In recent years, hardly a month goes by without news of a new development in the corporate governance framework which overhangs the law of companies, both domestically and internationally. An overview of some of the recent developments in the area of corporate governance is set out below:
OECD Report on the Role of Institutional Investors in Promoting Good Corporate Governance
The OECD has recently published a report examining the role of institutional investors in promoting good corporate governance. The report covers a range of topics including voting and engagement patterns, the role of foreign investors, and cooperation between investors. It encompasses 26 countries including Ireland, and includes an in-depth analysis of 3 countries, Germany, Australia and Chile.
The OECD (or the Organisation for Economic Co-operation and Development) is a group of countries, including Ireland, which acts as a forum for governments to work together to develop and co-ordinate policy across a broad range of areas in order to address prevailing economic and social challenges. It has published a number of guidelines and reports in the area of corporate governance, including its Principles of Corporate Governance; Good Practice Guidance on Internal Controls, Ethics, and Compliance; Guidelines on Corporate Governance of State-Owned Enterprises; and Guidelines for Multinational Enterprises.
For a link to the OECD's The Role of Institutional Investors in Promoting Good Corporate Governance, please click here.
New Corporate Governance Code for the Irish Funds Industry
As we mentioned last year in this Bulletin, the Irish funds industry is now to be subject to its own new corporate governance code. In December, the Funds Industry Association (IFIA) issued the new Corporate Governance Code for Collective Investment Schemes and Management Companies accompanied by a "Frequently Asked Questions" document.
The voluntary code became effective on 1 January 2012 with a 12-month transitional period. Accordingly, a statement of compliance with the code should be included in all accounts in respect of the period ending on or after 1 January 2012. The code operates on a similar "comply or explain" basis to other corporate governance codes.
Corporate Governance Code (1.01 MB, Adobe PDF)
FAQ (1.04 MB, Adobe PDF)
For more information on the code, please click here.
FRC's Review of Compliance with UK Corporate Governance and Stewardship Codes
On 14 December 2011, the UK's Financial Reporting Council (FRC) published a report setting out the results of its review of compliance with the UK Corporate Governance Code and the UK Stewardship Code since the introduction of these codes in 2010.
The Corporate Governance Code, a discrete set of rules which sits alongside the Listing Rules and which deals specifically with corporate governance issues for listed companies in the UK, was introduced by the FRC in May 2010 to replace the Combined Code on Corporate Governance. The Irish Stock Exchange (ISE) announced its applicability to Irish companies listed on the Main Securities Market of the ISE from 30 September 2010. The Stewardship Code, which relates to institutional investors and their engagement with UK listed companies, was introduced by the FRC in July 2010. It is not applicable in Ireland and the ISE have indicated in the past that it did not intend to introduce a similar code here.
The FRC's recent report indicates that compliance with the Corporate Governance Code has been high. One of the somewhat controversial highlights of the new code was the recommendation that companies propose the annual re-election of all members of the board. However, the report shows that 80% of FTSE 350 companies (excluding investment funds) have adhered to this recommendation and have proposed annual re-election of their full board. There has also been a high level of compliance with a number of other new recommendations contained within the code. In general terms, the FRC noted that where companies confess any non-compliance with the code (the code operates on a "comply or explain" basis), in the case of the majority of companies, the non-compliance relates only to one or two provisions.
One negative comment however is that reporting by audit committees is still regarded as less than satisfactory.
As regards the new Stewardship Code, the FRC report that there are now 234 signatories to the code, including asset managers, asset owners and service providers such as investment consultants and proxy voting agencies. However, it seems that there is not yet a consensus on whether this new code has had any meaningful impact on the quality of engagement by investors.
For a link to the FRC report, please click here.
FRC's Report on How to "Comply or Explain"
On 15 February 2012, the FRC published a report on what constitutes an explanation for the purposes of the "comply or explain" concept in the UK Corporate Governance Code. The FRC drew a number of conclusions. In particular, the FRC concluded that a meaningful explanation should:
- set the context and background;
- provide a clear rationale for the deviation from the code's provisions and one which is specific to the company;
- state what mitigating action the company is taking to maintain conformity with the relevant principle of the code and to address any additional risk; and
- give details of the timing aspects, that is whether the deviation was limited in time and when the company intends to conform again with the code's provisions.
Among other matters, the report also suggests that the statements of the chairman, who plays an important role in the explanation process, could be fuller than they are currently.
For a link to the report, What Constitutes an Explanation under Comply-or-Explain? Report of Discussions between Companies and Investors, please click here.
Revenue Briefing regarding Directors' Remuneration
Anyone invested in the area of corporate governance may be interested in a specific issue which was one of a number addressed in a briefing issued by the Revenue Commissioners in December in relation to the tax treatment of directors' remuneration. The Revenue referred to the practice of paying directors' remuneration 'gross' to a special purpose company incorporated for that purpose. They state that this arrangement does not release the paying company from its obligation to make the statutory deductions under the Pay As You Earn and Universal Social Charge systems in relation to the director's remuneration, and neither does such an arrangement bring the taxation of such remuneration outside the scope of the director's charge to Irish tax under Schedule E or the Universal Social Charge.
For a link to the briefing, please click here.
Central Bank Letter on Risk Appetite Statements for Credit Institutions and Insurance Undertakings
As regards the banking and insurance sector, on 9 January 2012 the Central Bank of Ireland published a letter (dated 22 December 2011) in connection with the Corporate Governance Code for Credit Institutions and Insurance Undertakings (the new mandatory code, introduced by the Central Bank of Ireland in 2010, which imposes certain minimum core corporate governance standards on all credit institutions and insurance undertakings licensed or authorised by the Central Bank). The letter related to the risk appetite statement (RAS) required by the corporate governance code and urges undertakings to examine their RASs and to take account of the findings of a sample review of RASs conducted by the Central Bank's Insurance Supervision Directorate. The review found that RASs fell short of acceptable standards and identified a number of key areas for improvement which relate both to content and to the need for RASs to be approved by the board of directors.
For a link to the letter, please click here.
Feedback on European Commission Green Paper on Corporate Governance
In April 2011, the European Commission launched a public consultation on the framework of corporate governance across the EU. For a link to the EC's Green Paper, please click here. The Green Paper listed 25 questions across a broad range of corporate governance issues from the skills of the board of directors to risk management. In November, the European Commission published a "Feedback Statement" setting out the feedback received during such consultation from organisations, public authorities and individuals. For a link to the Feedback Statement, please click here.
The next step is for the European Commission to consider whether any legislative proposals are required as a result of the Green Paper and the responses received. In general, the Feedback Statement does not seem to suggest that there is any strong support for any proposals which would be considered by Irish companies and their advisers to be controversial.