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The right balance

31 October 2016 by Phil Festa and Lucinda Robinson

The right balance - read more

Firms should be thinking about the benefits of developing their secretarial talent to provide regulatory challenge

Firms are struggling to replace outgoing non-executives with people who have the ability and experience to oversee their firm’s activities, while keeping it safe from a conduct perspective. Some of the reasons include increasing individual accountability, greater focus on regulation and expanding board packs.

Earlier this year, Huntswood and Board Intelligence spoke to company secretaries from financial services firms about the implications of changes taking place in the sector. The high turnover of non-executive directors is a prime concern, as highlighted by one company secretary who said: ‘I wouldn’t want to be a NED, certainly not in a distressed bank. We are starting to see a turnover of non-execs – they’ve done their three years and want an easier life. This affects the calibre of directors in the market. SMR [Senior Managers Regime] will exacerbate this.’ Although as yet there is no empirical data to demonstrate this trend, this testimony should be an early warning sign to the industry, the regulator and individual firms.

The changing secretariat role

With individual accountability as a result of the SMR now in force for many financial service firms – and being rolled out to all FSMA-regulated firms by 2018 – companies are concerned about the growing regulatory responsibilities placed upon non-executives. In particular, how this can be handled in a way that ensures industry-wide compliance yet retains a sustainable pool of burgeoning non-executive talent. To make up for a potential short fall, there may be a need for company secretaries to take on a more proactive role to further support their boards.

Our research highlighted that the roles and responsibilities of the company secretary vary from firm to firm. Although this can be dependent on the complexity of the operation and company size, often it is a feature of how company secretaries have operated in organisations in the past. The modern day secretary no longer performs a purely administrative role. Although minute taking and filing information with Companies House may well be part of their package of responsibilities, they also have an important role to play in:

  • Evidencing the contribution of board members
  • Justifying specific conduct decisions made by the business
  • Ensuring effective financial crime risk discussion and management is taking place
  • Aligning the board calendar with board priorities and business needs 
  • Upholding the quality of board papers and supporting report writers if necessary.

Forward-thinking firms are looking to their company secretary to be board advisers, responsible for the company’s corporate governance and with an obligation to keep the board up-to-date with the knowledge, skills and expertise it requires.

The majority of company secretaries are clear about the issues facing their firms and what needs to be done about them. One explained: ‘Our problem is not that we don’t lack information, it’s that the right information needs to be in front of [the] highest level of people. There is so much information, it is tricky to get to the heart of what could be a potential issue. We need to get away from a pack that is hundreds of pages and move to KPIs and dashboards that really allow them to make decisions’.

Aligning activity to regulatory needs

There are several ways firms can ensure company secretaries are best placed to provide board support.

The board agenda

Give clear direction on what the board needs to be provided with – collaborative conversations and outside regulatory expertise can be effective in order to stay abreast of the specific themes and issues facing firms − and therefore what management information (MI) will need to be presented and how.

NED development

Many firms already have a non-executive development programme in place, however, it can vary significantly between organisations – with the regulator’s approach becoming more ‘intrusive and invasive’. All company secretaries in the research agreed that helping NEDs keep up-to-date with changes in regulation is vital.

Enable effective decision making

Autonomy should be given in the way that MI is displayed and ‘brought to life’. It should be supplemented by open conversations with the board and the wider firm about what might improve MI accuracy.

As well as streamlining board packs, some company secretaries are working with their chairmen and CEOs to review the frequency and duration of board meetings. Some firms are attempting to replace monthly, all-day meetings with shorter sessions held every other month. This allows more action to be taken between meetings and gives company secretaries more time to prepare and distribute relevant, focused, up-to-date information.

Managing conduct risk

There should be a commitment from the business to periodically review the information being provided to the board against current regulatory issues and their implications. Doing this will ensure board packs stay ‘on the pulse’ of regulation and allow them to show their effective mitigation of risk.

Develop the company secretary role

Much of this activity and enabling work will clearly need to come from firms, and this opens up wider questions about the need for the industry to develop the company secretaries of the future.

Foster talent

Because of the shrinking non-executive director pool in financial services, many NEDs commented that they are ‘putting in far more hours than being rewarded for’. In addition, the risk to NEDs’ reputation, income and freedom − under the new regulatory framework, NEDs are liable for unlimited fines, clawback, lifetime bans and up to seven years in prison for reckless misconduct in the management of a bank − is resulting in company secretaries having to take on greater responsibilities of the type outlined above.

However, one contributor to the research questioned the ability of some of their peers to handle the challenge. His concern is that the industry is ‘not breeding company secretaries of the future. There needs to be more of a shift towards different types of professionals. Lawyers tend to be far more rigid in their approach; the [company secretary] role has changed, not in intent – it has always been advisory – but the need is for individuals to be far more dynamic and pragmatic’. The same concern is echoed by another respondent, who said: ‘Retaining and attracting talent is a real challenge. The company secretarial team requires resources and personalities fit for purpose and these are increasingly hard to find’.

With this in mind, firms should look for opportunities to foster the talent of the company secretaries of tomorrow. Firms should be examining the way they view the company secretary role and circumvent the risk of it becoming bloated and unattractive to those with genuine talent. Not all firms will need to completely redefine their company secretary’s role, but all firms should be thinking about the benefits of developing their secretarial talent.

The benefits

Although regulatory and conduct risk changes over the past 12 months have increased the need for boards to review their current approach, regulators are clear that long-term success should not be driven purely by regulatory issues. Boards must preside over a culture that examines regulatory issues and changes against the commercials, the specific risks, the risk appetite of the firm and whether any proposed reaction to regulation is proportionate. Company secretaries can be intrinsic to firms achieving the right balance here.

If firms are able to rely on their company secretaries to provide the requisite regulatory knowledge and challenge − possibly through further supporting their regulatory education, or, in the case that their regulatory experience is good, giving the required autonomy − the board and non-executives will be in a great position to:

  • Further understand the risks their firms face
  • Arrive at a solution that deals with those risks proportionally
  • Make the required changes to products and process
  • Record and retain the justification as to why they made the decision (i.e. how it was designed to improve customer outcomes).

One pre-requisite is to ensure that the current routes to becoming a company secretary are aligned with the need in the industry – i.e. company secretaries within financial services need to have regulatory knowledge. The formation of a reliable ‘journey’ will enable aspiring company secretaries to gain a contemporary set of skills that will benefit boards across the industry. This will more than likely start with individual firms and the way they spot and nurture talent.

It is clear that the board’s understanding of the regulatory issues they face will always be imperative, so setting up your approach correctly and allowing it to begin its positive effect is just the first step. It is the ongoing maintenance of that approach − and ensuring the required changes are made − that will enable boards to move forward, with the confidence that they have a clear view of regulation via their company secretary.

To find request a copy of ‘Regulation in the boardroom’ please contact Huntswood or Board Intelligence directly.

Phil Festa is Director of Non-executive Engagement, Huntswood and Lucinda Robinson is Engagement Manager at Board Intelligence

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