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FROM WHERE I SIT

LIFE IN A POST-CRISIS LANDSCAPE

As the dust settles on the banking crisis, Kevin Eddy looks ahead to some of the fallout that company secretaries will have to get to grips with

T

he last year and a half has seen some significant soul searching from industry in the wake of the financial crisis. Admittedly, much of that introspection has been led by those in the financial

services industry, which has been hardest hit. However, the flaws in best practice revealed by the crisis have also caused most other firms to consider how they operate – as well as launched not one but two fundamental reviews of corporate governance frameworks.

So, what conclusions have been reached – and what are the priorities for company secretaries in the coming months and years?

KEVIN

EDDY

Editor,

Chartered Secretary

Troubled partnerships One of the key issues highlighted by the financial crisis is the relationship between companies and the investment community. Investors have been lambasted for not being active enough in holding boards to account; companies, conversely, have been

criticised for less-than-transparent reporting.

This looks likely to change: the recommendation in the Walker Report on banking governance that institutional investors be subject to their own comply-or-explain stewardship code, based on the existing Institutional Shareholders Committee (ISC) Code, is one that has garnered positive reactions and is currently being taken forward by the Financial Reporting Council (FRC).

However, there are concerns over the plans – not least in terms of reach. The Code will only cover UK-based institutional investors, not investors based overseas – who hold a significant proportion of UK shares. Even so, the reactions from many overseas investors have been favourable, so it is likely that the Code will be followed in spirit at least. The other fear, of course, is that investors will do little more than pay lip service to the Code – their commitment to good stewardship practices is something that will need to be carefully monitored if and when the Code comes into force.

On the flip side, the information that companies supply to investors is widely acknowledged to need improving – particularly in areas such as risk management and governance. ICSA’s own Transparency in Governance

Awards (created in partnership with Hermes) identified a number of companies whose annual reports were examples of good practice; anecdotal evidence suggests that this has been useful for other companies, but it remains to be seen whether this will translate into better disclosure come the reporting and AGM season.

Ultimately, the task for both companies and the investment community will be to build closer bonds – and that will take work on both sides of the fence.

Board stupid? The second major lesson that came out of the financial crisis is that boards need to operate more effectively (especially in the banking sector).

There are a number of elements to improving board practice, but it ultimately boils down to one key challenge: helping board members perform their roles effectively. This can be improved by attending to several different areas: » ensuring directors receive adequate support and information, whether from a well-resourced company secretariat or some other source of support

» making sure the board has the right mix of skills and personalities in order to operate effectively

» conducting truly rigorous board evaluations, and » using the results of these to put in place ongoing director and board development programmes.

Possibly more important than all of this, however, is creating the right environment in the boardroom to foster healthy, open debate and challenge. This is partly about having the right people, as mentioned above; however, it is also dependent on the chairman, supported by the company secretary, creating an appropriate atmosphere in the boardroom and ensuring that directors are aware of their duties and responsibilities.

It sounds simple in theory, but is far more complicated in practice. For those boards that already do this, consciously or unconsciously, creating an appropriate boardroom culture may be second nature. For others, it may involve a lot more work, changes of behaviour and maybe even changes of personnel.

Risky business The third area which has been highlighted as an area potentially needing attention is that of risk management.

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