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Essential Corporate News – Week ending May 5, 2017

Publication May 5, 2017


Introduction

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

ICGN: Use of share buybacks and their governance implications - Viewpoint

On May 2, 2017 the International Corporate Governance Network (ICGN) published a Viewpoint Report on the use of share buybacks and their governance implications. The report examines the arguments for and against the use of share buybacks as a tool for managing capital. It identifies some key issues that need to be addressed by shareholders and boards around buybacks, particularly in relation to capital allocation, determining the appropriate price for the buyback, calculation of net present value and the methodology for calculating this and the impact of buybacks on executive remuneration.

While the report does not take a view as to whether companies should or should not engage in share buybacks, it raises issues about potential abuses and suggests the need for healthy scepticism on the part of both boards and shareholders. It sets out a number of critical questions that should be asked by both shareholders and boards, including the following:

  • What is the board’s approach to capital management and the objective of buybacks? Is there an informed discussion involving the whole board? Was there a conscious discussion within the board about alternatives?
  • How much of what the company earns should be re-invested into the business?
  • How much should be returned to shareholders through dividends or buybacks and how much should be retained by the management as a reward?
  • How far did the board discuss the price at which buybacks were made and what is the buyback programme’s impact on the company’s creditors and credit quality?

(ICGN, Viewpoint: Share buy-backs and their governance implications, 02.05.17)

FRC Lab: A framework for future digital reporting

On May 2, 2017 the Financial Reporting Lab (the Lab) published a report which sets out a framework for future digital reporting. The Lab has decided to undertake a Digital Future project and this is the first in a series of reports, following on from the Lab’s 2015 Digital Present Report. Written by a wide range of preparers, investors and others, the report expresses what they would like to see in any future (digitally enabled) system of corporate reporting.

The future digital reporting framework consists of twelve characteristics that are fundamental to the future of digital reporting and these are contained within three broad stages in the process of corporate reporting:

Production characteristics
Digital reporting must be cost efficient, easy to produce, timely and compatible with current reporting systems. Production characteristics are of most interest to companies and those supporting them. They focus on the collation, amalgamation, packaging and presentation of financial and non-financial information that a company or organisation will gather with the intention of releasing it externally.

Distribution characteristics
The distribution of such reporting must be free, prompt, compliant and easily accessible to find. This stage is focused on the dissemination of the information, meeting the regulatory requirements and communicating with external stakeholders. These characteristics interest both companies and those consuming the information.

Consumption characteristics
Successful future digital reporting will have certain consumption characteristics too; it shall be contextual, usable, credible and engaging. This final stage is focused on the analysis and the use of the distributed information. The consumption characteristics are of most interest to those bodies utilising the information.

Next steps

The Lab is keen to hear from technology experts and others with strong views on, or experience of, how technology might be used for corporate reporting. The next stage of the project will assess various reporting technologies and initiatives against the future digital reporting framework, to see how they might work together to meet the needs of preparers and users.


(FRC, Framework for future digital reporting, 02.05.17)

ICAEW: Executive Remuneration - Factors influencing consultants’ advice

In May 2017, the Institute of Chartered Accountants in England and Wales (ICAEW) published a report which examines the factors that influence how remuneration consultants advise non-executive directors (NEDs) on important decisions made within remuneration committees. The report’s findings are the result of a number of face-to-face interviews with consultants who advise FTSE 350 companies on executive pay.

The key findings presented in the report are as follows:

  • Often a fundamental change in business strategy or in the leadership team triggers changes in the remuneration plan which requires advice from consultants.
  • Consultants’ advice is subject to organisational context and therefore influenced by the company’s industry, business strategy and stage in its lifecycle.
  • Regulation policies and the company’s country of origin are other important factors to influence a consultant’s pay advice.
  • Quality of the chairmanship is paramount to ensuring a ‘good’ or a ‘bad’ remuneration committee but the calibre of the whole committee is still relevant. NEDs should be competent and committed and the chair must involve the whole remuneration committee in decisions, and encourage participation and debate.
  • Characteristics of a good remuneration committee are intellectual capability, good commercial judgement and the competence to understand the various parameters and complexities.
  • The relationship between consultants and the remuneration committee being advised matters; for instance, some companies have used the same trusted consultant for years and meetings are frequent while other companies have relatively new consultants that may only attend meetings once a year.
  • The degree of involvement of the CEO in the remuneration-setting process can lead to tensions. Therefore boundaries must be set to ensure that the remuneration committee is maintaining independence and control over the outcomes.
  • The quality of the remuneration consultants themselves, their independence and ability to advise will affect the remuneration committee being advised.


(ICAEW, Executive Remuneration: factors influencing consultants’ advice, 04.05.17)


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