Business Laws & Ethics – Management Library

September 24, 2015February 17, 2023

Will beneficial ownership registers spread around the World?

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.

August 1, 2013January 28, 2022

Governing an entrepreneur – a dilemma

Zander has joined the board of a privately owned company that is growing rapidly and has plans to list within the next year or two. He is excited by the prospect of the IPO and determined to do a good job as a director, even though he has no prior board experience.

He is finding the role unexpectedly difficult as the CEO, who is also the founding entrepreneur and chairman, is very independent and views the board as a nice think tank – but not as an authority over him. On a few occasions the board has met without seeing up to date financial reports because the CEO was, by his own admission, “too busy building the business to worry about administration”. Whilst the business does appear to be going well Zander is worried that he is not discharging his duty.

Zander had a coffee with the CEO to discuss his concerns. At that meeting, the CEO let slip that he had set up a board because the company had reached a growth threshold where a board was required rather than because he felt any need for guidance or control.

At the latest meeting it became apparent that the capital structure of the company was changing and that new investors were being invited to take up shares. The board had not approved a prospectus or information memorandum or any valuation of the company. The meeting became quite disorderly as the two professional non executives expressed their concerns and the CEO refused to divulge information because it was ‘his company’ and he didn’t think they should know how much he got from the sale.

Directors’ fees were due for payment a week after the meeting but have not been paid. The CEO is not returning calls or replying to emails and Zander is wondering what he should do.

How would you advise him to proceed?

Many readers of this blog will be familiar with my newsletter The Director’s Dilemma. This newsletter features a real life case study with expert responses containing advice for the protagonist. Many readers of this blog are practicing experts and have valuable advice to offer so, again, we are posting an unpublished case study and inviting YOU to respond.

If you would like to publish your advice on this topic in a global company directors’ newsletter please respond to the dilemma above with approximately 250 words of advice for Zander. Back issues of the newsletter are available at http://www.mclellan.com.au/newsletter.html where you can check out the format and quality.

The newsletters will be compiled into a book. If your advice relates to a legal jurisdiction, the readers will be sophisticated enough to extract the underlying principles and seek detailed legal advice in their own jurisdiction. The first volume of newsletters is published and available at http://www.amazon.com/Dilemmas-Practical-Studies-Company-Directors/dp/1449921965/ref=sr_1_1?ie=UTF8&qid=1321912637&sr=8-1

What would you advise?

Julie Garland-McLellan has been internationally acclaimed as a leading expert on board governance. See her website atwww.mclellan.com.auor visit her author page athttp://www.amazon.com/Julie-Garland-McLellan/e/B003A3KPUO

July 10, 2013February 24, 2023

Can there ever be too much transparency?

Can there ever be too much transparency? Transparency has been recognized as a vital attribute for organizational health and performance. Organizations that demonstrate transparency give voice for employee concerns.

Leaders that are willing to be vulnerable in sharing even bad news create environments where employees can admit mistakes before crises erupt.

So when is too much transparency?

In the wake of the recent Asiana Airlines Boeing 777 crash in San Franscisco, many observers were praising The National Transportation Safety Board (NTSB) for their outpouring of information about the incident. However, as was reported in The Atlantic the Air Line Pilots Association (ALPA) believed that the NTSB was revealing too much. Were they protecting one of their own, or were they correct in being concerned about the damage “rampant speculation” could generate?

In an era of continuous communication, leaders have every right to be questioning how much information is too much. There is a wide range between hiding information and having a completely open book. Not every employee needs to have access to every piece of corporate information.

In a healthy culture employees can ask legitimate questions and be entitled to get timely responses, even if the response is “here is what we can talk about and here is what we can’t, and why we can’t.” Leaders who are successful in creating a culture of transparency have earned the trust of employees so that no one feels that information is being hidden, but that when information is requested, those requests are handling with respect and due attention.

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David Gebler is the President of Skout Group, an advisory firm helping global companies use their values to clear the roadblocks to performance. David’s book, The 3 Power Values is now available. Send your thoughts and feedback to dgebler@skoutgroup.com.

July 6, 2013January 28, 2022

Can a director serve two interests? – a dilemma

Xevach is a director on the board of a government trading enterprise. He also chairs the governance committee. The company has a significant geographic monopoly and owns and operates a vital piece of infrastructure in the industry. One of Xevach’s colleagues on the board, Yolanda, is a former director of a larger, competing, government trading enterprise from a neighbouring geographic area. She has worked in the industry for all her life and, in addition to her seat on this board, is a well-respected consultant in the industry.

Xevach’s company is seeking development consent for expanding its infrastructure. At the same time the government is reviewing industry structures and considering imposing a levy to fund the cost of dealing with industry externalities, such as pollution, noise and nuisance for neighbouring communities. Yolanda has been retained by a group of customers to represent their interests and draft a submission to the government about the effects of the proposed structural changes to the industry. The effects on the customers will be different to the effects on Xevach’s board and Xevach is concerned that Yolanda may find herself in a position of conflicted interests, lobbying for both the customers and the supplier. Yolanda asserts that this proves she will be seeking a ‘win / win or optimal outcome and that there is no conflict.

Xevach’s chairman admits that he is not sure of the right course of action and has asked Xevach to advise the board on how to move forward with the issue. What should Xevach advise?

If you would like to publish your advice on this topic in a global company directors’ newsletter please respond to the dilemma above with approximately 250 words of advice for Xevach. Back issues of the newsletter are available at http://www.mclellan.com.au/newsletter.html where you can check out the format and quality.

What would you advise?

May 15, 2013January 28, 2022

When a director knows what isn’t in the papers – a dilemma

Male executive going over business files

Winsome is a director of a large listed company. She has a strong track record in M&A advisory work and is now embarking on a non-executive career. She is finding the ‘hands off’ aspects of the role quite challenging as she is instinctively and by training a detail focused manager. She has been mentoring one of the young analysts at the company and recently helped him by reviewing a report that he was asked to prepare for the board.

The report concerned an acquisition that had been thoroughly analysed and was a compelling proposition due to a strong strategic fit and an advantageous price. The only negatives were:

1- The long standing employees who would have very high redundancy and retirement costs.

2- One of the international operations which uses agents and shows a historical tendency for large ‘round-number’ sums to be paid to these agents before tenders are awarded. This operation is only 3% of revenue and 2% of profit but the analyst is concerned that the forecast growth of the operation may not eventuate if the payments cease. He is aware that the board has a ‘zero tolerance’ policy for bribes and facilitation payments.

Winsome is concerned because the report covered these issues and called for the board to discuss and decide on a course of action. She has now received her ‘official’ version of the report in her board papers and all references to the suspicious payments have been edited out. Her mentee, when questioned, informed her that the CEO insisted on the edits as it was a small issue with a small part of the target company and the board was only to focus on the big picture.

Winsome is worried that if she says anything she will get her mentee into trouble but also that if she doesn’t say something the board could approve an acquisition that would later cause embarrassment and possibly worse. What should she do?

If you would like to publish your advice on this topic in a global company directors’ newsletter please respond to the dilemma above with approximately 250 words of advice for Winsome. Back issues of the newsletter are available at http://www.mclellan.com.au/newsletter.html where you can check out the format and quality.

What would you advise?

May 5, 2013January 28, 2022

Should the MD have a vote? – a dilemma

Victor is a director on a medium sized listed company board. The Chairman has been ill for several months and is not going to get better. He has announced that he wishes to retire. The Managing Director is keen that one of the directors, who had a strong track record as an executive within the industry and is very knowledgeable about the operations, be appointed as the successor to the current Chairman.

The board is divided as half the directors support another candidate who chairs the Audit and Risk committee and has a lot of credibility with the two institutional investors. Both candidates have voiced a desire to take the role. The current Chairman feels he is not entitled to vote as he will not be a member of the board under his successor. Neither candidate will vote. If the MD votes then his preferred candidate will be elected by one vote. If the MD does not vote then the board is split 50:50.

To complicate matters the opposing candidates have begun arguing about whether the MD has a conflict of interest and is entitled to vote. The MD is upset as he feels that he is a director and, under the constitution, entitled to vote. Others disagree as he is a close friend of his preferred candidate.

How can Victor help his colleagues to resolve their current impasse?

If you would like to publish your advice on this topic in a global company directors’ newsletter please respond to the dilemma above with approximately 250 words of advice for Peter. Back issues of the newsletter are available at http://www.mclellan.com.au/newsletter.html where you can check out the format and quality.

What would you advise?

April 7, 2013January 28, 2022

Association boards and conflicts of interest – a dilemma

Ursula is a director on of an industry association. Although they use terms such as ‘Councillor’ and ‘council’ it is constituted as a board and the members have the same duties and responsibilities as directors under the corporations act. All directors are nominated by companies within the industry and serving on ‘The Council’ is seen as an indication that a person has been identified as a future leader within their organisation and within the industry.

Councillors use the Council to promote their own profiles and enhance their networks.

Ursula is concerned at another aspect of their behaviour; using information that comes to the Council to benefit their own organisations. Information about proposed regulatory changes has leaked allowing first movers to gain an advantage; Ursula suspects her colleagues are involved.

Now the Council is deciding on a package of grant funding that will benefit the smaller participants in the industry as well as attract start-ups. Although this is clearly in the interests of the industry the councillors all come from larger, well established, companies and oppose the program as it will create competition for them. At the last meeting the Chairman remarked “I don’t see why we should be helping upstarts to eat our lunch.” Another board member responded “My boss will certainly not thank me if this gets approved.”

Staff at the government department are mystified as to why a good grant package is taking so long to get industry sponsorship and is continually bogged down in discussions. They have asked Ursula for her opinion on the best way to expedite it.

How should Ursula respond to this request?

Many readers of this blog will be familiar with my newsletter The Director’s Dilemma. This newsletter features a real life case study with expert responses containing advice for the protagonist. Many readers of this blog are practicing experts and have valuable advice to offer so, again, we are posting an unpublished case study and inviting YOU to respond.

What would you advise?

Julie Garland-McLellan has been internationally acclaimed as a leading expert on board governance. See her website atwww.mclellan.com.auor visit her author page at http://www.amazon.com/Julie-Garland-McLellan/e/B003A3KPUO

February 6, 2013January 28, 2022

Issues for a prospective owner director – a dilemma

Businessman burying his face in his palms

Sam is an experienced manager and has worked for over twenty years in his industry. He has also sat on two not for profit boards and enjoys the governance role. Now he has an opportunity to buy an equity stake in a small business that has a product and service for which market demand is growing.

The business has not been growing as quickly as the market and revenue has been pretty flat for the past three years. The current owners are a husband and wife team and are tired; they have run the business for many years and want to retire.

The proposal is that Sam should purchase 40% of the company and take a seat on the board. The existing owners would retain 30% equity each and a shareholders agreement would stipulate that board decisions would require a 70% majority to be agreed. The current board has three members consisting of the owners and an ‘independent’ chairman who is the lawyer and a long-standing friend of the owners. The proposal is that he should remain as “He adds a lot of value and sees things we would miss”.

Sam intends not to work in the company but to be merely a shareholder and director. He has ideas for improving the growth and increasing the value of the company but wants to retain his full time employment in a larger corporation as a security measure. His employer is happy for him to take on a board seat and there is no direct competition between the two companies so Sam would have no conflict of interest; however, Sam’s boss, who is a friend and mentor to Sam, is uneasy and has suggested that Sam could find himself outmanoeuvred in the boardroom and overcharged for his equity. Sam is appreciative of the counsel but believes the shareholder agreement protects his interests. He would like to discuss board dynamics with the current owners but they seem not to be interested as they say the chairman handles all the compliance and they just run the business so there is nothing to worry about.

How should Sam handle this issue?

What would you advise?

Julie Garland-McLellan has been internationally acclaimed as a leading expert on board governance. See her website atwww.mclellan.com.au or visit her author page athttp://www.amazon.com/Julie-Garland-McLellan/e/B003A3KPUO

January 24, 2013January 28, 2022

51% compliance with the UK Corporate Governance Code

Scrabble tiles spelling the word "rules"

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.

December 31, 2012December 30, 2022

10 Myths About Boards of Directors

Group of businesspeople sitting in a conference room for a board meeting

There are numerous myths that seem to persist about Boards of Directors. Here’s a list of 10 of them.

Myth –The phrase “corporate Boards” conventionally refers to statutory, for-profit Boards. However, statutory nonprofit Boards are Boards of a corporation, too, so they’re both “corporate Boards.”

Myth — A Board of Directors can delegate its fiduciary accountability to another body, for example, to a subcommittee. No, courts have held that the entire Board is always responsible for its fiduciary duties, not a subcommittee.

Myth — The Board Chair is the boss of the Board. No, typically, if a quorum of the Board members wants the Chair gone, then he/she is gone.

Myth — Working Boards are immature Boards. No, many organizations prefer a more hands-on Board. That’s fine, as long as they’re attending to their fiduciary roles, as well.

Myth — To get more engaged Board members, make their experience more pleasurable, e.g., have less Board meetings and bring cookies. No, it’s more effective to continue to expect and demand that members engage.

Myth — All Boards should have term limits. No, in small communities, you’d have to clone people if you have term limits on every Board.

Myth — The Strategic Planning Committee should do all of the planning, too. No, the Committee should be in charge of ensuring a high-quality planning process, but all Board members should be involved in the planning — or in approving the overall Strategy.

Myth — Board members are officially Board members once their names are on the Board minutes or a roster. No, courts discern a person to be a Board member if there’s proof that he/she has been acting like a Board member, e.g., attending meetings and taking part in votes in meetings.

Myth — For-profits Boards and nonprofit Boards are very different. No, most of the nature of their Board operations is the same, other than for-profits attending to shareholders and director compensation (and any rules and regulations for listed/public companies). Nonprofits Boards uniquely attend to volunteers and perhaps fundraising.

Myth — Strategic planning always follows the same process. No, the process should be highly customized to the nature of the organization and to the purpose of the planning.

Also see:

All About Boards of Directors

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Carter McNamara, MBA, PhD – Authenticity Consulting, LLC – 800-971-2250
Read my blogs: Boards, Consulting and OD, and Strategic Planning.