Wednesday 30 September 2009

Luxembourg: Stock Exchange publishes revised version of its Corporate Governance Principles

The Luxembourg Stock Exchange has published a revised edition of its Ten Principles of Corporate Governance for listed companies. Further information is available here (pdf). A copy of the principles is available in French here; a copy in English will be published here soon. 

Update (4 October 2009): a helpful comment (see below) alerted me to problems with the above links to the principles; this link should work. 

Australia: executive remuneration - Productivity Commission discussion draft published

The Productivity Commission has published its discussion draft Executive Remuneration in Australia. The Commission was asked by the Government to consider, inter alia, the effectiveness of the existing framework for the oversight, accountability and transparency of remuneration practices in Australia. The Commission is recommending changes concerning remuneration committees and the consequences of the 'say on pay' shareholder vote. 

The draft's overview contains the following key points (the draft contains much more detail and provides an excellent overview of the issues):
  • Strong growth in executive remuneration and instances of large payments, despite poor company performance, have fuelled and continue to fuel community concerns that executive remuneration is out of control.
  • Executive pay for larger companies appears to have grown most strongly from the mid-90s to 2000, and increased by over another 50 per cent in real terms to 2007.
  • Remuneration fell in 2007-08, but it is unclear whether this decline has continued. Virtually all recent growth has come from performance pay.
  • In practice, executive pay varies greatly across Australia’s 2000 public companies. For the top 20 CEOs, it averages almost $10 million (150 times AWE) compared to less than $200 000 for CEOs of the smallest companies (3 times AWE). Generally speaking, Australian executives appear to be paid in line with smaller European countries but below the UK and USA (the latter being a global outlier).
  • Globalisation, increased company size, and the shift to incentive pay structures have been major drivers of executive remuneration increases — companies compete to hire the best person for the job, and try to structure pay to maximise the executive’s contribution to company performance.
  • However, some trend and specific pay outcomes appear inconsistent with an efficient executive labour market. Incentive pay ‘imported’ from the United States and introduced without appropriate hurdles led to substantial pay rises in the 1990s, partly for ‘good luck’. Increasing complexity in pay arrangements in subsequent years also may have delivered ‘upside’ unanticipated by boards. Large termination payments could indicate compliant boards.
  • Instances of excessive payments and perceived inappropriate behaviour can reduce public confidence in the corporate sector and impact on equity markets. But the way forward is not to by-pass the central role of boards by capping pay, which would have adverse impacts on the economy.
  • The corporate governance framework should be strengthened, including by: [a] removing conflicts of interest through more independent remuneration committees, and improved processes for use of remuneration consultants; [b] promoting accountability and engagement through enhanced disclosure and strengthening the consequences for boards of shareholders’ ‘say on pay’".
With regard to this final point, the Commission recommends:

The Corporations Act 2001 should be amended to require that where a company’s remuneration report receives a ‘no’ vote of 25 per cent or higher, the board be required to report back to shareholders in the subsequent remuneration report explaining how shareholder concerns were addressed and, if they have not been addressed, the reasons why. If the company’s subsequent remuneration report receives a ‘no’ vote above a prescribed threshold, all elected board members be required to submit for re-election (a ‘two strikes’ test) at either: [a] an extraordinary general meeting or [b] the next annual general meeting".

Tuesday 29 September 2009

UK: consultation on introducing a protected cell regime for OEICs - Law Society response

Earlier this year HM Treasury published a consultation paper containing proposals for the introduction of a protected cell regime for open-ended investment companies (OEICs). The Law Society has published its response, in which it states:

We welcome the Government’s intention to proceed to implement a protected cell regime for OEICs. We are, however, disappointed with the way in which the Government proposes to implement its proposal. We believe that the proposals are flawed and will create uncertainty".

UK: statements of capital under the Companies Act (2006)

ICSA has published a guidance note dealing with statements of capital under the Companies Act (2006). The note explains how companies can deal with the requirement to disclose the amount paid up and the amount unpaid (if any) on each share. The guidance note explains:

Companies with a simple share history are unlikely to experience any problem in completing the requirement for the amounts paid up on each share. Many older and/or larger companies will not have tracked share premium on a per share basis; in addition, where the share premium account has been used, e.g. on a reduction, there is no requirement to attribute this use to particular shares. For these reasons, it may therefore be difficult or impossible for some companies to provide a single amount per share as the amount paid up on all the shares in a particular class of shares.

The Department of Business, Innovation and Skills (BIS) will, in the longer term, review whether a change to Companies House forms or the Companies Act 2006 is necessary. In the meantime, as stated in its FAQ on this subject on the BIS website, BIS has confirmed that companies will have to do what they can to complete this element of the statement of capital. There is a recognition by BIS that companies will have to ‘provide numbers ... that provide a pragmatic allocation of their share premium reserve between shares or classes of shares'".

Note: the guidance note is available to view free of charge but some personal information must be provided in order to do so. 

Monday 28 September 2009

UK: bankers bonuses at Brighton

Yesterday, on the eve of the Labour party conference in Brighton, the prime minister declared that the Government would "ban the old bonus system" with measures representing "the toughest action of any country in the world". Today, in a conference speech, the chancellor provided further detail (although not much): 

... in the next few weeks we will introduce legislation to end the reckless culture that puts short-term profits over long-term success. It will mean an end to automatic bank bonuses year after year. It will mean an end to immediate pay-outs for top management. Any bonuses will have to be paid over years, so they can be clawed-back if not warranted by long-term performance".

UK: FSA board approves listing regime change

At its meeting on Friday, the Board of the Financial Services Authority agreed to restructure the listing regime into two segments - premium and standard - following a consultation which ended earlier this year. A full feedback and policy statement will be published next week. Meanwhile, further information is available in Handbook Notice 92 which was published on Friday. 

Friday 25 September 2009

UK: the Companies Act 2006 (Allotment of Shares and Right of Pre-emption) (Amendment) Regulations 2009

The Companies Act 2006 (Allotment of Shares and Right of Pre-emption) (Amendment) Regulations 2009 were laid before Parliament earlier this week and come into force on 1 October. The Regulations were published on OPSI today - see here (html) and here (pdf) - and their purpose is to remedy defects in the Companies Act (2006) concerning pre-emption rights (sections 560 to 577) which come into force on 1 October. Further information about the defects, and the manner in which the Regulations correct them, is available in the accompanying  explanatory memorandum

USA: CEO pay - Corporate Library survey

The Corporate Library has published its  eighth annual CEO pay survey, a summary of which has been reported here (the full report is not available to download free of charge). This is the first of the Corporate Library's surveys to report a decline in CEO pay, albeit on a modest scale. 

Germany: English translation of the Commission's revised code published

The Government Commission of the German Corporate Governance Code published a revised edition of its code earlier this year. A copy, in English, of the revised code has now been published: see here (html) and here (pdf). A copy of the code with the changes highlighted is available in English here (pdf). 

UK: Takeover Code amendments

A revised edition of the Takeover Code comes into force on 1 October 2009 and will reflect the final implementation of the Companies Act (2006). The amendments are in Panel Instrument 2009/3. The new edition of the Code will be published on 1 October. 

Thursday 24 September 2009

Europe: Commission proposes changes to the Prospectus Directive

The European Commission has today published a proposal for the simplification of the Prospectus Directive. Amongst the proposed changes are the introduction of less comprehensive disclosure requirements for some issues of securities (e.g., those by small companies) and greater clarity concerning the exemptions from the obligation to publish a prospectus.

For further information see: press release | text of proposal | FAQs | impact assessment: full text | impact assessment: executive summary | background information

UK: filing Companies House forms and documents - transitional provisions

Final implementation of the Companies Act (2006) takes place on 1 October. With this in mind, Companies House has published a table setting out the transitional provisions for the most commonly filed forms and documents.

Wednesday 23 September 2009

UK: walker review of bank governance - PIRC response to consultation paper

Pensions Investment Research Consultants Ltd. (PIRC) has published its response to the consultation paper published by Sir David Walker as part of his review of the governance of banks and other financial institutions

PIRC finds the the review's recommendations, overall, to be "a useful contribution to the improvement of corporate governance in the financial sector" but adds that some recommendations would not, as they stand, change behaviour. PIRC's response reveals a preference for greater reliance on compulsory provisions as well universal principles. For example, with regard to recommendation 36 - the remuneration committee chair should stand for re-election a year after a company's remuneration report receives less than 75% of the votes cast - PIRC suggests that it would be simpler to adopt the principle of annual election for all directors. This would permit concerned shareholders to vote against the remuneration committee chair in the same year as opposing the remuneration report. 

PIRC also suggests that a limit should be set on the number of directorships that can be held: a non-executive director holding an executive directorship elsewhere should not be permitted to hold any further non-executive directorships; a non-executive director without executive responsibilities elsewhere should be permitted to hold a maximum of four non-executive directorships.

Europe: the future shape of financial supervision

The European Commission has today adopted draft legislation the purpose of which is to create a new European financial supervision framework. The legislation makes provision for the creation, inter alia, of a European Systemic Risk Board (dealing with macro-prudential supervision) and a European System of Financial Supervisors (a network of national financial supervisors providing micro-prudential supervision of individual institutions). For further details (and background information) see here

France: AFEP/MEDEF remuneration recommendations

AMF (Autorité des marchés financiers) - the French financial regulator - has published (in English) the seventh edition of its Regulation and Listed Corporates newsletter. The newsletter contains a short report on companies' compliance with the recommendations on executive compensation published in October 2008 by the French Private Companies Association (AFEP) and French Business Confederation (MEDEF).

Tuesday 22 September 2009

Accounting standards and standard setting - IASCF Monitoring Board reaffirms fundamental principles

The Monitoring Board of the International Accounting Standards Committee Foundation has published a statement reaffirming the fundamental principles on which accounting standards and the standard setting process should be based. The Board notes in its statement:

Accounting standard setters, both nationally and internationally, are currently considering how accounting standards can be improved in light of the recent credit crisis. We strongly support these efforts and agree that the credit crisis offers important lessons for how accounting standards can be improved to offer greater transparency in times of market stress, to the benefit of both investors and market stability.

... The International Accounting Standards Board (IASB) in its Framework and the U.S. Financial Accounting Standards Board (FASB) in its Statements of Financial Accounting Concepts provide objectives of financial reporting and describe the characteristics of accounting standards that support those objectives. These collectively form the foundation on which individual standards are developed. They are universal in that they apply to financial reporting for businesses of all sizes, across all industries. Though each standard setter has presented these objectives and characteristics in its own way, consistent principles can be readily identified. We view the primary objective of financial reporting as being to provide information on an entity’s financial performance in a way that is useful for decision-making for present and potential investors. To be considered decision-useful, information provided through the application of the accounting standards must, at a minimum, be relevant, reliable, understandable and comparable".

USA: Conference Board Executive Remuneration Task Force publishes report, principles and recommendations

Earlier this year, the Conference Board Governance Centre set up a task force on executive remuneration. The task force has this week published a report containing guiding principles and recommendations. In its report the task force observes: 

In retrospect, executive compensation governance and disclosure reforms implemented earlier in the decade may have changed 'too little, too late' and the current public demand for change has effectively eliminated the option for executive pay practices to gradually evolve, as boards explore and test alternatives over time. Regardless of whether the recent executive pay issues are concentrated in the financial services industry, the task force believes that public corporations and directors are at a crossroads with respect to executive compensation. In order to restore trust in the ability of boards of directors to oversee executive compensation, immediate and credible action must be taken. All boards should examine their executive pay practices and take action to ensure that there are strong links between performance and compensation, that the company employs best practices and avoids the controversial practices described in this report absent significant justification, that they demonstrate effective oversight of executive pay, that there is transparency with respect to the executive compensation decision making processes, and that board and shareholder dialogue is available to resolve executive compensation issues".

Monday 21 September 2009

UK: IoD responds to Walker Review consultation paper

The Institute of Directors has published its response to the consultation paper published by Sir David Walker as part of his review of the governance of banks and other financial institutions. The IoD comments on each of Sir David's recommendations in its response and observes: 

Our overall observation is that the Review provides an informed and reasoned response to a number of important corporate governance issues. To its credit, it has not been unduly influenced by populist demands to overthrow the overall UK model of corporate governance (which is based on a distinctive mixture of hard and soft law) in favour of a heavily regulated approach. Equally, the Review has recognised – given the magnitude of recent governance failures – that an unthinking defence of the status quo is untenable. Reflecting this, it has made a number of significant recommendations for reform.

... In our view, a number of the Review’s recommendations – although potentially relevant to systemically important financial institutions – would not be desirable governance standards for non-financial companies (or for smaller listed and unlisted companies). Consequently, incorporation of the Review’s recommendations into the Combined Code would imply a split of the Code between provisions that apply to financial firms alone, and those that apply to all companies. This is not a step that we would support. In our view, the Combined Code should consist of high level best practice principles for all listed companies. It should not be carved-up on a sectoral basis. A move towards incorporating sectoral provisions into the Code would represent an excessively prescriptive approach to the overall corporate governance framework, and an unwarranted presumption on behalf of regulators regarding how specific industries and sectors should structure their activities".

UK: Lord Myners on bank governance, remuneration and communitarianism

Lord Myners, the Financial Services Secretary, delivered a speech last Friday titled "Developing a new financial architecture: lessons learned from the crisis" at the Financial Times Global Finance Forum. The wide-ranging speech has attracted much attention in the newspapers (see here and  here). With regard to governance - one of several topics covered in the speech - Lord Myners had some strong words, particularly with regard to remuneration in banks. It is well worth quoting this part of his speech in full:

It is critical that we have effective corporate governance – failures of corporate governance were after all a material contributor to the financial crisis. Company directors must make decisions based on long-term performance considerations; investment managers must engage with the companies in which they invest and hold them to account when they fail to think long-term; shareholders, for instance pension fund trustees, must ensure that their managers are appropriately incentivised to engage and held to account when they don’t.

Shareholders must take front-line responsibility for the companies in whose equity they have invested their client funds. Shareholders have previously spoken of their concerns that there were structural impediments to effective engagement. Therefore I welcome the recent announcements by the FSA [here] and the Takeover Panel [here] that their rules do not constitute an impediment to effective collaborative engagement by like-minded shareholders. There is no structural or regulatory obstacle to the pursuit and delivery of effective stewardship. But does the will exist for shareholders and trustees to take seriously their fiduciary and legal responsibilities? Sir David Walker will have more to say on this.

Firms too need to show leadership if they are to regain the public’s trust. This applies to everyone in the governance chain, including banks and their boards. It is time for banks to explain to the public what contributions justify the ever-growing rewards of derivatives traders, speculators and other inhabitants of the so-called casino end of the industry. Where those justifications cannot be easily made, tough questions need to be asked by boards and shareholders. Also, directors and senior management need to take full and explicit responsibility for Risk. Walker is proposing a Board Risk Committee. Good. The challenge to put to the banks is they should not approve new products or engage in complex strategies without the fullest possible understanding of Risk and economic purpose. The government and the regulator cannot do that for them. Clearly that challenge was not always properly applied prior to the crisis.

For obvious reasons, the issue of remuneration is a sensitive one. For some the only answer is to ban bonuses outright, for others, a bank in a free market should be able to pay as it pleases. There is an irony in the labour market not working effectively at the heart of financial markets; the citadel of market efficiency. Supply is not responding to pricing signals. If some activities like proprietary trading are so profitable, banks clearly have an economic incentive to participate, provided risks are properly controlled and regulation complied with. But why do banks appear to be allowing a disproportionate share of surplus to pass to employees? Do these employees really have unique talents, or are they largely reliant on the banks' capital and franchise and the banks' knowledge, from order flow? Logically, the banks would 'institutionalise knowledge', and nurture pools of talent to reduce dependence on individual talent; writing it down and building bench strength. And yet they do not appear to have done this. Derivative traders are not footballers with unique talents, and should not be paid as though they are. Bank owners, our pensions and savings, are possibly being short-changed by ineffective governance and stewardship.

And why do M&A bankers get so hugely rewarded? What skill do the members of this small elite community have which cannot be replicated by others? I suspect a great deal has to do with the authority of the investment bank’s brand – which begs the question why individual bankers frequently pocket 50 per cent or so of the fee charged by the bank to clients. Some get bonuses in excess of £10million per annum (and not always for advising on transactions which deliver all they promise, as we have seen in banking sector transactions in recent years). Why hasn't the market mechanism adjusted pricing? What is frustrating a logical market response? If the market was working rationally, these rewards should have led to a sharp increase in supply and downwards pressure on margins.

These are not the only areas where market discipline doesn't appear to function at the heart of markets. Another example is equity underwriting or agency brokerage. Let me be clear: the primary responsibility for achieving rational outcomes lies with directors and shareholders. They need to explain why they are not pressing much harder, for instance, on fees at M&A or the costs of underwriting. For the Government, our focus in this area is on ensuring that bank remuneration is structured so that it rewards long-term value creation in an environment of rigorous risk control and regulatory compliance; not short-term and unsustainable illusory profit streams.

It is clear is that the prevailing bonus culture failed to take a long-term approach to risk allocation and capital protection. The public is rightly angered by what we have seen with bonuses and remuneration, and change is coming. Higher capital requirements (higher in the case of some activities by multiples rather than percentages) will serve to limit bonus pools for risky activities, reducing the profitability of many activities and dealing strategies, and the G20 has agreed to implement tough rules to ensure clawback and deferral of bonuses in addition to significantly enhanced disclosure of remuneration culture and structures.

There is another very important issue around remuneration: perceived fairness. Organisations with extreme distributions of income are inherently prone to greater instability. It is harder to foster shared values and common culture. It can be a source of risk. The national minimum wage is £5.73 per hour. That means that someone working for forty hours a week for forty-eight weeks a year earns £11,001.60 per annum. According to the Office for National Statistics' Annual Survey of Hours and Earnings (ASHE), "mean" gross annual earnings across all employee jobs in 2008 came to £26,020 and "median" gross annual earnings was £20,801, across all employee jobs. I sometimes think that Remuneration Committees and senior investment banking executives need to be reminded of this reality before they disgorge huge bonuses. And they have to ask themselves whether they have fully explored all options to protect organisational and shareholder interests before going down the route of making payments which many in society find unacceptable in terms of reward for skill and contribution.

We need to get the balance right between the individual and the firm, and the individual and society. Communitarianism emphasises the need to balance individual rights and interests with that of the community as a whole, and the fact that individual people are shaped by the cultures and values of their communities".

USA: SEC introduces new rules and amendments governing credit rating agencies

The Securities and Exchange Commission has voted unanimously to introduce amendments designed to strengthen the regulatory framework governing credit rating agencies. For further information see: SEC factsheet | SEC press release | AmendmentsSEC Chairman speech (wmv) | SEC Chairman speech (quicktime) |

Friday 18 September 2009

UK: England and Wales: financial reporting and the true and fair view

Last year the Financial Reporting Council published a legal opinion written by Martin Moore QC concerning the status of the 'true and fair' concept in UK financial reporting. In his opinion, Mr Moore QC endorsed the analysis contained in earlier legal opinions written by Lord Hoffmann and Dame Mary Arden and observed that the 'true and fair' concept "...remains at the heart of the preparation of financial statements. It can aptly be described as an overarching concept which should inform all decisions by the preparers of such statements" (para. 46). 

Against this background, the judgment of Mr Justice Andrew Smith in Macquarie Internationale Investments Ltd v Glencore UK Ltd [2009] EWHC 2267 (Comm), handed down yesterday, is interesting and important. The judgment contains discussion of the application of accounting principles, Financial Reporting Standards (FRSs) and the relationship between the 'true and fair' concept and FRSs. This makes the case unusual because such issues are not often considered by the courts.  

The case concerned a claim for damages by Macquarie against Glencore for breach of warranties in a sale and purchase agreement for the acquisition by Macquarie of the shares in Corona Energy Holdings Ltd. The warranties provided that accounts had been prepared in accordance with relevant accounting standards and gave a true and fair view of assets and liabilities. Macquarie claimed that Corona's subsidiaries had incurred charges that were not recognised in the relevant accounts and, had they known about these charges, they would have paid less for the shares. The trial judge found Glencore not in breach of the warranties and, in the course of his judgment, observed: 

[Para. 106] ... in order for an item to be recognised as an asset or a liability there should be sufficient evidence of its existence. No doubt evidence will be sufficient for this purpose if, while not itself demonstrating the existence of the item, it sufficiently indicates it to call for enquiries about the position and reasonable and proportionate enquiries would provide sufficient evidence of its existence. But it does not seem to me that extravagant and disproportionate investigations are demanded, or that there is sufficient evidence of an item if its existence might be established only by investigations which the entity or those preparing its financial statements could not be expected to conduct if exercising reasonable diligence and making sensible enquiries.

[Para. 166] ... Although it might be that the quality of being "true" is directed to the accuracy of statements of fact and the quality of being "fair" reflects that accounts involve matters of assessment and judgment, it would be an arid and unhelpful exercise to decide whether financial statements are (i) true and (ii) fair as if they were separate questions. The sensible and generally accepted approach is to recognise that "true and fair" is a composite phrase, and the requirement that financial statements be "true and fair" is a single, indivisible requirement.

[Paras. 167-169] The concept of a "true and fair view" was considered by Mr. Leonard Hoffmann QC and Ms Mary Arden in a Joint Opinion written for the Accounting Standards Committee (the predecessor of the Accounting Standards Board) and dated 13 September 1983 ... [The] Joint Opinion ... explains why the "true and fair" concept necessarily relates to the expectations that accounting practices generate. It is of some interest that Mr Hoffmann and Ms Arden recognise that the application of the "true and fair" concept involves "judgment in questions of degree" and observe that cost-effectiveness is relevant to deciding what information is required in order to prepare financial statements that give a true and fair view. So too, as I have explained, it seems to me that both judgment and the cost-effectiveness and proportionality of potential investigations are relevant to deciding whether there is sufficient evidence to recognise an item as an asset or a liability. None of this means that financial statements that are prepared in accordance with FRSs necessarily give a true and fair view.

[Para 170] ... I find it difficult to envisage circumstances in which, because an entity has no or no sufficient evidence of a liability and therefore does not provide for it in its financial statements, they would on that account fail to give a true and fair view of the entity's financial position. I have already concluded that the Accounts were prepared in accordance with Relevant Accounting Standards, and I cannot accept that, this being so, the Accounts did not give a true and fair view of the assets and liabilities ...".

Thursday 17 September 2009

Germany: 'say on pay' arrives and other remuneration reforms

The German Bundestag yesterday adopted the Gesetz zur Angemessenheit der Vorstandsvergütung (VorstAG, Act on the Appropriateness of Management Board Remuneration). The Act introduces important changes concerning the composition of management board remuneration and the manner in which it is determined by the supervisory board. It also introduces 'say on pay' in Germany, i.e., a non-binding advisory vote on remuneration for listed company shareholders. 

Further information about the Act has been published here (in English) by the Federal Ministry of Justice, from where the following summary of the Act's provisions is taken:

In future, there must be an appropriate relationship between the remuneration of the management board of a public limited company and the management board's performance, and this remuneration may not exceed the usual (sector or country-specific) level of remuneration in the absence of special reasons.

The remuneration structure of listed companies must be oriented towards sustainable corporate development. Components of the remuneration package that are variable should be based on assessment criteria covering a number of years; the supervisory board should provide the possibility of introducing caps in the event of unusual developments.

Share options may be exercised at the earliest four years after the option was granted. This is intended to give managers who benefit from such schemes a greater incentive to act with sustainable goals in mind and in the interests of the company.

The supervisory board's right to subsequently make cuts in the level of remuneration in the event that the company's situation worsens has been extended. Explicit statutory regulation is necessary in this respect since this constitutes an interference with existing contracts. An example of 'worsening' in this sense would be where a company is forced to make redundancies and is unable to distribute profits; in such a case, continuing to pay the agreed remuneration to the management board members would be inequitable for the company in question. There is no requirement of insolvency to enable this. The possibility of reducing pensions is restricted to the first three years following the board member's departure.

A decision concerning remuneration of a board member may - unlike at present - no longer be delegated to a committee of the supervisory board but must be made by the supervisory board in a plenary meeting. This will contribute to making the determination of remuneration more transparent.

The liability of the supervisory board has been increased. If the supervisory board determines a level of remuneration that is inappropriate, it thereby makes itself liable to compensation vis-à-vis the company. This rule makes it clear that determining an appropriate level of remuneration is one of the most important duties of the supervisory board and that it is personally liable for any violations of its obligations.

Companies are required to disclose more extensive information regarding remuneration and pension payments made to management board members when they discontinue their board activity, be it premature or under normal circumstances. This will enable shareholders to gain a better insight into the extent of agreements entered into with members of the management board.

If the company takes out so-called 'directors and officers liability insurance' (D&O insurance), something which is common practice, a mandatory deductible amount must be agreed. This amount must not be lower than one and a half times the amount of annual fixed remuneration. This is intended to promote business conduct that is focused on greater sustainability.

In future, the general meeting of shareholders of a listed company will be able to give a non-binding vote on the system of management board remuneration. In this way, an instrument for controlling the existing executive remuneration system is put at shareholders' disposal, which enables them to express their approval or disapproval thereof. Thus pressure will be exerted on those responsible to act particularly conscientiously when determining management board remuneration.

Lastly, former management board members may not become a member of the supervisory board within a two-year period following their departure from the management board, in order to prevent any conflict of interest arising. This restriction period rule does not apply if election to the supervisory board takes place at the instigation of shareholders who hold more than 25% of voting rights in the company. This balanced rule permitting exceptions is designed to take account the interests of family-run companies, in particular".

Wednesday 16 September 2009

UK: the case for a High Pay Commission

Compass continues its call for the creation of a High Pay Commission with the publication today of Never Again! Why Britain needs a High Pay Commission

UK: shareholder voting in the FTSE100

The BBC news website reports that in the year to 31 July 2009, 67.3% of votes were cast at FTSE100 company annual general meetings. The report is based on research by Manifest which analysed shareholder voting across Europe.

IOSCO: a couple of auditing consultations

The International Organization of Securities Commissions has published a couple of consultation papers concerning auditing. In the first - Auditor Communications - questions are asked about the value of the audit report. In the second - Exploration of Non-Professional Ownership Structures for Audit Firms - the IOSCO seeks views on whether regulators should address barriers to entry in the audit market. From a comparative perspective both consultation papers are of interest because they provide examples from different jurisdictions.

Tuesday 15 September 2009

UK: the Companies Act 2006 and Limited Liability Partnerships (Transitional Provisions and Savings) (Amendment) Regulations 2009

The Companies Act 2006 and Limited Liability Partnerships (Transitional Provisions and Savings) (Amendment) Regulations 2009 were laid before Parliament on 10 September and come into force on 1 October 2009 (with the exception of paragraph (2) of regulation 2, which comes into force on 30 September and which will cause Section 22(2) of the Companies Act (2006) not to come into force on 1 October).

A copy of the Regulations has been published today on OPSI: see here (html) and here (pdf). The Regulations make amendments concerning: the property of a dissolved company or limited liability partnership; entrenched provisions of a company's articles of association; and company and business names which suggest a connection with the Welsh Assembly Government. Further information is available in the accompanying explanatory memorandum.

UK: the Unregistered Companies Regulations 2009

The Unregistered Companies Regulations 2009 were laid before Parliament on 8 September and come into force on 1 October 2009. The Regulations have been published on OPSI: see here (html) and here (pdf). In the accompanying explanatory memorandum the purpose of the Regulations is explained: to apply specified provisions of the Companies Act (1985) and Companies Act (2006) to unregistered companies (those not incorporated under any of the Companies Acts but through, e.g., a private Act of Parliament or Royal Charter). The explanatory memorandum explains:

The exact number of unregistered companies is not known. It is believed that most have been formed by Royal Charter: over 900 such companies have been formed since the 13th Century but many are now defunct. About 400 are still actively within the purview of the Privy Council. Of these, many were not formed for the purpose of carrying on a business that has for its object the acquisition of gain by the body or its individual members. Fewer than 50 unregistered companies have, in recent years, filed documents with Companies House as required by the 1985 Act. (By way of contrast, there are nearly 2.5 million active companies formed under the Companies Acts.)".

Monday 14 September 2009

UK: the Companies (Unfair Prejudice Applications) Proceedings Rules 2009

The Companies (Unfair Prejudice Applications) Proceedings Rules 2009 were laid before Parliament last week and come into force on 1 October. A copy of the Rules has been published on OPSI: see here (html) and here (pdf). The purpose of the Rules is explained in the accompanying explanatory memorandum as follows:

The Companies Acts provide that a member of a company can petition the court on the grounds that the company is being run in a way that is unfairly prejudicial to the members as a whole or some part of them. And they apply rule-making powers in the Insolvency Act 1986 to enable rules to be made supplementing the Civil Procedure Rules for unfair prejudice petitions. This was in Part XVII of the Companies Act 1985, which has been replaced – without significant change – by Part 30 of the Companies Act 2006. The new Rules will bring the references into line with the Companies Act 2006, including removing the requirement for the petitioner to state the objects of the company. They also take account of changes in the Civil Procedure Rules since 1986".

UK: Guardian survey of executive pay

The Guardian newspaper's survey of executive pay 2009 has been published. The survey also contains information about board composition (e.g., directors' nationality and gender). The front page of today's Guardian leads with the survey and reports:

Executives at Britain's top companies saw their basic salaries leap 10% last year, despite the onset of the worst global recession in decades, in which their companies lost almost a third of their value amid a record decline in the FTSE. The Guardian's annual survey of boardroom pay reveals that the full- and part-time directors of the FTSE 100, the premier league of British business, shared between them more than £1bn. Bonus payouts were lower, but the basic salary hikes were more than three times the 3.1% average pay rise for ordinary workers in the private sector. The big rise in directors' basic pay – more than double the rate of inflation last year – came as many of their companies were imposing pay freezes on staff and starting huge redundancy programmes to slash costs".

UK: the Companies (Authorised Minimum) Regulations 2009

The Companies (Authorised Minimum) Regulations 2009 were laid before Parliament last week and come into force on 1 October. A copy of the Regulations is now available on OPSI: see here (html) and here (pdf). In the accompanying explanatory memorandum the purpose of the Regulations is explained as follows:

The Regulations provide a euro figure and rules necessary for certain provisions of the Companies Act 2006, which refer to the 'authorised minimum' share capital requirement for public companies. The euro figure replaces the one currently fixed in the Companies (Authorised Minimum) Regulations 2008 (SI 2008/729), and the rules correspond to those provided in those Regulations for provisions in the Companies Act 1985 and the Companies (Northern Ireland) Order 1986".

UK: the Companies (Disqualification Orders) Regulations 2009

The Companies (Disqualification Orders) Regulations 2009 were laid before Parliament last week and come into force on 1 October. The Regulations are available on OPSI: see here (html) and here (pdf). An explanatory memorandum has also been published and this explains the purpose of the Regulations as follows:

The purpose of this instrument is to require certain court officers to provide the Secretary of State with particulars of disqualification orders and grants of leave in relation to such orders or disqualification undertakings made or accepted under the Company Directors Disqualification Act 1986 (“the CDDA”), and of any action taken by a court in consequence of which any such orders or undertakings are varied or cease to be in force. The instrument prescribes the particulars and form in which the particulars are to be provided by the court officers to the Secretary of State. Section 18 of the CDDA requires the Secretary of State to maintain a public register from the particulars so furnished".

Friday 11 September 2009

UK: MG Rover report published

In May 2005 the (then) Secretary of State for Trade and Industry appointed inspectors (Gervase MacGregor FCA and Guy Newey QC) under Section 432(2) of the Companies Act (1985) to investigate the affairs of Phoenix Venture Holdings Limited, MG Rover Group Limited and 33 other companies. Rover entered administration in April 2005. 

The inspectors' report was published today.  It is very long and split into volume one and volume two. On the basis of the report, Lord Mandelson - the Secretary of State for the Department of Business, Innovation and Skills - has announced that: "work has been commissioned to start legal proceedings to seek to declare relevant directors unfit to hold office and to disqualify them from management of any company in future". The report is also being considered by the Financial Reporting Council, given the issues it raising concerning, e.g., governance and financial reporting. 

Chapter 12 (in volume two) is titled "Aspects of corporate governance" (although corporate governance issues arise throughout the report, including the financial rewards received by the so-called Pheonix Four directors discussed in chapter 11 and found to be "unreasonably large"). The focus of chapter 12 is with the conduct of board meetings and the inspectors record that some directors were not always invited to such meetings. On page 661 the inspectors conclude:

It is obviously desirable to dispense with unnecessary bureaucracy. It is doubtless also the case ... that there are other companies which do not fully comply with legal requirements in relation to, say, the calling of board meetings. Even so, we consider that the members of the Phoenix Consortium paid insufficient regard to legal requirements. With respect, in particular, to board meetings, it seems to us that all directors should have been notified of all board meetings of their companies both because there was a legal requirement to do so and because that obviously represented proper corporate governance. It is of little significance in this context that transactions can sometimes be legally effective even where meetings were not properly called or minuted or directors were excluded from decision-making. Legal efficacy need not connote good corporate governance".

For background information, see here

UK: shareholder activism - Takeover Panel statement

The Takeover Panel has issued Practice Statement 26: Shareholder Activism, in response to concerns that certain provisions of the Takeover Code prevent co-operation by fund managers and institutional shareholders. The Takeover Panel Executive does not share these concerns and Practice Statement 26 describes the way in which the Executive interprets and applies the Code provisions in question.

Thursday 10 September 2009

USA: the SEC's failure to uncover the Madoff ponzi scheme - OIG report published

The Office of Inspector General (OIG) report concerning the failure of the Securities and Exchange Commission (SEC) to uncover Bernard Madoff's ponzi scheme has now been published: see here

Netherlands: the Code Banken (Banking Code)

The Netherlands Banking Association has published a Banking Code (Code Banken) in response to the report titled "Restoring Trust" published earlier this year by the Advisory Committee on the Future of Banks. The recommendations from chapters one and two of the Advisory Committee’s report have been used as the basis for the new Code. The Code will operate on a 'comply or explain' basis and comes into force on 1 January 2010. It will apply to all banks licensed under the Financial Supervision Act (Wet op het financieel toezicht), irrespective of the location of their activities.

The Code contains principles based on the Dutch Corporate Governance Code (December 2008) and focuses on the operation of executive and supervisory boards, risk management, auditing and remuneration. With regard to remuneration, the following principles are included in the Code (it will be very interesting to see how 6.3.1 operates in practice):

6.3.1  The total income of a member of the executive board shall be in reasonable proportion to the remuneration policy adopted by the bank. At the time when his or her total income is decided, it shall be slightly below the median level for comparable positions in the relevant markets both inside and outside the financial sector. The relevant international context shall be a major factor.

6.3.2  The remuneration in the event of dismissal may not exceed one year’s salary (the ‘fixed’ remuneration component). If the maximum of one year’s salary would be manifestly unreasonable for an executive board member who is dismissed during his first term of office, such board member shall be eligible for severance pay not exceeding twice the annual salary.

6.4.2 Every bank shall set a maximum ratio of variable remuneration to fixed salary that is appropriate for the bank in question. The variable remuneration per annum of members of the executive board shall not exceed 100% of the member’s fixed income".

UK: amending the articles of association - City of London Law Society pro forma circular

The City of London Law Society Company Law Committee has published a pro forma circular for listed companies which contains suggested changes to articles of association to deal with the implementation of the Companies (Shareholders' Rights) Regulations 2009 and provisions of the Companies Act (2006) coming into force on 1 October 2009.

Wednesday 9 September 2009

Iceland: Guidelines on Corporate Governance - third edition published

The third edition of the Icelandic Guidelines on Corporate Governance was published a couple of months ago by the Iceland Chamber of Commerce, NASDAQ OMX and the Confederation of Icelandic Employers. A copy in English has this week been added to the codes directory maintained by the European Corporate Governance Institute. In the foreword accompanying the Guidelines it is explained:

The main additions and changes involve requirements for the independence of Directors, communications and goal setting, the role of the Chairman of the Board, internal controls and risk management, remuneration policy, as well as focusing on the disclosure of more detailed information. this new edition also discusses the code of ethics and corporate social responsibility, which is known to substantially affect the reputation of corporations and their success in the long term. This type of emphasis would give the Icelandic business sector an opportunity to gain an edge internationally and is in line with goals for sustainable development and the development of resources, something that has long been of great interest to Icelanders.

These Guidelines are suitable for and are particularly directed at undertakings that are considered public-interest entities, whether listed on a stock exchange or not. They are also suitable for other public limited companies and private limited companies and may in whole or in part be useful for other undertakings or institutions given that they contain guidelines on the work and job responsibilities of nearly all managers, regardless of the size and type of undertaking. In addition, the Guidelines apply to companies owned by the state and local authorities. The publication 'Corporate Governance of Publicly Owned Enterprises', issued in November 2008, contains further provisions on special stipulations for such undertakings. Although the goal of the Guidelines is to strengthen and promote firms, strict compliance is not mandatory. Listed firms, however, are required to comply with these Guidelines, as is indicated in the NASDAQ OMX rules for the issuers of financial instruments. As before, the basic requirement is that companies follow the rule of 'comply or explain', which states that if a company does not comply with the Guidelines in all matters, it must then disclose any non compliance and provide the reason for it in the annual accounts or in the annual report".

Tuesday 8 September 2009

Japan: corporate governance reform

Following last week's dramatic election in Japan, Reuters is reporting - on the basis of an interview with a member of the new Government - that corporate governance reforms are likely, including legislation on the composition of listed company boards. Elsewhere, The Economist suggests that "[t]he effect on business of the change of government in Japan is likely to be subtle but profound".

Monday 7 September 2009

UK: should auditors undertake non-audit work for their audit clients?

Yesterday's Sunday Times newspaper reported that Pensions Investment Research Consultants (PIRC) is calling for a ban on auditors performing non-audit work for their audit clients. The report cites "fears that it compromises auditors' independence and discourages them from confronting directors on difficult issues" as reasons for PIRC's position. Research by proxy voting agency Manifest is also cited:

The FRC said the level of fees paid to auditors in the FTSE 100 for non-audit work dropped from 191% of audit fees in 2002 — almost double their traditional income — to 71% last year. However, research by Manifest, the voting advisory service, for The Sunday Times shows a significant number of blue-chip companies last year shelled out more in non-audit fees to their auditors than for the cost of core audit work. The firms included Pennon, Experian and SAB Miller. PIRC research found that many smaller companies in the FTSE All-Share paid hefty multiples of auditors’ fees for their non-audit work. The biggest spenders in the 2008-9 financial year included Salamander Energy, Ashmore Group, Berkeley Group, William Hill and Premier Foods, as well as Land Securities, the FTSE 100 property company".

We've been here before: the Cadbury Committee considered whether auditors should be prohibited from providing non-audit services to clients and concluded in its 1992 report (at para. 5.11):

Such a prohibition would limit the freedom of companies to choose their sources of advice and could increase their costs. The Committee was not persuaded that any potential gains in objectivity would outweigh these disadvantages. It does, however, strongly support full disclosure of fees paid to audit firms for non-audit work".

These arguments will be considered again very soon: the report notes that in a few weeks' time the  Auditing Practices Board will begin a consultation on the issue of non-audit work performed by auditors.

The G20 finance ministers framework on governance and compensation

Last Saturday the G20 Finance Ministers and Central Bank Governors issued a communiqué and banking statement. In the statement the finance ministers identified several actions including the following:

Clear and identifiable progress in 2009 on delivering the following framework on corporate governance and compensation practices. This will prevent excessive short-term risk taking and mitigate systemic risk, on a globally consistent basis building on and strengthening the application of the FSB principles:

  • greater disclosure and transparency of the level and structure of remuneration for those whose actions have a material impact on risk taking;
  • global standards on pay structure, including on deferral, effective clawback, the relationship between fixed and variable remuneration, and guaranteed bonuses, to ensure compensation practices are aligned with long-term value creation and financial stability; and
  • corporate governance reforms to ensure appropriate board oversight of compensation and risk, including greater independence and accountability of board compensation committees.

We call on the FSB to report to the Pittsburgh Summit with detailed specific proposals for developing this framework, which could be incorporated into supervisory measures, and closely monitoring its delivery. We also ask the FSB to explore possible approaches for limiting total variable remuneration in relation to risk and long-term performance. G20 governments will also explore ways to address non-adherence with the FSB principles".

Friday 4 September 2009

UK: online filing of accounts - HMRC and Companies House joint approach statement

HMRC and Companies House have published a statement concerning their joint approach to the online filing of accounts, the development of which was one of the recommendations in the Carter Review (2006). The statement explains:

HMRC has now decided that statutory accounts and tax computations showing the derivation from those accounts of the entries in the Company Tax Return must be delivered electronically using Inline XBRL (iXBRL) format. Inline XBRL will allow companies and agents to submit their accounts and tax computations to HMRC with all branding, stylistic and terminological preferences in the human-readable form. The use of iXBRL will be mandatory when filing accounts with HMRC as part of a Company Tax Return for all accounts prepared under the Companies Act 2006. Companies with less complex tax affairs will be able to use HMRC’s software, provided free on their website, which will allow those companies to fully meet their HMRC filing obligations after mandation.

HMRC will introduce their iXBRL service in November 2009. Companies House will add iXBRL software filing for unaudited full accounts to their service by the summer of 2010 and then continue to develop their iXBRL capability for all the main accounts types they receive by summer 2011".

UK: England and Wales: the FSA's assistance of an overseas regulator

The ICLR, as part of its WLR Daily service, has recently provided a summary of  Amro International SA v Financial Services Authority [2009] WLR (D) 288, a case concerning Sections 169 to 172 of the Financial Services and Markets Act (2000) which is not yet available on BAILII. The ICLR's summary begins:

Although the purpose of ss 169–172 of the Financial Services and Markets Act 2000 was to facilitate investigation in support of overseas regulators and such co-operation was desirable in order to maintain the regulation of financial markets and banks, the nature of the claim in respect of which the Financial Services Authority’s assistance was sought was of fundamental importance and it was wrong to exercise the powers to aid an investigation into allegations that were not made in that claim. The correct approach was to apply a test of proportionality and the documents required should be properly specified".

Update (15 September 2009): the case is now available on BAILII: see here.

Thursday 3 September 2009

USA: the SEC's failure to uncover Madoff's ponzi scheme - OIG report

The Office of Inspector General (OIG) - an independent office within the Securities and Exchange Commission (SEC) responsible for auditing and investigating the SEC's operations - has published the results of its investigation into the SEC's failure to uncover Bernard Madoff's ponzi scheme. A full report will be published shortly. Meanwhile, an executive summary has been published in which the OIG states:

The OIG investigation did not find evidence that any SEC personnel who worked on an SEC examination or investigation of Bernard L. Madoff Investment Securities, LLC (BMIS) had any financial or other inappropriate connection with Bernard Madoff or the Madoff family that influenced the conduct of their examination or investigatory work ... The OIG investigation did find, however, that the SEC received more than ample information in the form of detailed and substantive complaints over the years to warrant a thorough and comprehensive examination and/or investigation of Bernard Madoff and BMIS for operating a Ponzi scheme, and that despite three examinations and two investigations being conducted, a thorough and competent investigation or examination was never performed".

The response of the SEC chairman, Mary Schapiro, highlights some of the reforms that the SEC has taken and is available here

Wednesday 2 September 2009

South Africa: King III Report and Code available online

Contrary to what I was expecting, the Institute of Directors in Southern Africa has made available online copies of the King III Report and Code. The Code is available here (pdf) and here (ipaper). The Report is available here (ipaper).

UK: issue 22 of LIST! published - UKLA reminder on compliance with the Listing Principles

Issue 22 of LIST! - the UK Listing Authority newsletter - was published at the end of August. The newsletter adopts a question and answer format to deal with some of the issues raised in the course of the UKLA's work. The newsletter also provide a reminder concerning compliance with the Listing Principles:

We sometimes get queries about the interaction between the Listing Principles (set out in LR7) and the Disclosure & Transparency Rules (DTRs) and Prospectus Rules (PRs).We therefore thought it would be helpful to remind issuers of the approach we take regarding compliance with the Listing Principles. The Principles are a general statement of the fundamental obligations of listed companies. They were introduced to ensure adherence to the spirit as well as the letter of the various rules, including the DTRs and PRs, comprising the listing regime.

Issuers should therefore be aware of the importance we place on compliance with the Principles on an ongoing basis. As our Handbook notes, a breach of a Listing Principle will make a listed company liable to disciplinary action by the FSA. While cases may be brought in conjunction with action for a breach of a specific rule or rules, the FSA is prepared to take enforcement action on the basis of the Principles alone, taking account of the standard of conduct required by the Listing Principle in question".

Tuesday 1 September 2009

South Africa: King III Report and Code published

The King III Corporate Governance Report and Code will be published today by the Institute of Directors in Southern Africa. Further information is available here. The first King Report and Code was published in November 1994; King II was published in March 2002. It is unlikely that a copy of King III will be available online.

Update (2 September 2009): see here for an update and how to access the Report and Code online. 

UK: Gordon Brown on bank governance

An interview with the prime minister, the Rt Hon Gordon Brown MP, appears in today's Financial Times. The transcript has also been published here by the Daily Telegraph newspaper. As the FT notes, Mr Brown has "tempered his call for a crackdown on bankers’ remuneration with a warning that the UK could not be expected to take action unilaterally". Below are some of Mr Brown's comments:

... we’ve set up the Walker Review but it’s absolutely clear you cannot have banks in a position where the main board members – in some cases even some of the executives of the bank – don’t understand the risks that are being taken. And there is still a worry that unless systems of governance are improved, not just in Britain but around the world, that we end up in a situation where, for example, banks are holding subprime mortgages from the US but they don’t understand what the meaning of the asset is. So I think governance has got to be good.

... as many members of boards have recognised themselves, they did not have the information in a global marketplace on which to base their assessment of the risks that they were undertaking. Now that’s why I think you get quite strong recommendations from the Walker Review in Britain but that’s why I think you’ve got to have common standards of governance throughout the world and it would be unfair if we had tightened up all the arrangements for governance in a global economy when other countries have not done so. So one of the things that I’ll be looking for at Pittsburgh [where the G20 will meet this month] is an assurance that the governance arrangements of financial institutions are going to meet the highest standards possible in the future".

.... I think you’ve got to be absolutely clear that remuneration has got to be based on long-term success, not short-term speculative deals, that there’s got to be a clawback system in remuneration itself so that if things are not working in year two then there is a clawback that is possible as an example. And I think we’ve also got to look at whether the capital requirements of individual institutions would have to be increased in situations where the regulator thought that risk was higher"