Friday 31 October 2008

UK: auditors' reports and the Companies Act (2006) - APB guidance

The Auditing Practices Board (APB) has today issued Bulletin 2008/9: Miscellaneous Reports by Auditors Required by the United Kingdom Companies Act 2006. The Bulletin provides guidance on those reports and statements required to be made by a statutory auditor which are not dealt with in earlier APB bulletins

Uganda: company law reform

Uganda's Companies Act (1961) is based on UK legislation - the Companies Act (1948) - that has long since been replaced. Several years ago the Uganda Law Reform Commission published a report in which recommendations were made for the reform of Ugandan company law. It now appears - from this report - that Uganda will introduce a new Companies Act in 2009. 

Thursday 30 October 2008

Spain: Unified Good Governance Code available on ECGI website

The European Corporate Governance Institute website now contains a copy (in English) of the Spanish Unified Good Governance Code. The Code adopts the comply or explain approach and makes clear that it is for shareholders to evaluate the explanations provided by companies with regard to their degree of compliance with the Code. 

Interestingly, the Code does not take a position on the desirability of one person occupying the position of chairman and chief executive but, where this takes place, it recommends that: independent director should be empowered to request the calling of board meetings or the inclusion of new business on the agenda; to coordinate and give voice to the concerns of external directors; and to lead the board's evaluation of the Chairman".

Wednesday 29 October 2008

UK: The Climate Change Bill and company reporting

[Update (28 November): see here]. Yesterday the Climate Change Bill received its third reading in the House of Commons. The Bill now enters the ping-pong stage before receiving Royal Assent. The Bill contains new provisions concerning companies' reporting of their carbon emissions. New Clause 17, titled "Regulations about reporting by companies", provides:

(1) The Secretary of State must, not later than 6th April 2012— (a) make regulations under section 416(4) of the Companies Act 2006 (c. 46) requiring the directors’ report of a company to contain such information as may be specified in the regulations about emissions of greenhouse gases from activities for which the company is responsible, or (b) lay before Parliament a report explaining why no such regulations have been made.

(2) Subsection (1)(a) is complied with if regulations are made containing provision in relation to companies, and emissions, of a description specified in the regulations.

Additionally, new clause 5 provides:

(1) Any company that is required to produce a business review under section 417 of the Companies Act 2006 (c.46) must have regard to any guidance issued under section 80 of this Act when reporting on greenhouse gas emissions.

(2) The Secretary of State may by order provide that any company that is required to produce a business review that includes information on environment matters (including the impact of the company’s business on the environment) under section 417(5) of the Companies Act (c.46) must include information on greenhouse gas emissions, and in doing so have regard to any guidance issued under section 80 of this Act.

(3) The Secretary of State may by order provide that compliance with guidance issued under Section 80 of this Act will be presumed to constitute compliance with section 417 of the Companies Act 2006 (c.46).

(4) The Secretary of State must make provision under either subsection (2) or subsection (3) before 1st April 2010.

(5) The expiry of the period mentioned in subsection (4) does not affect the power of the Secretary of State to make further provision by order under subsections (2) and (3).

(6) The Secretary of State shall, when setting carbon budget pursuant to section 4 of this Act, lay before Parliament a report on any changes to any guidance issued hereunder which the Secretary of State believes are necessary to promote the achievement of any carbon targets.

(7) Any order under this section is subject to affirmative resolution procedure.

According to Government minister Joan Ruddock MP (Hansard: 28/10/08, col 814), these new provisions:

are designed to reinforce our [the Government's] commitment to the importance of corporate transparency and to taking forward the process as quickly as possible. We will consult publicly next year on the detail of how companies’ carbon emissions should be defined and measured. The outcome of that consultation, which will include close work with individual stakeholder groups, will be reflected in the guidance on measurement of emissions that the Government are required to publish by 1 October 2009".

The provisions have been discussed in the Financial Times newspaper - see here

Tuesday 28 October 2008

UK: the Bank of England's Financial Stability Report

The Bank of England has today published its Financial Stability Report. The Report provides an overview of the events leading to the crisis in financial markets and the response of the UK authorities (including the Banking Bill, currently before Parliament). Section 6 of the report, titled "the medium term agenda", concludes:

the events of the past year or so clearly highlight the need for a fundamental overhaul of the regulatory safeguards used to mitigate systemic risk within the financial system".

Monday 27 October 2008

USA: the rise of the poison pill

The Wall Street Journal has reported that "[the] number of U.S. businesses adopting poison pills is rising this year as companies move to defend themselves against potential hostile takeovers. Fifty publicly traded companies adopted poison pills this year through Thursday, up from 42 in all of 2007, according to John Laide of FactSet SharkRepellent, which tracks corporate takeover defenses". For background information, and further discussion, click here

UK: FRC statement on the development of accounting standards

Earlier this month the International Accounting Standards Board (IASB) and the Financial Accounting Standards Board (FASB) published an announcement in which they explained their joint approach with regard to the reporting issues arising from the global financial crisis. Both stressed the need to work cooperatively and in an internationally coordinated manner. 

Following the joint announcement, the Financial Reporting Council has published a statement in which it sets out its position on the development of accounting standards and in which it defends the role of the UK's Accounting Standards Board. Whilst supporting the work of the IASB and FASB, the FRC states:

We also believe that other experienced accounting standard setters, such as the ASB, can contribute to developing high quality solutions. We will continue to work with the IASB to help them draw on the extensive experience of the UK financial reporting community".

Sunday 26 October 2008

Cayman Islands: Directors Association publishes Code of Professional Conduct

The Cayman Islands Directors Association (CIDA) was formed earlier this year. One of its first tasks was to produce a code of conduct and this has now been published: see here. The CIDA's code draws heavily on the Chartered Director Code of Professional Conduct produced by the UK's Institute of Directors. Both codes cover matters such as leadership, responsibilities, conflicts of interest and keeping up to date with good practice. 

Note: the Cayman Islands are a British Overseas Territory; for further information see here.

Friday 24 October 2008

UK: implementing the shareholder rights Directive (2007/36/EC)

The Department for Business, Enterprise and Regulatory Reform has today published a consultation paper with regard to the UK's implementation of Directive 2007/36/EC on the exercise of certain rights of shareholders in listed companies. The opportunity is also being taken to make some amendments to the Companies Act (2006). The Government plans to implement the Directive by the deadline (3 August 2009) and in this regard the consultation paper contains a draft of The Companies (Shareholders’ Rights) Regulations (2008/9). 

One area of company law that will be changed concerns the rules for calling meetings of the shareholders. The Directive requires that at least 21 days' notice is given for AGMs.  14 days' notice is required for other meetings subject to certain conditions being met.  These conditions are different from those currently in place and include providing "the facility for shareholders to vote by electronic means accessible to all shareholders". 

For further background information, from the European Commission's Internal Market website, click here.

Thursday 23 October 2008

UK: FRC - preliminary lessons from the financial crisis

The Financial Reporting Council chief executive, Paul Boyle, has today delivered a speech in which he identified some preliminary lessons from the financial crisis with regard to corporate governance and the Combined Code on Corporate Governance. Mr Boyle observed (emphasis in the original):

With respect to the FRC’s responsibilities for Corporate Governance, it is the case that the current market difficulties have raised questions about corporate governance in the UK’s banks and, perhaps, these questions will extend to other financial institutions. Our preliminary conclusion is that the primary questions should not be about the standards of corporate governance in these institutions but rather the practice of it. Our view is that the standards set out in the FRC’s Combined Code remain comprehensive and appropriately principles-based standards.

We expect that directors of banks and other financial institutions are already reviewing their governance and risk management practices. We, therefore, currently believe that the recent difficulties in the financial sector do not require a generalised tightening of governance standards across the UK corporate sector. The focus should be on whether the existing standards have been observed in practice".

India: Companies Bill 2008 introduced in the Lok Sabha

The Companies Bill (2008) has been introduced in the Lok Sabha. For further information about the Bill and the changes it will introduce, see this Government announcement. A copy of the Bill as introduced is available here. In order to become law, the Bill will be read three times in each House (the Lok Sabha and the Rajya Sabha) before it is submitted to the President for assent (for information about this process, see here).

Publication of the Santiago Principles - generally accepted principles and practices for sovereign wealth funds

Last month, as noted here, the International Working Group of Sovereign Wealth Funds (IWG) agreed a set of (voluntary) Generally Accepted Principles and Practices (GAPP) with regard to the governance and operation of sovereign wealth funds. The GAPP - also known as the Santiago Principles - have now been published: see here. The IWG website states that guiding purpose of the GAPP is to:
  • have in place a transparent and sound governance structure that provides for adequate operational controls, risk management and accountability
  • ensure compliance with applicable regulatory and disclosure requirements in the countries in which SWFs invest
  • ensure SWFs invest on the basis of economic and financial risk and return-related considerations
  • help maintain a stable global financial system and free flow of capital and investment

Wednesday 22 October 2008

USA: NACD publishes principles to strengthen corporate governance

The National Association of Corporate Directors has published a document titled "Key Agreed Principles to Strengthen Corporate Governance for US Publicly Traded Companies". The introduction states that boards and shareholders are encouraged to use the Principles when designing and evaluating companies' governance structures. The Principles are as follows (see the NACD document for elaboration):
  1. Board responsibility for governance: Governance structures and practices should be designed by the board to position the board to fulfill its duties effectively and efficiently.
  2. Corporate governance transparency: Governance structures and practices should be transparent— and transparency is more important than strictly following any particular set of best practice recommendations.
  3. Director competency and commitment: Governance structures and practices should be designed to ensure the competency and commitment of directors.
  4. Board accountability and objectivity: Governance structures and practices should be designed to ensure the accountability of the board to shareholders and the objectivity of board decisions.
  5. Independent board leadership: Governance structures and practices should be designed to provide some form of leadership for the board distinct from management.
  6. Integrity, ethics and responsibility: Governance structures and practices should be designed to promote an appropriate corporate culture of integrity, ethics, and corporate social responsibility.
  7. Attention to information, agenda and strategy: Governance structures and practices should be designed to support the board in determining its own priorities, resultant agenda, and information needs and to assist the board in focusing on strategy (and associated risks).
  8. Protection against board entrenchment: Governance structures and practices should encourage the board to refresh itself.
  9. Shareholder input in director selection: Governance structures and practices should be designed to encourage meaningful shareholder involvement in the selection of directors.
  10. Shareholder communications: Governance structures and practices should be designed to encourage communication with shareholders.
Note: the Principles were unveiled on October 20, day two of the NACD's corporate governance conference. They have been described by the International Corporate Governance Network as a "good start which we believe should encourage further discussion on how to improve practice in corporate governance and develop much better understanding between companies and the shareholders who own them".

Tuesday 21 October 2008

Italy: restrictions on sovereign wealth fund investment

The UK's Financial Times newspaper has reported (online, October 21) that "Italy's centre-right government opposes sovereign wealth funds acquiring more than 5 per cent in individual Italian companies and has set up a national interests committee to establish rules governing their behaviour".

UK: Deloitte 2008 survey of narrative reporting

Deloitte has published the 2008 edition of its annual survey of narrative reporting. Titled "Write from the start - surveying narrative reporting in annual reports", the report explores the content of the narrative sections of listed companies' annual reports including, for the first time this year, corporate governance statements.

The authors surveyed 130 companies and examined reports published in the period between 1 August 2007 and 31 July 2008. With regard to corporate governance, it is reported that 30% of companies complied fully with the Combined Code on Corporate Governance. At 7% of companies the same person occupied the position of chairman and chief executive.

Monday 20 October 2008

Europe: the challenges for corporate governance

Last week the European Internal Market Commissioner, Charlie McCreevy, spoke at a conference on European corporate law and corporate governance organised by MEDEF, the Paris Bar Association and the Association française des entreprises privées (AFEP). In his speech, Mr McCreevy highlighted several challenges for corporate governance in Europe. The following extracts deserve attention because of the indications they provide about future policy at European level:

In the past 10 years or so, corporate governance codes have either been adopted or modernised in many European countries. These codes have, in general, served EU companies well. They are important instruments in the area of corporate governance. However, that does not mean that codes are always the right solution. In certain circumstances, binding rules may be necessary. The current financial crisis has pushed systems of corporate and internal governance across the global financial system to the limit. As we know, these systems have unfortunately been found wanting.

Credit rating agencies played a major role in the market turmoil by greatly underestimating the credit risk of structured credit products. We can no longer leave it to the rating agencies themselves to deal with this. This business is much too important for the stability of the financial markets for us to sit by and watch from the sidelines. And that is why, I intend to propose in the next few weeks, a legally binding registration and external oversight regime whereby European regulators will supervise the policies and procedures followed by the CRAs. Reforms to the corporate and internal governance of rating agencies will also be included.

It seems that clearer guidance may be needed from policy makers [with regard to remuneration]. Only about a third of Member States followed the Commission's 2004 recommendation that shareholders should be able to vote on the remuneration criteria applying to board members. Shareholders must have a say on this - and they must be more engaged. However, I note that the issue of remuneration for executives now figures in some of the emergency measures that certain of our Member States have taken in response to the financial crisis. That must mean that the message is hitting home. 

Availability of independent board members alone is not a guarantee for a well functioning board. Indeed, the current turmoil has led many to question the usefulness of simply requiring independent board members. The whole of the board and the individual board members must not only be competent in relation to their tasks; they must also excercise a collective responsibility and due diligence with respect to the company. And I include non executive directors in this. That does not mean that companies should look for board members only within the traditional circles or the so called "old boys" network. Why not cast the net wider.

I am convinced that active shareholders are a pillar of good corporate governance and have a role in the supervision of the company. But what if they become too active? And are they destructive if they only take a short term view? Here my answer is dialogue. Let shareholders explain their vision and their interests and share the philosophy of the management with them. In this respect, it should be noted that hedge funds, as a type of 'activist' shareholders generally improve the performance of investee companies. This perception is widely held. But shareholders must not take on the role of management. Strong management with well organised, diligent boards, conscious of the long term health of the company is crucial".

Europe: company law and corporate governance - infringement proceedings

The European Commission has begun infringement proceedings against 12 Member States in respect of their failure to implement certain Directives in the company law and corporate governance fields. Further information is available here.

UK: a global framework for bankers' pay?

In a report published in yesterday's Sunday Times newspaper, it is noted that the FSA's chairman, Lord Turner, "is looking to create a standard global policy on remuneration to stop executives holding banks to ransom ... The FSA is to work with America’s Federal Reserve, the Organisation for Economic Cooperation and Development, other European regulators as well as seconding bankers. The ambition is to create a global framework".

Sunday 19 October 2008

UK: Companies House - updated guidance booklets

Companies House has this month updated several of its guidance booklets, including the following: company formation (HMTL, PDF), company names (HTML, PDF), business names (HTML, PDF), directors and secretaries (HMTL, PDF), annual returns (HTML, PDF) and the European Company: Societas Europaea (SE) (HTML, PDF).

Friday 17 October 2008

UK: DBERR consultation on the European Private Company Statute

The Department for Business, Enterprise and Regulatory Reform has published a consultation paper concerning the European Commission's European Private Company proposal. The consultation paper notes (para. 2.7):

The French Presidency hope that broad political agreement can be reached on the Proposal by the end of 2008. This is a very demanding timetable and therefore this consultation will only last five weeks, closing on 21st November".

UK: England and Wales: lifting the veil of incorporation

In Hashem v Shayif & Anor [2008] EWHC 2380 (Fam), Mr Justice Munby provides detailed analysis of the principles governing the circumstances in which the separate legal personality of the company can be ignored (often known as lifting or piercing the veil of incorporation). This issue arose in ancillary relief proceedings brought by an ex-wife against her former husband in which she argued that he and a company were "one and the same" and that, as such, the company's assets belonged to the husband. 

In his judgment, delivered in the Family Division, Munby J. stressed that in determining whether the veil could be lifted, the same principles applied in the Family Division as in the Chancery Division.  In this regard he cited with approval the following dicta of Bodey J. (in Mubarak v Mubarak [2001] 1 FLR 673, p. 682): "it is quite certain that company law does not recognise any exception to the separate entity principle based simply on a spouse's having sole ownership and control". The need for Munby J. to make these points might, at first sight, be surprising but it is clear from his judgment that he believes that some involved with Family Division proceedings do not fully appreciate the principles flowing from the company's separate legal personality (see, e.g., paras [149] and [159]). 

Munby J. accepted as definitive the following statement by Lord Keith of Kinkel in Woolfson v Strathclyde Regional Council 1978 SC(HL) 90, 96: "it is appropriate to pierce the corporate veil only where special circumstances exist indicating that it is a mere façade concealing the true facts". His Lordship also articulated the following principles:
  • Ownership and control of a company are not of themselves sufficient to justify piercing the veil (para. [159]). 
  • The veil cannot be pierced merely because it is thought to be necessary in the interests of justice (para. [160]).
  • The veil can be pierced only if there is some impropriety but this alone is not sufficient: the impropriety must be linked to the use of the corporate structure to avoid or conceal liability (paras. [161] - [162]).
  • There must be control by the wrongdoer(s) and impropriety, i.e., (mis)use of the company by them as a device or façade to conceal their wrongdoing (para [163]).
  • A company can be a façade even though it was not originally incorporated with deceptive intent (para. [164]).

Thursday 16 October 2008

UK: England and Wales: the admissibility of evidence in directors' disqualification proceedings

The Court of Appeal has given judgment today in Secretary of State for Business,  Enterprise & Regulatory Reform v Aaron & Ors [2008] EWCA Civ 1146. The issue on appeal was the admissibility of evidence in directors’ disqualification proceedings. The Secretary of State sought the disqualification of three directors under Section 7 of the Company Directors Disqualification Act (1986) (CDDA). In doing so, reliance was placed on findings of fact and evidence in a report prepared by Financial Services Authority investigators appointed under Sections 167 and 168 of the Financial Services and Markets Act (2000). The report identified failings on the part of the directors in respect of their selling of structured capital at risk products; it contained witness statements, investigators’ findings of fact and conclusions.

The directors argued that the findings of fact and other opinions in the FSA report were inadmissible and in doing so relied on the strict rule of evidence in Hollington v Hewthorn [1943] 1 KB 587. The Court of Appeal (Buxton, Keene and Thomas LJJ) unanimously rejected this argument and provided a strong endorsement of the implied exception to the rule in Hollington in directors’ disqualification proceedings brought under Section 7 and 8 of the CDDA. Thomas LJ (delivering the only reasoned opinion) observed:

…there is good reason to reaffirm not only the principle of the implied exception as extending to whatever is contained in the reports and other materials obtained under the statutory scheme but also its eminent good sense in relation to disqualification proceedings such as this … it cannot sensibly be argued that the admission of such evidence causes any disadvantage to the defendant directors” (para. [31]).

It may be that in a diverse regulatory system within the UK and in a globalised financial and banking services industry, it is necessary to rely on investigative reports carried out by other regulators or under statutory authority in other states and that by analogy, such material can be relied on in disqualification proceedings … I accept that an argument can be made along those lines and the merits of the argument can be decided when it arises, unless Parliament takes the preferable course of amending the CDDA” (para. [37]).

Note: click here for a copy of the FSA's final notice, which provides further information on those matters investigated by the FSA. 

Update (17 October 2008): the case has been reported here by the ICLR (this report will disappear if, as is likely, the case is reported by the ICLR in one of its series of law reports).

Update 2 (20 October 2008): a case summary has been provided here by Maitland Chambers. 

South Africa: Companies Bill - update

South Africa's Department of Trade and Industry has reported that it will today "table the Companies Bill, 2008, in Parliament, to the Select Committee on Economic and Foreign Affairs for ratification and adoption. If the National Council of Provinces (NCOP) approves the Bill, subject to certain amendments, such amendments will be tabled before the National Assembly for concurrence, and thereafter directed to the Presidency for signature".  A copy of the Bill, as it stood on 29 August 2008, is available here

Wednesday 15 October 2008

UK: FRC publishes updated guidance for audit committees

The Financial Reporting Council has today published updated guidance for audit committees. The guidance is not mandatory but is intended to assist listed company boards in their compliance with the Combined Code on Corporate Governance. It replaces the earlier Smith Guidance.

Sri Lanka: revised corporate governance code

A revised corporate governance code has been published in Sri Lanka by the Institute of Chartered Accountants of Sri Lanka (ICASL) and Securities and Exchange Commission. Although the Code relies heavily on the UK's Combined Code on Corporate Governance there are some noticeable differences in emphasis and wording. Both codes stress the important role performed by the chairman but the Sri Lankan code expresses this most succinctly in principle A.3 as follows: "The Chairman’s role in preserving good Corporate Governance is crucial".

Earlier this year, KPMG published a survey of corporate governance in Sri Lanka: it is available here

UK: England and Wales: rejecting an application to disapply the "prescribed part"

The High Court has considered the operation of Section 176A of the Insolvency Act (1986) in Re Courts plc [2008] EWHC 2339 (Ch). Section 176A was introduced by Section 252 of the Enterprise Act (2002) for the benefit of unsecured creditors. It requires the setting aside of a "prescribed part" from a company's net assets for the benefit of unsecured creditors by an administrator, liquidator or receiver.

In Re Courts plc, the joint liquidators applied for an order under Section 176A(5) to disapply selectively the application of Section 176A such that only the largest creditors would receive a share of the prescribed part. The liquidators argued that making a distribution to unsecured creditors with claims of £ 28,000 or less would be disproportionate to the benefits. They calculated that creditors would need to have claims in excess of £ 28,000 before the apportioned average claims handling cost of £ 168 would be exceeded by the likely dividend of 0.6p in the £.

The trial judge, Blackburne J., rejected the liquidators' application and provided a strong defence of the pari passu principle. His Lordship held that the Section 176A(5) power to disapply the application of Section 176A(2) operated on an "all or nothing" basis. Moreover, Blackburne J. observed that if he was wrong on this point he would not have granted the application and noted (para. [22]):

As the figures in the present application indicate, a calculation of the average cost per creditor is at best an informed guess. Yet, based on that informed guess, will be, if I make the qualified disapplication order, the point where the threshold for payment lies and whether therefore a creditor will receive anything. If the average cost per creditor should turn out to be less, the threshold for payment will be correspondingly lower and more creditors could expect to qualify for payment. Then there is the consideration that a creditor with an undisputed claim for £27,999 which it has cost the joint liquidators little or nothing to process might justifiably feel aggrieved if he gets nothing when a creditor with a claim of £28,001 which has involved the joint liquidators in much time and expense in processing, gets something. That does not strike me as at all fair. Indeed, it strikes me as altogether arbitrary".

Tuesday 14 October 2008

UK: Northern Rock board not taking legal action against former directors

In a trading statement published today, the board of Northern Rock has indicated that legal action will not be taken against the company's former directors. To quote directly from the statement:

A review of the conduct of the previous Board in respect of funding and liquidity has been undertaken with the assistance of external advisors, Freshfields and KPMG Forensic. The Board has concluded that there are insufficient grounds to proceed with any legal action for negligence against the former Directors, and has no intention of bringing any such action. The Board has also completed a similar review in respect of the Company’s auditors and has determined that no action is warranted".

Australia: ASIC launches claim against KPMG over Westpoint audits

ASIC has begun proceedings against KPMG in respect of its auditing of companies within the collapsed Westpoint Group. ASIC alleges that KPMG negligently carried out its audits because it failed to identify issues relating to the solvency of the companies and failed to qualify its audits. It is also alleged that KPMG should have informed ASIC that it had grounds to suspect that breaches of directors' duties and companies legislation were taking place within the Group.

The proceedings have been instigated under Section 50 of the Australian Securities and Investments Commission Act (2001), which enables ASIC to commence proceedings for damages in the public interest. ASIC's statement of claim is available here (this PDF is large: over 350 pages and in excess of 15MB). A summary is available here

Monday 13 October 2008

UK: the banking 'bail out' and corporate governance

In his statement to Parliament today, the Chancellor provided further information about the governance changes in those banks which will benefit from the Government's £ 37 billion of funding. 

With regard to Lloyds TSB plc and HBOS plc, the Government will purchase ordinary and preference shares when the merger is complete (representing about 44% of the share capital in the merged bank) and will appoint two independent board members. No board member will receive a cash bonus this year.

In the case of Royal Bank of Scotland plc, the Government will take up to £ 15 billion of ordinary shares and £ 5 billion of preference shares. The Government's investment potentially represents a 63% interest in RBS plc. Three independent board members will be appointed by the Government and no bonus will be awarded to any board member this year.

Note: It is not clear from the Government's announcement whether the Government appointees will replace existing non-executive directors. It is also unclear what will happen with bank bonuses beneath board level. 

UK: Prime Minister calls for "a new international financial architecture for the global age"

On the day that saw the Government provide the UK's largest banks with £37 billion in order to promote financial stability, the Prime Minister delivered a speech in which he called for "new international financial architecture for the global age". Here is an extract in which the Prime Minister touches upon several governance issues including director competency:
...we must now reform the International financial system around agreed principles of transparency, integrity, responsibility, good housekeeping and co-operation across borders.

First transparency. We must now insist on openness and disclosure, with an immediate adoption of the internationally agreed accounting standards - and the standards being brought forward for the valuation of assets. And transparency must extend also to markets including the trillion dollar credit insurance markets which now play such a central role in shifting risk around the system.

Second integrity. We must tackle once and for all the conflicts of interest which have distorted behaviour and undermined trust; and now lie at the heart of public concern. This includes a system of remuneration founded on long term success not short term irresponsibility. We must ensure that those who run our financial institutions have the right incentives.

Third responsibility. We must ensure that all board members have the competence and expertise to manage the risks and so effectively supervise their institutions and do not walk away from their obligations.

Fourth sound banking practice. We must have regulation and supervision that looks at both solvency and liquidity and ensures adequate protection throughout the economic cycle to prevent speculative bubbles when markets are rising and to cushion the impact of shocks when they are falling.

Fifth, we must have a new bretton woods - building a new international financial architecture for the years ahead. Sometimes it takes a crisis for people to agree that what is obvious and should have been done years ago can no longer be postponed. We must create a new international financial architecture for the global age".

UK: FSA statement on remuneration policies + criteria for good and bad remuneration policies

The UK's Financial Services Authority has published a statement concerning firms' remuneration policies in which it observes: "[it] would appear that in many cases the remuneration structure of firms may have been inconsistent with sound risk management". The FSA makes clear that it does not want to become involved in setting remuneration levels but explains that it wishes to see firms adopt remuneration policies which are aligned with sound risk management systems and controls. In this regard, the FSA sets out in an annex to its statement a list of criteria for good and bad remuneration policies. These criteria represent the FSA's initial thoughts and are arranged within the following headings: 
  • Measurement of performance for the calculation of bonuses
  • Composition of the remuneration 
  • Performance adjusted deferred compensation 
  • Governance 
The FSA also explains that its statement does not extend to non-executive director remuneration.

Sunday 12 October 2008

UK: an interview with Paul Myners, Financial Services Minister

Today's Sunday Times newspaper contains an interview with Paul Myners, recently appointed to the Government as Financial Services Minister. Mr Myners observes that there is nothing fundamentally wrong with the tripartite system and, when asked if the Government would impose a limit on remuneration in the banking industry, replied:

The Financial Services Authority is producing a code on remuneration. The FSA has quite correctly concluded that the incentive effects of remuneration arrangements appear to have induced reckless behaviour, and so the FSA view is that if it is not happy with the way incentive effects work it will require a higher capital requirement for the institution, which you could see as requiring more insurance. If you are at the riskier end of banking you will need stronger capital ratios than if at the less risky end of banking.”

With regard to the Government's wider response, Mr. Myners observed:

I think regulation is one aspect of enhancing confidence in financial institutions. Others include self-healing through improved governance, more effective boards, more considered analysis of incentive plans and the behaviours they will produce, and stronger capital. There isn’t a single silver bullet here, regulation in itself without support of those other features will lead to a potential frustration of innovation and probably higher cost of funding.”

Saturday 11 October 2008

UK: The Statutory Auditors and Third Country Auditors (Amendment) (No. 2) Regulations 2008

On 7th October, The Statutory Auditors and Third Country Auditors (Amendment) (No. 2) Regulations 2008 were laid before Parliament. The Regulations come into force on 31 October and amend the Statutory Auditors and Third Country Auditors Regulations 2007 in order to align them with European Commission Decision 2008/627/EC. For further information, see the explanatory memorandum accompanying the Regulations. 

Friday 10 October 2008

Europe: taking fright of the SPE?

An indication of the controversy surrounding the European Commission's proposals for the European Private Company (Societas Privata Europaea) was given by Internal Market Commissioner McCreevy in a speech delivered today in Paris. Mr McCreevy noted that negotiations on the SPE proposal were well underway in the European Council but he added:

I am not surprised to see that Member States are a little frightened by the SPE. It may well create competition to national company forms. But is that really a problem? It is simple; it is easy to set up; it is attractive to business ... Critics of the proposal say that we have left too much freedom to business; that this freedom will lead to mistakes, or worse still, abuse. I believe that not enough has been done to encourage entrepreneurs".

UK: FRC publishes quarterly progress and planning report

The Financial Reporting Council has published the October edition of its quarterly progress and planning report. The report indicates that the FRC has no major projects or activities concerning corporate governance planned for the next quarter. The FRC will, however, soon publish updated guidance for audit committees on corporate reporting risks for 2008 year ends. A revised version of the Smith Guidance on Audit Committees is also expected within the next quarter. The FRC's second progress report on choice in the UK audit market is due to be published later this month.

Thursday 9 October 2008

UK: new corporate governance minister

Following the recent cabinet reshuffle, a new minister has responsibility for corporate governance and company law matters: Dr Ian Pearson MP. Dr Pearson is the MP for Dudley South and has a majority of 4,244 votes. His ministerial responsibilities are split between DBERR (as Under-Secretary) and HM Treasury (as Economic Secretary). Dr Pearson's contributions to parliamentary debates and his voting record can be followed here.

UK: Launch of "Tomorrow's Owners - Stewardship of Tomorrow's Company"

Yesterday saw the launch by Tomorrow's Company of the report "Tomorrow's Owners - Stewardship of Tomorrow's Company". The report reviews changes in the ownership of company shares and argues that there are different roles for shareholders. It accepts that not all shareholders want to be "stewards" - those influencing companies in the direction of long term sustainable progress - but argues that investors wishing to act as such should be supported. The report identifies the following questions (to quote directly from the press release):
  • What can be done to address the lack of alignment between the interests of some investors and some companies?
  • What regulations or frameworks are needed to underpin stewardship – protecting the long-term health of a company and supporting global growth?
  • Can regulators and the law continue to treat all shareholders in the same way?
  • Why should a CEO extend the same time and co-operation to a short-term investor seeking to profit by movements in the company’s share price as to a long-term intrinsic investor?
  • What does stock-lending do for the concept of stewardship?
  • Why do pension funds allow stock-lending across the board when it can harm their longer term approach in particular situations?
  • Doesn’t the practice of borrowing shares to vote negate the stewardship role?
  • Why don’t pension funds do more to influence the activities of the hedge funds and private equity vehicles through which they invest, especially where the actions of those funds can compromise their longer term interests?
  • Government ownership has been extended to a number of strategic financial institutions recently. Is it necessary to review the case for state ownership of strategically important industries – energy, defence, food - or could foreign ownership help to guarantee economic interdependence and its wider benefits?
  • Shouldn’t responsible investment criteria apply to debt holders as well as equity?
Further information is available in this press release (in Word format).  The report is not available online but is available for purchase. It has been discussed in the Financial Times newspaper - see here

Wednesday 8 October 2008

UK: England and Wales: bonus payments, dividends and unfair prejudice

In Hecquet v McCarthy [2008] EWHC 2279 (Ch) it was argued before the High Court that various bonus payments, and the non-payment of dividends, were unfairly prejudicial under (what is now) Section 994 of the Companies Act (2006) (the unfair prejudice remedy). Such claims are not that unusual under the unfair prejudice remedy but the trial judge's decision is interesting because of the comments made regarding the payment of dividends. 

In finding the bonus payments to be unfairly prejudicial, the trial judge observed that they represented an attempt to prevent the shareholders receiving the benefits of a lucrative contract. His Lordship also held that the bonus payments breached the director's duty to act fairly between shareholders and that the board's failure to consider paying dividends was also a breach of duty. With regard to the latter, the judge observed (para. [84]):

"This is not a case where the board has bona fide decided not to declare dividends in the best interests of the Company. It is a case where the board has consistently failed to consider whether or not to declare dividends, and that must be a breach of duty".

Note: the decision has not yet been posted on BAILII (if it does appear, this post will be updated).

France: executive pay - code of conduct published

The Financial Times newspaper has reported (online edition, October 7): "The French government on Tuesday ordered companies to rein in executive pay and curb reward for failing top management or face legislation early next year. Businesses were told to comply with a new industry code of conduct, published on Monday, that would restrict severance payments for departing bosses and the award of stock options".

Information (in French) about the new code of conduct is available in this video

Tuesday 7 October 2008

UK: Banking Bill introduced into the House of Commons

The Banking Bill has been introduced into the House of Commons. Amongst other things, the Bill provides for: the establishment of a permanent statutory framework (the special resolution regime) to deal with banks in financial difficulties; new regimes dealing with bank administration and insolvency; the placing on a formal footing of the Bank of England's role in the oversight of payment systems; changes to the governance of the Bank of England including a new statutory financial stability objective and the establishment of a Financial Stability Committee (a subcommittee of the Bank's court of directors). The Bill is accompanied by explanatory notes - see here

USA: the Emergency Economic Stabilization Act (2008) and corporate governance

Those hoping that the successful passing of the Emergency Economic Stabilization Act (2008) would calm the world's stock markets will be disappointed. But what does the Act contain with regard to corporate governance? Section 111 of the Act is titled "Executive compensation and corporate governance" and provides that any financial institution that sells troubled assets to the Secretary of the Treasury under the Act is required to meet "appropriate standards for executive compensation and corporate governance". As noted in this commentary, the Act is, however, silent on what corporate governance standards the Treasury will apply.

Monday 6 October 2008

UK: directors, accountants and the financial crisis

A couple of articles from today's newspapers deal with two inevitable consequences of the financial crisis: the prospect of litigation and a reassessment of governance structures. The Financial Times newspaper reports the following comments of former Attorney-General Lord Goldsmith: "There will be an avalanche of litigation arising from the credit crisis". Elsewhere, Richard Aitken-Davies, the president of the Association of Chartered Certified Accountants, writing here in the Guardian newspaper, questions the role of directors but has the humility to question the role played by accountants: 

The roles of the chairman and chief executive are ultimately ones of accountability - to shareholders, to customers, to staff and, whether they like it or not, to government, the taxpayer and society at large. But our increasingly well-defined principles of corporate governance have not prevented this crisis. We therefore need to open our thinking to alternative models and, in particular, to the role and effectiveness of independent non-executive directors. If directors ignored bad habits, if they accepted complacency after a prolonged bull market then they should be held accountable. If they have overseen failure, and allowed greed to flourish then they are accountable for this, too. Naivety has also played its part, with well-meaning people succumbing to the seductions of advanced risk management techniques at the expense of common sense. And perhaps we accountants haven't said no enough, either"

Saturday 4 October 2008

USA: "The Race for the Bottom in Corporate Law" - Frank Easterbrook

The Virginia Law Review recently held a symposium to mark the 75th anniversary of the Securities and Exchange Commission (SEC). The keynote address, titled "The Race for the Bottom in Corporate Law", was delivered by Chief Judge Frank H. Easterbrook of the United States Court of Appeals for the Seventh Circuit. Within corporate law scholarship, Judge Easterbrook is perhaps most well known for his book The Economic Structure of Corporate Law, co-authored with Daniel Fischel (considered here).  The following outline of Judge Easterbrook's speech is taken from Virginia Law Weekly (the Virginia Law School newspaper):

The primary focus of Easterbrook’s talk was the application of Judge Ralph Winter’s hypothesis regarding broad state regulation of corporations, particularly of corporate governance. Winter had argued that increased discretion in the hands of corporate managers would, in the end, enable them to design the governance measures that investors want the most. Easterbrook pointed out that economic event studies in the last 20 years or so had confirmed this: securities prices would rise and fall depending on different structures of governance, and investors could indeed move to those forms which they found most attractive.

The national government, however, has been “hampering the market of corporate control” in recent years. Easterbrook singled out the Sarbanes-Oxley Act passed in the wake of the Enron and WorldCom scandals as the major culprit, although he also targeted the recently imposed limits on short sales and changes to the tax code. Sarbanes-Oxley, Easterbrook argued, mandated corporate governance structures that often set up an “adversarial mode of corporate governance” that made little sense for the companies forced to adopt them and were, ironically, not at all what investors wanted.

Worse, Easterbrook argued, the “national government could win a race to the bottom in a way that the states cannot,” since in “moving toward a national system of corporate governance,” corporations could not simply change to another jurisdiction’s corporate law if dissatisfied with federal requirements. Easterbrook argued that in theory there are four basic models of corporate governance, and that any one could be appropriate for a corporation at a given time. “A reduction in [this] opportunity set,” the judge concluded forcefully, “makes everyone worse off, all the time—and that’s what the Sarbannes-Oxley Act has done.” As further evidence, he noted that event studies indicated that the Act actually depressed stock prices, and that Enron was, in fact, a model corporation under the governance terms of the Act.

Easterbrook had some suggestions on what might happen as a result of the “Race to the Bottom.” He noted that many firms are “opting out” of the system by becoming private and thereby removing themselves from regulation. He also argued that the international market could supply a response to Sarbanes-Oxley, the ultimate result of which may be the flow of capital to other countries with more desirable governance regulations.

Friday 3 October 2008

Europe: exempting "micro-entities" from the Accounting Directives - McCreevy recommendation

Internal Market Commissioner Charlie McCreevy has stated that he will recommend to the European Commission that Member States should be given the option to exempt "micro-entities" from the Accounting Directives (Fourth Council Directive 78/660/EEC (annual accounts of companies with limited liability) and the Seventh Council Directive 89/349/EEC (consolidated accounts of companies with limited liability). Mr McCreevy also announced that the time has come to overhaul the Accounting Directives and in this regard he stated that his review would be guided by the "think small first" principle. 

Thursday 2 October 2008

UK: Companies Act (2006) implementation - directors' duties and financial assistance

Amongst the provisions of the Companies Act (2006) which came into force on 1 October are those concerning directors' duties and financial assistance. It is no longer unlawful for private companies to provide financial assistance for the purchase of their own shares (see here for further information and note this post). With regard to directors and directors' duties, the following provisions are now in force:

[a] The duty of directors to avoid conflicts of interest (Section 175) and not to accept benefits from third parties (Section 176). 

[b] The duty of directors to declare interests in proposed transactions or arrangements (Section 177) and the duty to declare interests in existing transactions or arrangements (Sections 182-187).

[c] The requirement for all companies to have at least one director being a natural person (Section 155).  There is, however, a period of grace for certain companies - see here.

[d] The minimum age requirement for directors: 16 years (Section 157). 


[a] Section 170 provides, inter alia, that directors' general duties within Sections 171 to 177 are owed to the company and that they replace the common law rules and equitable principles upon which they are based.  This said, Section 170 also provides that the general duties "shall be interpreted and applied in the same way as common law rules or equitable principles, and regard shall be had to the corresponding common law rules and equitable principles in interpreting and applying the general duties".

[b] Companies House has published information on the provisions coming into force on 1 October 2008 - see here

UK: market conditions and the challenges for corporate reporting - FRRP annual report

The Financial Reporting Review Panel has published its annual report with regard to its reviews of reports and accounts for the year to 31 March 2008. The main purpose of the report is to provide guidance for those preparing accounts in the future. It therefore includes comments from the Panel on the challenges for corporate reporting presented by the so-called "credit crunch".  In this regard, the report identifies several issues which are of particular relevance:
  • Selection of accounting policies.
  • Disclosure of management judgments and estimation uncertainties.
  • Sufficiency of descriptions of revenue recognition policies.
  • Consolidation.
  • Principal risk and uncertainty disclosure in the business review. 
With regard to its review of accounts and reports, the Panel noted in its report:

... the current standard of corporate reporting in the UK is good. The areas of reporting that prompted most questions were those dealing with more complex accounting issues or where the exercise of judgement by management is most critical. The Panel did not identify any systemic issues requiring immediate remedial action.

The Panel published two press notices in the year in respect of companies that had failed to comply with the requirements of the Act. These companies restated comparative amounts in their next set of annual and half-yearly financial statements ... 88 companies undertook to make future changes to their reporting. Several of these were asked to refer to the Panel’s intervention when explaining the changes in their accounts".