Corporate governance is rarely out of the news these days, from scandals to business failures, to the changes in the framework put forth by the Government and regulators.
While the majority of stories on the subject focus on failure, this misses the point of corporate governance – putting frameworks in place to help organisations achieve long-term success and value creation.
This applies to organisations of all shapes and sizes.Further more, the earlier a company begins to give mind to these structures, the easier implementation can be. Good corporate governance can help bring in outside expertise, attract funding, and ensure long-term sustainability. Companies of all sizes stand to benefit from implementing corporate governance practices, however, often unless it is “encouraged” for a privately held business, you will find itis not at the forefront of the business owner’s mind. The foundation for good corporate governance is sound business strategy along with a competent and responsible management team, with a positive customer-focussed culture.
Corporate governance refers to the manner in which companies are directed and controlled. It encompasses the means by which the Board and Senior Management are held accountable and responsible for their actions and includes corporate discipline, transparency, independence, accountability, responsibility, fairness and social responsibility. Corporate governance increases competitiveness and makes criminal activities more difficult, and helps to hold us accountable for our actions, which is ever more important in a regulated entity engaged in the management of, or advising, on other people’s wealth. Good corporate governance therefore includes those structures, practices and procedures put in place by the Board of Directors as well as persons duly appointed by the owners to direct and manage the business of the company. It must ensure transparency, accountability and enhanced shareholders’ value. It is important that companies operate within the framework of appropriate rules and regulations under which they were incorporated, as well as rules and regulations put in place by relevant regulatory authorities from time to time.
Per the Central Bank of Ireland (CBI) website, their supervision process for a broker/retail intermediary mirrors the general supervision approach of the CBI. This general supervision approach seeks to ensure that all regulated financial services providers meet their responsibilities to have strong management, internal control and compliance procedures in place, and have people of integrity and competence at all levels in their organisations. All Irish authorised financial service providers are expected to implement best practice. The current Fitness and Probity regime imposes certain obligations on individuals and firms. The proposed new Senior Executive Accountability Regime will require firms to review and update their governance frameworks and ensure all personnel have clearly defined roles and understand their respective obligations and responsibilities, including the implications if they fail to live up to the required standards.
Your Governance and Systems
Firms should have appropriate corporate governance in place to ensure they meet the expected levels of best practice. Firms should also have systems and policies in place to mitigate risk and monitor compliance with their internal policies and all stakeholders should be aware of the internal policies. In otherwards, they should not just be put on paper and filed away only to be considered if an inspection were to occur. The level of governance and policies will often depend on the size of the firm and the nature and complexity of services provided. It is strongly recommended that each firm look toits internal systems and controls and review these regularly to ensure they continue to meet the minimum standards expected. Firms should not just look to meet the minimum standards, but rather strive to achieve best-in-class ethical and industry practices.
Examples of Good Governance
Internal committees can be a positive way of keeping different functions focussed on driving good governance in particular areas. Depending on the size of the organisation, an Audit and Risk Committee reporting to the Board can assist in oversight in specific areas, with members of the Committee bringing the irrespective skills to oversight.– A committee focused on developing and updating an in house view of products e.g. investments / pension / protection on a regular basis, can bring greater consistency to the sales and advisory process, again with a customer-centric focus.– Regular board meetings where challenge and debate is not only expected but welcomed. Firms could consider having a non-executive director on the Board to ensure an external perspective is considered. An independent person who is not caught up in the internal politics of an organisation can only provide an objective and positive perspective to oversight.– Board training should be provided at a minimum so that the members of the Board understand what is expected of them and the responsibility that comes with being a board member. This includes understanding obligations arising from the Companies Acts, various other legislation, and in particular, Central Bank requirements. While considering the role of board members, it is also imperative that members receive adequate training on, and are fully conversational with, AML/CFT obligations. Boards should also be aware of the need to have an AML/CFT Business Risk Assessment completed on an annual basis.
Where to From Here?
While the CBI has no specific code of governance for brokers and retail intermediaries, there are Corporate Governance Codes for Credit Institutions, Insurers, Collective Investment Schemes, etc. By understanding the general nature of these codes, other firms can adopt the key principles to ensure best practices in corporate governance are achieved. The Central Bank issued its latest Consumer Protection Outlook Report in March 2022 (CPOR) and issued a ‘Dear CEO ‘letter to the industry in November 2022. The CPOR identifies the five key cross sectoral risks which financial firms should take to avoid consumer harm. These risks are identified as poor business practices and weak business processes, ineffective disclosures to consumers, the changing operational landscape, technology-driven risks to consumer protection, and the impact of shifting business models. Again, boards of firms can demonstrate good corporate governance by considering the CPOR risks and ensuring that these riskware addressed to mitigate against potential exposure. In the current climate of global warming, volatile investment markets, high inflation and sustainability being an everyday focus, good corporate governance and a prudent approach will lead to long-term value.
Written by Jillian O'Sullivan, Partner - Corporate Compliance Grant Thornton. This article first appeared in February 2023 - Vol 3 Issue 1 of The Advantage magazine, one of the many benefits exclusively available to LIA members.