The Stewardship Code: FRC tiering of signatories

We reported previously that in December 2015 the Financial Reporting Council (FRC) announced it would introduce public tiering of the signatories to the Stewardship Code (the Code) in an attempt to improve reporting against its principles. The Stewardship Code was introduced in 2010 to set out areas of good practice to which investors should aspire and operates on a comply or explain basis. The FRC has now published its assessment of signatories' reporting against the Code. Asset managers have been categorised in three tiers and other signatories to the Code in two tiers. The three tiers are as follows:

  • Tier 1: Signatories provide a good quality and transparent description of their approach to stewardship and explanations of an alternative approach where necessary
  • Tier2: Signatories meet many of the reporting expectations but report less transparently on their approach to stewardship or do not provide explanations where they depart from the Code
  • Tier 3: Significant reporting improvements need to be made to ensure the approach is more transparent. Signatories have not engaged with the process of improving their statements and their statements continue to be generic and provide no, or poor, explanations where they depart from the Code

An additional tier for asset managers has been included by the FRC on the basis that the Code is of greater relevance for asset managers. Asset managers who do not reach Tier 2 status after six months will be removed from the list of signatories. Those achieving only Tier 3 are encouraged to contact the FRC to discuss ways to improve reporting.

The FRC press release can be found here and the list of tiers here.

Investment Association guidelines on viability statements

Since I October 2014, companies with a premium listing have been required to produce a viability statement under provision C.2.2. of the UK Corporate Governance Code. This is a statement which sets out how the directors assess the company's on-going viability and over what period of time. Premium listed companies are also required to confirm whether they have complied with this Code provision under Listing Rule 9.8.6.

The Investment Association (IA), which is the representative body for the UK asset management industry and institutional investors in listed companies, has issued guidelines outlining what institutional investors expect to see in viability statements. The guidelines focus on four key areas;

  • Period for the viability assessment

The Corporate Governance code leaves it to directors to decide on the appropriate period for the assessment though the Financial Reporting Council has stated in guidance that the period should be significantly longer than 12 months unless there are exceptional circumstances.

The IA guidance suggests directors should consider longer time frames than between 3 to 5 years, which are often the period chosen by companies. It also suggests that directors should be clear why the chosen timeframe has been selected and consider differentiating between short, medium and long term timeframes for prospects and viability.

  • Consideration of prospects and risk when assessing viability

Directors should consider the current state of affairs of the company, the sustainability of dividends; distinguish between risks which impact future prospects and those that threaten day to day operations, separate prospects from viability, how risks are identified and managed and how they are prioritised.

  • Stress testing

Investors would welcome transparency on specific scenarios considered and likely outcomes, specific mitigating or remedial actions which have been or may need to be taken. Also transparency on reverse stress testing - the circumstances in which the business model would no longer be viable.

  • Qualifications and assumptions

The Code requires any qualifications and assumptions to be stated but the guidelines require them to be differentiated ie what are qualification and what are assumption and that both are specific to the company in question, not generic. These guidelines are directed to those companies with a premium listing though the IA would like them to be considered best practice for other companies.

The guidelines can be read here.

ISS publishes updates to UK/Ireland benchmark voting policies

Institutional Shareholder Services (ISS) has published its update to its voting proxy policies for 2017 which largely follow their proposals from October. These policies set out when ISS recommends shareholders vote against a proposed resolution.

Changes have been introduced to:

  • clarify ISS's position on overboarding (where a directors is deemed to hold an excessive number of board appointments)
  • the wording of the remuneration sections have been amended to reflect market practice developments and investor expectations
  • the policy has been amended to clarify the policy on board and committee composition for smaller UK companies and to bring policy into line with the Quoted Companies Alliance Code by saying that audit and remuneration committees should be fully independent.

Full details can be found in the Proxy Voting Guidelines Updates (EMEA):2017 Benchmark Policy Recommendations here and a useful summary of the position in the Executive Summary of Key 2017 Updates and Policy Development Process here.