UK: FRC consultation - Guidance for Directors of Listed Companies on Going Concern and Financial Reporting

Listing Rule 9.8.6 requires listed companies incorporated in the UK to provide in their annual report "a statement made by the directors that the business is a going concern, together with supporting assumptions or qualifications as necessary, that has been prepared in accordance with Going Concern and Financial Reporting: Guidance for Directors of listed companies registered in the United Kingdom, published in November 1994".

The 1994 Guidance is now the subject of review: the Financial Reporting Council has published a consultation paper in which it states:

The Guidance for Directors was written by a Working Group formed under the auspices of the Cadbury Committee that reported on the Financial Aspects of Corporate Governance. The formation of the Working Group arose out of concerns that there had been several high‐profile company failures where there had been no apparent indication of the imminent problems in the previous year’s report and accounts.

The objective of the Guidance for Directors is to support good corporate reporting and, in particular, the requirements of the Listing Rules and Accounting Standards. When a company is not a going concern this does not necessarily mean that it is, or is likely to become, insolvent. The Guidance for Directors is not intended to address aspects of insolvency and, in particular, is not intended to support the requirements of the Insolvency Act 1986.

In the period since 1994 there have been substantial changes to the accounting standards applied by directors of listed companies. This is particularly the case for directors preparing consolidated accounts required to comply with International Financial Reporting Standards (IFRSs) as adopted by the EU.

The FRC observes that current economic conditions are creating particular challenges for companies. Recent developments in global debt markets have led banks to be cautious of lending to one another (the so‐called “credit crunch”). This has severely restricted liquidity which has created unexpected financial difficulties for banks and entities that depend on the availability of loans as a key source of capital. Many market commentators are now forecasting a period of reduced growth and in some cases recession, with the result that going concern questions are likely to need to be considered in more detail by Boards of Directors.

In view of these deteriorating economic conditions the FRC has concluded that this is an appropriate time to consider whether the existing Guidance for Directors is necessary and remains appropriate, or whether it can be improved.

Note: The UK's Combined Code on Corporate Governance (June 2008) provides in Section C ("Accountability and Audit") the following provision (C.1.2): "The directors should report that the business is a going concern, with supporting assumptions or qualifications as necessary".

Postscript (2 Sep 2008): For further comment see this short article in the Financial Times newspaper. 

USA: California: directors' duties and corporate social responsibility

Section 309 of the California Corporations Code provides that a director must act in good faith, in the manner in which he/she believes to be in the best interests of the corporation and its shareholders. A proposal to amend Section 309 is currently before the California State Legislature. Assembly Bill 2944 , introduced by Assemblyman Mark Leno, will provide that in acting in the best interests of the corporation, the director may consider:

(1) The long-term and the short-term interests of the corporation and its shareholders.

(2) The effects that the corporation’s actions may have in the short term or in the long term upon any of the following: 

• The prospects for potential growth, development, productivity, and profitability of the corporation.
  
• The economy of the state and the nation.
  
• The corporation’s employees, suppliers, customers, and creditors.
  
• Community and societal considerations.
  
• The environment. 
  

The draft Bill makes clear that the introduction of the above provision will not impose on the director any legal or equitable duties, obligations of liabilities, or create any right or cause of action against the director. According to Assemblyman Leno, the Bill "would promote socially responsible corporate conduct by authorizing boards of directors to consider the interest of the full community, the environment and employees, along with the interest of shareholders, when making official decisions on behalf of the corporation".  There has, quite predictably, been opposition. For example, the Corporations Committee of the Business Law Section of the State Bar of California has argued that the Bill would undermine director accountability to shareholders without effectively promoting interests of non-shareholder stakeholders.

Notes:

[1] Progress of the Bill can be monitored here and for an overview of the legislative process in California, click here. 

[2] Bill 2944 does not go as far as the UK Companies Act (2006) which, in Section 172, requires the director to act:

in the way he considers, in good faith, would be most likely to promote the success of the company for the benefit of its members as a whole, and in doing so have regard (amongst other matters) to: (a) the likely consequences of any decision in the long term, (b) the interests of the company's employees, (c) the need to foster the company's business relationships with suppliers, customers and others, (d) the impact of the company's operations on the community and the environment, (e) the desirability of the company maintaining a reputation for high standards of business conduct, and (f) the need to act fairly as between members of the company".

Germany: corporate governance code - new edition published

The German Corporate Governance Code was updated earlier this year. A copy of the new version, in English, has been published here on the ECGI website. For a copy of the new version with the changes highlighted in bold, click here.

Belgium: corporate governance code - proposed changes

Belgium's Corporate Governance Committee has proposed several changes to the Belgian Corporate Governance Code. A consultation paper is available here (in Word format) and a draft of the new code is available here (also in Word format). The proposed changes address a wide range of areas including corporate social responsibility, the gender diversity of boards, board evaluation, directors' remuneration and the remuneration report. 

Turkey: CMB Corporate Governance Principles

The codes and principles directory maintained by the European Corporate Governance Institute has been updated to include a copy of the Capital Markets Board of Turkey's Corporate Governance Principles: see here.

Latvia: NASDAQ OMX Riga Principles and Recommendations

The codes and principles directory maintained by the European Corporate Governance Institute has been updated to include a copy of the NASDAQ OMX Riga Principles of Corporate Governance and Recommendations on their Implementation: see here.

UK: annual election of directors

Today's Financial Times newspaper reports, in an article titled Investors oppose annual board vote available here, that Hermes, Railpen and the Universities Superannuation Scheme have "written to 700 companies to encourage them to ignore new guidelines [in the UK Corporate Governance Code] that require the annual re-election of board members".

Slovenia: governance code added to ECGI directory

The codes directory maintained by the European Corporate Governance Institute has been updated to include a copy of the governance code published by the Ljubljana Stock Exchange, Slovenian Directors’ Association and Managers' Association of Slovenia in late 2009: see here.

Guernsey: corporate governance code update

Guernsey's Financial Services Commission has published its annual report: see here (pdf). This provides an update on the Commission's work developing a corporate governance code (at p.13):

One area on which the regulation of financial services businesses in Guernsey will focus more intensively is corporate governance, the proper practice of which is an invaluable adjunct to effective regulation. Increasingly, external assessments of the Bailiwick’s financial services sector will address compliance by its constituents of current notions of proper corporate governance and accountability, but of course these are not always readily adaptable to particular sectoral circumstances, nor are the precepts and practices of the business world necessarily consistent.

A group of practitioners, reflecting an appropriate cross-section of Guernsey’s financial services sectoral interests, is working with the Commission to produce a draft Code of Corporate Governance, applicable to all licensed entities, and available more widely as a best practice model to local industry and commerce. The draft Code has been the subject of extensive consultation, and work will shortly begin on the particular sectoral adaptations and modifications necessary or expedient to make it practically workable, bearing in mind also that it will eventually have to be acceptable externally. A further consultation will be undertaken in Autumn 2010".

Norway: proposed amendments and additions to the Code of Practice

The Norwegian Corporate Governance Board, which is responsible for the Norwegian Code of Practice for Corporate Governance, has published a consultation paper setting out proposed amendments and additions to the Code: see here (pdf). Amongst the proposed additions is one requiring the board to define the company's basic corporate values and to formulate ethical guidelines and guidelines for corporate social responsibility in accordance with these values.

Ireland: draft corporate governance code published

The Irish Stock Exchange has published a consultation paper in which it proposes the introduction of an Irish Corporate Governance Code: see here (pdf). The Irish Code is likely to be based on the UK Corporate Governance Code and is expected to come into force in the autumn. A draft copy of the Irish Code is available here (pdf).

UK: the Corporate Governance Code

The new edition of the UK's Corporate Governance Code - available here (pdf) - applies to financial years beginning on or after today. All companies with a Premium Listing of equity shares in the UK are required under the Listing Rules to report on how they have applied the Code in their annual report and accounts. The Financial Reporting Council is expected to publish soon the final version of the Stewardship Code for Institutional Investors.

UK: corporate governance and AIM companies

Companies listed on AIM - the London Stock Exchange's Alternative Investment Market - are not subject to the "comply or explain" regime of the Combined Code on Corporate Governance.  The LSE AIM Rules for Companies (2007) contain some provisions concerning the conduct of directors but these are not intended as a substitute for the Combined Code. The corporate governance practices of AIM companies have been explored in a recently published PwC report titled "Corporate Governance and AIM - An assessment of the governance procedures adopted by AIM companies". According to the report's executive summary:

...governance procedures adopted by AIM companies vary widely. It is apparent that good governance is not necessarily a function of size of the company or its location, and it is hard to argue that the bigger the company on AIM, the better the governance. This survey shows that the composition of the Board is a particular area of weakness for many AIM companies. The need for strong independent non-executive director representation on the board appears to be something many AIM companies have yet to recognise. Perhaps linked to this, is the fact that only a fifth of the AIM Top 100 reported that they had assessed their Board effectiveness. This fell to only 5% of the smallest AIM companies in our sample. It remains to be seen whether the current voluntary approach to governance is a sustainable model for AIM, especially when the evidence of this survey shows a relatively limited application of best governance practices, across all segments of the market".

Ghana: company law reform

Fifty years ago the Government of Ghana appointed the late Professor L.C.B. ("Jim") Gower to review its company law. Professor Gower's work resulted in the Companies Code 1963. The 1963 Code is now being reviewed as part of a wider review of business law initiated by the Ghanaian Attorney General and Ministry of Justice. See here and here for further information. 

ICGN Newsletter published - sovereign wealth funds and Swedish corporate governance

The June 2008 issue of the International Corporate Governance Network Newsletter has been published. The leading article concerns sovereign wealth funds and there is also a short piece on corporate governance in Sweden. The latter highlights some important differences between the Swedish model and the approach taken in other countries.

Note: On 1 July 2008, a new version of the Swedish Corporate Governance Code came into force - see here. For background information, including a comparison between the new Code and its predecessor, see here.

UK: Takeover Panel consultations - electronic communications and miscellaneous amendments

The UK's Takeover Panel has published two consultation papers, for which responses are invited by 17 October:

[1] Miscellaneous Code Amendments (2008/2) - the Panel proposes amending Rules 2, 8, 9, 35 and 28. These amendments are intended to clarify the application of existing Code provisions or to codify existing practice in relation to matters which are not currently covered by the Code.

[2] Electronic Communications, Websites and Information Rights (2008/3) - the Panel proposes that the Code should be amended to:

• enable electronic forms of communication to be used to send documents and information to shareholders and certain other relevant persons;
• facilitate and require a wider use of websites by parties to offers; and
• ensure that persons nominated to enjoy “information rights” receive the same information as shareholders. 

UK: Takeover Panel - annual report published

Yesterday the UK's Takeover Panel published its annual report for the year to 31 March 2008. The report provides a summary of statements issued by the Panel as well as statistics concerning resolved takeover and merger proposals. The report also refers to the High Court's decision in Re Expro International Group Plc [2008] EWHC 1543 (Ch) - noted in this post - and states:

In the recent High Court judgment in relation to the offer for Expro International Group Plc, which was effected through a scheme, it was noted that it was not considered desirable for Court procedure to introduce a level of uncertainty into offers which the provisions of the Code had successfully eliminated. On this evidence, it does not appear that there is any current likelihood of the Courts playing a more active role in determining the outcome of offers".

UK: the Data Sharing Review and corporate governance

The Data Sharing Review Report was published today. It contains many recommendations but the first two are of particular importance within the field of corporate governance:

Recommendation 1: As a matter of good practice, all organisations handling or sharing significant amounts of personal information should clarify in their corporate governance arrangements where ownership and accountability lie for the handling of personal information. This should normally be at senior executive level, giving a designated individual explicit responsibility for ensuring that the organisation handles personal information in a way that meets all legal and good-practice requirements. Audit committees should monitor the arrangements and their operation in practice.

Recommendation 2: As a matter of best practice, companies should review at least annually their systems of internal controls over using and sharing personal information; and they should report to shareholders that they have done so. The Combined Code on Corporate Governance requires all listed companies to review ‘all material controls, including financial, operational and compliance controls and risk management systems’ ... It would be surprising and worrying not to see information risks addressed explicitly in the Statements of Internal Control for such companies. We hope that bodies such as the Confederation of British Industry will develop guidance to help companies ensure their controls and disclosures are adequate. If approaches on these lines are not successful in improving high-level accountability for giving assurance on information risks, we would expect the Financial Reporting Council to intervene.

For background information click here.

Germany: corporate governance developments

A the end of June, at the 7th German Corporate Governance Code Conference, Dr. Gerhard Cromme delivered his final speech as chairman of the Government Commission on the German Corporate Governance Code. In his speech, Dr Cromme discussed the development of the Code - widely known as the Cromme Code - and reflected on the German two-tier board model and issues associated with the transparency of business decisions and executive pay.  Regarding the latter, Dr Cromme observed:

In connection with cases of excessive severance payments, there were calls to shorten the term of management board contracts from five years to, say, three years. This would have limited the amount of potential several payments without introducing a severance payment cap. However, we came to the conclusion that the five-year term of office is the greater good - for reasons of planning and reliability alone, but also in the interest of a long-term corporate strategy. Only first time appointments should generally be made for a shorter term. Instead of shortening management board contracts, we introduced suggestions on the severance payment cap in 2007. At the start of this month we took this a logical stage further and upgraded the suggestions to recommendations. This means that non-compliance with this rule has to be disclosed in the annual declaration of conformity. This is transparency which will bear fruit in the long-term and change patterns of behaviour".

Further information about the recommendation on severance pay is available here and a video of the conference is available here. Interestingly, the UK's Financial Times newspaper has reported, in a piece titled "Berlin plans to curb excessive executive pay" (online edition, July 10):

Berlin is poised to crack down on what it considers 'excessive' executive pay in a move that could curtail the use of stock options in Germany. The Christian Democratic Union of Chancellor Angela Merkel has set up a working group that will start work in September on concrete proposals. These are likely to include a tightening of corporate governance rules and corporate taxation possibly as soon as the end of this year. The proposals, to be finalised in the autumn, are likely to make it into law since the CDU has the support of its coalition partner the Social Democratic party. The CDU initiative is intended to target DAX-listed companies, but would also affect executives of foreign companies who live in Germany".

NB:

[1] In the UK, under Section 188 of the Companies Act (2006), directors' service contracts exceeding 2 years (or those with any fixed or rolling notice period exceeding 2 years) require shareholder approval. This provision applies to all companies.

[2] The UK Combined Code on Corporate Governance (June 2008) provides:

B.1.6 Notice or contract periods should be set at one year or less. If it is necessary to offer longer notice or contract periods to new directors recruited from outside, such periods should reduce to one year or less after the initial period.

UK: the FSA's annual report 2009/10

The Financial Services Authority has published its 2009/10 annual report: see here (pdf). Whether this will be the last report from the FSA as it is currently organised should become clear (or clearer) this month. The emergency budget on June 22 provides a good opportunity for plans to be published but the Financial Times newspaper suggests (here) that proposals may be published next week.

Meanwhile, the report provides an overview of the FSA's actions in the past year. There is a section titled "Corporate governance and Significant Influence Functions" which states:

As part of our supervisory enhancement programme,we now place much greater emphasis on the role of senior management at firms ... in 2009/10 we completed 377 cases involving a significant influence function (SIF) interview where 27 were withdrawn by the firms concerned ...

On governance more widely, in November 2009 Sir David Walker completed his Treasury-commissioned review of corporate governance in banks and other financial industry entities; our proposals in the January [Consultation Paper] cover the FSA-specific recommendations in the review. Sir David’s recommendations address many current governance concerns and, as we have said publicly, we intend to play our part in supporting their delivery alongside the Financial Reporting Council (FRC) and work in relation to the Corporate Governance Code (formerly the Combined Code)".