Corporate Governance Reform: Green Paper
The BEIS issued its eagerly awaited Green paper on Corporate Governance reform on 29 November, inviting responses with regards proposed enhancements to encourage investor and employee engagement with company boards. The stated aim of this Green Paper is ‘to consider what changes might be appropriate in the corporate governance regime to help ensure that we have an economy that works for everyone.’
The paper revisits the topic of executive pay, encouraging further transparency, increased shareholder engagement and strengthening the role of the Remuneration Committee. Billed as a part of the wider work to enhance public trust in business as a force for good, the paper requests responses by 17 February 2017.
Principles of Remuneration and letter to Remuneration Committee Chairs
The IA has written to the Chairs of Remuneration Committees setting out the changes made to the latest version of the IA’s Principles of Remuneration (the Principles). These have been reviewed and amended by the IA in order to reflect the recommendations of the Executive Remuneration Working Group. The amendments to the Principles also:
- acknowledge the need for increased flexibility of remuneration structures;
- aim to ensure that the Principles do not promote a single remuneration structure;
- aim to ensure that the level of remuneration has appropriate focus and that companies should disclose pay ratios between the CEO and median employees, the CEO and the Executive team, to provide context;
- include a new section on the importance of improving shareholder consultation, ensuring that it is based on the strategic elements of remuneration and leads to a proper consultation process;
- encourage post retirement shareholding guidelines.
The letter to Remuneration Committee chairs sets out matters that investors will be looking at in 2017 and highlights issues to be focused on ahead of the 2017 AGM season. In particular investors have asked the IA’s research arm, the Institutional Voting Information Service (IVIS), to give a Red Top to a remuneration report where there is failure to give full retrospective disclosure of financial targets. A full explanation of why personal and strategic performance targets have paid out are also expected in order to avoid an Amber Top being given to a remuneration report.
Good Governance Report released
The IoD’s Good Governance Report ranks the FTSE 100 based on an assessment of their corporate governance performance. The IoD states that the purpose of the project is to “reignite the governance debate by leading it away from the compliance approach to corporate governance that has become widespread in recent years.” The approach is to combine traditional objective governance indicators with a measure of the quality of corporate governance, as perceived by stakeholders. From this, the IoD have prepared a model to build an index of corporate governance.
Updated Q&A and guidance published
The European Securities and Markets Authority (ESMA) have updated their Q&As on the Market Abuse Regulation (MAR) and its guidelines on delaying the disclosure of inside information, and for persons receiving market soundings. The updated Q&As are related to Persons Discharging Managerial Responsibilities (PDMR) dealings and investment recommendations. A new question has been included on PDMR transactions that are carried out in a currency other than the Euro, and the exchange rate that should be used, if over the EUR 5,000 limit. The published guidelines apply from 20 December 2016. Companies are required to make ‘every effort’ to comply with the guidelines.
The 2017 Dividend Procedure Timetable is now available
The London Stock Exchange has published its 2017 Dividend Procedure Timetable. In all major respects it is unchanged to the procedures issued in 2016. However, it now states that dividends can be announced as part of Interim or Final Results announcement or under the Headline Category ‘Dividend Declaration’, but that dividends should not be announced under other headlines, as this can lead to dividend details going unnoticed. In these circumstances the LSE may ask a company to change and re-announce their dividend dates.
Fourth money laundering directive – discussion paper published
BEIS have published a discussion paper on the fourth money laundering directive which relates to the beneficial ownership of corporates and other legal entities. The regime of disclosing Persons with Significant Control (PSCs) for UK companies was introduced earlier this year. BEIS considers that some amendments to this regime may be necessary in order to comply with the fourth money laundering directive. For example, BEIS is considering widening the scope of the companies subject to the PSC regime and requiring companies to update their PSC information within 6 months of a change occurring. The current implementation date for the directive is 26 June 2017, although there is a proposal from the European Commission to bring the date forward to January 2017.
A number of reports have been published by the FRC on various aspects of corporate reporting. These include:
Corporate Reporting Annual Review and letter to listed companies
The FRC have published their annual review on corporate reporting. The review sets out:
- nine characteristics of good corporate reporting
- an assessment of corporate reporting during the last year
- enforcement activity
- current and future developments in corporate reporting.
The annual review also includes a copy of a letter sent to audit committee chairs and finance directors giving guidance on four key areas of the annual report: the strategic report, directors’ remuneration report, audit committee reporting and the financial statement disclosures.
Report on business model reporting
The Financial Reporting Lab has published a project report on business model reporting, which examines the reporting of quoted companies' business models in the annual report. The report sets out investors’ expectations and requirements for business model reporting and what is currently seen as best practice.
Report on business model reporting
The FRC has issued a review on certain aspects of tax reporting in annual reports which identifies opportunities for companies to improve the usefulness of certain disclosures relating to tax. The review specifically addresses tax reporting in the strategic report and reporting on uncertainties relating to tax liabilities and assets. The FRC also identifies good tax disclosures which, for example, include the specific nature of the tax assumption or uncertainty, and provides a sensitivity analysis or a range of possible outcomes to provide users with a better understanding of the issue.
Further information and copies of these reports are all available on the FRC website.
The Business & Human Rights Resource Centre (BHRRC) analysis of Modern Slavery Act statements
Modern Slavery Act reporting requirements apply to companies carrying on business in the UK supplying goods or services with a total turnover of £36 million or more. The legislation took effect for financial years ending on or after 31 March 2016 and the first statements are therefore now appearing. The BHRRC has analysed 27 statements published by FTSE 100 companies so far. It has put companies into ten tiers (tier one being the best performing and tier ten the worst). The BHRRC looked, not just at compliance with the minimum requirements, but six recommended content requirements contained in the Modern Slavery Act. The BHRRC analysis highlights good practice and areas for improvement.
The BHRRC report and Modern Slavery Act Registry is available on the BHRRC website.
Report on ethnic diversity on boards
The Parker Review Committee has published a consultation report into the ethnic diversity of UK boards which focuses on FTSE 100 companies. The review found that ethnic minority representation on FTSE100 boards is disproportionately low and includes a number of recommendations to help increase ethnic diversity of FTSE 100 and FTSE 250 boards. Comments on the consultation are requested by February 2017.
Gender Pay Gap Reporting
The requirement to report on the gender pay gap introduced by the Equality Act was expected to take effect this autumn but its introduction has been delayed and it is now only likely to come into effect from April 2017.
Ban on corporate directors
The introduction of a ban on appointing corporate directors, which was expected to be introduced from October 2016, has been delayed and as yet no future implementation date has been published.
Late payment of suppliers
Regulations on a new requirements for certain companies to report on supplier payment practices and policies was expected to come into force in April 2016. The Department for Business, Energy and Industrial Strategy (BEIS) has now confirmed that the draft regulations are due to come into effect from 6 April 2017 for financial years starting on or after that date. It is expected that more information on the metrics to be used and accompanying guidance will be issued shortly.