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Essential Corporate News – Week ending December 18, 2015

Publication December 18, 2015


Introduction

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

PLSA: Corporate Governance Policy and Voting Guidelines 2015/16

On December 12, 2015 the Pensions and Lifetime Savings Association (PLSA), formerly known as the National Association of Pension Funds or NAPF, published a revised version of its Corporate Governance Policy and Voting Guidelines. These seek to reflect current market best practice as determined through consultation with PLSA members and the aim of the Guidelines is to assist members in promoting the long-term success of the companies they invest in and ensuring that the board and management of these companies are held accountable to shareholders. The Guidelines also aim to assist investors and proxy voting agents in their interpretation of the provisions of the UK Corporate Governance Code and in forming judgements on the resolutions presented to shareholders at a company’s AGM. The Guidelines note that while the UK Corporate Governance Code only applies on a mandatory basis to companies with a premium listing, its principles are just as relevant to smaller quoted companies as they are to larger ones and it refers to the QCA Corporate Governance Code for Small and Mid-sized Quoted Companies as a useful reference point for companies in this respect.

Key changes to the version of the Guidelines published in 2014 include the following:

  • In reporting on strategic risk in accordance with Section C of the UK Corporate Governance Code, the company’s report should explain how the company generates value from its key tangible and intangible assets. The PLSA also wants corporate reporting to enable an investor to understand how the company is maximising the long-term value of the human capital it has at its disposal and the understanding and reporting of risk should remain a dynamic in a continually evolving and refining process. It suggests examples of emerging risks may include those from cyber security and climate change as well as risks relating to issues such as the company’s approach to tax management which, while also posing a financial risk, could, in addition, pose a risk to the company’s reputation and brand value. Companies need to communicate how these risks are managed and what changes have occurred in relation to these risks over the course of the past year.
  • The Guidelines comment on the time commitments of the chairman and non-executive directors. They note that a chair’s time commitment may be questioned where they are a director of more than four companies and/or are a chair of two or more global and highly complex companies. In the case of non-executive directors, the Guidelines state that for complex companies it may be appropriate to vote against the (re)-election of a non-executive director who holds more than four directorships. Where a director chairs a number of key committees a stricter view may be adopted, especially where an individual is a director of two or more companies in heavily regulated industries.
  • The Guidelines comment on dividend policy disclosure. This should be specific enough to understand what the policy means in practice, including the basis for deriving the proposed level of dividend and the specifics of how it is determined. Good disclosure should describe the governance process over the policy decision, the risks and constraints associated with the policy and the timeframe over which the policy is expected to operate.
  • In relation to issues of new shares, the Guidelines continue to support the limit set out in the Pre-Emption Group’s Statement of Principles issued in March 2015. However, a new addition to the Guidelines is that companies should clearly signal at the earliest opportunity their intention to undertake a non-pre-emptive issue and to engage in a meaningful dialogue with their shareholders about this. Companies should keep shareholders informed of issues related to an application to disapply their pre-emption rights and in return, shareholders should review each case made by a company on its own merits and decide on each case individually, using their investment criteria.
  • In relation to market purchases of shares, the Guidelines now state that the board should provide investors with an understanding of the process used to identify when a buyback is appropriate, the maximum price the company would be prepared to pay and the hurdle rate in respect of the buyback, linking to the overall capital management framework of the company. Investors should also be provided with summary information on the weighted average cost of shares bought, total cost, and impact on key metrics for buybacks undertaken during the year to enable them to assess the impact.
  • There is a new section of the Guidelines concerning shareholder resolutions. The Guidelines state that management should always provide a comprehensive outline of their position on such resolutions and be available to engage with shareholders to facilitate an understanding of both the rationale and merits for the resolutions. The Guidelines note that shareholders should consider supporting proposals that will protect or further enhance shareholder rights and transparency and which are directed towards improving corporate reputation and/or the long-term sustainable success of the company.

(PLSA, Corporate Governance Policy and Voting Guidelines 2015/16, 12.12.15)

FRC: Year-end advice to preparers – large listed companies

On December 15, 2015 the Financial Reporting Council (FRC) wrote to audit committee chairs in larger listed companies summarising key developments for 2015 annual reports. The letter highlights where companies might take steps to continue to improve their reporting.

Points covered in the letter include the following:

  • Clear and concise reporting – The letter refers to amendments made to IAS 1 Financial Statement Presentation by the International Accounting Standards Board which note that the inclusion of immaterial information can obscure relevant information and highlight the need for preparers to apply professional judgement in determining what information to disclose in their financial statements. The FRC comments that boards need to assess materiality through the “right lens” and points to its Guidance on the Strategic Report which indicates the considerations that should apply.
  • Risk reporting – In reporting on principal risks in the strategic report, the FRC comments that investors are surprised that risks relating to data protection in IT systems/cyber risk and risks from climate change are not reported more often as principal risks. The FRC also refers to the time period for assessing viability and points out directors need to explain their reasoning for the period chosen, taking into account the company’s circumstances, to avoid boilerplate statements. In addition, investors will be looking for consistency and clarity between audit committee and auditor reporting and the financial statements.
  • Disclosures – Effective disclosure is important and improvements are needed in relation to disclosures about accounting policies and the impact of new standards, alternative performance measures and dividends and dividend policy.
  • The new UK GAAP Reduced Disclosure Framework – The FRC reminds preparers about the new framework that can be applied.
  • Digital communication – The FRC comments that companies can optimise their PDF report by “thinking screen first”, simplifying the report structure, removing double page spreads and considering how images and columns of text are displayed.
  • Quarterly reporting – Investors have asked the FRC to encourage companies to focus reporting outside of the annual report and accounts cycle on providing information which is of import to the longer term prospects of the company.
  • FRC oversight – In 2016 the FRC plans to increase transparency of reporting its conclusions on individual companies, letting companies know when the FRC has reviewed its report and accounts and has no substantive points to raise and publicising the names of companies whose reports have been subject to its corporate reporting review. The FRC will consult on these proposals to the extent they affect its operating procedures.

(FRC, Year-end advice to preparers – larger listed companies, 15.12.15)

FRC: Clear and Concise – Developments in narrative reporting

On December 17, 2015 the Financial Reporting Council (FRC) published a report examining the steps companies have taken towards clear and concise reporting, whereby annual reports provide relevant and easily understandable information for investors. The report highlights emerging best practice in narrative reporting and considers developments in the reporting framework.

The report is in three sections as follows:

Clear and concise reporting

The report sets out steps that can be taken to help achieve clear and concise reporting, including starting the annual reporting process early, applying materiality, considering the audience for the annual report and engaging with the board early in the planning process. It points out that companies do not need to provide every disclosure set out in standards or regulations and that only material and relevant disclosures need to be included. It confirms that complementary information that is not required by law or regulation to be included in the annual report can be published separately and it sets out questions to consider when deciding whether information can be removed or moved from the annual report.

Impact of the strategic report

The FRC has collated the findings of reports produced by a number of organisations on the quality of UK corporate reporting and supplemented that with a detailed review of a sample of 2013/14 and 2014/15 strategic reports of FTSE 350 companies.

In terms of communication, it notes that many companies have improved how they communicate in their annual reports, particularly in their strategic reports, by making important information more accessible. Steps to help communication include the following:

  • Giving sufficient prominence to changes in strategy, significant acquisitions or disposals and key developments for each segment, market or core product range is considered particularly helpful.
  • The best strategic reports communicate to investors the effectiveness of the board’s stewardship both in terms of capitalising on opportunities and managing the impact of less favourable events, trends and conditions. They also avoid jargon and explain acronyms and industry specific terms.
  • The FRC believes there is scope for companies to go further in providing a longer-term forward-looking analysis and suggests companies may wish to consider the alignment between time horizons applied to their forward-looking information, strategic review, impairment reviews and viability statement and/or clarify why it is appropriate to consider different time periods in each context.
  • The FRC sees good linkage as essential for the annual report to communicate a holistic story to investors and strategic reports which explain the nature of the linkage between disclosures are more useful than those that simply highlight the location of related information. The report provides examples of where companies have used linkage effectively.
  • Boilerplate disclosures should be avoided. Principal risk disclosures and reporting on environmental, employee. Social, community and human rights matters (EESCH) tend to be more generic than company specific.

The report also considers the placement of information and urges innovation with structure and presentation in the strategic report. The FRC has found that companies are generally striking a good balance in the proportions of summarised information and more detailed narrative explanation providing analysis and context. However, it believes companies can be more ambitious in their use of cross-referencing and an increased use of signposting to complementary information inside or outside the annual report should enable companies to streamline strategic reports further and communicate more clearly and succinctly.

In terms of the content of the strategic report, the FRC comments include the following:

  • Business model disclosures that focus on the main drivers of value generation are more informative than those that primarily focus on describing the company’s broad objectives or mission statement. Placing business model disclosures near the front of the strategic report, followed by strategy disclosures, is the most logical approach as these disclosures underpin the other disclosures in the strategic report.
  • There are a variety of approaches to disclosure of strategy. Best practice reports explain the relationship between strategy and principal risks and some link key performance indicators (KPIs) to specific strategy objectives. The clearest explain why these KPIs have been selected as the most appropriate measures for quantifying progress towards those strategic objectives.
  • Some companies still report a large number of principal risks which makes it difficult for investors to identify and understand which are the most significant for the business. The clearest reports identify as principal risks only those that have a high likelihood of occurrence or have the potential to have an effect on the entity of high magnitude, or both.
  • In terms of KPIs, the FRC notes that it considers strategic reports which contain a limited number of KPIs that are clearly linked to the company’s strategy are the most informative.
  • The quality of reporting on EESCH matters has generally improved but the relevance of EESCH matters disclosed is clearer when the EESCH reporting is linked to the business model, principal risks or KPIs, highlighting the impact of EESCH matters on the business and how the company operates. Positive EESCH matters should be balanced with sufficient discussion of the negative impacts of the business on EESCH matters.

In addition, in terms of materiality, the FRC believes there is scope for companies to go further in the application of materiality to certain areas of the strategic report, particularly in relation to disclosures of principal risks and KPIs.

Emerging developments

The FRC discusses a number of developments in the pipeline that will impact on corporate reporting in the future. These are:

  • Non-financial reporting – the UK will soon be implementing the requirements of the EU Directive on the disclosure of non-financial and diversity information. The Department for Business, Innovation and Skills is shortly to consult on implementation and the FRC will update its 2014 Guidance on the Strategic Report once regulations are in place.
  • New disclosure requirements – there are likely to be new reporting requirements in 2016 on prompt payment of suppliers, closing the gender pay gap, tax transparency and transparency in supply chains (through the annual slavery and human trafficking statement under the Modern Slavery Act 2015).
  • Risks and going concern – in 2016 the FRC will publish its non-mandatory simplified Guidance on the going concern basis of accounting and reporting on solvency risk and liquidity risk for non-Code companies which it published for consultation in October 2015.
  • APMs - In 2016 there will be more focus on alternative performance measures.
  • IASB disclosure initiative - The International Accounting Standards Board is progressing an initiative aimed at improving the quality of disclosures in financial statements that could contribute to clear and concise disclosures in financial statements.
  • Digital reporting – The FRC’s Financial Reporting Lab will work on the next phase of its digital project in 2016, following its 2015 report, Digital Present.

(FRC, Clear & Concise: Developments in Narrative Reporting, 17.12.15)

FRC: Consultation on draft amendments to FRS 101 – Reduced Disclosure Framework

On December 11, 2015 the Financial Reporting Council (FRC) published Exposure Draft 63 (FRED 63) proposing limited amendments to FRS 101, Reduced Disclosure Framework, which is an optional accounting standard intended to enable cost-efficient financial reporting within groups, particularly those applying EU-adopted IFRS in their consolidated financial statements. It requires an entity to apply EU-adopted IFRS subject to specified disclosure exemptions. The draft amendments to FRS 101 provide certain disclosure exemptions in relation to IFRS 15 “Revenue from Contracts with Customers” and clarify the order in which the notes to the financial statements are presented.

FRED 63 has arisen as a result of the annual review of FRS 101 which aims to ensure that it continues to be as cost-effective as IFRS on which it is based. Comments on the proposed amendments are requested by March 31, 2016.

(FRC, FRED 63 – Draft amendments to FRS 101 Reduced Disclosure Framework 2015/16 cycle, 11.12.15)

The Small Business, Enterprise and Employment Act 2015 (Commencement No 3) Regulations 2015

On December 17, 2015 the Small Business, Enterprise and Employment Act 2015 (Commencement No 3) Regulations 2015 (the Regulations) were published. The Regulations bring into force certain provisions of the Small Business, Enterprise and Employment Act 2015 (the Act).

Regulation 3 commences provisions for the purpose of exercising powers in the Companies (Audit, Investigations and Community Enterprise) Act 2004 and the Companies Act 2006 (CA 2006).

Regulation 4 commences on April 6, 2016 provisions that insert a new Part 21A and Schedules 1A and 1B to the CA 2006, which bring into force the requirement for companies to keep a register of people who have significant control over the company, together with the Secretary of State's obligation to review those provisions. This is subject to Regulation 5 which specifies that sections 790M(9)(c) and 790W to 790ZE of Part 21A, together with paragraphs 4, 5 and 7 of Part 2 of Schedule 3, will commence on June 30, 2016.

(The Small Business, Enterprise and Employment Act 2015 (Commencement No 3) Regulations 2015 (SI 2015/2029), 17.12.15)

FRC: Improved reporting by signatories to the UK Stewardship Code to be introduced

On December 14, 2015 the Financial Reporting Council (FRC) announced that it will introduce public tiering of signatories to the UK Stewardship Code in July 2016 to improve reporting against the principles of the Stewardship Code and assist investors. The FRC believes that improved reporting will help asset owners judge how well their fund manager is delivering on their commitments under the Stewardship Code, help those who value engagement to choose the right manager and, consequently, should provide a market incentive in support of engagement.

To promote commitment to stewardship, the FRC will assess signatories’ reporting against the Stewardship Code and make public its assessment. Signatories will be assessed as being:

  • Tier 1 – meeting reporting expectations in relation to stewardship activities. Asset managers will also be asked to provide evidence of the implementation of their approach to stewardship. The FRC will look particularly at conflicts of interest disclosures, evidence of engagement and approach to resourcing and integration of stewardship; or
  • Tier 2 – not meeting those reporting expectations.

The FRC notes that, before making a public assessment, it will contact firms for feedback to allow time for improvement.

(FRC, FRC promotes improved reporting by signatories to the Stewardship Code, 76/15, 14.12.15)


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