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".

USA: NASDAQ's corporate governance standards

Last year the NASDAQ Listing and Hearing Review Council undertook a review of its corporate governance listing standards. The Council identified a number of emerging governance practices that it believed could assist boards and sought views on whether these or other governance practices should be designated as best practices and subject to 'comply or explain'.

In a report published earlier this month - available here (pdf) - the Council announced its decision not to recommend that NASDAQ change its corporate governance standards. The Council reached its decision following comments received and in the light of forthcoming legislative changes. A report was published because the Council wished to make public the issues it discussed and to provide guidance for boards. The Council concluded in its report:

Regulatory changes implemented throughout the course of the past decade by the SEC, Congress, NASDAQ and the other national securities exchanges are continuing to lead to significant changes in corporate governance in the United States. Following every reform, new events occur that reopen the debate on corporate governance practices. While we are not recommending that NASDAQ change its governance listing standards or designate best practices at this time, we urge all boards to engage in periodic review of board functions, procedures, and responsibilities. We also urge NASDAQ-listed and other companies to follow closely the current debates about governance issues".

Denmark: private equity and transparency

The Danish Venture Capital and Private Equity Association has published "Active ownership and transparency in private equity funds: guidelines for responsible ownership and good corporate governance". The guidelines, which operate on the 'comply or explain' basis, contain rules governing the disclosure of information to supplement the requirements, where relevant, of the Danish Financial Statements Act.  In the report it is stated:

...it has to be recognised that today’s private equity funds own companies that may be of broad interest to society. These may be companies that are important for infrastructure or play a major role in the local area. They may also be companies that employ large numbers of people. In addition, many investors in private equity funds are pension funds, whose most important stakeholders are pension savers – typically ordinary salary earners. The general public may therefore have an interest in gaining insight into how a private equity fund works and creates value. This is the background to why these guidelines specify a number of areas where private equity funds and their portfolio companies should publish information.

According to a report in the Financial Times newspaper:

Denmark has leapfrogged the UK and adopted the most far-reaching guidelines to improve the transparency of private equity funds. The new voluntary code ... is designed to rehabilitate the reputation of private equity in Denmark, but will also increase pressure on the industry in the rest of Europe to follow suit to avert the threat of national or EU imposed rules. The UK and Sweden have already published voluntary guidelines to try to head off such rules but the DVCA's proposals go much further by covering 80 per cent of private equity-owned companies - compared to just the 100 largest under the UK guidelines - and requiring a far higher level of disclosure."

For further information see:

DVCPEA | Guidelines | Financial Times report | 

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 |

Bahrain: corporate governance code published

The Kingdom of Bahrain's Ministry of Industry and Commerce has published a corporate governance code: see here (pdf). The code contains nine principles with supporting directives and recommendations. For example, principle 5 provides that the company "shall remunerate directors and officers fairly and responsibly". This principle is supported by the directive that the board should establish a remuneration committee. A recommendation provides that all plans for performance-based incentives should be approved by the shareholders.

The code will initially apply to public companies but it is intended that it should, in due course, apply to all operating joint stock companies incorporated under the Bahrain Commercial Companies Law. The subject of enforcement is explained in the code's introduction. Whilst the code is based on the comply or explain approach, the introduction notes that market based monitoring alone is not sufficient and identifies other bodies and mechanisms which should perform this function including the Central Bank of Bahrain and shareholder litigation.

Europe: corporate governance in the Member States

The study report commissioned by the European Commission on corporate governance monitoring and enforcement practices within the Member States has been published: see here (pdf). The study was commissioned to describe within each Member State: the relationship between legislation and codes; the existing monitoring and enforcement mechanisms for codes and their effectiveness; companies' perceptions of the codes; the quality of companies' disclosure regarding governance principles and 'comply or explain'.

The study found widespread support amongst regulators and institutional shareholders for the 'comply or explain' approach but identified clear scope for improving its operation with regard to the quality of information disclosed and enforcement. A greater role for regulators and statutory auditors is advocated as well as the adoption of a 'comply or explain' code for institutional shareholders regarding the exercise of their voting rights. 

The report is accompanied by three appendices: [1] legal analysis by Member State [2] survey on company perceptions of governance codes and [3] methodology. Appendix one contains much useful information and provides a reasonable starting point for further research. However, the UK section is over simplified in places and is, therefore, potentially misleading. For example, the short summary on p. 421 is misleading to the extent that it suggests that all UK incorporated companies are subject to the Combined Code. Moreover, on p. 423, it is stated that that the consent of at least 75% of the shareholders is required to amend the articles of association: this should be at least 75% of votes cast at the relevant shareholders' meeting (see Sections 21 and 283 of the Companies Act 2006). Finally, is it correct to assert, as is done in the conclusion presented on p. 421, that the UK corporate governance framework "ensures that basic standards of corporate governance are maintained throughout all companies incorporated in the UK"?

UK: GC100 publishes response to the FRC Combined Code review

GC100 - the Association for the General Counsel and Company Secretaries of FTSE100 companies - has published its submission to the Financial Reporting Council with regard to the proposed changes to the Combined Code on Corporate Governance: see here (pdf).

The GC100 continues to argue that substantial change is not required and that greater prescription should be avoided. It also notes, amongst other things, its disappointment that the FRC has retained the description "comply or explain" to describe the basis of the Code's operation in preference to "apply or explain". The GC100 membership continues to be divided on whether annual re-election for all directors is preferable to three year rotation.

Ireland: the Combined Code - compliance and disclosure

Grant Thornton Ireland has published its 2010 Corporate Governance Review: see here (pdf). The report examines compliance with the UK Combined Code on Corporate Governance by companies having their ordinary shares listed on the main market of the Irish Stock Exchange. Such companies are required under the Exchange's Listing Rules (chapter 6) to state whether they have complied with the Code and, if not, to explain why.

The report notes a decline in the proportion of companies claiming full compliance with the Code (down from 51% to 36%) but notes an improvement in the quality of disclosure provided by companies in respect of non-compliance. This said, the report identifies many areas where improvements in disclosure are needed. A summary of the report is available here.

The 2009 report is available here (pdf).

UK: Corporate governance, M&S style

The UK's Combined Code on Corporate Governance, provides: "The roles of chairman and chief executive should not be exercised by the same individual". Companies can decide otherwise, providing disclosure is made: this is the principle of "comply or explain" which underpins the Code.

Against this background, strong disquiet has followed Marks and Spencer's recent announcement that Sir Stuart Rose will become executive chairman of the company, in breach of the Code. M&S's institutional investors are reported to be divided on this change in board structure and, surprisingly, M&S appears to have mishandled the way in which institutional investors were consulted and advised. The Times newspaper reported that M&S's second largest shareholder, Legal and General, was given an hour's notice of the change.

UK: Walker Report on Private Equity published

At the end of November 2007, Sir David Walker published his report titled "Guidelines for Disclosure and Transparency in Private Equity". This contains guidelines for enhanced disclosure by private equity firms. Amongst the recommendations are the following:

(a) Private equity firms should publish either in the form of an annual review or through regular updating of its website:

- a description of its own structure and investment approach and of the UK companies in its portfolio, an indication of the leadership of the firm in the UK and confirmation that arrangements are in place to deal with conflicts of interest
- a commitment to conform to the guidelines on a comply or explain basis
- a categorisation of its limited partners by geography and by type

(b) A portfolio company should publish its annual report and accounts on its website within six months of the year-end and include:

- the identity of the private equity fund or funds that own the company, the senior managers or advisers who have oversight of the fund or funds, and detail on the composition of its board
- a business review that substantially conforms to the provisions of section 417 of the Companies Act 2006, including sub-section 5 that otherwise applies only to quoted companies, calling for an indication of main trends and factors likely to affect the future development, performance and position of the company’s business and to include information on the company’s employees, environmental matters and social and community issues.

A copy of the report - which provides definitions of a "private equity firm" and "portfolio firm" - is available here.