Originally published in HFM Week Guernsey Special Report, June 2011
Richard Bray of Active Group, shares his views on the eminent review of Guernsey's corporate governance principles and urges companies to review whether the corporate governance they have in place is fit for purpose.
HFMWEEK (HFM): There has been a revision of the Guidance on Corporate Governance in Guernsey on the cards for a while – what are the latest developments?
Richard Bray (RB): In 2004, The Guernsey Financial Services Commission (GFSC) issued a 'Guidance on Corporate Governance in the Finance Sector in Guernsey', which, after the introduction, essentially amounted to one page of guidance. The GFSC have been looking to revise this for the last few years and after an unpopular revision, the GFSC has now issued a new 'Code of Corporate Governance' consultation paper, which they are looking to bring into force on 1 January 2012.
The consultation submission date for the revised Code closed on 1 June. It was largely accepted by the local industry bodies such as the Guernsey Investment Business Association, and thus we are now waiting for the GFSC to issue the Code in final form and the intention is to bring the Code into force on 1 January 2012.
HFM: How does this new Code update the old Guidance?
RB: The new Code, as it currently stands, sets out eight main principles of good corporate governance and then gives guidance as to how the GFSC would expect companies to adhere to these principles. The principles themselves set out such points as:
- Companies should be headed by an effective board of directors
- The directors should take collective responsibility for endeavouring to maximise the success of the company
- The directors should maintain good standards of business conduct
- The board should have formal and transparent reporting arrangements
- The board should provide suitable oversight of risk management
- Timely and balanced disclosure of material matters to shareholders and regulators
- Remuneration arrangements should be fair and responsible
- The board should ensure sufficient communication takes place with shareholders.
Evidently, the general principles are not unreasonable; many boards will already be adhering to them. The devil of the Code though is in its details, which the GFSC gives as its guidance to these principles. Based on the mantra 'if there is no evidence then we will assume it did not happen' it will no longer be appropriate for boards to merely confirm that they adhere to the principles, boards of regulated entities will find that they must prove adherence to the principles.
HFM: What sort of 'evidence' will be required to demonstrate proven adherence to the new Code?
RB: It is Active Group's opinion that the corporate secretarial team play a key role in supporting the board in its activities and in evidencing the board's activities. The team will need to include items given in the guidelines such as Board performance evaluation into meeting agendas. The minutes of the meetings are considered to be the true record of the meeting; the corporate secretarial team will need to take care in producing these minutes, and the board will need to review them to be sure that they are a true and fair record of that meeting. To be able to reasonably review these minutes, the board will need to receive the first draft as soon as possible after the meeting – we would tend to recommend within a week of the meeting.
It is not just in the minute taking and review which will become more laborious; providing evidential adherence to the guidance and principles will also mean extra levels of record keeping outside of the formal meetings too. As an example one of the guidance points is that; "All directors should regularly update and refresh their skills and knowledge." A point that most, if not all, board members of regulated industries would tend to follow in any case. It will now be necessary to demonstrate that the board member has regularly updated and refreshed their skills and knowledge - so therefore all directors may well need to keep logs of their continual professional development – a task that members of professional bodies will be very familiar with, but not so far required of all board members. These few examples demonstrate the extra levels of diligence and record keeping that the new Code will require of us.
HFM: Does the Code cover all the Corporate Governance requirements of Guernsey regulated entities?
RB: Many Guernsey companies interact with the world outside the island and become subject to other Corporate Governance Codes and Regulations, a classic example being the ongoing obligations and corporate governance requirements of a listed company on the London Stock Exchange or the corporate governance guidelines that should be contained within the AIFM Directive when it is released.
Good corporate governance also takes into account the establishment and ongoing operations of companies. For example, it is absolutely vital that the company being established in Guernsey can demonstrate that all the important responsibility, especially mind and management, is placed firmly in Guernsey with the local directors assuming corporate responsibility, placing the company firmly offshore.
This needs to not only be achieved but documented and evidenced. To facilitate one would expect to see the following put in place and followed.
- A full administration agreement to cover all the duties necessary to be performed on the Guernsey side, including the provision of directors and managers to create a solid base for mind and management from Guernsey;
- Creating manuals and documentation for the Guernsey company to meet all regulatory obligations and create a durable ongoing programme of compliance supervision;
- Creating local procedures to outsource functions to the overseas offices and conducting the highly important outsource visits to check and assess that the overseas offices can meet the necessary requirements of the Guernsey business;
- Obtaining the relevant licenses from the GFSC as required;
- Registered offices and company secretarial services all in Guernsey;
- Conducting regular board meetings and meeting all local compliance requirements in order that the company is in good order.
So as an adjunct to following the guidelines suggested by the GFSC the boards of companies must be showing mind, management and span of control in Guernsey to satisfy external tax authorities that the Guernsey company does indeed have the substance and capability to make the decisions that it does.
HFM: What should companies do in preparation for the new code?
RB: As already discussed, companies shouldn't just be preparing themselves for the new code, they need to consider whether they are covering existing requirements too. We would suggest that companies review the corporate governance they have in place and seriously consider whether it is fit for current requirements. This corporate governance health check will show what needs to be done to make sure they will be working in line with the new requirements as they come into force, as well as how the company is able to demonstrate mind and management with span of control occurring in Guernsey.
Tasks such as these are often most efficiently performed by external companies, such as ours, who can take a 'disinterested' view from outside the normal modus operandi of the company and not be caught up in the existing company culture.
For more information about Guernsey's finance industry please visit www.guernseyfinance.com.