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Listed company update II
This update summarises the major developments in UK corporate law and regulation for listed companies since our last update in July 2014.
UK Corporate Governance Code 2014
On 17 September 2014, the Financial Reporting Council published a new edition of the UK Corporate Governance Code, incorporating changes it has made to the Code following its latest regular consultation exercise. The changes to the Code are virtually the same as were proposed as part of the consultation exercise. Listed companies are required to report each year on how they have applied the principles of the Code and also report on a comply-or-explain basis on whether they have applied the provisions in the Code. The new Code will apply to reporting periods beginning on or after 1 October 2014, so companies should start considering the impact of their governance processes and in due course on the relevant areas of their annual reports. Some companies may wish to adopt the new Code earlier than required.
The main changes to the Code address going concern and risk management, remuneration and shareholder voting issues. They include:
Going concern and risk management – in place of the requirement to report that a business is a going concern, with supporting assumptions or qualifications as necessary, a new requirement for directors to state in the company's annual and half-yearly financial statements whether they consider it appropriate to adopt the going concern basis of accounting in preparing them and to identify any material uncertainties as to the company's ability to continue to do so over a period of at least 12 months from the date of approval of the financial statements (provision C.1.3) (the new longer term Viability Statement). Here, the Directors need to say that they have assessed the prospects of the company (and state the period which this covers and the reasons for choosing this period). They also need to state whether they think they have a reasonable expectation that the company will be able to continue to operate over that period, based on a robust assessment of the risks ahead. The FRC recommends that the statements are contained in the strategic report so that they are covered by the safe harbour provisions in section 463 CA 06 (liability for false or misleading statements in reports). There may be difficulties in looking ahead more than 12 months in any meaningful way. The guidance states that the period covered by the Viability Statement should be significantly longer than 12 months, except in rare circumstances. But clearly the longer the period, the less certainty. The Viability Statement responds to criticism that during the financial crisis there was little reported that indicated that there was trouble up ahead.
A separate new requirement for directors to confirm in the company's annual report that they have carried out "a robust assessment" of the principal risks facing the company, describing the risks and explaining how they are being managed or mitigated (provision C.2.1).
Remuneration – a shift of emphasis on directors' remuneration so that, instead of focusing on the levels of remuneration that are sufficient to attract, retain and motivate directors, main principle D.1 requires executive directors' remuneration to be designed to promote the long-term success of the company, and that performance related elements should be ‘transparent, stretching and rigorously applied'. Also for the first time, companies are required to include claw-back provisions to recover or withhold sums paid or payable to under-performing directors, or explain why not (provision D.1.1). Listed company director remuneration has been moving in this direction over the last few years, but the need to expressly report on these aspects of remuneration in future annual reports will no doubt accelerate these trends. Some technical difficulties also arise in making changes because for most companies, the remuneration policy on which shareholders voted in 2014 is the one which will be carried forward for the next few years without amendment.
Shareholder voting – the extension of main principle E.2 (constructive use of general meetings) will apply to all general meetings rather than just AGMs and a requirement that, while the period for AGMs remains 20 working days, all notices of other general meetings should be sent to shareholders at least 14 working days before the relevant meeting. There is also a new requirement that when, in the board's opinion, a significant proportion of votes have been cast against a resolution (which does not include withheld votes) at any general meeting, the company should explain when announcing the results of voting what actions it intends to take to understand the reasons behind the vote result.
A copy of the new Code can be downloaded from the FRC website.
Role and contribution of the Company Secretary
As mentioned in our last update, the Institute of Chartered Secretaries and Administrators (ICSA) has conducted a collaborative survey with Henley Business School looking at the changing, and at times contradictory, role of the Company Secretary. The study suggests that the role is changing and the increased focus on corporate governance has raised the profile and visibility of the Company Secretary, who has become the primary point of information and influence between the executive management and the board.
Since then, there has been much discussion about the suitability of company secretaries for non-executive directorships. An article in the Sunday Times in September drew out the skills of the company secretary for NED roles, citing the example of the company secretary at Standard Chartered securing a NED role at WHSmith. It could be said that in many ways, company secretaries are non-executive directors in waiting. Andrew Kakabadse, the co-author of the survey, agrees that company secretaries would make great NEDs. Company secretaries may not always take a low-key approach to promoting themselves and their achievements, which means that people may be less aware of their capabilities. Perhaps the time has come for company secretaries to come out from behind the scenes and into the limelight!
There has been a steady increase in the amount of information on non-financial matters that companies will be expected to disclose in their corporate reporting. Since October 2013, UK companies have had to include information on environmental, employee and social and community matters, as well as information on human rights, gender statistics and greenhouse gas reporting.
However, under the new Non-Financial Reporting Directive published in October 2014, more detailed information will be required on policies, risks and outcomes as regards environmental, social and human rights issues, diversity, anti-bribery and corruption matters. Luckily most of the content of the Directive, except for anti-corruption and bribery disclosure, is already in place in the UK. The Directive will need to be implemented in member states for financial years beginning on or after 1 January 2017.
FRC Labs report "Towards clear and concise reporting"
The Financial Reporting Lab was set up by the Financial Reporting Council to improve the effectiveness of corporate reporting in the UK. In August, the Lab published an insight report entitled "Towards Clear & Concise Reporting", examining progress made by companies towards producing relevant and succinct annual reports and accounts and provides ideas on how companies can make further progress. The 20 page report is in two parts, the first section containing the Lab's observations on the way in which certain FTSE 350 companies have already improved their reporting, focussing specifically on the use of different communication channels, content, materiality and layout. The second part describes how companies can embark upon a continuous process for improving their annual reports, making them clearer and concise.
Based on a review of the most recent round of annual reports published by FTSE 350 companies, the Lab encourages companies to think about issues such as:
- The communication channels used and how to match information to users' needs;
- How to focus content on what is most important to investors;
- Removing immaterial disclosures;
- Using cross-referencing and layout to improve clarity; and
- Planning ahead.
Helpful case studies are provided (BP and Prudential), giving practical insight into how both companies have managed the process. The appendices include clarification on cross-referencing and signposting, as well as setting out nine characteristics of good corporate reporting.
The Lab has also published a set of reminders for the 2014 reporting season, which summarise, in a handy two page format, the key messages from the Lab during 2014.
Both the report and the reminders can be downloaded from the FRC website.
Modern Slavery Bill
Under the Modern Slavery Bill, which is currently working its way through Parliament, companies of a certain size will be required to prepare an annual slavery and human trafficking statement. While its final form remains unclear, the legislation will probably contain some form of corporate reporting statement. This statement will most likely need to include the steps the company has taken during the financial year to ensure that slavery and human trafficking is not taking place in any of its supply chains or in any part of its own business. Disclosure will also need to be made on the company's website.
Reporting on payments to governments for extractive industries
BIS has put forward its proposals for implementing the new European Accountancy Directive requiring disclosure of payments to governments by extractive industries and loggers of primary forests. This will include industries such as oil and gas extraction, mining, dredging and quarrying.
The UK Government is keen to be among the first European Member States to adopt implementing legislation for this Directive, having made a commitment to promote greater transparency during its presidency of the G8 (now G7) countries in 2013. BIS intends to adopt implementing regulations during 2014 (well ahead of the July 2015 deadlines set by Europe).
As a result, all listed companies who are active in the extractive or logging of primary forest industries are required to prepare an annual report on payments made to the governments in which they operate. It is expected that this requirement will apply to affected companies from the start of their financial year commencing on or after 1 January 2015.
The FCA has issued a consultation paper on amendments to the Transparency Rules to implement the provisions for listed companies. Under the consultation, listed companies will have to make their reports public, via an RNS announcement, within 6 months of their financial year end. The report must also be available on the listed company's website for 10 years. The consultation closed on 7 October 2014 and the final rules are expected to be made before the end of the year.
Those affected should start planning their reporting strategy now and put in place procedures for collecting the appropriate information.
Listing rule changes
In September 2014 the FCA published its sixth quarterly consultation paper CP14/18 which contains proposed amendments to the Listing Rules. The amendments are minor in nature, largely clarifying existing provisions and include narrowing the scope of circulars requiring prior approval by the FCA, amending the FCA's role in reviewing and approving material changes to a closed-ended investment fund's investment policy, clarifying the accounting policies to be used when presenting a profit forecast, clarifying the application of the insignificant subsidiary undertaking exemption for related party transactions, and updating the rules to reflect the 2012 edition of the UK Corporate Governance Code. This consultation ended on 5 November.
In May 2014 the London Stock Exchange published amendments to its AIM rules for companies and for their nominated advisers. The changes relate to the disclosure of price sensitive information, statements in admission documents and disclosure on company websites.
In September 2014 the London Stock Exchange issued AIM Notice 40 reminding AIM companies and Nomads of their duty to keep up to date with and have due regard to their obligations in respect of sanctions generally and in the context of a Nomad's appropriateness considerations in respect of issuers. This follows developments in Ukraine resulting in EU sanctions against Russia.
The FRC has launched a project with the objective of improving corporate reporting in the AIM and small cap sector, in response to concerns about the quality of reporting. Jordans has contributed to this project.
Market abuse and inside information
In June 2014 the new Market Abuse Regulation (MAR) was published. MAR will change the market abuse and inside information regime in EU countries and will take effect from July 2016. Key implications for listed companies include an EU-wide harmonised format for insider lists, an expansion of behaviours subject to the regime and enhanced PDMR disclosures. In July 2014 ESMA published for consultation draft technical standards on MAR, along with technical advice on the possible delegated acts concerning MAR. The Technical Standards consultation paper covers areas including conditions for buy-back and stabilisation measures, technical means for public disclosure of inside information and delays and insider lists and managers' transactions.
A package of regulations relating to EU audit reform was published in May 2014. The regulations will apply in member states from 17 June 2016 and include, inter alia, the mandatory rotation of auditors every 10 years, restrictions on the provision of non-audit services by audit firms to existing clients, and the prohibition of ‘big four' terms in agreements. The UK Corporate Governance Code already requires FTSE 350 companies to put their audit contract out to tender at least every 10 years, but the EU position goes further in that it applies to all UK listed companies. In September 2014 the Competition and Markets Authority issued its final order following its inquiry into the FTSE 350 audit market. The CMA has come up with a raft of reforms, including giving the Audit Committee greater powers in relation to auditor appointments.
The Investment Association
The Investment Affairs division of the ABI merged with the Investment Management Association (IMA) on 30 June 2014 and the enlarged IMA will be renamed the Investment Association in January 2015. The IMA has therefore assumed responsibility for the investor guidelines previously issued by the ABI and has taken over the Institutional Voting Information Service (IVIS) from the ABI. As part of this relaunch, two new sets of guidelines have been issued on the IVIS website. The first is a new set of IMA Guidelines called "Share Capital Management Guidelines" which combine the ABI's previous guidelines on authority to allot shares, share buybacks and scrip dividend programmes. The second is a set of "Transaction Guidelines", which address IPOs, secondary capital raising and transactions by listed companies.
Interim management statements (IMS)
The FCA has published amendments to the DTRs to abolish the requirement for listed companies to publish an IMS. The amendments were effective from 7 November 2014. However, discussion continue apace around whether companies will continue to voluntarily publish an IMS or quarterly trading updates in order to keep their shareholders and the markets informed.
QCA Audit Committee Guide
The QCA has revised its Audit Committee Guide for small and mid-sized quoted companies, designed to assist Audit Committee members navigate their way through their responsibilities. The roles and responsibilities of people involved in the work of the Audit Committee have been expanded, placing greater emphasis on the role of the chairman and indeed the secretary to the committee. The Guide also covers risk management and internal controls, the corporate reporting cycle and the Audit Committee Report, as well as a helpful appendix containing suggested agenda items and a meeting schedule for Audit Committees. A copy can be ordered via the QCA website.
BIS has published its latest update on Women on Boards. As at the start of October 2014, the percentage of women on boards of FTSE 100 companies was 22.8& (up from 20.7% in March) and within the FTSE 250 the percentage stood at 17.4% (compared with 15.6% in March). There are no longer any all-male boards in the FTSE 100, but there are still 28 all-male boards in the FTSE 250. Vince Cable and Lord Davies have written to the chairs of those companies urging them to look again at new talent.
AGMs: NAPF 2014 AGM Season Report
The National Association of Pension Funds (NAPF) has published its 2014 AGM Season Report in respect of the FTSE 350. The majority of the report focuses on executive pay, the implantation of the new DRR regulations and shareholder voting on the DRR. A copy of the report can be found on the NAPF website.
Takeover Panel Consultation
The Takeover Panel has issued a consultation paper on proposals to require parties to a takeover bid to clarify whether any promises made in any public statement concerning the bid are intended to be binding commitments of merely statements of intention. A copy of the consultation paper can be viewed on the Takeover Panel website.
LPDT Rules and sponsor competence
The FCA has published its response to its consultation on sponsor competence. The FCA plans to take forward the three main proposals in its consultation paper CP14/2 in relation to sponsor competence, namely (i) that a sponsor must have sufficient prior experience of carrying out sponsor services in order to remain competent, (ii) that sponsors must ensure they are appropriately resourced and (iii) to introduce the concept of key contacts to liaise with the FCA. These rule changes will take effect on 1 February 2015.
ICAEW paper on the UK corporate governance framework
In November 2014, the Institute of Chartered Accountants in England and Wales (ICAEW) published a paper on the UK corporate governance framework. The paper questions the existing corporate governance framework and proposes an overarching framework code, consisting of a set of fundamental principles, promoting a culture of good corporate governance across society, as well as within individual companies.