2018 Corporate Governance Code Published Today

The 2018 UK Corporate Governance Code has been published today by the Financial Reporting Council.

The 2018 Code puts the relationship between companies, shareholders and stakeholders “at the heart of long-term sustainable growth in the UK economy”. It is shorter and sharper than the previous Code and is structured by high-level Principles and more detailed Provisions.  The supporting Principles from the previous Code have been removed and, in some cases, been incorporated into the new Principles or Provisions, while others have been moved to the supporting Guidance on Board Effectiveness. Boards should also take into account the Financial Reporting Council’s Guidance on Audit Committees and Guidance on Risk Management, Internal Control and Related Financial and Business Reporting.

The 2018 Code has five sections:

Section 1—Board leadership and company purpose

Section 2—Division of responsibilities

Section 3—Composition, succession and evaluation

Section 4—Audit, risk and internal control

Section 5—Remuneration

The majority of changes have been made to the first three sections, which broadly correlate to the former Sections A (Leadership) and B (Effectiveness). Section E (Relations with shareholders) has been integrated within Section 1 (Leadership and purpose) of the revised Code to reflect its importance as a key aspect of good governance. Section 4 (Audit, risk and internal control) remains largely unchanged as this section of the Code was recently amended. The former Schedule A has been removed and where appropriate incorporated into Section 5 (Remuneration).

Key changes include:

  • Increased emphasis on engagement with the workforce, customers, suppliers and other stakeholders, including a requirement for companies to establish a method for gathering views of the workforce.
  • Requiring Boards to describe in the annual report how key stakeholders’ interests and the matters set out in section 172 of the Companies Act 2006 have been considered in Board discussions and decision-making.
  • Requiring Boards to create a culture which aligns company purpose, values and strategy and to assess how they preserve value over the long-term.
  • Requiring Boards, where 20% or more of votes on a shareholder resolution have been cast against the Board recommendation, to explain what action they intend to take to consult shareholders to understand the result.
  • Removing the exemptions for smaller companies relating to annual director re-election and the composition of the Board, the Audit Committee and the Remuneration Committee.
  • Broadening the recommendations around diversity, including encouraging Boards and Nomination Committees to consider the composition of not only the Board, but also the senior management pipeline.
  • Giving Remuneration Committees greater responsibility for overseeing pay and incentives across their company and requiring them to engage with the wider workforce.
  • Extending the recommended minimum vesting and post-vesting holding period for executive share awards from three to five years to encourage companies to focus on longer-term outcomes in setting pay.
  • Rejecting formulaic calculations of performance-related pay.

Over time, compliance with the former Code focused on the “comply or explain” aspects of the Provisions (Listing Rule 9.8.6 (6)) rather than the application of the Principles. The 2018 Code instead emphasises the importance of applying the Principles effectively. When reporting on these, Boards will be expected to justify to shareholders why the Board implemented certain structures, policies and practices. The Principles will need to be linked to the company’s strategy and business model, and related to outcomes achieved. Companies will need to signpost and cross-refer to those parts of the annual report which describe how the Principles have been applied.

In line with previous practice, the Provisions should be complied with or an explanation given. Explanations should set out a clear rationale for the decisions the Board has taken, allowing investors to understand Board thinking clearly and to engage constructively with the company.

The 2018 Code’s inclusion of company culture, diversity and a wider range of stakeholders seems likely to positively enhance corporate governance in the UK.

The 2018 Code is expected to be effective for financial years beginning on or after 1 January 2019.

For more information please contact the author, or your usual Squire Patton Boggs contact.

Revised UK Corporate Governance Coming

The UK will be getting a revised Corporate Governance Code, most likely effective January 2019.

The House of Commons Library has published a briefing paper on Corporate Governance Reform. The briefing paper provides an overview of the corporate governance framework in the UK, including the history of the UK corporate governance code (UKCG Code) and the interaction of the UKCG Code with directors’ duties under the Companies Act 2006 (CA 2006). The paper also provides an overview of the reforms announced by the government in August 2017 and provides an update on timescales.

The government is keen to strengthen corporate governance in 3 particular areas:

  • employees’ and other stakeholders’ voice
  • governance of large private companies
  • executive pay

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Keep Your Residential Address Confidential

There is increasing concern about the public availability of residential addresses in a digital world. A balance needs to be struck between ensuring that the information on the company register is of practical use in achieving corporate transparency but, at the same time, ensuring that the information does not become a tool for abuse, such as identity fraud.

To achieve this balance, the government has passed The Companies (Disclosure of Address) (Amendment) Regulation.  As from 26 April 2018, directors, company secretaries and people with significant control of a company have the right to suppress their residential address from public inspection at Companies House.

To remove your home address, you can apply at a cost of £55 for each document you want to suppress.

You must provide an alternative correspondence address if you’re still appointed to a live company, such as a current director. This will replace your home address on the public register.

Note that this process cannot be used to remove a home address if it has been used as a company’s registered office address.

Revised QCA Code 2018

On 25 April 2018 the Quoted Companies Alliance published a revised version of its 2013 corporate governance code.

Key changes from the 2013 version include:

  • The principles have been redrafted so there are now 10, rather than 12.
  • A new principle has been added requiring companies to promote a corporate culture that is based on sound ethical values and behaviours.
  • The principles and the necessary disclosure sections have been merged so that the necessary disclosures now appear underneath the relevant principle.
  • The section on the effective application of the QCA Code has been substantially expanded and redrafted and now appears towards the beginning of the Code.
  • A new description of how a board is typically composed, how it works and the key challenges it faces regarding directors’ independence has been added.
  • The section on the effectiveness of the board and the appendices have been removed. They are now included in a separate document, the Corporate Governance Files. It is intended that these Files will be updated on a rolling basis, and also include a draft board resolution adopting the QCA Code for the purposes of AIM Rule 26.
  • There is less emphasis on the QCA Code being for small and mid-size quoted companies.
  • The new code may be suitable for privately-owned companies that wish to adopt good governance practices.

Interestingly, QCA research indicates that currently over half of the 900+ companies on AIM refer to the QCA Code. There is also, however, a significant minority of AIM companies that currently do not apply any code. The amendments to the AIM Rules in March 2018 will of course require all AIM companies to report against a recognised corporate governance code by 28 September 2018.

Audit Committee Consultation

The International Organization of Securities Commissions (IOSCO) has published a consultation report inviting input to a possible Good Practices Report on how issuer audit committees can promote and support external audit quality.

IOSCO acknowledges the crucial role independent, high quality audits play in supporting investors’ confidence in a company’s financial report. To that end, IOSCO proposes several ways in which the audit committee can promote quality audits:

  • recommend an external auditor independently of management, with selection criteria set upfront.
  • when assessing auditors, consider the auditor’s knowledge of the business and industry, the extent of involvement of senior team members in the audit, use of other auditors, use of technical and specialist expertise, capability in different geographical locations, coverage of internal systems and controls, and how the engagement partner and team are accountable within their firm for audit quality.
  • consider the extent to which audit fees are consistent with the audit plan and a quality audit.
  • consider the extent to which audit processes are planned so an effective quality audit can be conducted within reporting deadlines; seek explanations and advice on the appropriateness of accounting treatments and estimates and, where appropriate, challenge the applied estimates and treatments.
  • review and challenge management’s accounting treatments and estimates, and where appropriate, seek independent third party advice and not seek advice from the auditor. Oversee the development of policies on auditor independence, undertake procedures to satisfy itself of that independence and require non-audit services to be subject to the committee’s prior approval.
  • establish a direct line of communication with the auditor. The communication should include concerns and risks affecting the processes which support the information in the financial report, and how those concerns and risks are being addressed by directors and management and responded to in the audit.

IOSCO also makes several proposals in relation to the composition of audit committees, the role of the committee in assessing audit quality, and audit committee reporting.

Comments should be submitted on or before 24 July 2018.

New AIM Rules

The London Stock Exchange has published AIM Notice 50 which, amongst other things, announces the implementation of updated versions of the AIM Rules for Companies and the AIM Rules for Nominated Advisers from 30 March. Marked up versions of both are also available on the LSE’s website.

In providing feedback on the changes proposed in AIM Notice 49, the LSE has said that respondents were supportive of the proposed new obligation for an AIM company to disclose on its website details of how it complies or explains against a recognised corporate governance code chosen by the board of directors. Some respondents suggested that the code be defined. However, the LSE is of the view that it remains preferable for AIM companies to have a range of choice of corporate governance codes to suit their specific stage of development, sector and size rather than have a prescribed list of recognised codes.

In response to feedback on the proposed changes, the LSE has amended the proposed Rule 26 disclosures to require an AIM company to review its corporate governance disclosures annually, rather than maintain them up to date. The LSE has said it expects that in most cases this review will be carried out at the same time as an AIM company prepares its annual report and accounts.

From 30 March 2018, all new applicants to AIM will be required to state which corporate governance code they intend to follow. However, in order to give AIM companies and nominated advisers sufficient time to prepare for the new Rule 26 corporate governance requirements, these will take effect from 28 September 2018.

Public Register of Shareholder Dissent

At the request of the Department for Business, Energy & Industrial Strategy, the Investment Association (IA) has launched a public register of FTSE All-Share companies showing occasions where these companies have experienced substantial shareholder dissent i.e. where companies have received votes of 20% or more against any resolution or which have withdrawn a resolution before their AGM.

The purpose of the register is to identify companies who receive a high vote against or withdraw a resolution, and to understand the process used by those companies to identify and address their shareholders’ concerns. The register also publishes links to any public statements made by those companies on how they are addressing those concerns.

In the period from 1 January to 15 December 2017:

  • 22% of FTSE All-Share companies featured on the register.
  • Pay-related resolutions featured most commonly on the register (38%) followed by re-election of director resolutions (32%).
  • 31% of companies on the register published a statement explaining how they are adressing shareholder dissatisfaction.

 The register represents a substantial piece in the move towards greater transparency and accountability in corporate governance by putting companies under close scrutiny by investors, the media and the wider public in general.

Proposed New Corporate Governance Requirement for AIM Companies

The London Stock Exchange has published a feedback statement to its July 2017 discussion paper, together with a consultation on proposed changes to the AIM Rules.

Of note is the change regarding corporate governance.

The LSE is proposing to remove the option for an AIM company to state that it has not adopted a corporate governance code and instead to require AIM companies to state in their AIM Rule 26 disclosures, which recognised industry code of corporate governance it has adopted and to comply or explain against its chosen code. The LSE expects companies to provide meaningful information to investors to enable them to understand an AIM company’s approach to governance. The LSE acknowledges that there may be specific reasons why a company may choose not to comply and explaining this to investors should facilitate meaningful dialogue between investors and the company.

The LSE is not proposing to require companies to update the disclosure annually. However, the information must be kept up to date and the last date on which it was updated should be included in the disclosure. It will be the company’s responsibility to ensure that the information is kept up to date, not the nominated advisers’.

The LSE also considered feedback on the composition of the board of AIM companies. Whilst the LSE does not propose to introduce mandatory board composition requirements, it would normally expect the board to include a Chairperson, Finance Director and Non-Executive Directors.

Responses on the consultation should be sent to the LSE on or before 29 January 2018. It is anticipated that the amended AIM Rule 26 will be effective from 30 June 2018 so as to give AIM companies and their nominated advisers sufficient time to prepare for the proposed changes.

Changes to the Takeover Code

The Takeover Panel has published details of amendments to the Takeover Code, effective from 8 January.

When a firm intention to make an offer is announced, the announcement will need to include a new requirement, namely the offeror’s intention with regard to the business, employees and pension scheme(s) of the offeree company.

The notes to the new requirement expain that the offeror must state:

  1. “its intentions with regard to the future business of the offeree company, including its intentions for any research and development functions of the offeree company;
  2. its intentions with regard to the continued employment of the employees and management of the offeree company and of its subsidiaries, including any material change in the conditions of employment or in the balance of the skills and functions of the employees and management;
  3. its strategic plans for the offeree company, and their likely repercussions on employment and on the locations of the offeree company’s places of business, including on the location of the offeree company’s headquarters and headquarters functions;
  4. its intentions with regard to employer contributions into the offeree company’s pension scheme(s) (including with regard to current arrangements for the funding of any scheme deficit), the accrual of benefits for existing members, and the admission of new members;
  5. its intentions with regard to any redeployment of the fixed assets of the offeree company; and
  6. its intentions with regard to the maintenance of any existing trading facilities for the relevant securities of the offeree company.”

Equally, where the offeror has no intention of making any changes in relation to the above matters it will be required to make a statement to that effect.

Consultation on Changes to the UK Corporate Governance Code

Colleagues in Squire Patton Boggs have added an interesting post on the Compensation and Benefits Global Insights blog. It looks at the FRC’s consultation on proposed changes to the UK Corporate Governance Code, with emphasis on remuneration and benefits.

Responses to the consultation need to be in by 28 February 2018 with the final revised Code being published in early summer 2018 and coming into force for accounting periods beginning on or after 1 January 2019.

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