New AIM Rules and QCA Corporate Governance Code
Following the recent consultation by the London Stock Exchange, new AIM Rules were published in March 2018. One of the key amendments is in respect of AIM Rule 26 (as set out in AIM Notice 50), which now requires AIM companies to state on their website which recognised corporate governance code they apply and how they have applied that code. Disclosures made pursuant to AIM Rule 26 should be reviewed annually and the date on which the information was last reviewed should be included on the website. For companies registered overseas, it is possible to report against a recognised code in their home country. Existing registered companies have until 28 September 2018 to comply with the new requirements, giving them time to make the necessary arrangements.
AIM companies will therefore have a choice as to which code they wish to adopt. The two main corporate governance codes in the UK are the UK Corporate Governance Code and the Quoted Companies Alliance Corporate Governance Code (QCA Code).
A revised version of the QCA Code (the “Revised Code”) was published in April 2018, based on the ‘comply or explain’ principle. The Revised Code includes ten corporate governance principles that companies should follow. Consideration needs be given as to how the company applies each principle to the extent that the board judges these to be appropriate in the circumstances, and then provide an adequate explanation for the approach taken. Where a company departs from the principles (and their application) it should provide a well-reasoned explanation for doing so as part of its reporting on corporate governance. Copies of the Revised Code are available to purchase from the QCA.
2018 AGM Season Update
Putting resolutions to shareholder vote does not mean that those resolutions will be accepted and receive shareholder approval. At the end of 2017, the Investment Association launched its’ public register of FTSE All-Share companies that have received significant shareholder opposition to proposed resolutions or who have withdrawn a resolution prior to shareholder vote. The register, which can be viewed here, provides a fascinating insight in to the areas which are receiving greater shareholder focus and interest.
Provision E.2.2 of the UK Corporate Governance Code provides that if there is a significant proportion of votes cast against a resolution, a company must, when announcing the results of voting, also announce what actions it intends to take to understand the reasons behind the votes against.
The 2018 AGM season is now underway and early reports suggest that some shareholders are using their votes to confirm their unhappiness with remuneration policies and/or reports. Those companies which have received significant votes against such resolutions have re-confirmed their commitment to engage with shareholders regarding their approach to remuneration. The register, still in its infancy, will be a useful tool for shareholders to use over time to see if companies really are engaging as they promised.
Companies should be aware that under the revised Governance Code proposed by the Financial Reporting Council (FRC), there is a provision which requires companies to also publish an interim action statement within six months and a final summary in the next annual report, making it easier for shareholders to track commitments made by companies.
Last year, a number of listed companies sought shareholder approval to have the ability to hold future shareholder meetings virtually (a meeting held wholly via online technology with no physical attendance). It will be interesting to see how popular this type of resolution is during 2018 bearing in mind that both the Investment Association and Institutional Shareholder Services Inc have set out their views on virtual meetings, indicating that they are not in the best interests of all shareholders and, whilst they support the use of technology at AGMs, they advise voting against virtual meetings, suggesting instead that support should be given to hybrid shareholder meetings (physical meetings held but where shareholders can participate online as well as in person).
BEIS Consultation on Insolvency and Corporate Governance
The Department for Business, Energy and Industrial Strategy (BEIS) published a consultation in March 2018 on ways to improve the governance of companies when they are in or approaching insolvency.
The overriding objective behind the project is to “reduce the risk of major company failures occurring through shortcomings of governance or stewardship, and to strengthen the responsibilities of directors of firms when they are in or approaching insolvency”.
The consultation considers the following: sales of businesses in distress; reversal of value extraction schemes; investigation into the actions of directors of dissolved companies; and strengthening corporate governance in pre-insolvency situations.
Regarding the final limb, corporate governance in pre-insolvency situations, the consultation further considers complex group structures; strengthening the role of shareholders; improvements to the dividend payment framework; directors’ duties and the role of professional advice; and protection for company supply chains.
Commons Select Committee – Joint Report on Carillion
The final report of the joint BEIS and Work and Pensions Committee into the collapse of Carillion has been published. When the company collapsed in January 2018 it had around 43,000 employees, liabilities of almost £7 billion and only £29 million in cash. The report highlights that the collapse was sudden and entirely contrary to Carillion’s publicly-stated position of strength which had included a record dividend of £79 million in 2016 (£55 million of which had been paid only a month before a profit warning was issued by the company).
The report strongly criticises the conduct of the Directors, the company’s auditors and the regulators and has made several recommendations. These include a further investigation into whether directors breached their duties under the Companies Act and whether the Secretary of
State should take further action to disqualify them as directors. The report recognises a chronic lack of accountability, challenge and professionalism within Carillion’s governance structure.
The Committee felt there were varying degrees of conflict of interest by the Big Four accountancy firms, all of whom had acted for the company over the years. One of the recommendations of the report is for the Government to refer the statutory audit market to the Competition and Markets Authority with consideration of breaking up the Big Four into more audit firms and detaching audit arms from those providing other professional services.
The Committee also criticises the regulators, the FRC and The Pensions Regulator for failing to take enforcement action against the company. The report recommends harsher sanctions are made available to these regulators and that a change of culture is required to ensure these powers are enforced. The full report is available here.
On 18 May 2018, the details of the independent advisory group appointed to assess the FRC’s governance, impact and powers were released, a review initially launched in 2018. The advisory group will no doubt incorporate the findings of the final report into the collapse of Carillion into their review.
FRC Audit Culture Thematic Review
Staying with the FRC, the results of its thematic review of audit culture were published on 10 May 2018.
The thematic review provides a summary of the actions being taken, by the eight firms that have adopted the Audit Firm Governance Code (as set out on page 2 of the report), to “establish, promote and embed a culture that is committed to delivering consistently high quality audits”. The review notes that “firms are investing considerable time and effort on their firm-wide culture” and sets out examples of good practice among firms and highlights key areas that audit firms should address to enhance audit quality, including:
- Giving additional prominence to audit specific behaviours and values within the firms’ cultural design, including the fundamental principles of integrity, objectivity, independence and professional scepticism that underpin high quality audit;
- Ensuring that all audit partners and staff appreciate that a good audit is of significant societal value and helps to underpin transparency and integrity in business; and
- Balancing the firms’ robust processes to sanction poor quality work or behaviour with better recognition of positive contributions to high audit quality.
The FRC has also made suggestions within the report on how stakeholders, such as investors and audit committees, could engage more on audit culture.
The FRC plans to report publicly within the next three years on the actions firms have taken in relation to the findings of the thematic review and will also consider culture where it is relevant to its planned 2018/19 thematic reviews on audit quality indicators and transparency reports. A copy of the audit culture thematic review can be found here.
Update on New Governance Code for Large Private Companies
In response to the Green Paper Consultation on Corporate Governance Reform, the Government announced in 2017 that it is to create a working group (the Coalition Group) to develop a “voluntary set of corporate governance principles for large private companies under the chairmanship of a business figure with relevant experience.”
In January 2018, both the Government and the FRC confirmed that James Wates CBE, Chairman of the Wates Group, would chair the Coalition Group, working alongside the FRC, the Institute of Directors, the Trades Union Congress, ICSA: the Governance Institute and others.
The new corporate governance principles for large private companies are expected to apply to companies with either 2,000 employees or turnover above £200 million and a balance sheet over £2 billion. The Government has stated its intention to bring the reforms into effect by June 2018 to apply to company reporting years commencing on or after that date.
BEIS Committee Launches Executive Pay Inquiry
In March 2018, with the deadline for gender pay gap reporting fast approaching, the BEIS Select Committee launched an inquiry on executive pay and the gender pay gap in the private sector. The inquiry will look at compliance with reporting requirements on the gender pay gap and, in respect of executive pay, the progress made in simplifying the structure of executive pay since BEIS published its report in April 2017.
The deadline for comments has now passed and we await the findings of the inquiry. Further information can be found here.
Companies House to Strengthen Enforcement of PSC Regime
In the recently published Companies House business plan for 2018-19, Companies House has announced a three-year programme of transformation, moving Companies House to a “truly digital organisation”.
Of particular interest to UK companies will be its enhanced focus on the people with significant control (PSC) regime. Companies House intends to contact companies where they believe they have misunderstood the PSC regime’s requirements to ensure that the records are corrected. They will also pursue companies that have not provided PSC information in their confirmation statement and follow up with companies and PSCs where a company has imposed restrictions (because a PSC has failed to provide information) or issued a notice to a PSC (asking him or her to provide information). In addition, they will be seeking compliance from companies where there has been a complaint about missing or incorrect PSC information.
The full text of the Companies House business plan for 2018-19 can be accessed here.
Protecting Directors’ Residential Address on Public Record
On 25 April 2018, new regulations came into effect making it easier for directors’ residential addresses to be removed from the public register at Companies House.
Since 1 October 2009, directors’ residential addresses contained in filings made to Companies House have been omitted from the public register. However, where directors’ residential addresses were included in filings made before this date, such addresses may still appear on the public register.
The new regulations make it easier for a director or company secretary to apply individually to remove their residential address from the public register and for a company to apply in respect of a residential address of a member or former member.
The Government has published guidance on the application process, which can be found here, and a copy of The Companies (Disclosure of Address) (Amendment) Regulations 2018 (SI 2018/528) is available here.
BEIS Consultation on Reform of Limited Partnerships
A consultation period is underway on Government proposals to reform limited partnership law, with the purpose of deterring the misuse of limited partnerships in criminal activity. Limited partnerships were introduced in 1907 and remain popular business entities for many legitimate business purposes.
The Government, following an initial investigation last year, has identified that there is evidence of misuse of limited partnerships with a disproportionately high volume of suspected criminal activity involving Scottish limited partnerships, specifically in international money laundering schemes.
In summary, the proposals being consulted on cover four main areas:
- all those seeking to register a limited partnership would be required to be registered with an anti-money laundering supervisory body;
- limited partnerships would need to maintain some connection with the UK, either by ensuring the principal place of business remained in the UK or by ensuring a service address was maintained within the UK;
- limited partnerships would have increased reporting requirements similar to those currently required of limited companies; and
- the Registrar of Companies would have powers to strike off the register the limited partnerships that fall within scope of certain conditions.
The consultation closes on 23 July 2018 and the consultation paper can be found here.
Register of Overseas Beneficial Owners
BEIS has published the response to its call for evidence (publish in April 2017) on proposals for a register showing who owns and controls overseas companies and other legal entities that own UK property or participate in UK government procurement.
The information required in relation to beneficial owners would be the same as that required under the PSC regime. The Government intends to establish a criminal offence to enforce the requirement to update information and will confirm the frequency of updates when publishing draft legislation.
Failure to comply with the regime would ultimately mean that overseas entities would be unable to buy or sell registrable leasehold property in the UK and unable to participate in UK central government procurement processes.
The Government intends to publish a draft bill this summer and it is intended that the register will be operational in 2021.
This article was written by Jordans Corporate Law Limited's Specialist Corporate Governance team. For more information, please contact Daniel Murray, Associate Director at Jordans Corporate Law Limited.
