UK Corporate Governance Code
Company Secretaries can’t have escaped the news that the FRC issued its consultation in relation to the proposed changes to the UK Corporate Governance Code (the “Code”) on 5 December 2017. The FRC have said that the new Code will be “shorter and sharper” with 17 Principles and 41 Provisions. As a result, the new version of the Code will be quite different from the current version. The FRC have looked at the structure, the language and will be introducing new areas of content.
In line with Government proposals, and current thinking around corporate governance, the FRC has focussed on several areas. More emphasis on stakeholders and employees, and not just shareholders. Making it clearer what should be done when a company receives significant votes against a resolution. The role of the chair, diversity, the remit of the remuneration committee and potentially removing the exemptions for sub-FTSE 350 companies.
The consultation also includes some initial questions around the Stewardship Code, as the FRC are looking to update this as well. A full consultation is expected to be issued in the summer in relation to this. In conjunction with changes to the code, there will be a revised guidance on board effectiveness.
The consultation for the code closes on 28 February 2018, and the new Code is expected to be launched in the summer with an application date of 1 January 2019.
Company Secretaries with a December year end will be considering the content of their 2017 annual reports. Changes are relatively light this year whereby listed companies are required to supplement existing disclosures rather than make any wholesale changes. With that said, 2017 saw a plethora of new or revised guidance notes, best practice, and disclosure recommendations which annual report preparers should consider.
Annual report preparers should consider, inter alia, the following provisions:
- Enhanced non- financial information disclosures to reflect new reporting requirements for larger listed companies;
- as noted above, greater recognition of wider stakeholder interests; reshaping risk and viability reporting to reflect disclosures issued by the FRC’s reporting lab;
- disclosures relating to the company’s business model, as per the FRC reporting lab report;
- reporting against the April 2016 version of the UK Corporate Governance Code;
- reflect new DTR 7.2 relating to the board’s diversity policy; consider changes in key investor guidance (such as the Investment Association – see later) on remuneration;
- as referred to later in this report, consider the consequences and report on action taken of a significant vote against a general meeting resolution in the previous year;
- new regulatory notification requirements when publishing preliminary announcements and the annual report
Financial Reporting Council (FRC) news
The FRC has been busy issuing guidance, which will be of use to producers of Annual Reports…
FRC thematic reviews
Preparers of annual reports are encouraged to read three thematic reviews published by the Financial Reporting Council (FRC). Each of the three reviews contains extracts from annual reports which in the FRC’s opinion represent good practice. The reviews relate to judgements and estimates, pensions disclosures and the use of alternative performance measures in annual report.
In terms of 2018/19 reviews, the FRC has confirmed that it will be targeting, among other issues, corporate reporting by small and AIM companies and the effect of Brexit on principle risks and uncertainties.
FRC FAQs on non-financial information
The FRC has issued FAQs on non-financial reporting, which include a flowchart to help companies determine which requirements apply to them, linking non-financial information to other information in the strategic report, reporting on the impact of a company’s activities on employees and the requirement under section 414 CB of the Companies Act 2006, disclosures in relation to policies and due diligence, principle risk disclosures, materiality and auditor responsibility.
FRC lab reports on audit committee reporting
The FRC has published some really helpful good practice examples of audit committee reporting.
Investment Association 2018 remuneration principles
The Investment Association (IA) has published its principles of remuneration for 2018 and has written to remuneration committee chairs to advise them of the changes to the principles. Several key changes have been made to the principles. These include the fact that remuneration policies should now focus on promoting long-term value creation, the policy should disclose any discretion the remuneration committee has in relation to a particular incentive scheme, reporting on gender pay gap and executive remuneration ratios, disclosure of relocation benefits at the time of an executive’s appointment, among others.
ISS 2018 proxy voting guidelines
The ISS has published updated 2018 proxy voting guidelines, effective for meetings after 1 February 2018. In common with the Investment Association (as referred to above), the guidelines reject “virtual only” general meetings and support hybrid shareholder meetings. Other sections of the guidelines relate to “overboarding”, the composition of audit and remuneration committees (which reiterate the UK Corporate Governance Code requirements), threshold vesting levels for long-term incentive plans and “cash box” structures of issuing shares without supplying pre-emption rights.
In relation to overboarding, this specifically relate to chairs and ISS state that negative vote recommendations will be applied to the chair where the individual has three of more chair positions.
Investment Association public register of companies with 20% or more vote against GM resolutions
On 19 December 2017 the Investment Association launched the public register of listed companies which have had significant shareholder rebellions. The records include FTSE companies which have received votes of 20% or more against any resolution or withdrew a resolution prior to their Annual General Meeting (AGM) in 2017. The register aims to increase transparency, accountability and scrutiny of listed companies by shareholders, media and the wider public by publishing this information in one central location.
A key purpose of the public register is to focus attention on how these companies respond to the concerns of their investors. The Register includes the public statements made by the companies on how they have addressed shareholders’ concerns.
According to the public register:
- 22% of listed FTSE companies feature on the public register based on the AGMs and GM held in 2017 due to having at least one resolution that received over 20% dissent or was withdrawn.
- 38% of resolutions obtained shareholders voting against companies’ annual remuneration reports, remuneration policy or other remuneration related resolutions.
- 32% of resolutions listed on the Register obtained high vote against the re-election of a company director in 2017.
It is worth noting that under provision 6 of the revised UK Corporate Governance Code, when more that 20% of votes have been cast against a resolution, a company should explain what actions it intends to take to consult shareholders in order to understand the reasons behind the result. An update would have to be published no later than six months after the vote and a final summary should be included in the annual report or in the AGM notice.
Legal Identity Identifiers (LEIs) and classification of regulated information
As reported in our June 2017 and September 2017 updates about the requirement for listed companies to include both their LEI and additional information in London Stock Exchange announcements, listed companies are reminded that if they have missed 1 October 2017 deadline for registration that they must now register for an LEI immediately.
Consultation on changes to the Stewardship Code
As a reminder, the UK Stewardship Code (the ‘Code’) sets out a number of areas of good practice to which the FRC believes institutional investors should aspire and operates on a ‘comply or explain’ basis. The FCA requires UK authorised asset managers to report on whether or not they apply the Code. In a similar way to the UK Corporate Governance Code, the UK Stewardship Code aims to make investors more accountable to their clients and beneficiaries.
As alluded to in our section on updates to the UK Corporate Governance Code, the FRC has announced that it is looking to update the Stewardship Code. The FRC expects a detailed consultation on specific changes to be published in mid-2018, once the comprehensive review of the UK Corporate Governance Code has been finalised. The consultation will end on 28 February 2018.
Virtual AGMs – Investment Association statement
The Investment Association (IA) published a position statement on virtual-only Annual General Meetings (AGMs).
In common with ISS, the IA members’ view is that virtual-only AGMs (i.e. meetings held exclusively using online technology, and not accompanies by a physical meeting) are not in the best interests of all shareholders, and therefore should not be used by investee companies.
IA members do recognise the use of technology at a physical AGM as a factor that could increase retail and institutional investor participation. However, their view is that such technology should be used in parallel with a physical meeting and not lead companies to adopt a ‘virtual-only’ approach. Virtual-only AGMs are seen by IA members as detrimental to the board accountability due to the remoteness of participants. Investors expressed their view that the public nature of AGMs and full attendance of the board are important to bring matters to the board’s attention.
Therefore, IA members will not support amendments to articles of association in relation to electronic meetings if they allow for virtual-only AGMs. It is expected that any amendments to the articles will state that a physical meeting will be held alongside an electronic meeting. Companies which have the ability to hold virtual-only AGMs following any amendments to their articles will be red-topped by the IA’s Institutional Voting Information Service (IVIS).
View the full IA position statement.
New Shareholder Rights Directive – key highlights
The Shareholders’ Rights Directive EU/2017/828, which amends the existing EU Shareholders' Rights Directive from 2007, came into force on 9 June 2017. EU Member States have to implement the Rights Directive into national legislation by 10 June 2019. The objective of the Shareholders’ Rights Directive is to increase shareholder engagement and corporate transparency in the long term.
The Department of Business, Enterprise and Innovation invites submissions to a public consultation on the transposition of the Directive into UK law. The deadline for submissions is 9 February 2018.
The Directive applies to companies having their registered office in a EU Member State and whose shares are admitted to trading on a regulated market in or operating in a Member State. The key amendments to the directive are as follows:
- Shareholders’ oversight over directors’ remuneration: Shareholders will have the right to vote on their company’s directors’ remuneration policy, and the remuneration policy will have to be publicly disclosed without delay after the shareholders’ vote at the general meeting.
- Identification of shareholders: Companies will have the right to identify and obtain details of their shareholders from intermediaries. Member states may provide that companies are only allowed to request identification with respect to shareholders holding more than a certain percentage of shares or voting rights which will not exceed 0.5%.
- Facilitation of shareholders’ rights: Intermediaries will have to facilitate the exercise of the rights by the shareholder, including the right to participate and vote in general meetings. They will also have the obligation to deliver to shareholders all information from the company that will enable the appropriate exercise of their rights.
- Material Related Party Transactions: Material related party transactions should be submitted to approval by the shareholders or the administrative or supervisory body to provide adequate protection for the interests of the company. Companies will have to announce publicly material transactions.
- Institutional Investors, Asset Managers and Proxy Advisors: Institutional investors and asset managers must either develop and publicly disclose a policy on shareholder engagement or explain why they have chosen not to do so. Proxy advisers will also have to disclose certain key information and will be subject to a code of conduct.
View the full text of the directive.
Tejoori Limited – MAR Compliance Fine
The FCA has taken enforcement action under MAR against an AIM quoted company for first time since it came into effect in the UK on 3 July 2016, at which point AIM companies first fell within the scope of MAR. Tejoori Limited, an investment company listed on AIM was fined £70,000 for breaching Article 17 of MAR. However, the final notice stated that this was a misunderstanding rather than a deliberate attempt to deceive the market. Mark Steward, FCA Executive Director of enforcement and market oversight stated that “misunderstanding the commercial reality of a transaction is no excuse”. The FCA fined Tejoori Limited because it failed to release an announcement as soon as possible after being notified of inside information relating to the valuation of a major investment. The final notice can be found here.
The General Data Protection Regulation (GDPR) is new data protection law that will apply to all EEA countries from 25 May 2018. The aim of GDPR is to harmonise data protection procedures across the EU, enforce existing good practice and introduce more stringent requirements around the management of personal data and cyber security.
The GDPR increases the sanctions for breaches of its obligations to either 4% of annual worldwide turnover or EUR 20 million (whichever is greater). In addition to the increase in maximum fines, the GDPR introduces many new compliance obligations. For instance, organisations will have 72 hours to communicate to the relevant data protection authority that they have suffered a data breach. Another far-reaching requirement is for organisations which carry out certain types of data processing to appoint a data protection officer (irrespective of the organisations’ size or turnover).
As a result of the newly-introduced magnitude of fines and the reputational issues associated with data breaches, data protection compliance is attracting a high level of scrutiny among UK-based companies.
CIPFA – Revocation as audit qualifying body
The FRC has revoked the recognition of CIPFA as an audit qualifying body, now that it no longer has any members who hold a CIPFA awarded audit qualification. There are no CIPFA members who hold a CIPFA awarded audit qualification and therefore no one is directly affected by this revocation, but company secretaries may wish to confer with their Finance teams on this matter. View the revocation order.
Extension of senior managers regime to all financial services firms
For interest to those of you working in the financial services sector, the FCA has published a further consultation on its plans to move all firms and individuals in the wider financial services sector to the Senior Managers and Certification Regime (SMandCR). The consultation sets out proposals for transitional arrangements for moving from the old Approved Persons regime to the new SMCR and guidance on the duty of responsibility for the extended regime and how this would be enforced by the FCA. The consultation closes on 21 February 2018 and the rules are expected to apply mid to late 2019. See further information.
Transparency directive – ESMA final report on RTS on European Single Electronic Format (ESEF)
With effect from 1 January 2020, listed companies will be expected to prepare annual financial reports in a format known as ESEF and in December 2017, ESMA published a final report on the draft regulatory
technical standards on the ESEF. The purpose of this is to enable software supported analysis and comparison of different reports, even though these may be in different languages. The FRC lab has also issued a report on XBRL and the future of digital corporate reporting. Their report looks at the nature of XBRL, the potential impact and issues relating to its development and use by listed companies. The FRC is looking to form a committee in the UK to progress the benefits of digital corporate reporting. The FRC lab report on XBRL can be found on the FRC website.
Listed companies should already be considering, with their Finance teams, the impact and opportunities of ESEF and how this will be implemented within their companies.
Companies House update
As part of its current business plan Companies House committed to undertake a review of data quality. Consequently, Companies House has introduced standards for the nationality and country of residence free text fields. They have produced guidance listing the nationalities and countries they will accept and which should be used when completing the relevant fields on any information submitted to Companies House.
It is appreciated that most customers will already be using these standards. We will implement the standards for nationalities on 8th February 2018 and for country of residence in April 2018 (date will be confirmed nearer the time). It should be noted that Companies House will reject any forms after these dates if the nationality or country details do not comply with the guide.
This article was written by Jayne Meacham, Associate Director at Jordans Corporate Law Limited.