The United Kingdom’s corporate governance regime consists of laws, rules and practices that ensure that companies operate with integrity and that those responsible for their management are accountable for their actions. Its purpose is to encourage investor and public confidence in UK companies and thus to promote economic stability. The main sources of corporate governance in the UK are as follows:
The Companies Act 2006 (CA 2006) is the principal statute relating to corporate governance in the UK. CA 2006 codifies and replaces certain common law duties of directors (CA 2006, section 170(3)) (see ‘Common law’). The statutory duties of directors under CA 2006 are as follows:
- to act within powers (ie, in accordance with the company’s constitution) (section 171);
- to promote the success of the company (section 172);
- to exercise independent judgement (section 173);
- to exercise reasonable care, skill and diligence (section 174);
- to avoid conflicts of interest (section 175);
- not to accept benefits from third parties (section 176); and
- to declare any interest in a proposed transaction or arrangement with the company (section 177).
However, these statutory duties must be interpreted and applied in accordance with the common law duties that are discussed below (CA 2006, section 170(4)). Indeed, in respect of directors’ duties that have not been codified under CA 2006 (such as the duty to keep the affairs of the company confidential) the common law rules remain the only relevant law. CA 2006 contains further provisions relevant to corporate governance, which are discussed at various points in this chapter.
Statutes including the Corporate Manslaughter and Corporate Homicide Act 2007, the Financial Services and Markets Act 2000 (FSMA 2000), the Criminal Justice Act 1993, the Insolvency Act 1986, the Bribery Act 2010, the Financial Services Act 2010 and various statutory instruments also contain provisions relating to corporate governance.
Company directors have a range of fiduciary, or common law, duties derived from a long line of case law dating back to the early nineteenth century. These fiduciary duties include a requirement:
- to exercise skill and care;
- to act in good faith in the best interests of the company;
- to act within the powers conferred by the company’s constitution and to exercise these powers for proper purposes;
- not to fetter discretion;
- to avoid interests that conflict with those of the company and to avoid duties that conflict with the director’s duties to the company;
- not to make a secret profit; and
- to keep the affairs of the company confidential.
Some of these common law duties have now been codified and replaced by CA 2006, sections 171 to 177 (see ‘Statute’).
The listing regime
The Listing, Prospectus, Disclosure Guidance and Transparency Rules (the LPDT Rules) play a significant part in regulating UK-listed companies. They form part of the Financial Conduct Authority’s (FCA) Handbook, which contains the rules and guidance made under FSMA 2000, the principal statute relating to financial services in the UK. The LPDT Rules comprise the following sets of rules, which are mandatory for those companies to which they apply:
- the Listing Rules (LRs) apply to companies that have applied for their securities to be listed, or whose securities are already listed, on the Official List (maintained by the FCA), and set out:
- the requirements a company must meet for its securities to be admitted to listing;
- rules relating to listing particulars;
- certain obligations with which a company must continue to comply after its securities have been admitted to listing (known as ‘continuing obligations’); and
- apply only to companies with a premium listing and not to those with a standard listing;
- the Prospectus Rules (PRs), which implement the Prospectus Directive and require UK-listed companies, subject to certain exemptions, to publish a prospectus if they offer their shares to the public or make a request for their shares to be admitted to trading on a regulated market in the UK. The PRs contain rules on the contents of a prospectus and the approval process for such a document; and
- the Disclosure Guidance and Transparency Rules (DTRs), which apply to a company that has applied for its securities to be admitted, or whose securities are already admitted, to trading on a regulated market in the UK (this includes companies whose shares are admitted to the Official List and are traded on the London Stock Exchange (LSE), but not companies whose securities are listed on the Alternative Investment Market).
Perhaps the two most important elements of the LPDT Rules are the Listing Principles set out at LR7 (which assist UK-listed companies in understanding their duties under the LPDT Rules and encourage them to take their role in maintaining market confidence and ensuring fair and orderly markets seriously) and the continuing obligations contained in the LRs and DTRs with which a UK-listed company must comply in order to maintain its listing. Broadly speaking, in terms of complying with corporate governance disclosure obligations, UK-listed companies must ensure that they comply with DTRs 7.1 and 7.2, and LR9.
The UK has a two-tier listing regime, which, as of 6 April 2010, is divided into a premium listing and a standard listing (before this date the two tiers were referred to as a primary listing and a secondary listing). UK-listed companies with a premium listing must comply with super-equivalent standards (standards that exceed the minimum standards set down by the relevant EU directive). UK-listed companies with a standard listing need only comply with the minimum standards of EU legislation.
The UK Corporate Governance Code
The UK Corporate Governance Code (the Code) represents key corporate governance recommendations of best practice for UK-listed companies. The Financial Reporting Council (FRC) first published the Code on 28 May 2010 when it superseded the existing Combined Code on Corporate Governance (Combined Code). A new version of the Code was published in September 2012, applying to accounting periods beginning on or after 1 October 2012; a revised version was published in September 2014 applying to accounting periods beginning on or after 1 October 2014; a further revised version was issued in April 2016 applying to accounting periods beginning on or after 17 June 2016; the most recent version was published in July 2018 applying to accounting periods beginning on or after 1 January 2019. The old versions of the Code will continue to apply to the historic accounting periods to which they relate. This chapter concentrates on the application of the current version of the Code.
The Code is applicable to all companies with a premium listing of equity shares in the UK, regardless of whether the company is incorporated in the UK or elsewhere. The Code is divided into principles and provisions. The Code does not have statutory force, rather it establishes principles of good governance and provides recommendations and guidance. Companies with a premium listing of equity shares incorporated either in the UK (LR9.8.6R(5)) or overseas (LR9.8.7R) are required to include a statement in their annual financial report that explains how the company has applied the ‘main principles’ of the Code in a manner that would enable shareholders to evaluate how the principles have been applied. The reference to main principles in this rule relates to the 2016 version of the Code (as further explained below), however the rule should now be read as referring to the principles of the 2018 version of the Code. Companies with a premium listing of equity shares must also set out in the annual financial report whether or not they have complied with all the provisions (including the principles) of the Code over the course of the accounting period and give reasons for any non-compliance (the comply or explain regime) (LR9.8.6R(6)).
UK-listed companies are not obliged to comply with the Code and the board may explain why it has not complied, but failure to comply with the Code could damage investors’ confidence in a company if good governance has not been adhered to. This could ultimately lead to its shareholders voting against resolutions proposed by the company or even selling their shares. The FRC acknowledges that a listed company may wish to deviate from the provisions of the Code: the intention of the comply or explain approach is to encourage engagement with the shareholders and to ensure good governance, perhaps in a different guise.
According to the FRC, the 2018 version of the Code places greater emphasis on the relationships between companies, shareholders and stakeholders, as well as promoting the importance of establishing a corporate culture that is aligned with the company purpose and business strategy, and which promotes integrity and values diversity.
Some of the crucial principles and provisions that the Code encompasses are:
- effective board management in the long-term interests of the company;
- definitions of the role of the board, the chair and the non-executive directors of a company;
- the separation of the roles of the chair and the chief executive officer (CEO) of a company;
- the role of the chair in leading the board and ensuring effectiveness;
- the role of non-executive directors in constructively challenging strategy, scrutinising performance and offering specialist advice;
- the composition of the board, especially in terms of ensuring a combination of skills, experience and knowledge of the company;
- open and rigorous procedures for the appointment of directors with due regard for the benefits of diversity (of gender, social and ethnic backgrounds, cognitive and personal strengths);
- formal evaluation of the performance of boards, committees and individual directors (demonstrating whether each director continues to contribute effectively);
- the proportion of independent non-executive directors that a company must have on its board;
- the role of a company’s audit committee in monitoring the integrity of its financial reporting, reinforcing the independence of the external auditor and reviewing the management of financial and other risks; and
- executive remuneration being clearly linked to the successful delivery of the company’s long-term strategy.
In July 2018, the FRC published an updated version of the Code, applying to accounting periods beginning on or after 1 January 2019. The Code is shorter than the previous version, with the number of provisions reduced by one-third. The Code consists of five sections:
- Section 1: Leadership and Purpose;
- Section 2: Division of Responsibilities;
- Section 3: Composition, Succession and Evaluation;
- Section 4: Audit, Risk and Internal Control; and
- Section 5: Remuneration.
The revised Code includes the following changes:
- the board establishing a method of gathering the view of the workforce through a director appointed from the workforce, a formal workforce advisory panel or a designated non-executive director;
- means for the workforce to raise concerns in confidence and anonymously and an emphasis on engagement with the workforce;
- consideration by companies of their responsibilities to shareholders and stakeholders and the contribution made to wider society;
- the establishment of a nomination committee to lead the process for appointments to the board to ensure succession planning that develops a more diverse pipeline;
- where 20 per cent of votes have been cast against a resolution, the company should explain, when announcing voting results, what actions it intends to take to consult with shareholders to understand the reasons behind the vote with an update to be published not later than six months after the vote; and
- regular engagement by the chair with major shareholders to understand their views on governance and performance against strategy.
The Code is supplemented by the following published guidance, and it is considered good practice to comply with this guidance, although it has no formal status:
- FRC Guidance on Board Effectiveness, which replaced the Good Practice Suggestions from the Higgs Report following a review undertaken by the Institute of Chartered Secretaries and Administrators (ICSA), and was last updated in July 2018;
- FRC Guidance on Audit Committees, which was updated by the FRC in December 2010, September 2012 and April 2016; and
- FRC Guidance on Risk Management, Internal Control and Related Financial and Business Reporting, published in September 2014.
The UK Stewardship Code
The FRC first published the UK Stewardship Code (the Stewardship Code) on 2 July 2010 and it came into immediate effect. This version of the Stewardship Code was replaced by a new version published on 28 September 2012 and effective from 1 October 2012. The Stewardship Code is applicable to those firms who manage assets on behalf of institutional shareholders, including pension funds, insurance companies, investment trusts and other collective investment vehicles. The Stewardship Code, like the Code, operates a comply or explain approach and the FRC recommends that a company publishes a statement of compliance on its website. At present, there is no requirement to disclose whether or not a relevant company has complied with the Stewardship Code principles, though this is set to change. All institutional investors are encouraged to observe the Stewardship Code and to observe the comply or explain approach, on the same basis as asset managers. The Stewardship Code is complementary to the Code and replaced Schedule C of the Code, which was removed with effect from 1 August 2010. The intention of the Stewardship Code is to promote greater engagement between institutional shareholders and company boards and to encourage greater transparency about the way in which institutional investors oversee the companies they own. The FRC believes that good governance is underpinned by high-quality dialogue between boards and investors. The principles of the Stewardship Code are that institutional investors should:
- publicly disclose their policy on how they will discharge their stewardship responsibilities;
- have a robust policy on managing conflicts of interest in relation to stewardship, which should be publicly disclosed;
- monitor their investee companies;
- establish clear guidelines on when and how they will escalate their stewardship activities;
- be willing to act collectively with other investors where appropriate;
- have a clear policy on voting and disclosure of voting activity; and
- report periodically on their stewardship and voting activities.
The Stewardship Code is based upon the Code on the Responsibilities of Institutional Investors, published by the Institutional Shareholders’ Committee, which is discussed further below.
In December 2011, the FRC published a report on the impact and implementation of the Code and the Stewardship Code, revealing a broadly positive reception to the Stewardship Code. The later published version of the Stewardship Code, which applies to relevant companies with accounting periods beginning on or after 1 October 2012, does not represent a change in policy or direction, but attempts to create a common understanding of the term ‘stewardship’, with greater clarity on the roles and responsibilities of asset owners and managers. The revised Stewardship Code also takes into account changes in market practice, such as the issuance of standards on assurance reports, and the FCA’s requirement that firms authorised to manage funds on behalf of others disclose the nature of their commitment to the Code.
In 2016, the FRC introduced a tiering system, whereby signatories to the Stewardship Code are categorised according to the quality of their statements, in an effort to improve standards of reporting. The FRC believes that the quality of reporting has improved substantially as a result of the exercise. In November 2016, of the nearly 300 signatories to the Stewardship Code, over 120 were placed in the highest tier (of three for asset managers and two for other signatories), representing an increase from approximately 40 at the beginning of the exercise. Although those with weaker reporting standards were encouraged to engage with the FRC to discuss improvements, asset managers that did not achieve at least Tier 2 were removed from the signatory list in August 2017, on the basis that their reporting failed to demonstrate the level of commitment expected by the FRC to the objectives of the Stewardship Code.
Sir John Kingman’s independent review of the FRC in December 2018 has called the ongoing existence of the Stewardship Code into question, noting that a fundamental shift in approach was required in order to focus outcomes on effectiveness rather than boilerplate reporting. In addition, the Investment Association (IA) has stated that now is an opportune time for the Stewardship Code to be fully refreshed and focused on best practice. Accordingly, a draft version of the revised Stewardship Code (which is set to be finalised in the summer of 2019) has been published by the FRC. Under the prospective regime, in order to become a signatory to the Stewardship Code, entities will be required to submit a policy and practice statement. This statement will set out which category of signatory-status the entity is applying for (from a choice of asset owner, asset manager or service provider), and confirm how the entity’s policies and practices enable it to apply the applicable principles and comply with the applicable provisions of the Stewardship Code. Where the entity is not compliant with a provision, a meaningful explanation of an alternative approach will be required. After becoming signatories, entities will be further required to produce an annual activities and outcomes report. This report would require signatories to:
- detail their compliance with their policy and practice statement and any departures from that statement;
- describe the activities they have undertaken to implement the provisions of the Stewardship Code in the preceding 12 months; and
- provide an evaluation of how well stewardship objectives have been met and have enabled clients to meet theirs, or both, and the outcomes achieved.
The FRC also proposes a new definition of stewardship, defined as the ‘responsible allocation and management of capital across the institutional investment community to create sustainable value for beneficiaries, the economy and society. Stewardship activities include monitoring assets and service providers, engaging UK-listed companies and holding them to account on material issues, and publicly reporting on the outcomes of these activities’. In addition, the draft Stewardship Code makes explicit reference to environmental, social and governmental concerns. For example, it obliges signatories to demonstrate how they take into account material environmental, social and governmental factors in their investment approach.
City Code on Takeovers and Mergers
The City Code on Takeovers and Mergers (the Takeover Code) regulates takeovers and mergers of certain companies in the UK, the Isle of Man and the Channel Islands, including companies whose shares are listed on the LSE. It consists of six general principles that set out the standards of behaviour expected of companies engaged in a merger or takeover and 38 rules (with accompanying notes) that expand on the general principles and provide detailed guidance on the conduct of takeovers and mergers.
Broadly, the aim of the Takeover Code is to ensure that:
- shareholders of the same class in a target company are treated equally and have adequate information so that they can reach a properly informed decision about whether to approve the proposed takeover or merger;
- a false market is not created in the securities of the offeror or the target company; and
- the management of the target company do not take any action that would frustrate an offer for that company without the consent of its shareholders.
The Takeover Code has statutory force and the Panel on Takeovers and Mergers (the Takeover Panel) has statutory powers in respect of transactions to which the Takeover Code applies. Breach of any Takeover Code rules that relate to the consideration offered for a target company could lead to the offending party being ordered to compensate any shareholders who have suffered financial loss as a result of the breach. A person who breaches any Takeover Code rules relating to the content requirements of offer documents and response documents may be guilty of a criminal offence and liable to a fine (subject to certain exceptions) (CA 2006, section 953(2), (3), (4) and (6)). The Takeover Panel may also issue rulings compelling parties who are in breach of the Takeover Code to comply with its provisions. Such rulings are enforceable by the court (CA 2006, section 955(1)). In addition, the Takeover Panel may require a party who is in breach of the Takeover Code to remedy such breach and may withdraw or impose conditions on any exemption from the Rules that it has granted and issue a private or public reprimand to companies in respect of any breach.
Institutional investor guidelines
Bodies representing institutional investors, most notably the Association of British Insurers (ABI) and the Pensions and Lifetime Savings Association (until October 2015 known as the National Association of Pension Funds (NAPF)), issue guidelines to their members advising them how to vote in relation to certain resolutions proposed by companies. The ABI, for example, has published guidelines relating to the level of authority to allot shares that should be granted to directors, which it updated in December 2009. The ABI’s Investment Affairs division merged with the Investment Management Association (IMA) on 30 June 2014 to form a body called, since January 2015, the Investment Association (IA), which is now responsible for issuing guidance that used to be issued by the ABI. Before it was renamed, the enlarged IMA issued updated guidelines on share capital management in July 2014. The Pre-Emption Group, a body consisting of listed companies and their investors, has issued guidance as to how its members should vote on resolutions to disapply shareholders’ pre-emption rights. This guidance, originally published in May 2006, was updated in July 2008 and again in March 2015.
The Pension and Lifetime Savings Association (PLSA)’s corporate governance policy and voting guidelines (the PLSA Guidelines) aim to assist its members to interpret the Code when considering how to vote on certain resolutions proposed by the company. The PLSA Guidelines are updated on a regular basis to reflect amendments made to the Code, and the most recent PLSA Guidelines were published on 29 January 2019. The PLSA Guidelines cover the following matters, among others:
- how to vote if the chair is not sufficiently independent (on appointment);
- the separation of the role of the chair and the CEO (and how shareholders should vote if these roles are not properly divided);
- the independence of non-executive directors;
- how shareholders should vote if the board contains insufficient non-executive directors;
- how shareholders should vote if the company’s audit, remuneration and nomination committees are improperly constituted;
- the standards to which the board should hold itself, to ensure pay is aligned to long-term strategy and the desired corporate culture throughout the organisation;
- how to vote if a company fails to properly disclose its strategic objectives or fails to properly report on its risk management and internal control principles;
- the processes that a company should have in relation to appointments to the board, including the need to disclose its diversity policy and its application of that policy;
- how to vote in relation to the remuneration report and new share scheme proposals;
- the re-election of directors;
- the ability of companies to hold meetings at short notice;
- how to vote when a company fails to comply with the Code and does not provide an adequate explanation;
- how shareholders should vote on proposed changes to the company’s memorandum and articles of association;
- how shareholders should vote if their approval is not sought for final dividends;
- how shareholders should vote on share issues and share purchases;
- how to vote if shares have been issued in excess of the Pre-Emption Group guidelines; and
- the payment of political donations.
The PLSA notes the growing trend towards shareholder resolutions in recent years and encourages their use only where engagement has failed.
In October 2009, the ABI Investment Committee published updated guidance on various provisions that it believes public companies should include in their articles of association. This guidance covers the following areas, among others: corporate representatives; directors’ fees (the guidance recommends that a company’s articles of association should contain a cap on the fees paid to directors); and penalties for shareholders who fail to comply with CA 2006, section 793 (which relates to notice given by a company requiring information about interests in its shares). The ABI published a position paper in relation to directors’ remuneration on 15 December 2009, and a full set of Principles of Remuneration in September 2011, following the implementation of the Code. These principles were updated in November 2013 to reflect changes to the CA 2006 (see question 28), and following the merger of the ABI’s Investment Affairs division with the IMA were updated in October 2014, again in November 2015 and November 2017 under the IA name and most recently in November 2018.
The key changes to the IA Remuneration Principles made in 2018 to reflect the shifting culture and shareholder expectations of shareholders were clearer provisions on clawback and malus provisions; reduction of executive director pension contribution rates over time to equal the rate received by the majority of the workforce; and improved guidance on leaver provisions, including post-employment shareholding periods.
These principles set adherence to the CA 2006, the LRs and the Code as a minimum standard to be followed, and call for remuneration policies to be set up so as to promote value-creation through transparent alignment with agreed corporate strategy. They call for remuneration principles to have a long-term focus and incentive structures to be based on a similar approach. It is advised that attention be paid to market environment, company performance, and the possibilities of divergence between executive and shareholder interest in relation to remuneration strategy. Further, in September 2011, the ABI had also published a paper on Board Effectiveness, highlighting the need for succession planning, and diversity on boards, and setting out best practice in this regard, including reporting and monitoring progress. This paper was updated in December 2012 to reflect additions made to the Code.
The ABI and the then NAPF also issued a joint statement entitled ‘Best Practice on Executive Contracts and Severance’, which was last updated in February 2008.
In November 2009, the Institutional Shareholders’ Committee, of which the ABI and the PLSA were members, published its Code on the Responsibilities of Institutional Shareholders (the ISC Code). The ISC Code is based on a statement of principles that was originally published by the ISC in 2002 and revised in 2007. The statement of principles highlights the corporate governance duties of institutional investors in relation to the companies in which they invest, and these principles are supplemented by additional guidance. The ISC Code operates on a comply or explain basis. The principles of the ISC Code that institutional investors should adhere to have been largely replicated in the Stewardship Code, and for that reason they are not repeated here. The Institutional Shareholders’ Committee was renamed and reconstituted as the Institutional Investor Committee on 18 May 2011 and was dissolved in 2014 after the merger of the Investment Affairs division of the ABI and the IMA.
The ICSA, although not a body representing institutional investors, is an important authority on corporate governance. It has published guidance on a range of corporate governance matters including corporate representation at general meetings, matters reserved for the board, voting at general meetings and model terms of reference for audit, remuneration and nomination committees. Its terms of reference for audit committees were updated in June 2013 and then again in March 2017 (see question 25). On 16 April 2012, the ICSA Registrars Group published guidance on the practical issues of voting at general meetings. The aim of the guidance is to address the perceived misconceptions in the market regarding management of general meetings, and it covers areas such as proxy voting, notice of meetings and voting periods. The guidance recommends, among other things, that all UK-listed companies with CREST shareholders announce meetings via CREST, encourages electronic voting and states best practice for proxy voting. The ICSA also launched a consultation document in October 2012 on stewardship titled ‘Improving Engagement Practices by Companies and Institutional Investors’ designed to examine the efficiency of investor-director communications. On 14 March 2013, the ICSA published its guidance ‘Enhancing Stewardship Dialogue’. This guidance provides four key messages for how to improve engagement practices: the need to develop an engagement strategy; the importance of getting housekeeping issues right; strengthening the conversation on strategy and long-term sustainable performance; and providing feedback in a way that adds value for all participants. Finally, in September 2017 the ICSA, jointly with the IA, published practical guidance aimed at assisting boards to understand and engage effectively with the views of employees and other stakeholders. This guidance identified 10 principles to guide the way boards approach these issues.
The Pensions Investments Research Consultants (PIRC) is an independent body that publishes guidance of relevance to institutional investors. The PIRC’s UK Shareholder Voting Guidelines, published yearly, set out its views on issues such as board structure, remuneration policy and the management of social and environmental issues, applying these to the listed companies it covers in the UK market. Notably, the 23rd edition of the guidelines, published in 2016, gave support for the recommendation in Lord Davies’ final report on improving gender balance on boards. The report, which was published on 29 October 2015, recommends that a target of 33 per cent of board positions in FTSE 350 companies be held by women by 2020. The 2017 version of the guidelines reiterates this position, and states that the PIRC will not support the re-election of the nomination committee of a FTSE 350 company where current female representation on the board falls below these expectations, and there are no clear and credible proposals for reaching these objectives.
In January 2015, Institutional Shareholder Services (ISS) published its first stand-alone UK and Ireland Proxy Voting Guidelines: 2015 Benchmark Policy Recommendations. These guidelines constitute a codification and update of ISS’s approach and align with the NAPF Guidelines but do not represent a materially different approach to the previous one. These were updated in December 2018 and effective for meetings on or after 1 February 2019.
The guidance issued by bodies representing institutional investors does not have statutory force but failure to comply with it could lead to institutional investors voting against any resolutions proposed by it or selling their shares in the company.
Articles of association
A company’s articles of association will contain provisions as to what its directors may and may not do in respect of the company. Directors who do not comply with the provisions of their company’s articles of association may be in breach of their statutory duty to act within their powers under CA 2006, section 171. A company may place additional corporate governance requirements on the board of directors, beyond the scope of CA 2006 and the statutory framework.
In May 2003, the European Commission released an action plan on company law and corporate governance (entitled ‘Modernising Company Law and Enhancing Corporate Governance in the EU’). The action plan’s main objectives are to strengthen shareholders’ rights and protection for third parties who deal with companies and to encourage companies to improve their efficiency and competitiveness.
A number of corporate governance measures have already been implemented under the action plan, including:
- the Company Reporting Directive (2006/46) (which has been implemented in the UK by DTR7);
- the Shareholder Rights Directive (2007/36) (which was implemented in the UK on 9 July 2009 by the Companies (Shareholders’ Rights) Regulations 2009 (SI 2009/1632) (the Shareholders’ Rights Regulations) as amended by Directive ((EU) 2017/828) (SRD II) (which member states must transpose into national law by 10 June 2019);
- a recommendation aimed at enhancing the role of non-executive directors; and
- a recommendation aimed at giving shareholders greater control over directors’ remuneration (which has been implemented in the UK by the Directors’ Remuneration Report Regulations 2002 (SI 2002/1986) and schedule 8 of the Large and Medium-sized Companies and Groups (Accounts and Reports) Regulations 2008 (SI 2008/410)).
At present, the European Union does not intend to introduce its own corporate governance code but hopes that the measures implemented under the action plan will increase consistency between national corporate governance codes. The European Commission published a Green Paper on 5 April 2011 and launched a consultation into the effectiveness of the existing EU corporate governance framework for listed companies, with a view to improving the way in which companies are run. The questions in the Green Paper deal with issues of executive remuneration, diversity, risk management, shareholder cooperation and minority-shareholder protection. A feedback statement summarising the results was published in January 2012, and a non-legislative resolution was adopted by the European Parliament in March 2012, which, among other things, welcomed the European Commission’s proposed revision of the EU corporate governance framework initiated by the Green Paper of April 2011.
In March 2012, the European Commission published a consultation paper on gender imbalance in corporate boards in the EU, which resulted in the publication of a proposal for a directive on improving gender balance among corporate boards of listed companies in November 2012. In November 2013, the European Parliament adopted the directive (with amendments), which, among other things, sets an objective for listed companies to increase non-executive directors of the under-represented gender (usually women) to 40 per cent by 1 January 2020 (see question 23).
In December 2012 the European Commission published an additional action plan on European company law and corporate governance, which included proposals such as:
- amending the Accounting Directive to increase disclosure of company board diversity policies and non-financial risks;
- creating an initiative to improve corporate governance reports, focusing specifically on the quality of explanations to be provided by companies departing from the corporate governance code of their jurisdiction;
- new legislation to improve visibility of listed company shareholdings;
- creating new initiatives, for example, by amending the Shareholder Rights Directive to improve disclosure of voting and engagement policies and voting record by institutional investors; transparency on remuneration policies and grant shareholders a vote on remuneration policy and the remuneration report; shareholder control of related-party transactions; and the transparency and conflict of interest frameworks applicable to proxy advisers; and
- increasing legal certainty on shareholder cooperation concerning concert party issues.
The European Commission has started to implement these proposals:
- in April 2014, it adopted a draft recommendation on the quality of corporate governance reporting;
- in December 2014, it implemented Directive (2014/95) on disclosure of non-financial and diversity information (amending the Accounting Directive) which had to be transposed by member states into national legislation by 6 December 2016. This Directive requires certain large companies to disclose relevant environmental and social information in the management report, and was implemented in the UK by DTR 7.2.8A (see question 23); and
- in May 2017, it adopted SRD II, which requires member states to give companies the right to identify their shareholders. Given Part 22 of the CA 2006 already permits public companies to investigate the identity of their shareholders, specific UK transposition measures will be limited to proposed amendments to the FCA handbook in respect of institutional investor and asset manager engagement policies, institutional investors’ investment strategies and arrangements with asset managers, and transparency of asset managers.
The UK voted to leave the European Union on 24 June 2016 and triggered the negotiation process for withdrawal on 29 March 2019 (as subsequently extended to 30 October 2019). It is too early to speculate on the potential consequences for corporate governance in the UK; however, with effect from 30 October 2019 (at the time of writing), the UK will cease to be a member of the European Union and will cease to be bound by EU legislation, except to the extent that EU legislation has been incorporated into domestic legislation (by virtue of section 3 of the European Union (Withdrawal) Act 2018) and not repealed.
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