Welcome to Essential Corporate News, our weekly news service covering the latest developments in the UK corporate world.
Investment Association: IVIS approach to pensions and post-employment holding periods in 2019
On November 22, 2018 the Investment Association (IA) released their updated Principles of Remuneration accompanied by a letter to Remuneration Committee Chairs to highlight the items of focus for IA members ahead of the 2019 AGM season. Following this, on January 23, 2018 the IA circulated an email explaining that IA members have asked the Institutional Voting Information Service (IVIS) to take a specific approach to pensions and post-employment holding periods at AGMs in 2019.
The approach is to be taken as follows
Executive director pensions
For new appointments (including new joiners and promotions)
- New remuneration policies seeking shareholder approval in 2019 should make it explicit that any new appointees will have their pension contributions set in line with the pension contributions provided to the majority of the workforce, otherwise IVIS will Red top the policy report.
- If new appointees from March 1, 2019 have pension contributions at a higher level than the pension contributions provided to the majority of the workforce, IVIS will Red top the remuneration report.
For existing directors
- Approval of remuneration policies and remuneration reports where an executive director receives a pension contribution of 25 per cent of salary or more will be Amber topped by IVIS.
The IA asks that companies disclose the pension contribution level which they consider to be the level for the majority of the workforce and that remuneration reports confirm if the pension contributions for new joiners, new appointees or existing executive directors are at the level for the majority of the workforce.
Post-employment holding periods
- If there is a remuneration policy vote in 2019, the policy should include post-employment holding periods in line with the Principles of Remuneration, otherwise the remuneration policy will be Amber topped.
- If there is no policy vote in 2019, those companies not in line with the Principles of Remuneration will be noted.
IVIS will adopt these approaches for remuneration policies and remuneration reports for companies with year-ends on or after December 31, 2018.
ICAEW: Consultation on guidance for preparers of prospective financial information
In December 2018, the ICAEW published for consultation an Exposure Draft of new guidance for preparers of prospective financial information (PFI). The Exposure Draft updates 2003 guidance, “Prospective Financial Information: Guidance for UK Directors”, and it follows a July 2017 consultation paper which set out a case for updating the 2003 guidance.
As well as updating the 2003 guidance, the Exposure Draft includes general guidance for preparing any PFI, including, on a proportionate basis, any unpublished PFI. It aims to reflect developments since the 2003 guidance was published, such as demands for greater accountability, closer board engagement with management, higher standards of regulation, and investor expectations of cohesion between business strategy, corporate appetite for risk and prospects.
The Exposure Draft is structured as follows
- Part I – Principles for preparing PFI (which includes primary financial statements, elements, extracts and summaries of such statements and related financial disclosures and/or supporting calculations).
- Part II – General application guidance. This Part identifies procedures that will assist in the preparation of PFI that is relevant, reliable, understandable and comparable.
- Part III – Application note for statements of sufficiency of working capital in capital market transactions. This application note applies to working capital statements included in an investment circular by regulation, and to the supporting underlying PFI which forms the basis for the statement.
- Part IV – Application note for profit forecasts in capital markets transactions and other profits guidance. This application note is primarily intended to assist directors making profit forecast statements for inclusion in an investment circular (where regulation applies to such profit forecast statements), and also those involved in the preparation of such profit forecasts and the supporting unpublished PF).
- Part V – Application note for synergy and stand-alone cost saving statements in capital markets transactions. This application note applies to directors when making statements of anticipated synergies published in a merger and acquisition transaction related UK investment circular, and includes stand-alone cost saving statements published in a bid defence document under the Takeover Code.
Comments on the Exposure Draft are requested by April 30, 2019. Following the consultation process, guidance in the form of a technical release will be published which will replace the 2013 guidance.
FRC: Artificial Intelligence and corporate reporting – How does it measure up?
On January 21, 2019 the Financial Reporting Council’s (FRC) Financial Reporting Lab (Lab) published a report, "Artificial intelligence and corporate reporting: How does it measure up?", which considers artificial intelligence and its role in the future of corporate reporting.
The report is the third in a series of technology deep-dive reports exploring how different technologies might impact corporate reporting production, distribution and consumption. It follows from the Lab’s report on blockchain and corporate reporting published in June 2018. It also highlights key decisions and considerations that boards and others need to think about when using artificial intelligence (AI).
The nature of corporate reporting and reporting process challenges
The report highlights the potential uses of AI in corporate reporting and addresses some of the challenges faced across the various stages
- Production – The report suggests that corporate reporting and underlying accounting processes could be made less complex and time consuming by using AI to help solve problems in the production of accounting and reports. A significant proportion of the work of a typical back-office finance function is the routine recording, managing, matching and processing of transactional and other information and the report suggests that AI can provide an alternative to the outsourcing of such activities. AI could enhance efficiency by replacing mechanistic human processing of underlying transactions and transforming that data into accounting and management information, ultimately feeding into annual reports.
- Distribution – Both internal and external auditors obtain comfort over a consolidated annual report, specific entity report, balances or process by undertaking testing. Testing is undertaken on a sample basis, however, as it is impractical to review all transactions, due to the limitation of the human team. AI combined with data analytics tools might allow 100 per cent of certain balances to be rechecked or recomputed and connections to external data sources such as bank or investment feeds could also match and confirm transactions. The report suggests that AI could be used to help provide assurance on compliance with rules, both internally and externally, in an efficient and effective way. AI could efficiently and effectively support auditors and boards in the internal and external validation processes needed to ensure that annual reports are credible and compliant. AI can support auditors and boards in getting comfort over the data internal to the company that makes up the annual report. AI can support auditors, boards and regulators in getting comfort over annual reports using data external to the company. However, the report points out that while AI will play a role in both internal and external audit processes in the future, the overall complexity and uniqueness of each business requires a human and AI approach for the foreseeable future.
- Consumption - The report notes that many investment organisations and their data providers already use AI to enhance the effectiveness of investment analysis by extracting meaning and value not only from company reporting but also from various sources of alternative data.
Corporate reporting actions and questions
The report emphasises that the quality of company financial and accounting data is critical to the development of AI in corporate reporting, and advises that if AI is to be used to improve the efficiency and effectiveness of companies’ financial processes then they need data that is of sufficient quality and quantity and is relevant to financial decision making.
The report suggests a number of key considerations for companies considering AI-based accounting and finance systems, including: the source of data used to train systems and how quality and lack of bias is ensured; what controls and processes need to be changed or modified to reflect the new system; and, where significant to the company’s operations, how the risks associated with the use of AI and data are being managed and disclosed.
The report acknowledges that the opportunities for achieving efficiencies require a rethinking of processes with AI in mind, and highlights the need to embed the expertise of AI directly into governance, finance, the board, advisers and regulators through training and development. Boards are advised to consider how they are going to meet the challenges that AI brings either through including AI focused individuals in the boardroom, or through wider training.
IOSCO: Statement on disclosure of ESG matters by issuers
On January 18, 2019 the International Organization of Securities Commissions (IOSCO) published a statement setting out the importance for issuers of considering the inclusion of environmental, social and governance (ESG) matters when disclosing information material to investors’ decisions.
The statement notes that the disclosure of ESG information in the market has increased in recent years and investors have highlighted that ESG disclosure is necessary to supplement their investment and voting decisions. However, IOSCO has observed that disclosure practices are varied, with the type of information disclosed and the quality of information differing in and between markets. It notes that there are also various disclosure frameworks that issuers can consider on a voluntary basis when disclosing ESG information, including those developed by the Financial Stability Board’s Task Force on Climate-Related Financial Disclosures.
IOSCO encourages issuers to consider the materiality of ESG matters to their business and to assess risks and opportunities in light of their business strategy and risk assessment methodology. When ESG matters are considered to be material, issuers should disclose the impact or potential impact on their financial performance and value creation. In doing so, issuers should give insight into the governance and oversight of ESG-related material risks.
World Economic Forum: How to set up effective climate governance on corporate boards – Guiding principles and questions
On January 17, 2019 the World Economic Forum published a report in collaboration with PwC which sets out guiding principles and questions to assist corporate boards in driving climate governance effectively.
The principles built on existing corporate governance frameworks, such as the International Corporate Governance Network’s Global Governance Principles, as well as other climate risk and resilience guidelines such as the recommendations of the Financial Stability Board’s Task Force on Climate Related Financial Disclosures. Each principle is accompanied by a set of guiding questions to help a company identify and fill potential gaps in its current approach to governing climate. The principles are designed to increase directors’ climate awareness, embed climate considerations into board structures and processes, and improve navigation of the risks and opportunities that climate change poses to business.
The eight guiding principles for effective climate governance on corporate boards are as follows
- Principle 1 – Climate accountability on boards: the board is ultimately accountable to shareholders for the long-term stewardship of the company so the board should be accountable for the company’s long-term resilience with respect to potential shifts in the business landscape that may result from climate change.
- Principle 2 – Command of the (climate) subject: the board should ensure that its composition is sufficiently diverse in knowledge, skills, experience and background to effectively debate and take decisions informed by an awareness and understanding of climate-related threats and opportunities.
- Principle 3 – Board structure: the board should determine the most effective way to integrate climate considerations into its structure and committees.
- Principle 4 – Material risk and opportunity assessment: the board should ensure that management assesses the short, medium and long-term materiality of climate-related risks and opportunities for the company on an ongoing basis.
- Principle 5 – Strategic and organisational integration: the board should ensure that climate systematically informs strategic investment planning and decision-making processes and is embedded into the management of risk and opportunities across the organisation.
- Principle 6 – Incentivisation: the board should ensure that executive incentives are aligned to promote the long-term prosperity of the company. The board should consider including climate-related targets and indicators in their executive incentive schemes where appropriate.
- Principle 7 – Reporting and disclosure: the board should ensure that material climate-related risks, opportunities and strategic decisions are consistently and transparently disclosed to all stakeholders.
- Principle 8 – Exchange: the board should maintain regular exchanges and dialogues with peers, policy-makers, investors and other stakeholders to encourage the sharing of methodologies and to stay informed about the latest climate-relevant risks, regulatory requirements etc.
Home Office: Second interim report reviewing the Modern Slavery Act 2015
On January 22, 2019 the Home Office published the Second Interim Report from the independent review team which is reviewing the Modern Slavery Act 2015 (Act). The review, launched by the Home Secretary in July 2018, aims to report on the operation and effectiveness of, and potential improvements to provisions in the Act.
The First Interim Report published in December 2018, addressed the role of the Independent Anti-Slavery Commissioner. This Second Interim Report considers the legal application of the Act and transparency in supply chains and addresses the question of how to ensure compliance with the Act and how to improve the quality of slavery and human trafficking statements produced by eligible companies.
The report’s recommendations include the following
- Clarifying the companies in scope - The Government should establish an internal list of companies in scope of section 54 of the Act and check with companies whether they are covered by the legislation. However, individual companies should remain responsible for determining if they need to produce a slavery and human trafficking statement.
- Improving the quality of statements – Section 54(4)(b)of the Act, which allows companies to report they have taken no steps to address modern slavery in their supply chains, should be removed.In section 54(5), ‘may’ should be changed to ‘must’ or ‘shall’, so the six areas set out as areas that an organisation’s statement may cover become mandatory. If a company determines that one of the headings is not applicable to its business, it should be required to explain why.
The statutory guidance should be strengthened to include a template of the information organisations are expected to provide on each of the six areas. Guidance should also make clear that reporting should include not only how businesses have carried out due diligence but also the steps that they intend to take in the future. The legislation should be amended to require companies to consider the entirety of their supply chains. If a company has not done so, it should be required to explain why it has not and what steps it is going to take in the future.
- Embedding modern slavery reporting into business culture - The Companies Act 2006 should be amended to include a requirement for companies to refer in their annual reports to their modern slavery statement. Section 54 should be amended to impose a similar duty on non-listed companies that meet the £36 million threshold but would not be captured by the Companies Act 2006 reporting requirements.
Businesses should be required to have a named, designated board member who is personally accountable for the production of the statement and failure to fulfil modern slavery statement reporting requirements or to act when instances of slavery are found should be an offence under the Company Directors Disqualification Act 1986.
- Increasing transparency - There should be a central Government-run repository to which companies are required to upload their statements and which should be easily accessible to the public, free of charge. Statements should be dated and clearly state over which 12-month period they apply.
- Monitoring and enforcing compliance – The Independent Anti-Slavery Commissioner should monitor compliance, and the Government should make the necessary legislative provisions to strengthen its approach to tackling non-compliance, adopting a gradual approach: initial warnings, fines (as a percentage of turnover), court summons and directors’ disqualification.
Global financial response to the crisis – a cross-border guide
With disruptions to supply chains and significant impacts to regional workforces, some corporates may be left with little other choice than to restructure their business.