In China, Directors Can Have Criminal Liability Leading To The Death Penalty
Regulators continue to pass legislation to improve corporate governance. Legislation encompasses more mundane issues of who can be a director and what is their role to regulations to end bribery and corruption. We focus here on Corporate Governance issues applicable to all but particularly relevant to the smaller company.
Boards And Directors
Countries naturally vary in their specific regulations but all have regulations aimed at ensuring that Board members, Directors and other officers of the Company have well defined roles, responsibilities and powers to enable them to carry out their functions effectively. Their role is likely to cover:
- Formulating the company’s strategy in all areas
- The requirement to support and supervise the company’s management in implementing company strategy.
- Responsibility to ensure that financial statements show a true and fair view of the company’s financial status.
- Taking decisions on mergers, acquisitions and disposals.
- Establishing equitable remuneration among company staff also complying with local law.
- Dealing with any business issues that impact the reputation of the company or the group
A parent company frequently wishes to limit the powers of local directors of a subsidiary. While this desire is understandable and the required result can be achieved, it is very important that the powers are not restricted in a way that does not allow them to carry out their responsibilities under local corporate governance regulations. For example, it is sometimes desired to have specific individuals have powers over the local bank account. However, in Italy, it is unlawful for a local Director not to have powers over the local bank account.
Many countries have a specific role defined by company law of “Company Secretary”. Other countries do not have such a role but any officer whose role is to support the Board in its Corporate Governance responsibilities can be called a “Company Secretary” and often this role is fulfilled by the Legal Counsel.
Subsidiaries are created for a multitude of different reasons – it may be because local regulations require a legal structure based on the nature of the activities or to protect the parent company from various risks.
One thing everyone involved in international business will agree on is that it is far easier to create a legal entity than to get rid of it! In our experience, with the passage of time, many large multinationals do not even remember why various subsidiaries were created – hence many lie dormant.
An essential role of Company Secretary/Legal Counsel is to keep track of these subsidiaries, keep them compliant with local Corporate Governance rules and close them down when their use has clearly been outlived!
Mundane But Critical Issues
There are requirements that are the more “mundane” aspects of corporate governance but with which, nevertheless, compliance is a must!
- Filings – accounts, tax, VAT, Data Protection
- Company records – shareholders, Directors’ details, preparation of Directors’ Report, resignations, appointments, resolutions, minutes
- Organizational – Board meetings, shareholders meetings and giving notice required by law
Generally, a parent company will want the local monthly accounts to be maintained to parent company jurisdiction GAAP e.g. US GAAP. However, it is important to understand that the local Directors are responsible to ensure the integrity of the financial statements under local law. It is, therefore, important to have systems in place that track the local GAAP and particularly at year end have processes in place to enable accounts to be put together compliant with local GAAP.
Auditors And Directors’ Report
Many countries will require financial statements to be audited at the year end. Each country has regulations often related to the size of the entity that will determine whether or not an audit is required. The Directors will be required to sign the financial statements and also issue an annual (or more frequent) Directors’ Report.
Directors’ Personal Liabilities
Often Directors do not realize that when they take on the role of Director they take on substantial personal liability, including criminal liability, imposed by local law. A critical part of Corporate Governance is helping Directors manage their personal liabilities. Many countries allow Directors to be indemnified by the Company and often Directors will want a contract with the Company limiting their liability to the extent allowed by law. Insurance is also available to protect Directors.
These are general guidelines, for more information on your specific country or situation, please connect with us.