Tuesday 30 June 2009

UK: Code of Practice on Taxation for Banks - draft published by HMRC

HMRC yesterday published for consultation a Code of Practice on Taxation for Banks. HM Treasury explained, in an accompanying press release, that the Code "sets out the behaviours the Government expects from banks in the management of their tax affairs and in their relationship with HMRC, including governance, tax planning and the relationship between banks and HMRC". 

Section 1 of the Code states that banks should comply with the spirit as well as the letter of tax law, with reference to the intention of Parliament. Banks should not, the Code provides, undertake tax planning that aims to achieve a tax result that is contrary to the intention of Parliament. This is supported by Section 3 which provides that banks should not engage in tax planning other than that which supports genuine commercial activity.

Section 2 of the Code deals with governance and contains the following provisions:

The bank should have a documented strategy and governance process for taxation matters encompassed within a formal policy. Accountability for this policy should rest with the UK board of directors or, for foreign banks, a senior accountable person in the UK.

This policy should include a commitment to comply with tax obligations and to maintain an open, professional, and transparent relationship with HMRC.

Appropriate processes should be maintained, by use of product approval committees or other means, to ensure the tax policy is taken into account in business decision-making. The bank’s tax department should play a critical role and its opinion should not be ignored by business units. There may be a documented appeals process to senior management for occasions when the tax department and business unit disagree".

With regard to enforcement of the Code, the Government explains (para. 4.8 ):

The Government expects banks who adopt the code to comply with it. Where banks do not comply, or where HMRC has concerns about compliance with the Code, HMRC will raise the issue with the board of the bank. Where appropriate, HMRC will raise their concerns with the senior non-executive. Where non-compliance is found to be deliberate and the officer of the bank who signed up to the Code is a member of a professional body, HMRC will consider making a report to that body. We welcome views on this approach to enforcement".

UK: NAPF's Pension Fund Engagement with Companies 2009 survey

The National Association of Pension Funds has published its Pension Funds Engagement with Companies Survey 2009. In the accompanying press release it is stated: 

Key findings from the National Association of Pension Funds 2009 engagement survey show that nearly half (49%) of pension schemes will spend more time scrutinising the actions of their fund managers on engagement issues as a result of the economic crisis. Over three quarters of funds (78%) said they will give more time to reviewing reporting and 57% said they will pay more attention to votes cast. The survey examined the engagement policies and practices of pension schemes with assets totaling nearly £200 billion".

Monday 29 June 2009

UK: TUC Fund Manager Voting Survey 2009

The Trades Union Congress has today published its Fund Manager Voting Survey 2009: a survey of the voting and engagement records and processes of institutional investors. According to the TUC, the survey "is intended to give trustees information on how various fund managers exercise voting rights in relation to controversial issues at company AGMs, and an insight into voting and engagement processes".

The survey contains full or part responses from 23 organisations (29 organisations did not respond) and covers the 13 month period 1 July 2007 to 31 July 2008. The survey finds (to quote directly from it):

There is a clear divide amongst investors in their willingness to challenge management. At one end of the spectrum, eight respondents supported over 90% of management proposals on which voting decisions were sought. At the other end six respondents supported less than 50% of management proposals.

Investors say that remuneration is the issue over which it is most likely that they will oppose management. This is confirmed in the voting data supplied to the survey. Respondents do not appear to have had a particular issue with remuneration arrangements at UK banks, as votes on the banks’ remuneration reports are not out of line with those at other companies. Only a single investor in the sample – Co-operative Insurance Society – opposed the RBS acquisition of ABN Amro. All other respondents voted in favour".

The protection of minority shareholders in listed companies

The Technical Committee of the International Organization of Securities Commissions established a corporate governance task force in 2005. In 2007 the task force published a report titled Board Independence of Listed Companies. A further report - Protection of Minority Shareholders in Listed Issuers - was published last week and summarises information gathered by the task force concerning the rules designed to protect minority shareholders in eighteen jurisdictions.

The report provides a useful starting point for research but its limitations must be noted: the Task Force did not explicitly require respondents to assess or comment on how the rules were implemented or applied in practice. The eighteen jurisdictions included are: Australia, Brazil, Canada, Germany, Hong Kong, Israel, Italy, Japan, Mexico, the Netherlands, Poland, Portugal, Spain, Switzerland, Thailand, Turkey, the United Kingdom and the United States of America.

UK: England and Wales: an unlawful distribution in disguise?

The Court of Appeal has given judgment in Progress Property Company Ltd v Moorgarth Group Ltd [2009] EWCA Civ 629. The case concerned what Mummery LJ described as a short and basic point of company law: what are the circumstances in which a sale of assets at an undervalue by a company to, or at the behest of, a shareholder in the company should be held ultra vires on the ground that, in substance, the sale is an unlawful distribution in disguise? Mummery LJ (delivering the only reasoned judgment, with which Touslon and Elias LJJ concurred) observed (paras. [23] and [31]):

The common law rule devised for the protection of the creditors of a company is well settled: a distribution of a company's assets to a shareholder, except in accordance with specific statutory procedures, such as a winding up of the company, is a return of capital, which is unlawful and ultra vires the company.

In my judgment, the deputy judge was right in holding that the sale of the ... shares was not a disguised distribution of assets either in breach of the common law rule or in breach of section 263 [of the Companies Act (1985)] or as being for a collateral purpose. It was an intra vires sale of shares for a proper purpose, even if, as was assumed, it was at an undervalue, and even if Mr Moore [the director negotiating the sale] ought to have appreciated that fact. The authorities demonstrate that the issue is whether, on the facts as they were genuinely perceived by Mr Moore to be, and having regard to the nature and character of the payment, it could properly be characterised as something other than a gratuitous distribution to shareholders. In [Aveling Barford Limited v Perion Limited & Ors [1989] BCLC 626] and [Re Halt Garage (1964) Limited [1982] 3 All ER 1016] the payment (or at least part of it) could not. Here the payment could only properly and objectively be characterised as consideration for the sale of an asset without any element of gratuitous benefit".

Note: for further discussion of the issues in this area, and the Aveling and Re Halt cases, see: Micheler, E., Disguised Returns of Capital - An Arm's Length Approach (December 8, 2008), available at SSRN: http://ssrn.com/abstract=1313144.

Update (30 June 2009): the case has been reported by the ICLR as part of its WLR(D) service: see here

Friday 26 June 2009

UK: short selling disclosure regime - continuation announced by FSA

The Financial Services Authority has announced the continuation of its short selling disclosure regime, following a consultation earlier this month. For information about the action taken by other European regulators, see the list of measures, updated today in respect of Austria, maintained by the Committee of European Securities Regulators

UK: Bank of England says fundamental reform of financial regulation required

Ahead of the HM Treasury white paper on financial regulation reform, the Bank of England has published issue 25 of its bi-annual Financial Stability Report in which it identifies five areas where reform is needed. These are explained in section 3, which begins:

The financial system should be capable of absorbing shocks from the economy and from financial markets rather than generating them. It also needs to be much better able to support economic activity on a sustainable basis, without relying on large-scale publicly funded support to weather shocks. This will require fundamental changes to the way the financial sector is regulated, supervised and manages its own affairs".

The five areas identified are: [1] stronger market discipline; [2] greater self-insurance (financial institutions' own resources should be the first line of defence against financial pressures); [3] improved management of risks arising from interactions among firms and with the real economy; [4] banks should not be too big or complex (the size and structure of the financial system needs to be compatible with maintaining financial stability); and [5] clear principles for public safety nets.

UK: FSA annual report published

Earlier this week the Financial Services Authority published its annual report for the period 1 April 2008 to 31 March 2009. In his chairman's statement, Lord Turner provides an overview of what the FSA has done to meet its regulatory objectives. He notes that maintaining financial stability has been a major task and states that it should explicitly be made one of the FSA's statutory objectives under the Financial Services and Markets Act (2000). This may well happen: the Financial Times today reports:

Alistair Darling is planning a new Banking Act this year that will strengthen the role of the Financial Services Authority, in an unexpected move that follows criticism that the Bank of England failed to warn adequately of the impending banking crisis. The chancellor wants to give the FSA a new statutory objective of maintaining financial stability, making it partly responsible for a function currently entrusted to the Bank".

Hector Sants, in his chief executive's report, describes the FSA's regulatory philosophy as "outcomes focused" and notes the shift away from "principles based" regulation. Mr Sants observes:

We are now focusing on questioning the overall business strategy of the institution and more generally on the possibility of risk crystallising in the future. This is a fundamentally different way of supervising firms. We are now making judgements on the judgements of senior management and taking action if, in our view, those decisions will lead to risks to our statutory objectives. We believe this move from regulation based only on observable facts to regulation based on judgements about the future is vital to help us deliver our statutory objectives".

Another example of the FSA's new approach is given in section one of the report - titled "Financial stability and supervision of firms – responding to the crisis" - where the FSA's Supervisory Enhancement Programme is explained. It is stated:

The presumption is that any application submitted by a high-impact firm for the roles of Chair, CEO, Finance Director or Risk Director will result in an interview. Other [Significant Influence Function] candidates may also be interviewed at the supervisor’s discretion – for example, if there are concerns about the compliance culture of the firm or the track record of the candidate. In the first six months of the enhanced approval process, 51 SIF interviews were carried out. In a number of cases applications have been withdrawn following interviews that raised questions concerning the candidate’s fitness or competence. The focus on assessing key competencies, as well as matters of probity and past compliance record, represents a significant shift in our supervisory approach".

The appendices are particularly interesting. Appendix 1 contains data on the costs of regulatory authorities in other jurisdictions including the USA, France, Germany, Hong Kong, Ireland, and Singapore. Appendix 5 contains statistical information in relation to cases investigated by the FSA's Enforcement Division and the outcomes of the investigations. 

UK: the Companies Act 2006 (Consequential Amendments, Transitional Provisions and Savings) Order 2009 - draft published

A draft of the Companies Act 2006 (Consequential Amendments, Transitional Provisions and Savings) Order 2009 has been published on the OPSI website: see here (html) and here (pdf). As the accompanying explanatory memorandum states, the principal purpose of the Order is to amend legislation which contains references to earlier Companies Acts and the definitions found therein. The Order will come into force on 1 October 2009. 

UK: the Community Interest Company (Amendment) Regulations 2009 - draft published

A draft of the Community Interest Company (Amendment) Regulations 2009 has been published on the OPSI website: see here (html) and here (pdf). The Regulations are scheduled to come into force on 1 October 2009. In the accompanying explanatory memorandum the changes introduced by the Regulations are explained:

The principal changes include provisions to enable a CIC to convert to the asset locked form of a community benefit society (a form of Industrial & Provident Society) or a Scottish charity to convert to a CIC; to remove requirements relating to alternate Directors and casting vote; and to add a reasonable person’s test to the section of the community aspect of the community interest test".

Thursday 25 June 2009

UK: FRC review of the Combined Code - submissions published

The Financial Reporting Council has published the submissions received as part of its review of the Combined Code: see here. A progress report will be published next month. Some of the responses are described here by the Financial Times newspaper

Netherlands: Cabinet endorses updated Code

Last December the Dutch Corporate Governance Monitoring Commission published an updated edition of the Dutch Corporate Governance Code. The updated code has received the endorsement of the Cabinet. In a press release published last month by the Ministry of Finance it was stated:

The Cabinet will statutorily assign the Code as the code of conduct to be complied with to replace the Tabaksblat Code of 2003. The Code includes valuable additions in the fields of executive pay, risk management in listed companies, the diversity of members of supervisory boards, the shareholders' responsibility, take-overs and socially sound entrepreneurship. The updated Code puts in further details of the accountability of management boards, of supervisory boards and of shareholders of listed companies and pays more attention to the stimulation of 'desired behaviour'".

The press release also stated that the Cabinet intends to: [a] oblige instiutional shareholders to report on their compliance with those parts of the new code which apply to them and [b] appoint a new Commission, taking the place of the Frijns Committee, to monitor compliance with the code. 

Wednesday 24 June 2009

UK: England and Wales: insider trading - R v McQuoid

The Court of Appeal (Criminal Division) decision R v McQuoid (10 June 2009) was noted here earlier this month. The decision has since been reported in the Times Law Reports - see here - and will be available to view, free of charge, for at least the next seven to ten days. The decision has not yet been published on BAILII

UK: Walker Review - consultation paper due on 16 July

A quick update: the Walker Review consultation paper on corporate governance in the banking industry will be published on 16 July. Update (16 July): see this post for a summary and a link to the consultation paper. 

Philippines: SEC adopts revised corporate governance code

The Philippines Securities and Exchange Commission has adopted a revised corporate governance code. The first page of the revised code indicates the companies to which it applies. Unlike the UK's Combined Code, the revised code stipulates board size: at least five and no more than fifteen members. 

The revised code also requires companies to appoint a compliance officer, reporting directly to the chairman of the board, with responsibility for monitoring the company's compliance with the code and the rules of other regulatory agencies. It is the compliance officer's responsibility to issue a certificate each year explaining the extent of the company's compliance with the code and the reasons for any deviations. The compliance officer can be summoned before the SEC to answer questions about the company's compliance with the code. 

Tuesday 23 June 2009

Europe: Commission consults on the adoption of International Auditing Standards

The European Commission has published a consultation paper considering whether the International Standards on Auditing of the International Auditing and Assurance Standards Board should be adopted for statutory audits required by Community law (such adoption is permitted by Article 26 of the Statutory Audit Directive (2006/43/EC)). The Commission has also published an independent study exploring the costs and benefits of such adoption (an executive summary is available here).  

UK: accounts and accounting reference dates - updated guidance from Companies House

Companies House has published a revised edition of guidance booklet GBA3: Accounts and Accounting Reference Dates: see here (html) and here (pdf). The booklet explains the rules governing the public disclosure of accounts in respect of accounting reference periods beginning on or after 6 April 2008. 

OECD report - Finance, Competition and Governance

The OECD has published Finance, Competition and Governance: Priorities for Reform and Strategies to Phase-Out Emergency Measures. The report outlines guiding principles and proposals for reforming incentives in financial markets. The report contains proposals intended to strengthen financial firms' corporate governance (see pp. 52-54) and begins:

Many firms that have received public funds or are owned by governments are already subject to special conditions on governance and remuneration. During such periods, they should be run as close as possible to the OECD Guidelines to ensure appropriate governance. Before phasing out emergency measures, it is incumbent upon governments and authorities to improve rules and guidance for the governance of financial firms in general, both to enhance risk control and to redress other weaknesses that contributed to the present crisis. Since the OECD Principles of Corporate Governance have not been properly implemented by a number of financial firms in the past, there is also a need for improved monitoring and peer review processes. The OECD Steering Group on Corporate Governance examined the implementation issues at its meeting in April 2009, and some of its basic recommendations follow".

These recommendations include (to quote directly from the report):

[1] Independent and competent directors: strengthening the fit and proper person test to competence and knowledge of governance; term limit on board membership for independent directors without a direct stake in the company; formal separation of the role of the CEO and the Chair in banks, except in special circumstances.

[2] Risk officer role: all financial firms should require a ‘Chief Risk Officer’, responsible for risk management, with direct access to the board (not necessarily a Risk Committee but probably not the Audit Committee).

[3] Fiduciary responsibility of directors: the complexity of some corporate groups (large and complex businesses) has been identified as both governance and risk control issues during the crisis. To the extent that this issue cannot be adequately addressed by policies to separate and simplify the activities of affiliates in complex groups (see above), in some jurisdictions there may be a need to clarify the fiduciary duty of directors.

[4] Remuneration: reformed and strengthened boards would improve governance, especially if it was clear that the duties of directors were extended to overseeing sources of risk and the compatibility with the institutions financial strategy. This would make the link between risk management and compensation policies clear and transparent. Where possible, tax incentives could also help to encourage a greater use of compensation linked to longer-run performance.

Monday 22 June 2009

UK: England and Wales: is an industrial and provident society a company?

This was one of the questions before the judge in Re Dairy Farmers of Britain Ltd. [2009] EWHC 1389 (Ch). It arose in the context of Section 72A(1) of the Insolvency Act (1986), which provides that "[t]he holder of a qualifying floating charge in respect of a company's property may not appoint an administrative receiver of the company" (emphasis added). The trial judge held that Section 72A(1) did not apply to industrial and provident societies, which should not, for the purposes of this section, be regarded as companies. 

A summary of the case has been provided here by the ICLR as part of its excellent WLR Daily service (the summary will be removed if the case is subsequently reported in one of the ICLR's series of law reports). 

UK: key trends in the accountancy profession - POB report

The Professional Oversight Board has published the seventh edition of its key facts and trends in the accounting profession report. Of particular interest are the data concerning auditing. The report notes:

The number of registered audit firms has been gradually declining. The overall number of audit firms registered in 2008 (8,179) is 25.7% lower than the number in 2003 (11,006). However, the rate of decline has been less in recent years. The number of registered audit firms fell by 4.6% in 2008.

Over the past five years, the Big Four have experienced a steady increase in the proportion of fee income from non audit work for non audit clients. In contrast their fee income from non audit work to audit clients has been falling.

... there has been a small increase in the proportion of listed companies audited by non Big Four firms".

UK: submissions to the FRC review of the Combined Code - some initial feedback

news report on the Accountancy Age website reports comments from Chris Hodge, head of corporate governance at the Financial Reporting Council, regarding submissions to the FRC's review of the Combined Code. With regard to the current 'comply or explain' approach, Mr Hodge states:

The feedback we are getting is saying the flexibility provided by the [present] code is desirable and there is nothing we are picking up to say that it be changed".

Ireland: DCC plc provides say on pay vote

An entry on the Manifest blog reports: "DCC plc have become the first Irish-incorporated company listed on the Irish Stock Exchange to include an advisory say-on-pay resolution on the agenda for the annual general meeting". The following explanation is provided by the company's chairman in his letter accompanying the AGM notice

From 2009, the Directors have decided to put the Report on Directors’ Remuneration and Interests to a shareholder vote. There is no legal obligation on the Company to put such a resolution to shareholders, so it is an ‘advisory’ resolution and is not binding on the Company. The Board believes that such a resolution is good practice and is an acknowledgement of a shareholder’s right to have a ‘say on pay’".

Friday 19 June 2009

Japan: governance, international accounting standards and financial regulation reform

Three devolopments to report. [1] The Financial System Council study group on the internationalisation of Japanese financial and capital markets has published recommendations for improving the governance of listed companies in "Toward Strong Corporate Governance of Publicly Listed Companies"  (an overview is available here). These are being considered by the Financial Services Agency. The better protection of minority shareholders is an important theme (as it was in the Asian Corporate Governance Association's 2008 white paper), the study group noting:
... there seems to be no end to instances where the interests of minority shareholders are severely undermined when companies raise additional capital from the market. The strengthening of governance in connection with capital policies of listed companies has become a pressing issue".

[2] The Business Accounting Council's Planning and Coordination Committee - which advises the FSA - has published an interim report in which it recommends that companies be permitted to use International Financial Reporting Standards. This is a "landmark decision" according to Professor Sir David Tweedie, chairman of the International Accounting Standards Board.

[3] In a speech delivered earlier this week, Dr. Takafumi Sato, Commissioner at the FSA, described recent and proposed changes to financial regulation in Japan. He noted, inter alia, the increases in disclosure required by financial firms and reported that greater regulation of credit rating agencies was being introduced.

Thursday 18 June 2009

UK: banks boards + the Bank of England and financial stability

At the Mansion House last night: two speeches; two different messages. In his speech, the Chancellor gave little away regarding the Treasury's forthcoming white paper on financial regulation reform. He did, however, repeat a point he has already made with regard to bank boards and corporate governance:

Bank boards must have the right people and the right skills and experience to manage themselves more effectively. And they need to be equipped to ask the right questions. Their focus must be long-term wealth creation, not short-term profits. They must recognise their duty to shareholders is best fulfilled by acting in the interests of their customers and all – not just some – of their employees. And ensure staff are rewarded for long-term success – not for failure. David Walker’s review of banks’ corporate governance will look at how bank boards and institutional investors can manage their businesses more effectively".

With regard to financial regulation, the Chancellor stated:

No one model of regulation has been successful in insulating a country from the current crisis – and we are not alone in strengthening regulation. The Banking Act gave us new powers to deal with failing banks and strengthened the Bank’s existing responsibility for financial stability by putting it on a statutory footing".

But has this gone far enough? In his speech - a video extract of which is available here - the Governor of the Bank of England provided an answer:

The Bank of England has a new statutory responsibility for financial stability. Bank Rate is the instrument we deploy to achieve monetary stability, and should be used exclusively for that purpose. To achieve financial stability the powers of the Bank are limited to those of voice and the new resolution powers. The Bank finds itself in a position rather like that of a church whose congregation attends weddings and burials but ignores the sermons in between. Like the church, we cannot promise that bad things won’t happen to our flock – the prevention of all financial crises is in neither our nor anyone else’s power, as a study of history or human nature would reveal. And experience suggests that attempts to encourage a better life through the power of voice is not enough. Warnings are unlikely to be effective when people are being asked to change behaviour which seems to them highly profitable. So it is not entirely clear how the Bank will be able to discharge its new statutory responsibility if we can do no more than issue sermons or organise burials".

UK: ASB amends three financial reporting standards

The Accounting Standards Board has published amendments to FRS2: Accounting for Subsidiary Undertakings, FRS6: Acquisitions and Mergers and FRS28: Corresponding Amounts. The amendments do not change the requirements of the standards but update them to include references to the Companies Act (2006) and the Large and Medium Sized Companies and Groups (Accounts and Reports) Regulations 2008.

USA: financial regulation reform

The US Government's white paper Financial Regulatory Reform was published yesterday. It heralds significant reform including the creation of new agencies and expanded roles for the Federal Reserve and SEC. The proposals include (to quote from the white paper):

[1] Promoting robust supervision and regulation of financial firms.
  • A new Financial Services Oversight Council of financial regulators to identify emerging systemic risks and improve interagency cooperation.
  • New authority for the Federal Reserve to supervise all firms that could pose a threat to financial stability, even those that do not own banks.
  • Stronger capital and other prudential standards for all financial firms, and even higher standards for large, interconnected firms.
  • A new National Bank Supervisor to supervise all federally chartered banks.
  • Elimination of the federal thrift charter and other loopholes that allowed some depository institutions to avoid bank holding company regulation by the Federal Reserve.
  • The registration of advisers of hedge funds and other private pools of capital with the SEC.
[2] Establishing comprehensive supervision of financial markets.
  • Enhanced regulation of securitization markets, including new requirements for market transparency, stronger regulation of credit rating agencies, and a requirement that issuers and originators retain a financial interest in securitized loans.
  • Comprehensive regulation of all over-the-counter derivatives.
  • New authority for the Federal Reserve to oversee payment, clearing, and settlement systems.
[3] Protecting consumers and investors from financial abuse.
  • A new Consumer Financial Protection Agency to protect consumers across the financial sector from unfair, deceptive, and abusive practices.
  • Stronger regulations to improve the transparency, fairness, and appropriateness of consumer and investor products and services.
  • A level playing field and higher standards for providers of consumer financial products and services, whether or not they are part of a bank.
[4] Providing the government with the tools it needs to manage financial crises.
  • A new regime to resolve nonbank financial institutions whose failure could have serious systemic effects.
  • Revisions to the Federal Reserve’s emergency lending authority to improve accountability.
[5] Raising international regulatory standards and improve international cooperation.
  • International reforms to support our efforts at home, including strengthening the capital framework; improving oversight of global financial markets; coordinating supervision of internationally active firms; and enhancing crisis management tools.
For further information see: white paper | executive summaryremarks by President Obama |

Wednesday 17 June 2009

UK: England and Wales: the Court of Appeal on what is wrong with insider dealing

Earlier this year Mr Christopher McQuoid was found guilty of insider dealing and sentenced to 8 months' imprisonment. He appealed, making several arguments including: the sentence was wrong in principle because the FSA had used his case to signal a change in its policy in cases of insider dealing; the sentence was manifestly excessive and that regard should be had to his previous good character and the fact that the offence concerned a one off transaction. 

The Court of Appeal rejected his appeal (R v McQuoid, Criminal Division, 10 June 2009). The judgment has not yet been published on BAILII but a summary has been provided here by Outer Temple Chambers (where Michael Bowes QC, counsel for the FSA in the case, is based). The court's decision is significant because, in addition to the sentencing guidelines provided, there is discussion of the rationale for the prohibition and prosecution of insider dealing. In the court's view, according to the Outer Temple Chambers summary, insider dealing is not a victimless crime and, when done deliberately is a form of cheating which betrays the principles of confidentiality and trust and undermines public confidence in the market. 

The arguments for and against the prohibition of insider dealing have generated a large academic literature and are well described here by Professor Stephen Bainbridge. The view of the FSA - which the Court of Appeal endorses - is that insider dealing reduces market confidence and represents the unfair exploitation of information (see "The FSA's Approach to Insider Dealing" - a speech by Margaret Cole, the FSA's Director of Enforcement). 

Update (24 June): the court's decision has been reported in The Times - see here - but note that such reports are only available for a limited period of time. 

Europe: update on company law and financial services reform

The Joint Brussels Office of the Law Societies of England and Wales, Scotland and Northern Ireland has published the June 2009 edition of its very useful EU financial services and company law reform update. Previous updates are available here.

Tuesday 16 June 2009

UK: Institute of Directors responds to the Walker and FRC reviews of corporate governance

The Institute of Directors has published its submissions to the Walker Review and FRC review of the Combined Code: see here and here. The IoD's submissions contain seven proposals:

[1] A standardised boardroom appraisal process should be endorsed by the main stakeholders of the UK corporate sector (i.e. regulators, investors and boards). Listed companies should be encouraged to undertake this appraisal process on an annual basis, and disclose the outcome in their annual report.

[2] Chairmen should encourage a greater presence of Chartered Directors on company boards. The Combined Code should include a provision to support this objective.

[3] The non-executive directors of large, complex companies should have greater access to significant in-house administrative support, coordinated by the company secretary.

[4] The Combined Code should provide guidance on the maximum number of board positions that should be held by directors of listed companies.

[5] Shareholders should have an advisory vote on risk at the Annual General Meeting of all listed companies.

[6] Investors should be subject to their own combined code, with regard to which they should either “comply or explain”.

[7] The FRC should produce guidance on remuneration to assist in the implementation of the principles and provisions of section B of the Combined Code.

Monday 15 June 2009

Norway: company boards and gender diversity

Today's Financial Times newspaper contains an extended report exploring the consequences of greater female representation on company boards in Norway following the introduction of a law designed to promote greater gender diversity. The report notes:

Norway has gone the furthest in pushing female participation in the boardroom but other countries are thinking of following its lead. Sweden proposed a similar law in 2006 but a change in government meant it was scrapped. Nonetheless, says Grace Reksten Skaugen, a Norwegian who is a director at Investor, the Swedish financial group, the mere threat of the law was enough to increase the number of women on Swedish boards. ... In legislative terms, the next most advanced country is Spain. Long perceived as a macho society, Spain introduced an equality law in 2007. It recommends that women have an 'equal representation' to men – defined as 40 per cent to men’s 60 per cent – on boards by 2015. There is no compulsion – unlike in Norway where there was a theoretical threat to close down non-compliant companies – but a suggestion that if a company wants government work it should comply".

Austria: Code of Corporate Governance - updated edition (English translation)

A revised edition of the Austrian Code of Corporate Governance was published earlier this year. A draft translation in English is available here (it has not yet been added to the code directory maintained by the European Corporate Governance Institute). The structure of the code is noteworthy: it includes good practice guidance as well as relevant provisions of Austrian company law. There is more about the latter in Annex 4 of the Code.

UK: the Bankers' Pensions (Limits) Bill

The Bankers' Pensions (Limits) Bill was introduced in the House of Commons on 10 March. It is a private members' bill introduced by Ann Clwyd. A copy of the Bill was published on the Parliament website on 12 June: see here (html) and here (pdf). The Bill is scheduled to have its second reading on 3 July but is unlikely to become law. Its purpose is to provide for the forfeiture in certain circumstances of the pensions of directors of banks wholly or partly in public ownership.

Friday 12 June 2009

UK: corporate manslaughter trial begins next week

Earlier this year the Crown Prosecution Service announced that a company - Cotswold Geotechnical Holdings Ltd. (CGH) - had become the first to face the charge of corporate manslaughter under the Corporate Manslaughter and Homicide Act 2007. In an article titled "Corporate manslaughter: making work a much safer place", which appeared in yesterday's Times newspaperProfessor Gary Slapper noted that the trial of CGH will begin next week at Stroud Magistrates' Court

For further information about the 2007 Act see the guidance published by the Ministry of Justice available here.

Australia: Productivity Commission's executive remuneration enquiry

The Australian Productivity Commission began its review of the regulation of executive and director remuneration earlier this year. An issues paper was published in April and comments invited. The deadline for doing so has passed and submissions have now been published. The Commission's draft report is expected in September (register here to be informed when it is published). Meanwhile, the Commission's chairman, Gary Banks AO, provided a very informative update and overview of the issues earlier this month when he spoke at an event organised by the Financial Services Institute of Australasia

Thursday 11 June 2009

USA: facilitating the nomination of directors by shareholders - SEC publishes rules

Last month the Securities and Exchange Commission announced significant proposals to facilitate the nomination of directors by shareholders. The SEC's proposed rules were published yesterday: see here. Comments can be submitted here. Background information is available here.

UK: ASB FRED Improvements to Financial Reporting Standards

The Accounting Standards Board has today published a financial reporting exposure draft: Improvements to Financial Reporting Standards 2009. For further information see here

USA: Treasury statement on executive pay

Yesterday the US Treasury Secretary Tim Geithner issued a statement outlining several principles for the reform of executive pay and highlighting a couple of legislative proposals. Mr Geithner stated:

We intend to work with Congress to pass legislation in two specific areas. First of all, we will support efforts in Congress to pass "say on pay" legislation, giving the SEC authority to require companies to give shareholders a non-binding vote on executive compensation packages. "Say on pay" – which has already become the norm for several of our major trading partners, and which President Obama supported while in the Senate – would encourage boards to ensure that compensation packages are closely aligned with the interest of shareholders.

Secondly, we will propose legislation giving the SEC the power to ensure that compensation committees are more independent, adhering to standards similar to those in place for audit committees as part of the Sarbanes-Oxley Act. At the same time, compensation committees would be given the responsibility and the resources to hire their own independent compensation consultants and outside counsel".

In addition to the statement, further information is available in a say on pay factsheet and a compensation committee independence factsheet

Wednesday 10 June 2009

UK: building society risk management - FSA consultation on specialist sourcebook

The Financial Services Authority has published for consultation a specialist sourcebook for building societies: enhanced supervisory guidance on financial and credit risk management. This contains guidance on the systems and controls which the FSA believes are appropriate and sets out the responsibilities of building society boards in this regard. 

Tuesday 9 June 2009

UK: GC100 submission to the Walker Review

GC100 - the Association for the General Counsel and Company Secretaries of FTSE100 companies - has published its submission to the Walker Review: see here (Word). The GC100 notes (echoing, unsurprisingly, the views of ICSA noted yesterday):

... the consensus is that there is already adequate prescription around corporate governance practices, and the most effective change would be to ensure that NEDs and Boards exhibit the right behaviours, in particular creating an environment where constructive challenge is always welcomed and encouraged. These behaviours should be encouraged rather than prescribed. In practice, it is extremely difficult to try to codify proper behaviours. Further, there is a risk that the available gene pool of NEDs would otherwise be further reduced and a form over substance culture result".

Monday 8 June 2009

UK: Boardroom Behaviours report published by ICSA

The Institute of Chartered Secretaries and Administrators has published "Boardroom Behaviours: a report prepared for Sir David Walker" (and also submitted to the FRC review of the Combined Code). The report concludes (to quote directly from it) that:

  • Appropriate boardroom behaviours are an essential component of best practice corporate governance; and that the absence of guidance on appropriate boardroom behaviours represents a structural weakness in the current system.
  • Had that guidance been available and, more importantly, observed, some of the consequences of the current crisis might have been less severe and that, in any case, prevention of a recurrence of the events of the last year is at least partly dependent upon guidance on appropriate boardroom behaviours being incorporated in the Code.
  • Better articulation of the business case for best practice corporate governance, and more focus on directors’ responsibilities and potential liabilities, should incentivise directors to exhibit appropriate boardroom behaviours. 
Amongst the recommendations in the report is the suggestion that the Code should be accompanied by a best practice guidance note on how boards can create the circumstances necessary for improved boardroom behaviour.

Canada: CCGG publishes 'pay for performance' principles

Several years ago the Canadian Coalition for Good Governance published Good Governance Guidelines for Principled Executive Compensation. Building on this work, it last week published a document containing further guidance based on six "pay for performance" principles. These are: 
  • "Pay for performance" should be a large component of executive compensation. 
  • “Performance” should be based on measurable risk adjusted criteria, matched to the time horizon needed to ensure the criteria have been met.
  • Compensation should be simplified to focus on key measures of corporate performance.
  • Executives should build equity in their company to align their interests with shareholders.
  • Companies should limit pensions, benefits, and severance and change of control entitlements.
  • Effective succession planning reduces paying for retention.

UK: Improving Institutional Shareholders' Involvement in Governance - ISC paper published

The Institutional Shareholders' Committee has published a paper titled Improving Institutional Shareholders' Involvement in Governance in which it makes proposals (including the annual re-election of board committee chairmen) and outlines measures to promote greater dialogue between institutions and boards. Greater collective action by institutions is an important theme developed by the paper.

Friday 5 June 2009

UK: the new Department for Business, Innovation and Skills

The Department for Business, Innovation and Skills came into existence today, following the merger of the Department for Business, Enterprise and Regulatory Reform and the Department for Innovation, Universities and Skills. The Secretary of State for the new department is Lord Mandelson. For further information see here. Click here for a history of the DBERR and its predecessors, dating back to the Board of Trade formed in 1621. 

UK: FRC review of the Combined Code - LSE submission

The London Stock Exchange has published its submission to the FRC's review of the Combined Code on Corporate Governance: see here. In preparing its submission, the LSE sought feedback from a sample of companies (the sample size is not disclosed) and this found "no substantive evidence for wholesale changes to the Code". The LSE nevertheless states that there are some areas which demand further attention, including:

Shareholder engagement. Measures to encourage increased and direct engagement by major shareholders beyond the annual general meeting period would be welcomed. Engagement of such investors with the non-executive directors in particular should be encouraged.

Risk management. In light of challenging economic conditions, boards seem to be adapting their approach to risk management. Operational risks are extensively reviewed, but the financial crisis has highlighted the need to consider contingency planning for ‘high impact/very low probability’ macro risks, which may warrant further guidance.

Non-executive directors. Given the additional focus on the non-executive director role, the FRC might consider reviewing the determination of independence within the Code as a way to help expand the associated non-executive director recruitment pool and to allow more flexibility for companies with widely differing business models to balance the need for independence with the need for sector expertise. An example raised included potentially reviewing the nine-year threshold when determining whether or not a non-executive was ‘independent’. Additionally, there would seem to be merit in creating guidance as to the qualities needed for an effective non-executive chairman capable of challenging the executive directors. Lastly, given the strategic role played by non-executive directors, the need for companies to ensure that they are properly informed in a timely fashion was reinforced, although mandating a separate company secretariat was not supported, which would be expensive and unwieldy for smaller companies particularly.

Positioning of the Code. There is a need to reassert the Code’s authority in light of certain third party interpretations, publications and commentary which have introduced confusion to the corporate governance debate.

Climate Disclosure Standards Board publishes Reporting Framework Exposure Draft

The Climate Disclosure Standards Board has published an exposure draft of its reporting framework. In the accompanying press release, the CDSB explains that its framework:

... [is] designed to assist directors in the inclusion of climate change-related information in companies’ annual reports. The pioneering proposals ... take the form of a global framework that clarifies precisely which climate change data should be reported by corporations and provides management with a set of guidelines designed to streamline disclosure procedures. The inclusion of climate change data in companies’ annual reports will enhance corporate transparency for the benefit of shareholders and prospective investors alike".

Thursday 4 June 2009

UK: the FRC's guiding principles for reporting - Louder than Words discussion paper published

The Financial Reporting Council, as part of its project reviewing the complexity and relevance of corporate reporting, has today published an important discussion paper: Louder than Words: principles and actions for making corporate reports less complex and more relevant. With regard to the purpose of corporate reports, the discussion paper states:

There is a need to re-establish the principle that corporate reports should be designed for their primary purpose – providing investors with information that is useful for making their resource allocation decisions and assessing management’s stewardship".

The FRC states that the most important conclusion from its research is that reporting and reporting regulation should be more principles-based. In this regard, eight guiding principles are proposed, divided into two groups. The first four are directed at regulators and standard setters and provide that regulations should be: targeted, proportionate, coordinated and clear. The final four principles are directed at reports, which it is said should be: focused; open and honest; clear and understandable; interesting and engaging.

The discussion paper also lists five calls for action including: improve cash flow and net debt reporting; ensure disclosure requirements are relevant and proportionate to the risks; and improve the usability of IFRSs.

UK: England and Wales: winding-up in the public interest and the courts' discretion

Judgment in Secretary of State for Business, Enterprise & Regulatory Reform v Charter Financial Solutions Ltd & Ors [2009] EWHC 1118 (Ch) was given towards the end of last month. The case concerned an application by the Secretary of State for the winding-up of five companies under Section 124A of the Insolvency Act (1986) although the winding-up of only one of the companies was contested.  Section 124A provides the Secretary of State with the power to petition for the winding-up of a company where this is "expedient in the public interest"; the court must be satisfied that it is "just and equitable" for the company to be wound-up.

The trial judge (Sir Edward Evans-Lombe) granted the application: the directors were found to have displayed a "serious lack of commercial probity". His decision is of interest because he commented on the scope of the courts' discretion under Section 124A following the Court of Appeal decision Secretary of State for Business, Enterprise & Regulatory Reform v Amway (UK) Ltd [2009] EWCA Civ 32. His Lordship observed (at para. [61]):

... the judge hearing such a public interest petition has a complete discretion as to whether to make a winding up order in the light of the facts, including past conduct, existing at the time the petition comes to be heard and including the fact that, at the time of the hearing, undertakings are being offered by the company to seek to ameliorate criticisms of that conduct and to indicate an intention, in the future, to change it for the better. It will be a rare case where the court declines to make a winding up order where the Secretary of State has rejected the undertakings and pressed for a winding up order. Nonetheless it is open to the court in such a rare case to do so where the facts, in the court's judgment, require it".

Switzerland: FINMA's remuneration proposals

The Swiss Financial Market Supervisory Authority (FINMA) has published for consultation a circular on remuneration systems. It contains wide-ranging proposals regarding the structure of remuneration which will apply to all financial institutions supervised by FINMA. With regard to disclosure, FINMA proposes that institutions should be required to disclose their remuneration policies in a remuneration report and that there should be summary disclosure of the remuneration structure for all employees. Further information is available here

Wednesday 3 June 2009

Ireland: the Corporate Governance (Codes of Practice) Bill 2009

Earlier this year one of Ireland's opposition parties, the Labour Party, published far reaching proposals for the reform of corporate governance. Its leader, Eamon Gilmore TD, has since introduced a Bill in the Dáil: the Corporate Governance (Codes of Practice) Bill 2009. The purpose of the Bill is to require the Central Bank and Financial Service Authority of Ireland to prepare for Ministerial approval a binding code of corporate governance practice. 

Section 6 of the Bill provides some of the code rules including: a prohibition on the same person holding the position of chairman and chief executive; a prohibition on a former chief executive becoming chairman of the same company; and a limit on the number of boards on which a non-executive director may sit. Of particular interest is Section 2, which provides the following definition of "good corporate governance":

... policies and practices relating to the way in which a company is directed, administered and controlled so as - 

(a) to contribute to better company performance by helping a board discharge its duties in the best interests of shareholders,
(b) to facilitate efficient, effective and entrepreneurial management that can deliver shareholder value over the longer term, and
(c) to promote ethical and responsible decision-making, compliance with regulatory requirements and confidence in corporate reporting and governance”.

Tuesday 2 June 2009

UK: Banking Regulation and Supervision - Lords Economics Affairs Committee report published

The House of Lords Select Committee on Economic Affairs has today published its report Banking Regulation and Supervision. The abstract is available here. Conclusions and recommendations are in chapter 11. Chapter 7 deals with bank governance and focuses on non-executive directors, the remuneration of bankers and Government shareholdings in banks. 

With regard to the role of corporate governance, the Committee states in chapter 7 (para. 178):

Maximising shareholder value gives bankers a clear objective, and ensures that they are accountable for their actions. But since bank shareholders, boards and management are not exposed to all of the costs of their decisions, corporate governance legislation as it relates to banks should recognise this fact by modifying shareholder rights as necessary, for example through the introduction of rigorous procedures for shareholder approval of senior bankers' remuneration, of the appointment of directors and of arrangements for assessing risk".

With regard to non-executive directors, the following recommendations are made:

Non-executive directors need experience at high level in business, public affairs and other relevant fields, the personal qualities to obtain clear and full answers from management, and the ability to understand the bank's businesses and the risks being undertaken. Selection procedures should stress these requirements, and directors should be drawn from a diverse range of backgrounds so as to minimise the danger of 'group think'.

There is also a case for a risk committee of non-executive directors with relevant expertise, able to devote significantly more time than a conventional non-executive, to the assessment of the bank's risk profile, independently of the bank's executives. They would need to be remunerated accordingly and be provided with suitable support. All non-executives should have access to outside advice.

Once appointed, non-executive directors should have adequate access to information and advice, from experts inside and outside the firm. Formal mechanisms to acquire this information are desirable. Larger firms should consider establishing a permanent support staff for their non-executive directors.

Bank non-executives need sufficient experience, and a broad enough perspective, to enable them better to challenge the bank's management. To accomplish this, there is a strong case for relaxing term limits on non-executive appointments, and for lifting age restrictions on non-executives.

The possibility that non-executives in financial firms be required explicitly to sign off on their fields of competence should be considered by the firms themselves and, if necessary, by the Government".

The report makes further recommendations concerning the operation of the tripartite model of regulation but it does not go as far as Sir Martin Jacomb in a paper titled Re-Empower the Bank of England published yesterday by the Centre for Policy Studies. Sir Martin, a former director of the Bank of England, calls for a much greater role for the Bank of England in regulating individual banks. Indeed, he argues that the Financial Services Authority should become a subsidiary of the Bank of England.