Governance & Compliance Update - Issue 142

Included in this issue of our Governance & Compliance Update: Hampton-Alexander Review update; ICSA consultation on effectiveness of independent board evaluation in UK listed sector; revised UK Stewardship Code to be published in October and more...

Corporate Governance

Hampton-Alexander Review update: FTSE 350 urged to keep up the pace of change

The Government has announced that the Hampton-Alexander Review has published an update suggesting that, for the first time, the FTSE 250 could meet the 33% target for women in senior leadership positions if the current rate of progress is maintained. 

The figures published by the Review reveal that:

• 32.1% of FTSE 100 board positions are held by women, up from 12.5% in 2011 – thus the FTSE 100 is also on track to meet the 33% target by 2020;
• 27.5% of FTSE 250 board positions are now held by women, up from 24.9%;
• there remain four all male FTSE 350 boards (albeit that is down from 152 in 2011); and
• 14 companies in the FTSE 350 are named as having not responded to the joint letter from the Investment Association and the Hampton-Alexander Review written in March 2019 to 69 companies in the FTSE 350 with one woman or less on their board and which sought clarification of the actions those companies intended to take to ensure progress was made towards the 33% target.

The 2019 Hampton-Alexander Report will be published in November 2019.

ICSA consultation on effectiveness of independent board evaluation in UK listed sector

The Governance Institute (ICSA) has published a consultation aimed at assessing the quality of independent board evaluation, as well as ways in which it might be improved. The review is being carried out at the request of the Department for Business, Energy and Industrial Strategy (BEIS).

The ICSA seeks views on whether there is a need for:

• a code of practice for board evaluers, and formal arrangements for implementing and monitoring such a code;
• voluntary principles to be applied by listed companies when engaging external evaluers; and
• guidance for listed companies on disclosure of the conduct and outcomes of their board evaluation.

The consultation document includes draft versions of a code of practice for independent reviewers and voluntary principles and guidance on disclosure for listed companies.

Investment Association calls for companies to state dividend distribution policy

The Investment Association (IA) has published a report: 'Shareholder votes on dividend distributions in UK listed companies’, which calls for companies to be more transparent on their approach to paying dividends. The report forms part of an investigation into dividend payment practices carried out by the IA at the request of the Government as part of its consultation on 'Insolvency and Corporate Governance'. Other Government proposals in this area include strengthening the 'net asset' test that applies when a public company pays a dividend; requiring companies to state their level of realised profits as a separate line item in their accounts; and introducing an ability for companies to declare and pay dividends based on an assessment of their solvency by directors, rather than on the level of their distributable profit.

Revised UK Stewardship Code to be published in October

The Financial Reporting Council (FRC) has confirmed that it will publish the revised Stewardship Code in October and not, as previously announced, in July 2019. The volume of responses received is one reason for the delay. Details of the consultation can be found in our February Governance & Compliance update.

Risk Coalition launches consultation on risk guidance in FS

The FRC has announced that the Risk Coalition is consulting on the principles and guidance for board risk committees and risk functions in the UK financial services sector. The consultation closes on 20 September 2019.

Corporate Governance Factbook published by OECD

The Organisation for Economic Co-operation and Development (OECD) has published a comparison of the corporate governance frameworks of 49 jurisdictions.

Narrative Financial Reporting

Government develops proposals on prompt payments

In the response to its call for evidence on how to improve corporate payment practices, the Government has confirmed a number of outline proposals including the requirement for audit committees of certain large companies to report in their annual report on their payment practices. The Government’s preference is that this requirement will be implemented through guidance, but it will consider legislating to ensure that the issue of late payments is given sufficient board attention. In order to inform its thinking on this issue, the Government is asking the FRC to review how well payment practices are reflected when the first reports are published under the Companies (Miscellaneous Reporting) Regulations 2018 which requires large and medium sized companies to include a statement in their directors’ report summarising how directors have had regard to the need to foster the company’s business relationships with suppliers, customers and others, and the effect of that regard.

The Government also plans to reform and strengthen the Prompt Payment Code and to shift responsibility for it to the Small Business Commissioner.

FRC and ICAEW publish guide for smaller listed companies

The FRC and the ICAEW have published a guide to help audit committees and boards of smaller listed and AIM quoted companies improve their financial reporting. The guide addresses issues raised by the FRC about the quality of financial reporting in this sector, and provides practical tips and questions for audit committees to consider, with a view to driving up the quality of smaller quoted company financial reporting. The guide builds on key themes that emerged from the FRC’s 2015 Discussion Paper: ‘Improving the Quality of Reporting by Smaller Listed and AIM Quoted Companies’.

Single Electronic Financial Reporting Format published

The European Commission has published a new regulation which introduces the new single electronic financial reporting format. This will apply to all annual financial reports published by issuers with securities admitted to trading on an EU regulated market such as the main market of the London Stock Exchange (LSE) and the NEX Exchange Main Board.

The regulation requires a relevant annual report to be prepared in extensible hypertext mark-up language (XHTML). In addition, should an annual report contain consolidated financial statements prepared in accordance with IFRS, an issuer will need to annotate them in extensible business reporting language (XBRL).

The regulation is now in force and applies to the annual reports of relevant issuers for financial years beginning on or after 1 January 2020.

FSB Task Force publishes status report on climate-related financial disclosures

The Financial Stability Board (FSB) has issued a press release noting that the Task Force on Climate-related Financial Disclosures (TCFD) has published its 2019 Status Report.

The status report provides an overview of the extent to which companies' reports included information aligned with the core TCFD recommendations on climate-related financial disclosures, over the period from 2016 to 2018.

The Task Force's key findings include:

• Disclosure of climate-related financial information has increased since 2016, but is still insufficient for investors.
• More clarity is needed on the potential financial impact of climate-related issues on companies.
• Of companies using scenarios in their disclosures, the majority do not disclose information on the resilience of their strategies.
• Mainstreaming climate-related issues requires the involvement of multiple functions within organisations.

Green Finance Strategy: disclosure requirements

The Government has launched its Green Finance Strategy. The Green Finance Strategy report states that the government expects all listed companies and large asset owners to be disclosing in line with the TCFD recommendations by 2022. The Government is also establishing a joint task force with UK regulators, which it will chair, in order to examine the most effective way to approach disclosure, including the appropriateness of mandatory reporting.

European Commission guidelines on climate-related information reporting

The European Commission has published new guidelines on corporate climate-related information reporting, as part of its Sustainable Finance Action Plan. The guidelines aim to provide companies with practical recommendations on how to better report the impact that their activities are having on the climate as well as the impact of climate change on their business. The Commission also notes the publication of three new reports by the Technical Expert Group on sustainable finance. These include key recommendations on the types of economic activities that can contribute to climate change mitigation or adaptation.

Strengthening transparency in supply chains – possible changes to the Modern Slavery Act

The Government published a consultation on proposed measures to strengthen the transparency in supply chain provisions in section 54 of the Modern Slavery Act 2015 (2015 Act). The consultation includes proposals on the content of modern slavery statements and how the Government can improve enforcement of non-compliance. The consultation seeks view on the mandating of content requirements, confirms the development of an online registry for published statements, proposes the introduction of a single reporting deadline and explores options for improving the process and tools for tackling non-compliance. Responses are requested by 17 September 2019.

The Government has also announced the establishment of a £10m Policy and Evidence Centre for Modern Slavery and Human Rights as part of its response to the Independent Review of the 2015 Act. The research centre will bring together academics, businesses and charities to drive forward new studies, share knowledge, and improve collaboration at home and overseas.

FRC amends disclosure framework and reporting standards

The FRC has announced amendments to FRS 101 - Reduced Disclosure Framework and proposed amendments to FRS 102 – The Financial Reporting Standard applicable in the UK and Republic of Ireland.

FRC launches consultation on Auditing and Ethical Standards

The FRC has published a consultation on proposed revisions to the 2016 UK Auditing and Ethical Standards. This proposes more stringent ethical rules for auditors in response to findings from recent audit enforcement cases and audit inspections. The FRC is also proposing to enhance the quality and content of auditor's reports in order to improve transparency about what is found in the course of an audit. The consultation closes on 27 September 2019.

Key changes proposed include:

• A clearer and stronger ‘objective, reasonable and informed third party test’ which requires audit firms to consider whether a proposed action would affect their independence from the perspective of public interest stakeholders rather than that of another auditor;
• Enhancing the authority of the Ethics Partner function within audit firms, in order to ensure firm wide focus on ethical matters and the public interest, and to require reporting to those charged with governance where an audit firm does not follow the Ethics Partner’s advice;
• The list of prohibited non-audit services that auditors of Public Interest Entities (PIEs) can provide to audited bodies has been replaced with a much shorter list of permitted services, all of which are ‘closely related’ to an audit or required by law and/or regulation. No other services can be provided; and.
• The requirement for the auditors of all UK listed entities to include in their published auditor’s reports the performance materiality threshold used in the audit.

The FRC has also published exposure drafts of the Revised Ethical Standard 2019, Changes to the International Standards on Auditing (UK) and International Standard on Quality Control (UK) and a Glossary of auditing and ethics terms.

Consultation on draft Code of Practice for internal auditors

The Chartered Institute of Internal Auditors has published a consultation on the development of an Internal Audit Code of Practice, which, once implemented, will provide the first comprehensive benchmarks to be met by organisations outside of the financial services sector. The consultation closes on 11 October 2019.

The draft Code makes 30 recommendations to strengthen internal audit including:

• unrestricted access for internal audit;
• full access for internal audit to senior meetings; and
• full access for internal audit to key management information.

Regulation in Practice

FCA fines Cathay International, its CEO and Finance Director for breaches of the Listing Principles and DTRs

The Financial Conduct Authority (FCA) has published decision notices concerning Cathay International Holdings Limited (Cathay) and two of its directors, Mr Jin-Yi Lee, its CEO, and Mr Eric Siu, its Finance Director. The FCA considers that Cathay breached the FCA’s Listing Principles and DTR by:

• failing to have adequate systems and procedures in place to monitor its financial performance and being reckless as to the need to take reasonable steps to put such systems and procedures in place (in breach of Listing Principle 1);
• recklessly failing to inform the market of a material change to its actual and expected performance relative to market expectations (in breach of Premium Listing Principle 6 and DTR 2.2.1R); and
• failing to deal with the FCA in an open and co-operative manner (in breach of Listing Principle 2) in providing information in relation to forecasting procedures which was materially different to the actual procedures undertaken.

The FCA also considers that the relevant directors were knowingly concerned in some of the breaches, including as regards co-operating with the FCA's investigation. The FCA has imposed a fines of £411,000 on Cathay, £214,300 on Mr Lee and £40,200 on Mr Siu.

LSE disciplines Real Good Food plc for breaches of AIM Rules

The LSE has published a Disciplinary Notice in relation to the public censure and fine of £450,000 (discounted to £300,000 for early settlement) of Real Good Food plc (RGF) for breaches of Rule 10 (Principles of disclosure), Rule 13 (Related party transactions), Rule 17 (Disclosure of miscellaneous information), Rule 19 (Annual accounts), Rule 21 (Dealing policy) and Rule 31 (AIM company and directors’ responsibility for compliance) of the AIM Rules for Companies (AIM Rules).  

The AIM Rule 17 and 21 requirements relating to directors’ dealings at the relevant time were subsequently removed from the AIM Rules on the implementation of MAR.

The events which gave rise to the public censure occurred during the tenure of RGF's former board and relate to:

• RGF's disclosure of misleading or incomplete information in respect of its expected trading performance;
• disclosure failures with respect to multiple related party transactions between RGF and certain members of the board;
• dealing by a director in a close period and delaying the notification of that dealing; and
• failures in RGF's procedures and controls to comply with the AIM Rules, and in its approach to ensuring both collective and individual responsibility of its directors for its AIM Rules compliance and in its approach to providing information to, and seeking advice from, its Nomad.

The LSE emphasises that robust procedures and controls, overseen by independent non-executive directors who can hold management to account, are essential to ensure integrity, considered judgement and accountability. It is therefore incumbent on AIM companies to ensure that appropriate corporate governance and financial controls are properly embedded and are effective in practice. Failure to do so gives rise to the inherent risk of breaches of a company’s AIM Rules obligations.

LSE disciplines Telit Communications plc for breaches of AIM Rules

The LSE has published a Disciplinary Notice in relation to the public censure and fine of Telit Communications plc (Telit) for breaches of Rules 3 (Admission document) and 31 (AIM company and directors’ responsibility for compliance) of the AIM Rules.  

The LSE states that is had agreed settlement terms with the Company for a public censure and fine of £350,000, but has decided to waive the fine in light of the particular circumstances of the case. Nevertheless, details of the public censure have been published to educate the market on expected standards of conduct for AIM companies under the AIM Rules, including as regards directors and proposed directors.

Telit failed to disclose the former name of one of its directors and CEO (Mr Oozi Cats), which previously had a different spelling, in its Admission Document published in 2005. The Admission Document also failed to refer to the fact he had been indicted in the US under that former name. This information had also been withheld from Telit's Nomads and only came to light when Telit conducted a subsequent review in August 2017. The LSE noted Telit's swift action when the matter came to light and the current board's full co-operation in the subsequent investigation. 

ICO issues first fines for security breaches under GDPR 

The Information Commissioner's Office (ICO) has issued notice of its intent to impose its first fines for security breaches under GDPR. More detail is contained in our Data & Privacy News.

Executive Remuneration

Government implements Shareholders' Rights Directive Remuneration aspects

The Companies (Directors’ Remuneration Policy and Directors’ Remuneration Report) Regulations 2019 have been published. They amend the regulations and legislation governing the disclosure of directors' remuneration and are being implemented to enact SRD II. A full summary can be found in our Governance & Compliance update. The Government has also published a Q&A document to explain various aspects of the regime. A full list of the new measures, and the extent to which they were already given effect in previous UK law prior to the Regulations, has also been made available.  

Government responds to BEIS Select Committee proposals on pay

The Government has published its response to the recommendations of the BEIS Select Committee. Of particular note are that the replacement body for the FRC (the Audit, Reporting and Governance Authority) will be responsible for monitoring directors' remuneration reports and section 172(1) statements made in accordance with the Companies (Miscellaneous Reporting) Regulations 2018 – i.e. the statement of how directors have satisfied their Companies Act 2006 duty to promote the success of the company while taking into account various factors and stakeholder interests.

The Government has, however, rejected various proposals from the Select Committee including its call for remuneration committees to be augmented with at least one employee representative and requiring such committees to put a cap on CEO pay.

Prospectus Regulation

Prospectus Regulation to come into full effect on 21 July 2019

On 21 July, the new EU Prospectus Regulation comes fully into force. For more detail on its impact on equity issuance and supporting technical standards and guidance - click here.