Governments have become more and more focused on the risks posed by opaque and confidential corporate structures. In particular the ability of a certain type of person to use such structures to hide the true ownership and origin of funds, thereby facilitating tax evasion and money laundering.

Most bodies set up to tackle these issues are of the view that for law enforcement agencies, being able to quickly and easily identify who really owns a company or a corporate structure, would be a huge boon to the fight against money laundering and tax evasion.

Recommendation 10 of the Financial Action Task Force (FATF) states that financial institutions should undertake customer due diligence measures to identify and verify the identity of the beneficial owner of the customer and not just the customer themselves. This is because it is the beneficial owner that really matters for money laundering, not the customer themselves.

This recommendation has been implemented in most countries who follow the FATF recommendations and it also extends to many non-financial institutions (including Elemental).These checks are done specifically by the financial institution though and they are not part of a government register of similar.

However, the UK has gone a step further in the Small Business, Enterprise and Employment Act 2015 (“SBEE“). Through the SBEE, the UKhas passed legislation to create a Register of Persons with Significant Control. This will require every company in the UK to maintain a register of every individual who holds or controls more than 25% of the beneficial interest in the company (Note: Please see here for the full test). Importantly, this register will be publicly available on the Companies House website for anyone to review.

In theory therefore, this achieves the desired aim of shining a light on any opaque or confidential structures involving UK companies. David Cameron (the UK Prime Minister) announced this policy to the G8 summit back in 2013 to great fanfare and he encouraged other countries to follow suit suggesting that it would be a great weapon in the fight against money laundering.

In many ways, this was a brave gesture. One of the factors that has discouraged countries from adopting policies to make it harder to use companies for illegal purposes, is the fear that increased regulation will harm other more legitimate businesses and maybe encourage businesses to utilise other jurisdictions. By taking a lead in this area, the UK has taken a risk and hopefully lead by example for others to follow.

On the other hand, the SBEE has not gone as far as David Cameron would like people to believe. There is no independent verification of the information on the beneficial owner register and it has no force of law relating to who the actual owner is.

Therefore, it would be naïve to think that those persons who are participating in illicit activity will disclose the true information on this register. In fact, Lord Blencathra, the former Tory home office minister David Maclean has gone further and claimed that this policy was a ‘purely political gesture’ designed to head off European attempts to curb the City of London.

So, will this idea go further and be adopted in other jurisdictions and potentially with some form of verification process? It can only be hoped, but I suspect that it will be a long and slow road.

Nick Lindsay is a director of Elemental, a corporate service provider who provides Escrow Agent services.

Grant Thornton have issued their annual Corporate Governance Review for 2012; which is a review of the annual reports of the FTSE 350 to analyse their compliance with the UK Corporate Governance Code.

The headline grabbing figure is that full compliance with the Code has hit a plateau, with 51% of the FTSE 350 being in full compliance. However, this initially pessimistic figure hides some very optimistic underlying statistics, including:

• 44% of those companies that did not comply with the Code are intending to do so next year;
• 73% of companies provided detailed reasons for their failure to comply (which was up from 69% in 2011);
• 96% of companies are complying with the new provisions on the annual re-election of directors; and
• 98% of companies are complying with the provisions relating to triennial external board evaluations.

On the other hand, there is still some considerable room for improvement, including:

• 25% of chairman gave no information on their board’s governance practises;
• only 5% of chairman are emphasising how important culture is to an effective governance regime;
• two thirds of those companies who did not comply with the Code gave the same explanation as the previous year; and
• nearly 20% of the companies had insufficient NEDs throughout the year.

It is, as always, a very detailed and informative report and I would recommend that anyone with the time, takes the opportunity to read it properly. The full report can be found here.

This article was written by Nick Lindsay of Elemental Cosec, UK process agent and providers ofcompany secretarial services. This article is for informational purposes only and should not be relied upon as specific advice or acted upon without seeking legal advice.

Women on boards has been one of the most contentious topics of the last few years. In the UK, we had the Davies Report in February 2011 which set out a series of recommendations with the aim of increasing female representation to 25% on the boards of FTSE 100 companies by 2015. Although this was non-binding, the report has been used as a basis for the UK government and the FRC to adopt various measures to try and encourage the recruitment of female directors.

It’s not just in the UK, but across the world that people have been looking at how to encourage female representation on boards. The Scandinavian countries of Norway, Sweden and Finland have all adopted mandatory quotas for female representation and now the EU as a whole is looking at it.

First the disclaimer. This is based on a (well) leaked report from the EU which is resisted by certain countries, notably the UK. Before it could become law, it would have to pass through numerous legislative steps which would likely change it dramatically. Nevertheless, it is still very instructive in showing how the powers that be are approaching this issue.

The draft proposal that has been leaked would look to mandate that at least 40% of the non-executive directors of large listed companies in the EU were female by 2020. A company would be considered ‘large’ if it had more than 250 employees or €50 million in annual revenues. The penalties for non-compliance could be extreme with fines and, arguably more importantly, they would be barred from state aid or bidding for government contracts.

Now, this draft proposal has often been reported in terms thatexaggeratethe detail. The proposed quota is only relevant to non-executive directors and therefore there is no proposed restriction on the gender diversity of executive directors. The draft proposal also states that the quota should not force a company to reach 50% or more female non-executive directors. So, if a company has four non-executive directors, the proposed quota would only require the company to have one woman amongst these four. The reason being that if the company was forced to have two women, they would have 50% female directors.

Nonetheless, mandatory quotas across one of the largest economic blocs in the world would be a huge step and could well lead to other countries adopting similar measures. To answer the question posed in this blog, will the EU insist on such a quota? Personally, I don’t think it will come to pass, at least not in its current form. However, I do think some form of gender diversity legislation will be passed by the EU in the next few years and it will be telling to see what the nations of the EU finally agree on.

This article was written by Nick Lindsay of Elemental Cosec, UK providers of company incorporations and company secretarial services. This article is for informational purposes only and should not be relied upon as specific advice or acted upon without seeking legal advice.

Hector Sants, the chief executive of the UK Financial Services Authority has given a speech today (24 April 2012) highlighting the importance of good corporate governance and effective boards in regulating financial firms. Although this is a view widely held, this emphasise from the main UK regulator is telling. It is also one of his last speeches before leaving the FSA and has therefore been eagerly awaited. The full text of the speech can be found on the FSA’s website here.

Mr Sants does draw some interesting conclusions from the financial crisis and he says that “when you analyse those firms that failed during the crisis, one or more of five key indicators were evident:

• a dysfunctional board;
• a domineering CEO;
• key posts held by individuals without the required technical competence;
• inadequate ‘four-eyes’ oversight of risk; and
• an inadequate understanding of the aggregation of risk.”

Mr Sants is primarily looking at financial firms in his review as this is the ambit of the FSA, however these failings could be levelled at a huge number of firms the world over, in many different sectors. Yet it is cheering to see that a regulator is highlighting this as such a key point because in part, one suspects, that were the financial firms lead, other industries will be inclined to follow. Yet, both the importance and limits of a regulators role is well summarised by by Mr Sants:

Good governance and a strong culture are a necessity for maximising the likelihood of the right judgements being made by management. Regulators have a role to play in ensuring that firms have the right governance and culture. But I should stress that it is not for the regulator to determine the culture. Ultimately, however, even a successful regulatory regime will not be sufficient to ensure good outcomes. Crucially, firms need to have an appropriate culture and one which is focused on the firm delivering the right long-term obligations to society. The right cultures are rooted in strong ethical frameworks and the importance of individuals making decisions in relation to principles rather than just short-term commercial considerations. In particular, this means that when a regulator expresses a clear instruction then firms should not continue to resist for reasons of expediency and short-term gain.

Time will tell how much of a change in the approach of the FSA this speech actually leads to but I undoubtedlyapplaudthe sentiment and encourage you to read the full text of the speech if you have time.

This article was written by Nick Lindsay a director of Elemental CoSec. Elemental CoSec providescorporate governance and UK company secretarial services. This article is for informational purposes only and should not be relied upon as specific advice or acted upon without seeking legal advice.

One of the enduring adages of corporate governance is that it is a philosophy and not a tick box exercise. Company secretaries and corporate governance experts can often be heard stating this line and, like many clichés, it is often repeated because it’s true.

A company can fulfil all the requirements of its relevant code(s) and not embrace the fundamentals of corporate governance and, more importantly, a company can deviate from its relevant code(s), but still have a sound approach to corporate governance at its heart. It is the second of these scenarios that I’m going to look at here.

Despite not being a tick box exercise, the various codes of governance across the world are there for a reason; because they provide a sound framework from which to run a corporate governance regime. They also give a benchmark from which the company’s stakeholders, directors and company secretary can judge the performance of the company.

In the UK, the main code is the UK Corporate Governance Code (in this article, the “Code”) but there are various other guidelines and codes that UK listed companies should bear in mind. These include the guidelines of various institutional shareholder bodies such as the Association of British Insurers and the National Association of Pension Funds.

What all of these rules have in common is that they are not mandatory. They are guidelines that applicable companies will look to adopt but are free to deviate from if they feel that such deviation is in the interests of the company. The Code itself differentiates between the Main Principles, which are mandatory, and the supporting provisions which can be deviated from if good governance can be achieved in other ways:

“A condition of [deviation] is that the reasons for it should be explained clearly and carefully to shareholders, who may wish to discuss the position with the company and whose voting intentions may be influenced as a result. In providing an explanation, the company should aim to illustrate how its actual practices are both consistent with the principle to which the particular provision relates and contributes to good governance.” – UK Corporate Governance Code 2010

Yet, for a minority of companies, this option to explain deviations from the Code has been utilised without due regard to the above principle or the concerns of shareholders. Many explanations given by companies are substantial and useful to shareholders, yet a few are brief and dismissive. This has caused some concern and has led the Financial Reporting Council (the governing body of the Code) to carry out a discussion with relevant directors and company secretaries and to report on what constitutes a proper explanation under the Code.

In the words of the report:

[An explanation should be] full andinclude reference to context and coherent rationale. They should explain how the company isfulfilling the relevant principle of the Code and also whether deviation from its provisions istime limited. Ideally explanations should be sufficiently full to meet the needs of thoseshareholders who could not simply call up the company and ask for information, but largershareholders also saw them as the foundation for further dialogue that should engender trust.

Even the best explanations though, are often considered to merely counter the deviation from the Code. Providers of company secretarial services often feel that a company that deviates from the Code and provides a good explanation should still only be considered on a par (form a corporate governance perspective) from one that has followed the provision.

Arguably this goes against the idea that corporate governance is not just a tick box exercise. If done properly, limited deviations from the Code, coupled with full and complete explanations can show that the company is truly considering and embracing good corporate governance and this should be encouraged rather than criticised.

Nick Lindsay is a UK corporate lawyer and director of Elemental CoSec, a provider of company secretarial services. This article is for informational purposes only and should not be relied upon as specific advice or acted upon without seeking legal advice.

In the modern world, women are outperforming men in many stages of their career; especially at school level, university and during the early years of work. However, despite a considerable number of women entering the corporate world, the gender diversity of top companies at executive and board level is woeful.

Background

In 2010, women made up only 12.5% of the directorships of FTSE 100 companies in the UK (see Women on Boards, The Davies Report, February 2011) and in 2008 women held only 12% of the directorships in the S&P 1500 (see RiskMetrics Group, Inc., “Board Practices: Trends in Board Structure at S&P 1,500 Companies”).

These low numbers are not through lack of initiatives from campaigners, governments and even the companies themselves. For example:

• Norway has introduced a mandatory quota for their biggest companies;
• following the Davies Report, there are new measures being introduced in the UK around diversity; the UK Corporate Governance Code is being amended to require companies to set out their diversity policy and the UK government is introducing new legislation requiring quoted companies to report on the number of women in senior executive roles; and
• the SEC in the US has introduced a rule requiring corporations to disclose, inter alia, whether a nomination committee considers diversity in identifying nominees for director and, if so, how they consider diversity in this respect.

These and other changes are beginning to increase the number of women in boardrooms around the world but the change is occurring at a slow rate. This rate of change does make it worthwhile re-considering the rationale for increasing gender diversity in boardrooms as the current approach does not seem to be achieving the results that are expected.

Economic vs Social Rationale

Historically, gender diversity advocates relied primarily on moral arguments to persuade companies to change their recruitment policy towards women. However, in recent years, the argument has shifted with advocates pointing to studies that show that the share prices of companies with more diverse boards outperform companies with less diverse boards. The feeling is that hard-nosed shareholders, and the directors who owe a fiduciary duty to these shareholders, will be more receptive to economic rather than social or moral arguments.

This view has been readily adopted, not just by activists, but by the mainstream media and governments. Lord Davies in the UK said that “The business case for increasing the number of women on corporate boards is clear…… Evidence suggests that companies with a strong female representation at board and top management level perform better than those without and that gender-diverse boards have a positive impact on performance”. This is fairly representative of the argument being put forward at the moment.

This argument has its limits though and, perhaps, could be contributing to the slow rate of change. In her excellent paper, ‘Revisiting Justifications for Board Diversity’, Lisa Fairfax reviews the various empirical studies around the financial performance of companies with more diverse boards. She reviewed numerous studies that did support the economic case for gender diversity, but there were also studies that found no link or even showed a negative link between gender diversity and the economic performance. These are often overlooked or dismissed in discussions around this subject but are equally important.

Overall Ms Fairfax felt that “the empirical results provide at least some support for the proposition that board diversity may lead to increased firm value or improved corporate governance under certain conditions.” However, for me, the biggest question is over causation. Do the best performing companies naturally attract and support diverse boards or do diverse boards lead companies to perform better. This question has never been properly addressed in the empirical studies and it would be very difficult to do so.

The lack of clear evidence means that that economic argument for board diversity is weak at best. This may be a slightly controversial statement to make but I think it is important to put it forward as the reliance on the economic argument may actually be hindering the cause of gender diversity.The doubts over the link between economic performance and gender diversity are probably shared by many shareholders and boards of listed companies. If this is the main argument being put forward in support of gender diversity, it is one that can be ignored by these groups with impunity. After all, if the main rationale is the economic benefit, then the shareholders are the only ones to suffer if they are wrong.

On the other hand, many corporate governance developments over the years have not been supported by economic arguments and instead have won through by other means. For example, it is now an accepted position that strong independent directors are essential to good corporate governance. Yet there is relatively little empirical evidence of a positive effect on the value of a company from strong independent directors. It is assumed, but not proved.

It is widely accepted, and a view I share, that improved diversity in the board room (both in terms of gender diversity and other forms of diversity) is a good thing. It is a good thing from the perspective of society and also for the health and state of our companies. As is the case with independent directors, I believe it makes companies better prepared to deal with long term risks (by discouraging tunnel vision) which are rarely reflected in the share price until they happen.

I believe though that the focus on the business case for improving diversity may be harming this cause and advocates should present the wider argument rather than pushing the economic angle so much and hoping that the market will do the rest.

Nick Lindsay is a director of Elemental CoSec a provider of company secretarial services and corporate governance advice in the UK. This article is for informational purposes only and should not be relied upon as specific advice or acted upon without seeking specific legal advice.