Corporate Update for Listed Companies

Profession:Herbert Smith
This article contains a snapshot of the major developments in UK corporate law which have occurred so far this year and which will be of interest to UK listed companies.CORPORATE GOVERNANCE2003 has been a busy year so far for corporate governance. January saw the publication of the Higgs Review and the Financial Reporting Council's new guidance for audit committees, produced by a group chaired by Sir Robert Smith. Together, the recommendations in these reports, which have been reflected in a proposed revised Combined Code, amount to a significant overhaul of best practice in corporate governance and continue to attract a huge amount of interest from many quarters.Against this backdrop, the 2003 AGM season is currently in full swing and the major institutional shareholder groups have been kept busy analysing the new-style directors' remuneration reports. Higgs and Smith - the reaction Consultation period closedThe consultation period for the revised Code closed on 14 April. Over 150 submissions have been made to the Financial Reporting Council (FRC), which had invited "fatal flaw" and drafting comments only. The government had set a date of 1 July for the revised Code to be put in place but Sir Bryan Nicholson, chairman of the FRC, has recently indicated that there might be a delay if "sufficient consensus" has not been reached by that date. Several commentators, including the London Stock Exchange (LSE), have called for implementation to be delayed.Responses to HiggsAt a speech at a National Association of Pension Funds (NAPF) conference in March, Ruth Kelly, the Financial Secretary to the Treasury, reiterated that the Higgs Report continues to have the government's "strong support". In a shift of approach to the FRC's "fatal flaw" only consultation, she said that the FRC would accept all comments as part of the consultation process and not just comments on points of detail. However, she limited this apparent concession by saying that the FRC is starting from the presumption that the Higgs proposals should be implemented in the absence of a "clear case to the contrary".The developing consensus among those who are critical of the Higgs proposals, is that most of the problems stem not from the review itself, but from the way that the recommendations have been translated into the draft revised Code. The LSE has suggested that the apparent shift from principles to rules - moving from 13 to 43 - takes corporate governance in an unwelcome direction, encouraging "box-ticking" and creating the mindset that anything is permitted if not expressly forbidden. The Confederation of British Industry (CBI), which has been one of the strongest critics, agrees, sharing the LSE's concern that too much emphasis is given to compliance with the Code provisions rather than the principles behind them.The CBI also objects to several of Higgs' recommendations, particularly in relation to the roles and responsibilities of the chairman and of the senior independent director. The CBI's response can be found on its website at FRC is reported to be considering whether some of the Higgs proposals should be introduced as guidance rather than rules. Sir Bryan is quoted as saying "we are looking at what are best left as "comply or explain" provisions and what is better as guidance. It is not a dilution of the Higgs Report but a proper response to the process of consultation in which good points were made". It was reported in the press that Patricia Hewitt, the UK Trade and Industry Secretary, may give ground over the proposal that senior non-executives should hold regular meetings with shareholders, a development which investors fear could lead to rival boardroom powerbases. Another area on which the government may be prepared to grant some concessions is in respect of the proposal that no one individual could chair more than one FTSE 100 company. It may be prepared to concede that, where a chairman is nearing the end of his appointment with one company, he would be allowed to take up a chairmanship of another.The Association of British Insurers (ABI) and the NAPF have both said that they have, with immediate effect, adopted the criteria suggested in the Higgs Report for determining whether or not a non-executive director may be regarded as independent.Attitudes to Smith proposalsKPMG carried out a survey of 118 members of FTSE 350 audit committees. The survey found that 65% thought the Smith Report proposals to enhance the responsibilities of audit committees would discourage individuals from serving on them. It also found that 57% thought that companies would struggle to find audit committee members with recent and relevant financial experience.However, the survey found "strong" support for the proposal that the audit committee should make recommendations to the board on the appointment and remuneration of the auditors, and for the proposal that the audit committee should develop a policy on the provision of non-audit work by the audit firm.Shareholder voting issuesShareholder challengesFollowing the introduction of the Directors' Remuneration Report Regulations 2002, and against the backdrop of falling equity markets, institutional shareholder groups have tabled a bumper batch of objections and challenges to executive pay so far this year.The new Regulations require UK quoted companies to produce a directors' remuneration report for each relevant financial year and to put a resolution on that report to shareholders at each annual general meeting. These new requirements apply with regard to financial years ending on or after 31 December 2002, which means that many listed companies have by now produced their first remuneration reports under the new requirements. The ABI says that the new information being disclosed is the main factor behind the increased number of objections to directors' pay. More detail on the Regulations can be found later in this article.The NAPF targeted 21 companies with AGMs during the period from 22 April to 2 May, urging investors to vote against the appointments of directors or remuneration reports at four companies and to abstain on resolutions for a further 17. The ABI, which does not make voting recommendations to its members but highlights issues of concern, says that it, too, is flagging up a record number of executive pay items. The most common objections relate to long-term performance-related schemes, executive bonuses and the length of directors' contracts.PIRC publishes new voting guidelinesOn 19 February the Pensions Investment Research Consultants (PIRC) published its new shareholder voting guidelines, which it sent to all listed companies, setting out its standard voting positions on major corporate governance issues. These take account of a number of the Higgs and Smith recommendations meaning that, with immediate effect, PIRC will assess listed companies' annual reports and accounts and AGM notices for aspects of Higgs and Smith compliance, even though the...

To continue reading