What to look out for in 2014
AGM and reporting season
We reported over the course of last year on the progress of the plans for a new regime for directors' remuneration reports for quoted companies and the new structure for narrative reporting (which replaced the requirement for a business review, as part of the directors' report, with a requirement for a standalone strategic report). For more details on the changes and to view the applicable regulations please see the article in our October newsletter. Both sets of changes came into force on 1 October 2013 and apply for financial years that began on or after 1 October 2013. So what do these new requirements mean in practice?
There are implications for this year's AGM documentation:
a new style remuneration report is now required which consists of:
- the chairman's annual statement and the directors' report on implementation of the company's directors' remuneration policy (the implementation report)
- the company's forward-looking policy on directors' remuneration (the remuneration policy).
- separate shareholder approvals are needed for the implementation report and the remuneration policy. Shareholders have an annual advisory vote on the implementation report and a binding vote on the resolution to approve the remuneration policy. An AGM notice this year needs therefore to include two separate ordinary resolutions to cover approval of the implementation report and the remuneration policy as do the accompanying proxy and poll cards. Any explanatory circular should contain an explanation of the changes the new regulations have brought in and their effect. The annual report must also reflect the new structure for the remuneration report
- the timing of when the new remuneration policy will come into effect must be made clear. This could be immediately after approval at a company's AGM or at any time thereafter up until the start of its next financial year. Some Investor groups have made clear that they expect the new policy to come into effect immediately after it is approved at a company's AGM
- a standalone strategic report is now required by the narrative reporting regulations in a company's annual report and accounts. The strategic report replaces the business review which was previously required and requires similar information but for premium listed companies some additional information is required:
- a description of the company's strategy and business model
- information on human rights issues
- a gender breakdown of the number of directors' senior managers, and employees in the company.
In addition a new disclosure is required around greenhouse gases (for more information and to see the Defra guidance on this please see the article in our July 2013 newsletter).
Companies must now send out the strategic report to those who previously elected to receive Summary Financial Statements instead of the full report and accounts, together with the information set out in Section 426A of the Companies Act 2006 (including how to obtain a full set of company's report and accounts).
UK Corporate Governance Code (the Code)
As previously reported (see the article in our October 2013 newsletter) the Financial Reporting Council (FRC) put out a consultation paper in October to look at whether changes were needed to the Code as a result of the changes to the reporting of directors' remuneration. Three specific proposals were suggested:
- whether the Code should be more specific in relation to clawback arrangements, ie should it set out the circumstances in which payments should be recovered or withheld
- whether non-executive directors who are executive directors of other companies should be allowed to sit on the company's remuneration committee
- what actions a company might take if it fails to obtain at least a substantial majority in support of a resolution on remuneration.
The consultation closed on 6 December and, if any changes are proposed as a result of responses received, a further consultation will take place in Q1 this year with any resulting changes taking effect from October this year.
The FRC also published a consultation paper in November setting out its plans to integrate its guidance on going concern, risk management and internal control into a single document 'Integrated Guidance'. This single document would replace what is commonly known as the Turnbull Guidance on internal controls from 2005 and the FRC's Guidance for Directors on Going Concern and Liquidity Risk from 2009.
The consultation also proposes associated changes to the Code involving the introduction of a new provision requiring the board to carry out an assessment of the principal risks for the company and reporting that this has been done in the annual report while providing an explanation as to how such risks are being managed or mitigated. This consultation closed on 24 January. The Integrated Guidance is expected to be published in the first half of this year and will take effect at the same time as any changes to the Code, which is likely to be for reporting periods beginning on or after 1 October 2014.
Introduction of shareholder vote on audit committee report?
The Competition Commission's report on its investigation into the supply of statutory audit services to large companies in the UK came out in October last year. In brief, in a bid to increase competition in the external auditor market a package of remedies has been proposed including a requirement for FTSE 350 companies to put their statutory audit out to tender at least every 10 years. This differs from the Code provision which came in last October which recommends that this be done at least every 10 years on a comply or explain basis.
Another suggested remedy is the introduction of an advisory shareholders vote on whether the audit committee report in the annual report is satisfactory.
It had been thought that these proposals would come in later this year but because of recent developments at EU level on reforms of the EU audit market, the Competition Commission recently announced that it would be considering the implications of the EU proposals before proceeding with its own timetable for reform.
Recent publications to note
FRC report on implementation of the UK Corporate Governance (the Code) and Stewardship Codes in 2013
The FRC published its third annual report looking at the impact of the Code and the Stewardship Code in December. In relation to Code compliance the report found that:
- overall compliance rates were up. 57% of FTSE 350 companies comply fully with the Code (an increase of 6% on 2012). 85% of the remaining companies comply with all but one or two of the Code's 53 provisions
- the highest rate of non-compliance is with the requirement that at least half the board, excluding the chairman, should be independent although the compliance rate is now 87 per cent, up from 81 per cent on the previous year
- companies that deviate from Code provision are still failing to explain clearly why they are not complying
- despite the initial controversy surrounding it, annual re-election of directors is generally the norm. All but two of the premium listed companies in the FTSE 350 held annual director re-elections as did over 40 per cent of smaller listed companies, even though the Code provisions do not formally apply to them
- no significant increase has been made in the number of female executive directors but the FRC's view is that better succession planning will help increase numbers. There has been an increase in female non-executive directors across the FTSE 100, FTSE 250 and small cap companies. In addition many companies are already disclosing their boardroom diversity policies even though this in not required until 2014
- only 20% of the FTSE 100 and the FTSE 350 have specified a date for a prospective audit tendering process but it looks likely that the number of companies doing so will increase significantly over the next couple of years
- a new requirement for companies to confirm that their annual report and accounts are 'fair, balanced and understandable' comes into effect in 2014. A limited number of companies have given this confirmation in their 2013 annual report and accounts, others have reviewed their processes to ensure they will be able to give the appropriate confirmation in 2014
- the FRC notes that board succession planning should be a key area of focus for companies going forward to ensure the appropriate mix of skills and experience on the board.
In relation to the Stewardship Code, the report notes that:
- there are now nearly 300 signatories to the Stewardship Code, of whom approximately two-thirds are asset managers
- the quality of reporting by signatories is variable and almost half have not updated their public statements more than a year after a revised version of the Stewardship Code came into effect in October 2012. The FRC is therefore looking at mechanisms to ensure the statements are up to date and possible sanctions if they are not
- the FRC has concerns that engagement between companies and their major shareholders is not happening in mid-market companies although there is evidence this is happening at larger companies.
The Report also set out some of the FRC's plans for 2014:
- a project to identify and spread good practice in succession planning and how the nomination committee can be effective
- the FRC will consider if further changes are needed to the Code in 2014 in relation to risk management and reporting, remuneration and the work of the audit committee
- the FRC will also consider whether the Code needs to be amended to allow companies to put their full corporate governance statement on their website with only an edited version appearing in the disclosures relevant to investors in the annual report and accounts.
The full report can be view here.
Collective Engagement Working Group report
The Collective Engagement Working Group was formed in April 2013 in response to the Kay Review on equity markets and long-term decision making. In December it published its report and recommendations as to how investors might be able to work together to improve their engagement with listed companies.
The Collective Engagement Working Group has launched an Investor Forum, as recommended by the Kay Review. The Forum should be operational by June 2014 and is being funded for at least 2 years by investors and trade associations. The aim of the Forum is to facilitate collaboration among investors, both UK and internationally. (One of Kay's points was the need to increase the involvement of overseas investors such as sovereign wealth funds).
The Forum will have its own secretariat to progress objectives and an implementation team to establish the Forum. A status update report is expected by the end of March 2014.
The Forum is supported by the Association of British Insurers, the Investment Management Association and the National Association of Pension Funds.