Gríana O’Kelly, Corporate Partner outlines why it’s good for Irish SMEs to have good corporate governance in place.
Corporate Governance in small and medium size enterprises in Ireland
The Companies Act 2014 strengthens the legal accountability of directors for the actions of the corporate bodies they represent. There is an increasing focus on corporate governance in the boardroom. As would be expected, directors view corporate governance as an important element of their role. Good corporate governance ensures a business is conducted with integrity, transparency and complies with all the laws of the land.
Why it’s good to have good corporate governance…. Because it’s the law!
Why should a company ensure that it adopts correct procedures and holds requisite meetings? One of the most important reasons is that companies are under a legal obligation to do so. The Companies Act 2014 regulates companies limited by shares in Ireland. This stipulates that many actions taken by directors in a company or transactions involving the company itself are likely to require the adoption and approval of a company law procedure. Under the Companies Act, certain actions of the board require shareholder approval first.
A corporate governance structure should aim to ensure that matters carried out follow the law. There are implications for contracts entered into by a company where correct procedure and safeguards in the Act are not followed. There may also be implications for directors. The Companies Act codifies directors’ duties for the first time; one of the duties outlined is that directors must ensure compliance with the Act.
As part of good corporate governance decisions of a board must be adequately documented. Formal board meetings should be held at regular intervals to document key decisions. If a company is being sold or looking for investment, a transparent and accountable governance structure and proper records are a bit like keeping receipts. A record of decision making within the company and transactions involving the company provide a paper trail to show potential investors or a prospective buyer. The company can illustrate that correct procedures were followed and company law applied where necessary.
All companies are obliged to maintain a company register recording share ownership, current directors, secretary and other important information. Every entry in a statutory register should have a corresponding corporate authorisation in the form of a shareholder or board resolution depending on what the transaction requires. A board will typically delegate the maintenance of registers and statutory filings in the companies’ registration office to the secretary.
Power within a company originates with its owners; the shareholders. Shareholders delegate responsibility for running a company to a board of directors. The board of directors will manage the day to day operations of a company. These directors involved in day to day business are usually executive members of the board. Non-executive directors can offer an impartial focus at board meetings where key decisions are made. Non-executive directors can review prospective decisions and hopefully offer an independent perspective. Directors can delegate authority to certain individuals or to committees of the board. For example a remuneration committee would fix the salaries of executive directors and employees. Often a remuneration committee is made up of non-executive directors. Single director companies must have an independent secretary. This ensures a system of checks and balances for such companies.
The governance structure within a company will depend on its size but the aim in all companies should be the same; ensure that key decisions are cross checked, that the Companies Act is being followed and that the division of responsibility is clearly set out. The governance system should aim to minimise the chance of faulty decision-making.
In putting in place a governance structure it is important for directors and shareholders to be aware of the default positions that exist under the Companies Act. For example, companies will often appoint a chairperson. The role of a chairperson is to chair meetings of the board. Many directors do not realise that a chairperson has a casting vote at board meetings under the Act. This provision can be dis-applied by a company under its constitution but if this is not done, the default position will apply. While many companies appoint a chairperson to chair meetings of the board, it may not be intended to give this person a casting vote.
In setting out a defined governance structure, some shareholders put a shareholders agreement in place. While this document will deal with many items, it can also define a governance structure. It may also place a contractual obligation on the board to obtain shareholders’ consent before carrying out certain matters; thus putting a limitation on a board’s authority. This limitation means that certain board decisions are checked by members.
The benefits for companies which embrace robust corporate governance arrangements are manifold. Doing so does not merely ensure compliance with the Companies Act, it also leads to improved transparency, decision-making and accountability, which in turn is likely to improve business practice and success. Good corporate governance makes good sense.
For more information on corporate governance contact Gríana O’Kelly, Partner in our Corporate and Commercial Group.
This article originally appeared in the Sunday Business Posts' Corporate Governance, Company Law & Company
Secretarial Services on 19th March 2017.