue is the degree of trust the board invests in the company secretary. He points out that the APPCGG report found that nearly 75% of the board respondents believed the role was primarily administrative (compared with only about 25% company secretaries who characterised their role in this way). Several respondents to this article emphasised that, for this reason, company secretaries need to earn the trust of board members.
‘If you want to be treated as a professional, you must behave professionally,’ says Wendy Yung, Company Secretary and Head of Corporate Services, Hysan Development Company. ‘Taking corporate governance as an example, I think it is a given that we should all know the listing rules well. The next step is to understand your own company’s business and operations and the board’s processes, and to see how you can effectively apply the rules effectively in your own organisation bearing in mind its unique circumstances. In this way, you can add value to your company’.
‘Set an example and demonstrate your integrity and professionalism,’ April Chan says. ‘Company secretaries should communicate with their colleagues about good corporate governance standards and practices as well as the importance of ensuring compliance within the company. A company secretary is more than an administrator’.
‘How much you know and how you apply the knowledge will gain you respect,’ says Susie Cheung. ‘This is a profession; it is not marketing or advertising. There is no getting away from the rules and regulations. A company secretary needs to know and be familiar with all the latest rules and corporate governance standards as applied to the company. You need to acquire the necessary skill sets befitting a competent secretary and learn not to be a mouse. This does not mean you need to lecture – you need to know how to address the board. Confidence stems from knowledge and the realisation that you know what you are talking about and can present it in the best way possible’.
The danger of management ‘capture’
There are dangers for the company secretary where the role is assumed to be purely administrative. The danger of management ‘capture’ of the company secretary was on display in the Shanghai Land fraud case of 2005/ 2006. When non-executive director Gordon Ng refused to sign a resolution that would have facilitated the fraud, Company Secretary Catherine Tse Wai-kuen was asked to draw up minutes of a fake telephone conference in which it would appear that the deal was ratified, bypassing the need for Ng’s signature. Tse, in her defence, argued that she was doing the bidding of her employer but her case has since become a warning for company secretaries who find themselves in the unenviable position of having to choose between their professional integrity and their loyalty to their employer.
‘A professional company secretary should always keep a true record of meetings,’ says April Chan. ‘If you are under pressure to put something into minutes that did not take place in a meeting, I would suggest you offer to include a post-meeting note on what was clarified after the meeting in the minutes for approval by directors in the next meeting. That way you can do the right thing and hopefully maintain harmony amongst board members’.
Susie Cheung agrees. ‘Backdating is a bad practice and no self-respecting company secretary should consider adopting it. As a matter of correct record, it is important to state the ‘correct’ date of the board meeting and the board resolutions. Inserting a date other than the correct date could, at the very least, run the risk that the requisite quorum might be challenged since the directors alleged to be present on the date of the backdated board meeting might not have been in Hong Kong on that date! At the worst, if a dispute was to arise at a later date which might relate to the backdated minutes/resolutions, such backdated records could be held by the court as being fraudulent and the company secretary could find him/herself unwittingly being embroiled in the dispute and be part of the complicity to the plot’.
This dilemma is less acute where a company secretary is acting as an outsourced company secretary. This is the case, for example, for Paul Moyes. ‘When someone asks me a question, they are seeking independent, professional advice. As an external party, I cannot be unduly influenced by any one client. Our professional services could be terminated, but I cannot be forced to compromise. So my objective judgements and professionalism will not be altered. My role has always been external. I’ve also always been independent and I have adhered to that (original) ethos of professionalism. When you come from a “Big-Four” background, a healthy degree of scepticism is inculcated in you. It’s not that I am querying what a company is doing; rather, I am wondering if what they are doing is best. So a healthy degree of scepticism is good in the role’.
Practitioners working as in-house company secretaries will tend to be closer to company management, and both Wendy Yung and April Chan emphasise that practitioners should chose their employers well. Put simply, working for companies with dubious ethics will be bad for your career. ‘You may end up as a mediocre company secretary doing administrative work and taking instructions from everyone else,’ says April Chan. ‘Moreover, if you fail to put the right practices in place after repeated trials, it’s time for you to consider whether your current employer deserves a company secretary as good as you are’.
‘The culture of a company is of paramount importance,’ Wendy Yung adds. ‘I am very lucky and feel very comfortable that my independence is respected in my company given our culture in corporate governance. However, I appreciate it may be more challenging in a company that is developing and growing its corporate governance culture’.
The question of liability
Respondents also point out that, quite apart from the moral argument for maintaining good ethical practices, there is of course the delicate question of the liabilities practitioners face for breaches of their professional standards. This does not only mean internal disciplinary action by the relevant professional body – these days company secretaries face significant legal liabilities. The revised Securities and Futures Ordinance, for example, substantially expands the existing framework for the disclosure of price-sensitive information and imposes personal liability on officers of listed companies, including company secretaries.
Susie Cheung points out that these liabilities give company secretaries both the incentive and the right to object to breaches of ethics or corporate governance principles. ‘The fact that a company secretary is also legally liable – as other members of the board are – gives you the right to object to bad behaviour. I think, that the issue of personal liability raises the standing of the company secretary: it shows that they are important enough to carry the can,’ she says.
Similarly, Wendy Yung believes that, while the new liabilities might seem rather intimidating, the new inside information disclosure regime should be regarded as a positive development for company secretaries. ‘Setting up internal systems to address the new disclosure requirements can turn these challenges into positives. You can propose and help to set up various internal systems: a disclosure committee, training for officers of the company who may not have a legal/ regulatory background, and add the confirmation of noinside information as a regular senior management meeting agenda’.
She reminds readers that if company secretaries can put these kinds of initiatives into the company’s internal systems, then they become key team members in the development of internal policies. ‘This is the kind of work that will make you a useful: definitely not only fulfilling administrative duties,’ she adds.
Preserve your independence
When the Hong Kong stock exchange recently updated Hong Kong’s Corporate Governance Code, it brought in a number of reforms intended to centralise the role of the company secretary in corporate governance. Tucked away among those reforms was the innocent-sounding code provision (F.1.3) stating that ‘the company secretary should report to the board chairman and/ or the chief executive’.
Many senior company secretaries have argued that F.1.3 is one of the most significant reforms introduced by this latest revamp of the Corporate Governance Code because it seeks to preserve the independence of the company secretary as an in-house gatekeeper. The term ‘gatekeeper’ was first coined to describe the role of non-executive directors and external professional advisers who are specifically tasked to ensure that companies abide by all relevant legal and ethical expectations. These gatekeepers are outsiders but company secretaries combine a position as an officer of the company with an independent gatekeeper role – they are both insiders and outsiders – and this is why their reporting line is so important.
Ben Mathews, FCIS, Company Secretary and Global Head of Secretarial Services, Rio Tinto, points out that, while there isn’t a single solution for every company, reporting to a non-executive chairman can help to reinforce the independence of the company secretary role. This reporting line is relatively rare, however. Susie Cheung points out that in most companies’ management prefer ideas to be run past them first. ‘If you don’t play by the rules of the team, the rest of the board won’t trust you – you have to be collegiate. And you may wish to bring the CEO and directors with you, and share your passion for good norms and corporate governance,’ she says.
Some commentators have suggested that having a completely independent company secretary might be a good thing. ‘Perhaps this is a bit radical, but perhaps the company secretary should not be an employee,’ says Ben Mathews. ‘Perhaps the company secretary should be engaged under some kind of fee-based arrangement that preserves his/ her independence and that would reinforce the trust particularly of the non-executive component of the board, other stakeholders, NGOs in our case, shareholders obviously. It’s a thought’.
April Chan points out, however, that it is impossible for the company secretary to be totally independent. ‘A company secretary is an employee. The listing rules state that a company secretary should be an employee of the company and have dayto-day knowledge of his/ her company’s business. The company secretary should be unbiased and seen as a neutral body between directors and management. This is critical to earn the credibility and trust from the board and management’.
Paul Moyes concurs. ‘From a practical point of view the company secretary is an officer of the company – full stop. So independence simply means that they are carrying out their duties as they are supposed to be discharged. The director has fiduciary duties; company secretaries have their own duties. I believe the company secretary should report to the chairman and to the board’.
A question of balance
The unusual position of company secretaries in companies inevitably comes with its own challenges. We have looked at one scenario, for example, where a company secretary had to choose between remaining ‘loyal’ to management or to the profession. Susie Cheung points out, however, that there should be no conflict between company secretaries’ loyalties since the companies that employ them and the profession requires them to embrace good corporate governance.
‘When you look at this from the perspective of good corporate governance – and really you don’t even need the word “good” in front of that term – you find that it is the norm, and the norm will tell you what to do. There should be no conflict in exercising your honesty and integrity vis-à-vis the company or the shareholders or the stakeholders. I would say that the intangible values and a company’s reputation are worth a lot of money and if you truthfully embrace corporate governance, it contains all the norms: integrity, honesty, good management, and fairness to other staff.’
Paul Moyes concurs. ‘It is incumbent on me to inform the board of both my and their obligations. As long as I make sure of that, and I educate the board, then the balance of loyalties is not a major issue; it is a professional job’.
Nevertheless, a balance needs to be struck in terms of how independent the company secretary should be. If company secretaries are too independent they risk losing their ability to bridge the gap between the executive and non-executive elements of the organisation. Conversely, if they are entirely integrated into the management of the company they risk losing their ability to provide the board with independent advice.
While balancing their roles as in-house gatekeepers will not always be easy, company secretaries are increasingly aware that their unique position in the corporate structure is the foundation of the real value they can bring. What other company officer or external adviser can combine a position at the heart of the company with an independent gatekeeper role acting as the ‘conscience of the company’?
‘Directors and company secretaries must have a mutual respect for each others’ responsibilities,’ says Wendy Yung, ‘which includes the independence of company secretaries.’ She adds, however, that the special value added by company secretaries comes from their intimate knowledge of the company’s operations and circumstances. ‘This is how you differentiate yourself from being just an external adviser,’ she says. ‘As you are familiar with the company, you can provide solutions. An external adviser may tell you what the company needs to improve on, or where the weak areas are. But how to implement these changes? How quickly or in phases? What personnel should be involved and what is the most effective division of roles? A resourceful internal company secretary can help’.
Gina Miller and Kieran Colvert
The report ‘Elevating the role of the company secretary’ (May 2012) by the All Party Parliamentary Corporate Governance Group in the UK is available online at: www.appcgg.co.uk.