The OECD says its purpose is to “help build an environment of trust, transparency and accountability necessary for fostering long-term investment, financial stability and business integrity.” That description likely won’t help an organisation develop its own corporate governance framework, but the general message is clear: Get it right, and corporate governance becomes a very valuable asset for a business.
It’s also clear that developing sound corporate governance practices has never been more important. Tax and other authorities all over the world are implementing and enforcing new regulations related to transfer pricing, economic substance and more that promote transparency and corporate responsibility. In this complex and changing regulatory landscape, corporate governance controls are often a multinational organization’s first level of defence against fines and reputational damage.
To get a better sense of what corporate governance is now and why it’s important, we emailed three Vistra experts a list of related questions. They shared their answers with each other, and the result is this interview. First, here are brief descriptions of our interview subjects.
Charlotte Hultman is Vistra’s global sector head for corporates. For nearly two decades she’s helped companies expand into new jurisdictions and has deep experience structuring private equity and real estate transactions. Debbie Farman is Vistra’s global head of legal and regulatory services. With more than twenty years’ experience in corporate law, she helps clients with a wide range of legal and regulatory challenges, including those related to mergers and acquisitions and management buyouts. Theresa Doyle is a manager in Vistra’s global services team. Since 2016, she has helped Vistra’s large multijurisdictional clients solve their corporate governance challenges.
The OECD’s Principles of Corporate Governance is 60 pages, giving an indication of how broad this area is. What does corporate governance mean to you?
Theresa: For me, corporate governance is a set of rules, regulations and controls which should dictate the corporate behaviour of a company. The rules should ensure accountability and transparency for key stakeholders as well as the wider community. Corporate governance rules should be strict enough to ensure regulation and accountability, but flexible enough to support and enable growth of new business.
Debbie: I describe corporate governance to clients as a necessary framework to a successful business. Getting the governance right ensures the board has a risk framework that allows them to make informed and strategic decisions with the peace of mind that their statutory and regulatory requirements are in line with best practices. For large global multinational corporates this can be very tricky, because regulations are changing constantly all over the world. I always advocate using specialists to get this right and help design a suitable framework.
What would you say are the most common corporate governance risks that companies must address?
Debbie: In many countries it is very simple to set up an entity without any formal governance in place. For example, very few countries, and very few sectors (financial services excepted) have directors’ fiduciary duties clearly regulated. This provides an uneven platform for good governance. As a business grows and expands, it usually places an emphasis — both from a cost and efficiency perspective — on bare-minimum statutory compliance by jurisdiction. Without a clear framework and regular governance audits, management may find themselves with a large global group that has no central core for group- and entity-management governance.
Theresa: Unfortunately, we still encounter companies that are trying to get away with the bare minimum when it comes to setting rules and policies for their entities. For example, some choose to set up a non-resident partnership instead of a subsidiary, even when they project headcount to grow beyond five to seven people within six months. This can be a big corporate tax risk that doesn’t provide much reward. And some companies barely meet economic substance requirements when they do set up an entity, which given EU blacklisting and similar initiatives is increasingly risky. Other companies for whatever reasons don’t implement robust structures when setting up boards and other functions.
It’s important for new and established companies to understand that corporate governance regulations are becoming stricter worldwide. More and more pressure is being put on corporate leadership to ensure that they are not merely profitable, but that they are good corporate citizens.
Is there a client or prospect story related to corporate governance that you find particularly illuminating or interesting?
Debbie: I have a fantastic client who has been with me for many years and has what I regard as best-in-class corporate governance. It has over $200 million in assets under management and a clear remit to ensure its philanthropic, environmental and social governance programme is second to none. It is a quasi-NGO, not-for-profit, and must be transparent about its asset holding and donations to good causes. The chair and board members are truly an inspiration. Their governance is like an A-plus-plus response to an exam question about what good governance should look like. I learn from them every day.
Theresa: A client I’ve been managing over the last two years is a life sciences group with a presence in more than 30 countries. They also have over 60 entities. This type of client is particularly interesting from a corporate governance perspective. It’s extremely challenging for this kind of multinational group to adhere to the corporate governance requirements in each of their jurisdictions, while also developing and following a consistent set of policies and controls governing the entire organization.
Do most countries have similar corporate governance requirements, or are there significant differences between jurisdictions?
Charlotte: When expanding to new markets I think it is very important to keep an open mind and be prepared that most things in the destination market will be very different from home. Theresa made the point about regulatory differences between countries, and it’s critical to understand that aspect of corporate governance and account for those differences. Many companies make the mistake of not taking cultural differences and language barriers into account as well. Many firms turn to third parties that have cross-border experience to help them understand all these factors. That’s of course a big part of our job — to help clients reduce the risks associated with new expansions, keep track of any new regulations and provide advice on how to approach each market.
Debbie: All countries tend to have a minimum statutory requirement, such as annual checks on shareholding, the production and filing of annual accounts, etc. However, the biggest difference can be on what is legislatively required for corporate governance. For example, some countries require a company to appoint a company secretary. In the UK this is a statutory requirement for public companies, but not for private ones.
To take another example: In the UK, a private limited company can be formed in one hour, the constitution is default through statute, there is a minimum share capital of one pound, the registered office can be at your home, and there is no requirement for a company secretary. The minimum statutory requirements are to file accounts annually and to confirm beneficial ownership, shareholder and director changes. There are codified directors’ duties, but limited policing. By contrast, to form a private company in Luxembourg, you will need legal representation, a formal set up through a notary, and a minimum share and registered office through an agent. The officer appointment is regulated and costs approximately 20,000 euros.
Accounting for these kinds of jurisdictional differences is where the risk lies for most companies. It’s also why I recommend that businesses adopt a general corporate governance code, akin to a code of conduct. A general code provides a common approach to all countries, regardless of their minimum statutory requirements, and is a best practice.
What specifically are “company secretarial services” and why are they such an important part of sound corporate governance?
Theresa: I would say that company secretarial services — often shortened to “cosec” services — are the day-to-day service operations that maintain an entity and ensure its compliance with local laws and its good standing within the wider company’s corporate structure. Cosec services encompass everything from diligently maintaining a company’s corporate records to ensuring the correct administration of a company’s AGM [annual general meeting]. That last point may seem like an insignificant one, but AGM administration is an important and often-overlooked part of corporate governance.
So, cosec services are wide-ranging. They also include domiciliation services — such as providing locally compliant registered office addresses and mail-forwarding services — providing local directors and nominee shareholders, appointing local company secretaries, preparing annual reports and filings, acting as agents for process and more.
It’s also important to emphasize that good corporate governance involves adhering to the operational rules set out in a company’s articles of association or incorporation memo.
Debbie: The only addition I would make here is that it is vitally important to maintain a strong evidence-trail of decisions made. So for example if an entity within a portfolio is regulated, you need to make sure that board meetings are held regularly and in line with the entity’s constitution, and that board minutes and action lists are taken and reproduced in a timely manner. This can be achieved through an outsourced service — and, yes, Vistra does provide these through our board advisory teams!
I sometimes hear of service providers offering corporate governance “health checks.” What’s involved in a health check and why are they important?
Charlotte: Performing a corporate health check is as important as taking a company’s inventory. In the case of a health check, you’re making sure all entities within a group have their documents in order, that they’ve made all their required filings, and that they have no outstanding government fees, pending tax disputes or other outstanding obligations. A health check can significantly lower a group’s financial and reputational risks in certain situations, such as after a period of rapid growth through acquisition when a multinational group’s structure may become unwieldy and difficult to oversee.
A corporate compliance audit is also a critical process in certain situations, such as prior to disposing a company or a division and making it ready for a sale. If we find compliance gaps, we can give you that information and recommend steps to close the gaps. A compliance audit can ensure that a business is in an operational-readiness stage to enable optimal separation and a successful sale.
In your career, how has corporate governance changed, both from the perspective of corporations and regulators?
Debbie: Previously, I would have said corporate governance was seen, even by the global groups, as an irritation, something that had to be done to comply with certain statutory requirements. If there was a need for cost savings, the company secretariat could be one of the first functions to feel the cuts. The thinking was usually something along the lines of: “Surely anybody can do this, it just takes a few minutes to write board minutes and file a few forms?”
With most regulators now choosing a risk-based, outcomes-focused approach to their regulations, there’s more of an emphasis on what good governance looks like, which places more responsibility on the senior management teams of businesses. Now more than ever, a board needs to know its business and how it’s governed, while also having a robust framework that ensures that global entity statutory and regulatory requirements are satisfied.
In addition, and most significantly, there is now a widespread expectation that businesses aren’t solely focused on maximising shareholder value in the short term, but also on being a force for societal good in the long term. Good corporate governance now involves demonstrating that a business is committed to environmental and social needs, sustainability and climate change, that it takes care of its supply chain and its employees’ wellbeing. Investors now look to invest in companies that focus their efforts on these important factors.
How does technology affect corporate governance? For example, do companies use apps or other tools to help create better corporate governance? Are there risks involved in using these?
Theresa: Technology has had and will continue to have a massive effect on corporate governance. For example, an effective and efficient entity management system — or EMS — allows companies to automate certain documents to reduce data-entry errors, facilitates remote participation and allows for the secure transmission of board information. It can also act as a single source for key stakeholders to access company information, such as articles of incorporation, tax filings and board minutes. Improved technology allows for corporations to work more efficiently by increasing accountability, transparency and the ability to securely store information and make it accessible to the right people, no matter where they’re located.
Of course, there are always risks involved when using any platform. It’s critical to select a thoroughly vetted provider with proven data security controls in place so you can use an EMS with confidence.
How can we help?
Hiring workers in another country: Understand your options and be ready to change course
17 Jun 2021
Whether you’re a tech start-up expanding into another country for the first time, an established multinational or a private equity firm preparing to acquire part of another company, you need to know your options for employing workers across borders…
BVI economic substance: Case studies and practical implications
16 Jun 2021
How CLOs are changing and why they're resilient and buoyant
08 Jun 2021
Opportunities in adversity: The future of philanthropy in the Middle East
22 Jun 2021
Vistra Academy Part 1: Offshore capital fundraising – what you need to know
17 Jun 2021
Vistra appoints Steven van Tuijl as Regional Managing Director, Continental Europe
02 Jun 2021