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Industry update
UK Corporate Governance Code
On 5 December the anticipated consultation on the new UK Corporate Governance Code was published (found here) by the Financial Reporting Council (FRC). The revised code has been shortened and sharpened to reflect the changing business landscape and take account of the FRC's recent culture report.
The revised code is focused on long-term success and sustainability while trying to address the public's trust in companies while maintaining the UK as an attractive market.
The revised code aims to ensure that boards of companies can:- establish the purpose of the company and ensure that their culture is aligned with their strategy and values
- embark on effective stakeholder engagement to improve trust and gain mutual benefit
- seek the views of their workforce
- make certain that board appointments and succession are based on merit and promote diversity
- encourage greater clarity of action when encountering significant shareholder opposition, which has not been set at votes of 20% or more against a resolution. Any resolutions that receive such a result will be recorded on a newly established public register operated by the Investment Association. Companies will be required to clearly explain what actions they are going to take regarding the resolution when announcing the results of their meeting, and then provide an update no later than six months after the vote
- give remuneration committees broader responsibility and discretion
2018 Principles of Remuneration
The Investment Association (IA) has published an amended version of their Principles of Remuneration (found here) for 2018 which details their expectations on Directors’ pay. The revised principles which include the following are incremental in their nature:- Relocation benefits - Such benefits must be disclosed at the time of a Directors’ appointment, in place for a limited time and detailed in the remuneration report.
- Annual bonus - Bonus payments should be disclosed within 12 months of the payment, and that a deferral is expected where the bonus opportunity is greater than 100%.
- Long-term incentive schemes - Guidance on these schemes has been re-organised to make it clearer what the IA’s attitudes are to specific examples of schemes.
- Levels of remuneration - The IA recognises that some companies addressed levels of pay in their 2017 policies but expect companies across the broader market to follow this example in the coming season.
The IA also remains concerned about incremental increases to variable remuneration maximums and salary increases, including automatic inflationary increases. The IA expects companies to satisfactorily justify the levels of remuneration and to take account of the wider social context. - Remuneration structures - While the IA has no preference in the structure a company applies, it does expect that such structures are carefully chosen and are appropriate for the company’s business. They do recognise that in some cases this has not been the case and it appears new structures have been proposed as existing ones are not paying out to executives.
Gender Diversity
A second report has been published by the Hampton-Alexander Review about improving gender diversity balance within FTSE leadership (found here).
The review extends the focus of other gender diversity reviews from beyond the boardroom to improving representation in leadership positions of FTSE 350 companies. The original recommendations were published in November 2016 and this second report explores how gender representation is progressing.
The report recognises that representation on boards is increasing but that executive committees or their direct reports still have low female representation. Within the FTSE 100, female representation has only increased by 0.1% within the last year. The report now recommends extending a target previously only for FTSE 100 companies to the full FTSE group so that by 2020 there is a female representation of 33% in leadership teams.Energy Reporting
The Department for Business, Energy & Industrial Strategy (BEIS) has published a consultation paper (found here) seeking views on proposals to require companies to report on their energy consumption in their annual reports.
The consultation makes a number of proposals or seeks views on a number of areas:- Requiring quoted companies to extend their need to report on greenhouse gas emissions to include a disclosure on total global energy usage across all energy types.
- Extending the reporting requirements of quoted companies to non-quoted companies and asks for which unquoted companies should be required to comply.
- Whether energy disclosures should be included in the directors' report, strategic report or a new bespoke report held within the annual report.
2017 Corporate Governance Review
Grant Thornton has published their 2017 Corporate Governance Review (found here) based on the annual reports of the FTSE 350.
While the report finds that 66% of the FTSE 350 state they are in full compliance with the UK Corporate Governance Code, this is not matched in other areas of governance best practice.
The report highlights a number of trends identified from the annual reports reviewed which include:- A three-year downward trend in companies providing an informative insight into shareholder engagement.
- 19% increase in companies providing a strong overview of their organisation's culture.
- A disappointing trend with only 29% of CEOs making reference to culture in their opening statements even though the Financial Reporting Council have acknowledged them as the principal culture setter for an organisation.
- Female representation is still well below the Hampton-Alexander Review goal of 33% by 2020 for both board roles and executive leadership roles.
ISS Proxy Voting Guidelines
Following a consultation, Institutional Shareholder Services (ISS) has now published their 2018 Proxy Voting Guidelines (found here). These include a new policy for the UK and Ireland on virtual meetings together with other minor changes. The updated policies will apply to meetings held on or after 1 February 2018.
In respect of virtual meetings, ISS have said they will generally recommend voting for proposals that allow the convening of hybrid meetings, providing it is clear there is no intention to hold virtual-only meetings. This policy has been drafted to take account of the divided views on virtual meetings and that if virtual-only meetings are held this could lead to an erosion of meaningful exchanges between companies and shareholders. Other changes include:- Over-boarding - How different board positions are categorised when determining if a director is regarded as holding too many board roles. Negative recommendations for a chairman would be applied in the first instance to their non-executive positions.
- Audit and remuneration committees - Make clear that ISS's view is that such committees should only be composed of independent directors.
- Share issuances without pre-emption rights - Where a company used a cash-box structure to issue more shares than authorised to do at the last AGM, it may receive a negative recommendation on any such authority sought at the next AGM.
- Long-term incentive plans - A vesting level of 25% for threshold performance could be inappropriate where grants represent large multiples of salary.
Market Abuse Regulation
The Law Society and the City of London Law Society Company Law Committees have updated their Q&A on the Market Abuse Regulation (MAR) (found here). The Q&A has been drafted as a suggested approach to interpreting certain aspects of MAR. The latest update includes when a company will be a person closely associated (PCA) with a person discharging managerial responsibilities (PDMR).
Number seven of the Q&A gives the example of where the PDMR of a company that is subject to MAR (company A) is also a director of another company (company B). For company B to be a PCA depends on the PDMR's influence or involvement in the decisions of company B in relation to company A's securities. Previously, the Q&A suggested that company B would only be a PCA if the director was company B's sole director, or had control over company B's management decisions.To avoid company B being a PCA, (and therefore avoid being included on the list of PCAs and required to notify transactions in company A's securities under article 19 of MAR) the director should recuse themselves from any board meeting discussing, or relating to company A. This is because the PDMR should not influence any decision of company B to carry out a transaction in the financial instruments of company A.
FRC Thematic Reports
The Financial Reporting Council (FRC) published three thematic reports on 9 November to help companies improve the quality of their corporate reporting.
The reports cover three specific areas which the FRC have acknowledged are areas of difficulty:- Judgements and estimates – The report can be found on the FRC website here. The FRC stated that judgements, where properly separated from estimates, can help investors to understand the quality of management decisions. They stated three areas in which they identified room for improvement, including:
- identifying the assets and liabilities at significant risk of material change in the next 12 months
- quantifying the specific amounts
- providing a sensitivity analysis of the possible range of outcomes
- Pension disclosures – The report can be found on the FRC website here. The FRC noted that low interest rates and the economics of defined benefit pension arrangements have increased the need for transparency of pension reporting. Better information was identified in providing information about the risks and uncertainties arising from pension schemes, although the FRC also noted that improvements are still required in certain areas, including:
- providing information to aid an understanding of how risks could affect future cash flows
- explaining the basis on which different plan assets have been valued
- Alternative Performance Measures (APMs) – The report can be found on the FRC website here. When clearly presented and chosen to provide a balanced view of the company, APMs can be helpful to investors. The FRC observed improvements in a number of areas, including that all companies provided definitions of their APMs with fair and accurate descriptions.
Alternative Performance Measures
The European Securities and Markets Authority (ESMA) has published updated Q&As (found here) on the implementation of its guidelines on the Alternative Performance Measures (APMs) for listed issuers. The guidelines came into force on 3 July 2016, and the purpose of promoting the usefulness and transparency of APMs included in prospectuses, financial reports, and market disclosures, which qualify as regulated information.
ESMA has published six new questions covering the following areas:- Definition of an APM – ESMA clarified that where there are any adjustments to a financial measure defined or specified in the applicable financial reporting framework, that measure will qualify as an APM.
- The scope of the guidelines – Measures disclosed in accordance with the applicable reporting framework but calculated on a different basis than the one defined or specified in the applicable financial reporting framework also falls within the definition of an APM in accordance with the APM guidelines.
- Application of the scope exemption – The question of when the scope exemption in paragraph 19 of the APM guidelines is applicable was addressed. ESMA clarified that the exception in paragraph 19 of the APM guidelines is only applicable when an issuer uses APMs solely to explain compliance with terms of an agreement or legislative requirement.
- Definition of an 'organic growth' APM – This question gives guidance for APMs indicating the organic growth of an issuer's total revenues.
- Reconciliation – ESMA advises that issuers should use numeric reconciliation between 'the most directly reconcilable line item, total or subtotal' presented in financial statements and the APM used.
- Application of the 'fair review' principle – The APM guidelines are based on the principle stated in articles four and five of the Transparency Directive of providing a fair review of the development and performance of the business and the position of the issuer. Due to this, any APMs which are biased in that they exclude only one-off losses but include one-off gains could be seen to violate these principles, as well as the overall objective of the APM guidelines.
Global News
Canadian Director Independence
The Canadian Securities Administrators (CSA) has published a consultation (found here) entitled "Approach to Director and Audit Committee Member Independence". It seeks comments on the Canadian approach to board and audit committee independence requirements, in addition to their general independence regime under securities laws.
Currently, there exists a subjective definition of independence together with a bright-line test that precludes directors or audit committee members from being considered independent on the basis of certain relationships. There have been concerns over inflexibility and the restrictiveness of the standard embedded in the current corporate governance regime.
The consultation closes on 25 January 2018.
Irish Corporate Governance Review
A report (found here) entitled "Measures to Enhance Ireland's Corporate, Economic and Regulatory Framework" has been published by the Department for Business, Enterprise & Innovation. The report contains a number of wide-ranging proposals divided into several key areas:- Organisational and procedural reforms
- Corporate Governance
- Enhancing powers to combat economic and regulatory offences
- Countering money laundering and corruption
Hong Kong Corporate Governance Code
The Hong Kong Stock Exchange (HKEX) has published a consultation (found here) setting out some proposed changes to the Corporate Governance Code. The changes address a variety of issues including:- Non-Executive Director over-boarding
- Non-Executive meeting attendance
- Non-Executive Directors' independence
Georgeson market update
Georgeson is a leading Corporate Governance advisory and Shareholder Engagement company, and part of the Computershare group
UK Activism
BEIS Denies Conflict
The Institute of Chartered Accountants in England and Wales (ICAEW) reports that the Department of Business, Energy and Industrial Strategy (BEIS) denies conflict of interest over FRC relationship.
"The profession has been shocked by the revelation in the Financial Reporting Council's newly published register of interests that the senior civil servant at the BEIS, who is responsible for managing the department's relationship with the UK audit watchdog, is married to FRC chief executive Stephen Haddrill. However, both organisations have denied that there is anything out of the ordinary in the situation."New Guards of the City
The Financial Times reports that new guards of the city take aim at corporate delinquents.
"Stewardship, which for years languished in relative obscurity, is now in the spotlight". The article includes profiles of a few leading Heads of Governance/Stewardship.
International Activism
What Happens When an Activist Goes on the Board?
The New York Law Journal reports about what happens when an activist goes on the board."The pattern of the vast majority of activist challenges being settled through private negotiations makes the settlement process academically interesting. What gets negotiated? And with what outcomes?".Europe’s Busiest Activist Attacks
The Financial News reports that Europe's busiest activist attacks big asset managers.
"The founder of the busiest activist investor in Europe has criticised investment managers for buying large stakes in companies and then abdicating responsibility of shareholder voting to third parties. Joseph Oughourlian, founder of London-based Amber Capital, said asset managers that do not exercise their voting rights in the companies in which they are a major stakeholder 'pose a risk to the system' and could damage the economy".Peltz Claims Win in Proxy Fight Against P&G
Reuters reports that Trian's Peltz claims win in proxy fight, P&G says not yet.
"Activist hedge fund manager Nelson Peltz claimed victory in his fight to win a seat on Procter & Gamble Co's board after a preliminary tally of votes was released on Wednesday, but P&G refused to concede and said it wants to see a certified result before declaring a winner. […] A new preliminary vote tally prepared by independent election inspector IVS Associates after four weeks of recounting from last month's proxy contest showed Peltz won by 43,000 shares voted out of 2.6 billion, according to a source. That leaves Peltz with a margin of victory of 0.002 percent of outstanding shares, which analysts said is so slim it could easily flip again".
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Registry round-up archive
Take a look at our previous editions of the Registry round-up.