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Essential Corporate News – Week ending November 3, 2017

Publication November 3, 2017


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

Investment Association: Revised Principles of Remuneration

On November 3, 2017 the Investment Association published their updated Principles of Remuneration (Principles) which set out, through over-arching Principles and general guidance, the views of Investment Association members on the role of shareholders and directors in relation to remuneration and the manner in which it should be determined and structured. While predominantly aimed at Main List companies, the Investment Association notes that the Principles are also relevant to companies on other public markets, such as AIM, and other entities.

Key changes from the October 2016 Principles include the following:

  • Discretion specific to a particular incentive scheme should be disclosed in the remuneration policy in addition to the plan rules.
  • In reporting on matters such as the gender pay gap or publishing executive pay to employee pay ratios, the remuneration committee should provide numbers in the context of the company’s business and fully explain why these figures are appropriate.
  • In consulting with shareholders on remuneration, details of the whole remuneration structure, not just the proposed changes, should be provided.
  • Following consultation and before the remuneration report is finalised, the remuneration committee should review the proposals in light of subsequent events between the consultation and implementation of the policy, to ensure the proposals remain appropriate.
  • Relocation benefits should be disclosed when an executive director is appointed. If needed, they should be for a limited period, disclosed to shareholders and each element detailed in the remuneration report.
  • In relation to annual bonuses, the definition of performance measures should be clearly disclosed, any adjustments to the metrics set out in the accounts should be clearly explained and the impact f the adjustment on the outcome disclosed.
  • When a bonus is paid, a full analysis of the performance relative to targets should be provided in the remuneration report and bonus targets should be disclosed no later than 12 months following payment of the bonus award.
  • Deferral of a portion of the bonus into shares is expected for any bonus opportunity of greater than 100 per cent of salary.
  • In looking at long-term incentives, remuneration committees should select a remuneration structure that is appropriate, efficient and cost-effective in delivering long-term strategy and its selection should be well justified to shareholders.
  • If an LTIP-type structure is chosen, performance conditions should be carefully chosen so they are suitable for measurement over a long period of time, threshold vesting amounts should not be significant compared to annual base salary and full vesting should reflect exceptional performance and depend on achieving significantly greater value creation than that applicable to threshold vesting.
  • In relation to restricted share awards, the discount rate for moving to these from an LTIP should be a minimum of 50 per cent. The total vesting and post-vesting holding period should be at least five years and some Investment Association members expect restricted share awards to be subject to an appropriate underpin.

(IA, Principles of Remuneration, 03.11.17)

Investment Association: Remuneration issues to consider for 2018 AGMs

On November 3, 2017 the Investment Association wrote to chairs of remuneration committees outlining key changes to their updated Principles of Remuneration and highlighting items of focus for their members in the 2018 AGM season.

Issues to be considered for 2018 AGMs include the following:

  • Levels of remuneration – It is hoped all companies will follow the approach of some large companies who have reduced potential variable remuneration rewards and limited overall pay in renewing their remuneration policies in 2017. Increases to variable remuneration maximums in revised remuneration policies, salary increases and “automatic” inflationary salary increases are matters of concern. Disclosure of pay ratios between the CEO and median or average employee and between the CEO and executive team are welcomed. Contribution rates to pensions for executive directors should be at the same level as for the general workforce.
  • Remuneration structures – The letter notes the move by some companies to restricted shares and states that growing numbers of shareholders will support this for the right company, in the right circumstances. However, new remuneration structures should not be proposed only when the current structure is not paying out to the executive directors and remuneration committees are urged to adopt a remuneration structure which is most appropriate for the company and the implementation of its business strategy.
  • Shareholder consultation – The letter notes the consultation process could be improved in some cases. Where companies withdraw resolutions prior to the AGM, they should conduct a full analysis of shareholder feedback and consult further before resubmitting their remuneration policies.
  • Pay for performance – Robust transparency on targets and structures is required so that the link between remuneration and company performance can be clearly seen. Full disclosure of all performance targets is needed, either through disclosure at the time of the award or within 12 months where there is commercial sensitivity. Where adjusted metrics for executive remuneration are used, an explanation of why this is appropriate should be given and a breakdown of how the remuneration target has been adjusted from the headline key performance indicator should be provided. A thorough explanation as to why personal and strategic performance targets have paid out should be provided and IVIS will Amber Top reports where insufficient information on non-financial targets is provided.
  • Accountability of remuneration committee chairs – The letter notes the different approaches investors are taking in their voting policies in relation to the re-election of directors based on decisions made by the remuneration committee.

(IA, Letter to chairs of remuneration committees, 03.11.17)

ISS: Consultation on changes to UK/Ireland policy on virtual/hybrid shareholder meeting proposals

On October 27, 2017 Institutional Shareholder Services (ISS) published its 2018 benchmark policy consultation, seeking views on changes to certain of its voting policies for 2018. In relation to its UK/Ireland policy and its European policy, ISS is considering adding a new policy on virtual/hybrid shareholder meetings.  While ISS notes that the practice of holding virtual shareholder meetings is rare in the UK, it comments that a growing number of companies have sought shareholder approval for article amendments that allow for the possibility of hybrid or virtual shareholder meetings in the future.  While in continental Europe the practice of holding virtual or hybrid shareholder meetings has not been observed, it notes that it is thought that the practice could emerge at some point if UK and US-based companies continue to adopt it.

Key changes under consideration

Under the proposed policy, ISS will generally recommend FOR proposals that allow for the convening of hybrid shareholder meetings and will generally recommend AGAINST proposals that allow for the convening of virtual-only shareholder meetings.

ISS is proposing these changes in light of investors’ views on virtual shareholder meetings. It notes that some investors are concerned about moves to completely eliminate physical shareholder meetings, arguing that virtual meetings may hinder meaningful exchanges between management and shareholders and enable management to avoid uncomfortable questions.  However, investors generally support “hybrid” meetings, where companies employ technological means to allow for virtual participation as a supplement to the physical shareholder meeting.

Questions for comment

While ISS welcomes any comments on the topic, it specifically seeks feedback on the following:

  • If investors would be willing to support “virtual-only” shareholder meetings if they provide the same shareholder rights as a physical meeting, what rationale or assurances would be required for investors to support changes to the articles of association allowing for “virtual-only” shareholder meetings?
  • Should ISS provide additional disclosure or alter its voting policies in markets where shareholder approval is not required for companies to switch to virtual-only meetings?

Next steps

Comments are requested by November 9, 2017. ISS expects to publish its final 2018 benchmark policy changes in the second half of November 2017 and it will apply the revised policies to shareholder meetings on or after February 1, 2018.

(ISS, Consultation on changes to UK/Ireland policy on virtual/hybrid shareholder meeting proposals, 27.10.17)

CLLS and Law Society: Updated Q&As on Market Abuse Regulation

On October 30, 2017 the City of London Law Society (CLLS) and Law Society Company Law Committees’ Joint Working Parties on Market Abuse, Share Plans and Takeovers Code updated their Q&As on the Market Abuse Regulation (MAR) in light of ESMA’s updated Q&As on MAR published in July 2017. 

Q&A 7 in Part A, on managers’ transactions, asks whether, where a director of a company whose shares are traded on AIM (Company A), who is also a person discharging managerial responsibilities (PDMR) of, and holds less than 50 per cent of the shares in, Company B, Company B is a “person  closely associated with the director” so that Company B must notify Company A under Article 19(1) of MAR of transactions in Company A’s shares conducted on its own account.

The Q&A refers to Q7.7 of ESMA’s Q&As and has been amended to set out the circumstances in which Company B will be a person closely associated to the director, a PDMR of Company A. These include where the managerial responsibilities of Company B are discharged by the director, or if the director took part in or influenced the decision of Company B to carry out the transaction in Company A’s financial instruments. To avoid making Company B a “person closely associated” in these circumstances, the Q&As state that the director should not vote on, participate in any discussion in relation to or otherwise influence Company B to carry out a transaction in Company A’s financial instruments. The Q&A says that it will be sufficient for the director to recuse himself from any board meeting discussing or relating to Company A unless, on the specific facts, the director otherwise exerted an influence on Company B’s decision.

However, since MAR does not define “control”, this should be given its ordinary meaning (ie a majority of the voting rights) so if the director owned 60 per cent of Company B, this would make Company B a person closely associated to the director even if the director did not take part in or influence any decision of Company B to carry out a transaction in the financial instruments of Company A.

(CLLS and Law Society, Updated Q&As on MAR, 01.11.17)

ESMA: Updated Q&As on Guidelines on Alternative Performance Measures

On October 30, 2017 the European Securities and Markets Authority (ESMA) updated its Q&As on its Alternative Performance Measures guidelines (APM Guidelines). ESMA’s APM Guidelines aim to promote the usefulness and transparency of APMs in prospectuses and regulated information.

ESMA has added six new Q&As:

  • Question 12 on the definition of APMs – This clarifies that financial measures originally defined or specified in the applicable financial reporting framework and adjusted with the aim of isolating the effect of foreign currency on the measures qualify as APMs.
  • Question 13 on the scope of the APM guidelines – This notes that a segment measure of profitability, which is determined on a different accounting basis than the basis defined or specified in the applicable reporting framework, does fall within the definition of an APM. The application of the APM Guidelines depends on where these measures are presented (for example inside or outside financial statements, regulated information documents or voluntary information).
  • Question 14 on the application of the scope exemption – This notes that the scope of the exemption in paragraph 19 of the APM Guidelines is only applicable when an issuer uses APMs solely to explain compliance with terms of an agreement or legislative requirement.
  • Question 15 on the definition and basis of calculation – This highlights how paragraph 20 of the APM Guidelines requires issuers to provide users with definitions of the APMs used and the basis of calculation adopted, including details of any material hypotheses or assumptions used.
  • Question 16 on reconciliation – This states that issuers should provide a numeric reconciliation between “the most directly reconcilable line item, total or subtotal” presented in financial statements and the APM used. As required in paragraph 26 of the APM Guidelines, the reconciliation should separately identify and explain the material reconciling items.
  • Question 17 on the application of the fair review principle to APMs – This notes that paragraph 8 of the APM Guidelines is based on Articles 4 and 5 of the Transparency Directive, while paragraph 6 of the APM Guidelines aims to contribute to transparent and useful information to the market and improve comparability, reliability and comprehensibility of APMs used.

(ESMA, Press release, 30.10.17)

(ESMA, Q&As on APM guidelines, 30.10.17)

ESMA: Public Statement on European common enforcement priorities for 2017 IFRS financial statements

On October 27, 2017 the European Securities and Markets Authority (ESMA) published the priorities to be considered by listed companies and their auditors when preparing and auditing their 2017 financial statements. These priorities are set out in the annual Public Statement on European common enforcement priorities in which ESMA promotes the consistent application of International Financial Reporting Standards (IFRS).

The common enforcement priorities for the 2017 year-end are as follows:

  • Disclosure of the expected impact of implementation of major new standards in the period of their initial application: ESMA stresses the need for high-quality implementation of IFRS 9 Financial Instruments, IFRS 15 Revenue from Contracts with Customers and IFRS 16 Leases;
  • Specific recognition, measurement and disclosure issues of IFRS 3 Business Combinations: ESMA draws issuers’ attention to the treatment of intangible assets, adjustments during the measurement period, bargain purchases, mandatory tender offers, business combinations under common control, contingent payments and disclosures on fair value;
  • Specific issues of IAS 7 such as reconciliation of liabilities arising from financial activities: ESMA reminds issuers of the importance of specific disclosure aspects;
  • Requirements of the amended Accounting Directive: ESMA reminds issuers that the 2017 year-end will be the first time that companies are required to disclose non-financial and diversity information and it recommends that the European Commission’s Guidelines on non-financial reporting which describe the methodology for reporting non-financial information should be considered;
  • Inclusion of alternative performance measures in annual financial reports: ESMA urges issuers to meet the principles in its Guidelines on Alternative Performance Measures published in July 2017.

(ESMA, Public Statement on European common enforcement priorities for 2017 IFRS financial statements, 27.10.17)

(ESMA, Press release, 27.10.17)

FRC: Consultation on annual review of FRS 101 – Reduced Disclosure Framework

On October 30, 2017 the Financial Reporting Council (FRC) published FRED 69 following its annual review of FRS 101 Reduced Disclosure Framework. This annual review considers whether additional disclosure exemptions are needed as IFRS evolve and it is also used to respond to stakeholder feedback about other possible improvements.

Having considered the 2017/18 annual review of FRS 101, the FRC is proposing no amendments to FRS 101. More detailed consideration of IFRS 17 Insurance Contracts will be required, but this work will be deferred until a clearer picture of the progress with the endorsement of the standard is known.

The FRC asks for comments by February 2, 2018. It will publish a summary of the consultation responses, either as part of, or alongside, its final decision.

(FRC, Consultation on annual review of FRS 101, 30.10.17)

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