Corporate Governance Reporting

Introduction The events of the last few years, including the financial crisis and continuing economic pressures, have highlighted the importance of good governance and the way companies are run. Demonstration of effective governance practices remains of great importance to shareholders and the wider community. A number of reviews triggered by the financial collapse, such as the Walker Review, Sharman Enquiry and the Kay Review have led in particular to amendments in regulation, best practice and guidance. The ability of shareholders to engage and debate with companies on governance issues largely depends on the quality of reporting by companies. This Briefing considers corporate governance reporting requirements depending on the companies listing status.

“The purpose of corporate governance is to facilitate effective, entrepreneurial and prudent management that can deliver the long-term success of the company.” Introduction to the UK Corporate Governance Code

Requirements for Companies with a Premium Listing

The Listing Rules Companies with a premium listing of equity shares, regardless of whether they are incorporated in the UK or not, must make a statement in their annual financial report of how the company has applied the main principles set out in the UK Corporate Governance Code, in a manner that would enable shareholders to evaluate how the principles have been applied. (LR 9.8.6(5)). In addition the company must make a statement in its annual financial report as to whether the company has:

a) Complied throughout the accounting period with all relevant provisions set out in the Code; or

b) Not complied throughout the accounting period with all relevant provisions set out in the Code and if so, set out:

i. those provisions it has not complied with; ii. in the case of provisions whose requirements are of a continuing nature, the period within

which it did not comply with some or all of those provisions; and iii. the company’s reasons for non-compliance. (LR9.8.6(6))

UK Corporate Governance Code For Main Market companies and those wishing to adopt best practice, reporting on compliance with the Code will form the basis of the company’s corporate governance report. The preface to the Code encourages Chairmen to report personally in their annual statements on how the principles in the Code relating to the role and effectiveness of the board have been applied, in an effort to ensure that corporate governance practices are put into context and to encourage a move from ‘boiler-plate’ reporting. This is important in order to demonstrate how the ‘tone from the top’ is established. Although not strictly a requirement, it has also become best practice for the chair of each committee report to include an introductory statement on the key issues facing the committee during the year. This avoids the tendency for box ticking and allows reporting to be focused on issues of importance to that committee. Emphasis is also placed by the FRC on complying with the spirit as well as the letter of the Code. The 2014 Code emphasises the provision by companies of information about the risks which affect longer term viability.

“Companies will now need to present information to give a clearer and broader view of solvency, liquidity, risk management and viability. For their part investors will need to assess these statements thoroughly and engage accordingly.” UK Corporate Governance Code September 2014

The Disclosure and Transparency Rules Under DTR 7.2 a company must include a corporate governance statement either in its directors’ report or in a separate report published together with and in the same manner as its annual report. (DTR 7.2.1/7.2.9). Until now it has been common practice for companies to produce a separate corporate governance report within its report and accounts but not to include this within the directors’ report. The corporate governance statement must contain a reference to:

a) The corporate governance code to which the company is subject; and/or b) The corporate governance code to which the company may have voluntarily decided to apply; and/or c) All relevant information about the corporate governance practices applied beyond the requirements

under national law. (DTR 7.2.2)

There are also further requirements in the DTR of corporate governance items that the company must report on. These are:

DTR 7.2.5 - requires that the corporate governance statement must contain a description of the main features of the company’s internal control and risk management systems in relation to the financial reporting process.

DTR 7.1.5 – requires companies to make a statement available to the public disclosing which body carries out the responsibilities for monitoring financial reporting, the effectiveness of the company’s internal control and risk management systems, the statutory audit of the annual accounts and the independence of the external auditor. In most companies this body will be the Audit Committee. The statement may be included in the corporate governance statement required by DTR7.2.

DTR 7.2.6 - requires the corporate governance statement to include certain information specified by Schedule 7 to the Large and Medium sized Companies and Groups (Accounts and Reports) Regulations 2008 where the company is subject to these regulations. This information is in respect of the structure of the company’s share capital and voting rights.

DTR 7.2.7 - specifies that the corporate governance statement must contain a description of the composition and operation of the company’s administrative, management and supervisory bodies and their committees.

There is clearly an overlap between the requirements of DTR 7 and certain provisions of the Listing Rules and the Code. However, the FCA has issued guidance that compliance with relevant sections of the Listing Rules and the Code will satisfy DTR 7 requirements. The overlapping requirements are summarised in Schedule B and the Appendix to the UK Corporate Governance Code.

Requirements for Companies with a Standard Listing For those companies with a standard listing there is no requirement to apply the UK Corporate Governance Code under Listing Rules 9.8.6(5) and (6). However, companies are required to comply with DTR 7.2 on corporate governance statements. If a standard listed company has decided not to apply any provisions of a corporate governance code it must explain its reasons for that decision (DTR 7.2.3(3)). It is very likely therefore that many standard listed companies will voluntarily apply the UK Corporate Governance Code although there is no specific requirement for them to do so. Even if the company decides not to apply to any corporate governance code it is still required to:

Describe the main features of its internal control and risk management systems in relation to its financial reporting process (DTR 7.2.5);

Provide information about share capital and voting rights (DTR 7.2.6);

Provide information on the company’s administrative, management and supervisory bodies and their committees (DTR 7.2.7).

Requirements for AIM Listed Companies On applying to join AIM a company must publish an admission document that includes a statement on whether or not the company complies with its home country’s corporate governance regime, and if not, an explanation as to why. Aside from this there is no formal corporate governance regime that AIM companies are required to adhere to. However, AIM companies are required to have in place sufficient procedures, resources and controls and their nominated adviser must continue to assess their suitability of their AIM clients. In addition, under the London Stock Exchange’s AIM Rules, companies must provide details of the corporate governance code that the AIM company has decided to apply, how the AIM company complies with that code or if no code has been adopted this should be stated together with its current corporate governance arrangements. Many AIM companies therefore either chose to adopt the UK Corporate Governance Code, as far as is practicable given their size and nature, or the corporate governance guidelines published by the Quoted Companies Alliance (QCA). The QCA publishes a voluntary set of corporate governance guidelines for smaller companies which have become a widely recognised benchmark for AIM company corporate governance. The QCA Guidelines recommend that AIM companies publish an annual corporate governance statement either on its website or in its annual report and accounts. The QCA Guidelines encourage AIM companies to describe in its corporate governance statement how it puts into practice each of the QCA Guidelines, or, to the extent that the QCA Guidelines are not complied with, how it is achieving the features of good governance. The statement should also describe any additional corporate governance procedures adopted by the company beyond the basic QCA Guidelines. The National Association of Pension Funds (NAPF) also published in 2007 The Corporate Governance Policy and Voting Guidelines for AIM Companies. The NAPF policy guidelines are based on the UK Corporate Governance Code and it encourages AIM companies to apply the provisions of the Code as appropriate. The London Stock Exchange issues a publication ‘Inside AIM’ which keeps AIM companies informed of topics that may affect them. In the July 2010 edition it is stated that “The Exchange believes that good corporate governance is just as relevant and important for AIM companies as it is for those on the Main Market.” The Exchange also voices its support for the QCA’s Guidelines and encourages nomads to extend their involvement in this area by setting and satisfying the corporate governance standards that their AIM company clients will follow.

GDRs and Convertible Bonds

Overseas companies issuing GDRs and companies issuing convertible bonds are subject to the same corporate governance reporting requirements as a company with a standard listing of equity shares as described above.

Debt Issuers Debt issuers are not required to adhere to the Code or make the corporate governance statements specified under DTR7.2.

Prism Perspective In the current continued climate of economic uncertainty pressure remains on public companies from governments and shareholders to apply the highest standards of corporate governance in order to avoid some of the more extreme risk taking perceived to have taken place before the financial collapse. Whether a company is premium, standard or AIM listed the expectation from shareholders will be to see transparent reporting on corporate governance and the adherence to some form of corporate governance regime. The UK Corporate Governance Code provides a benchmark against which all companies can measure their corporate governance practices and there is an increasing trend for companies not required to adopt the Code to use this as the standard against which to ‘upgrade’ their corporate governance compliance. For major shareholders, institutional investors and voting advisers good corporate governance remains a key feature of how they propose to vote on various AGM resolutions. It is essential therefore that companies explain clearly their governance practices in particular where these do not comply with best practice.

Useful Sources FCA UK Listing Rules FCA UK Disclosure and Transparency Rules Financial Reporting Council’s UK Code on Corporate Governance Corporate Governance Guidelines for AIM Companies (the Quoted Companies Alliance Guidelines) The Corporate Governance Policy and Voting Guidelines for AIM Companies (NAPF) AIM Rules for Companies (London Stock Exchange) Inside Aim (London Stock Exchange) Schedule 7 to the Large and Medium sized Companies and Groups (Accounts and Reports) Regulations 2008

Prism Cosec July 2015