Introduction
Bank of Uganda has recently issued a directive instructing all supervised financial institutions to stop outsourcing company secretaries effective 31st December 2023. Non-compliance could attract regulatory sanctions. The objective behind this move is to fortify corporate governance and ensure that the integrity of highly sensitive and confidential data is maintained. This directive has been received with mixed reactions and caused debates in the industry. This article, therefore, aims to dissect the implications of this directive by evaluating its advantages, drawbacks, and possible mitigation strategies.
Corporate governance has become increasingly essential and even more so for financial institutions. Uganda has previously been a victim of bank failures primarily attributed to poor corporate governance. A dominant shareholder(s) often exerts undue influence over management, leading to insider dealing and several other breaches. This is coupled with weak boards lacking professional expertise and the required independence to carry out their oversight function. The corporate governance requirements under the Financial Institutions Act and corporate governance guidelines have helped avert these issues. However, in the past, emphasis has been on the role of the board, and that of the company secretary (“the chief whip”) has been overlooked and overshadowed.
The new directive will, therefore, draw attention to the vital role a company secretary plays. A company secretary is a crucial link between the organisation's board of directors and management, overseeing governance frameworks, compliance, and corporate policies. This role involves ensuring that all board procedures are followed rigorously, maintaining essential corporate records, and facilitating effective stakeholder communication. In addition to these traditional responsibilities, the company secretary is increasingly involved in strategic planning, risk management, and acting as a liaison point with regulatory bodies. The role is integral to the institution's legal and ethical standing, demanding a nuanced understanding of governance and the complex regulatory landscape of financial entities.
Accordingly, given the pivotal and critical role played by the company secretary, it's not difficult to see why Bank of Uganda has issued the said directive. Having an in-house company secretary presents the following advantages.
Pros of an In-House Company Secretary
1. Strengthened Corporate Governance
An in-house company secretary ensures that corporate governance standards are continuously upheld. Given that they are part of the daily operations, they can offer real-time governance insights and facilitate immediate action.
2. Enhanced Accountability
When the company secretary is an internal member, accountability to the board and the institution is direct and immediate, leading to a greater commitment to organizational objectives.
3. Fluid Communication
An in-house company secretary can improve communication channels between management, the board, and regulatory authorities, thereby creating a more seamless operational flow.
4. Tailored Expertise
Over time, an internal secretary acquires deep-rooted knowledge about the organization's specific challenges and intricacies, which allows for more targeted and effective governance solutions.
5. Improved Confidentiality
Sensitive information is better protected when managed internally. An in-house company secretary is bound by the institution’s non-disclosure agreements, ensuring that confidential information remains secure.
Cons of an In-House Company Secretary
1. Risk of Bias
Being an internal member may lead to biases towards the management or the board, potentially compromising objectivity and independent judgment.
2. Increased Costs
The overheads of maintaining a full-time, in-house company secretary can be significant, including salaries, benefits, and administrative costs.
3. Scalability Concerns
As the institution grows, the secretary’s roles and responsibilities may become overwhelming, demanding additional resources and potentially diluting the effectiveness of governance processes.
4. Skill Diversification
An in-house company secretary might not possess the full range of skills required to navigate all governance complexities, especially those requiring specialised knowledge.
5. Regulatory Vulnerability
Being solely reliant on an internal resource can result in compliance risks, particularly if the company secretary is not up-to-date with regulatory changes.
Mitigation Strategies
1. Frequent Training Programs
Regular training sessions on corporate governance, regulatory compliance, and ethics can be instrumental in keeping the company secretary impartial and updated.
2. Clearly Defined Role
Establishing clear job descriptions and governance frameworks can minimise potential conflicts of interest and enhance the independence of the company secretary.
3. Periodic External Audits
Routine external audits can offer an unbiased perspective on the effectiveness and objectivity of the company secretary, thereby helping to maintain transparency and accountability.
4. Hybrid model/ Support Staff or Technology
As the organisation expands, additional support staff or technology solutions can be leveraged to manage the growing workload effectively. Also, with the adoption of the hybrid model, very specialised engagements can be outsourced to relevant experts under the company secretary’s instructions and oversight. All concerned must sign Non-Disclosure Agreements before any confidential information is shared.
5. Professional Networking
Membership in professional bodies and industry seminars can provide fresh insights, keeping the company secretary informed about best practices and upcoming regulatory changes.
Conclusion
The directive by the Bank of Uganda aims to enhance corporate governance and protect sensitive information by mandating in-house company secretaries in financial institutions. While the policy has several advantages, including better corporate governance and increased accountability, it also presents challenges like potential bias and escalating costs. However, with effective mitigation strategies, such as ongoing training and clearly defined roles, financial institutions can adapt to this change while maximising its benefits and minimising its drawbacks. The ultimate goal is to create a more secure, accountable, and effectively governed financial industry in Uganda.