Industry update
Corporate Governance Reform
The UK Government has published their anticipated response (found here) to the Corporate Governance Reform green paper released earlier this year.
While the press have covered some headline making aspects of the Government's response, such as the lack of worker representation on boards or the requirement for quoted companies to annually report pay ratios, there are nine proposals across the three specific aspects of corporate governance that were consulted upon:- Executive pay
- Strengthening the employee, customer and supplier voice
- Corporate governance in large private businesses
Executive pay:
The Government found that while many companies are responding positively to the reforms introduced in 2013, a persistent minority continue to disregard the views of shareholders each year. They have also found that remuneration committees do not appear to take seriously enough their obligations in respects of workforce pay and conditions when setting remunerations. The Government also found high levels of uncertainty and unnecessary complexity of pay especially when considering the outcomes of LTIPs. Therefore, in relation to executive pay the Government are proposing to:- have the FRC revise the UK Corporate Governance Code to:
- offer more specific steps for premium listed companies when encountering significant shareholder opposition
- give remunerations committees broarder responsibility for overseeing pay and incentives and engage with the wider workforce to align wider company pay policies with executive remuneration
- extend the minimum vesting and post-vesting holding period for executive share awards from three to five years to encourage longer-term focus.
- introduce secondary legislation for quoted companies to:
- report annually the rationale of CEO pay to the average pay of their UK workforce along with narratives to explain changes to ratios from year to year
- provide clearer explanation in remuneration policies of possible outcomes from complex, share based incentive schemes.
- invite the Investment Association to create their proposed public register of listed companies who have had shareholder opposition of 20% or more to pay awards and record the company's proposed actions to address shareholder concerns.
The Government haven't ruled out further action if they see evidence that these measures are not producing effective outcomes to address shareholder concerns, and they have also confirmed that they will be forging ahead with a Government examination of the use of share buybacks.
Strengthening the employee, customer and supplier voice:
Following the responses received and taking into account the Taylor report on Employment Practices in the Modern Economy, it is felt that legal frameworks such as section 172 of the Companies Act could be made to work more effectively through improved reporting, code changes, increased awareness and more guidance. Therefore the Government have proposed to:- introduce secondary legislation which requires companies of a significant size to explain how directors are complying with section 172
- invite the FRC to consult on the development of a new Code establishing the importance of strengthening the voice of employees and non-shareholder interests and to have the FRC consult on a specific code provision for premium listed companies to adopt one of three engagement mechanisms (designated non-executive director; employee advisory council; director from the workforce)
- ask the ICSA and IA to complete their joint guidance on practical ways to engage with employees and other stakeholders. Also invite the GC100 to complete and publish new advice and guidance on the practical interpretation of section 172.
Corporate governance in large private businesses:
The green paper revealed support for action to encourage high standards of corporate governance in the largest private companies as a reflection of their significance on employees, suppliers, customers and others. Therefore the Government intend to:- invite the FRC to work with other bodies included in the Institute of Directors to develop a voluntary set of governance principles for private companies under the chairmanship of a business figure with relevant experiences
- introduce secondary legislation to require companies of a significant size to disclose their corporate governance arrangements in their Directors' Report and on their website.
The Government have also requested that the FRC, the FCA and the Insolvency Service issue revised letters of understanding with each other to ensure the most effective use of their powers to sanction directors and ensure integrity of corporate governance reporting.
It is currently intended that the reforms are to be in effect by June 2018 and apply to company reporting years commencing on or after that date.- Executive pay
Narrative Reporting
The Financial Reporting Council (FRC) have released a factsheet (found here) covering the requirements of the EU Non-Financial Reporting Directive which was implemented in the UK through amendments to the Companies Act 2006 and the Disclosure and Transparency Rules. The changes will apply to financial years beginning on or after 1 January 2017.
The two key areas covered by the factsheet are:- Companies in scope – The changes will apply to large "public interest entities" (PIEs)
- Necessary disclosures – Companies within scope are required to make a disclosure within their strategic report regarding environmental, employee, social, human rights, anti-corruption and anti-bribery matters. Listed companies are also required to make a diversity policy statement regarding their board within their corporate governance statement.
The FRC have also released a consultation (found here) on some proposed amendments to their Guidance on the Strategic Report, ensuring it covers the changes following the introduction of the EU Non-Financial Reporting Directive. The consultation also considers:- possible enhancements of how a company can evidence through the Strategic Report that directors have performed their duties under s.172 of the Companies Act 2006;
- improvements to the guidance to reflect other key developments in corporate reporting.
Responses to the consultation are being sought by 24 October 2017.Climate Financial Disclosures
The Financial Stability Board's (FSB) task force on climate related disclosures has published their final recommendations in relation to disclosures that should be made by companies in their mainstream financial reports.
The recommendations are designed to aid companies in understanding what markets want and expect from disclosures to measure and respond to climate change risks, allowing companies to align their disclosures to the needs of their investors.
The recommendations cover four areas:- Governance of climate related risk and opportunities
- Actual and potential impacts on an organisation
- Processes used to identify, assess and manage risks
- Metrics and targets used to assess and manage risks and opportunities.
Prospectus Regulation
Following the implementation of the EU Prospectus Regulation in late July, listed companies will no longer need to publish a prospectus in certain circumstances. Certain other aspects within the regulation will not apply until July 2019 and it is yet unclear if the UK Government will implement these other measures.
The regulation is part of the EU's Capital Markets Union project and aims to make it easier for small and medium sized companies to access capital markets while also addressing other more general issues on the operation of the EU prospectus regime.
The regulation provides an exemption for the providing of a prospectus when carrying out a conversion or exchange of securities.
This regulation has also effectively lifted the previous threshold for raising capital (doubling it from 10% to 20%). This means that a prospectus does not need to be published where a company on a regulated market wishes to issue additional shares up to 20% of issued share capital.
A more detailed explanation of the changes can be viewed in the ICSA Newsletter (found here).Proper Purpose
The Court of Appeal have now ruled on the case of Fox-Davies v Burberry Group plc (the full decision can be found here), a court case relating to access to the Register of Members and what constitutes a 'proper purpose' under the 2006 Companies Act.
This original court case related to a request by Burberry for court direction on a proper purpose request made by a tracing company who wished to access the register of members. Burberry's view was that the proper purpose test had not been met as the request was not in the best interest of their shareholders, principally because Burberry had already appointed their own tracing agency and whose terms were more favourable to the members than those of the party making the proper purpose request.
An initial court decision found in favour of Burberry, stating that the interest of the tracing agency in the register of members was for 'commercial self-interest' and that their activities did not advance the interests of the members (in light of a pre-existing tracing programme on more favourable terms). This decision was appealed by Fox-Davies, but the Court of Appeal has unanimously dismissed the case, but for different reasons than the presiding judge in the first case:- The initial request by Fox-Davies for a copy of the register of members did not constitute a proper purpose and was invalid as it failed to provide the names and address of the persons to whom the information on the register would be given. The second request did conform to these requirements and is therefore the one which was tested before the courts
- The onus is on the company to show that the purpose of the request is improper as the test is as to whether the purpose is improper is objective. When deciding whether a purpose is proper, it may be necessary to look at both the objective in obtaining the information but also the methods being used to achieve that objective
- There is no distinction between members and non-members and the test should not depend on whether it is in the interests of the members.
The Court in particular felt in this case that the manner in which the tracing was conducted (in particular that members would have to pay a fee prior to having information disclosed) meant the request was not for a proper purpose. One judge felt that if the commercial terms were oppressive then the purpose might not be proper.
While the decision made in this case adds to the uncertainty in the practice of deciding if a request is for a proper purpose, it does confirm that a company may reject a request without the need for a court proceeding, if the procedural requirements are not strictly met.Voting Trends
The Investment Association (IA) has published their analysis of shareholder voting trends for the 2017 AGM season (found here). The report focuses on trends for the FTSE 350 companies in relation to executive remuneration and director re-election votes and is based on meetings held between January and July 2017. Findings include:- an increase in substantial votes against the re-election of directors
- an increase in substantial votes against both remuneration reports and policies for FTSE 250 companies
- a decrease in substantial votes against remuneration reports and policies for FTSE 100 companies.
Global News
Pay ratio communication strategy
Pay Governance have released a memo (found here) which outlines a suggested corporate communication strategy designed to add weight and context to a company's pay ratio disclosures. They aim to mitigate unwarranted adverse reactions from investors and employees.
ISS policy survey
ISS launched their 2018 Annual Policy Survey in early August and while the opportunity to comment on a shortened version closed on the 31 August, the longer and more expansive portion remains open for feedback until 6 October (found here).
This shortened version covered fundamental and high-profile topics including pay ratio disclosures, virtual meetings and board diversity. The expansive portion of their survey allows respondents to provide responses on key issues by market and region as well as by topic.
Board diversity
State Street Global Advisors have voted against or withheld votes for the re-election of Nomination and/or Governance Committee chairs at 400 out of 476 companies. It identified with male only boards during this AGM season.
All of the 476 companies were contacted in advance and informed of State Street's plans. This facilitated a productive dialogue with 42 of the remaining 76 companies and resulted in favourable votes being lodged and the remaining 34 companies were not putting their committee chairs up for re-election.
Blackrock have reportedly been engaging in similar voting practices during the 2017 season, having voted against five companies Nomination Committee members because of a failure to address board diversity.
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Georgeson market update
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UK Activism
Executive Pay Review
The CIPD and the High Pay Centre have published a report entitled Executive pay: Review of FTSE 100 executive pay packages:
"An annual assessment of FTSE 100 CEO pay packages released today shows that rewards at the top have dropped by almost a fifth, but still remain extraordinarily high. The analysis, from the CIPD, the professional body for HR and people development, and the High Pay Centre, the independent think tank, shows that the average FTSE 100 CEO now receives an annual pay package of £4.5 million. This represents a 17% drop from £5.4 million in 2015. While this may represent a significant drop in CEO pay packages, it would still take the average UK full-time worker on a salary of £28,000 (median full-time earnings) 160 years to earn what an average FTSE 100 CEO is paid in just one year and 1,718 years to earn what Sir Martin Sorrell, CEO of WPP, received last year alone (£48.1 million)."'Clarkson Moment'
The Telegraph reports that AA chief fired for 'Clarkson moment' could lose nearly £100million in share options:
"The former executive chairman of the Automobile Association who was sacked after a Jeremy Clarkson-style bust-up with a colleague faces losing share options worth nearly £100 million. Bob Mackenzie, 64, was in line for a massive payout if the company hit a series of annual targets. But, his dismissal for gross misconduct on Tuesday means the AA can now strip him of the 33 million performance related shares he was given when he floated the company on the stock exchange two years ago. Those shares could have been worth up to £95 million if the AA's stock market value reached set levels over the next few years."
International Activism
Diversity Deficit
Bloomberg reports that Activist Investors Leave Company Boards More White, More Male:
"Shareholder activists say they shake up companies by bringing in new, better ideas. What they don't bring, it turns out, is women. Or people of colour. Firms targeted by activists end up with more white men on their boards, often replacing women and minorities in the process, according to a study by proxy voting firm ISS. The researchers looked at 380 board seats spread across 93 companies in the Standard & Poor's 1500 Index targeted by activists between 2011 and 2015. A separate Bloomberg News analysis of the same period found that five of the biggest U.S. activist funds sought 174 board positions on Standard & Poor's 500 companies in the same period but nominated women only seven times."Biggest Fight in History
Bloomberg reports that Peltz, P&G Expect to Spend $60 Million on Record Proxy Fight:
"The biggest proxy fight in history, pitting activist investor Nelson Peltz against Procter & Gamble Co., will also be one of the most expensive. The two sides expect to spend a combined $60 million on the contest for a board seat at the Cincinnati-based company, according to separate regulatory filings this week by P&G and Peltz's Trian Fund Management LP. Peltz estimated his firm will deploy $25 million to gain access to the consumer-products company's boardroom, while P&G said it budgeted an extra $35 million to keep him out."What is Activism?
The World Economic Forum discusses What is shareholder activism and how should businesses respond?
"There were 758 shareholder requests against public companies in 2016. That's nearly double the number there were in 2013. How have these formerly niche campaigns gained such momentum? So-called shareholder activists, meanwhile, manage capital of more than $170 billion, compared with less than $3 billion in the year 2000. But how effective or precarious are such activist campaigns and what can firms do about them?"A Continental Surge
The Economist reports that Investor activism is surging in continental Europe:
"Leave it to the Americans to besiege European companies in August, when the entire continent is on holiday. […] Such tussles used to be relatively rare in Europe. But shareholder activism is on the rise, with restive investors demanding corporate overhauls. Armand Grumberg, a mergers lawyer in Paris, last year counted 70 such campaigns in continental Europe. He expects this year to be even livelier."
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