Welcome to Essential Corporate News, our weekly news service covering the latest developments in the UK corporate world.
Parker Review Committee: Final report into the ethnic diversity of UK boards
On October 12, 2017 the Parker Review Committee, led by Sir John Parker, published its final report (Report) into the ethnic diversity of UK boards. This follows the report that the Parker Review Committee published in November 2016 which summarised the findings of their review so far and was prepared for consultation purposes.
The Report notes that UK citizen directors of colour represent only about two per cent of the total director population and 51 out of the FTSE 100 companies do not have any directors of colour. The Parker Review Committee believes that it is important that FTSE 100 and FTSE 250 companies change the way they approach the issue of ethnic diversity in the boardroom and the pipeline and as well as highlighting clear business reasons for increasing ethnic diversity on UK boards, the Report includes a number of recommendations as follows:
Increasing the ethnic diversity of UK boards
- Each FTSE 100 board should have at least one director of colour by 2021 and each FTSE 250 board should have at least one director of colour by 2024.
- Nomination committees of FTSE 350 companies should require their human resources teams or search firms (as applicable) to identify and present qualified people of colour to be considered for board appointment when vacancies occur.
- Relevant principles of the Standard Voluntary Code of Conduct for executive search firms, which have been used successfully for gender-based recruitment, should be extended on a similar basis to apply to the recruitment of minority ethnic candidates as board directors of FTSE 350 companies.
Development of candidates for the pipeline and plan for succession
- FTSE 350 companies should develop mechanisms to identify, develop and promote people of colour within their organisations to ensure over time that there is a pipeline of board capable candidates in their managerial and executive ranks that appropriately reflects the importance of diversity to their organisation.
- Led by board chairs, existing board directors of FTSE 350 companies should mentor and/or sponsor people of colour within their own companies to ensure their readiness to assume senior managerial or executive positions internally or non-executive board positions externally.
- Companies should encourage and support candidates drawn from diverse backgrounds, including people of colour, to take on board roles internally (e.g. subsidiaries) where appropriate, as well as board and trustee roles with external organisations to give experience and develop oversight, leadership and stewardship skills.
Enhanced transparency and disclosure
- The board’s policy on diversity should be described in the annual report and this should include a description of the company’s efforts to increase, amongst other things, ethnic diversity within its organisation, including at board level.
- Companies that do not meet board composition recommendations by the relevant date should disclose in their annual report why they have not been able to achieve compliance.
The Report includes “Questions for Directors” in Appendix A and a “Directors Resource Toolkit” in Appendix B to help existing boards deliver on the recommendations of the Report. Appendix C sets out case studies, with organisations providing practical examples of the steps they have taken to improve diversity in their organisations and within their executive and board ranks.
The Report notes that based on the current rates of turnover amongst FTSE 100 directors, the Parker Review Committee estimates that to reach an ethnically diverse mix similar to that of the overall adult working population by 2021 (approximately 15 per cent), one in five new board appointees would need to be a person of colour. Taking into account typical board appointment cycles, they calculate that this would mean that, on average, each FTSE 100 company would need to appoint one minority director in the period to 2021.
The Parker Review Committee plans to stay intact at least through 2021 and will meet at least annually to assess efforts being made and progress in relation to the Report’s recommendations. It encourages FTSE 350 companies to adopt the recommendations on a voluntary basis but notes that if there is insufficient progress it may endorse that the recommendations (or relevant parts) become mandatory.
BEIS: Streamlined Energy and Carbon Reporting – Consultation
On October 12, 2017 the Department for Business, Energy and Industrial Strategy (BEIS) published a consultation paper seeking views on the UK Government’s proposals for a streamlined and more effective energy and carbon reporting framework. The consultation builds on responses to a consultation in 2015, “Reforming the business energy efficiency tax landscape” which showed support for mandatory reporting of energy use and carbon data by certain large organisations.
The proposals include the following:
- UK quoted companies – They would still be required to report annually on their global greenhouse gas (GHG) emissions, but should also disclose total global energy use across all energy types in their annual report.
- UK unquoted companies – Certain of these (and their corporate groups) would need to report certain UK energy and associated GHG emissions and energy use via their annual reports. Respondents are asked whether those in scope should be “large” (and whether the Companies Act 2006 definition or the definition in the Energy Savings Opportunity Scheme should be used for these purposes) or whether the existing CRC Energy Efficiency Scheme qualification threshold of over 6GWh of electricity use per year should be used, or whether a different threshold of energy use should determine those in scope.
- Limited Liability Partnerships – The consultation asks whether the reporting requirements should apply to these.
- Voluntary participation by out of scope organisations – The Government wants to encourage this and asks for views on how support might be given, possibly through guidance.
- Reporting of information – The information would need to be included in annual reports. The consultation asks whether it would best sit within the strategic report, directors’ report or a new bespoke report forming part of the annual report. The information would require board level sign off.
- Information to be reported – UK quoted companies would continue to have to report on their global Scope 1 and Scope 2 GHG emissions and an intensity metric, with the addition of reporting on total global energy use across all energy types. Scope 3 reporting would remain voluntary. Unquoted UK companies would have to report energy use and associated emissions, but scope would be restricted to electricity, gas and energy used for transport and they would also have to report on an intensity metric.
- Reporting of complementary energy and carbon information – The consultation asks whether it should be mandatory for UK quoted and unquoted companies in scope to include information from the most recent audit on any identified energy savings opportunities and any energy efficiency action taken.
- Guidance – The consultation asks for views on what guidance, tools and data companies might need for financial managers to understand climate risks and their implications for their business and for companies to implement the recommendations of the Financial Stability Board’s Taskforce on Climate-related Financial Disclosures in financial disclosures.
- Complementary policies - The consultation also seeks views on other policy mechanisms such as regulation and incentives, that can work with reporting to drive energy efficiency.
The Government asks for responses by January 4, 2018 and encourages respondents to use the online e-Consultation platform.
FRC: Advice for preparing 2017/18 annual reports
On October 10, 2017 the Financial Reporting Council (FRC) wrote to companies highlighting changes to UK reporting requirements and setting out key areas where the FRC believes improvements can be made when companies prepare their annual reports for the 2017/18 reporting season.
The areas that the FRC considers require improvement include the following:
- The implementation of new accounting standards IFRS 9 “Financial Instruments”, IFRS 15 “Revenue from contracts with customers” and IFRS 16 “Leases” – the FRC notes that these standards have the potential to have a significant impact on many companies’ results and financial position. As a result, companies should be disclosing the likely impact of the new accounting standards on their financial statements as soon as they can be reliably measured. In the last set of financial statements before the implementation date of the standards, the FRC will expect to see detailed quantitative disclosure regarding the effects of the new standards. These quantitative disclosures should be accompanied by informative and sufficiently detailed explanations of the company’s analysis. Key judgements that management will need to make in complying with the new standards should be described.
- Strategic report – the FRC notes that quality can be further improved by ensuring that strategic reports explain the relationships and linkages between different pieces of information. The FRC encourages companies to improve their strategic report where a compliance focused approach leads to lack of coverage or the strategic report appears to be lacking balance.
- Non-financial reporting – the FRC notes that it aims to finalise its revised Guidance on the Strategic Report that it published for consultation in August 2017 in the first half of 2018. It also notes that it is undertaking a fundamental review of the UK Corporate Governance Code on which it will consult in November 2017. In looking to improve the effectiveness of section 172 Companies Act 2006, the FRC encourages companies to consider the broader drivers of value that contribute to the long-term success of the company, including disclosures relating to sources of value that have not been recognised in the financial statements and how those sources of value are managed, sustained and developed.
- Performance reporting – the FRC notes that reasons for changes to key performance indicators (KPIs) and the impact of this should be explained. Disclosure should be sufficiently case specific and be clear and informative.
- Risk reporting and viability statements – the FRC notes that its Financial Reporting Lab will publish a report on risk and viability reporting later in 2017 to provide practical guidance for companies. The FRC encourages companies to consider developing their viability statements in two stages – first, to consider and report on the proposals of the company over a period reflecting its business and investment cycles, and second to state 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, drawing attending to any qualifications or assumptions as necessary.
- UK referendum result – companies should consider how their assessment of the potential impact on their business of the UK referendum result has developed over the year and make appropriate disclosures to reflect their latest analysis.
- Statement of cash flows – the FRC draws attention to the amendments to IAS 7 “Statement of Cash Flows” which require an explanation of changes in a company’s financing obligations over the period. It notes that the new requirements provide an opportunity for companies to improve the clarity of their disclosures, particularly in areas where investors have voiced disappointment, for example, on the use of financing facilities such invoice discounting arrangements.
- Dividends – the FRC urges companies to adopt the recommendations in the Financial Reporting Lab’s implementation study on this topic published earlier in October 2017. In particular, the FRC encourages further adoption of reporting on the capacity to pay dividends, including the extent to which profits can be distributed by subsidiary companies and the extent of any restrictions.
- Critical judgements and estimates – the FRC notes that information value can be approved by providing more granular information about a smaller set of judgements and estimates that had a significant impact on results and explaining why certain assets were subject to significant risk of material change. It notes that the FRC has carried out a thematic review of this topic which will be published in Q4 2017.
- Accounting policies – the FRC notes that companies should ensure that their disclosures are sufficiently tailored to their circumstances.
- Business combinations – the FRC states that the impact of contingent and deferred consideration arrangements can be difficult to determine as they rely on a high level of estimation and multiple assumptions, making clear disclosure imperative. It points out that sometimes it is also not clear why few or no intangible assets, other than goodwill, were recognised in accounting for an acquisition.
- Pensions – pension disclosures should provide sufficient transparency of the nature and risks to which the schemes expose the company, including informative explanations of deficit funding arrangements, risk management strategies and scheme assets. Again, the FRC notes that it has carried out a thematic review on this topic which will be published in Q4 2017.
- Audit quality and effectiveness – the FRC notes that in its monitoring of 2017/2018 year end audits, it will be seeking evidence that the auditor has challenged management and reported clearly to the audit committee in several of the areas featured in this letter, including critical judgements, estimates and pensions.
AIM Notice 47 – LEI requirement for AIM companies
On October 13, 2017 the London Stock Exchange (LSE) published AIM Notice 47, notifying AIM companies that the LSE requires all AIM companies to have a Legal Entity Identifier (LEI) code, in order to ensure compliance with the obligations under MiFID II and the Market Abuse Regulation (MAR).
Market operators, such as the LSE, are required to collate LEI codes for each issuer with securities admitted to trading. An LEI code holds information that enables clear and unique identification of legal entities participating in financial transactions.
The AIM application form for admission of new securities to trading to AIM has been amended to require an LEI. AIM companies must register for an LEI by November 30, 2017 if they have not already done so and the AIM Notice provides information on how to do that.
BEIS: Updated guidance and webpage on reporting requirements relating to business payment practices and performance
On October 11, 2017 the Department for Business, Energy and Industrial Strategy (BEIS) updated its webpage which provides guidance on the reporting requirements for business payment practices and performance. This now states that businesses can publish their reports online.
The Reporting on Payment Practices and Performance Regulations 2017 and the Limited Liability Partnerships (Reporting on Payment Practices and Performance) Regulations 2017 came into force on April 6, 2017 and they have introduced a “duty to report” which requires qualifying companies and limited liability partnerships to publicly report twice a year on their payment practices and performance on a Government-provided web service.
The webpage provides a link to updated guidance for those businesses which have to comply with the new statutory reporting duty as well as details about the Government’s new digital service. Businesses can use the digital service to check if they need to publish a report, publish the report itself or search for a report. A contact address is also given for queries related to the reporting requirement or digital service.
Best Practice Principles Group: Consultation on Shareholder Voting Research and Analysis
On October 11, 2017 the Best Practice Principles Group (BPP Group) launched a consultation that seeks views from investors and companies on whether the Best Practice Principles for Shareholder Voting Research and Analysis (the Principles) have been effective in ensuring the integrity and efficiency of the services provided by shareholder voting analysts and advisors.
The Principles, introduced in 2014, were developed by the industry to provide a voluntary performance and reporting framework, to promote a greater understanding of its role, and to promote the integrity and efficiency of processes and controls related to the provision of these services and management of any conflicts of interest.
The BPP Group has also published a consultation questionnaire, which asks various questions including the following:
- Would it be beneficial to have a set of principles that are capable of being applied in all markets?
- Are there any other issues or activities that should also be covered by the Principles, such as intermediary vote processing and confirmation, ESG advisory services and indices or governance engagement services?
- Is the structure of the Principles, whereby each principle is accompanied by guidance which sets out practices to be followed and information to be disclosed on a "comply or explain" basis, clear and appropriate?
- Should details of any other potential sources of conflict of interest be included in the non-exhaustive list currently set out in the Principles?
- How satisfied are companies with their communication with signatories to the Principles?
- What are the views of investors in relation to many companies' belief that they should have the opportunity to comment on the analysis and recommendations in research reports before they are finalised?
The BPP Group is keen to hear from investors, companies and other providers of voting research and related services on their experience by December 15, 2017. A decision has not yet been taken on whether there will be a second consultation on draft revised Principles and reporting arrangements. This is likely to depend on the extent of any revisions proposed, and will be informed by the responses to this consultation. If it is decided that a second consultation is not necessary, then the aim would be to publish a report setting out the findings and conclusions of the review, together with the revised Principles and details of the reporting and monitoring arrangements in April 2018. If there is a second consultation, it will begin in April2018 and the revised Principles and other documents will be published in July or August 2018.
Middle East: Landmark decision by the DIFC Court
On November 17, 2019, the DIFC Court handed down a landmark decision in YYY Limited v ZZZ Limited [DIFC] 2017 ARB 005 (DIFC Court Judgment).
Australia: Be wary of strangers: WA Court of Appeal decides when disputes involving both parties and non-parties to an arbitration agreement should be stayed
The recent decision of the Western Australian Court of Appeal in Hancock Prospecting Pty Ltd v DFD Rhodes Pty Ltd highlights the complex issues that arise where court proceedings commenced by “strangers” to an arbitration agreement involve disputes covered by the arbitration agreement.