Corporate governance
The trend to ever-greater regulation and compliance, in an era of increased transparency, means that today’s GC has a vital role to play in toughening governance models.
‘It’s a very different world, and the trend to ever-greater compliance is only going to continue. The corporate governance landscape today is almost unrecognisable from a couple of decades ago.’
Gareth Sykes is bound to say that – his entire practice at Herbert Smith Freehills (HSF) is dedicated to corporate governance and he is proud of his firm for grasping the nettle and becoming the ‘first major City firm to set up a dedicated governance practice’. The trouble is, he speaks so persuasively of the array of issues facing today’s corporates that surely it won’t be long before competitors follow suit and carve out their own bespoke practices.
‘A number of high-profile corporate failures contributed to today’s culture,’ he comments. ‘Now companies must be mindful of all manner of compliance and regulatory requirements, from the advent of s172 of the Companies Act 2006, which was a significant development, to the Companies (Miscellaneous Reporting) Regulations 2018 and Environmental, Social and Governance (ESG) issues generally. Then there are the new UK Corporate Governance Code and the Wates Corporate Governance Principles, which came into effect on 1 January 2019. There’s an awful lot to keep on top of for the contemporary general counsel.’
Change in perception
Chris Newby, AIG’s legal chief for EMEA, notes the evolution of the GC role to the engine room of a company. ‘You’re at the heart of all the discussions about culture, about whether the company has got things right. You have to be aware of each and every new development, and the pace of change is relentless. You’re working strategically with the CEO and the board all the time.’
Is there a case to be made for the modern GC being the company’s conscience? Not quite, says Newby. ‘Today’s GC is integrally involved but the whole executive sets the tone of the company. That’s all the more so in a business the size of AIG. The GC guides and reminds but as part of a collective.’
A glance at the regulatory small print shows why GCs need to be on their mettle. Take s172 of the Companies Act 2006: it requires directors to act in good faith to ‘promote the success of the company’, taking account of stakeholders who range from shareholders and employees to suppliers and local communities affected by the company’s activities. The Miscellaneous Reporting regulations mean that companies will have to make an ‘s172 statement’ for the financial years from 1 January 2019; the statement must be made available online and in the company’s annual strategic report. It cannot be mere fluff; the statement has to include an ‘appropriate’ level of detail to demonstrate which stakeholders featured in the board’s decision-making, and how they were treated during board deliberations.
And, of course, there are the Wates Principles. Named after James Wates, chairman of the Wates Group, the principles are directed squarely at corporate governance and cover purpose and leadership, board composition, board responsibilities, opportunity and risk, remuneration, and stakeholder relationships and engagement. Wates himself said that the aim of the principles is so that ‘large private companies can look themselves in the mirror’. His rationale? Only this level of ‘transparency… can build the trust of stakeholders and the general public’.
While the regulations are targeted at listed behemoths, SMEs and start-ups will not be immune in future. ‘The new reporting requirements won’t apply to SMEs, charities and LLPs,’ says Sykes. ‘They’re applicable if two of the following criteria are meet: the business has a turnover of more than £36m; balance sheet assets are more than £18m; and there are more than 250 employees. But this is a societal direction of travel. Any business looking to grow and be successful will need to embrace and make a virtue of the new requirements.’
GCs are in a pivotal role to direct culture and ensure the tone from
the top – showing a commitment to ethical practice – is strong.
Imogen Haddon, News Corp
Jeremy Drew, a commercial partner at RPC, is convinced of the need for any ambitious company to embrace ESG criteria. ‘Over recent years we have seen many examples of high-profile ESG issues being played out in the media and in “show time” Government Select Committees. These reflect the public’s heightened interest in responsible capitalism. These issues can affect businesses of all sizes from SMEs to listed companies.’ Drew cites the retail sector as just one example of the spotlight shining on ESG factors, where ‘staff welfare, customer data security and national minimum wage compliance have all been heavily scrutinised. Get it wrong, and it can be a PR maelstrom that can disproportionately affect customer sentiment, credit ratings and share prices.’
For Drew, the trusted GC is ideally suited to helping guide the board. ‘They should be able to use their legal and regulatory knowledge to navigate the growing minefield of applicable rules while facilitating the board achieving the business’ commercial goals. A degree of independence is vital, but the GC also needs to be close enough to understand the personalities and commercial drivers.’
Competitive advantage
Audrey Harris, formerly chief compliance officer for BHP and now a Washington DC-based partner with Mayer Brown, says modern media has a bearing on the GC’s governance work. ‘We live in an age of hyper-transparency, with a 24-hour news cycle and instantaneous coverage of just about everything via social media. Companies can’t ignore the reality of the world we live in. The emphasis now is on integrity and sound ethical practices and behaviour, but not just internally, or simply with a view to maximising shareholder profit. What’s now crucial is assessing the impact of corporate activity in a holistic way. Good governance is about anti-bribery and anti-corruption, and any other relevant law and regulation – and it’s also about treating people well, whether they’re part of the company, a local community, or the world at large.’
For Harris, good governance is tantamount to competitive advantage, and GCs are at the heart of it. ‘Regulatory enforcement and reputational damage when things go wrong can destroy a business – GCs can point to any number of examples like this.’
And whereas in the days of the dotcom boom content was king, there is now a new saying on the Millennial block: ‘Culture is king’ says Harris – referring to corporate culture, one that treats everyone, from employees to suppliers to customers, with respect and dignity.
At AIG, Newby, who joined the business in 2006, presides over a 30-strong team in London and a further 120 people across EMEA. ‘There is a huge amount of governance law and regulation to monitor,’ he says. ‘From the impact of section 172 of the Companies Act to the Modern Slavery Act 2015 and regular guidance issued by the FCA, to all things Brexit-related as well as regulation on money laundering, bribery, proceeds of crime and so on – the list is endless. We have monthly meetings and lawyers whose job is to monitor and report on these developments. In-house teams are multi-faceted, and able to handle the majority of legal work themselves. And at AIG, even when we do instruct externally, for example if we’re buying a substantial asset, we will work in tandem with the outside lawyers rather than just let them get on with it.’
Divide and conquer
In larger companies, the roles of GC and company secretary are likely to be split, according to Newby, again because of the sheer welter of regulation and compliance. ‘The GC will report to the CEO, while the company secretary will usually report to the chairman. There’s now too much for one person to do when combining the roles of GC and company secretary.’
Matt Wilson, Uber’s associate general counsel for EMEA, echoes Newby on the dichotomy between GC and company secretary, and likewise is not as bullish when it comes to positing the GC as the ‘conscience’ of a company. ‘There’s still plenty of crossover in the duties of GCs and company secretaries but the trend in bigger corporations is for there to be a dedicated company secretarial or corporate governance function,’ says Wilson, whose legal team numbers 70. ‘But while risk management goes with the territory for a GC – not just legal and regulatory risks, but broader political, reputational and business risks – something will have gone wrong if the GC is the lone conscience. The GC has to embody integrity and ethics but corporate governance is such that the directors do too.’
Imogen Haddon, deputy chief compliance officer of News Corp, agrees with this view. ‘The culture of a company is becoming increasingly important in corporate governance and boards and shareholders are really taking an interest in this: what it is, how it manifests itself and, the hardest question: how can it be effectively measured? GCs are in a pivotal role to try and direct that culture and ensure that the tone from the top – showing a commitment to ethical practice – is strong, in actions but also as encapsulated in policies and codes of conduct.
However, she does not believe GCs should be labelled as the conscience of the company. ‘In a way, that discourages other employees from taking ownership of ethical conduct and can create a bottle-neck in decision-making, with too much to be determined and, in effect, approved by legal and compliance. Every single employee must know that they are accountable and that together, everyone is the conscience of the company. That accountability starts, clearly, with the top: the CEO or equivalent, who is integral to setting the tone.’
