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Masthead Local Govt - Governance and Risk

The Company Sec in local government

Company Secretary 54365336 l 146x219As commercialisation grows, Azhar Ghose outlines the increasing importance of the Company Secretary role within local authorities and offers some tips on how it can be performed.

The role of a Company Secretary (CoSec) or company secretarial services in a local government trading environment is a relatively recent, demand led service being provided by Legal Services. In this article, I will highlight key issues that I encountered when acting in such roles for local authorities. By way of further abbreviation, when referring to a CoSec; I also mean the dual function of a legal advisor or counsel to the Board of Directors of a company.

Do you really need a Company Secretary?
An experienced company secretary should be valued like the person positioned on a ship or sailing boat acting as the monitor for signs of impending trouble. For most of the journey, you will not hear anything from these individuals. When you do hear from them, this informs the captain to navigate the vessel into safer waters thereby avoiding potential disasters.

Likewise, the CoSec role is strategically positioned on the board to help to identify and facilitate the safest navigation of the pathways that the company or the local authority as shareholder may be undertaking.

However, it is not uncommon to find that the appointment of a CoSec was an afterthought to a local authority business plan in establishing a new company. The assumption, it seems, is that an in-house local authority lawyer could deliver these services by adding this onto their existing duties without any additional training or resources.

When establishing a private company, local authorities are sometimes advised that there is no legal requirement for limited companies to appoint a company secretary. Whilst this advice is legally sound, it may not always be appropriate for the circumstances and it may just explain the absence of the appointment of a CoSec upon establishing a company or the low priority given to this function when resourcing a new company.

Bear in mind that the ultimate statutory responsibility for compliance of the Companies Act 2006 (CA), regardless of a CoSec appointment, lies with the directors. The directors for a local authority company are typically drawn from senior management or members of the council and/or outside appointments of Non-Executive Directors who usually hold a portfolio of other companies.

These directors would not usually be best placed to undertake the duties of the Company Secretary. It is, therefore, in the interests of the directors to ensure that there is a sufficiently competent and experienced CoSec appointment, who will ensure that the director duties are being properly fulfilled.
Companies’ legislation pre-dating the CA, required all private companies to be structured in the same grandiose style as a public listed company (PLC) on the London Stock Exchange. All such companies were required to hold annual general meetings for shareholders and to appoint a company secretary. The introduction of the CA discarded these mandatory requirements as it was intended to facilitate the vast majority of companies in England and Wales that are ‘one man bands’ with sole directors.  

A local authority company will usually be well resourced, have more than three directors and be set up in a complex legal and governance framework. Such a company would clearly be in need of a company secretary. Arguably, this need is even greater now as Companies House continues to simplify its online processes that can lull the unsuspecting to believe that company law procedures are simply a matter of ticking the right boxes.  
Companies House does not check or reject online company submissions on their compliance with the CA as this is the responsibility of the directors. A dedicated company secretary will want to ensure that the statutory procedures, underlying the online responses, have been complied with before ticking any of the boxes.

But what do they do?
As already alluded to, the CoSec role in the context of local authorities is still in its formative years although its importance and need is certainly growing. At times, the CoSec role has been misunderstood as a ‘glorified’ secretary or a position for a junior lawyer to undertake. However, I would suggest that if it includes the function of a legal advisor to the board then it is, at least, equivalent to the strategic role of a head of legal or the monitoring officer of the authority.

If the role is extended to acting as a legal advisor, as in the case of the NHS, then the company can benefit from an experienced lawyer with the ability to apply diverse areas of law to a hybrid of public and private law business requirements. There are no prescribed duties of a Company Secretary. It depends on the circumstances of the company and the requirements of the role as determined.

For example, a plc will usually have both a CoSec to support the board and in-house counsel, whereas in the NHS there is a dual role for the CoSec that includes also acting as the legal advisor. Most local authority-controlled companies, dependent on their size and resources, should have a dual role for the CoSec to include acting as the board’s legal advisor. This would be a cost-effective solution and add value to the business of the company and the local authority in question.   

The typical list of company secretarial duties can be readily found on numerous company law websites, so I have not duplicated these here. However, I would broadly categorise the CoSec duties as falling into; administration, statutory and regulatory compliance, legal advice, communication with internal and external stakeholders, corporate governance and attending to Companies Act requirements.  

Whilst directors occupy highly visible leadership and decision-making roles in the company, the CoSec role provides the underlying support and conduit that links the company with the local authority as the sole shareholder or other shareholders as the case maybe. The role requires forethought, planning and due diligence for the preparation of Board meetings and to facilitate the implementation of Board decisions. It is all about making things happen behind the scenes; they are as the civil servant is to the ministers or the court clerk is to the magistrates.

In some local authorities, it seems to be the practice that a senior legal or management officer is appointed in the role of the CoSec who then delegates to an operative to attend Board meetings and the like without taking any further interest in the role.

This can create challenges in acting in the best interests of the company, building relationships and unnecessary exposure to risks. The operative will be attending board meetings in an otherwise unidentifiable capacity from a Companies Act perspective and along with the registered CoSec is exposing themselves to risks and liabilities for the company’s failures.

The simple solution would be either for the person who attends board meetings to be registered as a company secretary or for the appointment of a corporate body as a CoSec which would allow the proper delegation of such duties.

Do you have the correct reporting line?
The CoSec role can become a more demanding and challenging role than it need be, with the creation of inappropriate reporting lines for the role.

The CoSec role has a natural accountability to the board of directors and the chairperson and consequently this is an implied situational reporting line. Just mess up with the board papers and you soon face the agitation of the Board. In a PLC the formal reporting line will usually be to the most senior legal counsel.

However, local authorities have at times required the strategic CoSec role to report to middle management in the authority such as within the Contracts team. The CoSec and their work may be managed by someone with little understanding of the role and the support required. In addition, it simply adds another unnecessary layer of demands onto the role. It will, most likely, be essential for the de facto company secretary to keep the most senior legal officer of the local authority informed of any significant issues and other inter-related issues with the companies.

If, clear and proper reporting lines are not established for the CoSec role, this will regularly place the person acting as the CoSec in  very difficult situations that can only lead to frustration; by creating a complicated maze of conflicts of interests, breaches of confidence and moral dilemmas.    

A source of income generation for the legal department
In a previous article for Local Government Lawyer, I explored local authority Alternative Business Structures (ABS) in which I mentioned the CoSec role as a source of real income generation for the local authority. This may not necessarily be directly from the delivery of the CoSec services to the company but from exploiting other opportunities for legal services.

An experienced CoSec could identify such opportunities whilst playing an integral role with the Company. Also, the CoSec role is the mechanism by which to overcome SRA rules restricting the ability of the local authority to act for companies with insufficient nexus between them.
Legal Services and their use of electronic time recording systems, sometimes treat the CoSec role in the same way as other legal roles for the purposes of charging companies for these services.

There is, for example, considerable preparation for Board meetings, organisation, administration and report preparation that would come into the category of “non-chargeable” work that could not be billed to the client if it were a true “legal service”.

A full time CoSec being “sold” by a local authority to its own or other companies at its legal hourly rate could cost the company anything up to £180,000 per annum. A cost-conscious chief executive of the company is unlikely to countenance such a cost when they could directly recruit and employ a CoSec for considerably less.

I speak from personal experience of this, having been in the middle of such conflicts many times! For example, on one occasion I was approached by the company to be engaged directly by them as a cheaper alternative to buying the service from the local authority.

Other options to reduce the fee structure of the CoSec role could include offering different levels of service. For example, by providing remote filing and basic compliance duties as the lowest level of service and increasing the fees with any additional level of service required by the company.

From the company’s perspective it can appear that the local authority has simply foisted its company secretarial services delivery model upon the company without properly consulting it. These issues need to be explored at an early stage between the local authority and the company to strike the right balance, taking into account the different perspectives of each party.

The cost of such a service will be detrimental to the loss making company during its initial trading years when it is trying to break even and produce a profit. However, over time this model may prove useful as a tax efficient tool from which the company can benefit and more of the company income can be passed onto the local authority without being subject to corporation tax.

Is your CoSec properly remunerated?
The local authority CoSec is a demanding role in a complex and unprecedented environment that adds considerable value and efficacy to the new governance arrangements. The demands of the role are comparable to, if not exceeding, the complexities of the NHS and a PLC environment. However, the remuneration on offer from some local authorities tends to be below that of the market for CoSec’s salaries. Just check the salaries on offer for CoSecs being recruited by the NHS or PLCs to get some idea of what I am talking about!

If the local authority makes the investment in the CoSec but does not offer a commensurate salary, then it naturally runs the risk over time of losing its “asset” to the private sector or another public body that requires such skills such as university trading arms.  However, all the signs are that aocal authorities are moving in the right direction and that feedback including from their own companies has been informing the decision making in respect of what is required of the CoSec role. Steady as she goes!

Azhar Ghose ACIS, Solicitor and Chartered Secretary, is a freelance legal writer in his spare time with substantial years of legal experience in the public sector. He has recently been employed as an in-house Solicitor with Npower. This article is independent of his employer and reflects his own opinions.

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This article was first published in the February edition of Local Government Lawyer Insight, which can be accessed at http://www.localgovernmentlawyer.co.uk/insight

Insight is published four times a year and is circulated free-of-charge to all Local Government Lawyer newsletter subscribers (click here to subscribe) in electronic format. A single hard copy is also circulated to all local authority legal departments in England and Wales.

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