As the 2015 AGM and reporting season gets underway, this bulletin gives an overview of the key changes affecting listed companies.
Directors' remuneration report
The 2015 AGM season will see the second year of reporting under the new remuneration reporting regime. In particular, this year's implementation reports will, for the first time, report against the remuneration policies approved in 2014.
Investors are expected to remain focused on remuneration during the 2015 AGM season and to carefully evaluate implementation reports. The Investment Association, NAPF and the GC100 and Investor Group have all recently published revised guidance to help remuneration committees address directors' remuneration reporting requirements.
This guidance provides, amongst other things, that:
- where a company relied on the "commercial sensitivity" opt-out in relation to disclosing performance targets, remuneration committees should be retrospectively disclosing the performance range of such targets and the actual performance in order to demonstrate the link between pay and performance; and
- details of compliance with any assurances given should be included in the subsequent remuneration report although the provision of assurances is felt to be generally undesirable - any discretion should be tightly defined in scope and quantum thus removing the need for assurances to be given.
Since last year's remuneration policies were approved, some companies may already be considering amendments to their policies in light of both this guidance and the remuneration provisions in the revised UK corporate governance code ("Code") (see below for further details).
Even if a company is not amending its remuneration policy this year, the Investment Association and the GC100 and Investor Group recommend that at least the policy table is disclosed with the directors' remuneration report. Remuneration committees should also consider whether any additional summary or extract from the policy is required and should ensure its approved policy is easily accessible on the company's website.
UK Corporate Governance Code
The FRC has published an updated version of the Code which applies to financial years beginning on or after 1 October 2014 (although companies are encouraged to adopt the updated Code earlier).
The 2014 edition of the Code focuses on risk management and requires directors to:
- carry out a robust assessment of the risks facing the company and explain in the annual report how those risks are being managed and mitigated;
- set out in the annual report a longer term viability statement. The directors should explain how they have assessed the prospects of the company, over what period they have done so (which should be significantly longer than 12 months) and whether they have a reasonable expectation that the company will be able to continue in operation and meet its liabilities; and
- state in the financial statements whether it is appropriate to adopt the going concern basis of accounting (which should be for a period of at least 12 months from the date the financial statements are approved).
Alongside the revisions to the Code, the FRC has incorporated new guidance on going concern and viability reporting into its new guidance on risk management, internal control, and related financial and business reporting.
Director remuneration also remains a key area of the Code and there is a focus on aligning directors' interests with the long-term interests of the company and ensuring remuneration policies are designed to deliver long-term benefits to a company. The updated Code also includes a requirement to include provisions in bonus and long term incentive plans that would enable performance adjustment or post-vesting clawback.
Mandatory audit tender
The Code already recommends that FTSE 350 companies put their external audit contract out to tender at least every ten years. New regulations implemented from 1 January 2015 make this audit tender process mandatory for FTSE 350 companies. These regulations follow the Competition and Markets Authority's investigation into the supply of statutory audit services and include requirements for: (i) FTSE 350 companies to put their external audit contract out to tender at least every ten years; and (ii) from year five onwards to state in their audit committee reports when it plans to hold a competitive process and why the proposed timescale is in the best interests of shareholders. There is a transitional period for existing FTSE 350 companies to put their audit contracts out to tender, which varies depending on the duration of the existing auditor's appointment.
Premium listed companies with controlling shareholders will need to make changes to their AGM and annual reporting procedures this year, following changes to the Listing Rules in May 2014.
In relation to AGM resolutions proposing the election or re election of independent non executive directors, such companies must operate a new dual voting process. Any such election/re-election must be approved by both: (1) shareholders of the company as a whole; and (2) independent shareholders (being those shareholders other than the controlling shareholder(s)). The FCA has indicated that the Listing Rule requirements can be satisfied by holding a single vote or proposing a single resolution provided that the votes of independent shareholders can be identified by the company. In practice, companies have been implementing the dual voting process in a variety of ways with some companies proposing a single resolution and others proposing two separate inter-conditional resolutions. The FCA has further confirmed that no amendments are required to a company's articles of association in relation to the dual voting process unless the articles contain a prohibition on the use of such a process.
Where a premium listed company has a controlling shareholder, the annual report should also contain enhanced disclosures, including a statement regarding the company's compliance with the independence provisions in the relationship agreement between the company and the controlling shareholder and disclosures relating to the independent director(s).
From financial years ending on or after 1 September 2014, the Listing Rules require that any disclosures required by the Listing Rules should be in a single identifiable section in the annual report, unless the report includes a cross-reference list indicating where the disclosures may be found.
Changes in EU regulation, which will apply to member states from June 2016, will require a mandatory change to auditors every ten years, which may be extended by a further ten years if a tender process is undertaken. The government intends to consult on the UK's implementation of the EU regulation during 2015. Once implemented, these regulations will apply to all listed companies (not just those in the FTSE 350).