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Essential Corporate News – Week ending September 29, 2017

Publication September 29, 2017


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

ICSA and the Investment Association: The stakeholder voice in board decision making – Guidance

On September 26, 2017 the Governance Institute of the Institute of Chartered Secretaries and Administrators (ICSA) and the Investment Association issued joint guidance on stakeholder engagement which is aimed at helping company boards think about how to ensure they understand and weigh up interests of their key stakeholders when taking strategic decisions (Guidance).

In the Government’s response to its Green Paper consultation on corporate governance reform published in August 2017, in the context of its proposals for strengthening the employee, customer and wider stakeholder voice, the Government said that it would be encouraging industry-led solutions in this area by asking ICSA and the Investment Association to complete the joint guidance they announced in January 2017 on practical ways on which companies can engage with their employees and other stakeholders.  This is the Guidance which has now been published.

The Guidance is designed to take boards through the different elements involved in understanding and assessing the company’s impact on key stakeholders, noting that while almost all companies will have common key stakeholders such as workers and customers, for each company the list will be different depending on factors such as their size, location and the nature of their activities and business relationships. As a result, the mechanisms used by boards to gain an understanding of the views of their key stakeholders will vary and each company’s approach needs to be informed by its purpose, culture and value.

In light of this, the Guidance does not attempt to set out a comprehensive range of different approaches that should be considered but it includes a list of ten core principles that should guide the way boards approach the issue and the Guidance also contains illustrative examples of how some companies have gone about the process. In addition, the Guidance considers a potential change to the UK Corporate Governance Code, as announced by the Government in its August 2017 response document, which would require listed companies to have either a designated non-executive director, a formal employee advisory council or a director from the workforce, or to explain why they do not have one.  The Guidance covers these approaches, among others, but states that companies should choose whichever approach or approaches are, in the opinion of the board, most likely to lead to effective engagement and an enhanced understanding of the impact of their decisions on their key stakeholders.

The Guidance is divided into seven sections as follows:

Directors’ duties

The Guidance notes the general statutory duties of directors set out in sections 171-181 Companies Act 2006, noting in particular the duty to promote the success of the company set out in section 172.

Stakeholder identification

The Guidance points out that boards should identify and prioritise their stakeholders. They should identify the groups which have a positive or negative impact on the company’s ability to operate or are potentially impacted by the company’s activities.  They could then conduct a mapping exercise to prioritise these stakeholders for the purposes of engagement by identifying the key stakeholders and/or the issues or activities with the most material impact on a range of stakeholders.  The Guidance notes that once the prioritisation exercise has been completed, it should lead to a discussion of the extent to which the board needs information on and from those stakeholders, how extensively the company should engage with them, and how best to do so.  It includes, as an example, a matrix developed by the Royal Bank of Scotland Group to identify the significant issues that impact on its different stakeholder groups.

The Guidance also points out that boards should consider in the identification process the types of individuals or groups that they will use as points of contact for a particular stakeholder group. The board should also have a process in place for reviewing the groups identified as key stakeholders to make sure that engagement remains appropriate for the relevant audience.  It notes the manner in which Intu Properties conducted a review of its stakeholder programme in 2016.

Board composition

The Guidance notes that the board’s knowledge and understanding of the interests of the company’s key stakeholders should be among the factors considered when assessing the overall composition of the balance of the board and whether there is a need to recruit new directors. In relation to the approach to acquiring expertise, it suggests that one broad approach would be to reserve one or more board positions for directors drawn from a stakeholder group, such as the workforce.  Another approach would be to extend the selection criteria and search methods for non-executive directors to identify individuals with relevant experience or understanding of one or more stakeholder groups.  It considers the merits of both of these approaches and points out that they need not be mutually exclusive.

Given that directors share collective responsibility for the board’s actions and have the same legal responsibilities and liabilities, the Guidance recommends that unless there are exceptional considerations, the terms of appointment for these directors should be the same as for other directors.

The Guidance looks at the selection and search procedures in relation to finding a new director and sets out a number of questions to be considered if it is decided that one or more new directors are needed to bring an understanding of particular stakeholders. It also sets out particular questions to be considered by a board if it is decided that one or more directors should be appointed to represent the views of the workforce and it suggests companies may also wish to consider whether there is a case for appointing one or more non-executive directors with specific responsibility for other key stakeholders.

Induction and training

The Guidance notes that directors will be more effective in their role if they have benefited from a well-thought-out and effective induction programme which enables them to build an understanding of the nature of the company, its business and its markets, build a link with the workforce and build an understanding of the company’s main relationships.

The Guidance looks at designing a directors’ induction programme and it suggests a non-exhaustive list of activities that could be considered to give the new director an understanding of the role and nature of the company’s principal stakeholders. The Guidance also stresses the need for ongoing director training.

Board discussion

The Guidance points out that having relevant expertise on the board is only of limited use if that expertise is deployed and engaging with important stakeholders is only of limited value unless the results of that engagement are used to inform the board’s decisions. It notes that many boards suffer from a shortage of time and an excess of information so it looks at the following:

  • the management of the board’s agenda;
  • the form and frequency of the information the board wishes to receive, including any relevant performance measures; and
  • whether any board committees or individual directors should have specific responsibilities for some stakeholder-related issues.

The Guidance also looks at the approach of designating to one or more individual directors the task of understanding the views of, and impact on, key stakeholders in ensuring these are fed into the board’s discussions. It considers issues that will arise if this approach is adopted and sets out a list of points for boards to consider if they do decide to designate one or more non-executive directors.

Engagement mechanisms

This section of the Guidance gives some illustrative examples of approaches already being used by companies to engage with their important stakeholders, with the aim of prompting companies to review their own existing mechanisms and to consider whether there would be value in adopting alternative or additional ways of engaging with the stakeholders concerned. In assessing the overall engagement carried out by the company, the Guidance sets out a number of key questions boards should consider.

In terms of engagement mechanisms, it looks at forums and advisory panels, as well as at other engagement mechanisms such as surveys and social media. It also considers staff engagement mechanisms and includes examples in each case.

Reporting and feedback

This section of the Guidance considers both how companies should report to shareholders and to their other stakeholders. It notes that reporting to shareholders will primarily be done through the annual report and accounts and through subsequent ongoing or specific engagement, such as meetings or discussions at and before the annual general meeting. It notes that reporting should cover the following three questions:

  • Who are the key stakeholders?
  • How does the board hear from its key stakeholders?
  • What were the outcomes of the company’s engagements with its key stakeholders, and what impact did that all have on the board’s decisions?

The Guidance notes that one approach would be for the board to disclose its key stakeholders and explain concisely the processes that the board has in place to receive input and information from stakeholders. It could then demonstrate how the directors have fulfilled their duties under section 172 by explaining how information gathered through engagement with stakeholders has informed the board’s decisions during the year.

The Guidance also considers reporting to other stakeholders and notes that companies should consider what other reporting and feedback mechanisms might be necessary. It considers publications and online resources as well as other forms of reporting and feedback. It also points out that different stakeholders may want or require reporting on different timescales so while annual reports may be appropriate for groups such as shareholders, social media and other forms of communication could be used to update other stakeholders on a more regular basis.

Next steps

The Guidance notes that the Government’s intention is that the various reforms to corporate governance that it announced in August 2017 will come into effect by June 2018. ICSA and the Investment Association will update the Guidance if necessary to reflect the new reporting requirements and potential changes to the UK Corporate Governance Code. They state that in any event, they will review the Guidance in the second half of 2019 to learn from companies’ experience of applying it.

(ICSA and Investment Association, The stakeholder voice in board decision making, 26.09.17)

The Takeover Panel: Panel Statement 2017/19 – Additional Checklists

On September 29, 2017 the Takeover Panel published Panel Statement 2017/19 which lists three new checklists to be completed and submitted to the Executive by the financial adviser to an offeror or an offeree company (as appropriate) where certain announcements are made and distributed.

The three checklists are:

  • Possible offer (Rule 2.4) announcement checklist;
  • Rule 2.11 (Distribution of announcements) checklist for possible offer (Rule 2.4) announcement; and
  • Rule 2.11 (Distribution of announcements) checklist for firm offer (Rule 2.7) announcement.

(The Takeover Panel, Panel Statement 2017/19, 29.09.17)

BEIS Committee: Government responds to corporate governance report

On September 22, 2017 the Business, Energy and Industrial Strategy Committee (BEIS Committee) published the Government's response to the BEIS Committee’s report on corporate governance which was published in April 2017. Since then, the Government, in August 2017, published its own response to its Green Paper consultation on corporate governance, which supports a number of the BEIS Committee’s recommendations.

The Government’s response to a number of BEIS Committee’s recommendations is as follows:

Promoting good corporate governance

  • Recommendation 1 – The Government agrees with the BEIS Committee that all companies of significant size (private as well as public) should explain how their directors have had regard to their employee and other non-shareholder interests set out in section 172 Companies Act 2006, and intends to make this form of reporting a legal requirement by introducing secondary legislation. The Government will publish a draft statutory instrument setting out details later this year.
  • Recommendation 2 – The Government believes that a formal annual rating exercise risks undermining the current valuable and legitimate flexibility of the UK’s ‘comply or explain’ approach to corporate governance.
  • Recommendation 3 – The Government does not, at this stage, believe that the Financial Reporting Council (FRC) should receive extra powers to engage and hold directors to account for their duties. However, it notes the steps it has set out in its own response to the Green Paper in this area.
  • Recommendation 4 – The Government supports further development of the role of the Investor Forum and notes that the Investment Association and other representative bodies offer additional means to facilitate dialogue between investors and boards.
  • Recommendation 5 – The Government agrees that companies should be required to explain how they are engaging with stakeholders and notes that further details will be set out in a draft statutory instrument to be published later this year.
  • Recommendation 6 – The Government agrees that institutional investors have a vital stewardship role in relation to the companies in which they are invested and welcomes ideas for strengthening this role.
  • Recommendation 7 – The Government agrees that companies’ use of advisers should be subject to appropriate transparency and accountability but does not plan to introduce any further requirements on private companies at present, though notes that this might be an area for consideration by the group developing corporate governance principles for large private companies. The Government will also consider some of the points raised as part of transposing the Shareholder Rights Directive in the UK.

Privates companies

The Government shares the BEIS Committee’s view that good corporate governance is relevant to all companies, not just those with a public listing, and notes the steps it has taken in the response to the Green Paper for the development of an appropriate code or set of principles for large private companies.

Executive pay

The Government believes that companies should continue to have the flexibility to choose the long-term share remuneration policies and models that they put to investors for approval. At the same time, companies and shareholders should aim to be more open to alternatives to the currently dominant LTIP model. The Government notes the proposals it set out in its response to the Green Paper in this area. This includes steps taken by companies that receive significant shareholder dissent on executive pay, the position of chair of remuneration committees, the broader responsibilities of the remuneration committee in overseeing pay and reward across the company, and the requirement to publish the pay ratio between the CEO and average employee pay, as will be required by secondary legislation.

Composition of boards

In response to the BEIS Committee’s report, the Government is not preparing to mandate that, from May 2020, at least half of all new appointments to senior and executive management level positions in the FTSE 350 and all listed companies should be women as it believes the Hampton-Alexander Review targets of 33 per cent women on FTSE 350 boards and 33 per cent women on executive committees and their direct reports by 2020 should be met first in terms of diverse workforces. The Government also continues to believe that a non-legislative solution is the right approach for now, rather than legislation requiring FTSE 100 companies to publish their workforce data, broken down by ethnicity and by pay band. The Government also does not intend to guarantee the FRC an increased role in overseeing the rigour of the board evaluation process by the external facilitator.

(BEIS Committee, Government response to the Committee’s Third Report of Session 2016/17, 22.09.17)

CDSB: Corporate sustainability reporting

On September 26, 2017 the Climate Disclosure Standards Board (CDSB) launched The Reporting Exchange, a free online platform designed to help businesses understand sustainability reporting requirements.

The Reporting Exchange includes information on environmental, social and governance reporting requirements and resources from 70 sectors and 60 countries and it includes supporting guidance, voluntary standards and stock exchange listing requirements.

The tool is public and it is noted that it should assist people involved in preparing and delivering corporate sustainability, annual or integrated reports.

(CDSB, Press release – The Reporting Exchange, 26.09.17)

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