Corporate governance remains a key area for companies in 2013 as it continues to develop and change at a rapid pace. This article brings together information on changes that are happening in 2013 (to narrative reporting, the reporting of directors' remuneration and greenhouse gas emission disclosures), information on areas of corporate governance where changes are being considered and also looks briefly at the recent reports and guidance which have been published in this area.
Changes in 2013 that will require action
The much debated reforms to directors' remuneration are expected to come into effect from 1 October this year. The changes being made will require the directors' remuneration report to be split into two parts: one setting out the company's future pay policy for directors and the other setting out what payments have been paid to directors over the past year. The current proposal is that a company's future pay policy will be subject to a binding shareholder vote at least every three years and that the report on what has been done over the previous year will be subject to an annual advisory vote of shareholders.
These reforms will be implemented through amendments to the Companies Act 2006 which are in the Enterprise and Regulatory Reform Bill and through amendments to the Large and Medium-sized Companies and Groups (Accounts and Reports) Regulations 2008. The ERR Bill is currently being debated in committee in the House of Lords and is thought likely to become law in the spring. For more details on the proposals please see our article in the June 2012 newsletter.
Under new regulations which will apply to all large and medium-sized companies, and which are expected to apply to accounting periods ending on or after 1 October 2013, companies will be required to produce a stand-alone Strategic Report which will replace the existing Business Review currently required as part of the Directors' Report. The content of the Strategic Report will largely replicate the requirements of the Business Review but quoted companies (those listed on the main market in the UK (but not AIM), officially listed in an EEA state or admitted to trading on the NYSE or Nasdaq) will have to report on their strategy and business model, their diversity record and human rights issues relevant to an understanding of their businesses. The regulations will amend the Companies Act 2006. We reported in detail on the proposals in our November 2012 newsletter.
Greenhouse gas emissions
Another change which is also intended to come into effect on 1 October this year, with the narrative reporting changes, is a requirement for UK incorporated quoted companies to include disclosures in relation to their greenhouse gas emissions in their annual report. Draft regulations in relation to the reporting requirements were published in July last year but are yet to be finalised. Defra is also consulting on draft guidance to the regulations. Originally the regulations were due to come into force in April 2013 but the decision was taken that it made more sense for these requirements to come into effect at the same time as the narrative reporting changes. For more details please see our article in our August 2012 newsletter.
Revised NAPF guidelines
In December the National Association of Pension Funds (NAPF) published revised versions of three sets of guidelines.
This includes a few changes to the 2010 version, generally reflecting the changes in approach that have been developing over the last couple of years. It provides for greater emphasis on improved board diversity, an enhanced audit committee report, simplification of remuneration policies and for directors' service contracts to be available online. It also encourages greater dialogue between companies and investors given the upcoming narrative reporting and executive remuneration changes.
These guidelines are based on the UK Corporate Governance Code and this version revises the 2010 edition. New provisions include:
- a recommendation that without a disclosed succession policy or evaluation process shareholders may abstain or vote against re-election of the chairman of the nomination committee or the chairman of the board
- a new section on board balance for open-ended investment companies. A third of the board should consist of independent non-executives and, where this requirement is not met, NAPF recommends a vote against re-election unless clear timelines are in place to address the issue, and
- a vote against re-election of a non-executive director who has served more than 9 years unless there is clear evidence of continued independence.
These guidelines are designed primarily for companies with shares admitted to trading on AIM, though they are also appropriate for other smaller listed companies including standard listed and ISDX listed companies. The guidelines are based on the UK Corporate Governance Code (which applies to companies with a premium listing) but do not cover every provision of that Code, only those issues considered to be of key importance and where practice may reasonably differ from the Code. The guidelines are also aligned to the 'Corporate Governance Guidelines for Smaller Quoted Companies' issued by the Quoted Companies Alliance.
Other possible changes
Executive Pay and Remuneration Bill
A Private Member's Bill presented by Thomas Docherty, MP for Dunfermline and West Fife was published on the UK Parliament website on 31January; ahead of its second reading on 1 February (its first reading was in June 2012).
This Bill proposes that:
- a public company should reserve a place on its remuneration committee for a representative of the employees
- that the company may determine whether the employee representative has a vote on the remuneration committee, and
- that all public companies must have an annual binding shareholder vote on the remuneration of executive directors.
Private Members' Bills are not often passed into law and, given that the subject matter covers changes already being covered by government, it does seem unlikely that this Bill will succeed but we will monitor its passage.
To see the full text of the Bill please click here.
European Commission Action Plan on Company Law and Corporate Governance
The European Commission adopted an Action Plan in December 2012 which sets out its future initiatives in the corporate governance area. The Action Plan followed the Commission consultation paper on the future of European Company Law in 2011 and the 2012 consultation on the future of European company law. The Action Plan includes a number of corporate governance proposals, some of which are detailed below:
- increasing disclosure of diversity policies through amendments to the Accounting Directive
- undertaking an initiative to improve corporate governance reports, in particular explanations to explain non-compliance with national corporate governance codes
- an initiative to improve disclosure of voting and engagement polices and disclosure of voting records of institutional investors, and
- an initiative to grant shareholders a right to vote on remuneration policy and remuneration reports and to improve transparency of remuneration policies and individual director remuneration.
For more on the Action Plan please see our separate article.
Recent reports and guidance
ICSA guidance on the liability of non-executive directors
In January, the Institute of Chartered Secretaries and Administrators ('ICSA') issued a Guidance Note, 'ICSA guidance on liability of non-executive directors: care, skill and diligence'. The aim of the guidance is to suggest ways in which non-executive directors should approach their role to enable them to demonstrate to a regulator or in a court of law that they have taken appropriate steps to exercise care, skill and diligence in the exercise of their roles and responsibilities.
While in practical terms non-executive directors are not likely to be expected to have the same detailed knowledge and experience of a company's affairs as the executive directors and will not be expected to spend as much time on the company's affairs as the executive directors, it is important that the non-executive directors understand that, in law, they have the same duties and obligations as executive directors. Indeed, the UK Corporate Governance Code now emphasises the importance of the role of the non-executive director on the board and on company committees.
The Guidance Note helpfully sets out issues non-executives should consider before joining a board, including undertaking their own due diligence to ensure the organisation they are joining is right for them. It also covers what should happen when a non-executive joins a board, including receiving proper induction training, and sets out in an Appendix the relevant provisions of the UK Corporate Governance Guide which apply to non-executive directors.
Please click here to view the Guidance.
FRC report on implementation of the UK Corporate Governance Code and Stewardship Codes 2012
In December the FRC published a detailed report which summarised how the UK Corporate Governance Code was implemented during 2012 focusing particularly on overall compliance rates, diversity, annual re-elections, quality of reporting and board evaluation.
- compliance rates: over half of FTSE 350 companies complied fully with the Code
- although explanations for non-compliance were in the minority, the quality of explanations, when made, was variable
- diversity: the FRC reports an encouraging response to the Code provision on reporting on diversity policy with 60% of FTSE 100 companies already reporting to some extent
- annual re-elections: 96% of FTSE 350 companies now re-elect directors annually. This is cited as a good example of how effective a non-statutory, code-based approach can be in changing market practice
- quality of reporting: quality of reporting on risks and uncertainties was noted to have improved and the majority of companies are attempting to explain their business model, though audit committee reporting was said not to be very informative, and
- board evaluation: the FRC believes compliance with the requirement for external evaluation every three years will be high.
The number of signatories to the Stewardship Code has increased though Sovereign Wealth funds do not seem to be signing up. Voting levels were up at AGMS and more asset managers disclosed details of their voting records.
The report also sets out what the FRC will be consulting on in 2013: further changes to the UK Corporate Governance Code, revisions to its guidance on going concern, risk and internal control and narrative reporting. The Financial Reporting Lab will be undertaking a project on audit committee reporting, as this is seen to need improvement.
To view the report, please click here.
Association of British Insurers (ABI) report on comply or explain
In December the ABI published a report on investors' views of explanations given by companies that depart from the UK Corporate Governance Code provisions. This follows on from a FRC report in February 2012 which summarised discussions between companies and investors on what constitutes an explanation under the 'comply or explain' approach in the Code.
The ABI has developed criteria to help companies in preparing disclosures to explain non-compliance and the report sets out the ABI's findings when it sampled Code non-compliance explanations against their criteria. The report also includes some examples of best practice explanations. The ABI also notes that the move towards having a Chairman's introductory corporate governance statement is having a beneficial effect on disclosures generally.
To view the report, please click here.
ABI report on board effectiveness
Also in December the ABI issued its 2012 report on board effectiveness, an update on its first such report which was published in 2011. This report covers the progress of corporate reporting on board diversity, succession planning, external evaluations of boards and gives examples of best practice and recommendations in relation to each point. A new section is included on the role of the chairman based on interviews with a number of chairmen from FTSE 350 companies asking them what skills they consider most important to create an effective board. The report also contains the results of a survey of FTSE 350 company secretaries about the market for external board evaluations.
To view the report, please click here.
ABI Principles of Remuneration, including expectations for remuneration reporting
In November 2011 the ABI updated its Principles of Remuneration which set out the views of ABI members on the role of shareholders and directors in relation to remuneration and the manner in which remuneration should be determined and structured. The ABI also set out its areas of focus for 2013 together with its initial views on guidance for the new remuneration reporting regime coming in this year. For more details please see our article in our December 2012 newsletter.
The Kay Review: Call for evidence
The Government published its response to the Kay Review in November which we reported in our December newsletter. In December, the Business, Skills and Innovation Committee issued a call for evidence from interested parties on the recommendations set out in the Kay Review and on the Government's response on implantation of the recommendations. Evidence had to be submitted by 18 January and the Government is planning to issue an update in summer 2014 on what progress has been made.
Click here for details.