April

BEIS Select Committee publishes its report on corporate governance

06 Apr, 2017

The Business, Energy and Industrial Strategy (BEIS) Select Committee has published its report following its inquiry and consultation on corporate governance launched in September 2016, recommending that action must be taken to address a lack of trust in business. Whilst the findings of the Select Committee are not binding on the Government, the proposals laid out in this report may be taken into consideration in any subsequent White Paper on Corporate Governance Reform.

The Report highlights the strong reputation of the UK as a place to do business, backed up by the “considerable asset” of the UK Corporate Governance Code ("the Code") and the fundamental principle of “comply or explain”. It adds, “We do not believe that there is a case for a radical overhaul of corporate governance in the UK.”

However, the Committee does see benefit in further embedding good corporate governance in all companies, including private companies, supported by investors, regulators and Government. In order to achieve this and find a way to enforce better compliance, the Report recommends far-reaching reforms to the FRC and the Code, in addition to certain legislative changes and a new corporate governance code for large private companies.

The key recommendations are:

Stakeholder engagement by companies

It was widely anticipated that the Report would comment on the importance of s172 of the Companies Act 2006, which focuses on long term thinking and consideration of wider stakeholders by company directors. Without proposing legislative change, the Report recommends that the FRC should amend the Code to require more transparent narrative reporting regarding stakeholders, with any identified failures to apply s172 reported on and explained.

Stakeholder advisory panels are also encouraged for all companies as a way of providing valuable feedback from stakeholders to boards.

In order to hold company directors to account, the Report recommends that the FRC should be given additional powers to address failings in directors’ duties. These powers would include “name and shame” public reporting on such failings and, ultimately, the authority to initiate legal action for continued breach of duties under s172.

Non-executive directors

The Report emphasises the importance of the role of non-executive directors in holding companies and executive directors to account. 

The Report calls on the FRC to revise the Code to include best practice guidance on additional professional support for non-executive directors, such as advice, training and continuing professional development. It draws out the importance of continued training of board members, which should take account of the responsibilities of individual non-executive directors, and of focusing on the importance of director evaluation. 

When a non-executive director plans to serve on more than one board, they should be asked to demonstrate convincingly to their companies that they have the time to fulfil their responsibilities to each board. 

Diversity

The Report is positive about current initiatives, including the Hampton Alexander Review and the McGregor Smith Review. It encourages the FRC to address these in the revision of the Code and to embed ethnic diversity in the revised Code with as much prominence as gender diversity. 

The Report argues for stricter targets for the Hampton Alexander Review, suggesting that from May 2020 at least half of all new appointments to senior and executive management level positions throughout listed companies should be women. 

The Committee recommends that Government should legislate for disclosure of workforce data broken down by ethnicity and pay band, in the spirit of the McGregor Smith review published recently. 

Corporate reporting 

In addition to reporting on s172, described above, the Report calls on the FRC to be active in working against “boilerplate” corporate reporting and to revise the Code to: 

  • require a section in annual reports on engagement with investors;
  • require disclosure of training of board members;
  • require companies to identify any specific responsibilities held by particular non-executive directors and how they should be held to account for their performance;
  • require all listed companies from May 2020 to explain in annual reports if strict diversity targets are not achieved, to report on gender diversity of the executive committee in line with the Hampton Alexander Review, and to explain how they plan to rectify gender composition of the executive committee;
  • require a public explanation of why board members are appointed to the board and a detailed narrative about actions taken to promote diversity and how seriously it is taken by the board;
  • require the use of open advertising and / or use of an external search consultancy for appointments to the board with detailed disclosure if these methods are not used; and
  • require companies to set out clearly their people policy, including approach to investing in and rewarding employees and clear reporting on remuneration levels. 

In addition, the Report recommends that the Institute of Directors’ Good Governance Index should be adopted and adapted by the FRC to provide FTSE 350 companies with a new annual rating of their governance arrangements on a “traffic light” system, which should then be reported in their annual reports. 

Some of the evidence heard by the Select Committee highlighted large fees paid to advisors on transactions and lack of transparency regarding the basis for those fees, and how and by whom advisors were engaged. The Report calls on government to consult on new requirements for listed and large private companies to disclose engagement with advisors on certain transactions that exceed a threshold to be determined. 

Recommendations for investors and the Stewardship Code 

The Report calls on the FRC to review and improve the Stewardship Code. The new Stewardship Code should encourage high quality engagement between investors and companies, include more detail on requirements and undertake to flag poor performance annually. 

The Report also proposes that the Stewardship Code should require disclosure of voting records by asset managers to continue to promote active engagement, and that those who do not vote should be named. 

It also calls upon the Investor Association’s Investor Forum to seek to be a more “pro-active facilitator of dialogue between boards and investors.” 

Executive pay 

The Report indicates that high and unwarranted executive pay is an issue that needs to be addressed for the benefit of society as a whole, however ‘the current scale of opposition to remuneration reports and policies’ does not justify annual binding votes on pay levels. 

The Report includes the following recommendations on pay:

  • Companies should make it their policy to align bonuses with broader corporate responsibilities and company objectives and take steps to ensure that they are genuinely stretching.
  • Following consultation with stakeholders, the FRC should amend the Code to establish deferred stock rather than LTIPs as a best practice in terms of incentivising long-term decision making.
  • LTIPs should be phased out as soon as possible. No new LTIPs should be agreed from the start of 2018 and existing agreements should not be renewed.
  • The FRC should revise the Code to include a requirement for a binding vote on executive pay awards the following year in the event of there being a vote against of more than 25%. This requirement should be included in legislation at the next opportunity.
  • Any Chair of a Remuneration Committee should normally have served on the committee for at least one year previously. To further incentivise strong engagement, the Chair of a Remuneration Committee should be expected to resign if their proposals do not receive the backing of 75% of voting shareholders.
  • The FRC should amend the Code to require the publication of pay ratios between the CEO and both senior executives and all UK employees. 

It also believes that employee representation on remuneration committees would represent a powerful signal on company culture and commitment to fair pay and that this should be included in the Code. The Report adds that it expects leading companies to adopt this approach. This would only be possible where an employee is a full board member, as recommended elsewhere in the Report. 

Private companies 

A newer area of focus on which the Report issues recommendations for potential reform is private company corporate governance. The Report recommends that the FRC works together with the Institute of Directors and with the Institute for Family Business to develop a new Code for the largest privately held companies, to be followed on a comply or explain basis. This Code should broadly mirror the proposed amendments to the Code for listed companies in terms of reporting on duties under s172. The Report suggests that the initial threshold for private companies could be those with over 2,000 employees. 

The challenge with private companies is to determine a method to oversee compliance, and the Report proposes establishing a new body to oversee the Code and report on compliance, with a complaints mechanism to raise concerns with the companies concerned. The body would be funded by a levy on companies subject to the scheme. 

The Report contemplates a mandatory regulatory regime if standards remain low or there is a significant level of non-compliance in a three year timeframe. 

Board composition 

In addition to diversity, the Report supports the inclusion of workers on boards in the form of an employee being appointed as a director in their own right with full responsibilities. It cites NHS Foundation Trusts, John Lewis and First Group as boards where this is the norm and encourages companies to consider this as something that should become the norm. The Report does not recommend a compulsory requirement but believes the insight and challenge brought by worker directors would benefit many boards. 

Board evaluation 

Finally, the Report proposes that the FRC should be given new powers to oversee the three-yearly external board evaluation process to ensure it is “genuinely independent, thorough and consistent across companies.” 

Select Committees do not form part of Government but scrutinise the work of Government departments and therefore their recommendations may not be followed through unless Government agrees. 

The Government is expected to respond to the Select Committee report within two months and the Financial Reporting Council (FRC) has indicated (link to FRC website) it will be consulting on changes to the UK Corporate Governance Code in the autumn. 

The press release and full report of the BEIS Select Committee are available on the BEIS Select Committee website.

EFRAG establishes academic advisory panel

05 Apr, 2017

In a move that reflects a current direction in standard-setting, the European Financial Reporting Advisory Group (EFRAG) has established an academic panel in order to strengthen its relationship with the academic community’s thought leaders on financial reporting and to ensure that solutions to financial reporting issues are developed on a firm foundation of evidence.

Given EFRAG's European role, the composition of the advisory panel is pan-European and brings together eminent researchers from Austria, Cyprus, Denmark, Germany, Italy, the Netherlands, Norway, Portugal, Spain, Sweden, Switzerland, and the UK.

In Australia, the AASB also set up an academic advisory panel and held a very successful first research forum in November 2016. The IASB does not have an academic advisory panel but has already held three research forums, the last one in October 2016. And the French ANC has established a series of symposiums on accounting research where the 6th one took place in December 2016.

For more information on the new EFRAG Academic Panel please see the press release on the EFRAG website.

The Bruce Column — Explaining the issues around climate-related financial disclosures

05 Apr, 2017

As Special Advisor to the Financial Stability Board’s Climate-related Financial Disclosures Task Force, the body which produced the Recommendations of the Task Force on Climate-related Financial Disclosures, Russell Picot, is at the forefront of efforts to encourage the disclosure of climate risks in annual reports. Robert Bruce, our regular, resident columnist has interviewed him and reports on the latest progress.

We are now in the midst of the period when the comments on the Recommendations of the Task Force on Climate-related Financial Disclosures are being assessed. A final report is promised by the middle of the year. And one of the key people assessing the comments is the task force’s special advisor, Russell Picot. Picot has a long pedigree in this field. He was in at the beginning of the Prince of Wales’ Accounting for Sustainability project. For years he was in command of financial reporting at HSBC. He is an ambassador for the International Integrated Reporting Council and chairs the judges for the Finance for the Future Awards. And he wears an asset-owner’s hat as well as a director of the HSBC UK Bank Pension Trust and chairman of its asset and liability committee. 

We sat down together for an interview the other day, to talk through the issues behind the Recommendations of the Task Force on Climate-related Financial Disclosures. ‘Its objectives’, he said, ‘were to come up with recommendations within a voluntary framework for information to be published around climate risks and which would provide for information which would enable stakeholders to understand the distribution through the financial system of holdings of climate-related and carbon-related assets’. 

For Picot much of this stems from two pressures. First, the understanding of physical risks to assets from extreme events and secondly, the Paris Agreement adopted at the UN Climate Change Conference in 2015, that, as he puts it, ‘we should move to a low carbon global economy’. For Picot ‘that was a real game-changer’. ‘That will affect all businesses in all different sectors to some extent’, he said. And part of the Bloomberg agenda was, he said, simply ‘how do we give the market the information that quite frankly they are missing at the moment’. In his view it is a simple equation. ‘We do need to see a significant improvement in the quality of both quantitative and qualitative financial information’, he said. That would ‘make sure that climate risk is properly priced into decisions and capital allocation for equity and debt and credit’. That, Picot argues, ‘will reduce risk and be of interest to the beneficiaries of the pension schemes and other asset holders’. 

And this will have a knock-on effect. ‘Our recommendations would move climate change into the mainstream’, he says. ‘It would be a step forward for most companies to actually think about this through their mainstream processes’. The report recommends that the disclosures should sit in the annual report as a mean to reach a wider stakeholder base. ‘This is because we want to drive this into the mainstream’, he said, ‘and also because we believe there is strong stakeholder interest in this information being subject to the highest quality of internal assurance’. 

We are back to the mantra of what gets measured, gets managed. ‘When you ask a company to make disclosures things happen’, he says. ‘The CFO gets interested, because it is a public disclosure. The audit committee chair gets engaged and then the normal reporting processes kick in. That tends to lead to a good structure, good discussion and a dialogue in the boardroom’. For Picot this is one of main objectives of the report’s recommendations. ‘One of the great benefits of our work is to actually bring a proper discussion about climate risk and its impact on strategy and the business model into boardrooms’, he said. But he doesn’t want to scare the horses. He stresses that there is a concept of materiality in the recommendations. If having considered the issues companies feel that climate risk is not material then they can simply disclose how they considered the governance and strategy aspects and that would be it. Though for more complex situations the report does recommend the publication of scenario analysis. 

Picot sees the report as an opportunity for the finance function. ‘As we have seen through the judging of the Finance for the Future Awards’, he said. ‘There are some really exciting examples of talent within finance functions who are making a really important contribution. I think this is a very good opportunity for the finance function to really understand what is an emerging mainstream business risk and to really help the organisation shape the way it thinks about it and to craft external disclosures which will be helpful’. 

Looking five years ahead Picot would ‘like to see the broad spectrum of asset owners really understand the climate risk in their portfolios and use the information to make better decisions and to call on their fund managers to use this information when they are running their funds and for the managers in turn to be demanding the information from the companies’, he said. ‘And it is only by having all these elements within the investment chain working properly that will we actually manage to deal with the issue’. 

Picot, again thinking of his experience chairing the judging panel for the Finance for the Future Awards, sees all this as being part of the way the world is changing. ‘In the judging of the awards I got a sense of what the younger generation wants to happen’, he said. ‘I think they have a real and genuinely keen interest in what their savings are being used to do. The younger generation are going to typically be members of a defined contribution scheme and the pension they will get many years in the future is going to be a function of the amount of money they put in and the investment return’, he said. ‘I sense they want more than that. They want to know what their money is being used for and they worry about issues like climate risk and sustainable investing. I see that as being a significant and growing force for good and we have started to see the asset management industry responding. We are starting to see some really interesting innovations around some of the defined contribution investment products as a consequence’. 

But Picot stressed that what the report calls for underlines that there is no substitute for the traditional rigour of financial disclosure. ‘Shareholders’, he said, ‘need to understand the financial condition of the companies they are investing in and understand the stewardship’. But the landscape is changing. ‘There is no doubt that broader society wants more than that’, he said. ‘And climate risk is part of that. I think there is a lot of interest in organisational thinking around the UN Sustainable Development Goals, for example’, he said. ‘I don’t think this is some sort of overnight fad’, he said. ‘I think this is a genuine change in terms of what the world is demanding from the business community who in turn is responding very practically to that change’. 

Meanwhile the sifting and assessing of over 300 comment letters continues. ‘They show very strong support from asset owners and fund managers’, he said, ‘and perhaps unsurprisingly less wholehearted support from the corporate reporting world, probably because it is a voluntary framework and they can see the costs attached to that and see less of the benefits.’ The final version of the report will be with us by the middle of the year.

ICAS publishes a guide on charity audit exemption

05 Apr, 2017

The Institute of Chartered Accountants of Scotland (ICAS) Charities Panel has published new guidance on charity audit exemption in England and Wales.

The aim of the guidance is “to support ICAS members acting for charities in England and Wales to understand when a charity client is entitled to audit exemption”. 

It provides an overview of the audit thresholds relevant to charities, including charitable companies, registered with the Charity Commission for England and Wales (the CCEW).  The guidance includes: 

  • Audit thresholds: charities receiving an audit under the Charities Act 2011.
  • Change of legal form and external scrutiny considerations.
  • ICAS guidance on the audit of charitable companies.
  • Independent examination.
  • Cross-border charities: the England and Wales perspective. 

Excepted charities fall within the scope of the guidance.  However the guidance does not specifically address the external scrutiny requirements which apply to exempt charities. 

A press release and full guidance are available on the ICAS website.

Article on investor event on better communication

05 Apr, 2017

On 29 March 2017, the IFRS Foundation and the CFA Institute hosted a joint event for investors entitled 'Better Communication in Financial Markets: Sharing Perspectives'. A general article on the event has now been posted on the IASB's website.

The better communication discussion was for a large part held under Chatham House rules but saw directly attributable contributions by IASB Chairman Hans Hoogervorst who explained the IASB's position around alternative performance measures and the IASB's primary financial statements project. He believed that the IASB "should definitely have a go at defining EBIT" – a position also evidenced by the Board discussions on primary financial statements in March 2017 and the recently published discussion paper on principles of disclosures, which features a section on the use of performance measures in the financial statements.

Gary Baker, managing director of CFA Institute in EMEA, stressed there is a need to improve the presentation of financial statements to investors and to better connect all the different strands of information released by companies and pointed at the institute's recent studies on non-GAAP financial measures.

The article summarising the event on 29 March is available here.

Recording and slides of the IFRS Taxonomy 2017 webinar

05 Apr, 2017

On 28 March 2017, the IFRS Foundation held web presentation introducing the IFRS Taxonomy 2017.

The IFRS Taxonomy 2017 is a translation of IFRSs (International Financial Reporting Standards) into XBRL (eXtensible Business Reporting Language) and consistent with IFRSs as issued by the IASB at 1 January 2017.

The webcast and slides are available through the press release on the IASB website.

EFRAG Board meeting April 2017

04 Apr, 2017

The European Financial Reporting Advisory Group (EFRAG) will hold a Board meeting on 11 April 2017 in Brussels.

An agenda with supporting papers and details on how to register for the public meeting can be found on the EFRAG website.

Recent sustainability and integrated reporting developments

04 Apr, 2017

A summary of recent developments at the GRI/UNCTAD and WBCSD/Natural Capital Coalition.

The Global Reporting Initiative (GRI) and the UN Conference on Trade and Development (UNCTAD) have signed an Exchange of Letters to deepen the organisations’ collaboration on responsible investment, including work related to the Sustainable Stock Exchanges (SSE) initiative. The aim of SSE is to motivate improved performance on environmental, social and corporate governance through informed investment. Please click for press release on the GRI website.

The World Business Council for Sustainable Development (WBCSD) announces the launch of the pilot version of the Natural Capital Protocol Toolkit. It’s an online interactive database that helps businesses find the right tools to measure and value natural capital as they use the Natural Capital Protocol and Sector Guides. Please click for the press release offering access to the toolkit. Comments are requested by 27 April 2017.

We comment on the on the FRC's Discussion Paper: 'Improving the Statement of Cash Flows'

03 Apr, 2017

We have published our comment letter on the Financial Reporting Council's (FRC's) Discussion Paper: 'Improving the Statement of Cash Flows'.

We agree with many of the suggestions made in the paper to improve the statement of cash flows. We believe that the focus should be on improving classification and we support introducing more classification headings. However, we believe that less emphasis should be afforded to suggestions made where the existing principles and rules in IAS 7 Statement of Cash Flows are operating successfully in practice and are not considered to be significant problem areas such as net presentation and where the reconciliation of operating activities should be presented.

We also consider that several of suggestions could be enhanced through further outreach to determine whether the issue raised is an important one for users of financial statements and to strike the appropriate balance between costs and benefits.   

Further comments and a full response to all questions raised in the invitation to comment are contained within the full comment letter.

FRC publishes revised operating procedures for reviewing corporate reporting

03 Apr, 2017

The Financial Reporting Council (FRC) has today published revised operating procedures for its Conduct Committee for when it reviews company reports and accounts.

The revised operating procedures, which took effect from 1 April 2017, have been published following a consultation in October 2016.  

They will increase the transparency of the Conduct Committee’s processes by permitting the publication of the names of those companies whose reports and accounts have been reviewed, once the case has been closed.  The revised operating procedures will also allow the Conduct Committee to issue press notices referring to matters that have come to its attention that it feels warrant sharing more widely.  However, in these cases, individual company names will not be identified. 

Alongside the revised operating procedures, the FRC has published a feedback statement on its October 2016 consultation and has updated its ‘Frequently Asked Questions’ to reflect the revised operating procedures. 

Click for (all links to FRC website):

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