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. 

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".

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)".

UK: Anthony Bolton on corporate governance

One of the UK's most well known fund managers, Anthony Bolton, has written a short piece in the UK's Financial Times newspaper titled "What investors must look for in captains of industry". Amongst the points made by Bolton are the following concerning corporate governance and the Combined Code:

One of the other things we will consider when we look at a company’s management is the corporate governance structure – are there sufficient checks and balances there to control executives? Here we have a pragmatic rather than a box-ticking culture. If something is working, we will not change it even if it is not necessarily best practice. However, we do in general like separate chairman and chief executives. Where they are the same person, this can be driven by personal ego and does not necessarily reflect business acumen. Also, when matters are not going as well as they should be, it can be harder to effect management or strategic change. I don’t personally agree with all the aspects of the City code of best practice [i.e., the Combined Code]. In particular, the belief that a non-executive’s independence becomes tainted by tenure is not one that I support. In my experience, directors are either independent by nature or not. But one of the consequences of this rule is that the average tenure of non-executives has fallen. In some cases, this means there is no-one on the board who has experienced a full business cycle for that particular industry"

For further information see:

Financial Times article | Times interview | Guardian interview |  

Ireland: ISE consultation on corporate governance framework

Following the publication last week of a revised UK Corporate Governance Code by the Financial Reporting Council, the Irish Stock Exchange has announced that it will begin a consultation this month on the governance framework for Irish listed companies: see here (pdf). Views will be sought on whether a separate corporate governance code for Irish listed companies should be adopted and, if not, how best to incorporate the FRC's Code into the ISE's Listing Rules.

UK: revised Corporate Governance Code published

The Financial Reporting Council has today published a revised edition of the UK's Corporate Governance Code (formerly known as the Combined Code): see here (pdf). The new Code applies to financial years beginning on or after 29 June 2010.

A short summary of some of the changes included in the new edition is provided in the accompanying press release and more detailed information is available in the report on the consultation process leading to the publication of the new Code: see here (pdf).

The changes include a new provision (B.7.1) concerning directors' election: "All directors of FTSE350 companies should be subject to annual election by shareholders". With regard to gender diversity, a new supporting principle provides that "[t]he search for board candidates should be conducted, and appointments made, on merit, against objective criteria and with due regard for the benefits of diversity on the board, including gender".

In its press release, the FRC states that it intends to publish its Stewardship Code for Institutional Investors by the end of next month. Further background on the review leading to the new Code is available here.

UK: new version of the Combined Code published

The Financial Reporting Council has published an updated version of the Combined Code on Corporate Governance, which applies to financial reporting periods beginning on or after 29 June 2008. 

The revised Code includes the following changes, resulting from the FRC's 2007 review of the Code:

• The removal of the restriction on an individual chairing more than one FTSE 100 company
  
• For listed companies outside the FTSE 350, allowing the company chairman to sit on the audit committee where he or she was considered independent on appointment.
  

UK: comply or explain and corporate governance statements

The Financial Services Authority has today published a policy statement in which it announces a change to the "comply or explain" statement required by listed companies with regard to their compliance with the Combined Code on Corporate Governance. The FSA is modifying Listing Rule 9.8.6R(5) so that listed companies will be required to report on how they have applied "the main principles" set out in Section 1 of the Combined Code. This change will come into force on 29 June 2008 for financial reporting periods beginning on or after this date. At present, rule 9.8.6R(5) requires companies to state how they have applied "the principles" in Section 1. With regard to this change, the FSA explains:

Where a company has applied the Code’s Main Principles by complying with the associated provisions it should be sufficient for the company simply to report that it has done so. However, where a company has taken additional actions to apply the principles or otherwise improve its governance, it would be helpful to shareholders to describe these in the annual report. We do not expect this to have any cost implications, and modification will benefit smaller companies by cutting back the amount of boiler-plate"

This change is one of many being made as part of the FSA's implementation of the Statutory Audit Directive (2006/43/EC) and the Company Reporting Directive (2006/46/EC). The latter requires companies whose securities are admitted to trading on a regulated market to produce a corporate governance statement in their annual reports. This statement must explain which corporate governance code the company has followed and the extent to which it has complied with the code. The UK rules governing the corporate governance statement will be introduced in new rule DTR 7 within the FSA Handbook and will come into force on 29 June 2008 for financial reporting periods beginning on or after this date. 

For further information see:
FSA policy statement | FSA newsletter | FSA consultation paper (Dec 2007) | FSA Handbook | Listing Rules | DTR 7 - corporate governance statements | Statutory Audit Directive | Company Reporting Directive |

UK: annual election for directors? - what the papers say

The Financial Reporting Council is expected to publish the revised Corporate Governance Code this week. A report in yesterday's Sunday Times newspaper (see here) repeats the suggestion made in the Daily Telegraph last week (see here) that the FRC has decided that it is desirable for boards to be subject to annual re-election by the shareholders (presumably subject to 'comply or explain'). But yesterday's Independent on Sunday offered a more cautious view in a short report - available here - titled "Annual directors' vote in doubt".

UK: annual election for directors?

Ahead of the publication of the UK's revised Corporate Governance Code next week, today's Daily Telegraph newspaper reports - see here - that the Financial Reporting Council has decided that the Code should require the entire board to face annual election by shareholders.

The newspaper also reports that in a lecture given last night, Sir David Walker stated that he now supported the annual election of the whole board. In his recent report concerning bank governance (here, pdf), Sir David recommended that the chairman should face annual election, with the board keeping "under review the possibility of transitioning to annual election of all board members".

UK: the Combined Code - recommendations from the Conservative Party Working Group on Responsible Business

The Conservative Party Working Group on Responsible Business has proposed some changes to the Combined Code in its (reasonably) recent report "A light but effective touch". The Working Group stated:

Clearly it is one of the roles of company boards to help define the standards and values of the company. The Combined Code on Corporate Governance does contain a reference to the board’s role in setting the company’s values and standards (Code A.1 The Board). However, we suggest that this is insufficiently clear and requires further serious thought. Further, the tick-box mentality of some companies and investors has led to this clause being overlooked in practice. While the Turnbull Inquiry, a forerunner of the Combined Code, does mention corporate responsibility as a concept, the Combined Code does not make sufficient mention of this. The Working Group believes the Combined Code should make recommendations about incentives, training and corporate responsibility strategy"

UK: limiting the size of the company's board

The UK Companies Act (2006) does not impose an upper limit on the number of directors that can be appointed to a company board. Section 154 of the Act does, however, set a minimum number of directors: two for a public company and one for a private company. Moreover, Section 155 (which comes into force on 1 October 2008) provides that all companies must have at least one director who is a natural person.  

Companies can, if they wish, set a maximum number of directors in their articles of association. Marks and Spencer plc is planning to adopt such a provision. In the Notice for its forthcoming AGM, M&S explains its proposal to include in its articles a new term which will limit the size of its board to 20 directors. M&S says that this reflects "current best practice". What is this best practice to which M&S refers?  The Combined Code does not impose a limit on board size but it does state that "[the] board should not be so large as to be unwieldy" (A.3). Sir Adrian Cadbury has provided a further insight: in his book Corporate Governance and Chairmanship: A Personal View (Oxford: OUP, 2002) he observed that a limit of 10 was "an admirable starting point for any consideration of board size" (p. 51).

Postscript (8 June 2008): 

Interestingly, Tesco plc, at its forthcoming AGM, will be seeking shareholder approval for the removal of a cap on the number of directors in its articles. The company states that this will provide "more flexibility". Tesco's existing articles set a limit of 16.  See this Notice for further information.  

Another FTSE100 company - Centrica - has altered its articles this year and has included a cap of 20 directors on the board. The company has explained why in the Notice sent to shareholders: "Following guidance from the Association of British Insurers, published since the current Articles were brought into force, the Company has decided to insert a provision into the New Articles to allow for a maximum number of twenty Directors of the Company".

UK: changes to the Combined Code

The Financial Reporting Council has announced several changes to the UK's Combined Code on Corporate Governance:

• the removal of the restriction on an individual chairing more than one FTSE100 company.
  
• for listed companies outside of the FTSE350, permitting the chairman to sit on the audit committee where he/she was considered independent on appointment.
  

These changes follow a consultation earlier this year.  The revised Code will be published at the end of June and it will apply to accounting periods beginning on or after 29 June 2008.  Click here for further information.  The FRC has also published a regulatory impact assessment and a summary of consultees' responses.

NB: The revised Code will come into force on the same day as new FSA rules implementing European Directive 2006/46/EC which will require a corporate governance statement to be published in the annual reports of companies who have their registered office in the Community and whose securities are admitted to trading on a regulated market.  For further information, see here.

Postscript (27 June 2008): Further information about the new FSA rules is available here and information about the revised Combined Code is available here.

UK: ICSA's board performance evaluation report

The Institute of Chartered Secretaries and Administrators has published a report in which it reviews the manner in which the top 200 listed companies (at the end of 2009) undertook and reported their annual evaluation of the performance of the board, the audit, nomination and remuneration committees and the individual members of the board in line with Principle A6 of the Combined Code: see here (pdf).

According to the report, 16% of companies undertook some form of external board evaluation process. The Financial Reporting Council, in its 2009 report on the Combined Code, stated (para. 3.41):

... the potential benefits resulting from the greater objectivity that an external facilitator can bring to the evaluation process are such that a provision should be added to the Code recommending external facilitation of the board review at least every three years. Those companies that consider this to be unnecessary or undesirable will, of course, continue to be able to choose to explain rather than comply. Those companies that choose to comply will be free to decide what form of external involvement would be most beneficial to them".

UK: proposed changes to the Combined Code - guidance for boards

Deloitte have prepared a short document summarising the main recommendations in the FRC's recent report on amending the UK's Combined Code on Corporate Governance (to be renamed the UK Corporate Governance Code) and highlighting the actions that boards should take: see here (pdf). 

UK: FRC consults on its priorities for 2010/11

The Financial Reporting Council has published, for consultation, its priorities for 2010/11: see its draft plan (pdf). Major activities include implementing changes to the Combined Code (to become known as the the UK Corporate Governance Code); supporting the introduction of a Stewardship Code for institutional investors; considering whether the need remains for updated guidance for directors and audit committees arising from the financial crisis; and continuing work to improve narrative reporting, including disclosures concerning business models.