On January 25, 2018 the Pensions and Lifetime Savings Association (PLSA) published their latest Corporate Governance Policy and Voting Guidelines (Guidelines) to assist PLSA members in promoting the long-term success of the companies in which they invest and ensuring that the board and management of those companies are held accountable to shareholders.
The PLSA notes that since the changes proposed by the Financial Reporting Council (FRC) to the UK Corporate Governance Code (Code) in December 2017 will not come into effect for some time, the Guidelines relate to the application of the current Code. Key changes in the Guidelines from those published in January 2017 include the following:
The PLSA expects both audit committee and auditor reports to provide sufficient “colour” to enable shareholders to form a judgement about their work in the year. Particular areas of interest are:
- critical accounting policies used;
- level of materiality adopted;
- assumptions and judgements;
- evidence of professional scepticism by the auditor;
- main findings and actions taken to respond to any recommendations where the FRC’s Audit Qualiy Review Team has undertaken a review; and
- oversight of auditor independence by the audit committee.
Auditors are also expected to maintain a healthy level of scepticism over management accounts, rigorously test them and be willing to challenge their own past judgements. A maximum 20 year audit firm tenure is a minimum expectation and the audit tender process should focus on auditors’ independence and processes to ensure professional scepticism, as well as audit quality.
Approval of annual report and accounts
The Guidelines note that if the audited accounts are deemed to fail to provide a true and fair view of profit or loss, assets or liabilities,(for example, because they overstate profit or assets or understate likely liabilities such as pension or climate-related liabilities) then shareholders should consider voting against the adoption of the report and accounts and/or the auditor and/or the audit committee chair.
The Guidelines also stress the need to provide a fair and balanced explanation of the composition, stability, skills and capabilities and engagement levels of the company’s workforce and recommend a vote against the annual report where this is not provided.
If there is boilerplate or limited disclosure about the board evaluation and review of corporate governance arrangements in the annual report, the Guidelines recommend a vote against adoption of the report and accounts.
Approval of remuneration report
Circumstances in which shareholders may wish to consider voting against the remuneration report include where the remuneration committee has failed to exercise discretion and pay awards fail to reflect wider circumstances such as serious corporate conduct issues.
If shareholders vote against the remuneration report, the Guidelines recommend that in most circumstances shareholders should also vote against the re-election of the remuneration committee chair and other remuneration committee members if they have been in post for more than one year.
Appointment of auditor and authorisation of auditor’s remuneration
Where the auditor has been in place for more than 20 years, the Guidelines suggest shareholders should consider a vote against the audit committee chair and auditor. They also stipulate that companies should spend no more than 50 per cent of the audit fee on non-audit services (or a material monetary sum - £500,000) unless an explanation of exceptional circumstances that may apply is provided. If that figure is exceeded, a vote against the audit committee chair, auditor and/or audit fees may be appropriate.
Similarly, if there are major concerns about the audit process or quality of the accounts (relating to a failure to provide a true and fair view or visibility over the dividend paying capacity) which are not satisfactorily resolved by the board, then a vote against the re-election of the audit committee chair or reappointment of the auditor may be appropriate.
Market purchase of shares
The Guidelines state that shareholders will generally support buy-backs if they are a prudent use of the company’s cash resources and are supported by cash-flows of the underlying business, and do not introduce excessive and unsustainable leverage.
The Guidelines include a new section headed “Sustainability”. This notes that positive relations with key stakeholders is of clear importance to a company’s long-term performance and it recommends that shareholders should consider voting against the annual report and accounts or the re-election of the board chair where they believe key relationships are being neglected and the board is not adhering with the spirit of requirements to have for the concerns of stakeholder constituencies.
Climate change is noted as a key sustainability issue and the Guidelines state that companies in sectors affected by climate change and efforts to mitigate it should undertake rigorous examinations of whether their business model is compatible with commitments to mitigate global temperature increases and how they plan to address the issue of climate change. This also requires climate-related expertise at board level. The Guidelines stipulate that where, after shareholders have attempted to engage on this issue, companies fail to provide a detailed risk assessment and response to the effect of climate change on their business, and incorporate appropriate expertise on the board, shareholders should not support the re-election of the board chair.
(PLSA, Corporate Governance Policy and Voting Guidelines, 25.01.18)