Corporate Governance and Company Secretarial Practice.

University Degree Business and Administrative studies

Company Secretarial Practice

Corporate Governance and Company Secretarial Practice

06 May 2007

The History of the Company Secretary

Introduction

The role of the company secretary can be traced through history with the development of company regulation and legislation.

History of Business Enterprise

Major changes in the development of business enterprise within England can be traced back to the 11th Century (see appendix 1). Medieval England underwent a transformation from a largely agricultural base with ancillary trades (carpentry, farrier), to a semi-industrialised nation in the late 18th Century, with the formation of industrial enterprises. The first type of legislative business regulation and ‘governance’ was provided by the Guilds in the 12th and 13th Century. Guilds regulated the local market, looking after the rights of individual members and ensuring fair trade and protecting the public by regulating standards.

Great ‘merchants’ emerged in the 16th and 17th Century whose role was that of trader, manufacturer and banker. These ‘providers of capital’, often employed a ‘steward’ to watch over their stocks and possessions, who later became linked to future professional occupations (accountancy/secretarial practice).

Trade and commerce expanded rapidly resulting in the formation of joint trade ventures and Chartered companies. The industrial revolution in the 18th Century created industrial entrepreneurs, who were often the owners and the financiers of enterprises. The need for governance became more evident with the development of unincorporated companies defined by Tricker (1984) as "co-partnerships, in which some members ran the venture, with others as financial or sleeping partners”. There was little legal protection for unincorporated companies, because company law was in very early stages of evolution. The first major development in company law was introduced in the early 19th Century, which recognised a need for stricter regulation and governance. Thus, the role of the company secretary was identified as being vital, by those responsible for legislation in a developing society.

The Emergence of the Company Secretary

In 1732, Wooley notes the existence of the secretary. “The secretary is present at the Court of Assistants to take short minutes of the transcript of the Committee. Upon… loose sheets, by order of the sub-committee of Accountants… “. Whilst the ‘company secretary’ had not yet appeared in legislation, the nature of the duties of the secretary were documented. For example, the ‘Notes from the Committee Meeting of Hudson Bay Company’ (1737) explain that the “secretary was instructed to purchase £1,000 of East India Stock”.

The role of the company secretary has evolved with the development of business enterprise, company law and corporate governance. The Board of Trade, set up in 1825, was responsible for incorporating companies through issuing ‘chartered status’, which allowed a company to sue and be sued.

Tricker (1984) chronicles the development of the company secretary from 1844. With the introduction of the Joint-Stock Companies Act, all unincorporated companies were required to be registered and regulated. This Act also required the company directors to “conduct and manage the affairs of the company” (Act, 1844). For the first time the appointment of a secretary appeared in legislation. The Act included the appointment of the secretary, clerks and servants. Other responsibilities are included in appendix 2

The 1844 Act forms the basis of current company law, regarding regulation, registration and formation of companies. The duties of the company secretary are closely linked with these three areas of company law, to ensure effective company regulation and ultimately, to protect the rights of the company stakeholders.

The role of the company secretary augmented in 1855 when limited liability became official, and the 1862 Consolidating Act laid down the regulations for forming a company with or without limited liability (see appendix 2).

The memorandum and articles of association for Barclays and Co Ltd, 1896, refer to duties of the company secretary as ‘authorising documents tendered for registration, organising the sale and registration of shares’. These particular memorandum and articles are based on the Companies Acts 1862-1890.

The Chartered Institute of Secretaries, a Professional Association, was set up in 1891.

The 1907 Limited Partnership Act introduced the concept of a ‘private company’, which was a company that did not require capital from public funds. These private companies did not need the strict disclosure requirements of a public company, such as,

filing documents
publishing financial information, and,
appointing auditors.

This differentiation was maintained in both the 1929 and 1947/8 Companies Acts.

The 1929 Companies Act (Section 380) defined a company as “a company formed and registered under that Act, or as an existing company”. The ‘existing company’ is defined as “a company formed and registered under the Joint Stock Companies Act, the Companies Act 1962 or the Companies (Consolidation) Act 1907. It further defines the ‘Joint Stock Companies Act’ as “the Joint Stock Companies Act 1856, and certain other acts before 1862 but the expression does not include the Joint Stock Companies Act 1844, under which Act companies were first empowered to become incorporated, although without limited liability” (Chartered Institute of Secretaries, 1946).

The Companies Act 1947/8 legalised the appointment of the secretary in all companies. The Institute of Chartered Secretaries and Administrators (ICSA) states that “The requirement for all companies to appoint a company secretary has been contained in Company Law since 1947…” (ICSA, 2002).

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It was not until the Companies Act of 1980 that a distinction was made between public limited companies (Plc) and private (Ltd) companies. A Plc is a company “… that alone can issue its shares and debentures to the public” (de Freitas, 1996). A private company is one that cannot invite public subscription of its shares. Private organisations, at this time, were further categorised into small, medium and large companies with limited requirements for smaller companies to file detailed records and accounts.

With the introduction of the Plc, the role of the company secretary became of paramount importance. Company secretaries employed by Plc’s were required by law to be professionally qualified and have the requisite knowledge and experience. A person who is not qualified, can only be appointed if they have held the post of secretary of a Plc for at least three years out of the last five years.

Effective company secretarial practice and corporate governance have been challenged further with the development of complex organisational structures during the 20th Century. Group structures have become commonplace, due to the information revolution and globalisation, with some companies holding hundreds of subsidiary companies.

“The current position is covered by Section 283 of the Companies Act 1985 which states that “every company shall have a secretary”.” (ICSA, 2002).

Identify and evaluate the major current concerns and issues facing the company secretary

Introduction

ICSA (2002), describe the role of the company secretary as someone who “usually play a central role in the governance and management of their organisations…… through regulation, legislation and best practice….”

It is necessary to understand the breath of responsibility a company secretary may encounter (see appendix 3) to evaluate the major current concerns and issues. Whilst the duties of the company secretary are not specified by the Companies Act, contractual duties often exist. Company directors hold primary legal responsibility for ensuring that the company meets legislative requirements. However, the company secretary may also be liable for failures to meet certain provisions of the Companies Act if it is part of their contractual duties.

Corporate Governance

Recent high profile cases of company fraud (Enron and BCCI) have pushed corporate governance to the forefront of company management. The company secretary plays a vital role in ensuring effective corporate governance.

Governance Issues and Legislation

The regulatory framework for effective corporate governance stems from a wide range of conditions such as legal requirements, statutory provisions, guidelines and codes of practice (Wong, 2000). Appendix 4 lists recommendations from guidelines and code of practice such as the Cadbury Report, the Greenbury Code and the Hampel Committee.

These Committees culminated in the production of the Combined Code on Corporate Governance issued by stock exchange in 1998. This Combined Code included rules on proper board meetings, establishing key committees, appointment of non-executive directors and has been appended to the London Stock Exchange’s Listing Rules.

Whilst it is not mandatory for companies to follow these codes of practice and guidance reports, listed companies not following the Combined Code need to provide justification to the Stock Exchange for divergent practices. “Such disclosure requirements exert a significant pressure for compliance” (Monks and Minnow, 2001). To monitor and ensure compliance with the rules given in the Combined Code companies must also “ensure that they appoint suitably qualified staff, including a company secretary” (Robinson, 2002).

It is also important for the company secretary to maintain independence from the board to protect rights of stakeholders. “The challenge for company secretaries is to play a leading part in achieving a balance between their corporate and commercial responsibilities and the interests of all stakeholders…” (Altman, 2000).

Company Law Review (CLR)

The CLR, commissioned by the Government in 1998, propitiates smaller, private organisations. The CLR (which will inform the new Companies Act, expected in 2003) proposes the removal the strict reporting required for all companies through the Companies Act. This Act will focus primarily on the large majority of private companies, and detail the provisions that apply to those companies (Blanks, 2001). Existing legislation focuses mainly on detailing the provision of large companies.

The new Company Law and Reporting Commission and the Standards Board, will keep company law and governance under constant review, providing guidance and advice to companies and government. The Standards Board will be responsible for keeping the Combined Code updated and setting company reporting requirements.

The CLR proposes to remove the mandatory obligation for all private companies to have company secretaries, so that it will be the decision of the private company whether or not to appoint a company secretary. ICSA are concerned that this proposal ignores the role that the company secretary undertakes in influencing and monitoring the governance of a company (Blanks, 2000; DTI, 2001). ICSA recommend that only very small private companies have the option not to appoint a company secretary.

Electronic communications

Major advances in technology affect the way the company secretary works. The Companies Act 1985 (Electronic communications Order 2000) allows companies to communicate with shareholders electronically. Appendix 5 shows the circumstances where electronic communication can be used. The company secretary must know which statutory declarations can be substituted by electronic submissions. False submissions will incur the same strict penalties for making a false declaration.

By 2005 the Government will require Companies House to be able to accept all documents by electronic form which will mean that all accounts, resolutions and other documents will be submitted electronically. Whilst the introduction of the electronic system will have advantages such as speed of information transfer and elimination of storage requirement, it will be a challenge for all companies (including Companies House) to reach this level of technological advancement. For example, staff will need to have relevant electronic knowledge base and suitably advanced computer equipment.

For larger corporates the CREST system (introduced in 1996) is a technological advancement which allows relevant staff to have more control over international share settlements. Advantages of CREST are the ability to cope with large volumes of transactions, in multiple currencies and allow anyone dealing on the stock exchange to be able to hold shares in electronic form.

Data protection/copyright law

Following the introduction of the 1998 Data Protection Act, companies need to be aware of the implications of storing ‘confidential’ information in hard copy or in electronic form. The Act aims to protect the confidentiality of employees and members and is detailed in Appendix 6. Organisations can be liable to prosecution under UK copyright law if they breach the regulations on the law. For example, companies may be liable if they allow their employees to use software, which has not been obtained, from a legitimate source.

Corporate Social Responsibility (CSR)

Increased CSR regulation enforced by organisations such as governments, the European Commission and lobby groups have raised awareness and recognition in many companies on a global level. Corporates are recognising the need for investment in CSR to achieve sustainable growth. Many larger organisations are developing CSR strategies (CSR strategy for Astra Zeneca is shown in appendix 7).

Affiliated Legislation

Financial Services

The company secretary should also be aware of changes in affiliated legislation such as the Financial Services and Markets Act (2000). Whilst this is directed primarily at the regulation of financial markets and professionals, there are changes which affect day-to-day business operations, shown in appendix 8.

European Commission (EC) Law

The EC is introducing increasing amounts of company legislation, which may prevail over country legislation. The EC is looking into the possibility of harmonising the 43 different corporate governance codes used across Europe.

Limited Liability partnerships (LLP)

The introduction of the LLP Act 2000 changes the way certain organisations operate. Such organisations benefit through a tax status of a partnership with limited liability for its members and organisational flexibility.

Conclusion

To establish and sustain an effective corporation, it is vital that the company secretary stays up-to-date with advancements in technology, legislation and key issues, to advise and direct the company management. Company secretaries should operate alongside other professionals (e.g. accountants and lawyers) to ensure the company is run to the highest standard.

References

Altman W, (2000). 2020: facing up to the faster pace of change. A wider role for the chartered secretaries?. Chartered Secretary. Pp 10-11.

An Act for the registration, incorporation and regulation of joint-stock companies. CAP.CX: 7 & 8 Victoriae: 5th September 1844.

Barclays and Co Ltd, (1896), Memorandum and Articles of Association: The Companies Act 1862-1890.

Blanks R. (2000). Company Secretary in Company Law – business de-regulation goes too far. Chartered Secretary. June 2002, pp 20 – 22.

Blanks R. (2001). What Next for the Company Law Review? Chartered Secretary. August 2001, pp 10 – 11.

Blanks R. (2001). Company Law and Reporting Commission. Chartered Secretary. September 2001, pp 12 – 13.

Blanks R. (2001). The Companies Act 1985 (Electronic Communications) Order 2000. Chartered Secretary. January 2001, pp 10 – 12.

Chartered Institute of Secretaries, (1946), Secretarial Practice, The Manual of the Chartered Institute of Secretaries of Joint Stock Companies and Other Public Bodies (5th Edition), Cambridge Heffer and Sons Ltd.

Data Protection Commissioner. (2000). Data protection Code of Practice, (www.dataprotection.gov.uk).

de Freitas. (1996). Company Law. Castlevale Ltd: London.

Directors’ Briefing. (2001). Directors’ Briefing: Role of the company secretary. Business Hotline Publications Ltd.

(www.ibm.com/businesscentre/uk)

DTI. (2002). Final Report for the Company Law Review submitted to the Secretary of State 26/07/01. (http://www.dti.gov.uk/cld/review.htm)

Hayes J. (2002). FSMA: turning the screw. Chartered Secretary. January 2002 Pp 12 – 16.

Hudson Bay Company (1737), Notes of Committee Meeting of Hudson Bay Company, November 27 1737. In, Du Bois, Armand and Budington, (1938), The English Business Company After the Bubble Act, 1720-1800. English Business Company, New York The Commonwealth Fund

Institute of Chartered Secretaries and Administrators. (2000). Company Secretarial Practice: Paper 15, BPP Publishing: London

Institute of Chartered Secretaries and Administrators (2002). Report on Company Law Review, February 2002

Institute of Chartered Secretaries and Administrators. (2002). Special Report: A question of responsibility…. January 2002, Pp 20-22

Monks R A G and Minnow N. (2001). Corporate Governance. (2nd Edition). Blackwell Business.

Robinson A. (2002). Millstone or touchstone? Chartered Secretary. Pp 22-25.

Tricker. (1984). Corporate Governance, Gower Publishing, London, England.

Wong, W (2000), Corporate Governance: the debate continues. Chartered Secretary, pp 18-20

Wooley A, (1732), Letter February 8th 1732 to a bill of Governor and Company. In, Du Bois, Armand and Budington, (1938), The English Business Company After the Bubble Act, 1720-1800. English Business Company, New York The Commonwealth Fund

Appendix 1

Appendix 2

1844 Joint-Stock Companies Act

Responsibilities include:

To hold regular company meetings
To appoint a chairman to preside at such company meetings
To keep balanced account books
To produce balance sheet for the shareholders
To appoint auditors and to record the auditor’s details with the Registrar of Joint-Stock Companies (these auditors were appointed to report to the members on the balance sheet).

To keep a register of shareholders, which company members could inspect.

1862 Consolidating Act

The Act prescribed that:

Seven or more people should subscribe their name to the memorandum of association
Where liability was limited the memorandum should contain the;
company name with the word ‘Ltd’,
address of the registered office,
company objectives,
declaration that the members liability was limited, and,
amount of capital which the company proposed to have registered.
The company should keep a register of members, mortgages and charges and directors and managers

An annual general meeting should be held.

Appendix 3

Duties and complementary roles of the company secretary

Filing Annual Returns
Financial statements
Directors report to members of the company
Maintaining the company’s existence as a legal entity
Establishing and maintaining the companies registered office as the address for formal communications
Maintaining the company’s statutory books and records (e.g. register of; directors and secretaries, directors interests in the company, shareholders, charges, debenture holders and minutes of general and board meetings).
Ensure the security of the company’s legal documents
These documents include; Certificate of Incorporation, Memorandum and Articles of Association, Share certificates and stock transfers, the company’s seal (if it has one), Certificates of the company’s change of name (if any), directors’ service contracts.
Responsible for informing Companies House of any significant changes in the company’s structure or management. For example,
Information on any new shares allotted
Appointments, resignations, and changes of directors or secretaries
Certain resolutions
Any changes in charges over company assets.
Summoning meetings of directors and shareholders and ensuring proceedings are properly recorded.

In addition, company secretaries may also have responsibility for complementary roles such as;

Administrative responsibilities: PAYE and payroll, VAT registration, Insurance and pensions, managing company premises
Legal responsibilities: advising directors on their duties, to ensure they comply with legislation including data protection and health and safety
Signatory for the Board.

Directors’ Briefing, 2001

Appendix 4

Main Recommendations from Committees set up to review Corporate Governance

Code of Recommended Practice on Non-Executive Directors

1987

Published by Pro-Ned, for non-listed companies. Represents good practice as it aimed to achieve “a proper balance between independent non-executive directors and other directors” (ICSA, 2000).

Cadbury Report

1992

the first committee to report on corporate governance. Set up in response to increasing concern over the direction and control of large corporates. Recommendations include:

half yearly and annual review of statements, and liaison with internal and external auditors by the audit committee
the presentation of balanced and understandable assessment of company’s position by the board
the need for clear reporting to the board and clear division of responsibilities including a strong independent element on the board
at least three non-executive directors on the board, with a majority who are independent of management.

The Greenbury Code

1995

directors remuneration and Code of Best Practice. Greenbury emphasised the importance of the remuneration committee and transparency of information regarding director’s remuneration.

The Hampel committee

1998

Produced a report setting out the principles of corporate governance. Hampel recognised the need to balance wealth creation on the one hand and the protection of shareholders (and the wider stakeholder community) on the other. Recommendations include:

auditors should report privately on internal controls to directors and directors should report on all relevant control objectives (not just financial)
shareholders should be able to report separately on each substantially separate issue and companies should propose a resolution at the AGM relating to the report and accounts
a general statement on directors remuneration should be produced in the accounts
board evaluation and the introduction of procedures for assessing collective performance and that of individual directors

The role of the non-executive and executive directors should have the same duties in law, however, the role of the chairman and the chief executive should be separate. Non-executive directors should make up one third of the board. Directors should submit themselves for re-election at least once every three years.

Turnbull

1999

Guidance on Corporate Governance by The Institute of Chartered Accountants in England and Wales. Recommendations include:

risk management and effective internal controls encompassing whole of company
accountability for control (which lies with company directors) but everyone within an organisation having some responsibility
the focus of reporting to the board extending to cover the widest range of risks.

Appendix 5

The Companies Act 1985 (Electronic Communication Order 2000)

Electronic Communications are acceptable for the following:

incorporation of a new company;
re-registration as a different type of company;
sending reports, accounts, summary financial statements to members; sending notices of meetings to members (including a notice of meeting to pass an elective resolution under section 379a of the 1985 Act);
appointment of proxies by members in relation to meetings;
submission of documents to the registrar of companies;
where an elective resolution to dispense with AGMs is in force, to allow electronic transmission by a member of a notice requiring an AGM (s.366A).

The following documents can currently be submitted electronically:

Change of Registered Office Address (Paper Form 287)
Appointment of a Director/Secretary (Paper Form 288a)
Resignation of a Director/Secretary (Paper Form 288b)
Change of Director/Secretary Details (Paper Form 288c)
Annual Return (Paper Form 363a)
New Incorporations (Paper Forms 10,12 and Memorandum and Articles) from Sept 2001.

Companies House plans to increase the form types supported by the service according to demand and a series of additional forms will be implemented over the coming months / years.

The Order also amends Table A, so that in future the Table will be automatically amended to take account of future changes in the Order concerning electronic communications.

Appendix 6

Details of the Data Protection Code of Practice (based on the 1998 Data Protection Act)

Standards covered:

Managing data protection
Recruitment
Employment records
Access and disclosure
Contract and agency staff
Employee monitoring (this includes email and internet use monitoring)
Medical testing
Discipline and dismissal
Retention of records of former employees

Anyone processing personal data must comply with the eight enforceable principles of good practice. They say that data must be:

fairly and lawfully processed;
processed for limited purposes;
adequate, relevant and not excessive;
accurate;
not kept longer than necessary;
processed in accordance with the data subject's rights;
secure;
not transferred to countries without adequate protection.

Data protection code of practice, (2000), ()

Appendix 7

Corporate Social Responsibility Strategy from Astra Zeneca Plc

Appendix 8

Financial Services and Markets Act (2000).

Changes, which affect day-to-day business operations, include;

The updated Listing Rules (immediate disclosure to the market of changes in business activities and financial conditions);
Guidance on the dissemination of price sensitive information by listed companies (updated to include developments in the market place and advanced technologies);
New market abuse regime (misuse of information, creating a false/misleading impression and market distortion);
FSMA changes in financial promotion and corporate communication which could result in a criminal offence if not followed correctly.

Hayes, 2002.