USS Submission to the FRC Consultation on Revisions to the UK Corporate Governance Code, June 2014

Transcription

1 USS Submission to the FRC Consultation on Revisions to the UK Corporate Governance Code, June Introduction The Universities Superannuation Scheme (USS) is the largest pension fund in the UK with approximately 42 billion of assets under management, managed in-house by its wholly owned subsidiary USS Investment Management Ltd. As a defined benefit scheme, operating as an in-house fund manager and asset owner, USS s long-term perspective and active, responsible approach distinguishes us from many other institutional investors. We take seriously our role as a long-term owner of companies and other assets, and devote substantial resources to oversee and monitor their management. We welcome the opportunity to provide feedback on the FRC s proposed changes to the Corporate Governance Code (the Code) and set out our comments below. We would like to draw particular attention to our concerns regarding the proposed changes to the Code to provide for the board s opinion on the company s viability for the foreseeable future. 2. Adopting the Sharman recommendations We very much welcome the UK government s commitment to implement the Sharman Inquiry recommendations through the Code. The lengthy and ongoing consultation by the FRC on the issue reflects the importance of finding the correct formulation and wording to appropriately address the Sharman recommendations and provide for a useful opinion on the company s going concern. However, despite the ongoing dialogue between the FRC and investors, we still have significant concerns regarding the proposals put forward in the consultation document. We outline below our key concerns and refer you to the attached investor statement for additional rationale. Broader than risk management. We have concerns that the location of the stewardship going concern statement within the risk management and internal controls creates an unnecessary risk of limiting its scope. The explicit statement on the going concern of the company must not be limited to the principal risk assessment. Rather, it should be a broader assessment of the company s condition. Judgement and opinion, not an expectation. The stewardship going concern statement should be the director s opinion based on their professional judgement; this is very different to providing a guarantee. We believe the FRC s proposal of reasonable expectation significantly weakens the value of the stewardship going concern statement. Link to the audited accounts. The guidance should explicitly link the stewardship going concern statement to the audited accounts. The accounts must provide directors with a reliable and prudent view of the company s capital position, and therefore provide the foundation for the directors opinion on the company s going concern. Timeframe of the assessment. We believe that boards should be looking at the company s viability, in their professional judgement, over the foreseeable future. We have concerns 1

2 that directors retain the option to reduce the assessment timeframe to a short 12 month period. USS considers the proposed alternative wording provided below meets our needs for a directors stewardship going concern statement. Proposed alternative wording: The directors should confirm in the annual report that they have carried out a robust assessment of the state of affairs of the company and any risks, including to its solvency and liquidity that would threaten its viability. They should state whether, in their opinion, the company will be able to meet its liabilities as they fall due and continue in operation for such future period as may be reasonably anticipated, explaining any supporting assumptions and risks or material uncertainties relevant to that and how they are being managed. We would urge the FRC to review the concerns raised above and in the supporting paper co-signed by GO Investment Partners, Legal & General Investment Management, the Local Authority Pension Fund Forum, London Pensions Fund Authority, Royal London Asset Management, RPMI Railpen, Sarasin & Partners, Threadneedle Investments, UK Shareholders Association, and USS Investment Management Ltd. 3. Proposed revisions to the corporate governance Code Below we provide feedback on the additional revisions proposed by the FRC Directors remuneration We welcome most of the amendments proposed by the FRC in relation to remuneration. In particular, we have publicly supported the removal of the requirement for pay to be at a level sufficient to attract, retain and motivate directors 1. We believe this clause has been a driver of increased pay levels and encouraged a focus on the short-term needs of management as opposed to the long-term interests of the company and its investors. We therefore welcome the inclusion of specific wording that remuneration should be designed to promote the long-term success of the company. We also welcome the strengthening of executive minimum shareholding provisions in Schedule A of the Code and the changes to the provisions referring to the use of clawback and malus. We support remuneration committees that take a holistic approach to the assessment of corporate performance and promote a substantial and ongoing share ownership by the executive. The proposed amendments to the Code should encourage more remuneration committees to take this approach. However, we do have concerns that Code provisions on the structure and quantum of remuneration are being separated. We believe that the concept of not paying more than is necessary should be retained as a main principle of the Code. Downgrading this concept to a supporting principle removes an important point of leverage for shareholders when engaging with companies on quantum issues and may weaken the hand of remuneration committees when negotiating with executives. As highlighted in our submission to the FRC s consultation on Directors Remuneration (attached for reference), we believe the FRC should wait at least one voting season to see how companies and investors have responded to the new regulations and the GC100 and Investor Group Directors 1 2

3 Remuneration Reporting Guidance, published in September 2013 before making additional changes to the Code. We would encourage the FRC to monitor utilisation of the guidance with a view to updating the Code at the next opportunity if required. USS proposal The concept of avoiding paying more than is necessary should be retained as a main principle of the Code Engagement following significant dissent We support the proposed amendments to the Code which seek to encourage companies to consult with shareholders following significant shareholder dissent on any agenda item at a general meeting. We consider that the wording proposed by the FRC is clear in its meaning. It is equally important, however, that the directors also reflect the outcome of shareholder engagement in the following annual report. Further, we consider there is a weakness under the current framework due to the Code s continued promotion of voting by a show of hands and the associated partial disclosure of vote results which only include those cast by proxy, and omit those votes cast by a show of hands at the meeting. We consider this method can disenfranchise those shareholders in attendance at the general meeting from having their views fully considered by the board under the proposed changes to the Code. Additionally, only disclosing proxy results, as opposed to full poll results can give rise to the disclosure of inaccurate and potentially misleading voting results to the market. We would strongly encourage the FRC to endorse poll voting as the preferred method of voting in section E.2.2 of the Code. This will provide for a robust, transparent and auditable vote process. We provide more detail on the advantages of poll voting in section 4.2 below. USS proposals Boards should be encouraged to report on the outcome of shareholder dialogue and engagement activity, this could be added to the Code The FRC should address as a priority the current weaknesses within section E.2 of the Code and note specifically that voting on a poll is the preferred method of counting votes Audit committees and external auditors We look forward to responding to the FRC consultation on guidance to the Audit Committee to be released next month. We believe the corporate governance code requires updating to reflect emerging best practice in audit reporting, and the FRC may not wish to wait until 2016 to consider changes. We note that some companies continue to not disclose according to the current guidance, for example it is relatively common for audit tenure not to be disclosed in the annual report. We support the adoption of enhanced information from audit committees on the Audit Quality Review (AQR) assessment conducted by the FRC, however we retain our view that investors will need to access the original AQR report in order to hold external auditors to account Location of the corporate governance disclosures We consider the current disclosure requirements in the Code to be valuable and do not consider any of the requirements to be superfluous. 3

4 We do not support the proposition of removing certain aspects of the disclosure to other reports, the company s website or separate reporting websites. Whilst we recognise some of the advantages of a leaner report, we are concerned that multiple locations for disclosures will be less transparent, with information being more difficult to find. The key advantage of the current reporting regime is that all the key information is available in one document - the Annual Report and Accounts. Any additional time taken searching for data to inform investment analysis, engagement, voting and stewardship activities adds a cost burden for users and is an encumbrance to good stewardship. To support our engagement and stewardship activities, we prefer the Annual Report and Accounts to be located in a single place in a single file. The report should be clearly time-stamped in a format preserved for historic reference and that the user can download, save, search, copy and print. We are concerned that disclosures designed primarily for digital access will not fully meet these requirements. USS proposals We do not consider the FRC should remove reporting requirements from the annual report to other formats. Reporting should be in a format which is is clearly time-stamped, preserved for historic reference and that the user can download, save, search, copy and print. 4. Other additions to the UK Corporate Governance Code 4.1. Director nominee disclosure We note that the FRC have identified good practice in succession planning as a key topic for further investigation for 2014 and have committed to continue to monitor corporate reporting on the issue of director nominations. We welcome the FRC s attention to the nominations process; however we do not consider monitoring alone goes far enough. The appointment and re-appointment of directors is one of shareholders most important responsibilities. Enhanced information on each individual director and for the board as a whole provides shareholders with greater insight and the opportunity for more effective stewardship. Whilst we acknowledge the Code s emphasis on skills, experience, independence and knowledge (under B1), we consider public disclosure in this area to be too limited. For each nominee to the board we advocate the disclosure of their skills and competencies, planned contribution to board performance and an understanding of their perspectives on key issues of relevance to the company. Moreover, we would draw the FRC s attention to the progressive action of the FCA who have taken unilateral action to address concerns about the limited disclosure on board nominees at controlled companies with a UK listing. Under Listing Rule , companies are now required to provide enhanced disclosures on the election of independent directors of controlled companies. We would encourage the FRC to act with urgency to ensure similar disclosures are available for all director nominees. USS proposal The FRC should act with urgency to strengthen section B.2, Appointment to the Board, to include further guidance on increasing the quality of board biographies, to ensure disclosure of director appointees appropriateness of skills and competencies, value, and (potential and actual) 4

5 contribution to board performance Voting by poll We continue to be concerned that the explicit reference to voting on a show of hands in section E.2.2 is being misinterpreted as the preferred voting method. We consider this section needs to be clarified to specifically articulate that voting on a poll is the preferred method of voting. Adoption of poll voting is particularly important given the proposed changes to the Code regarding board consideration of significant shareholder dissent. Voting by poll ensures the principle of one share one vote prevails and provides an auditable vote trail for investors. Under the 2006 Companies Act investors are able to request a review of the poll votes and the result of the meeting. If the Chairman passes resolutions on a show of hands, investors have no right to audit the votes cast by proxy. The UK is a laggard in the promotion of poll voting, which is widely seen as global best practice. Poll voting is now legally mandated in many jurisdictions (e.g. United States, Germany, Hong Kong, Singapore) and was been widely adopted where it is not legally mandated (Netherlands, China). Please refer to section 3.2, where we explain further how a lack of poll voting could impact on recent proposals from the FRC regarding board responsiveness to significant dissent. USS proposal The FRC should address as a priority the current weaknesses within section E.2 of the Code and specifically note that voting on a poll is the preferred method of counting votes Location of Annual General Meeting Principle 3 of the UK Stewardship Code encourages institutional investors to attend the General Meetings of companies in which they have a major holding, where appropriate and practicable. The UK Corporate Governance Code also has guidance to encourage shareholder participation at General Meetings. However, a number of companies with a primary listing on the London Stock Exchange continue to host their Annual General Meetings outside of the United Kingdom. For example, in the FTSE 100 Glencore, International Consolidated Airlines, Royal Dutch Shell and Carnival all hold their AGM outside the UK with limited opportunity for UK based participation. USS proposal We believe that companies choosing to host General Meetings outside the UK should be encouraged to arrange a satellite meeting within the UK with full voting and speaking entitlements for attendees. We would support an addition to the Code in this regard The quality of explanations We continue to strongly support the concept of the comply or explain principles-based approach to corporate governance. The comply or explain approach is underpinned by the rights and protections provided to shareholders in the UK. However, we believe the comply or explain approach works less well when shareholders lack leverage (for example when there is a controlling shareholder). We welcome recent changes introduced by the FCA to improve minority shareholder influence and enhance transparency. However, we still believe more can be done to ensure the comply or explain principle is effective. In particular, we would welcome more robust oversight of 5

6 explanations for non-conformity and the introduction of a system for ensuring that companies with inadequate explanations or poor practices can be held to account. USS proposal We would support the FRC or FCA establishing more robust oversight for non-conformity with the Code, for example an investor ombudsman or mediator. When engagement on an issue is unsuccessful, the system would allow shareholders to report poor disclosure to an independent body which could then conduct an investigation and recommend actions or impose sanctions. For additional information, please contact: Dr Daniel Summerfield Co-Head of Responsible Investment USS Investment Management Ltd Tel: dsummerfield@uss.co.uk Attachments: The going concern statement underpins stewardship a long-term investor view, June 2014 USS submission to the FRC s directors remuneration consultation document, December

7 Catherine Woods Financial Reporting Council Fifth Floor Aldwych House 71-91Aldwych London WC2B 4HN INVESTMENT MANAGEMENT LIMITED 9 December 2013 Dear Ms Woods, Directors' Remuneration- Consultation Document We welcome the opportunity to respond to the FRC's consultation document on potential changes to the UK Corporate Governance Code regarding Directors' remuneration. By way of background, Universities Superannuation Scheme (USS) is one of the largest pension funds in the UK, with assets of approximately 40 billion. As an institutional investor that takes seriously its fiduciary obligations, USS aims to be an active, engaged and responsible owner of the companies and assets in which it invests. We devote substantial resources to implementing an active approach towards stewardship which includes engagement with companies on remuneration schemes and analysing pay plans. Overview We acknowledge that the FRC are responding to a request from government to consult on whether to amend the UK Corporate Governance Code to address a number of potential issues relating to executive remuneration. Nevertheless, we do not believe it is the right time to consider revising the Code so soon after the new legislation has been enacted. Our view is that it would be preferable to wa it for at least one voting season to see how companies and investors have responded to the new regulation and what amendments, if any, need to be made to the Code to enhance remuneration practices and disclosure. In addition, the GC100 and Investor Group in which USS participated have recently produced Guidance on Directors' Remuneration relating to the recent legislation. We think it is important that the Guidance is allowed time to be utilised and bed in before consideration is given to make further changes to the Code. Finally, as the Code will be reviewed in its entirety in 2014, it seems appropriate to wait until next year for any review to take place. USS INVESTMENT MANAGEMENT LIMITED: 6th FLOOR, 60 THREADNEEDLE STREET, LONDON EC2R 8HP TEL: +44 (0) FAX: +44 (0) WEBSITE: Registered in England & Wales No Registered Office: Universities Superannuation Scheme Limited, 2nd Floor, Royal Liver Building, Liverpool L3 1PY Au thorised and regula ted by the Financial Services Authority

8 Specific comments Extended Clawback Provisions: we do not believe it is appropriate for the Code to specify the circumstances under which payments could be recovered as this could be restrictive in terms of the issues covered. We also believe that the current wording in the Code is sufficient and it is more important for the board and the remuneration committee to take ownership of and be accountable to their shareholders for the policy and its outcomes. Remuneration Committee Membership: we do not believe it is appropriate to restrict membership of remuneration committees by excluding serving executive directors from sitting on this committee. USS expects independent directors (and hence members of board committees) to be selected on the basis of their experience and skill-sets and ability to undertake their role objectively and effectively. The analysis provided in your consultation document also suggests that there is no correlation between the levels of shareholder dissent and the presence of serving executive directors sitting on the remuneration committee. We would however welcome the FRC considering in the 2014 Code review whether the information provided to shareholders on director biographies, skill-sets and backgrounds should be strengthened. Votes against the Remuneration Resolutions: we do not support an explicit requirement in the Code to report to the market in circumstances when a company fails to obtain at least a substantial majority in support of a remuneration resolution. Our view is that there is already sufficient reference to the need for companies to engage with shareholders, following significant shareholder dissent, in the Regulations and GClOO and Investor Group Guidance. We also believe that any encouragement for companies to consult with shareholders following a significant vote should be applied in all circumstances and not just in cases relating to remuneration. I hope that you find our perspective on these issues useful as you consider the responses to the consultation document and deliberate over the proposed way forward. Please feel free to contact me should you require any additional information. Yours sincerely, Dr. Daniel Summerfield Co-Head of Responsible Investment USS Investment Management Ltd dsummerfield@uss.co.uk +44 (0)

9 17 June 2014 The going concern statement underpins stewardship a long-term investor view Introduction Whether or not an entity is a going concern, and likely to continue in operation for the foreseeable future, is of vital importance to all stakeholders. Directors confirmation that they believe a company is a going concern underpins the trust placed in it fulfilling its obligations. While the legal framework around how directors assess and communicate their opinion on companies continued viability has been strengthened over time, the financial crisis and the revelation of solvency issues in banks exposed limitations in practice. Long term investors need a robust stewardship going concern statement We welcome the UK Government s commitment to implement the recommendations of the Sharman Inquiry (2012) to tackle these failures. Of particular significance to long-term investors is the clarification and strengthening of the stewardship going concern statement alongside the more widely understood accounting going concern assessment; the requirement for directors to consider longer-term solvency risks taking into account business cycle and other economic and financial factors; improved disclosures around the risks and assessment process; and an auditor opinion of the going concern disclosures 1. A stewardship going concern statement, with supporting assessments and disclosures, is vital for two reasons: 1. To reassure the providers of capital (and other stakeholders) over the company s ability to continue to operate, and meet reasonably expected liabilities as they fall due. This is a matter of both liquidity and solvency. 2. To make clear directors responsibility to manage the company prudently and for the long-term, not just to focus on short term challenges. Taken together, the statement plays an important role in ensuring long-term and prudent behaviour, protecting capital, and strengthening responsible stewardship. This in turn underpins economic resilience and growth. Key elements of a stewardship going concern statement An explicit assertion by directors about the entity s expected future viability. The going concern statement represents directors best judgement of the entity s ability to continue in operation into the foreseeable future. Supported by a clear articulation of business risks to the outlook. While the statement sets out directors opinion of the company s future, the risk assessment should provide an indication of the possible variation around this projection. Grounded in true and fair accounts. The accounts must provide a reliable and prudent view of capital, including distributable reserves, such that directors have a solid basis on which to form a view about the future. Covers the foreseeable future. While directors should set the appropriate time frame (and justify this choice), the period of consideration should be considerably longer than the 12 months used for accounting purposes, and take into account the business cycle and other economic and financial factors facing the company. Is a judgement, not a guarantee. Directors are expected to provide their reasonable expectation of the company s viability based on available information at the time. Directors should not be held accountable for unforeseeable eventualities, and should be protected by safe harbour provisions. A proposed stewardship going concern statement The proposed statement below with supporting guidance meets the aims we have set out above, and is in keeping with the recommendations of the Sharman Inquiry. The directors should confirm in the annual report that they have carried out a robust assessment of the state of affairs of the company and any risks, including to its solvency and liquidity that would threaten its viability. They 1 The Sharman Inquiry. Going concern and liquidity risks: lessons for companies and auditors Final Report and recommendations of the panel of inquiry. June 2012.

10 17 June 2014 should state whether, in their opinion, the company will be able to meet its liabilities as they fall due and continue in operation for the foreseeable future, explaining any supporting assumptions and risks or material uncertainties relevant to that and how they are being managed. Supporting guidance: First sentence: there needs to be specific reference to the assessment giving consideration to the audited accounts and financial controls and to the specific issue of whether there is a risk that the value of the company s assets may be less than the amount of its liabilities, taking into account its contingent and prospective liabilities. Second sentence: It needs to be made clear that foreseeable future cannot be limited to 12 months and regards should be given to such things as the business cycle, contract lengths, the liability including contingent liability profile and other identifiable factors. The statement should be required as part of the Financial and Business Reporting section of Corporate Governance Code. Key areas of concern with recent Government proposals The Financial Reporting Council is now consulting on modified requirements relating to the going concern assessment and statement in the Corporate Governance Code to put recommendations from the Sharman Inquiry into practice 2. Several proposals have been put forward which we find troubling. These are outlined below. Subsuming the Longer-term viability statement into risk management - The going concern statement should not be subsumed within the Risk Management and Internal Control section of the Corporate Governance Code. This would frame the Going Concern assertion as a risk statement, which it is not. The assessment of risks should be holistic. Risks around the director s central projection need to be disclosed. This must not be limited to principal risks as currently proposed, but consider the risks to the business in the round 3. Reference to accounts is important. We believe the reference to audited accounts in supporting guidance is a critical part of any stewardship going concern statement as it makes clear the need for directors to root their judgement about the future in a firm understanding of the current capital position. Currently this is missing. Specific terminology should not prevent progress. We appreciate that terminology like going concern and foreseeable future is considered confusing by some. We are willing to consider alternative wording as long as the underlying principles set out in this paper are upheld. Signatories 2 FRC, Proposed revisions to the UK Corporate Governance Code Consultation document, April The phrase principal risks is often association with the COSO framework in the US, and more recently the UK s Turnbull guidance on internal controls. Both are driven by management s own assessment of the risks of them not delivering their objectives. In assessing Going Concern, we expect directors to take their own independent and holistic view of risks to the business, which may include the risks associated with the management s objectives themselves.

11 17 June 2014 Robert Talbut, Chief Investment Officer Royal London Asset Management Natasha Landell-Mills, Head of ESG Sarasin & Partners LLP Frank Curtiss, Head of Corporate Governance RPMI Railpen Kieran Quinn, Chair Local Authority Pension Fund Forum Andy Banks, Head of Corporate Governance Legal & General Investment Management Dr. Daniel Summerfield, Co-head Responsible Investment USS Investment Management Ltd Eric Tracey, Partner GO Investment Partners Susan Martin, Interim Chief Executive London Pensions Fund Authority RA Collinge, F.C.A., Head of Corporate Governance Group UK Shareholders Association Iain Richards, Head of Governance and Responsible Investment Threadneedle Investment