We have set out here a round-up of some of the recent developments in corporate governance over the last month:
Deadline Closes for Comments on Proposed Changes to UK Corporate Governance Code, FRC Guidance on Audit Committees and UK Stewardship Code
The consultation on the changes proposed by the UK’s Financial Reporting Council (FRC) to the UK Corporate Governance Code, to its related guidance on Audit Committees and to the UK Stewardship Code, closed on 13 July 2012.
This development, which we covered in previous updates, will be of interest to certain Irish companies, as the UK Corporate Governance Code is followed in Ireland on a “comply or explain” basis by companies listed on the Main Securities Market of the Irish Stock Exchange.
EBA Consultation on Guidelines on the Assessment of the Suitability of Key Managers of Banks and Competent Authorities Closes
The consultation launched by the European Banking Authority (EBA) on 18 April 2012 on draft guidelines regarding the assessment of the suitability of members of the management body and key function holders in banks closed on 18 July 2012. A public hearing was held on 1 June 2012 to hear initial comments of the interested parties on the proposed guidelines. The proposed guidelines are to be followed by both credit institutions and competent authorities and set out the process, criteria and minimum requirements for assessing the suitability of these individuals.
How this will impact on Ireland’s new fitness and probity regime is not yet certain.
For a link to the slides shown at the public hearing, please click here.
For a link to the consultation and related documents, please click here.
New Proposals by UK Government regarding Shareholders’ Say on Pay and FRC’s Decision to Consult on Proposed Changes to UK Corporate Governance Code on Remuneration
There have been a number of developments recently in the UK on shareholders’ so-called “say-on-pay”. As mentioned in previous updates, the UK government has published a new bill providing (among other things) for the removal of the UK statutory provision preventing the making of remuneration of directors of listed companies conditional on shareholders’ approval. This follows the much-publicised consultation launched in March by UK Secretary of State for Business, Vince Cable, on enhanced shareholder voting rights on executive pay in UK quoted companies.
The new bill, the Enterprise and Regulatory Reform Bill 2012, was published on 23 May 2012. Currently, Subsection (1) of Section 439 of the UK Companies Act 2006 provides that a quoted company must put to its members a resolution approving the directors' remuneration report for each financial year, but Subsection (5) provides that no entitlement of a person to remuneration can be made conditional on such resolution being passed. The new bill proposes that Section 439(5) of the UK Companies Act 2006 be removed.
The new bill is part of an international move towards affording shareholders of listed companies greater influence over the issue of executive pay through enhanced voting rights. However, as we highlighted in our last update, the proposal was only a first step in giving shareholders more of a “say on pay” in UK quoted companies and did not, for example, as the March consultation on executive pay had suggested, expressly grant a power to shareholders to exercise a binding vote on directors’ pay.
However, following the publication of this bill, the UK government announced on 20 June 2012 further proposals on directors' remuneration. Significantly, it is proposed that a binding vote, by way of ordinary resolution, on future remuneration policy (to include the company’s policy on exit payments) will be required at least every three years. Shareholder approval will be required if the directors wish to change the policy. It is also proposed that an annual advisory vote, again by way of ordinary resolution, on the implementation of the remuneration policy, including actual sums paid, will be required. Other changes include that one total figure of remuneration for each director will be required to be set out in the remuneration implementation report.
On 27 June 2012, the UK Department for Business Innovation and Skills published a consultation on these proposals, together with draft regulations which set out the proposed form and content of the directors' remuneration report. For a link to the consultation paper, please click here.
The FRC has also announced that, once the legislative proposals have been finalised, it will consult on changes to the UK Corporate Governance Code to address the issues arising on remuneration.
Again, the significance for Irish listed companies is that reforms on this issue could ultimately be implemented by way of amendments to the UK Corporate Governance Code, to which Irish listed companies adhere.
OECD Publishes its 2011 Annual Report on Bribery
The OECD Working Group on Bribery has published its annual report for 2011. The Working Group is responsible for monitoring the implementation of the OECD Convention on Combating Bribery of Foreign Public Officials in International Business Transactions and is made up of a wide number of member countries. The report evaluates the implementation of anti-bribery protections by OECD members. For a link to the report, please click here.
New Anti-Bribery Guidance for M&A Transactions
Transparency International UK, the UK arm of the global anti-corruption organisation, has published a guidance document aimed at the private equity sector and those involved in mergers and acquisitions. Anti-Bribery Due Diligence for Transactions - Guidance for Anti-bribery Due Diligence in Mergers, Acquisitions and Investments aims to be a practical guide on how to manage bribery and corruption risk in due diligence.
The guidance follows a consultation process and the publication of draft guidance, and includes a helpful anti-bribery checklist.
For a link to the guidance, please click here.
New Report on Transparency and Anti-Corruption Measures in the World’s Largest Companies
Transparency International has also recently issued a new report on the policies and measures adopted by the world’s largest companies in addressing transparency and in tackling corruption. On 10 July 2012, Transparency in Corporate Reporting: Assessing the World's Largest Companies was launched. It features the organisation’s analysis of 105 of the largest public multinational companies in the world in the areas of transparency, reporting and anti-corruption and sets out a number of recommendations for them in these areas. It also rates the companies from 0-10 based on their disclosure of various business information, where they pay their taxes, their corporate structures and their anti-corruption programmes.
For a link to the report, please click here.
New UK Recommendations Regarding Going Concern
As previously reported on in our weekly client bulletin, the panel of inquiry led by Lord Sharman, appointed last year by the FRC to report on the lessons to be learned from recent experience regarding the assessment and management of going concern by companies and auditors, has issued its final report on 13 June 2012.
The report of the panel lists 5 recommendations to the FRC in this area. The recommendations include a proposal that the FRC should take a more systematic approach to learning lessons relevant to its functions when significant companies fail or suffer significant financial or economic distress but nonetheless survive, for example through selective inquiries conducted by the FRC. In addition, it is proposed that a common international understanding of the purposes of going concern assessment, disclosures and related thresholds and descriptions, should be agreed which should be consistent throughout accounting and auditing standards, in FRS 18 and ISA (UK & Ireland) 570, throughout the UK Corporate Governance Code and related guidance for directors and auditors, and in the UK Listing Rules.
It is also proposed that the FRC’s Going Concern and Liquidity Risks: Guidance for Directors of UK Companies should be reviewed to ensure that the going concern assessment is integrated with the directors’ business planning and risk management processes and includes a focus on both solvency and liquidity risks. In addition the FRC should move away from a model where disclosures about going concern risks are only highlighted when there are significant doubts about the entity’s survival, to one where the discussion of a company’s strategy and principal risks always includes the directors’ going concern statement and how they arrived at it.
Lastly, it is proposed that the FRC should consider moving UK auditing standards towards inclusion of an explicit statement in the auditor’s report as to whether the auditor has anything to add to or emphasise in relation to the directors’ going concern assessment process and outcome.
The panel also considered a number of related issues. For example the panel posed the question whether banks should have a separate going concern disclosure regime and/or a separate financial reporting and auditing regime. But it considered that for various reasons these separate regimes were not necessary.
As regards implementation, the report suggests that implementation of the recommendations should, among other things, be through amendment to the FRC’s Going Concern and Liquidity Risks: Guidance for Directors of UK Companies, the FRC’s Guidance on Audit Committees, and a number of the UK auditing standards.
Central Bank Publishes Updated “Frequently Asked Questions” on the Corporate Governance Code for Credit Institutions and Insurance Undertakings
The Central Bank of Ireland has published updated FAQ’s in relation to its Corporate Governance Code for Credit Institutions and Insurance Undertakings.
The FAQ updates are to provide further guidance and clarification in relation to the following:
- board majority (new point (j) in Question 15 of the FAQ document);
- the role of the board (new response at (a) in Question 34); and
- the annual compliance statement (new points (e) to (k) in Question 53).
The updated FAQ document is available on the Central Bank’s website.
New Central Bank Fitness and Probity Service Standards
The Central Bank of Ireland has published Fitness and Probity Service Standards. These Standards set out the Central Bank’s target “turnaround times” in relation to approvals of “Qualifying Investor Fund IQ”, “Central Bank of Ireland Previously Approved Individual”, “EEA Previously Approved Individual”, “Standard IQ” and “Incomplete IQ Responses”.
The Standards also set out various reasons as to why an IQ (or Individual Questionnaire) would be returned.
The Standards are available on the Central Bank website.
Details of New Irish Anti-Corruption Legislation Published
The draft scheme of a new Criminal Justice (Corruption) Bill, which includes proposals in relation to corporate criminal liability for corrupt acts by company directors, managers, officers, employees, subsidiaries or agents, has been published by the Department for Justice.
The proposed comprehensive new legislation on bribery and corruption is of significance from a corporate governance point of view in that it includes provisions which will render companies criminally liable for corrupt acts committed by their directors, managers, officers, employees, subsidiaries or agents, where the corruption was intended to obtain or retain business for the company. The only defence available to a company in this scenario will be to show that it took all "reasonable steps" and exercised all "due diligence" to prevent the corruption taking place.
If the legislation is introduced in its current proposed form, it may have a dramatic impact on the corporate governance landscape for commercial entities operating in Ireland, as they will, in effect, be mandated by law to ensure that they have appropriate supervisions and controls in place to ensure that they do not facilitate the commission of bribery or other corrupt activities by their employees or other business associates. The risk for a company of not having appropriate anti-bribery and anti-corruption measures in place will be a potential criminal sanction if the company’s directors, managers, officers, employees, subsidiaries or agents engage in corrupt practices on its behalf.
For a link to our more detailed analysis of the new proposals, please click here.
Changes to the Prospectus and Transparency Regimes in Ireland
Changes have been made to the Prospectus and Transparency regimes in Ireland by the implementation into law of Directive 2010/73/EU (the Directive) which amends both the Prospectus Directive (Directive 2003/71/EC) and the Transparency Directive (Directive 2004/109/EC).
The Prospectus (Directive 2003/71/EC) (Amendment) Regulations 2012, which were published on 6 July, amend the Prospectus (Directive 2003/71/EC) Regulations 2005. The changes came into effect on 1 July 2012. Some of the key changes relate to the maximum number of investors and the threshold of total consideration for exempt public offers, the format and content requirements of the prospectus summary, the exemptions from the obligation to publish a prospectus in the case of retail cascades and for employee share schemes, and the definition of 'qualified investors'. In addition, amendments have also been made to Commission Regulation 809/2004, dealing with format and the content of the prospectus, the base prospectus, the summary and the final terms and as regards the disclosure requirements, and these amendments came into force also on 1 July.
The changes in the Directive related in the main to the Prospectus regime. However, some corresponding changes were introduced to the Transparency regime. The Transparency (Directive 2004/109/EC) (Amendment) Regulations 2012 amend the Transparency (Directive 2004/109/EC) Regulations and likewise came into effect on 1 July 2012. Some of the key changes here relate to the minimum denomination thresholds for issuers of debt securities (a) which apply in respect of the exemption from the requirement to produce annual and half-yearly financial reports and interim management statement, (b) which apply to enable the issuer to chose any member state as a venue for meetings, and (c) which govern the right of debt issuers to elect the language of regulated information.