The case for company secretary independence Cover Story

Saturday, 20 November 2004


    One of the theories of good corporate governance is that a company secretary is a fearless adviser to the board. He or she owes the board an unqualified allegiance and is required to serve it faithfully.  The case for company secretary independence  by Anthony Seyfort.

    One of the theories of good corporate governance is that a company secretary is a fearless adviser to the board. He or she owes the board an unqualified allegiance and is required to serve it faithfully.

    In reality, this theory loses substance because company secretaries are usually hired and fired, not by the board, but by the CEO. This is especially so where they are given additional functions such as that of general counsel or legal manager.

    In a skills sense, this type of "add-on" responsibility is a logical addition, but it requires the company secretary to report to line management on a variety of day-to-day matters and be involved in operational activities. In many cases, this dual reporting role can hinder a company secretary's efforts to provide the board with fearless advice.

    When the theory of good corporate governance is discussed, much is said about the roles of who does what, the need for a demarcation between the chairman and the CEO, and achieving the right mix of independent directors. However, in practice, good corporate governance relies heavily on the advice the board is given.

    For very large corporations with ample staff and resources, there is a strong argument that good corporate governance can best be achieved by making company secretaries independent of line management. This idea would be impracticable for small and medium sized companies but it has considerable merit for large listed companies. In these enterprises, it is arguably wrong for the company secretary to have secondary functions which require him or her to report to line management.

    People with such additional responsibilities are involved in making decisions about nuts and bolts matters and may then find themselves - with their company secretary's hat on - advising the board about whether those decisions were appropriate.

    Even if the company secretary is a lawyer, a dual role should be avoided. A company secretary who is a lawyer needs to be "Chinese walled" so that he or she is functionally separate from the company's transactional operating lawyers. If this separation is not made, his or her ability to provide the board with truly independent and fearless advice is potentially compromised.

    Quarantining company secretaries in this way will not guarantee the fearlessness and independence of their advice but it will increase the chances of such advice being given. A company secretary will still require considerable courage to tell the board that a management decision was wrong or inappropriate but if he or she is isolated from line management everyone will at least understand that fearless advice is what is required.

    This suggestion may be viewed unfavourably by many dual-role company secretaries, especially those who measure success by the size of their department or the number of functions they acquire. But there is a strong argument that making company secretaries part of line management undermines their ability to serve their boards faithfully. It is difficult to see how a major corporation can achieve exemplary levels of corporate governance while its company secretary wears two hats.


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