Guidance Note A practical guide to good governance

Transcription

1 Guidance Note A practical guide to good governance The Hong Kong Institute of Chartered Secretaries!"#$% Reporting Lines for the Company Secretary of a Listed Company June 2007 Reference number: 4

2 The Hong Kong Institute of Chartered Secretaries Hong Kong Office 3/F., Hong Kong Diamond Exchange Building 8 Duddell Street, Central, Hong Kong Tel: (852) Fax: (852) ask@hkics.org.hk Website: Beijing Representative Office Rooms , 10th Floor, Jinyu Mansion No. 129 Xuanwumen Xidajie Xicheng District, Beijing, China P.C.: Tel: (86 10) Fax: (86 10) bro@hkics.org.hk

3 Reporting Lines for the Company Secretary of a Listed Company THE ROLE AND DUTIES OF THE COMPANY SECRETARY In establishing the reporting lines for the company secretary it is necessary to have a good understanding of the role which he/she plays and the duties which he/she has to perform in the company. It is difficult, if not impossible, to set out all the duties and responsibilities of the company secretary of a listed company in a comprehensive list. 1 Apart from the core duties, the company secretary may sometimes also undertake certain additional responsibilities, depending much on the needs and structure of the company. The scope of his/her work is, therefore, to a certain extent dictated by the nature of business undertaken by his/her employer, his/her professional background, personal capabilities and previous work experience. In spite of the diversity of the company secretary s role, there is a common thread in the functions of all company secretaries of listed companies. The company secretary is an officer of the company, who like company directors, has the duty to act in good faith in the best interest of the company and to avoid conflicts of interest at all times. By virtue of his/her close relationship with the board of directors, the company secretary is at the centre of the decision making process and is in a position of considerable influence. Code Provision A.1.4 of the Code on Corporate Governance Practices of the Main Board Listing Rules ( CG Code ) 2 provides that:- All directors should have access to the advice and services of the company secretary with a view to ensuring that board procedures, and all applicable rules and regulations, are followed. As stated in the above Code Provision, all directors, whether executive or non-executive, should have equal access to the advice and services of the company secretary. It is important that the company secretary should always be mindful of his/her responsibility towards the board as a whole and his/her duty to give fair and impartial advice to all directors under all circumstances. 1 It is not within the scope of this Guidance Note to examine in detail the duties and responsibilities of the company secretary. For further details on this aspect, please refer to The Essential Company Secretary published by The Hong Kong Institute of Chartered Secretaries (HKICS) in January 2006 which sets out the essential responsibilities and duties expected of a company secretary of a listed company. It can be downloaded from the HKICS website. ( 2 For ease of reference, this Guidance Note only makes reference to the Main Board Listing Rules and the CG Code of the Main Board Listing Rules (Appendix 14). Guidance set out herein is applicable to GEM Board issuers but reference should be made to the Rules Governing the Listing of Securities on the Growth Enterprise Market of The Stock Exchange of Hong Kong Limited ( GEM Listing Rules ) and Appendix 15 of the GEM Listing Rules for details of the applicable rules. 1

4 In addition to the role as an advisor to the board of directors regarding the compliance with board procedures, relevant laws and regulations, the company secretary also plays a pivotal role in ensuring that good corporate governance practices are put in place within the company. The UK Combined Code (June 2006) provides as a supporting principle that:- The company secretary should be responsible for advising the board through the chairman on all governance matters. Unlike the UK Combined Code, the CG Code has not made particular reference to the responsibilities of the company secretary for corporate governance. However, the importance of the company secretary s role in promoting good corporate governance has generally been recognised in Hong Kong and elsewhere. 3 Code Provision A.2.5 of the CG Code provides that the chairman should take responsibility for ensuring that good corporate governance practices and procedures are established. Hence, one of the core duties of the company secretary is to assist the chairman with the discharge of this responsibility. Apart from the advisory role in compliance with board procedures, laws and regulations and the promotion of good corporate governance, the UK Combined Code further provides as a supporting principle that :- Under the direction of the chairman, the company secretary s responsibilities include ensuring good information flows within the board and its committees and between senior management and non-executive directors, as well as facilitating induction and assisting with professional development as required. Such principle has not been set out in the CG Code but it is generally accepted in Hong Kong that as a matter of established and good practice, it is within the ambit of the company secretary to ensure the smooth running of the board and the activities of the board committees by assisting the chairman of the board and the chairmen of the various board committees with the agenda setting, documents preparation for the meetings and board procedures advice etc. In most of the companies, the company secretary is usually the officer who co-ordinates and facilitates the induction and professional development of the directors 4 which essentially involves participating in the planning, implementing and updating of the induction and professional development programme. 5 3 For duties of the company secretary in promoting good corporate governance, please also refer to the publication of HKICS - The Essential Company Secretary. ( 4 It is a requirement under Code Provision A.5.1 of the CG Code that every newly appointed director should receive a comprehensive, formal and tailored induction on the first occasion of his appointment and subsequently such briefing and professional development as is necessary. 5 For guidance on the induction of directors and the role of the company secretary in this regard, please refer to the Guidance Note on Induction of Directors published by HKICS in August It can be downloaded from the HKICS website ( 2

5 MAIN CONSIDERATIONS FOR ESTABLISHING PROPER REPORTING LINES The significance of setting proper reporting lines for the company secretary is to facilitate the discharge of his/her duties in an efficient and effective manner. Hence, the key point is that the reporting lines should be established in such a way which is conducive to the performance of his/her role and duties. As noted above, the company secretary is expected to provide advice to all directors on various areas including board procedures, legal compliance and corporate governance issues. It is of paramount importance that his/her impartiality, independence and integrity should be maintained without favour or bias towards any individual director. It is incumbent upon the board of directors to ensure that the company secretary is not subject to undue influence of any one or more of the directors. The UK Combined Code has required that both the appointment and removal of the company secretary should be a matter for the board as a whole. Not only does this requirement reinforce the importance of the role of the company secretary, such collective responsibility of the directors helps to reduce the possibility of any individual director gaining undue influence over the company secretary by way of exercising the power to determine his/her appointment and removal and also ensures that the independence and integrity of the company secretary will remain intact under all circumstances. Although the CG Code has not explicitly addressed the issue of appointment and removal of the company secretary, it is good practice for all the issuers in Hong Kong to follow the UK practice in this regard. Apart from appointment and removal, remuneration of the company secretary is another matter which should be handled with great care so as to allay any concern about possible undue influence. It is presently a requirement under the CG Code that for the company secretary who is considered as the senior management of the company and described as such in its annual report, his/her remuneration should be determined by the remuneration committee of his/her company. 6 In all other cases to which this requirement is not applicable, it is recommended that the remuneration and benefits of the company secretary should still be determined by the board as a whole. 6 According to Code Provision B.1.1 of the CG Code, the issuers should establish a remuneration committee with specific written terms of reference. Code Provision B.1.3 of the CG Code provides that the terms of reference should include, inter alia, the duty to make recommendations to the board on the issuer s policy and structure for all remuneration of directors and senior management. For the purpose of the CG Code, senior management should refer to the same category of persons as referred to in the issuers annual report and is required to be disclosed under paragraph 12 of Appendix 16 of the Main Board Listing Rules. 3

6 REPORTING GUIDELINES In establishing the reporting lines of the company secretary, it should be borne in mind that the company secretary must act in the best interest of the company and he/she is accountable to the board of directors collectively rather than to any individual director. Nevertheless, it is clearly neither feasible nor desirable to expect him/her to report to all the directors on a daily basis. It is therefore important that the reporting lines are established in such a way that principle and practicality are well-balanced. As required by Code Provision A.2.1 of the CG Code, the roles of chairman and chief executive officer of every issuer should be separate and performed by two different people. 7 The rationale for such division is to ensure a balance of power and authority. Generally speaking, the chairman should be responsible for providing leadership for the board and the management of the board while the chief executive officer should take charge of the day-to-day management of the issuer s business. In view of the above requirement, it is desirable to establish dual reporting lines for the company secretaries of those companies which have segregated the roles of chairman and chief executive officer. Under such dual reporting lines, the company secretary should report to the chairman directly on matters which concern the management of the board e.g. setting of agenda for board meetings, running of board meetings, information flow within the board and compliance with the board procedures. These are matters for which the chairman has taken direct responsibility. For all other executive management matters which are the responsibilities of the chief executive officer, the company secretary should in principle report to him/her. However, to increase the operational efficiency of line management, it is usual that responsibility for certain executive matters or administrative duties may have been delegated to an individual director. In this case, the company secretary should report to that particular director regarding such duties. Apart from the core duties, it is common that the company secretary will also assume some additional duties. In that case, the company secretary should report to the chief executive or such other director to whom responsibility for that matter has been delegated by the board. 7 According to the Analysis of Corporate Governance Practices Disclosure in 2005 Annual Report published by the Hong Kong Exchanges and Clearing Limited in March 2007, it is one of the code provisions which were most deviated from. Around 30% (188) of all the 621 issuers covered by the review had not complied with this requirement. 4

7 Under the Main Board Listing Rules, every issuer should set up an audit committee 8. The CG Code also provides that every issuer should establish a remuneration committee and a nomination committee as a requirement and a recommended best practice respectively 9. In most cases, the company secretary will also serve as the secretary of these board committees. In respect of such duties, the company secretary should report to the chairmen of these board committees who may not necessarily be the chairman of the board or an executive director of the company as in the case of the audit committee which must be chaired by an independent non-executive director. As the job of the company secretary is becoming wider in scope and more complex in nature, it is appropriate and actually necessary under certain circumstances for dual or even multiple reporting lines to be established for the company secretary. However, one should never lose sight of the principle that the company secretary is ultimately accountable to the board of directors rather than to any individual director. It is therefore crucial that no individual director should be allowed to exercise any unfettered discretion over the appointment, removal, remuneration or other kinds of benefits of the company secretary as such discretion will very likely give rise to undue influence which undermines the impartiality and independence of the company secretary. Last but not least, for those company secretaries who take up other executive duties or have been appointed as executive directors of their companies, it is imperative that they should always remain alert to any potential conflicts of interest arising from the multiple roles and if necessary, make full disclosure to the board of directors. June See Rule 3.21 of the Main Board Listing Rules and Code Provisions C.3.1 to C.3.6 of the CG Code for the composition, functions and terms of reference of an audit committee. 9 See Code Provisions B.1.1 to B.1.5 of the CG Code for details of the remuneration committee and Recommended Best Practices A.4.4 to A.4.7 for details of the nomination committee. This guidance note is only intended to provide a general guide on the subject matter and should not be regarded as a substitute for detailed advice in individual cases. HKICS does not accept any liability for loss or damage sustained by any person or organisation as a result of reliance on the information or views stated therein. 5

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