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Directors' knowhow is a monthly article, which highlights key rule changes, proposed changes and market updates so that you know what is coming down the track.

London Stock Exchange advises AIM companies on how to prepare for corporate governance changes

In the latest edition of Inside AIM, London Stock Exchange has issued advice to AIM companies on how they should prepare for the upcoming corporate governance changes.

AIM companies will, from 28 September 2018, be required to disclose details of the recognised corporate governance code they have decided to apply. They will then have to explain how they comply with their chosen corporate governance code and, where they depart from the code, explain the reasons for doing so.

To ensure your company is prepared, London Stock Exchange has provided the following advice:

  • Timing of disclosure – AIM companies will be required to review their corporate governance disclosures annually. The company website should include the date of when compliance with its chosen corporate governance code was last reviewed and ensure its AIM Rule 26 disclosures remain accurate.
  • Where corporate governance disclosures should be made – Companies which have not yet made disclosures against a recognised code in their annual report must ensure that the corporate governance statement has been disclosed on their website by 28 September 2018.

    A corporate governance statement which has been published on a company's website should be clearly presented and easily accessible from the ‘AIM Rule 26’ landing page on its website. It is acceptable for the statement to incorporate by reference provided that the material is freely available and the statement clearly indicates where interested parties can read or obtain a copy of that material.

  • Recognised corporate governance codes – Although London Stock Exchange does not offer a specific list of recognised codes, it notes that established benchmarks include the QCA Corporate Governance Code and the UK Corporate Governance Code. AIM companies that have a dual listing in their home state are permitted to report using an appropriate standard in their home jurisdiction.
  • Good corporate governance and investor engagement – Companies are reminded that disclosure alone does not constitute good corporate governance; strong leadership, a positive culture, robust systems and risk management are also important ingredients.

FRC publishes revised Guidance on the Strategic Report

The Financial Reporting Council (FRC) has published its revised Guidance on the Strategic Report. The FRC explained that it had delayed publication of the guidance, so that the new legislative reporting requirement in the strategic report relating to reporting on Section 172 matters could be incorporated into the Guidance.

The main changes to the guidance concern:

  • Encouraging best practice reporting of the pieces of non-financial information that may impact company performance over the longer term, encouraging boards to give due consideration to directors’ duties under Section 172 of the Companies Act 2006 and to report on relevant matters relating to that duty; and
  • Clarifying that the primary audience of the strategic report remains the shareholders, but at the same time encouraging directors to consider how they have had regard to the interests of wider stakeholders as part of directors’ duties under Section 172 of the Companies Act 2006.

BEIS Committee publishes report on gender pay gap reporting

The House of Commons’ Business, Energy and Industrial Strategy Committee has published its report on gender pay gap reporting. The report forms part of an inquiry, launched in March 2018, into aspects of executive pay and the gender pay gap in the private sector.

The report found that the median gender pay gap is approximately 18% nationally, although some organisations have recorded gaps as high as 40%. The committee has therefore called for quick action to close the pay gap, making a number of recommendations:

  • The qualifying threshold for publishing gender pay gap statistics should be reduced from organisations with 250 employees or more to those with 50 or more.
  • Organisations should be required to provide narrative reporting alongside their gender pay gap statistics and an action plan setting out how pay gaps are being and will be addressed.
  • The government should publish revised guidance that deals with ambiguous areas, for example how bonus figures should be calculated.
  • Company boards should introduce key performance indicators for reducing and eliminating their pay gaps. Remuneration committees, in reporting on pay policy, should then explain how this commitment to reducing the pay gap is being reflected in their decisions.
  • The FRC's proposals for a revised Stewardship Code (due later in 2018) should include reference to ensuring that gender diversity is properly reflected throughout the company, particularly at board level.
  • The FRC should monitor the quality of reporting on gender diversity and the pay gap in annual reports and press for improvements where necessary. The UK Corporate Governance Code should go further in improving reporting obligations on actions taken to increase diversity in the management pipeline.

A second report examining the progress of reforms relating to executive pay levels and structure will be published in autumn 2018.

ICSA releases results of its survey on the Market Abuse Regulation

ICSA: The Governance Institute has published the results of a survey, which asked respondents a range of questions regarding the Market Abuse Regulation (MAR), which came into force in July 2016.

Noteworthy findings included;

  • 48% of respondents thought that MAR had had no positive effect on the market, while only 22% thought the opposite.
  • Half of respondents said that MAR had placed an excessive burden upon resources, although 33% said it hadn’t and 17% were unsure.
  • Many respondents felt that identifying what requires disclosure was a challenging aspect of MAR.
  • Respondents also urged a more proportionate approach to MAR, encouraging more flexibility for SMEs for whom the current rules were currently too restrictive.

Government publishes framework for UK-EU partnership on financial services post-Brexit

The UK government has published a framework for a UK-EU partnership on financial services after the UK has left the European Union.

The main features of the proposed framework are:

  • Principle of autonomy. Both the UK and the EU should retain autonomous judgement about both access to their market and over legislation. However, any bilateral aspect to the relationship must provide certainty and stability.               
  • Equivalence at the outset. The UK and EU start with the same rulebook and entwined supervision; there should initially be reciprocal recognition for all third country regimes.
  • Expanded scope of activities permitted cross-border. The most mutually beneficial activities for the economy should be prioritised to ensure that there are no unintended consequences or arbitrage. Due to the interconnectedness between the UK and EU markets, this is currently insufficient.
  • Common principles. A future UK-EU partnership on financial services should include common objectives to manage shared interests such as financial stability, investor protection, market integrity and the prevention of regulatory arbitrage.
  • Regulatory and supervisory co-operation. The UK and the EU should commit to an overall framework that supports continued extensive collaboration and dialogue.
  • Structured withdrawal. There should be consultation and discussion before loss of access to either market, with clear timelines and notice-periods to give time for businesses and supervisors to adapt to any changes.
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