Directors’ and Auditors’ Re-appointments
Across the world we are seeing more and more countries adopting corporate governance best practices and embedding them into local legislation in order to ease business across jurisdictions. At the same time, while the onus was previously more on listed multinationals to carry out rotation exercises for board members or auditors, many large companies are now adopting such practices in order to encourage new ideas and innovation or to improve the audit quality.
For many multinational companies, this means it is becoming increasingly difficult to track the re-appointment dates of directors and auditors across their various entities worldwide. Re-appointments are complex to manage because they depend on a number of factors including the jurisdiction, type of entity, company policy and terms of appointments among others, all which differ from country to country and are continuously changing.
Re-appoint VS. Rotate
In some countries, it is mandatory to rotate board members or auditors after a set number of years, whereas in others, the re-appointment needs to be approved for the directors or auditors to remain in office. In the event that the re-appointment is not approved, then, the rotation process kicks off.
Over the years, there has been ongoing debate about the merits of rotating directors and auditors. One side would argue that a rotation is simply following good corporate governance. On the other, it can be argued that a rotation creates inefficiencies, with the knowledge acquired by the existing directors and auditors being lost with each rotation. From experience, a middle ground confers both benefits – rotation at reasonably regular intervals safeguards good corporate governance whilst also retaining knowledge and experience.
What does a re-appointment entail?
It is important to understand what a re-appointment entails. This process gives a company the opportunity to decide whether directors are still fit and proper to carry out their duties and, in the case of an auditor, whether they remain independent. It is also crucial that the best interests of all stakeholders are safeguarded at all times – this is only possible if the board is fully functional and the auditors maintain a professional distance.
In circumstances where it is the group policy to regularly either re-appoint or rotate the board of directors and auditors, the Articles of Association (“AoA”) of the entity in question contain the relevant provisions to enable the re-appointment or rotation. For the re-appointment of directors, it is recommended a Nomination Committee is set up whereby the Chairman of such Committee recommends the re-appointment of existing directors or the appointment of new directors. As for the re-appointment of auditors, the assistance of an Audit Committee is commonly sought, which in turn, makes a recommendation to the Board. Ultimately, the shareholders will either vote in favor of or against such re-appointments.
In other instances, the re-appointment or rotation requirement emanates from prevailing laws or a Corporate Governance code, which is binding on many corporations. Here we often find that the AoA will need to be reviewed and amended as though the legislation may have changed, many companies omit to reflect such changes in to their AoA.
Keeping up to date
Once the requirement to re-appoint or rotate has been identified, it is important to determine the duration of such tenure and the process to carry out the exercise, as laid down either by statute or the AoA. At Mercator, we keep track of all such obligations via our platform Entica™; an advanced tool for calendaring, tracking and reporting company secretarial deadlines, tasks and key performance indicators. Users can easily view recent and historical updates and also receive notifications about their upcoming obligations across various jurisdictions at least six weeks in advance of the deadline, giving ample time to decide on the way forward.
In many cases, there are common directors across the board of a number of entities. Entica™ also generates a report per director and other officers, whereby the due date for each re-appointment or rotation is listed. This report also includes the expiration date or will indicate if there is no expiration date next to a particular officer’s name based on the agreed terms or relevant laws.
Client Service Leader, APAC, Mercator by Citco, Citco Mercator, UAB