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Essential Corporate News – Week ending November 11, 2016

Publication November 11, 2016


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

BEIS: Response to consultation on the implementation of the Non-Financial Reporting Directive

On November 9, 2016 the Department for Business, Energy and Industrial Strategy (BEIS) published its response to its February 2016 consultation on the implementation of the Non-Financial Reporting Directive in which it sought views on the best way to transpose the Directive, including how best to address the differences between the EU and existing UK framework and how to use the flexibilities that the Directive offers.

The Government’s responses include:

  • Placement of information – BEIS notes interest from respondents for increased flexibility in placing information and will continue to work with the Financial Reporting Council (FRC) to encourage companies to use the scope in the Directive for innovation and flexibility. The Government also acknowledges the concerns raised by respondents concerning the possible use of a separate report on non-financial information and will not pursue this further.
  • Scope of the Directive – Obliging companies outside the scope of the Directive to report under the new framework would go beyond the minimum requirements of the Directive, place a greater burden on these companies and effectively “gold plate” an EU requirement. Therefore, the Government is creating legislation to require companies that fall within the scope of the Directive to report using the requirements laid out in the Directive. Companies outside the scope of the Directive will continue to be required to comply with the current UK requirements. This means implementing the Directive requirements as an addition to the current UK strategic reporting framework. However, the Government wishes to avoid a situation where a company may, because of a change in size of their workforce for example, report using the UK framework one year and the EU’s the next. Therefore, the legislation will permit companies to voluntarily comply with the EU requirements and will exempt those who do so from the comparable domestic provisions. The proposed legislation is set out in the draft Companies, Partnerships and Groups (Accounts and Non-Financial Reporting) Regulations 2016.
  • Third party verification of non-financial information – The Government will not mandate independent verification of non-financial information. However, as now, companies may voluntarily seek independent verification of non-financial disclosures if they wish.
  • Current practice in electronic reporting – The Government will clarify legislation concerning sending annual reports electronically and will continue to work with the FRC to encourage innovative digital reporting.
  • Gender reporting – The consultation sought views on how the definition of senior manager in the gender reporting requirement could be improved and respondents favoured two approaches. The first suggested dividing “senior managers” into three separate categories (employees who are members of the executive committee, employees who are direct reports to members of the executive committee, and employees in all other management grades). The second approach uses the description of Key Management Personnel set out in international accounting standard IAS 24 which could be used to define a senior manager as a person who “has significant influence over the entity or is a member of the key management personnel of the entity”. The Government will explore these options with business and other stakeholders to consider how best to help companies make high quality disclosure to fulfil this requirement.
  • Other regulatory reforms – The Government will consider the comments and suggestions received carefully and, where appropriate, explore any proposals for amendments with stakeholders in future consultations.

(BEIS, Non-Financial Reporting Directive: Government response to the consultation on implementation of the Directive, 09.11.16)

The Companies, Partnerships and Groups (Accounts and Non-Financial Reporting) Regulations 2016 – Draft

On November 7, 2016 the draft Companies, Partnerships and Groups (Accounts and Non-Financial Reporting) Regulations 2016 were published, together with an explanatory memorandum. The Regulations amend Part 15 of the Companies Act 2006 (CA 2006) in order to implement articles 1(1) and (3) of the Non-Financial Reporting Directive (Directive 2014/95/EU) and to complete transposition of article 23(1) of the Accounting Directive (Directive 2013/34/EU). The Government’s response to its February 2016 consultation on implementation of the Non-Financial Reporting Directive was published on November 9, 2016.

Non-Financial Reporting Directive

The Regulations insert two new sections, 414CA and 414CB, into the CA 2006 in order to implement articles 1(1) and (3) of the Non-Financial Reporting Directive. Articles 1(1) and (3) amend the Accounting Directive, and insert a new requirement for some companies to disclose certain non-financial information in a statement as part of the entity’s management report.

Section 414CA sets out the requirement for certain companies and groups which are not small or medium-sized and which have more than 500 employees to include a non-financial information statement in their strategic report. The companies to which section 414CA relates are traded companies, banking companies, authorised insurance companies and companies carrying out insurance market activities (public interest entities under the Non-Financial Reporting Directive).

Section 414CB provides that the non-financial information statement must contain information to the extent necessary for an understanding of the company’s development, performance and position and the impact of its activity, relating to, as a minimum: environmental, social and employee-related matters, respect for human rights and anti-corruption and bribery matters (together "non-financial matters"). The information must include a brief description of the company's business model, a description of the policies pursued by the company in relation to such non-financial matters, the outcome of these policies, a description of the principal risks relating to such non-financial matters and how the company manages such risks. If the company does not pursue policies in relation to one or more of the non-financial matters, it must give a clear and reasoned explanation for not doing so. If a non-financial information statement complies with subsections (1) to (5) of section 414CB, it will be deemed to fulfil some of the requirements for non-financial information which are already contained in section 414C CA 2006 so as to prevent duplication. Section 414CB does not require disclosure of information about impending developments or matters in the course of negotiation if the disclosure would, in the opinion of the directors, be seriously prejudicial to the commercial interests of the company, provided that such non-disclosure does not prevent a fair and balanced understanding of the company's development, performance or position or the impact of the company's activity.

Accounting Directive

The Regulations remedy a gap in the transposition of article 23(1) of the Accounting Directive. The amendments ensure that the parent company of a small group cannot benefit from an exemption from the requirement to produce group accounts under section 399 CA 2006 if a member of the group is established in an EEA State and is a public interest entity.

The Regulations will come into force on the seventh day after they are made and apply to financial years of companies and qualifying partnerships commencing on or after January 1, 2017.

(The Companies, Partnerships and Groups (Accounts and Non-Financial Reporting) Regulations 2016, 07.11.16)

FCA: Handbook Notice No. 38 and Disclosure Guidance and Transparency Rules Sourcebook (Miscellaneous Amendments) Instrument 2016

On November 4, 2016 the Financial Conduct Authority (FCA) published Handbook Notice No. 38, which sets out its response to feedback received on its July 2016 Quarterly Consultation Paper No. 13 (the Consultation) as well as the final version of the Disclosure Guidance and Transparency Rules Sourcebook (Miscellaneous Amendments) Instrument 2016.

The final Instrument is in substantially the same form as proposed in the Handbook Notice and implements the following:

Changing the definition of a prescribed market in the Handbook Glossary for the purposes of DTR 5 following the repeal of the Prescribed Markets and Qualifying Investments Order on July 3, 2016. The new definition will comprise all markets which are established under the rules of a UK Recognised Investment Exchange.

Inserting a new rule, DTR 7.2.8A, to implement the requirement in the EU Non-Financial Reporting Directive for issuers (other than those which qualify as small or medium sized under the Companies Act 2006) to describe the diversity policy they apply to their administrative, management and supervising bodies, with regard to aspects such as age, gender or educational and professional backgrounds.  They must also describe the objectives of that diversity policy, how it has been implemented and the results in the reporting period.  If no such policy is applied, the statement must contain an explanation as to why this is the case. This requirement applies to an issuer’s financial year beginning on or after January 1, 2017.

The Handbook changes came into effect on November 4, 2016.

(FCA, Handbook Notice No 38, 04.11.16)

(FCA, Disclosure Guidance and Transparency Rules Sourcebook (Miscellaneous Amendments) Instrument 2016 (FCA 2016/70), 04.11.16)

BEIS: Implementation of the Fourth Money Laundering Directive – Discussion paper on the transposition of Article 30

On November 3, 2016 the Department for Business, Energy & Industrial Strategy (BEIS) published a discussion paper which outlines possible approaches to the transposition of Article 30 of the Fourth Money Laundering Directive (the Directive) for which BEIS is responsible. This discussion paper follows on from the HM Treasury consultation on the transposition of the Fourth Money Laundering Directive, published on September 15, 2016, which identifies and explains the changes to, and the new requirements of, the Directive as a whole, outlines the Government’s proposals or issues to be addressed for transposing them into UK law and seeks views on the proposed implementation. The BEIS discussion paper addresses the requirement for EU Member States to maintain a central register of beneficial ownership information of corporate and other legal entities in their territory. The UK already has a register of people with significant control (PSC) regime, however, certain of the requirements of the Directive are different from the existing PSC legislation. The discussion paper highlights those areas, and outlines possible ways for amending the UK’s requirements to meet the UK’s transposition obligations.

Article 30 of the Directive has two main requirements: that EU Member States hold adequate, accurate and current information on beneficial ownership of corporate and other legal entities incorporated within their territory in a central register; and that such information should be made available to specific authorities and organisations across the EU. BEIS believes that the existing PSC regime meets these requirements in most respects, but that some amendments and additions may be needed, including the following:

  • BEIS proposes that the rationale in determining whether an entity is in scope of the Directive for the purpose of Article 30 (and so details of its beneficial ownership should be held on a central register) is that it must be incorporated, it must have been incorporated in the UK and has not been re-domiciled, and it must be constitutionally capable of having a beneficial owner. As a result, entities such as open ended investment companies, investment companies with variable capital, Scottish limited partnerships and certain Scottish partnerships, as well as building societies and credit unions would be considered in scope. Since the Directive does not expressly exempt from the beneficial ownership requirements companies on prescribed markets such as AIM (while it does exempt those on regulated markets) it may be necessary to bring such companies within the scope of the UK PSC regime as part of the implementation and BEIS seeks views on possible transitional arrangements for this.
  • In terms of ensuring that the information on the central register is “adequate, accurate and current”, as required by Article 30(4), BEIS believes that the UK’s current PSC regime meets the requirements with regard to adequacy and accuracy. However, the UK requirement to update the information at least once every 12 months via the confirmation statement means it may not be “current”. As a result, where there is a change to an entity’s PSC(s), BEIS proposes introducing a new obligation to update the information at Companies House within 6 months of the change.
  • The vast majority of the information on the UK PSC register is publicly accessible, online, and fully searchable by anyone in any country, free of charge. BEIS proposes that this principle is applied in a similar manner for the new entities brought into scope. There is, however, a small proportion of the PSC information which is suppressed from the public register. As a requirement of the Directive, BEIS proposes to make this protected information available to credit and financial institutions, as defined in the Directive.

BEIS is requesting comments on its proposals by December 16, 2016.

(BEIS, Implementation of the Fourth Money Laundering Directive: Discussion paper on the transposition of Article 30: beneficial ownership of corporate and other legal entities, 03.11.16)

Hampton-Alexander Review: FTSE Women Leaders – Improving gender balance in FTSE leadership

On November 9, 2016 the Hampton-Alexander Review led by Sir Philip Hampton and Dame Helen Alexander published a report on improving gender balance in the leadership of FTSE companies. The report extends the recommendations of the Davies Review by increasing the target of representation of women.

The report’s recommendations include:

Women on boards

FTSE 350 companies should aim for a minimum of 33 per cent women’s representation on their boards by 2020. More women should be appointed to the roles of chair, senior independent director and executive director positions on FTSE 350 boards and FTSE companies which have yet to address gender imbalance on their boards should take prompt action to address any shortfall.

FTSE women leaders

  • All CEOs of FTSE 350 companies should take action to improve the under-representation of women on the executive committee and in the direct reports to the executive committee.
  • FTSE 100 companies should aim for a minimum of 33 per cent women’s representation across their executive committee and in the direct reports to the executive committee by 2020.
  • The chair of the nomination committee should take an active role in overseeing the progress made to improve women’s representation on the executive committee and the direct reports to the executive committee. At least once a year the nomination committee should review action plans and assess progress.
  • FTSE 350 companies should voluntarily publish details of the number of women on their executive committee and in the direct reports to the executive committee on an annual basis. This should be disclosed in the corporate governance section of the annual report and accounts and/or on websites. In addition, this data should be lodged with the Hampton-Alexander review, details of which will be advised early in 2017.

Government reporting requirements

  • As soon as is feasible, the Financial Reporting Council (FRC) should amend the UK Corporate Governance Code so that all FTSE 350 listed companies disclose in their annual report and accounts the gender balance on the executive committee and direct reports to the executive committee.
  • Current legislation requires companies to disclose the gender balance amongst directors, senior managers and employees within companies’ annual strategic reports. The current definition of ‘senior managers’ does not easily lend itself to making clear  comparisons between companies in order to assess progress on gender diversity. The Government should, in consultation with business, consider how best to clarify or supplement the definition of ‘senior managers’ to achieve a more consistent metric. This should be based on the executive committee or its nearest equivalent in each company, and direct reports to members of that committee. The Government should act as soon as possible in order to inform progress against the 2020 target set by this Review.


  • Progress on gender balanced boards and in the leadership ranks of FTSE 350 companies should be assessed as a key corporate governance issue when investors consider their responsibilities under the UK Stewardship Code.
  • All institutional investors should have a clear process in place for evaluating disclosures and progress on gender balance for FTSE 350 investee companies at board level, on the executive committee and in the direct reports to the executive committee. They should also have a clear voting policy on gender balance which could include voting against the re-election of chairs, nomination committee chairs and the annual report and accounts, where insufficient measures are in place in investee companies to address gender imbalance.
  • Investors should discuss and engage with investee companies on gender balance, in particular where progress has been slow, and vote in accordance with their policy. They should also publicly disclose their voting records.

Executive search firms

  • Executive search firms should build on success so far and continue their efforts to increase the number of women on FTSE 350 boards. They should apply the same effort and skills in supporting clients to increase the number of women on FTSE executive committees and in senior leadership positions.
  • Executive search firms should consider extending their Code of Conduct and Enhanced Code of Conduct to include the executive committee and direct reports to the executive committee.

The report also contains evidence for the rationale for improving diversity, a ‘how to” for companies to consider for improving diversity, CEO comments, emerging research, focus features on several industries, and a discussion on the progress for women on boards, as well as detailed analysis of progress in FTSE 100 and 350 companies.  

(Hampton-Alexander Review, FTSE Women Leaders: Improving gender balance in FTSE Leadership, 09.11.16)

Tomorrow’s Company: Report on bringing employee voice into the boardroom

On November 7, 2016 Tomorrow’s Company published a report presenting options to increase employees' voices in company governance structures. The report offers two options to achieve this. One option incorporates employees as insiders by introducing them as employee representatives on the board and the other is designed to give them a powerful channel of communication and challenge as outsiders based on some form of employee advisory panel.

Tomorrow’s Company suggests that, while offering companies flexibility, these options would apply to all companies with more than 500 employees in the UK. These companies would be required to demonstrate that they have offered effective employee voice within their governance structure. This could either be demonstrated by the formal introduction onto the board of one or more employee directors, or by the use of employee consultative structures outside the board. In both cases the company would be required to report on how its arrangements achieved employee voice. In the case of the second ’outside’ option the company would be required to give the employee advisory panel an opportunity to report publicly on its activities and its views of the effectiveness of the arrangements at the AGM, in its annual report, and on its website. There would be a transition period of two years during which the principle of ‘comply or explain’ would apply, as companies start to experiment with either option and explain what they are doing.

Companies with more than 50 per cent of employees in the UK would be required to demonstrate employee voice at the group level, while those below 50 per cent would have the option to demonstrate employee voice at the UK subsidiary level, most likely under option 2.

The proposed options are as follows:

Option 1 – Employee directors on a unitary board

This would involve introducing employee representatives onto the board, where they would have the same legal duties and responsibilities as other directors. There are three ways in which such directors could be elected:

  • directly elected by employees in the same way the employer’s pension scheme members elect their representatives;
  • appointed by an employee advisory panel that is in turn elected by employees;
  • appointed by an employee ownership trust that has a significant shareholding in the company, held on employees’ behalf.

Option 2 – Employee advisory panel

This would involve introducing (or, where it already exists, formalising) an elected employee advisory panel that meets regularly and has formal channels of communication to the board. In order to ensure that this option has teeth, the panel would be empowered by giving it the right to report publicly its views on key issues facing the company, including executive pay. These views could be published in the company’s annual report and a summary of the panel’s conclusions would be presented by the panel chairman at the AGM. For subsidiaries of multinationals the advisory panel would communicate regularly with the UK management board of the company with an annual report or presentation provided to the group level board.

Tomorrow’s Company comments that these proposals are intended to start a pragmatic discussion on how companies can increase employee voice in their governance structures and it notes that further work would be needed to work out the specific details of the proposals.

(Tomorrow’s Company, Bringing employee voice into the boardroom: A practical and flexible way forward, 07.11.16)

ESMA: MAR Guidelines – Persons receiving market soundings

On November 10, 2016 the European Securities and Markets Authority (ESMA) reissued its guidelines on persons receiving market soundings under Article 11(11) of the Market Abuse Regulation (MAR). The Guidelines were previously published in October 2016 and, while there have been no material changes, the application date has moved to January 10, 2017 from December 20, 2017.

(ESMA, MAR Guidelines: Persons receiving market soundings, 10.11.16)

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