Annual Report and Accounts and Preparing for the AGM in 2003

Profession:Herbert Smith

This briefing sets out a list of issues that have arisen over the last 12 months of which you should be aware in the preparation of your annual report and accounts and in the preparations for your next AGM.

Corporate Governance

ABI Launches New Guidelines on Executive Remuneration

The Association of British Insurers (ABI) has issued new guidelines on executive remuneration. The guidelines incorporate the best practice statement on contracts and severance pay which the ABI and the NAPF published jointly earlier in December 2002, together with two new sections, on the basic principles of remuneration and on the structure of pay packages. The existing guidelines on share-based incentive schemes are also incorporated, with minor modifications reflecting market practice over the past year. Some of the guidelines will be relevant for boards and remuneration committees preparing their Directors' Remuneration Reports.

The Guidelines can be accessed from the ABI website

There are 12 principles about executive remuneration, covering basic guidelines about structuring remuneration; dialogue with shareholders concerning remuneration; and what should go in the remuneration report.

The following are relevant to preparation for the AGM.

ï The remuneration report should set out the principles which have been followed and describe the approach used when putting into place the different components of total remuneration.

ï Remuneration committees should disclose senior executives' remuneration by disclosing the number of executives with specified levels of remuneration on a banded basis.

ï All new share based incentive schemes should be subject to approval by shareholders by means of a separate and binding resolution whether or not they are dilutive. If the rules of the share based incentive scheme, or the basis on which the scheme is approved by shareholders, permit some degree of latitude on the amounts to be granted or the performance criteria, any changes should be detailed in the remuneration report. Any substantive changes in the operation of schemes which have previously been approved should be subject to prior shareholder approval. Where there is performance-linked enhancement or matching arrangements in respect of shares awarded under deferred bonus arrangements, there should be a separate shareholder vote.

ï Any proposed departure from the stated remuneration policy should be subject to prior approval by shareholders.

ï Boards should review regularly the potential liabilities associated with all elements of remuneration and make appropriate disclosure to shareholders. There should be transparency on all matters relating to the remuneration of present and past directors and, where appropriate, other senior executives. Shareholders' attention should be drawn to any special arrangements and significant changes since the previous remuneration report.

ï All performance targets should be disclosed in the remuneration report. If there are commercial confidentiality concerns which prevent disclosure of specific short term targets, that is acceptable provided the basic parameters adopted in the financial year are reported on.

ï There should be informative disclosure of the value accruing to pension schemes or other superannuation arrangements, which should include the costs to the company, the extent to which liabilities are funded and aggregate outstanding unfounded liabilities.

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Enron fall out

Many of the questions which might be raised by shareholders may still focus on the Enron fall out. These may relate to the composition of the board and board committees, particularly the audit committee; the terms of appointment, remuneration and role of non executives; the company's internal controls; and the extent to which the directors understand the accounts.

For a checklist of issues which need consideration, see our briefing "The aftermath of Enron - a corporate action plan" (17 May 2002).

PIRC - shareholder voting guidelines

Each year, PIRC issues guidelines to shareholders on voting. The guidelines for 2003 are expected to be published on 19 February. Last year's guidelines, datedMarch 2002, highlighted its concerns over audit and accounting standards and suggested that the following be disclosed:

ï global, not just UK, non-audit fees.

ï dates of appointment of audit firm.

ï the name of audit partner.

ï a full explanation to be provided for any change of auditor.

ï the audit committee's terms of reference.

ï Audit Committees to report annually to shareholders on their activities including frequency of meetings, attendance and issues discussed.

PIRC also launched a directors' remuneration rating service, which aims to help investors assess the positive and negative features of any new share incentive scheme and/or remuneration report.

Source: PIRC Press Release, 2 March 2002.

The ABI and NAPF also issue guidance to shareholders on voting issues.

Directors' Report disclosure: auditor independence

In April 2002, the ABI's Investment Committee sent a letter to the chairmen of the audit committees of all FTSE-100 companies, in the wake of Enron, asking for disclosure (a "short yet informative" statement) to be made in the annual report about the audit committee's approach to ensuring that the auditors' objectivity and independence is maintained. The letter attached some examples of best practice.

Source: ABI letter.

"Independent Directors - what investors expect" - NAPF guidance

In May 2002, the NAPF published guidelines on what institutional investors expect from independent non-executive directors.

The guidance looks at the qualities investors expect an independent director (ID) to possess, what does an ID need to work effectively, the right level and type of reward for an ID, how many directorships the non-executive director should hold, and training needs. Quite a lot of this is not new but there are some new recommendations. For example, the NAPF suggest that the number of days spent by each ID should be reported in the listed company's annual report and that companies allowing their executive directors to serve as an ID elsewhere should state in their annual report whether or not the executive may retain such earnings (the NAPF recommends they should not be allowed to). They recommend that a full-time executive director should not take on more than one outside directorship, and those holding only non-executive posts would have to justify how they manage more than five (including charity boards).

The guidance also looks in detail at four specific areas: responsibilities of the audit committee, setting out typical questions that audit committees should be asking; executive directors' remuneration, again including questions the remuneration committee should be asking as well as guidance on non-executive remuneration; corporate social responsibility and the ID's role; and the definition of independence.

The NAPF also believes that companies should have to justify retaining any director aged 70 or over.

Institutional shareholder activism

Two major statements about institutional shareholder activism were published in October 2002; the first by the Institutional Shareholders' Committee (ISC) and the second by Hermes Pensions Management.

The ISC Statement of Principles

The ISC Statement of Principles is aimed at institutional...

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