Revised UK Corporate Governance Code issued

On 17 September 2014, the Financial Reporting Committee (FRP) published a revised version of the UK Corporate Governance Code and Feedback Statement. The revised Code will apply on the usual ‘comply or explain’ basis, to financial years beginning on or after 1 October 2014.

The key additions to the Code are:

  • Going concern accounting basis: directors must state in their annual and half-yearly reports whether they consider it appropriate to adopt the going concern basis of accounting and identify any material uncertainties in their ability to do so for at least 12 months. 
  • Risk management: directors must confirm in their annual report that they have conducted a robust risk assessment of the principal risks facing the company and describe those risks and how they are being managed. The annual report should also contain a statement whether over a stated period (which is expected to be significantly longer than 12 months) the directors have a reasonable expectation that the company will be able to continue in operation and meet its liabilities as they fall due. 
  • Dissenting shareholders: where a significant number of shareholders have voted against a resolution at a general meeting, the company should explain when announcing the results what actions it intends to take to understand the reasons behind the vote result. 
  • General meeting notice period: the notice period for general meetings other than AGMs must be at least 14 working days (as opposed to the statutory requirement of 14 clear calendar days). The notice period for an AGM will remain 20 working days.  

Apart from these key additions, the main changes are in the field of performance-related pay (see below).

Tightening performance-related pay under the UK Corporate Governance Code

The new Code also introduces stricter provisions on performance-related pay for directors. The key changes to directors’ pay are:

  • Remuneration: the focus in the Code has shifted from directors’ remuneration being ‘sufficient to attract, retain and motivate directors of the quality required to run the company successfully’ to being designed to ‘promote the long-term success of the company’.  
  • Performance-related pay: the requirement that pay is performance-related has changed from a Supporting Principle to a Main Principle. While previously performance-related pay policies had to be ‘stretching’, they should now be ‘transparent, stretching and rigorously applied’.  
  • Clawback arrangements: performance-related incentive schemes should include arrangements to recover or withhold variable pay when appropriate to do so.  

Our client briefing which provides a full analysis of pay aspects of the Code can be found here. 

Voting on directors’ remuneration – the new Directors’ Remuneration Report regime

With the 2014 AGM season more or less over, now is the time to reflect on how shareholders in UK incorporated companies that are listed (in the UK or elsewhere) have exercised their new voting powers on directors’ remuneration matters. Listed companies have now gone through the process of putting their remuneration policy to a binding shareholder vote (in addition to putting their implementation report on remuneration to an advisory vote). See our client briefing here which sets out the new regime in detail.

Companies were worried about the dire consequences of losing the binding vote on remuneration policy. In the event, no major company lost this vote. The approach of shareholders to their new powers has been tentative. Understandably they have been cautious to vote down a company’s remuneration policy when a ‘no’ vote could seriously damage the company. Only one company, Kentz (which has since been the subject of a takeover) had its remuneration policy voted down. Other companies whose policy contained features which shareholders were unhappy with took the opportunity before the AGM vote to finesse their policy via a clarificatory RNS announcement.

Shareholder discontent has been communicated through the advisory vote on remuneration reports. Although this year only two companies lost the advisory vote – Burberry (a FTSE 100 company) and Kentz – a greater number achieved lower votes in favour of their report. Standing back, it is clear that listed companies have woken up to the need properly to engage with shareholders on remuneration issues and have taken the new regime seriously with positive result.

Shareholder agreements to be put in place between listed companies and their controlling shareholders

The Listing Rules were amended on 16 May 2014 following the FCA’s response (CP13/15) to a consultation on Enhancing the effectiveness of the Listing Rules, which was covered in the last edition of this Newsletter. A link to the FCA Policy Statement on the amendments can be found here.

A key requirement of the amended Listing Rules is that premium-listed companies must have a relationship agreement in place with their controlling shareholder(s). A controlling shareholder is a person who, together with any of its concert parties, exercises or controls 30 per cent. or more of the votes able to be cast at a general meeting. 

The Listing Rules set out certain minimum content requirements for relationship agreements:

  • Transactions and relationships between the issuer and the controlling shareholder (and/or its associates) will be conducted at arm’s length and on normal commercial terms.
  • Neither the controlling shareholder nor any of its associates will take any action that would prevent the issuer from complying with its obligations under the Listing Rules.
  • Neither the controlling shareholder nor any of its associates will propose a shareholder resolution which is intended or appears to intend to circumvent the proper application of the Listing Rules.

The transition period for existing premium listed companies expires on 17 November 2014, at which time all premium listed companies with a controlling shareholder must have a relationship agreement put into place.

The FCA have also introduced into the Listing Rules a dual voting structure for the election of independent directors by premium listed companies with a controlling shareholder. Independent directors must be approved both by shareholders as a whole and by the independent shareholders. This dual voting structure must be provided for in the company’s constitution when it seeks a premium listing.

UK to push through Transparency Amending Directive to abolish interim reporting

The Transparency Amending Directive (2013/50/EU) (the Directive) came into force on 26 November 2013 to amend the Transparency Directive (2004/109/EC). The Directive will abolish the requirement for listed companies to publish interim management statements (IMS). Member States have two years to adopt the necessary measures.

The FCA published a paper on 23 July 2014 seeking views on its proposals to remove DTR 4.3. The deadline for responses was 4 September 2014 and the FCA is expected to abolish the IMS requirement before the end of this year. 

We expect that most issuers will continue to report on a quarterly basis to meet investor expectations, although some may have particular reasons for not doing so. Issuers will have more control over the timing, content and form of their voluntary interim reports.

Issuers should be aware that other Member States have until 26 November 2015 to implement the Directive. After the UK removes the IMS requirement this year, IMS obligations will continue to apply in other Member States until the relevant Member State implements the Directive. Germany, Italy, the Netherlands, Spain and Austria have not yet set a date to abolish IMS.