Incorporating ABI, NAPF and FRC feedback into your AGM and reporting

Transcription

1 Incorporating ABI, NAPF and FRC feedback into your AGM and reporting Every year the Association of British Insurers (ABI), National Association of Pension Funds (NAPF) and Financial Reporting Council (FRC) look back at the corporate governance disclosures, or AGM information provided by companies to shareholders, assessing the quality and usefulness of the information provided. These organisations then disclose their thoughts for the coming year and unveil their new or revised corporate governance policy recommendations. In the light of these plans for the coming year, this article outlines some practical steps that companies can take to improve their disclosure regime in order to meet the needs of institutional investors and other shareholders.

2 The FRC have indicated that where companies do not comply with the UK Corporate Governance Code they then struggle to explain the rationale for their non-compliance. How can they improve these sorts of explain disclosures? The concept of Comply or Explain is the trademark of the UK approach to corporate governance. When companies choose not to follow the provisions of the UK Corporate Governance Code (the Code ) they need to make sure that the explanation which they provide to their shareholders and other stakeholders is meaningful, understandable and persuasive. The FRC recommends 1 that the explanation for each case of non-compliance with the Code should consist of the following elements: Details of the business and/or contextual environment within which the company operates Provision of a clear rationale for the deviation (i.e. description of the bespoke circumstances) Definition of the mitigating actions taken to address any additional risk An indication of how and when (if at all) the company will be in the position to return to compliance with the relevant Code provision(s) An explanation of how the alternative remains consistent with the main principles of good corporate governance practice. Research conducted by Grant Thornton in December regarding non-compliance with the Code by FTSE 350 companies shows that the highest rate of non-compliance relates to Section B.1.2 of the Code which states that at least half of the board, excluding the chairman, should be independent. The FRC believes that it would be more helpful to investors if companies avoided general boilerplate statements and be specific. The table below contains examples of non-compliance with the Code and the potential components of a good explanation 3. Area of non-compliance The deviation from Section B.1.2 of the Code The continuation of service of the audit committee chairman beyond a nine year period Multiplicity of deviations from the Code Possible components of a good explanation 1. Illustrating the understanding of the company s business by long-serving non-executive directors ( NEDs ) who are considered independent 2. Providing details of the company s succession strategy 3. Explaining the key priorities of the board when appointing new NEDs 4. Explaining the process and the results of external board evaluation. For example, it may be the case that particular scrutiny was given to the efficiency of the board s long tenured directors who did not meet some of the parameters of independence set out by the Code. 1. Detailing the specific circumstances of why the company decided to maintain the current composition of its board 2. Setting out a defined time period for the departure from the Code 3. Explaining how the chairman s specific knowledge, skills or experience is beneficial to the Company and its shareholders as a whole. 1. Being direct in respect of the provisions that have been departed from, for example by listing them 2. Explaining what actions have already been taken or will be taken in an appropriate timeframe to remedy these deviations. 1 FRC What constitutes an explanation under Comply or Explain? Report of discussions between companies and investors, February 2012 and again in Developments in Corporate governance 2013; The impact and implementation of the UK Corporate Governance and Stewardship Codes, December Grant Thornton Governance steps up a gear, December ABI Comply or Explain: investor expectations and current practices, December 2012

3 The ABI are looking to companies to develop transparent annual investor relations programmes to improve shareholder engagement and facilitate contact between investors and companies. What more can be done on both sides of the engagement and stewardship equation to improve the situation? Both parties should be committed to the continual improvement of a relationship based upon truth and trust and an open two-way exchange. As part of the process of developing an engagement programme, both parties should have a clear understanding of the most effective level and form of communication required. ABI, IAM, NAPF and ICSA all in one way or another recommend that companies: Regularly review their investor relations programmes in consultation with the largest shareholders and long-term investors Encourage their non-executive directors to attend a selection of shareholder presentations on the annual results and strategy Another important aspect of a company s communication to investors is the AGM. Institutional investors often find it difficult to attend AGMs, given the number of meetings over a short period of time, and therefore think it could be helpful if companies thought of a way to reinvigorate the format of their AGMs. There are some ideas on how to solve this issue, for example, the possibility of virtual AGMs. Though this idea has not yet taken off, many agree that virtual formats which compliment in-person meetings might enable increased participation from institutional investors and other shareholders, especially when considering the availability of the internet and improvements in broadband services. The prevalence of internet usage across UK households makes it a good option for the delivery of services and should no longer be seen as only catering for the minority. Are more proactive in involving the corporate governance representatives of major investors in their scheduled investor relations meetings and events. Shareholders may consider collective engagement and better utilisation of the following activities, indentified by European Security and Markets Authority (ESMA) 4 : Entering into discussions with each other about possible matters to be raised with the company s board Making representations to the company s board about company policies, practices or particular actions that the company might consider taking Being proactive in exercising shareholders statutory rights and stewardship obligations, and to have a clear voting policy on important issues, including: directors remuneration, reduction of capital, share buy-backs, dividend distribution and appointment or removal of directors. 4 ESMA Public Statement: Information on shareholder cooperation and acting in concert under the Takeover Bids Directive, November 2013

4 The NAPF highlight significant votes at some companies against remuneration resolutions. How can these companies work to remove the controversy around remuneration and avoid potential future embarrassment and problems in the binding vote environment? The key problems with the remuneration reports that received significant dissent from shareholders in 2013 appear to be their length, complex bonus structures and the lack of transparency. The NAPF stresses it is critical that companies provide better quality and more concise information about pay, clearly explaining how rewards are linked to performance and how they impact shareholder value in the long-term. Some may say that being concise will be difficult given the content and the requirements of the new directors remuneration reporting regulations that came into force in October Some of the early AGMs in 2014 that sought approval for remuneration policies under the revised regulations have encountered difficulties in terms of disagreements about board discretion, for example, in relation to recruitment circumstances and payments. Furthermore, a number of shareholders have said that in order to get a proper understanding of a company s policy on pay, it is important to understand how spend on pay relates to a wider range of factors including dividends, profits and remuneration of the wider workforce. The new regulations have sought to address this issue and as an outcome, companies are now required to provide their shareholders with the following information: A single total figure of directors remuneration received in the reported year and the previous financial year The percentage change in salary, benefits and bonuses for the previous year and current reporting year for both the CEO and employees of the company A performance graph showing the five year comparative total shareholder return by dividend or share buyback, supplemented with a table setting out an actual expenditure on group remuneration and any further significant distributions of profits. In addition, under the new regime, the remuneration policy must have a description of each of the components of the remuneration package for the directors of the company and an explanation of how these components support the short and long-term strategic objectives of the company and what performance measures the company will use to assess directors performance. Here are four principles that NAPF recommends companies consider when designing their new remuneration policy 6 : 1. Material long-term investment Shares granted to executive directors should ideally be owned longer than the standard three year vesting period. This will encourage long-term business strategy and strong succession planning 2. Pay aligned to long-term strategy and the desired corporate culture The nomination and remuneration committees should work together to agree parameters around the remuneration for new appointees to the board 3. Avoid multiplicity and over-complexity of awards schemes Pay schemes should be simple, understandable for both investors and executives, and should ensure that executive rewards reflect returns to long-term shareholders. The NAPF endorse the approach of replacing long-term incentive plans with a single bonus scheme based on a balanced scorecard of metrics (including KPIs) 4. Remuneration policies should be fully explained and justified Well debated and explained decisions rather than using simplistic mechanistic formulae, enabling trust between the company and its share owners to be restored and maintained. In another words, to avoid future embarrassment companies are encouraged to regularly engage with their long-term investors and consult with them on the proposed remuneration policies ahead of the AGMs. 5 The Large and Medium-sized Companies and Groups (Accounts and Reports) (Amendment) Regulations NAPF and Hermes Remuneration principles for building and reinforcing long-term business success, February 2013

5 It is interesting to note that in the context of the questions and answers above, the European Commission announced on 9 March 2014 a package of measures to improve corporate governance for listed companies within the European Union. These measures also strengthen shareholder engagement, transparency and provide consistent shareholder rights across Europe. The measures include: The revision of the Shareholder Rights Directive (the Directive) A recommendation on the quality of corporate governance reporting ( Comply or Explain? principle) A single member company directive providing a legal structure to make it easier for small companies to set up, operate and trade across borders. Contact us For more information on how we can help you improve your disclosure regime and meet the needs of your investors contact: Georgina Morgan Director Company Secretarial e: georgina.morgan@capita.co.uk t: +44 (0) The specific objectives of the Directive look at: Increasing the level and quality of engagement of asset owners and asset managers with their investee companies Creating a better link between pay and performance of company directors Enhancing transparency and shareholder oversight on related party transactions Ensuring reliability and quality of advice of proxy advisors Facilitating the transmission of cross-border information (including voting) across the investment chain, in particular through shareholder identification. SS13929a