Ian Maurice of Egon Zehnder discusses the relation of General Counsel and Company Secretary and describes the UK trend to split the roles.
A quick study of the top 100 companies ranked by market capitalization listed on the London Stock Exchange (FTSE) shows that in just over 40 percent of the companies the role of General Counsel and Company Secretary is combined, while the other 60 percent have different individuals filling the two roles. Undoubtedly, there is a move towards a separation of the roles.
Why? Regulation around the world will continue to get tougher, requiring companies to increasingly emphasize risk management and compliance. As a result, the complexity of both roles, let alone the combined role, will increase dramatically. When the two roles are combined the individual is one of two people in the organization – the other is the Head of Internal Audit – who have a direct reporting relationship to two senior individuals within the organization. As General Counsel, he or she reports to the Chief Executive and acts as the Senior Legal Officer of the organization serving on the Executive Committee. As Company Secretary, there are clear responsibilities to the board, and the reporting line is to the Chairman. The question is whether in times of increasing complexity it is reasonable to expect one individual to have the breadth of skills to be able to fulfill these tasks.
The role of the Company Secretary is enshrined in law, and company secretaries play a central role in the governance and administration of companies. Historically, part of the role has been seen very much as administrative and can be regarded as “non-value-adding.” However, it is clear that correct governance procedures must be instilled and embedded within the organization and that the Company Secretary is vital in that regard.
The decision to combine the roles or separate them depends on a number of factors, especially the size and the maturity of the business, as well as the sector in which it competes. For example, smaller, lower-risk companies may have only a Company Secretary and no, or only junior, in-house lawyers. Businesses that compete in highly regulated industries are likely to employ far more senior legal talent. The choice of organizational structure may also influence the disposition of the roles. Some businesses adopt a functional structure, others a geographical structure and others a business unit structure, each of which imposes particular responsibilities on the legal function. Regardless of structure, however, there is an increasing trend to have the legal function centralized, both from a training and career development perspective. In addition, centralization gives the General Counsel visibility into the individual operations so that he or she can act as a further check and balance alongside the finance function in the post-Enron environment.
Although the trend, as the FTSE figures suggest, is to separate the roles, combining them is not without benefits. For example, the Company Secretary attends all board meetings. When the role is combined the board then has the General Counsel, albeit in the role of Company Secretary, present at the meeting. Should the board want a legal opinion or advice, they can simply ask the individual to take off the Company Secretary hat and put on the General Counsel hat.
An additional benefit of combining the roles may come from the increasing focus it affords on the management of risk at board level. One of the key aspects of the General Counsel’s role is to make judgments regarding risks across a business, often driving processes in key areas. Most GCs work hand-in-hand with Internal Audit, a function which in turn reports to the CFO/CEO as well as to the Chairman of the Audit Committee. When the Company Secretary/GC role is combined then the GC’s reporting relationship as GC, and the GC’s presence at board meetings in the role of Company Secretary, ensure that there are two routes for raising key risks at the main board level, thereby providing the board with greater comfort.
Nevertheless, given the far more onerous responsibilities that GCs and Company Secretaries increasingly must shoulder, it is hard to envisage many supermen who can play both roles simultaneously. For GCs, a number of trends have converged to leave little room for an additional role:
- An increasing number of regulations covering corruption, bribery, proceeds of crime, money laundering and the like require the full attention of a seasoned General Counsel, in addition to a greater focus on compliance and risk.
- Companies have come to understand the benefits of having the GC deeply involved in the business and expect the General Counsel to have far more business acumen. Rather than acting as “just a lawyer,” a modern General Counsel will need not only technical excellence but also broader skills in change management, project management, leadership, technology, and even an understanding of sales and marketing.
- The in-house legal function has grown in importance. Historically, the General Counsel may have been seen mainly as a conduit to external professional advice. However, the recent recession, the cost and the lower perceived value-add of some activities provided by external counsel, coupled with the ease of technology-enabled outsourcing, has changed the balance in the relationship.
- The increased importance of the legal function requires today’s GC to be a good manager as well as a functional expert. The GC must be able to build teams internally, grow the department, and develop talent – abilities that were not needed during the downsizing which typified the 1990s and early 2000s.
At the same time, the role of the Company Secretary is growing also, with an increasing focus on compliance, covering codes of conduct and whistle blowing provisions, audit, insurance, company secretarial procedures and risk management, including taking overall responsibility for the risk register.
Both roles will continue to grow in importance – and to diverge. Whether we will get to the point where the appointment of an executive Legal Director is as common and as the appointment of a Finance Director alongside the CEO, time will tell. However, it is clear that the legal function in its broader sense will have an increasing part to play in the management and development of corporations. The corresponding breadth of experience and management skills that will be required of the GC and the Company Secretary will challenge those currently in leadership roles to focus on talent development and career planning to ensure that their successors are in the best position to fulfill the roles in the future.