Best Practice in Comply or Explain Corporate Governance Reporting

Transcription

1 Best Practice in Comply or Explain Corporate Governance Reporting Irish Corporate Law Forum 29 March 2012 Cian Blackwell Partner, Business Risk Services Grant Thornton

2 Agenda Corporate governance codes and enforcement mechanisms in Ireland The UK Corporate Governance Code a brief history Structure of the Code and the 'comply or explain' mechanism Current compliance levels and recent developments Disclosure quality Improving disclosure Compliance monitoring

3 Corporate governance codes in Ireland Three major categories of Irish organisations have specific governance frameworks Listed companies (MSM only) UK Corporate Governance Code Irish Corporate Governance Annex Financial institutions Central Bank's Corporate Governance Code for Credit Institutions and Insurance Undertakings IFIA code, etc Public sector bodies Department of Finance's Code of Practice for the Governance of State Bodies

4 Enforcement mechanisms UK Corporate Governance Code "Comply or explain" Somewhere in between... Central Bank Code "Comply or else" "Hard law" Code of Practice for State Bodies "Comply or..." "Soft law"

5 The UK Corporate Governance Code A very brief history (1) Originated in the Cadbury Code (1 December 1992) A 'code of best practice,' but never intended to be a comprehensive governance code Focuses largely on the control and reporting functions of boards, and on the role of auditors Key recommendations Greater use of independent non-executives Formation of audit, nomination and remuneration committees Separation of roles of chief executive and chairman London Stock Exchange subsequently required all companies listed on LSE to state whether they are compliant or not; and if not, to explain why.

6 The UK Corporate Governance Code A very brief history (2) Greenbury Report on directors' remuneration issued July 1995 Hampel Report "Committee on Corporate Governance" Jan 1998 Significantly developed the "comply or explain" approach, e.g. "need for broad principles" "flexibility in the interpretation of the code" Avoidance of "box-ticking" Stated "principles" of corporate governance under four headings Role of directors (now "Leadership" and "Effectiveness") Directors' remuneration Role of shareholders Accountability and audit

7 The UK Corporate Governance Code A very brief history (3) Combined Code issued in 1998 Drew together recommendations from: Cadbury Greenbury Hampel Contained two sections, applying to: Companies Institutional investors Has been revised and updated approximately every two years

8 The UK Corporate Governance Code A very brief history (4) UK Corporate Governance Code issued 2010 Removed "Institutional Shareholders" section Introduced or enhanced principles on: Chair's responsibility for leading the board NED's role in challenging and developing strategy Balance of skills, experience, independence and knowledge Directors to devote "sufficient time" to discharge their duties Director appointments to have regard to "diversity" Introduced or enhanced several provisions, e.g.: "rigorous review" of NEDs after six years External evaluation of the board every three years Directors subject to annual election

9 Structure of the Code (1) Main principles, e.g. "There should be a formal, rigorous and transparent procedure for the appointment of new directors to the board" Supporting principles, e.g. "The search for board candidates should be conducted, and appointments made, on merit, against objective criteria and with due regard for the benefits of diversity on the board, including gender."

10 Structure of the Code (2) Code provisions, e.g. B.2.3: "There should be a nomination committee which should lead the process for board appointments and make recommendations to the board. A majority of members of the nomination committee should be independent non-executive directors. The chairman or an independent non-executive director should chair the committee, but the chairman should not chair the nomination committee when it is dealing with the appointment of a successor to the chairmanship. The nomination committee should make available its terms of reference, explaining its role and the authority delegated to it by the board."

11 The "comply or explain" mechanism Under the ISE Listing Rules (mirroring the FSA Listing Rules in the UK) a listed company must: state how it has applied the main principles of the code in a manner that would enable shareholders to evaluate how the principles have been applied ; state whether or not it has complied with all the relevant provisions of the Code; if not, it must set out: which provisions it has not complied with; the period for which it did not comply; and the company s reasons for non compliance. Source:

12 The "comply or explain" mechanism UK Corporate Governance Code now has a specific section on the comply or explain principle: "an alternative to following a provision may be justified in particular circumstances if good governance can be achieved by other means." "A condition of doing so is that the reasons for it should be explained clearly and carefully to shareholders, who may wish to discuss the position with the company and whose voting intentions may be influenced as a result." "In providing an explanation, the company should aim to illustrate how its actual practices are both consistent with the principle to which the particular provision relates and contribute to good governance."

13 Levels of compliance Several studies have attempted to quantify levels of compliance ISE / IAIM Report on Compliance with the Combined Code on Corporate Governance Overall "high level of compliance", but: Only 12 out of 49 explanations for non-compliance reviewed were classified as "adequate" Source:

14 Recent developments UK and Ireland UK Corporate Governance Code UK companies (FTSE 350) Periods beginning on or after 29 June 2010 Irish companies (MSM) Periods beginning on or after 30 September 2010 Irish Corporate Governance Annex Irish companies (MSM) Periods beginning on or after 18 December 2010 i.e. December 2011 year ends onwards

15 Recent developments Irish Corporate Governance Annex Effectively a reaction to the ISE/IAIM report, and to negative sentiment regarding Irish listed companies Explicitly requires enhanced and detailed disclosures on a number of areas Some notable requirements: Outline rationale for current board size and structure Explanation, for each new director appointed, of the process followed by the nomination committee More detail about board evaluations required More detail about remuneration policy, especially variable components

16 Recent developments EU European Commission Green Paper: The EU Corporate Governance Framework Asked several important questions on what an EU-wide governance code should look like, e.g.: Should CEO and chair be separated? Should gender quotas be required? Should "say on pay" resolutions be mandatory? Should minority shareholders be better protected? Should regulations be mandatory or on a CoE basis? Should governance compliance be monitored?

17 Recent developments EU The comply or explain debate The Green Paper: Notes widespread support for comply or explain amongst companies, investors and regulators However, it also notes "shortcomings in applying" the comply or explain principle that "reduce the efficiency of the EU's corporate governance framework and limit the system's usefulness" Preferred model is one where each company should "state clearly which code rules it has not complied with, explain the reasons for non-compliance and describe the solution it has adopted instead"

18 Disclosure quality As noted earlier, it varies greatly Grant Thornton Corporate Governance reviews have assessed levels of compliance and quality of disclosures in Ireland and the UK Ireland: Governance-Review-2011/Corporate-Governance-Review-2011 UK: 1/corporate_governance_review_-3.aspx

19 Survey findings Code compliance Claim full compliance: 2011 = 26% 2010 = 36% 2009 = 51% 74% explain non-compliance 19 separate Code provisions FTSE 350 = 49% 82 individual instances Source: Grant Thornton Corporate Governance Review 2011

20 Survey findings Code compliance Source: Grant Thornton Corporate Governance Review 2011

21 Survey findings Code compliance Review of disclosures of Combined Code compliance: Informative 12 Limited information 7 Uninformative 7 Total number of companies 26 An informative rating was given where a company: stated the provision not being complied with included an explanation for the non-compliance why it is in the best interests of the company and the shareholders had a specific section of the annual report explaining all instances of noncompliance Source: Grant Thornton Corporate Governance Review 2011

22 Comparison of disclosures Code compliance (1)

23 Comparison of disclosures Code compliance (2)

24 Survey findings non-executive directors Average number of NEDs Average tenure of NEDs ISE MSM = 7.6 FTSE 350 = 5.2 ISE MSM = 7+ years 36% served > six years 14% served > nine years FTSE 350 = 4+ years 6% served > nine years Source: Grant Thornton Corporate Governance Review 2011

25 Survey findings non-executive directors independence Requirement to have a majority of independent directors on the board compliant for the full year: 2011 = 62% 2010 = 77% 2009 = 87% Disclosure of independence is not consistent companies need to decide whether a director is independent or not if they claim the director is independent, but certain criteria exist, the annual report needs to explain why process is not always followed information is not always easily found by shareholders Source: Grant Thornton Corporate Governance Review 2011

26 Independence process and criteria The board should determine whether each director is independent in character and judgement, and identify them in the annual report "The board should state its reasons if it determines that a director is independent notwithstanding the existence of relationships or circumstances which may appear relevant to its determination," including: former employee business relationship additional remuneration family ties cross-directorship significant shareholdings more than nine years' service

27 Survey findings non-executive directors independence Review of quality of independence disclosures: Informative 7 Limited information 18 Uninformative 10 Total number of companies 35 An 'informative' rating was given to companies which: Identified individuals with "relationships or circumstances" noted in Code; explicitly identified the criteria that may affect their independence; explained why the board nevertheless deems them to be independent; and disclosed additional information in support of this decision. 'Limited information' rating was given where some information was provided, but not how the board reached its final determination of independence Source: Grant Thornton Corporate Governance Review 2011

28 Comparison of disclosures independence (1)

29 Comparison of disclosures independence (2)

30 Comparison of disclosures independence (3)

31 Survey findings audit committee and audit fees "informative" rating given where the disclosures of the work of the audit committee: explicitly identified the roles and responsibilities of the committee; provided details of committee activities in the period; provided details of the outcome of the committee effectiveness review; and outlined which non-audit services the auditors are prohibited from providing "limited information" disclosures tended merely to quote the audit committee terms of reference Disclosures on the work of the audit committee Rating Number of companies Informative 7 Limited information 19 Uninformative 9 TOTAL 35

32 Survey findings audit committee and audit fees Breakdown of non-audit fees offers an opportunity to provide quantitative data Breakdown of each type of non- audit service % 25% 43% 6% Total for non-audit services, with description of services (no breakdown) % 36% 44% 6% Total for non-audit services (no description or breakdown) 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% No mention of non-audit services Source: Grant Thornton Corporate Governance Review 2011

33 Improving disclosure further ideas (1) Replace narrative disclosure with graphical and tabular formats Director name Role Independent Nominee appointment Date of appointment Years on board Audit Years on committee Committee composition Remuneration Years on committee Nomination [A] Chairman No No 08/05/ Member 3 [B] Chief Executive No No 30/03/ [C] Chief Financial Officer No No 19/10/ [D] Senior Independent Yes No 28/04/ Chair 4 [E] Non-executive No Yes * 21/12/ Member 3 [F] Non-executive Yes No 01/02/ Chair 3 [G] Non-executive Yes No 10/06/ Member 4 [H] Non-executive Yes No 01/02/ Member 3 [I] Non-executive Yes No 17/09/ Chair 5 [J] Non-executive Yes No 16/02/ Member 1 Member 1 * Nominated by [Shareholder Y] Years on committee

34 Improving disclosure further ideas (2) Ongoing disclosures Communicating beyond the annual report e.g. on the corporate website Currently used in limited circumstances, e.g. committee terms of reference, directors' terms of appointment

35 Improving disclosure principles Give meaningful explanations that cover what the board did, and why, to meet its obligations For non compliance, be explicit about what, why, and when; the justification; and what will change Don't copy and paste from: Last year's annual report Someone else's annual report The Code itself In particular, say what was actually done, not just what was in the terms of reference

36 Compliance monitoring Introduction of governance elements to legislation (e.g. SI 450 / 2009) brings governance into scope for the ODCE, in a limited way Monitoring of quality of explanations is not likely responses to EC Green Paper were mostly against this; however: "Europe must move beyond the mere 'comply and explain' principle. We need a system of clear binding rules and sanctions, complemented by soft law..." "The programme for Government agreed by Labour and Fine Gael commits Ireland to making good corporate governance the law, not an optional extra, and to the better enforcement of corporate governance laws." Emer Costello, Labour Party MEP for Dublin EP debate on corporate governance, 28 March 2012

37 Cian Blackwell Partner, Business Risk Services E: T: +353 (0)