Revised Guidance on Directors’ Remuneration Reporting

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.


Investment Association’s Principles of Remuneration for 2019 AGM Season

The Investment Association has published a revised version of its Principles of Remuneration for the 2019 AGM season, most of the changes reflecting the new UK Corporate Governance Code.

Colleagues in the Squire Patton Boggs Tax Strategy and Benefits practice group have posted this insight on their blog, Compensation And Benefits Global Insights.

New Emissions, Energy Consumption and Energy Efficiency Reporting for 2019

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.



Directors’ Duties: Guidance From GC100

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.


ISS Proposes Changes to Benchmark Policy Regarding Auditors

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.


CMA Study Into Statutory Audits

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.


AIM Corporate Governance from 28 September 2018

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.

The Exchange has not prescribed a list of recognised codes so AIM companies have a range of options to suit their specific stage of development, sector and size.  The Exchange has, however, identified benchmarks for AIM company codes, such as the QCA Corporate Governance Code and the UK Corporate Governance Code. In addition, where an AIM company has a dual listing in their home state, it may report using an appropriate standard in that jurisdiction.

An AIM company’s corporate governance statement must be published on its website. The website disclosure must be clearly presented and easily accessible from the AIM Rule 26 website landing page. The statement may incorporate details by reference (for example disclosures that are provided in a clearly delineated corporate governance section of the annual report) provided that the material is freely available and the statement clearly indicates where interested parties can read or obtain copies of that material (for example, the relevant pages or section of the annual report or the URL for the relevant web page).

In accordance with AIM Rule 26, if an AIM company has not yet made disclosure against a recognised code in its annual report, the corporate governance statement must be disclosed on its website by 28 September 2018. After 28 September 2018, an AIM company will have to review its corporate governance disclosures annually, typically at the same time as the company prepares its annual report and accounts. The company’s website should include the date when it last reviewed its compliance with its chosen code and update its AIM Rule 26 disclosures to remain accurate.





Amended AIM Rules for Nomads

The London Stock Exchange (LSE) has published amended AIM Rules for Nominated Advisers (Nomad Rules). The Nomad Rules set out the eligibility requirements, ongoing obligations and certain disciplinary matters in relation to nominated advisers (Nomads). The revised rules will come into effect on 30 July 2018.

The main rule changes being introduced are:

  • Additional eligibility criteria for Nomads to provide evidence to the LSE about their resources and that they are able to comply with the standards of conduct the LSE expects from Nomad firms when undertaking their responsibilities. Guidance on the new eligibility criteria will be set out in a revised NA1 (Nomad application form).
  • A non-exhaustive list of matters that a Nomad firm must disclose to the LSE, which may affect its operation, role or the performance of its Nomad services.
  • Setting out the supervisory actions the LSE can take in respect of a Nomad’s performance, including requiring a Nomad to undertake remedial action or imposing restrictions or limitations on the services a Nomad may provide.
  • Empowering the LSE to require remedial action and/or restrictions in relation to a qualified executive (QE) at a Nomad firm, where issues of competency or training in relation to the QE arise.
  • Extending the list of scenarios of when the LSE may place a Nomad firm under a moratorium, stopping it from acting as a Nomad to further AIM companies.
  • Confirming that the LSE has jurisdiction over Nomads that were once, but are no longer, approved in relation to breaches or suspected breaches of the Nomad Rules they committed whilst they were approved.

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

Continue Reading