The report provides an overview of the various participants in corporate governance and the roles they play. The report also sets out a number of recommendations which are set out below.
Corporate governance reporting by companies must focus more on the application of the Principles of the UK Corporate Governance Code (the Code) rather than just compliance with Code Provisions. In this sense, the ABI supports the notion of ‘Apply and Explain’.
The new Preface to the Code urges Chairmen to report personally in their annual statements on how the Code Principles relating to the role and effectiveness of the board (in Sections A and B of the Code) have been applied. This should be done by way of an introductory statement to the corporate governance section of the annual report (and the Financial Reporting Council should consider making this a Code Provision). The ABI’s review of Code explanations in 2012 found that companies with these introductory statements scored on average 56% higher in terms of quality of explanation.
When explaining deviations from the Code, disclosures should aim to:
- be company-specific in context and historical background
- be convincing, with an understandable rationale
- include mitigating action to address any additional risk
- be time-bound and subject to on-going review
- specify deviations from the main Code Principles as well as from the specific Code Provisions
- explain how the alternative course being adopted is consistent with the Code Principles and contributes to the objective of good governance.
Companies are encouraged to review the time-commitment requirements of different non-executive roles and consider whether changes might result in better stewardship outcomes. Companies are also encouraged to consult their largest shareholders on major board appointments and improve Nomination Committee reporting in the annual report and accounts.
Boards are recommended to be more demanding of the formal flow of information they receive. The board should provide management with a clear statement of their priorities to serve as a brief for their information needs, and this should be updated at least annually and as often as circumstances require it. The board pack should help monitor the health of the organisation’s culture. Board packs that are too long to be read are unacceptable.
In the context of a transaction:
- executive directors should inform the appropriate non-executive directors of the proposed transaction as early as possible. This should always happen when an approach is received from a possible bidder or when management first actively considers a transaction that will require shareholder approval. The non-executive directors should be provided with a narrative description of discussions between the company and the transaction counterparty and the narrative should be disclosed in summary form in the circular to shareholders.
- non-executive directors should meet as a group without executive directors to consider the transaction and confirm to the Chairman, prior to the publication of any circular or recommendation to shareholders, that they are satisfied that they have had sufficient time and received enough information. They should be given direct access to financial and legal advisers to the company so that they can ensure that information can be rapidly obtained and understood.
- where the company is subject to a management buy-out or similar transaction or engages in a transaction with a controller or group of controllers, or where a conflict might otherwise arise, a special committee comprising only non-conflicted directors should always be formed to consider the transaction. The committee should always take independent financial and legal advice: it is not good enough just to set up a Chinese wall within the company’s existing advisers.
- independent committees formed to consider a transaction should ensure that their mandate is clear and is disclosed in any circular to shareholders or the annual report, as is currently required, for example, for remuneration committee terms of reference. Normally, the mandate should extend to considering the terms of the transaction and whether the transaction itself (as opposed to other courses of action) is in the best interests of the company and shareholders as a whole.
- the non-executive directors should consider whether it is appropriate to seek separate independent advice on the merits of the transaction. The adviser should be paid on a fixed fee (as opposed to a success or incentive) basis.
The report also makes recommendations on shareholder engagement.
- In order to ensure a regular and consistent process of engagement and to improve mutual understanding of the engagement process, companies should develop a transparent annual investor relations programme that includes the intended schedule and type of one-to-one and group meetings it intends to hold to discuss corporate governance and stewardship-related issues. Companies should consider arranging for non-executive directors to attend a selection of investor-relations presentations and proactively incorporate corporate governance institutional investor representatives in the programme. They should also consider whether the range of corporate governance topics in the annual schedule of meetings is wide enough.
- ABI members support the adoption of annual Stewardship Roadshows but believe they would benefit from a wider coverage of investment issues, such as strategy, performance and capital management, so that both investment and governance specialists will benefit from attending.
- ABI members also recognise the need, as part of their reciprocal stewardship obligation, to ensure the availability of appropriate governance expertise and to prepare fully for meetings and roadshows.
The report says that ABI members direct considerable resource and expertise to engagement. Ideally, this should result in a more coordinated and sophisticated level of dialogue with companies and more informed proxy voting. The report recognises that substantial resources are at present engaged to respond to companies’ remuneration consultations and says that, while ABI members understand the importance of this issue, they want to broaden the nature of their dialogue with companies. While existing collective engagement is generally effective, ABI members are keen to enhance it where appropriate, without damaging current practices.
To this end, the ABI Executive will shortly be formalising proposals to extend participation in existing collective engagements to non-members and to launch what it calls the Investor Exchange. This will be a mechanism designed to allow any significant shareholder, through the ABI, to raise a concern about a particular listed company with the top ten shareholders in the company or holders of at least 1% of the free float.
The ABI is also going to consult its members on how to develop a proactive methodology for identifying companies for engagement, which would complement existing investor engagement.
Shareholder rights and encouraging long-term investment
The report says that differentiated voting or dividend rights are likely to result in a number of unintended consequences and affect the interests of minority shareholders adversely rather than stimulate longer-term ownership.
Annual general meetings are said to remain an integral component of the UK corporate governance system and a key mechanism to enable shareholders to exercise their ownership obligations. There is no support from ABI members for virtual-only AGMs but companies should consider how the meeting could be reinvigorated.
There is no appetite for changing the existing ownership thresholds for requisitioning general meetings (5% of the voting rights) or proposing shareholder resolutions at the AGM (5% of the voting rights or 100 shareholders with voting shares who hold shares on which there has been paid up an average sum, per holder, of at least £100); but thought might be given to simplifying the requisitioning process in order to lower costs.
Asset owners and asset managers
Looking at the relationship between owners of shares and those who manage the assets for them, the report calls for clear specification of the owner’s stewardship requirements, particularly at the beginning of the client relationship, saying that this will improve understanding and enable corporate governance objectives to be reflected better in the terms of engagement and the operational processes. ABI members would like to see this take the form of a “Stewardship Mandate” in the agreement. This could include the agreed range of stewardship activities to be undertaken by the manager, such as an annual review of the stewardship activities on behalf of the owner, or simply confirmation that the manager is a signatory to the Stewardship Code.
You can access the report here.