2017/18 Annual ReportsThe Financial Reporting Council (FRC) announced in October that they have written to companies to highlight changes to reporting requirements and flag key areas where companies can make improvements when preparing their annual reports for the 2017/18 reporting period. The FRC's letter can be found here and some of the items discussed include:
- Detailed, quantitative disclosures explaining the likely impact of the new accounting standards (IFRS 9, IFRS 15 and IFRS 16) on their reporting should be included ahead of the implementation date
- EU Directive on non-financial and diversity information which became effective from 1 January 2017. The FRC's letter draws attention to this fact and that they are carrying out consultation on their guidance on the strategic report to reflect the new requirements
- The FRC is encouraging a two-stage development to viability statements which remain a priority for investors. Stage one is to consider the prospects of the company over a period reflecting a company's business and investment cycles. The stage two development is to state whether the company has a reasonable expectation that they will be able to continue to meet their liabilities
Board DiversityIn November 2016, Sir John Parker released a consultation version of his review into the ethnic diversity of UK boards. He has now published the final report (found here) following some overwhelmingly positive feedback and constructive suggestions on how to increase the impact of the recommendations.
The final report offers a number of key findings which include:
- Leading UK public company boardrooms do not reflect the ethnic diversity of the UK or the company's stakeholders
- 14% of the total UK population are non-white, yet they only represent 2% of FTSE 100 directorships
- 51 of the FTSE 100 companies have no non-white directors
- Six non-white people hold either a Chairmanship or CEO position on a FTSE 100 board
- FTSE 100 boards should have at least one non-white director by 2021 and 2024 for FTSE 250 boards
- FTSE 350 nomination committees should identify and present qualified non-white people for board appointments
- Directors should mentor or sponsor internal individuals to ensure their readiness to assume senior management or executive positions both for internal positions, or non-executive positions externally
- Companies should provide commentary on their efforts to increase ethnic diversity within their organisation which should be included in the diversity policy statement within a company's annual report
Modern SlaveryFollowing the initial guidance issued by the UK Government on the Modern Slavery Act 2015 reporting obligations, they have now updated this guidance (found here) and the updates include:
- Statement contents – statements "should aim to include information about" each of the six areas set out in Section 54 (5) of the Act rather than "may" as was previously stated in the guidance
- Publication timing – statements should be published "as soon as possible" after the end of the organisation's financial year and at most within six months of the end of the financial year in line with the government's expectations
- Online – historic statements should be made available online, even once new statements have been published
- Small organisations – those with turnovers of less than £36m are encouraged to produce a statement on a voluntary basis
Payment PracticesThe Department for Business, Energy & Industrial Strategy (BEIS) has published some updated guidance (found here) on the requirements for large UK companies and limited liability partnerships to report on their payment practices. This came into force on 6 April 2017.
The updated guidance includes the following key changes:
- Qualifying contracts – the guidance confirms that the reporting requirement applies to a qualifying contract where it has a "significant connection" to the UK and the guidance provides additional information on what constitutes a significant connection
- Report contents – the published report must include narrative information on business terms and statistics and the updated guidance explains that any settlement discounts must be described in the report as well as descriptions on maximum payment periods. The guidance also details how to calculate statistics where an entity hasn't received an invoice from the supplier or where supply chain finance is used
- Frequently asked questions – there have been a number of amendments to pre-existing questions and also some new questions including:
- how contracts between two group companies should be reported; and
- that an entity within scope with no qualifying contracts should still produce a limited report
Dividend DisclosuresThe Financial Reporting Council's (FRC) Financial Reporting Lab has published another report on dividend disclosures (found here). It looks at how well FTSE350 companies are applying their 2015 recommendations.
The 2017 report has found that aspects of disclosures by companies within scope have improved, in particular around risks to dividends and factors used in setting dividend policies and includes examples of best practice. The report also notes that improvements could be made in the following areas:
- Links between dividend, risks and viability – an upcoming report by the Lab on risk and viability will note the connections between an organisation's business model, the risk to the model and impacts on viability and their importance. Dividend strategy must be a clear element of all three as they will have outcomes on the business model and may be impacted by the risks
- Disclosures on constraints - enhancing such disclosures can be done by including details of dividend sustainability and clarifying levels of distributable profits that are available
- Policy in practice – the report provides an example of how to explain what dividend policy means in practice and explains what a 'progressive' policy means
National Security and Infrastructure Investment ReviewThe Department for Business, Energy & Industrial Strategy (BEIS) has released a consultation concerning foreign investment and national security. This consultation is split into two parts, focusing on short-term and longer-term approaches.
- Part one - focuses on the Government's short-term proposals to amend the turnover threshold and the share of supply tests within the Enterprise Act 2002. The aim of these changes would be to allow the Government to intervene, if necessary, into mergers which are over the threshold for either the dual-use and military sector, or parts of the advanced technology sector. The consultation for part one (found here) closes on the 14 November 2017
- Part two - the Secretary of State can currently intervene in a transaction on the grounds of national security, media plurality, and financial stability. This section asks for opinions regarding potential further measures and long-term reforms that the government could take in order to safeguard national security. The consultation for part two (found here) closes on the 9 January 2018
Takeover PanelThe Takeover Panel has recently published a consultation paper (found here) where a number of changes have been suggested in regards to how takeovers operate. The key proposals are as follows:
- Statements of Intention need to be announced with the announcement of the intended takeover, rather than when the formal offer document is published
- Bidders have to be more specific in certain areas including:
- The research and development functions
- The balance of the skills and functions of the target company's employees and management
- The location of the target company's headquarters and headquarters functions
- Allow a target company who is facing a bid to pause the takeover process. The amount of time the target company has to publish its defence to the bid would increase from 14 days to 28 days
- Require companies to report at least annually on how they are complying with their post-offer intention statements and post-offer undertakings
Proxy Advisors’ ConsultationThe Best Practice Principles (BPP) Group has released a consultation concerning the Best Practice Principles for Shareholder Voting Research and Analysis. The Principles, developed by proxy advisors and introduced in 2014, have the purpose of encouraging a clearer understanding of the role of shareholder voting research and analysis providers.
The aim of the consultation is to ascertain the views of market participants on whether the Principles have been effective in ensuring the integrity and efficiency of the services provided by proxy advisors. This consultation is part of a wider review considering the implementation and impact of the Principles, how they are reported on, and whether the Principles themselves need revising. This review will also consider regulatory developments since the Principles were introduced, such as the revised EU Shareholder Rights Directive taking effect in 2019.
The consultation, along with the questionnaire, can be found on the BPP Group's website (found here) and closes on the 15 December 2017.
Global NewsHong Kong Corporate Governance
The Stock Exchange of Hong Kong (HKEK) has published an analysis (found here) of corporate governance disclosures made by listed companies in respect of the HKEK Corporate Governance Code.
Their analysis looks at the reports of 1,428 issuers with a financial year ending 31 December 2016 and represents 72% of issuers listed. The provisions of the code which have received the lowest compliance ratings include: requiring separation of duties for the CEO and the Chairman. The most common reason for non-compliance is that issuers agree that one person occupying the two positions "can provide strong and consistent leadership and can enable more effective planning".
Corporate Responsibility ReportingKPMG has released their Survey of Corporate Responsibility Reporting (found here) which looks at the corporate responsibility and sustainability reporting of the world's 250 largest companies (G250) and the 100 largest companies in the 49 countries surveyed (N100). Some highlights include:
- 52% of the G250 and 72% of the N100 don't identify climate change as a financial risk in their annual reports
- 43% of the G250 and 39% of the N100 link their corporate responsibility activity to the UN sustainable development goals
Do you have any questions or suggestions on this month's edition?
Please contact your Client Manager.
Georgeson market update
Georgeson is a leading Corporate Governance advisory and Shareholder Engagement company, and part of the Computershare group
Ousted Chairman to repay bonusesSky News reports that AA demands ousted chairman MacKenzie repays £1.2m in bonuses.
"The AA is demanding that its ousted former chairman repays more than £1.2m in bonuses over an allegation that he was involved in a public altercation that was not previously disclosed to its board."
Engagement leads to better investment decisionsThe Investment Association reports that Latest figures show engagement leads to better investment decisions.
"The Investment Association and Pensions and Lifetime Savings Association joint report on 'Stewardship in Practice' shows that the engagement between asset managers and asset owners and UK companies is having a positive impact on investment decisions and ultimately value. The report demonstrates that the investment chain is working as intended. Asset managers, which tend to engage and vote in-house, are maintaining high standards of stewardship. Whilst most asset owners outsource their stewardship activities, a substantial core are integrating it into their investment practices and 68% now include a stewardship policy in their Statement of Investment Principles."
ISS Policy Application Survey and Benchmark Policy comment periodISS has announced the results of the 2017-2018 ISS Policy Application Survey and launched their 2018 Benchmark Policy comment period.
Please contact your Client Manager who can arrange for the Georgeson briefing on the main survey results affecting the UK and European companies.
"Potential changes to ISS' European voting policy include those related to general share issuance request proposals and non-widely-held company director elections in the area of board independence. Other draft policies for comment include the treatment of virtual/hybrid meeting proposals (within the UK/Ireland and Europe voting policies), as well as the prospect of applying ISS' existing European policy on director overboarding to the Nordic markets." The comment period closes on 9 November 2017.
Even in victory investors polarisedBloomberg reports that Even in victory, P&C polarises Investors with Peltz Fight.
"Procter & Gamble Co. may have prevailed in its proxy fight against activist investor Nelson Peltz, but the contentious showdown has left its investors as divided as ever. The world's largest consumer-products company said Tuesday that Peltz fell short of the votes needed to be elected to the board, based on preliminary results. But the investor isn't going quietly: His firm, Trian Fund Management, said the decision was too close to call and that it's waiting for certification by an independent inspector. Peltz argued that P&G suffered from a bloated structure and a lack of new brands favoured by younger shoppers. While he hasn't called for the replacement of Chief Executive Officer David Taylor or a breakup of the company, the 75-year-old did suggest reorganising the maker of Tide and Pampers into three largely autonomous units."
Passive investment better at providing corporate governanceBloomberg reports that Fink says BlackRock does better than hedge funds with corporate governance.
"BlackRock Inc.'s Larry Fink responded to critics of passive investors, saying his firm does a better job than hedge funds in providing corporate governance. 'I think we do as credible a job as anybody, better than any hedge fund, better than any firm, we are very committed to corporate stewardship,' Fink told CNBC Wednesday. The BlackRock chief executive officer was responding to comments from activist hedge fund manager Paul Singer, who has argued that passive investors lack incentives to push companies to change for the better."
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