The Investment Association has published guidelines concerning the redemption or cancellation of irredeemable preference shares. The aim of the guidelines, which are of general application to listed companies, is to promote market confidence in irredeemable preference shares as an asset class and avoid reputational risk for issuers.
The Pensions and Lifetime Savings Association (“PLSA”), representing the occupational pensions industry, has published guidance on market best practice to assist its members when exercising their vote at AGMs in 2019. The revised version of its Corporate Governance Policy and Voting Guidelines (“Guidance”) reflects the introduction of the 2018 UK Corporate Governance Code which applies to financial years beginning on or after 1 January 2019 (“Code”). Interestingly, the Guidance does not follow the format and order of a typical AGM agenda but instead highlights those issues which the PLSA believes are significant to investors. In particular, this change has resulted in greater prominence for resolutions regarding approval of the remuneration policy and remuneration report, and the principle of sustainability.
UK Corporate Governance Principles
Whilst the PLSA’s corporate governance principles remain largely unchanged, the Guidance includes the following additions:
- Companies should take capital structure decisions which balance the financing needs of the firm with the interests of broader stakeholders: a new principle which encompasses striking the right balance between dividend payments to shareholders and paying deficit repair contributions to any defined benefit pension scheme as well as undertaking share buybacks only when doing so is the best way to achieve long-term value.
- Pension schemes should consider explicitly setting out their expectations for outsourced engagement and stewardship activities in their contracts or mandates: a new principle which identifies that stewardship responsibilities remain when asset owners outsource engagement to asset managers and contracts should be set up to allow their service providers to be accountable. This principle recommends the International Corporate Governance Network’s Model Mandate as a starting point for ensuring this.
The International Organisation of Securities Commissions (IOSCO), being the leading international policy forum for securities regulators which focuses on the quality of financial reports and good corporate governance, has published a report on good practices for audit committees of listed companies in supporting external audit quality.
The report focuses on the importance of ensuring the quality of a company’s financial report, the independence of any external audit in achieving market confidence, transparency and effective functioning capital markets and the valuable role audit committees play in achieving this.
The GC 100 and Investor Group have updated their directors’ remuneration reporting guidance 2018 to reflect the changes to reporting requirements (under Schedule 8 to the Large and Medium-sized Companies and Groups (Accounts and Reports) Regulations 2008 (as amended)) introduced by the Companies (Miscellaneous Reporting) Regulations 2018.
The guidance seeks to facilitate the statutory disclosure regime and help companies to satisfy the prescribed reporting requirements. Before addressing the specific statutory provisions, the guidance includes a useful discussion around the concepts of flexibility, discretion and judgment. Given that the remuneration policy will need to endure for potentially 3 years, with different circumstances arising, these are key concepts that boards and investors will be keen to consider carefully.
Colleagues in the Squire Patton Boggs Tax Strategy and Benefits practice group have posted this insight on their blog, Compensation And Benefits Global Insights.
The government has published the Companies (Directors’ Report) and Limited Liability Partnerships (Energy and Carbon Report) Regulations 2018. The regulations amend the Large and Medium-sized Companies and Groups (Accounts and Reports) Regulations 2008 and the Limited Liability Partnerships (Accounts and Audit) (Application of Companies Act 2006) Regulations 2008 to require additional annual reporting on emissions, energy consumption and energy efficiency action by quoted companies, large unquoted companies and large LLPs.
The introduction of a new Streamlined Energy and Carbon Reporting framework, through company annual reports, will replace the reporting element of the existing UK-wide CRC Energy Efficiency Scheme.
The regulations will come into force on 1 April 2019 and have effect in respect of financial years beginning on or after 1 April 2019.
Detailed guidance on how to comply with the new obligations to disclose emissions, energy consumption and energy efficiency action in directors’ reports or energy and carbon reports as applicable is expected to be published by January 2019. This will build on the current guidance on mandatory greenhouse gas reporting.
The GC100, being the association of general counsel and company secretaries working in UK FTSE 100 companies, has issued guidance on the practical interpretation of section 172 of the Companies Act 2006. This section imposes a general duty on directors to act, in good faith, in a way they consider would be most likely to promote the success of their company for the benefit of its members as a whole. Factors which will affect the success of the company include the interests of the company’s employees, the needs of its customers, and relationships with suppliers and other stakeholders. Directors also need to consider how the actions of the company affect the community and the environment, and the company’s reputation. These factors constitute a non-exhaustive list of matters that require consideration.
The guidance aims to provide directors with practical help in interpreting their section 172 duties rather than offer legal advice. It sets out five specific things to help directors embed section 172 in their decision making:
- Strategy: reflect the section 172 duty when setting and updating the company’s strategy.
- Training: establish and attend training courses on induction to the board, with ongoing updates on the section 172 duty in the context of directors’ wider duties and responsibilities.
- Information: consider, and arrange to receive, the information needed on appointment and going forward to help carry out the role and satisfy the duty.
- Policies and processes: put in place policies and processes appropriate to support the company’s operating strategy and to support its goals in the light of the section 172 duty.
- Engagement with stakeholders: consider what should be the company’s approach to engagement with employees and other stakeholders for the company, whether through board engagement or wider corporate engagement.
Within all of this, there is one key principle, namely the culture of the company. The guidance recommends that directors consider how to embed in the habits and behaviour of the board, management and employees, a culture which is consistent with the company’s goals in relation to stakeholders, whether employees, customers, suppliers, local communities, the environment or others affected by or engaging with the company’s activities.
The Institutional Shareholder Services (ISS) has stated that recent high-profile corporate failures and accounting scandals have raised investors’ concerns about the efficacy of financial statements and the need for improved audit quality and stronger boardroom oversight.
Against this backdrop, ISS has published its 2019 benchmark policy consultation, seeking views on certain of its proposed voting policies for 2019. In relation to its UK/Ireland and European policies, the key changes under consideration are as follows:
”Where information is available, ISS research reports will note any lead audit partners (and/or partnership firms) who have been linked with significant auditing controversies and, where they are engaged in the audit for other public companies, this will be raised for investor attention – even if no audit concerns have been identified at the subject company. A negative recommendation on auditor ratification may be applied in the most severe cases, e.g. where the lead audit partner has previously been linked with a corporate failure scenario or other material destruction of shareholder value arising from fraud or other accounting issues.”
ISS is raising 2 specific questions of investors:
Would your organisation consider the lead audit partner’s involvement in a significant accounting controversy – even if this occurred at another company – to be a potential area of concern?
Would your organisation support ISS adopting in future a similar approach in other markets (outside the U.K. and Europe) where disclosure of the lead engagement partner is available?
The policy comment period closes on 1 November 2018. ISS expects to announce its final 2019 benchmark policy changes during the middle of November with the updated policies applying to shareholder meetings taking place on or after 1 February 2019.
The Competition and Markets Authority (CMA) has launched a detailed study into the statutory audit market.
The initiative follows growing concerns about the quality and resilience of statutory audits, in particular as a result of the collapse of construction firm Carillion and retailer British Home Stores, and the criticism of those responsible for reviewing the companies’ accounts, as well as recent poor results from reviews of audit quality. The CMA’s study will sit alongside the current independent review led by Sir John Kingman into the Financial Reporting Council as the sector regulator.
The CMA’s market study will examine 3 main areas:
- Choice and switching. Changes put in place by the Competition Commission (the CMA’s predecessor) appear to have strengthened competition between the big four firms – Deloitte, KPMG, E&Y and PwC – but the largest UK Plcs still rely almost exclusively on one of them when selecting an auditor.
- Resilience. The market study will examine what the role of the big four firms means for resilience – the risk being that each of the big four is “too big to fail”, potentially threatening long-term competition.
- Incentives. Companies, rather than their investors, select their own auditor. The CMA will examine concerns that this may result in a lack of incentive to produce challenging performance reviews.
Representations to the “Invitation to Comment” should be made to the CMA by no later than 30 October 2018.
The CMA will publish its market study report and the action (if any) which it proposes to take by no later than 8 October 2019.
The London Stock Exchange has published a newsletter, Inside AIM, to address some of the questions it has received from nominated advisers in relation to the corporate governance changes that take effect from 28 September 2018.
By way of background, from 28 September 2018, AIM companies will be required to disclose details of a recognised corporate governance code they have decided to apply. Companies will have to explain how they comply with their chosen corporate governance code and, where they depart from that code, provide a detailed explanation of the reasons for doing so. This principles-based approach to corporate governance is intended to allow shareholders to evaluate how the principles have been applied, rather than simply identifying areas of non compliance.