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Company Law

Analysis - guidance - compliance

20 JUN 2014

Is your corporate government framework fit for purpose?

Is your corporate government framework fit for purpose?

The all too recent scars on The Co-op Group’s corporate governance framework, following a scathing review by Lord Myners, has highlighted the need to continue to assess a business’ governance framework as it grows and diversifies its offering.

In a document stretching over more than 180 pages, Lord Myners strongly recommended, amongst other matters:

- A total reform of the Group Board

- Establishment of a National Member Council

- Creation of a Nominations Committee

- Extension of Constitutional Rights

- Re-alignment of the Co-op’s core social goals with the achievement of its commercial objectives

It is apparent from the Review (and the previous independent review undertaken on the Co-op Bank by Sir Christopher Kelly) that it was felt the traditional method of electing lay members to the executive board has culminated in those members not possessing the high level of skills required to run a business with a turnover of circa £13 bm. To get the message across in clear terms, Lord Myners used a football analogy i.e. certain Rochdale FC players being fielded for Manchester United. (as a follower of Peterborough United, I feel for the Rochdale fan). The starkness of this example may have been adopted by Lord Myners due to his brief moment on the Board (only 4 months in office, when he felt he needed to resign). He cited a lack of accountability, understanding (of the major difficulties the Group faced), and an inability to change amongst the long-established board members as his drivers to resign.

It is not that the Co-op lacks a framework for governance; far from it. It has a complex set up of boards, committees, group committees, committees of committees... What is clear from Lord Myner’s analysis is that its current framework is no longer “fit for purpose”. The Group morphed from a co-operative with social, responsible, ethical goals to a commercial bank, legal service, funeral service, pharmacy, department store and a famous food outlet to name but a few – somehow forgetting those goals along the way. The governance framework did not evolve with the business, culminating in the wrong people in the wrong places. Lord Myners is keen to point out that the Co-op should re-focus in order to re-ignite its social and ethical goals, whilst making sure it has a Board that fits its needs. He was also keen to make sure the people that matter (the members) have a say in their business which - due to the current draconian elective system – they currently do not.

The Co-op is an unusual beast in that it is a body corporate under the Industrial & Provident Societies Act 1985. It, therefore, has different rules to follow from the everyday public or private company. Notwithstanding this, it has a Bank, which is required to comply with the rules and guidelines set out by the Financial Reporting Council, Prudential Regulatory Authority and the Financial Conduct Authority. It also has a duty to its varied stakeholders to run its business in a manner that ensures it does not suddenly have, for example, a £1.5 bn “black hole” in its accounting. Those stakeholders include, but are not limited to: its management, its members, its customers, the government and the community as a whole.

Few businesses need an all singing, all dancing corporate governance framework. What they need is to ensure that the business is run in an appropriate manner, that all directors and other senior managers know what is expected of them, what their duties and obligations are (whether they are codified under the Companies Act 2006, set out in the business plan or their own service agreement) to whom they owe those duties, and, that the business never loses sight of what its goals are (both social and commercial). In these competitive times, it is necessary to ensure that all good governance is evidenced. This allows, for example:

- compliance with the Companies Act (by ensuring minutes are taken at board or general meetings; that resolutions are evidenced in writing and filed where appropriate; accounts are approved and filed; dividends are recommended and approved etc);

- in a bid process a would be supplier being able to evidence they have appropriate policies and procedures on anti-bribery and corruption; health and safety; information security; sustainability; corporate responsibility etc.;

- a global business being able to satisfy its main board that directors in all jurisdictions understand their duties and responsibilities (by, for example, providing directors duties and compliance training as part of their take on procedures/ongoing objectives);

- a financial services business being able to satisfy its sectoral regulator with regard to its compliance systems and controls.

When looking at the governance framework for a company, size is obviously a factor. A fledgling company probably does not need anything more than simplistic templates, with board meetings scheduled, say, once a quarter. What is imperative though, is that those at the top understand their obligations and who they owe duties to, as they plan and grow their business. It is good governance to have an annual review against business plan. Part of that review should also include the corporate governance framework. Does it still fit? Do we need more? Do we understand where we are going and why? Are we balancing the interests of all our stakeholders? Follow this golden rule and you may well avoid having to report receipt of a season ticket to Rochdale FC on your Gifts and Hospitality Register! About the author: Debbie Farman is Director of Legal Practice, Jordans Corporate Law Limited

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