Included in this issue: Corporate Governance reform - BEIS publishes Green Paper; Delaying the disclosure of inside information - FCA publishes consultation and Alternative Performance Measures require clear definition.

Corporate Governance reform - BEIS publishes Green Paper

The Department of Business, Energy and Industrial Strategy (BEIS) has published a Green Paper which builds upon the inquiry into corporate governance and pay published in September 2016.

The aim of the Green Paper is to consider what changes might be appropriate in the corporate governance regime to help deliver on the government's stated aim that the UK has an economy that "works for everyone". In doing so, it considers three specific aspects of corporate governance where there is scope to "build on and enhance the current framework":

  • executive pay;
  • strengthening the employee, customer and supplier voice; and
  • corporate governance in the UK's largest privately held businesses.

The Paper also endorses Matthew Taylor's review of employment practices in the modern economy and the Hampton – Alexander and Parker reports on diversity.

The Green Paper also asks for suggestions on any other themes, ideas or proposals that might be explored and which could strengthen the UK's corporate governance framework. Responses are requested by 17 February 2017.

Executive pay

It is stated that the government remains committed to ensuring that companies retain flexibility to set remuneration policy and pay appropriate to their business needs and strategy, whilst giving proper consideration to the views and concerns of shareholders and having appropriate regard to the interests of employees and other stakeholders. A number of options are proposed relating to:

  • shareholder voting and other rights – making some or all elements of pay subject to a binding shareholder vote; retaining the advisory vote on the remuneration report but imposing stronger consequences on companies that lose the vote; requiring an upper pay threshold which, if breached, would require a binding shareholder vote; requiring a binding shareholder vote on the remuneration policy to be held more frequently than once every three years; and, providing stronger guidance on how companies should meet their obligations to shareholders when deciding on pay;
  • shareholder engagement on pay – mandatory disclosure of fund managers' voting records at AGMs and the extent to which they use proxy votes; establishing a senior shareholder committee to engage with executive remuneration arrangements; and, considering ways to facilitate or encourage individual shareholders to exercise voting rights on pay and other corporate decisions;
  • role of remuneration committees – requiring the remuneration committee to consult shareholders and the wider company workforce in advance of preparing its pay policy; and, requiring the chairs of remuneration committees to have served for at least 12 months on a remuneration committee before taking up the role;
  • transparency in executive pay – publishing the pay ratio between the CEO's pay and pay in the wider workforce; and, strengthening the requirements in respect of the disclosure of bonus targets; and
  • long term executive pay incentives – using non-performance related share options or restricted stock (granted at much lower amounts than current levels); requiring share options to be held for a minimum of five years; and, requiring shares obtained as remuneration to be retained until the executive has built up a holding of two times salary.
Strengthening employee, customer and supplier "voices" in the boardroom

The Green Paper outlines the current framework and provides examples of current approaches used by businesses to understand the views of employees, consumers and other stakeholders. It also sets out and seeks views on a number of potential options to improve the connection between the boardroom and the workforce and other interests. Options include the establishment of advisory panels and the appointment of designated non-executive directors to take responsibility for articulating particular stakeholder perspectives. The strengthening of reporting requirements related to stakeholder engagement is also contemplated.

It is suggested that there should be higher expectations of company engagement with employees and others, but that companies should be free to select the most appropriate mechanisms, and explain why they have been chosen.

The proposals stop short of suggesting that the UK alter its unitary board system, nor does it recommend the mandatory appointment of stakeholder representatives to the board.

Corporate governance in larger privately-held companies

The government contend that good corporate governance is about more than the relationship between the owners and managers of a business. On that premise, the Green Paper considers whether the UK's largest private companies, which are of a similar size and economic significance to public companies, should be expected to meet higher minimum standards of corporate governance and reporting.

If a stronger framework is required, it is suggested that either the UK Corporate Governance Code (Governance Code) should be extended or a new code be developed which is tailored more specifically to the circumstances of such businesses.

FRC response

The Financial Reporting Council (FRC) has stated that it will consult to update the Governance Code and associated guidance in 2017 to address these issues having engaged with the government's consultation process throughout. This signals a change to its previously stated position that it would not seek to alter significantly the Governance Code until 2019. 

Delaying the disclosure of inside information - FCA publishes consultation

In October 2016, the European Securities and Markets Authority (ESMA) published final guidelines (Guidelines) setting out a non-exhaustive list of the legitimate interests of issuers that are likely to be prejudiced by the immediate disclosure of inside information and situations in which the delay of disclosure is likely to mislead the public in accordance with Article 17(11) of the EU Market Abuse Regulation (No.596/2014) (MAR). The Financial Conduct Authority (FCA) has now published a consultation containing proposals to amend Chapter 2.5 of the Disclosure Guidance and Transparency Rules (DTR) to ensure that its Handbook is consistent with the Guidelines.

In overview, the FCA proposes to delete those provisions of the DTRs which it believes are inconsistent with or duplicative of the Guidelines and to insert cross-references or "signposts" where appropriate.

Of greatest significance is the deletion of the final sentence of DTR 2.5.5G: "However, the FCA considers that, other than in relation to impending developments or matters described in DTR 2.5.3G(2) or Article 17(5) of MAR, there are unlikely to be other circumstances where delay would be justified." In doing so, it reflects the non-exhaustive nature of the Guidelines (i.e. that there may be other legitimate interests which may be prejudiced by immediate disclosure which are not currently set out in the Guidelines) and the possibility of the Guidelines being amended in the future.

The FCA notes that the proposed amendments are not intended to extend the scope for issuer non-disclosure. It also states that disclosure should only be delayed where all conditions in Article 17(4)/17(5) MAR have been met and reminds issuers of their obligations to disclose information as soon as possible and not to mislead the market through inaccurate, partial or non-disclosure.

ESMA also published final guidelines dealing with market soundings in November 2016, however, the FCA does not consider that any changes to its Handbook are necessitated as a result.

Responses to the consultation are required by 6 January 2017.

Alternative Performance Measures require clear definition

Since July 2016, guidelines issued by the ESMA on the use of Alternative Performance Measures (APMs) in company reporting have applied to various communications made by listed companies. According to the FRC, while reporting which uses APMs has improved, its thematic review suggests that further improvements are required.

Key Contacts

Richard Preston

Richard Preston

Managing Associate, Corporate Finance
London, UK

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