This exclusive excerpt from Jennifer Robertson’s FAICD authoritative text on The Role of the Company Secretary focuses on integrity and the need for transparent reporting and disclosure.
As a portfolio career enthusiast, Jennifer is a practising lawyer, governance consultant and company director. She consults with many corporate clients and facilitates the Company Director Course for the Australian Institute of Company Directors.
Transparent reporting and disclosure needs to be suited to the audience it is intended to serve. It must not be news double speak. You can’t let corporate affairs put a spin on it—it must have an honest element.
All reporting must be able to be understood by its audience. From a corporate governance perspective, it must also deliver on the board’s various accountabilities to its almost innumerable stakeholders. Reporting must be transparent and appropriately drafted to ensure that the audience can see the forest from the trees. Whether it is management reporting to their boards or organisations reporting to their shareholders or members, it must be fit for purpose and circumstance based. Reporting during different phases of an organisation’s life cycle could look like chalk and cheese. For example, reporting for an organisation seeking to consolidate and grow will be very different to reporting when the same organisation is part of a takeover bid and a lot of commercially sensitive data is not to be disclosed.
As a listed business, our lifeblood—that is the ability to raise capital—requires integrity in everything that goes out externally. That is what the public sees about our business and if they don’t trust what we publish, we can’t raise further capital.
From a capital market perspective, two critical confidence builders are transparency and board independence.39 In relation to transparency, some of the most important controls, according to some company secretaries, are the financial controls. The governance around reporting (and in particular, financial controls) can give the board insight into the internal control frameworks of the organisation generally. If there are lax or loose controls around finances, the lifeblood of any organisation, then it ought to be a matter which raises the interests of directors, CEOs and company secretaries.
Financial reports are a ‘rear-vision mirror’ look into the organisation, but the systems and processes that go into accurate reporting with transparency and integrity constitute the type of ‘windscreen’ assurance that a forward-looking company secretary wishes to give to their board.
What does quality transparent disclosure and reporting look like?
The financial governance frameworks and oversight of those frameworks are part and parcel of good governance and therefore the company secretary must have the ability to engage with the financial reporting for the business, even if they do not hold financial qualifications. At the very least, the company secretary ought to be involved with the internal controls around the finances (or understand them sufficiently to know where gaps in the controls may be) and be able to provide advice in the preparation of the annual report and accounts. This does not mean that the company secretary must do the role of a CFO however they must be comfortable enough to know that the narrative and non-financial information in the annual report and accounts is not inconsistent with the actual finances. In this regard, the company secretary takes the lead on a more integrated approach to board reports.
Exercising the collective conscience of the board will also cause the company secretary to always consider the reputation of the company and its protection as part of their role, to accept responsibility for identifying that risk and bring it to the board’s attention.
The double-hat: blessing, burden or both?
For many reasons, the company secretary role is often combined with a management role or roles in an organisation. In the James Hardie decision, the High Court found that the role of company secretary and general counsel was indistinguishable when held by one person, stating that, “…it is not possible to sever responsibilities into watertight compartments, one marked ‘company secretary’ and the other marked ‘general counsel’.
If you wear two hats, be clear in which capacity you are answering for.
Wearing two hats is often considered to be one of the more difficult permutations of the company secretary role. Despite the possibility of conflict and confusion between these two roles in practice, many double-hatted company secretaries are of the view that the combined role has great advantages. The combination of the management/governance role ensures that various people within the business come to the company secretary with their problems, which can then be solved by their knowledge of what is going in other teams within the organisation. From their vantage point, the company secretary has the opportunity to break down the silos within their organisations and join the dots between the information flowing to the board to ensure the best decision-making environment.
From a board’s perspective, the company secretary can be one of the more important governance checks and balances available to them. The role itself is directly accountable to the board and can be subject to legal duties equivalent to those of directors and officers of the company. Therefore a company secretary has the opportunity to add context and discuss the impact in relation to a board decision with the board knowing full well that the company secretary is likely to be approaching matters with a ‘best interests of the company’ perspective.
It would be a foolhardy board that would incentivise the company secretary by linking bonuses to matters such as financial performance as this could act as a significant deterrent to bringing matters of concern to the board’s attention.
Do not be fooled—the tension between any company secretary who takes on dual governance and management roles can be difficult to manage. Mix in the specific responsibilities and legal duties of the company secretary in addition to any professional standards and codes which may impact on the company secretary and their governance or management role and you have a potential powder keg of dilemmas.
A company secretary may feel deeply compromised if they receive different, and even conflicting instructions from the board (or the chair) and from the CEO (or their supervising manager) however, that can be just the start of their worries.
It may be your first role as a company secretary. It’s natural to think that you are the staff member who has to try to get the board to come around to accepting management’s views and priorities. However, it is the other way around. You are the board’s agent and it is a matter of explaining the board’s role, priorities and needs to management. Therefore, you need to understand your ‘principal’ (the board) and build a relationship with the chair and the board over time. The practical day-to-day challenge is that you are a member of two teams: management and [the] board.
As one of the most effective inbuilt internal controls available to the board, a failure to protect the integrity of the company secretary’s reporting lines to the board can mean that these internal controls are seriously undermined. Non-core company secretary duties or management role duties will more than likely be reported to a member of the management team, however these lines must be considered by the board and company secretary, and then reviewed accordingly to ensure protection. Reporting lines through the CEO in relation to company secretary matters run the risk of directors thinking that they are not receiving independent and unbiased advice, thus reducing the effect of the company secretary role.
The company secretary should never report to the CEO on company secretary matters.
The statement above belies the difficulty of effectively executing the double-hatted role. It is generally acceptable to report to the CEO on operational matters, and to the board via the chair on governance matters. There is a nuance required to articulate this principle in the position description. The challenge is where to draw the line on this distinction.
If I was in doubt and did not feel comfortable raising something with [the] CEO, I would go straight to [the] chair and then check if it [was] appropriate to inform the CEO. Nine out of ten times a good chair will probably raise it with [the] CEO in their next catch up to save you doing so and therefore protect you from the fact that you did not first raise it with [the] CEO.
In relation to the company secretary role and its execution, boards should be on notice. The latent tension in the double-hatted role is certainly not novel. Although managing the tension on a day-to-day basis, on the part of the company secretary, will come down to a mix of hard and soft skills, the documentation appointing the company secretary must give clarity for the company secretary and the organisation as to the matters which are the responsibility of the board and those which are the responsibility of the CEO.
For those company secretaries whose role and position descriptions do not provide such clarity, it must be recognised that the board’s confidence in the company secretary is paramount. For the board to retain that confidence, directors need to feel comfortable that the company secretary will regard their duty to the organisation as overriding the duty—and any loyalties—to the CEO. This is particularly important at those times when a conflict between the company secretary’s governance and management role may result in significant personal and professional pitfalls for the company secretary. The board must know, in these circumstances, that the company secretary will take steps to bring the matter to the attention of the chair of the board. In these situations, the board will have peace of mind that the company secretary will always be ensuring that the board is properly discharging its responsibilities on behalf of the organisation.
Many double-hatted company secretaries belong to legal, accounting or other professions which ensures the need for on-going training. This gives guidance—if not, a requirement—to consider ethical standards of behaviour. The background and expertise of the company secretary can be an indicator of a depth of experience in analysing information and providing options, which is considered by many board members—and the company secretaries who assist them—as one of the mainstays of good decision-making.
For example, a company secretary with a legal background will know that there is always an overriding duty to the court which must be contended with as a practicing lawyer. This will likely assist a company secretary to tease out competing interests and allocate a hierarchy that raises the organisation’s interests over all else rather than getting caught up in the melee of the day-to-day operations at the expense of the organisation. Of course, there is a question as to whether the company secretary’s legal or accounting qualifications heighten the way in which they are perceived by the board such that their qualifications give their views greater weight when delivering papers.
I think that the whole thing is that lawyers and company secretaries and general counsel are often the ones that didn’t even steal a packet of [chewing gum] when they were kids. We’re willing to walk away from an integrity point of view because we don’t want to work for a business where we can’t have the conversation with the CEO. In one particular situation I was happy to walk because I didn’t want to work for a CEO [who] wasn’t going to have that conversation with the chair. Because I have to sit in the room with [these] people I can’t, from an integrity point of view, look them in the eye and think you don’t know the stuff you need to know to make the decisions you need to make.
Where disagreement between the board and management roles arise, the company secretary can constructively assist the board and management team to identify areas of contest and unity. They can generate alternatives, focus parties on the areas where they diverge and provide them with frameworks to work through them.
Whistleblower policies may assist if the disagreement cannot be dealt with due to the working relationship between the board and company secretary. Using such a policy will likely be a matter of last resort for a company secretary given such formal mechanisms for communication of concerns would be a clear indicator of an unhealthy corporate governance culture. A strong and mature working relationship between the board and company secretary would potentially avoid the need for reliance on such formal mechanisms unless reporting of the issue in question was a legal requirement.
One of the key areas of risk for an in-house company secretary is that they themselves may be influenced more by the CEO, executive directors and management team than the board as a collective. They will have more contact with the organisation through these people on a day-to-day basis compared to the board as a collective, who may meet, on average, once or twice a month, every month, throughout the year. The company secretary must not be captured by the management team. They need to ensure that they can bring an independent mind-set to the board table and see the dangers that lie within an overly harmonious management team. Whilst harmony is good for the organisation, the company secretary may lose the ability to see into the organisation and bring a different perspective to bear on governance decisions.