MM&K News

  • September 17, 2018

    SEC Rescinds Guidance Providing Regulatory Support for Using Proxy Advisors

    On Thursday 13th September, the SEC rescinded two guidance letters from 2004 that will potentially reduce the influence that ISS has on, among other things, Say-on-Pay votes.

    These guidance letters informed investment managers that outsourcing their proxy voting decisions to proxy advisors would satisfy their obligations as fiduciaries to vote their shares while avoiding potential conflicts of interest with regards to companies whose funds they may be managing. For example, if Vanguard has proxies to vote for a company in one of its index funds, and that company also uses Vanguard in managing its pension fund, Vanguard could conceivably be influenced by its business relationship with that company to vote with management on the proxy matters. By essentially delegating to ISS or Glass-Lewis the votes on its shares in that company, Vanguard would be “cleansed” of potential allegations of conflict, based on the 2004 letters. With that guidance rescinded, Vanguard and others can choose to vote according to their own determination of the merits of each proxy resolution, which may or may not correspond to proxy advisor recommendations.

    Critics of these SEC guidance letters have argued that they effectively institutionalized proxy advisory firms, especially ISS, as de facto regulators without the oversight required of actual regulators, and that over-reliance on such firms may not be in investors’ best interests.

    ISS’s business model is arguably built largely on regulatory requirements, especially the 2003 SEC rule mandating that investment managers disclose their proxy voting policies (and votes) and the 2010 Dodd-Frank Act mandating Say-on-Pay, among other provisions. Many of the larger institutional investors have built internal governance expertise to guide voting decisions, using ISS data to help them screen companies to target, while smaller funds have generally found it more cost effective to meet these requirements by essentially outsourcing their votes to ISS. The larger firms, however, have also outsourced many of their votes due, in part, to the 2004 guidance letters because they are more likely to sell investment management to the companies that they also invest in.

    Research indicates that ISS has gained significant influence over shareholder voting and, consequently, on corporate governance policies. As their influence has grown, ISS’s dominance has been increasingly challenged by public companies and certain governance critics who have focused on ISS’s own potential conflicts of interest and the quality of the research and standards behind their recommendations.

    Following more recent SEC guidance for casting their votes in their client’s best interest should provide investment managers a strong basis for defending their voting decisions, even as they reduce their reliance on proxy advisors. The impact of this rescission is not expected to be very significant in terms of how investors generally oversee compensation governance. But it does portend continued push-back on ISS’s influence as the SEC prepares for its November roundtable on potential regulation of proxy advisors.

    However, the outcome is uncertain. Our advice from s UK proxy advisor is that the drafting of the original letters was poor, and the SEC may well issue new guidance.

    For more information contact: Damien.Knight@mm-k.com or Paul.norris@mm-k.com

  • August 30, 2018

    Investment Association register of AGM votes 2018

    On 30 August the Investment Association published its analysis of voting in the 2018 AGM season. Company resolutions are added to the register if they fail to achieve an 80% vote in favour.
    The picture is rather confused. For all listed companies the number of resolutions not achieving the hurdle dropped from 68 in 2017 to 61 in 2017. But the number in the FTSE 100 doubled from 9 to 18.

    Most of the “failed” failed votes were for the advisory vote on remuneration implementation. Only 12 in total concerned the remuneration policy. This is remarkable in a year when many companies would have been coming back to shareholders to renew the policy since the three year validity would now be up.

    The poor showing of a relatively small number of FTSE 100 companies is indicative of the intention of institutional investors to go after the high profile cases – WPP, Persimmon, BT. It is no indication of a general breakdown in corporate governance: indeed the improved general voting this year suggests practice is improving.

    For more information contact damienknight@mm-k.com

  • August 29, 2018

    Pay Ratios Disclosure Regulations

    Which companies do the pay ratio requirements apply to?
    Quoted companies (not AIM companies) with >250 UK employees (average no. over the financial year). This includes all UK employees who have a contract of service with the company, regardless of hours worked, although it is the FTE pay figure that is used.
    The draft regulations provide a ‘smoothing provision’ in paragraph 19B which provides for a two-year time lag before a company either drops out of, or is covered again, by the pay ratio disclosure requirement.

    What are companies required to do?
    Report in tabular form within their annual Directors’ Remuneration Report the ratio of their CEO’s latest Single Total Figure Remuneration to the 25th, 50th and 75th percentile of the company’s UK employees’ FTE remuneration.
    Underneath the ratios table, companies must provide some supporting information and an explanation, including:
    • the methodology chosen for calculating the ratios;
    • the reason(s) for any changes to the ratios compared to the previous year;
    • in the case of the median ratio, whether, and if so why, the company believes this ratio is consistent with the company’s wider policies on employee pay, reward and progression.

    How many years of pay ratio reporting should be included in the table?
    Going forward, the pay ratios table should cover a ten-year reporting period. The disclosure will build in the table incrementally to a ten-year period, with only one set of ratios therefore being disclosed in the first year of disclosure.

    The three methods/options for calculating the pay ratio
    The three options (A, B or C) essentially boil down to where the company gets their data from; collect it specifically for this purpose, use of gender pay gap data or use of other pre-existing data.

    Option A

    1. Calculate (on a day no earlier than three months before the end of the relevant financial year) the pay and benefits for every UK employee for the relevant financial year;
    2. Identify the employees whose pay and benefits places them at the 25th, 50th and 75th percentiles;
    3. Compare to the CEO to obtain the ratios.

    Option B (use of gender pay gap information)

    1. Use the most recent gender pay gap information to identify three UK employees whose remuneration place them at the 25th, 50th and 75th percentiles.
    2. Calculate these employees’ pay and benefits for the relevant financial year;
    3. Make any necessary adjustments to the pay and benefits identified in step 2 (e.g. if an employee identified using gender pay gap information receives an atypical variable pay in the relevant financial year);
    4. Compare to the CEO to obtain the ratios.

    Option C (use of other pre-existing pay data)

    1. Use pre-existing pay information for UK employees as an alternative to, or in combination with, gender pay gap information.

    More detailed information can be found in The Companies (Miscellaneous Reporting) Regulations 2018 – FAQ: https://www.gov.uk/government/publications/corporate-governance-new-reporting-regulations

    Or contact Harry.McCreddie@mm-k.com for further information

  • July 16, 2018

    The Companies (Miscellaneous Reporting) Regulations 2018
    On 11 June the Government put before Parliament a substantial and important statutory instrument, “The Companies (Miscellaneous Reporting) Regulations 2018” (2018  Regulations) which gives effect to a wide range of corporate governance reporting improvements that BEIS has been working on ever since its Corporate Governance Green Paper of 29 November 2016 .  These make several amendments to existing disclosure regulations, and are potentially quite onerous. There are exemptions, however, depending on company size.  Regulation requirements:

    • Production of a full statement in the Strategic Report explaining how Section 172(1) of the 2006 Companies Act has been complied with, i.e. how directors have met their obligation to promote the success of the company with regard for the interests of or impact on various stakeholders, including employees – applies ONLY to large companies (over £36m turnover plus 250 employees and/or assets of £18m) – unquoted companies can publish this on the website).

    • Modifications to the director’s report (applies to large companies only)
    – A statement summarising how the directors have had regard to the need to foster business relationships with suppliers, customers and others and the effect of that regard
    – A comprehensive report on engagement with employees and its effect.  Applies to companies with more than 250 employees (no turnover or assets limit).

    • A statement of corporate governance arrangements including identifying the corporate governance code the company has chosen to apply in the year, how it has done so and reasons for departure from the code.  This applies from 1 January 2019 to all companies (public and private) with more than 2000 employees and/or turnover of £200m and assets of more than £2 Bn.  Note that in March the Stock Exchange brought in a broadly similar requirement for all AIM listed companies with no size exemption, to apply from 28 September. Unquoted and AIM companies are expected to use their websites for this purpose.

    • Several modifications to the Directors’ Remuneration Reporting Regulations (2013), including
    – explanation of discretion on pay awards
    – provision of data on the pay ratio of the CEO to the median employee – extended now to upper and lower quartile (for companies with more than 250 employees)
    – Impact of share price increase on the historical single figure of remuneration and on future pay as shown in the “scenario charts” for each director.

    These changes have been introduced, in part, to reinforce the application of the revised UK Corporate Governance Code, issued by the FRC on 16 July. Contact Damien.Knight@mm-k.com or Paul.Norris@mm-k.com for advice on implementing the new disclosure regulations.

  • July 16, 2018

    Changes to the UK Corporate Governance Code
    The Impact of the FRC’s proposed changes to the UK Code was the theme for the recent Remuneration Dinner held by MM&K – the latest in its series of dinners for CEOs and Non-Executive Directors.  To read an overview of the evening click here. The final Code was issued on 16 July. The style of the code has changed substantially. Rather than “comply or explain” the new code has been characterised as “apply and explain” – companies adopting the code are expected to apply the 18 Code principles and then explain how they have applied them. There are still provisions in the Code, but the FRC is anxious that companies avoid a tick box approach to compliance (this is going to put pressure on the proxy agencies if they have to understand a more conceptual approach and provide commentary and judgment in their reports). Contact Damien.Knight@mm-k.com or Paul.Norris@mm-k.com for further information.

  • July 16, 2018

    Recent changes to the QCA Corporate Governance Code
    The Quoted Companies Alliance (QCA), has also been revising its Code and made radical changes (the number of Principles has been reduced from 12 to 10). The Code was issued on 25 April. It is considered to be more flexible than the UK Code and more suitable for smaller companies.  The existence of the two codes is particularly relevant to AIM listed companies – under a new AIM rule, AIM companies have to declare on their website, by 28 September, which “recognised” corporate governance code they apply. They have a choice of code. But they also have a separate choice of whether to prepare a remuneration report according to the Directors’ Remuneration Reporting Regulations (which only main market companies are obliged to follow) or to comply with the far more limited AIM rule 19 requirement to provide “details” of directors’ remuneration by applying, for example, the QCA specimen remuneration report in the QCA Remuneration Committee Guide.

    For more information regarding the new code and the QCA specimen report, please contact Damien.Knight@mm-k.com

  • June 12, 2018

    Making Executive bonus plans more effective
    On 11 June 2018, MM&K hosted one of its regular dinners for Company Chairman, Non-executive Directors and Chief Executives. The topic for discussion at the dinner was “making executive bonus plans more effective”. A note of the discussion (which was held under the Chatham House Rule) can be accessed here.
    In preparation for the dinner, MM&K produced some original research into bonus plan design practice. A copy of the report can be obtained by writing to Margarita.Skripina@mm-k.com

  • June 11, 2018

    Reporting the pay difference between Chief Executive and staff
    It was announced today by the Department of Business, Energy and Industrial Strategy (BEIS) that legislation would be laid before Parliament which states that larger UK Listed companies (with more than 250 employees) be required to publish annually the pay difference between the Chief Executive and staff, including an explanation of this difference.
    To read the full press release by BEIS click here

  • June 5, 2018

    Malus and LTIP awards
    The UK Corporate Governance Code states that long-term incentive plans (LTIPs) must include provisions to enable the company to withhold payments to participants in specified circumstances. It is now common for LTIP Rules to allow the Remuneration Committee to apply these ‘malus’ provisions and also to ‘claw back’ the benefit of awards which have already vested and been paid to the participants. The circumstances may include misconduct of the participant, misstatement of the company’s results and situations which have caused reputational damage to the company.
    In a recent case (Daniels v Lloyds Bank Plc), the High Court decided that a new malus clause, added to LTIP Rules, could not apply to awards which had already been granted before the amendment was made. The court also concluded that the Board of Directors could not decide that no shares should be delivered to the participants at all after the Remuneration Committee had determined the level of vesting. This ruling was based on the actual circumstances and may not be applicable to other plans. However, companies will need to ensure that malus and clawback provisions are carefully worded and that proper processes are used if they are ever applied.

  • June 1, 2018

    Share plan annual returns deadline
    Annual share plan returns for the tax year ended 5 April 2018 must be submitted online to HMRC no later than 6 July 2018. Returns must be made for the tax-advantaged share plans – SIP, SAYE, CSOP and EMI – and also for unapproved share plans. Items to be reported include grants of share options and conditional share awards, acquisition of shares by employees and any other taxable events. In addition, if any amendments have been made during the tax year to key features of SIP, SAYE or CSOP plans, the company must confirm that the plans continue to comply with the relevant legislation.
    Please note that, even if there are no reportable events, a nil return must still be submitted. HMRC has reported that, for the 2016-17 tax year, more than 7,000 companies had to pay penalties for missing the deadline.