Essential Corporate News – Week ending January 27, 2016

Welcome to Essential Corporate News, our weekly news service covering the latest developments in the UK corporate world.

On January 24, 2017 the Supreme Court ruled on Article 50 of the Treaty of European Union, handing down judgment in the UK Government’s appeal against the earlier decision of the High Court that parliamentary approval is needed to give notice under Article 50, the formal treaty mechanism by which a Member State exits from the European Union.

The decision, by a majority of 8-3, upholds the High Court’s earlier decision and means that the Government cannot invoke Article 50 without first obtaining the approval of Parliament.

For more information, please see our Inside Brexit blog entry discussing the judgment.

On January 23, 2017 the Department for Business, Energy and Industrial Strategy (BEIS) published a Green Paper on building Britain’s industrial strategy. Its aim is to improve living standards and economic growth by increasing productivity and driving growth across the whole country. It starts to set out a coherent framework for industrial strategy across all sectors and the Green Paper is accompanied by a separate document in which BEIS sets out the ten pillars underpinning BEIS’ approach to industrial strategy.

The ten pillars are as follows:

• Investing in science, research and innovation – The UK will become a more innovative economy and do more to commercialise its science base, developing new technologies and driving growth throughout the UK. 
• Developing skills – The UK will build a proper system of technical education, and boost key skills in science, technology, engineering, maths and digital proficiency, to ensure people have the skills employers need now and in the future. 
• Upgrading infrastructure – The UK will upgrade its digital, energy, transport, water and flood defence infrastructure, and join up central government investment and local growth priorities more efficiently. 
• Supporting businesses to start and grow – The UK will support businesses and entrepreneurs across the UK, to ensure they can access finance and wider support to grow, and have the right conditions for companies to invest long-term. 
• Improving procurement – The UK will ensure public procurement drives innovative new products and services, strengthens skills, develops UK supply chains and increases competition by creating more opportunities for small and medium-sized enterprises (SMEs). 
• Encouraging trade and inward investment – The UK will become a global leader in free trade, including promoting and supporting UK exports, building future trading relations and creating a more active approach to winning major overseas contracts.
• Delivering affordable energy and clean growth – The UK will keep energy costs down for businesses, build the energy infrastructure needed for new technologies, and secure the economic benefits of the UK’s move towards a low-carbon economy. 
• Cultivating world-leading sectors – The UK will build on its areas of global excellence and help new sectors to flourish, supporting businesses to take the lead in transforming and upgrading their industries through sector details. 
• Driving growth across the whole country – The UK will build on local strengths and address factors that prevent areas from reaching their full potential by investing in key infrastructure projects, increasing skill levels and backing local expertise. 
• Creating the right local institutions – The UK will create strong structures and institutions to support people, industries and places to maximise local strengths, including reviewing the location of government bodies and cultural institutions.

BEIS has requested comments on the papers by April 17, 2017.

(BEIS, Building our Industrial Strategy – Green Paper, 23.01.17)

(BEIS, Building our Industrial Strategy: 10 pillars, 23.01.17)

On January 24, 2017 the International Corporate Governance Network (ICGN), the Institute of Directors (IoD), Institute of Chartered Secretaries and Administrators (ICSA) and the Trades Union Congress (TUC) published a letter sent by them to the Prime Minister regarding corporate governance issues in the Green Paper published in November 2016.

The signatories note that they will be responding individually to the Green Paper setting out their own particular priorities, however, the signatories all recognise the importance of section 172 Companies Act 2006. Section 172 requires directors to promote the success of the company for the benefit of shareholders, and in so doing to have regard for the interests of workers, consumers and other stakeholders. The letter notes that there is no effective mechanism for policing this law, which means that if companies, particularly private companies where there is little or no institutional shareholder oversight, do abuse the law, they are not always held to account. The letter suggests that establishing a regulator for companies would deliver economic benefits and greater fairness.

In addition, the letter notes that one of the most contentious governance issues is that of executive remuneration. While the letter acknowledges it is not likely that one single measure will remedy the problem, it states that perhaps what is most important is the Government’s voice in demanding that companies, their remuneration committees, advisers and shareholders, recognise the problem, and resolve a better, and perhaps a simpler, regime for corporate pay which can command broad support.

Finally the signatories urge the Prime Minister to do the following, at a minimum:

• Create a complaint and appropriate remedy mechanism for those whose interests should be protected by the law.
• Ensure investors and stakeholders are involved in the governance of the complaint mechanism.
• Strongly encourage, or mandate larger private companies to apply the principles of independence and transparency which have worked for public companies.
• Help encourage more broadly acceptable frameworks for executive pay, and recognise that executive pay will require a long-term focus by directors, investors, stakeholders and government.

(ICGN, IoD, ICSA, and TUC, Letter to Prime Minister urging to strengthen corporate governance, 24.01.17)

On January 26, 2017 the Financial Reporting Council’s (FRC’s) Financial Reporting Lab published a case study report on WM Morrisons supermarket PLC (Morrisons). The report focuses on two areas of disclosure of Morrisons’ supplier arrangements: commercial income and relationships with suppliers.

Disclosures: Commercial income

Reporting by a company to investors is often a fine balancing act between providing too much information and not enough detail. This is especially the case in areas where there is limited guidance, regulation, and practice.

In 2015 Morrisons found itself managing this balance when responding to increased investor interest in the nature and impact of commercial income (a type of payment between suppliers and retailers), following recognition issues identified at Tesco plc.

In its 2014/15 annual report Morrisons adopted a level of disclosure of commercial income which was more comprehensive than others in the sector.

Through its disclosure, Morrisons sought to:

• Improve understanding of the context of commercial income by providing the background to and describing the nature of commercial income; and providing details of the impact on profit, debtors, and creditors.
• Generate a level of comfort over commercial income by describing the controls and processes in place around commercial income, concentrating on the recording, accrual, and collectability; and describing the work of the Audit Committee, focusing on what they did in gaining comfort over commercial income.

In 2015/16 the focus of value to investors of the Morrisons disclosures changed, with the initial concern of investors having been satisfied the importance of trend and industry comparative information came to the fore. The disclosures provide additional insight into the Morrisons business, and over time add to investors’ understanding of margins and how the company works with suppliers.

A model for reporting of emergent issues

Investors consider that the approach that Morrisons adopted could be a useful model for others when reporting on an emerging industry issue. Disclosures which are made on an emergent or one-off issue can often be seen as adding clutter to the accounts once their initial purpose has passed. Companies which seek to produce clear and concise accounts consider on a regular basis whether the information they are producing continues to meet an investor or regulatory need.

Disclosures: Relationships with suppliers

Information on commercial income provides some insight into how a retailer works with suppliers. This feeds into the broader desire from investors to understand the quality of supplier relationships and their place in a food retailer’s wider business model. Investors recognise that the multi-faceted nature of relationships can be difficult to report in the confines of the annual report. However, by drawing out the differential aspects of its relationship with the supply base, Morrisons’ business model disclosure helps investors understand the importance of these relationships to the company.

This report forms part of the FRC’s Clear and Concise reporting initiative that promotes transparent and accessible reporting.

(Financial Reporting Lab, Lab case study report: WM Morrison Supermarkets PLC – Supplier relationships and emergent issues reporting, 26.01.17)

On January 24, 2017 the Competition and Markets Authority (CMA) published an updated guide, developed jointly with the Institute of Risk Management, for senior managers, directors and their advisers on how to avoid breaching competition law.

The guide provides a basic overview of competition law, outlining the steps that can be taken to help identify and mitigate competition law risks specific to certain organisations. It is intended to help businesses ensure that they are compliant with competition law and may help businesses spot when others are engaging in illegal anti-competitive behaviour. The guide also provides details on what to do if a business is breaking competition law.

(CMA, Competition Law Risk: A Short Guide, 24.01.17)

On January 20, 2017 the European Commission published a consultation paper on the capital markets union (CMU) action plan in connection with its planned mid-term review. The consultation retains the same structure as the action plan adopted in September 2015 but seeks feedback on how the current programme can be updated and completed so that it represents a strong policy framework for the development of capital markets.

Proposals include:

• strengthening non-bank financing for innovation, start-ups and non-listed companies; 
• making it easier for companies to enter and raise capital on public markets; and
• facilitating cross-border investment.

The European Commission has requested comments on the paper by March 17, 2017.

(European Commission, Consultation Document: Capital Markets Union Mid-Term Review 2017, 20.01.17)