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The new framework for stopping scams before they start
Scams are a global phenomenon and no business is immune. In addition to reputational damage and a likely increase in customer complaints.
Global | Publication | November 18, 2016
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On November 16, 2016 the Investment Association (IA) published Guidelines on Viability Statements. Under Code Provision C.2.2 of the UK Corporate Governance Code (Code), directors are required to prepare a viability statement that explains how they have assessed the prospects of the company, what period the assessment covered and why this period is appropriate, and confirm whether they have a reasonable expectation that the company will be able to continue in operation and meet its liabilities as they fall due over the period of their assessment.
The IA Guidelines set out the expectations of institutional investors in relation to the disclosures to be made in the context of viability reporting by Premium listed companies and they include the following:
The period for the viability assessment
Consideration of prospects and risks when assessing viability
Stress testing
When directors assess a company’s prospects and viability the IA understands stress tests are likely to be undertaken to see whether the strategy is viable and evaluate any barriers to its execution. Investors are not always made aware of the extent of these stress tests and would welcome more transparency as to the specific scenarios considered and likely outcomes, specific mitigating or remedial actions, and any reverse stress testing.
Qualifications and assumptions
The Code expects directors to draw attention to any qualifications or assumptions as necessary and investors consider that qualifications should be differentiated from assumptions and be specific to the company.
On November 17, 2016 the Investment Association (IA) published a Public Position Statement providing its view on quarterly reports and the issuance of quarterly earnings guidance. The Statement calls for companies to cease reporting quarterly and refocus reporting on a broader range of strategic issues.
When developing its Productivity Action Plan, published in March 2016, IA members widely referred to quarterly reporting as a distraction that shifted company resources away from long-term strategic considerations. In particular, members expressed concern at the potential for the practice to promote myopic behaviour by senior management by channelling its focus on short-term fluctuations in performance - resulting in the risk of it managing the market, rather than managing the business.
The IA notes that the Transparency Directive, which has removed mandatory quarterly reporting requirements, came into force in November 2013 and was enacted into UK law in May 2014. Since it is no longer required, the IA is calling for companies to cease reporting quarterly and refocus reporting on a broader range of strategic issues. Companies should focus on improvements in reporting on the long-term drivers of sustainable value creation and shift resources towards improved reporting on long-term strategy and capital management. The IA encourages companies to review how their current reporting cycle is adding value, and to make necessary amendments to ensure it is appropriately focused on the long-term drivers of productive growth within the business. For those companies that believe it is important to continue to report quarterly, either due to competitive market pressures or shorter market cycles, the IA asks that they publicly explain this position, and how it is relevant to the achievement of their long-term strategy.
Going forward, the IA’s Institutional Voting Information Service (IVIS) will monitor each company’s approach to reporting and outline to IA members which companies continue to report on a quarterly basis and provide the company’s public explanation.
Additionally, in the coming months, the IA will host a series of round tables to discuss the benefits and challenges associated with ending quarterly reporting. Following these round tables, the IA will issue a guidance document on the issues raised.
(IA, Public Position Statement: Quarterly Reporting and Quarterly Earnings Guidance, 17.11.16)
On November 14, 2016 the Financial Reporting Council (FRC) published a press release advising that it has categorised signatories to the UK Stewardship Code (the Code) into tiers based on the quality of their Code statements. The FRC also published the list of asset managers, asset owners and service providers split into the relevant tiers. Asset managers have been categorised in three tiers and other signatories in two tiers.
The FRC first announced this exercise in December 2015 with the intention of improving reporting against the principles of the Code and assisting investors in judging how well their fund manager is delivering on their commitments. The FRC believes that the recent assessment demonstrates much improved reporting against the Code and greater transparency in the UK market.
Signatories to the Code have been tiered according to the quality of the reporting in their statements based on the seven principles of the Code and the supporting guidance:
Of the nearly 300 signatures to the Code, more than 120 are in Tier 1 now. Asset managers who have not achieved at least Tier 2 status after six months will be removed from the list of signatories as their reporting does not demonstrate commitment to the objectives of the Code.
(FRC, Tiering of signatories to the Stewardship Code, 14.11.16)
On November 14, 2016 Hermes Investment Management published a paper, “Remuneration Principles: Clarifying Expectations”, which is directed primarily towards large publically listed companies. The proposals in the paper seek to practically improve existing executive director pay practices to better achieve their intended objectives.
In 2013 Hermes published a set of Remuneration Principles (which have been updated subsequently) in conjunction with the Pension and Lifetime Savings Association (PLSA), BT Pension Scheme, Railpen Investments and Universities Superannuation Scheme. The Remuneration Principles are as follows:
This paper identifies issues with the prevailing model of executive pay, including excessive quantum, misalignment to long-term value, excessive complexity, weak accountability and unfairness, and low levels of trust. It then proposes solutions to these issues based on the Remuneration Principles.
The paper also sets out an illustration of a new type of remuneration structure that companies should consider.
(Hermes Investment Management, Remuneration Principles: clarifying expectations, 14.11.16)
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Scams are a global phenomenon and no business is immune. In addition to reputational damage and a likely increase in customer complaints.
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