Europe: Commission publishes governance proposals - remuneration, shareholder rights, disclosure, Societas Unius Personae

The European Commission has today published a proposal for revising the Shareholder Rights Directive, a Recommendation on corporate governance reporting and a proposal for a Directive on single member private limited liability companies: see here.

The proposed revisions to the Shareholder Rights Directive include changes to the disclosure obligations in respect of a remuneration and the introduction of a binding vote on remuneration policy for certain companies. It also imposes new disclosure obligations on proxy advisors and the requirement for shareholder approval of certain related party transactions. For further information see: FAQs | Proposed Directive (pdf) | Impact assessment: summary (doc) and full text (doc).

The purpose of the Recommendation is to provide guidance on improving the quality of corporate governance reporting for those companies required to publish a corporate governance statement under Article 20 of Directive 2013/34/EU. A copy of the Recommendation is available here (doc).

The proposed Directive on single member private limited liability companies will require Member States to make available, through their individual legal systems, a single member private limited liability company, with several harmonised features and a common name (Societas Unius Personae, or SUP). The SUP would have a minimum capital requirement of one euro. For further information see: FAQs | Proposed Directive (doc) | Impact assessment: summary (doc) and full text (doc).

Europe: the Commission's action plan for company law and corporate governance

The European Commission published its company law and corporate governance action plan yesterday: see here (pdf). Nothing revolutionary in approach is proposed: national corporate governance codes, and the dominant 'comply or explain' approach, will remain. There are, instead, proposals within three broad areas which build on the current framework: increased transparency; more shareholder engagement; and exploring ways to support economic growth particularly in the cross-border context. Amongst the Commission's proposals are the following:

• Increase disclosure of board diversity policy and of risk management arrangements.
• Improve the visibility of shareholdings in listed companies in Europe.
• Improve the quality of corporate governance reports (in particular the quality of explanations provided by companies departing from corporate governance code provisions).
• Disclosure of voting and engagement policies as well as voting records by institutional investors.
• Improving transparency on remuneration policies and individual remuneration of directors, and granting shareholders the right to vote on the remuneration policy.
• Improve shareholder control over related party transactions.
• Improve the transparency and the conflict of interest frameworks applicable to proxy advisors.
• Work closely with competent national authorities and the European Securities and Markets Authority to develop guidance to increase legal certainty as regards the relationship between investor cooperation on corporate governance issues and the rules on acting in concert.
• Increase awareness of the European Company (SE) Statute (including employees' involvement) and possibly of the European Cooperative (SCE) Statute.
• Identify obstacles to employee share ownership in Member States.
• Further investigate the rules on the cross-border transfer of a company's registered office.
• Revise the rules on cross-border mergers.
• Investigate further rules on cross-border divisions.
• Codify the major company law Directives.
• Improve the information available on groups and recognition of the concept of ‘group interest’.

UK: FRRP annual report published

The Financial Reporting Review Panel has published its annual report (previously known as its activity report): see here (pdf). For the period in question - the year to March 2010 - the Panel reviewed 308 sets of accounts; 146 companies were approached for further information or explanation and 3 companies agreed to restate amounts reported in prior periods.

The Panel found improvements in the general quality of IFRS reporting although with regard to capital management and share‐based payment disclosures, reporting was sometimes poor in terms of content, extent and usefulness. The Panel also had concerns with the quality of reports and accounts of some smaller listed and AIM quoted companies. Interestingly, the report contains a couple of pages dedicated to explaining what makes a "good set of accounts" (see pages 2 and 3).

The Panel's remit was extended last year to include monitoring company's compliance with the FSA Disclosure Rules and Transparency Rules (DTR) 7.1.5 and 7.2 relating, respectively, to audit committees and corporate governance statements. In this regard the Panel examined a sample of 30 accounts and found clear room for improvement; to quote from pages 7 and 8:

.. all provided a corporate governance statement and gave information on the composition and operation of their board and of their nomination, remuneration and audit committees as required by the rules. Companies that did not apply all the provisions of the Combined Code generally provided an explanation for the departures, although these could have been clearer at times. The areas of the code most often not complied with related to board balance and independence ...

Most companies provided some explanation of the key features of the internal control and risk management systems in relation to their financial reporting process although the level of detail provided was variable. Some companies provided boiler‐plate descriptions of their budgeting process while others had not adjusted their descriptions of the key features of their internal control system to focus specifically on the financial reporting process, as now required by 7.2.5. Few companies referred to the preparation of the consolidated accounts despite DTR 7.2.10 requiring a description to be given of the main features of the group’s internal control and risk management systems in relation to the process for preparing consolidated accounts".

UK: FSA quarterly consultation

The Financial Services Authority has published its quarterly consultation document: see here (pdf). This contains several governance related matters, including: an amendment to clarify the operation of DTR 7.2 (corporate governance statements) to overseas issuers; a proposal to change the status of LR 1.6.1G from guidance to a rule; and amendments concerning share capital reflecting the implementation of the Companies Act (2006).

UK: developments in corporate governance affecting the responsibilities of auditors of UK companies

The Auditing Practices Board has today published Bulletin 2009/4: Developments in Corporate Governance Affecting the Responsibilities of Auditors of UK Companies: see here (pdf). The bulletin considers the directors' statement on going concern, the corporate governance statement required by the Disclosure Rules and Transparency Rules, and changes to the structure of the listing regime.

Europe: corporate governance statements and the auditors' assurance role - FEE discussion paper

The Federation of European Accountants (FEE) has published a a discussion paper concerning the auditor's assurance role in respect of corporate governance statements: see here (pdf). The paper presents, inter alia, the results of a survey carried out by the FEE during 2007/08 regarding governance codes in the Member States. The FEE found (to quote from the paper):  

.... despite the range of legal systems, institutional frameworks and traditions, there is considerable convergence across Europe in the elements of national corporate governance codes. Most of these codes are closely related to the OECD’s Principles of Corporate Governance – either by making explicit reference, or by incorporating the principles within the national code, supplemented by local rules and guidance".

UK: Deloitte survey of narrative reporting and Combined Code compliance

Deloitte has published a report titled "A telling performance" which contains the the results of its study of narrative reporting (including corporate governance statements) in the annual reports of 130 listed companies (including 30 investment trusts). The reports consulted were those published between 1 August 2008 and 31 July 2009. A summary of the report is available here. Deloitte found that 35% of companies in its sample complied fully with the Combined Code on Corporate Governance.

UK: FRC review of the Combined Code - progress report published

The Financial Reporting Council has today published a progress report and second consultation document as part of its review of the Combined Code. The report provides a summary of the FRC's recent consultation and research and invites views on various aspects of the Combined Code and its application. It also sets outs the following guiding principles on which the FRC seeks views (to quote directly from the report):

• Where there is a demonstrable need for best practice to be clarified or strengthened, this will be addressed either through amendments to the Code or additional, non-binding guidance.
• Where not constrained by regulatory requirements, we will seek to rationalise disclosure requirements in the Code to encourage more informative disclosure on the issues of most importance to investors and to discourage boiler-plating and box ticking.
• We will seek to avoid an increase in the overall level of prescription in the Code and to preserve its principles-based style. 

Amongst the issues identified for further consideration are the following (to quote directly from the report):

• Whether it would be helpful to give further clarification of the role, key responsibilities and expected behaviours of the chairman, the senior independent director and/or the non-executive directors, either in the Code or in non-binding guidance.
• Whether it would be helpful to provide further guidance on the time commitment expected of the chairman, senior independent director and/or non-executive directors. 
• Whether more guidance is needed, in the Code or elsewhere, on succession planning and the need to ensure that board composition is aligned with the present and future needs of the business. 
• Whether changes to voting would increase accountability to shareholders and which, if any, of the following options they would support as recommendations for possible inclusion in the Code: [a] Annual re-election of the company chairman, [b] Annual re-election of the chairs of the main board committees, [c] Annual re-election of all directors, [d] Binding or advisory votes on specific issues, or on the corporate governance statement as a whole.
• Whether the board’s responsibility for strategic risks and setting risk appetite – as set out in the Turnbull Guidance - should be made more explicit in the Code, and whether the current balance between the Code and the Guidance is the right one.
• Whether there is a need for all or parts of the Turnbull Guidance to be reviewed. 
• To what extent the particular mechanisms recommended for banks and financial institutions would also be appropriate for other listed companies. For example, there were mixed views among commentators about whether separate risk committees were necessary for companies with less complex business models 
• Whether shareholders should be given a more direct role in setting remuneration and, if so, how this might be achieved.
• Whether it would be appropriate for the FRC or the FSA to undertake greater monitoring and enforcement of “comply or explain” statements, and if so what form this might take.
• What role, if any, it would be appropriate for the FRC to play in encouraging collective engagement.
• Whether further guidance on best practice for companies, investors or proxy voting services would be helpful, either in the Combined Code or elsewhere, and whether the practices currently recommended in Sections D and E of the Code continue to represent best practice.
• What other steps might be taken, by the FRC or others, to encourage both companies and investors to be more proactive about regular engagement and with a longer term focus than the annual results presentations.
  

UK: the Companies Act 2006 (Accounts, Reports and Audit) Regulations 2009

The Companies Act 2006 (Accounts, Reports and Audit) Regulations 2009 were made on 26 June and published on OPSI last week: see here (html) and here (pdf). An explantory memorandum is available here and this explains:

This instrument amends Parts 15 and 16 of the Companies Act 2006 on accounts and audit. Its main purpose is to complete implementation of the EU Company Reporting Directive (Directive 2006/46) by requiring filing at Companies House of, and an auditor’s report on, corporate governance statements of publicly traded companies where the corporate governance statements are not included in the directors’ report. The instrument also makes some technical amendments to other accounting provisions in Part 15 and regulations made under that Part".

UK: corporate governance statements

A revised draft of the Companies Act 2006 (Accounts, Reports and Audit) Regulations 2009 has been published today on the OPSI website. An explanatory memorandum is available here. The Regulations replace those published earlier this year and concern, inter alia, corporate governance statements which are not included as part of the directors' report (so-called separate corporate governance statements). They will amend Part 15 ("Accounts and Reports) and Part 16 ("Audit") of the Companies Act (2006) to require the filing of separate corporate governance statements with the registrar of companies. They also set out the auditor's obligations with regard to the statement. 

Malta: corporate governance statements + the Maltese Code

The Malta Financial Services Authority has issued a consultation paper concerning changes to its Listing Rules with regard to the requirement, under the Fourth Company Law Directive (as amended by Directive 2006/46/EC), for certain companies to include a corporate governance statement in their annual report. The deadline for implementation of the Directive by Member States was 5 September 2008. 

Companies with securities traded on regulated markets are required to provide the corporate governance statement (in the UK, this requirement is found in DTR 7.2 of the FSA Handbook). This must state, inter alia, the Code to which the company is subject and/or the code which the company has adopted. The relevant Code in Malta is the Code of Principles of Good Corporate Governance, which is included in the Listing Rules as an appendix (number 8.1). This Code has many similarities with the UK's Combined Code but it is interesting to note that it contains much greater guidance with regard to boards. There is, for example, a separate section titled "Board Meetings" and this explains:

Notice of the dates of the forthcoming meetings together with the  supporting material should be circulated well in advance to the Directors so that they have ample opportunity to appropriately consider the information prior to the next scheduled board meeting. Advance notice should be given of ad hoc meetings of the board to allow all Directors sufficient time to re-arrange their commitments in order to be able to participate".

There is also a section in the Code dealing with corporate social responsibility and Principle 12 of the Code states: "Directors should seek to adhere to accepted principles of corporate social responsibility in their day-to-day management practices of their company". In this regard the Code explains:

Corporate Social Responsibility is the continuing commitment by business entities to behave ethically and contribute to economic development while improving the quality of life of the work force and their families as well as of the local community and society at large. Being socially responsible means not only fulfilling legal expectations but also going beyond compliance and investing “more” into human capital, the environment and the relations with stakeholders".

UK: separate corporate governance statements and the Companies Act 2006 (Accounts, Reports and Audit) Regulations 2009

A draft copy of the Companies Act 2006 (Accounts, Reports and Audit) Regulations 2009 has been published on the OPSI website. The Regulations will, inter alia, insert new sections into the Companies Act 2006 with regard to corporate governance statements which are not included as part of the directors' report (so-called separate corporate governance statements). These new sections will require the filing of the separate corporate governance statement with the registrar of companies and they also set out the auditor's obligations with regard to the statement. Update (16 February 2009): an explanatory memorandum has been published on OPSI - see here. 

UK: the Companies Act 2006 (Accounts, Reports and Audit) Regulations 2009

The Department for Business, Enterprise and Regulatory Reform has published a draft of the Companies Act 2006 (Accounts, Reports and Audit) Regulations 2009. In the accompanying consultation paper, BERR explains that the Regulations are required to implement the requirements of Directive 2006/46/EC in respect of corporate governance statements which are published separately from the directors' report. 

The Regulations deal with the publication and auditing of such corporate governance statements. They also make changes to Part 15 (Accounts and Reports) of the Companies Act (2006) in order to correct several minor errors.