Law & Regulation
Corporate Governance by Phyllis Willoughby
Corporate Governance
by Phyllis Willoughby
Following the recent exposure, through a Grant Thornton Review, of issues within RTE, this article will set out the legislative requirements for Corporate Governance. It will also highlight requirements for good corporate governance and outline additional risk factors Boards needs to consider, particularly in relation to Environmental, Social and Governance (ESG) matters.
Definition –
“Corporate Governance is a set of rules, best practices and processes that determines how an organisation is managed, whilst also implementing best practices and processes by which an organisation is directed and operated”.
Good Corporate Governance
Good governance ensures that the interests of stakeholders of an organisation are met. The main objective of corporate governance is to ensure that the companies are managed and operated responsibly, ethically and transparently aiming to increase long-term shareholder value while considering other stakeholders’ interests. Good governance requires that the board of directors meets regularly, retains control over the business, divides responsibilities clearly and ensures that risk management is ongoing. Incorporating good governance practices can help reduce the chances of corruption within a company. For example, when a company fails to keep its books and records up to date, it is unlikely to attract top buyers or investors. Regular board meetings, making the correct strategic decisions and good governance are vital for success. By practicing good corporate governance, a company will earn public trust.
Duties & Obligations of Company Directors’
Directors’ duties and obligations derive from two sources:

  1. Statute (Acts of the Oireachtas and other Legislation)
  2. Common Law
  3. These are critical to good corporate governance.
Duties & Obligations of Company Directors’
S.223 Co. Act 2014
A director on appointment consents to the role and signs a statement to the effect that:

“I acknowledge that, as a director, I have legal duties and obligations imposed by the Companies Act, other statutes and at common law”.

Directors’ Fiduciary Duties
S.228 Co. Act 2014
  • Act in good faith in what the director considers to be the interest of the company.
  • Act honestly and responsibly in relation to the conduct of the affairs of the company.
  • Act in accordance with the company’s constitution and exercise his or her powers only for the purposes allowed by law.
  • Not benefit from or use the company’s property, information or opportunities for his or her own or any else’s benefit unless the company’s constitution permits it or a resolution is passed in a general meeting.
  • Not agree to restrict the director’s power to exercise an independent judgment unless this is expressly permitted by the company’s constitution.
  • Avoid any conflict between the director’s duties to the company and the director’s other interests unless the director is released from his or her duty to the company in relation to the matter concerned.
  • Exercise the care, skill and diligence which would be reasonably expected of a person in the same position with similar knowledge and experience as a director. A director may be held liable for any loss resulting in their negligent behavior.
Director Breach of his/her Fiduciary Duties
S.232 Co. Act 2014
A director of a company who acts in breach of his or her fiduciary duties and benefits or profits from the company’s property, information or opportunities for his or her own or anyone else’s benefit will be liable to account to the company for any gain and/or indemnity the company for any loss or damage resulting from that breach.
Duty to keep adequate accounting records
S.281 Co. Act 2014
Every company is obliged to keep or cause to be kept adequate accounting records.

It is a criminal offence for any director of the company to fail to take all reasonable steps to ensure compliance with this requirement.

Duty to prepare financial statements
S.290-295 Co. Act 2014
The directors of a company are required to prepare financial statements in respect of each financial year.

The annual financial statements are prepared from the information contained in the company’s accounting records and other relevant information.

The directors must not approve the financial statements of a company unless they are satisfied that they give a true and fair view of the assets, liabilities and financial position as at the financial year end.

Duty to have statutory financial statements audited S.333 Co. Act 2014
The Directors of a company are obliged to arrange for the company’s statutory financial statements to be audited by a statutory auditor, unless the company is entitled to, and chooses to avail itself of, audit exemption.
Substantial non-cash transactions involving directors
S.238 Co. Act 2014
Directors have certain responsibilities and obligations where they enter into transactions with the company of which they are a director.

A company (“relevant company”) shall not enter into an arrangement under which a director of the relevant company or of its holding company, or a person connected with such a director, acquires or is to acquire, one or more non-cash assets of the requisite value from the relevant company, or the relevant company acquires or is to acquire, one or more non-cash assets of the requisite value from such a director or a person so connected, unless the arrangement is first approved:

  1. By a resolution of the relevant company in general meeting, and
  2. If the director or connected person is a director of its holding company or a person connected which such a director, by a resolution of the holding company in a general meeting.
Acceptance of company directorships in certain circumstances
The Corporate Enforcement Authority (CEA) recently issued guidance regarding accepting directorships in certain circumstances. The guidance is aimed at members of the public who receive unsolicited approaches to become directors of companies about which they know little if anything, sets out at a high level:

  • Company directors’ principal duties and obligations of particular relevance in this context.
  • The considerable risks associated with accepting such appointments; and
  • Some of the basic steps that any member of the public should take before deciding to accept an unsolicited offer to become a company director.
Qualitative Report June 2023 YouGov/FRC Audit Committee Chairs’ (ACCs) views on, and approach to Environmental, Social and Corporate Governance (ESG)
The recent Research Report on ACCs’ views on, and approach to, ESG is highly informative and highlights the increased significance of ESG in recent years as part of good business practice.

The main role of many Audit Committee Chairs is related to risk and compliance. In addition, they must ensure that ESG matters are effectively reported on, rather than deciding on what to implement and how.

ESG success is dependent upon executive management’s interest levels and the company’s access to ESG resources. However if shareholders have an interest in ESG, it tends to influence the business’ attitude towards the framework and gives greater importance to company’s efforts.

Feedback from Audit Committee Chairs on ESG:
Environment
  • Environmental activities are wide ranging depending on operating markets and company size. Many organisations are trying to reduce their carbon emissions, workplace plastic use and ecourage staff to cycle or walk to work.
  • To date the recommendations by the task force on Climate Related Disclosures (TCFD) have proven most popular for implementation.
  • A small number of negative reactions around continual changes to reporting standards. Concerns from a few ACCs around the time needed and costs required for smaller businesses to comply with the recommendations.
Social
  • The ACCs agreed that the expansion of social activities is driven in part by societal shifts, in turn making investors more interested in companies’ social policies and activities and motivating companies to place a greater focus on their social activities and reporting
Governance
  • ACCs felt that they had a firm understanding of governance activities, issues and risks, as these activities and measures are well established.
Read More
business men and women conversing and shaking hands
Challenges with measuring and reporting on ESG
Some ACCs reflected that ESG was “too broad” and that it continues to evolve and grow rapidly, which can make the measurement of ESG activities difficult and inconsistent across sectors and markets. The increased focus on ESG reporting is making annual reports very lengthy; thereby making it harder to identify key information. Time and cost concerns are a further concern, particularly for organizations who do not have sufficient resources or a dedicated environment and social audit specialist.
people working
The future of Corporate Governance
The EU Corporate Sustainability Reporting Directive (CSRD) (2022/2464) entered into force in January 2023. There will be an introduction of mandatory sustainability reporting standards which will be harmonized with EU requirements for companies reporting of sustainability matters. This will provide more detailed information for investors, employees, consumers and other stakeholders.

When companies report on sustainability matters the annual report will consider environmental, social, and governance factors. This information must be clearly identifiable within the management/directors’ report within a dedicated section and said this management report must be produced in a European Single Electronic Format.

There will be additional education and training requirements for auditors to qualify to carry out sustainability assurance including transitional provisions.

Member states have until July 2024 to transpose the CSRD, with requirements being phased in between 2024 and 2028. The phasing in of the new rules in line with the Directive (2022/2464) is applicable to the following entities:

  • 2024 large public interest entities already in scope of non-financial reporting (> 500 employees)
  • 2025 large companies and large public interest entities (> 250 employees)
  • 2026 listed SMEs with further opt outs possible.
  • 2028 subsidiaries and branches of certain non-EU companies.
Conclusion
As illustrated within this article, good Corporate Governance is critical to company success particularly as we enter into the era of corporate sustainability reporting.

There are considerable risks associated with accepting directorship appointments, therefore it is essential to apply adequate due diligence measures. For success, the board of directors should meet regularly, retain control over the business whilst ensuring ongoing risk management

Phyllis Willoughby headshot
Phyllis Willoughby
Learning & Development Accountant Member Services CPA Ireland
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