Ethics and Governance

Ethics and Governance

Níall Fitzgerald explains how boards can use the current crisis to take stock and, where appropriate, reflect new priorities.While the COVID-19 crisis continues, organisations are preparing for the uncertainty ahead. This process presents an opportunity for organisations to rethink their priorities, how they deploy resources, and the way they do things.In the months ahead, boards will face new challenges that can give rise to major concerns. This article examines some of those challenges, the responsibility of boards in facing them, and questions board members can ask to help focus on what is important.Going concernIrish and UK company law requires directors to act in the best interests of the company, which includes promoting its success and ensuring that it continues as a going concern. Past corporate collapses have revealed instances where directors failed in this duty. Failures attributed to directors include having unquestioning optimism rather than a challenging mindset and succumbing to groupthink.Given the current uncertainty, threats to going concern are more likely to feature higher on the risk register in many organisations. Oversight is a key role of the board, and this requires directors to have a questioning mindset, apply their skills, experience and knowledge to challenge management appropriately on their judgements, and ensure that they have sufficient evidence to support those judgements. Having a range of skills, experience and knowledge (in addition to diversity in other forms) on a board will help ensure that a range of perspectives and practicalities are considered. Basic good governance practices such as reviewing meeting papers in advance, arriving to meetings prepared, and an effective chair who allows sufficient time for discussion will make a big difference to the quality of the decisions or actions arising.In June 2020, the Financial Reporting Council (FRC) published COVID-19 – Going Concern, Risk and Viability: Reporting in Times of Uncertainty. The paper highlights how challenges that would normally relate to building resilience and flexibility (e.g. sourcing short-term cash resources) have pivoted as a result of the pandemic to threats relating to survival and, therefore, going concern.Other examples of current threats and challenges to going concern include:further restrictions that limit the return to normal operations;restrictions placed on government (or other) capital;timing and continuation of government schemes and support packages;short-term impacts of pricing changes to revenue and expenses; andimpacts on human capital.An Institute article titled Going Concern Considerations for Members Preparing or Auditing Financial Statements in the Context of COVID-19 is available on the COVID-19 Hub on Chartered Accountants Ireland’s website.Social responsibility, and public and employee welfareDirectors have a duty under company law to have regard to the interests of employees and will therefore be involved in making important decisions in relation to workforce policies and practices. In addition, corporate governance codes (e.g. the UK Corporate Governance Code) and sustainability frameworks (e.g. an environmental, social and governance (ESG) framework) highlight how a board’s consideration of all stakeholder interests, including societal impact, is important to ensure the organisation’s long-term success.The COVID-19 crisis forced many organisations to rapidly transform the way they work. In many cases, anticipated obstacles to business continuity either did not arise or were overcome with adjustments to how work and people are managed, as well as investment in ICT infrastructure, connectivity and cybersecurity. In April 2020, The UK’s Office for National Statistics (ONS) released statistics revealing that 49% of adults in employment were working from home. In May 2020, an Irish survey of remote working during the COVID-19 crisis by the Whittaker Institute at National University Ireland Galway and the Western Development Commission revealed that 51% of respondents never worked remotely before the COVID-19 crisis. Of these, 78% would like to continue to work remotely.As public health restrictions are lifted, boards – or board chairs, at least – should engage with CEOs and executive management to support the restoration of operations and plan the safe return to the workplace of employees, suppliers and customers. Executive management and boards should be aware of, and follow, national and local government protocols issued on returning to the workplace.No plan survives the battlefield, so expect adjustments along the way. Updating the board and seeking direction at every turn is not practical, however. It might, therefore, be wise to establish an oversight working party with regular executive engagement and delegated responsibility for overseeing the implementation of plans to restore operations. Decision-making authority should be clearly defined to ensure issues are, where appropriate, referred to the board for a decision. As boards plan for the return to the workplace, directors should consider the following:what work can be done remotely?do certain internal policies need to be rewritten to support new or future ways of working?are there opportunities for automation or digitalisation?what impact could remote working have on organisational culture, and what changes are necessary to align it with the organisation’s mission, vision and values?Boards also have an opportunity to consider how their organisations can have a greater positive social impact. During the crisis, some organisations went further with social responsibility by redirecting their resources to provide support, services and products to the fight against COVID-19. Charities and other not-for-profit organisations excelled in meeting the social needs of many vulnerable people affected by the crisis. Many organisations incentivised staff to get involved in volunteerism to help with, or raise funds for, good causes. In fact, organisations such as Volunteer Ireland and the Royal Voluntary Service reported a surge in registrations, resulting in a surplus of volunteers.Sustainable ‘reset’An important principle set out in the UK Corporate Governance Code is for a board “to promote the long-term sustainable success of the company”. This involves considering how the organisation generates and preserves value, and contributes to wider society over the long-term. It also involves considering the sustainability of the business model – weighing up resilience with efficiency to achieve long-term success. In times of uncertainty, some efficiencies may be sacrificed to achieve resilience. A board’s macro perspective can make a significant contribution in helping the organisation achieve a balance between these two factors.As part of pre-recovery planning, many organisations will engage in horizon scanning to anticipate changes, sources of uncertainty, and future threats and opportunities. While the effect of the COVID-19 crisis on operations may dominate risk perception, organisations also have a unique opportunity to consider how they can rebuild better, greener, and for a more resilient, sustainable world. Boards are well-positioned to lead and encourage innovation on how organisations can adapt to expectations of sustainability from key stakeholders such as investors, customers and regulators. These expectations are apparent in changing social behaviour (e.g. support for global climate protests), investor conditions (e.g. ESG goals or investors’ adoption of Principles for Responsible Investment), and regulator mandates (e.g. the development of standards for ESG disclosures for financial market participants, advisers and products).The 17 UN Sustainable Development Goals (SDGs) provide a blueprint that can be used to define an organisation’s sustainability objectives. The World Economic Forum refer to this opportunity as the ‘great reset’. We all have a vested interest in averting further global crises. When boards are resetting their agenda to focus on new priorities, sustainability must be a key consideration in more ways than one.ConclusionOrganisations can expect further challenges in the months ahead. This is not ‘business as usual’ and boards are adapting as the situation unfolds. Whether an organisation is struggling or thriving in the uncertainty, key priorities for any pre-recovery strategy must include going concern, social responsibility, employee and public welfare, and sustainability.Níall Fitzgerald FCA is Head of Ethics and Governance at Chartered Accountants Ireland.

Jul 30, 2020
Ethics and Governance

How can charities, especially smaller ones, deal with the many challenges they are currently facing? Kathya Rouse identifies key areas where accountants may be needed to help charity clients. Like everyone else, charities are struggling to come to terms with their new normal. The unprecedented situation we find ourselves in, and uncertainty around the short-term outlook, makes planning for the future exceptionally difficult. Some charities are continuing to provide ongoing services, while other charities are operating limited or no services due to the current government restrictions. It seems likely that some level of social distancing will be in place for some time and many charities will need to come up with new ways to continue/recommence providing their services while adhering to the relevant government restrictions. Amid all this uncertainty, how can we, as accountants, help? Many smaller charities do not have the expertise among staff or trustees to deal with many of the challenges they are being faced with. We are more than “just” accountants to these clients – we are their trusted business advisors who can be relied on to provide independent advice. I have identified a few areas where you may be needed to help your charity clients: Provide a sounding board and listen to their concerns Despite many similarities between charities, each one will have different requirements right now, so aim to provide a bespoke solution for each charity.   Encourage them to develop a contingency plan to guide them through planning for their organisation during the life cycle of the current pandemic There are various free templates and guidance issued by some of the main charity sector support organisations, such as The Wheel and The Carmichael Centre, which you can direct clients to. The contingency plan should be a live document which remains under regular review. Advise charities around their governance requirements and their AGM There is conflicting advice around whether AGMs can be held entirely virtually under company law except where specifically allowed by the company’s constitution. You can play a key role in helping the charity figure out its position re quorum and use of proxies to overcome this hurdle. Get involved in the budgeting process Budgeting has never been more important, and you can provide your expertise through assisting in, or reviewing, the budgeting process. Like the contingency plan, the budget should also be a live document updated regularly. Empower the trustees Empower the charity trustees to make decisions around whether they can use their current accumulated reserves to make up for a temporary deficiency in resources by assisting them to ascertain their restricted and unrestricted funds. Stay up-to-date Ensure you stay on top of the various funding streams available to charities, such as the Temporary Wage Subsidy Scheme and the new €40 million COVID-19 support fund, and make sure to keep your clients abreast of any available funding. Keep up to date with ongoing regulatory, professional and other guidance which may be of use to your clients. Chartered Accountants Ireland have collated a list of various guidance documents which are available on its website and is open to everyone, not just members. Make use of any reputable free resources available to you and your clients. Kathya Rouse is a Partner at McMoreland Duffy Rouse and a CA Support Board member.

May 14, 2020
Ethics and Governance

How can charity trustees continue to safeguard charities during this tumultuous period? Michael Wickham Moriarty gives us three top tips on how to safely guide your charity through these uncertain times. The COVID-19 crisis has now been impacting Irish charities for at least two months. What should charity trustees be doing for their charities now and for the future? Keep meeting, but be flexible Board and committee meeting schedules may have been disrupted, or even paused, during the introduction of restrictions in March and April. This is entirely reasonably as management focused on facilitating remote working and core business continuity during the initial stages of the crisis. If meetings have been on hold, look to restart them now. All the governance functions of charity trustees are just as important during this crisis as they are during normal times. Undoubtedly, the agendas and board calendars will need to shift to focus on business continuity, crisis management and other COVID-19 related risks. All meetings should be remote rather than in-person. They may take place at different times to facilitate either board or management. Some meetings for board and committees may be called at short notice as the charity responds to a rapidly changing situation. The papers prepared by management may be less polished and punctual as the executive team focuses on crisis response. Going forward, charity trustees should continue to meet and focus on their core governance roles of strategic direction, oversight and risk management. Think of all stakeholders Given the serious impact of COVID-19, management may focus their energies and attention on specific stakeholders or critical areas. Charity trustees should ensure that all stakeholders are considered during the crisis. For example, the management team may be focused on serving and protecting their vulnerable beneficiaries without giving sufficient attention to staff welfare, including their own. In many charities, the funding and financial crises could take all the attention away from the critical work of the organisation. Institutional donors are a stakeholder that can dominate the attention of charities, but many of these funders are currently being flexible with their grants, allowing charities to focus on other stakeholders. Trustees should ensure due consideration is given to the needs of all stakeholders, as well as organisational sustainability. Be a critical friend to management Most charities are dealing with multiple complex risks with a high-level of uncertainty over the future operating context for funding, staff and beneficiaries. This level of uncertainty is likely to persist for the remainder of this year and beyond. Charity trustees must always balance their relationship with management between challenge and support. As a trustee, you may have access to networks, expertise and experience not available elsewhere within the charity. Use this information to test the assumptions that management use for their COVID-19 response plans. Examine the scenarios and decision points set out. This trustee perspective can really add value as you collaborate with management in agreeing how to chart your charity’s path through these unprecedented times. Good luck! Michael Wickham Moriarty FCA is a Governor and Vice-President of the Rotunda Hospital, and he is the Director of Corporate Services of Trócaire.

May 13, 2020
Ethics and Governance

Aoife Newton assesses the prospects for gender pay gap reporting legislation as negotiations continue to form a new government. The outgoing Government made limited progress in introducing gender pay gap reporting legislation in the Republic of Ireland, and it remains to be seen whether the next government will echo the same commitment. Two separate Bills were initiated in the Houses of the Oireachtas in the past three years. First, the Labour party initiated a private members bill titled The Human Rights and Equality Commission (Gender Pay Gap) Information Bill 2017, and this was followed by the Gender Pay Gap (Information) Bill 2019. The latter progressed to the third committee stage of the Dáil, but as with the 2017 bill, it lapsed upon the dissolution of the Dáil in January 2020. Although the timing of this legislation is unknown, the next government will be under pressure to advance such legislation. The European Parliament passed a non-binding resolution on 30 January 2020, which called on EU member states to strengthen their efforts to definitively close the gender pay gap by strictly enforcing the equal pay principle and adopting legislation increasing pay transparency. The European Commission reports that the overall gender pay gap in the European Union is 16%. In her political guidelines for 2019-2024, Commission President Ursula von der Leyen committed to addressing the gender pay gap within the framework of the upcoming Gender Equality Strategy. The Commission has previously called on member states to close the gender pay gap and address barriers to the participation of women in the labour market.  As there is an emerging consensus from the European Union to close the gender pay gap, there is, therefore, a strong possibility that the next government will introduce gender pay gap legislation to comply with the proposals outlined at a European level. Against this backdrop, employers should start preparations at an early stage. Those who fail to act will find themselves addressing issues in the public domain under the scrutiny of the media, trade unions, their employees, and their customers. Organisations reporting a high gender pay gap may be viewed as being less than fully committed to pay parity, promotion, and development opportunities for women. Where a gender pay gap exists, this may negatively impact an organisation’s brand, employee relations, public reputation, and its ability to attract and retain talent. Organisations operating within a pyramid workforce structure when it comes to gender creates a pay gap, and if such a difference is greater than that of an organisation’s peer employers, it may have some uncomfortable explaining to do to its stakeholders. The all-important narrative The size of the gender pay gap is important, but the accompanying explanation could distinguish progressive employers from those who are merely observing a compliance obligation. Under the Bill, employers would have been required to publish – concurrently with the percentage results – the reasons for such differences and whether they had taken any measures to eliminate or reduce the disparities. This requirement must be replicated in any new legislation, as the mere reporting of data could lead to a compliance complacency while defeating the spirit of the legislation. In contrast, employers who take the opportunity to analyse and explain their gender pay gap are likely to benefit from such transparency. The narrative for any gap is a particularly important opportunity for employers who have a relatively large gender pay gap. The media and the public often confuse the issues of the ‘gender pay gap’ and ‘equal pay’, even though the two are very different concepts. Employers should use their narrative to minimise the risk of confusion and take the opportunity to explain the nuances or legacy issues in their organisation, which may have led to a gender pay gap. This should encourage a level of transparency that enables employees to question and challenge reward models and packages, and employers to highlight their efforts to achieve gender pay parity.   Aoife Newton is Head of Corporate Immigration and Employment Law at KPMG Ireland.

Apr 01, 2020
Ethics and Governance

Karen Flannery and Níall Fitzgerald consider the critical points in the revised Chartered Accountants Ireland Code of Ethics, which came into effect on 1 March 2020. The revised Chartered Accountants Ireland Code of Ethics took effect on 1 March 2020. The revised Code was necessary to increase alignment with the International Ethics Standards Board for Accountants (IESBA) Code of Ethics, which underwent a significant restructure in recent years. While there are no changes to the fundamental principles, Chartered Accountants familiar with the previous Code of Ethics (effective September 2016 to 29 February 2020) will find the look and feel of the revised Code significantly different. While additional sections and emphasis were included, others were removed. This results in greater clarity and ease of navigation. Figure 1 provides an overview of the revised Chartered Accountants Ireland Code of Ethics. Added emphasis on fundamental principles The five fundamental principles of the Code of Ethics remain unchanged. These include integrity; objectivity; professional competence and due care; confidentiality, and; professional behaviour. The conceptual framework that describes the approach used to identify, evaluate and address threats to compliance with the fundamental principles also remains the same. However, there is now a heightened emphasis on the fundamental principles and the use of the overarching conceptual framework underlying each section of the Code. Before, much of the narrative was contained in a single section of the Code. Responding to non-compliance with laws and regulations New sections were added concerning non-compliance with laws and regulations (NOCLAR) for professional accountants in practice (Section 360) and professional accountants in business (Section 260). These bring the NOCLAR provisions of the IESBA Code of Ethics into the Institute’s Code. A vital feature of the NOCLAR provisions is the specific in-Code permission to breach the principle of confidentiality in the public interest. This permission has been explicit in the Institute’s Code for several years and so, the NOCLAR provisions can be seen as a change of detail rather than of substance. The new sections outline the required actions when NOCLAR is discovered and provide additional guidance in this area. Key points to note concerning the NOCLAR provisions are: The first response to identified NOCLAR is to raise the matter, and seek to address it, at the appropriate level within the relevant organisation (internally); Where NOCLAR is not dealt with appropriately internally, the professional accountant considers whether to report to an external authority in the public interest. The decision to report externally is (as it always has been) a complex one; and Where a report is made in the public interest and good faith, there is no breach of the confidentiality requirements of the Code of Ethics. However, there may be legal implications for the professional accountant to consider. Revised layout The most obvious change is the revised layout of the Code of Ethics, which now mirrors the structure of the IESBA Code of Ethics with additional material for members of Chartered Accountants Ireland. A new paragraph numbering format was introduced and as a result, sections were restructured (e.g. what was “Part C” (Professional Accountants in Business) is now “Part 2” in the revised Code).The revised layout facilitates more natural referencing and distinguishes between the Code’s requirements (in bold text and denoted by the letter ‘R’) and application material or guidance (indicated by the letter ‘A’). Complexity has been reduced by simplifying sentences and language in parts. Also a new ‘Guide to the Code’, explaining how it works, has been included. Other content changes Table 1 highlights other notable developments in the revised Code of Ethics and suggests where you might focus your attention depending on whether you are a member in practice or business. Retained Institute ‘add-on’ material Where existing Institute ‘add-on’ content created important additional requirements beyond the IESBA Code, these ‘add-on’ requirements are retained in the revised Code of Ethics. Such requirements include: Specific requirements regarding communicating with the predecessor accountant (Section 320); Particular obligations regarding transparency around the basis for fees and dealing with fee disputes (Section 330); and Agencies and referrals (Section 331). No new ‘add-on’ material was created. Additional support for members The Institute’s online Ethics Resource Centre is updated regularly with a range of supports and guidance for members. Additional information included in the old Code of Ethics, but removed in the revised Code and still considered useful, has been reproduced in a series of new Ethics Releases. The Ethics Releases are not a substitute for the requirements of the Code, but they do provide additional support for members in particular scenarios, including: Code of Ethics and changes in professional appointments; Code of Ethics and confidentiality; Code of Ethics and marketing of professional services; and Code of Ethics and corporate finance advice. Future updates The last substantial change to the Institute’s Code of Ethics was in 2016. While the Code does not change regularly, there is a significant body of work happening behind the scenes to ensure it remains appropriate, precise and effective in the context of the issues affecting the accounting profession. Members can, therefore, expect amendments from IESBA in the coming years; for example, considerations addressing the impact of technology-related ethics issues on the accounting profession. For members who are insolvency practitioners, a new Insolvency Code of Ethics is imminent. The current Code of Ethics for Insolvency Practitioners, appended as Part D of the Institute’s old Code of Ethics for members, remains in effect until then.  Actions speak louder than words It was evident from the Ethics Research Report, published by the Institute in January 2019, that members hold their professional and business ethics in high regard. While the Code of Ethics does not change regularly, it is a hallmark that establishes a minimum standard which is signed up to and shared by all members of the profession. It is useful to be familiar with its requirements and to remember that it is individual member actions that express commitment to the Code of Ethics in addition to a member’s personal ethics. The revised Code is available via the Institute’s Ethics Resource Centre.   Níall Fitzgerald FCA is Head of Ethics and Governance at Chartered Accountants Ireland.  Karen Flannery FCA is Head of Professional Standards Projects at Chartered Accountants Ireland.

Apr 01, 2020
Ethics and Governance

From a governance perspective, COVID-19 will test the robustness of our legislation and our ability to take a more technological, and perhaps modern, approach, writes Claire Lord. The Irish Government recently announced additional measures to protect citizens by delaying the spread of COVID-19. One of these measures is social distancing, which requires individuals to keep a two-metre space between them and other people. This measure and the increasing restrictions on international travel is making it difficult for Irish companies to hold ‘in-person’ board meetings and to proceed with shareholder meetings, particularly annual general meetings (AGMs), in the usual way. Against this backdrop, what can companies do to allow business to proceed so as to comply with the law while protecting the health of its directors, employees and shareholders? Board meetings Generally speaking, the board of an Irish company can meet ‘virtually’. This means that board meetings can be conducted by telephone, video conference or a similar facility. For a virtual board meeting to be properly convened, all directors must be able to hear each other and speak to each other. At a virtual board meeting, the quorum is made up of those participating in the meeting. All participating directors are entitled to vote in the usual way and the location of the meeting, consequent on social distancing requirements, is likely to be the location of the chair. The board of an Irish company can also usually pass resolutions in writing. For a written resolution to be valid, it must be signed by all directors of the company at that time. A written resolution takes effect when the last signature is collected. A written resolution can be signed in counterpart and can be circulated and signed electronically. The fully signed version must be retained with the minute book of the company. The written resolution procedure can be used even if one of the directors is not permitted to vote. Where this is the case, the remaining directors sign the resolution and note the name of the director who is not entitled to vote and the reason why. It is always recommended that a directors’ meeting is held where the business to be transacted is contentious, or if it is anticipated that the business to be approved will not be supported unanimously. Directors must also meet where they are required to make a declaration of the company’s solvency as part of the summary approval procedure to approve certain restricted activities. Where these circumstances exist, meeting “virtually” is sufficient. The board of a company must also consider the location of its board meetings or decision-making where it is important from a tax residency perspective for them to be able to demonstrate that the company is managed and controlled in Ireland. Shareholder meetings Companies with AGMs due to occur in the months ahead should consider how best to proceed with their AGMs in a way that complies with the law, and affords shareholders the ability to participate, while observing the Government’s restrictions on mass gatherings. An AGM must have a physical location that is specified in the AGM notice. The quorum for an AGM is determined based on the number of shareholders present in person or by proxy, usually at the physical location of the meeting. Therefore, to avoid a large  number of shareholders attending at the physical location for the meeting, shareholders should be encouraged to appoint a proxy to attend and vote on their behalf. Ideally, shareholders should be encouraged to appoint the same proxy where possible (while always considering how a quorum will be achieved).   While an AGM must have a physical location, a company can permit participation by shareholders at an AGM via technology, once that technology permits shareholders to participate and vote electronically.   Multi-member and single-member private companies limited by shares (LTDs) and single-member companies of other types can dispense with the legal requirement to hold an AGM by opting to carry out the business of the AGM by way of a unanimous written resolution.  Similarly, all company types can pass resolutions in writing.  In the case of LTDs and designated activity companies (DACs), this right applies regardless of any provisions in the company’s constitution.  Similarly, LTDs and DACs can pass majority written resolutions where a particular process is followed. Business as usual? We face significant uncertainty in the months ahead with the spread of COVID-19. Finding ways to conduct business regardless, while protecting the health of others, will test our ingenuity. From a governance perspective, it will allow us to see if our legislation is robust enough to support a more technological and, dare I say it, modern approach.   Claire Lord is a Corporate Partner and Head of Governance and Compliance at Mason Hayes & Curran.

Apr 01, 2020