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: 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".

UK: FSA quarterly consultation - sponsor regime changes proposed

In its July 2008 quarterly consultation the UK's Financial Services Authority outlined proposed changes to the FSA Handbook including the following changes to the Listing Rules with regard to the sponsor regime:

• Requiring an issuer to appoint a sponsor satisfying the requirement to be independent.
• Giving the UKLA the ability to require a sponsor to disclose information to the UKLA that it reasonably requires.
• Making the appointment of an independent sponsor an approval condition for a circular. 

For further information see:
Consultation paper | Newsletter | FSA Handbook | Listing Rules | Sponsors | 

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: FSA fines Woolworths plc - what is inside information?

The decision of the FSA to fine Woolworths plc £350,000 has been widely reported (see, for example, this report in the Financial Times). The case concerned Woolworths' delay in disclosing information (a variation in a subsidiary's contract with a supplier which would reduce profits by £8 million) about which it became aware of on 20 December 2005.  Disclosure was made on 18 January 2006, when Woolworths provided a Christmas trading update. On this day the company's shares fell from 36.75p to 32.25p (a fall o just over 12%).  

The FSA argued that Woolworths' failure to disclose before 18 January 2006 breached Disclosure Rule 2.2.1 and Listing Principle 4. Rule 2.2.1 requires the issuer of listed securities to disclose inside information as soon as possible on a Regulated Information Service. Listing Principle 4 requires the communication of information by a listed company to those holding its securities (and potential holders) in order to avoid the creation or continuation of a false market in the securities. 

The FSA's Decision Notice is well worth reading because there is discussion of the definition of inside information. An important part of this definition is the requirement that if the information were generally available, it would "be likely to have a significant effect on the price of the qualifying investments or on the price of related investments" (emphasis added). Woolworths argued that the information about the contract did not satisfy this part of the definition because a share price fall of at least 10% is needed for there to be a significant effect and that when determining whether information is inside information, reference should be made to what caused the share price movement.  Woolworths contended that news about the contract variation explained less than half of the share price fall on 18 January and for this reason it was not inside information.  

The FSA rightly rejected these arguments and observed:

...it is the wrong approach to seek to analyse the amount of an actual fall that might be attributed to a particular piece of information in order to determine whether it was 'inside information'. Indeed it is an unworkable test if the relevant piece of information was not in fact disclosed".

"The FSA is satisfied that the Variation resulted in a profit reduction of more than 10% and that this is, on any view, information of a type that a reasonable investor would be likely to use as part of his investment decisions".

UK: publishing the annual report and accounts - listed companies missing the new deadline

Under Disclosure and Transparency Rule (DTR) 4.1 listed companies are required to publish their annual report and accounts within 4 months of their financial year end. This rule implements Article 4(1) of the European Transparency Directive (2004/109/EC) and applies to companies with year ends after 20 January 2008. According to the FSA (acting as the UK Listing Authority):

Our recent experience, with the first issuers required to comply with these new rules, suggests that some companies have mistakenly believed that publishing Preliminary Results (required previously under the Listing Rules) within this period was enough to fulfil their obligations under DTR 4.1. This is not the case. We would remind issuers that we are able to suspend the listing of, or even take enforcement action against, companies who do not publish the required financial information within the required deadlines, and may employ this where necessary in the future".

For further information see this update. 

UK: the new listing regime

Changes to the Listing Regime come into effect today, with the creation of two segments: premium and standard. For further information see here. The revised Listing Rules are available here. Overseas companies with a premium listing of equity shares will be required to 'comply or explain' against the UK's Combined Code on Corporate Governance.

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: the listing regime review - FSA publishes policy statement and final rules

The Financial Services Authority has published a policy statement marking the end of its three year review of the listing regime: see here (pdf). The statement contains final rules which will restructure the regime into two listing segments: standard (based on EU minimum standards) and premium (denoting more stringent super-equivalent requirements). Further information about the review is available here.

UK: The FRC and cost effective regulation

The UK's Financial Reporting Council has issued a discussion paper the purpose of which is to explore ways of increasing the cost effectiveness of its operations. Amongst the proposals in the paper is one suggesting a review of the relevance and complexity of corporate reporting. With regard to corporate governance, for which the FRC is responsible, the discussion paper states (pp. 11-12):

"We believe that the UK approach combines high standards of corporate governance with relatively low associated costs. Studies consistently show that the UK outperforms other countries in terms of governance standards, and that standards within the UK continue to rise. Reports published in 2005 by the FTSE ISS Corporate Governance Index and Governance Metrics International both put the UK at the top of the list of countries by average corporate governance score. A survey carried out by the National Association of Pension Funds in the same year found that 94% of large UK pension funds believed that corporate governance standards in UK companies had improved. Compliance costs in the UK are considered to be lower than in other countries with comparable standards. A study published in June 2006 by Oxera on behalf of the London Stock Exchange found that the corporate governance requirements were seen by some companies as one of the main factors influencing the choice between a UK and US listing (to the advantage of the UK)".

UK: the FSA's listing regime review

The Financial Services Authority has published a policy statement and consultation paper with regard to its restructuring of the listing regime into premium and standard segments. The issues for consultation concern the draft rule requiring overseas companies in the premium segment to offer pre-emption rights to shareholders and the rule clarifying that equity securities with a standard listing must be admitted to trading on a regulated market. For background information see here. 

UK: FSA board approves listing regime change

At its meeting on Friday, the Board of the Financial Services Authority agreed to restructure the listing regime into two segments - premium and standard - following a consultation which ended earlier this year. A full feedback and policy statement will be published next week. Meanwhile, further information is available in Handbook Notice 92 which was published on Friday.