With the pressure on governance and tax substance increasing, it’s time for Luxembourg entities to fully appreciate the importance (and value) of a proper and well-managed corporate secretary to address these very challenges.
“Corporate secretary is a commodity”
The above sentence has been the motto for the last decade, as many entities based in Luxembourg didn’t place a strong emphasis and interest in the practice.
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Indeed, the services were considered as non essential for the business and were almost automatically delegated to any third-party offering an attractive bundle of “commodity” services —that is, accounting, domiciliation, corporate secretarial services, among others. The only differentiators were the pricing and the flexibility.
Nevertheless, there were a few players who understood the importance of a robust Corporate Secretary (CoSec) practice, whose main responsibility is to ensure that board members have relevant and sufficient information and resources to take decisions in good faith and discharge their duties to shareholders. For a deeper look into the corporate secretary’s role, read our previous blog entry.
However, the vast majority of these players focussed on costs and outsourcing. Context is important here. At the time, the market was under pressure and players were trying to reduce costs; back and middle-office functions —for example, accounting and tax— were being revamped and outsourced to service providers to reduce costs and focus on the key functions, such as strategy and assets management.
The objective was to have lower fees for the board meetings’ organisation, domiciliations and other standard corporate secretarial services. Companies didn’t perform any specific oversight and the CoSec could only render services at its minimum.
Given this low level of interest in the practice, the entities’ legal function couldn’t develop itself, as no investment was made to automate the processes or diversify the activities. There was therefore a status quo where corporate secretary players couldn’t exploit their full potential and were limited in their exposure and influence.
Substance: time to wake up!
But, at last, the winds of change arrived in Luxembourg.
The Grand Duchy came under greater scrutiny and the regulator —The Commission de Surveillance du Secteur Financier (CSSF)— put a lot of effort and pressure to ensure that domestic entities had sufficient substance in the country and were documenting it properly.
According to the Anti-Tax Avoidance Directive III (ATAD III), the objective of the Luxembourg substance is to prevent the misuse of shell entities for tax evasion purposes.
Regulations grew ever more strict and companies had to adapt. To ensure proper substance, decisions need to be made in Luxembourg by directors living in Luxembourg, and record them accordingly.
This meant that the rules and market practice had to evolve and not all market participants were ready or had the sufficient resources to adapt.
With the increased focus on corporate governance, the role of the company secretary has therefore been extended such that the secretary should now be seen as a safeguard to ensure the company’s compliance with legislative requirements and best practices.
The Organisation for Economic Co-operation and Development (OECD) defines corporate governance as “a set of relationships between a company’s management, its board, its shareholders and other stakeholders.
Corporate governance also provides the structure through which the company’s objectives are set as well as the means of attaining those objectives.
Good corporate governance should provide proper incentives for the board and management to “pursue objectives that are in the interests of the company and its shareholders and should facilitate effective monitoring,” as stated in the G20/OECD Principles of Corporate Governance.
To simplify, corporate governance is a sum of rules, practices, and processes that directs and controls a firm.
The Corporate Secretary, therefore, has a key role to play to address this challenge and should already be reinventing itself.
What’s the future for the CoSec?
Known as being a “simple” secretarial officer taking minutes and organising meetings, the new CoSec should become a governance advisor, giving guidance on best practices and having a deep understanding of the company’s business.
In addition to recording accurate and sufficient documentation to meet legal and substance requirements, the corporate secretary should also become a key resource to managers, directors and the legal function and provide counsel on these responsibilities.
To do so, it needs to go beyond the standards that are closely linked to the practice, such as doing administrative work (for instance formalities, minuting process, among others), and dealing with logistics (for example, board organisation, minutes recording, board packs consolidation) and exceed expectations by:
Becoming a real advisor to the board and the legal function and assisting them in terms of governance, compliance and market practice;
Understanding the company’s industry and business and grasping the main challenges and Key Performance Indicators (KPIs). The officer needs a clear understanding of the topics and different stakeholders as the minutes need to fully reflect the challenges and decision factors;
Getting familiar with the company’s organisation, stakeholders, culture and methodology to act as a facilitator during the meetings;
Moving from a passive to an active role during meetings to ensure that topics are sufficiently discussed and challenged and make sure that relevant information is documented;
Staying informed about the latest regulatory developments linked to the practice and updating the managers and directors regularly;
Being pragmatic: if the law needs to be respected at all costs, the governance practice also needs to take into account the context and the topics’ complexity.
While a good corporate secretary officer has been described as being rigorous, meticulous and well organised, the new function also requires:
Good communication skills;
Flexibility and responsiveness;
Resilience, tenacity and drive;
Trust and integrity;
Deep understanding of the business.
From register monitoring to payment processing
Most of the back and middle-office functions have been restructured over the years. Until now, the legal function was somehow safe, but the market uncertainty and margin pressure led to a revamp of this department as well.
We see more and more legal restructuring leading to a drastic reduction of the number of legal and paralegal staff in organisations. The will is to keep a few legal experts to deal with complex and strategic topics and delegate the rest to service providers.
Along with the outsourcing of other accounting and tax functions, we now see an expansion of the service offering. While the standard corporate secretary services —organisation of board meetings, incorporation or liquidation of companies, Luxembourg formalites, domiciliation, among others— remain in place, we now see also a demand for documents and agreements management, AML/KYC monitoring or for payments processing.
The role is therefore evolving and needs different skill sets and a strong need for automation and scaling.
Technology is a key challenge here as the legal function has never fully embraced and invested in it. These words may sound rather harsh, but that’s the reality.
Corporate secretaries should learn from the other alternative legal service providers (ALSPs), and understand the need for automated workflows and production. During the past years, ALSPs have been developing or acquiring solutions to allow mass production and efficiency. This allows a seamless integration with other back-office processes (for instance, accounting and treasury), and the ability to scale the production of standard documents.
A facilitator for companies
The new CoSec is at the heart of the company organisation. It’s the central point of contact for any demands and coordinates with the other departments (accounting, tax, finance…), manages all documents and agreements, documents the decision making in accordance with Luxembourg rules and principles and can take care of any secretarial activities.
In summary, the CoSec shouldn’t be seen as a burden but as a facilitator for a company.
Today, it can be difficult for a business to source a company secretary with the required governance experience, but also the required skills and expertise. To find the CoSec officer of the future, outsourcing may be considered, with a specific focus on quality, efficiency, compliance and reactivity.
Outsourcing also provides flexibility, allowing service providers to fully or partially assist in the areas companies consider as crucial. It’s also more cost-effective compared to employing a full-time, permanent company secretary.
Everyone knows the current corporate secretary services, but only a few players realise it will become a key function in tomorrow’s Luxembourg companies. Will you join them?
Our specialists can assist you in your company secretary operations and governance structuring. Click here to find out more.
What we think
Florent Delory, Director, Asset Management, at PwC Luxembourg
The legal and CoSec functions are becoming key in the Luxembourg organisations. We expect to see companies making significant investments —in technology, people, skillset— to ensure governance and compliance. Given today’s constraints and threats, we also expect most businesses to outsource these activities and transfer the burden to service providers in the future.
