MM&K News

  • November 25, 2019

    With the majority of parties now having published their manifestos, what clues do they contain as to the future direction of corporate governance and executive pay in the UK?

    This article is strictly apolitical – as countless polls have shown, it is impossible to predict how an election will be decided. However, irrespective of who wins (or perhaps which parties form a coalition) it is undoubtedly true that policies from one party can influence decisions of other parties.

    Even more crucially, when, as in the 2017 General Election, there was general consensus over an issue (such as pay ratios or increasing worker representation) changes followed within a year.

    So, what messages might we be getting from the manifestos?

    In terms of the Conservative party, unlike 2017, when actions around reward and pay were specific and targeted, the current manifesto raises only one point regarding executive pay:

    • “We will improve incentives to attack the problem of excessive executive pay and rewards for failure.”

    No explanation is given as to what “improving incentives” means in the context of ’rewarding failure’ or as to where those incentives are aimed and it seems a strange turn of phrase given that Remuneration Committee’s receive a flat fee in respect of their work on executive pay. NEDs are not supposed to participate in incentive pay plans but could this be a veiled recognition that whilst the remit of remuneration committees has expanded, their fees have not followed suit?

    Given the absence of anything more definitive, it is worth considering the Labour and Liberal Democrat manifestos.

    The main point of agreement in both documents is an extension of the requirement for large UK companies (i.e. those with 250+ employees) to report more “gaps in pay”. Both parties support an extension to record Black, Asian and Minority Ethnic (BAME) pay gaps. In addition, the Labour party would extend this to include gaps based on disability reporting and the Liberal Democrats to LGBT+ reporting.

    It is interesting to note that, in terms of gender pay reporting, Labour are proposing to extend the influence of government through the requirement that all large companies (listed or otherwise) will have to get government certification regarding their approach and level to gender equality.

    In terms of other common policy points, both Labour and the Liberal Democrats have indicated support for a proportion of a large listed company’s shares to be held in trust for employees. We assume such measures would be settled by an issue of new shares, thus diluting existing shareholders.

    The amount to be put into trust would be mandated at 10% by Labour (as previously indicated by Shadow Chancellor, John McDonnell) and, to avoid executives taking the largest share, the maximum payment receivable would be £500 per person per year.

    In comparison, the Liberal Democrats are only proposing a right for workers in large companies to request that a trust is created for employees.

    The other area of common interest in both manifestos is in respect of worker representation on Boards, with the Liberal Democrats suggesting that there should be one such person and Labour indicating that 1/3rd of the Board should be elected “worker-directors”.

    Only once things have settled after the Election will we have a better idea of what might occur in the short term.

    In terms of likely outcomes, the current Conservative government has expressed support already for BAME reporting and, therefore, it is strongly possible that this particular measure will be actively introduced within the next year.

    It is more difficult to tell with the other matters. However, given the general direction of travel, it is likely that issues of pay and corporate governance will be areas in which all parties (should they need to) are likely to feel that concessions could be made.

    For further information about the issues raised in this article or to discuss any questions you may have, please contact Stuart James.

  • November 25, 2019

    MM&K and its partner firm in the US, Holt Private Equity Consultants, have published their 2019 Survey Reports on Compensation in the UK and North American Private Equity and Venture Capital Fund Management industries.

    Nigel Mills reflects on some of the key findings in the Reports with regard to pay levels on both sides of the pond, and the levels of Management fees and Performance fees (or Carry).

    In October MM&K and Holt Private Equity Consultants published their 2019 European and North American Private Equity and Venture Capital Compensation Reports. The Reports are derived from Surveys that were conducted in the year into pay and incentive practices in the European and North American PE and VC fund management industries.

    Some of the key findings from the surveys and commentary thereon are set out below.

    The headline takeaway is that the market for top-quality talent in the sector remains extremely competitive. We see that the sector generally is booming with a large number of firms recruiting both in the US and in Europe, either with a view to simply increasing their headcount to deal with the strength of the business pipeline or in some cases to move into the sector for the first time.

    The stats from both North America and Europe showed significant increases in total cash compensation for non-partner investment professionals across all strategies. And, as in Europe, the North American VC data showed that the VC strategy, in particular, is doing particularly well in the United States.

    As most observers will know, the ability to reward and incentivise key talent in this industry is very dependent on the revenues that the firms make from management and performance fees (or carry). It is interesting to observe the slightly differing fee structures as between the European and North American Houses. In both territories, the standard fee structure remains 2% Management fee and 20% Carry (two and twenty). These still represent the median numbers for all participating houses both in Europe and North America. However, when one delves a little deeper, one sees that whilst this is still the standard for the Buy-out and growth capital houses, the numbers look a little different for the VC houses and for the fund-of-fund entities.

    In Europe, the median annual management fee for VC funds is 2.3%, whilst in North America it is 2.4%, perhaps unsurprisingly quite a bit higher than for the Buy-out houses. In sharp contrast to this, for fund-of-funds managers, the typical annual management fee is 1%, both in Europe and in North America, and for larger funds it is actually some way below this.

    20% carry is still the norm for the large majority of independent direct investing fund managers, although one does still see quite a number of 25% carry plans in VC houses in the United States. In fact, the upper quartile figure for VC Carry in North America is 25%, whilst in Europe it is 21%. This would suggest that over 25% of VC funds in the United States have a carry percentage of 25% or greater.

    Interestingly (and in our view rather surprisingly) we have not seen much movement in these figures over the last ten years or so. However, the one area where we are starting to see some movement is in the hurdle rates of return applying to carry plans. In the European Report, 18% of carried interest plans now have a hurdle rate of less than 8%. A few years ago, there would not be any plans (in the UK at least) with hurdle rates below 8%.

    One last interesting statistic relating to differences we are seeing between European Houses and North American firms is to do with how widespread the Carry is among the members of the firm. In North America it seems that over 80% of the carry is spread among the partners and only c 18% goes to non-partners. In Europe, we are seeing carry being spread more widely among the more junior investment professionals with only c 68% of the carry being allocated to the partners. It may well be that in the UK, in particular, there is a greater recognition of the need to incentivise and retain the more junior investment professionals in a very competitive market place. Offering them a small slice of the carry can help to do this.

    Readers wishing to obtain more information on this survey should contact Nigel Mills or Margarita Skripina.

  • November 25, 2019

    Revised and Strengthened UK Stewardship Code sets new world-leading benchmark

    Nigel Mills summarises some of the changes in the new Code and the impact it will have. One key change is that signatories now have to explain their Stewardship approach in their alternative investments such as PE and Infrastructure.

    The Financial Reporting Council (the FRC) launched a significant and ambitious revision to the UK Stewardship Code at the end of October 2019. The Code was last updated in September 2012.

    The Code was originally introduced to enhance the quality of engagement between investors and companies to help improve long-term risk-adjusted returns to shareholders.

    The new Code (the UK Stewardship Code 2020) substantially raises expectations regarding how money is invested on behalf of UK savers and pensioners.

    The new Code focuses on protecting the interests of UK Savers and pensioners by seeking to ensure that their money is managed (and invested) responsibly with a new emphasis on creating long-term value and while doing so, considering sustainable benefits for the economy, the environment and society.

    The FRC’s Chief Executive, Sir Jon Thompson said “I encourage institutional investors, asset managers and their service providers to sign up to the new Code and demonstrate that they are operating across their businesses to these high standards of Stewardship.”

    The new Code contains 12 principles for asset owners and asset managers and six separate principles for service providers. Each principle is supported by reporting expectations which indicate the information which a signatory to the Code should include in its Stewardship Report. The structure is different from that adopted by the UK Corporate Governance Code (which relies on principles and supporting provisions).

    The new Code makes it clear that: Environmental, particularly climate change, and social factors, in addition to governance, have become material issues for investors to consider when making investment decisions and undertaking stewardship.

    Signatories are now expected to explain how they have exercised stewardship across asset classes beyond just listed equity, such as private equity and infrastructure and in investments made outside the UK.

    The Code is voluntary and operates on a comply-or-explain basis. The Financial Reporting Council monitors compliance with the Code.

    Whilst the Code is voluntary, there is no doubt that the pressure is on for all UK asset managers to sign up to it, whether it be in connection with their listed investments or their unlisted ones. Asset managers are required under the FCA COBS to disclose the nature of their commitment to the Code or, where they do not commit to the Code, their alternative investment strategy.

    It does appear that the very large majority of the traditional UK fund management community have already signed up to the Code. This includes many UK hedge fund managers.
    However, there seems to be a large number of PE fund managers that have not yet signed up. We would suggest that those businesses will need to consider doing so.

    For further information contact Nigel Mills.

  • November 25, 2019

    “Does making the rich poorer make the poor richer?” – a new concept or just a misuse of Sir Winston Churchill’s quote “You don’t make the poor richer by making the rich poorer”.

    This month, the High Pay Centre (HPC) held an event to talk about pay and the increasing gap in incomes between those at the top and those at the bottom. In recent years, executive remuneration has attracted a lot of attention and is being thoroughly scrutinised by the media. So, can the Robin Hood effect be achieved without sending the economy into a turmoil?

    A panel consisting of representatives from the HPC, the Institute for Fiscal Studies, the GMB union and an independent writer/researcher, presented their thoughts on the topic. In this presentation only one side of the coin was discussed – how to make the rich poorer. The panel promoted the idea of wealth re-distribution but failed to identify how this is to be achieved. They also failed to mention the potentially negative effect of government intervention in the economy.

    This event has yet again highlighted, that while the HPC was set up to be an independent organisation it is nonetheless politically orientated.

    Robert Joyce, Deputy Director of the Institute for Fiscal Studies (one of the speakers) – used the latest available data from HMRC (2014-2015), to produce a report entitled: “The characteristics and incomes of the top 1%”. According to this report, across all income tax payers in the UK, the median tax payer has an income of about £22,000 per year, while at the 99th percentile, taxable income is £162,000. The top 0.1% earn a taxable income of about £650,000 and above.

    It is important to understand that the study includes the self-employed, entrepreneurs, business owners, partners and investors. So, the comparison is between salaries in some cases and total income in others. This is a skewed statistic which compares apples with pears and is used as a weapon to back a particular view rather than to offer objective comment on the topic.

    Robert Joyce also highlighted, that the dramatic income gap appeared in the period from 1980 to 1990. Since then, the top 1% of earners have continuously pulled away from the rest.

    So, could we attribute this gap in incomes between top and bottom to the reduction in income tax rates from 83% in 1979 to 40% in 1989 (for the top rate)? And if so, could the rapid growth in the country’s GDP in that period and subsequently be the result of tax reform and top earners being rewarded for top performance?

    The graph below represents the figures for GDP according to the Office of National Statistics:

    Sir Winston Churchill said: “For a nation to try to tax itself into prosperity is like a man standing in a bucket and trying to lift himself up by the handle”.

    In the current general election, campaign wealth re-distribution and change in tax rates are subjects both major parties are addressing. It remains to be seen what the majority of population think.

    For more insights on the executive pay please contact Margarita Skripina.

  • November 20, 2019

    No matter whether you are a listed company or a private company, the most recent remuneration guidelines from the Investment Association are likely to affect your business in the future

    To paraphrase an old saying, “when the FTSE sneezes, the rest of the market catches a cold”.  Whilst the recent publication of the Investment Association’s Principles of Remuneration (“the Guidelines”) on 1 November is targeted initially at the largest listed companies, we have consistently seen practices and outlooks move into other listed and non-listed companies.

    As a result, here are four particular points made by the IA which we think every business should be aware of going forwards.

    • LTIPs

    The IA has indicated that alternatives to Long Term Incentive Plans (LTIPs) should now be actively considered.  This statement can be confusing as the IA is not suggesting that rewards based on long term performance should be stopped – it is rather that the default position for companies should not be to use “Nil/Nominal Cost” Options.

    A discussion of the potential alternatives will be undertaken in a future article.  The key detail coming from this advice is the reiteration that any long-term plan for executives and key personnel should be aligned to the company’s strategy.  It is, therefore, acceptable to use a style of plan which is not common amongst peers or comparators if it would be the best type of structure for your business and is aligned to company strategy.

    • Pension Contributions

    There is a strong and consistent message that senior executives should not receive higher pension percentages than the majority of their workforce.  No new Directors should be awarded pension contributions above this level (typically expressed as a percentage of salary) and any incumbent directors should have their percentage reduced down to the same level as the rest of the workforce by the end of 2022.

    • Remuneration Committee discretion and capping variable pay

    Whilst the Guidelines acknowledge that the Remuneration Committee may need to exercise discretion at particular times, the indication and examples used are all in respect of using discretion to limit payments and it is clear that this is the expected direction of travel.

    In particular, there is an encouragement to not pay any variable pay at all if there has been “an exceptional negative event” (such as a significant health and safety failure or a poor outcome for clients).

    There is also a suggestion that variable pay should be capped at a maximum – to be set for each Company by its own Remuneration Committee.

    • Notice Periods

    Payments to exiting Directors should be limited to what is in the contract (i.e. no “ex-gratia” payments) and be limited to salary, pension and benefits already in the contract.  Where bonuses are due, these should only be paid if the individual is a “Good Leaver” and the Remuneration Committee should state on what basis this definition is made.

    Only time will tell if these new approaches will flow down to the rest of the market as a trickle or a surge. However, the continued tone is one of greater restraint over executive pay.

    For further information or to discuss any questions you may have, please contact Stuart James.

  • November 19, 2019

    Remuneration Planning for Management Succession

    On 18 November, MM&K hosted the latest in its series of Remuneration Dinners. The guests on the evening included Company Chairs, Remuneration Committee Chairs / Members and CEOs. The discussion topic for this event was Remuneration Planning for Management Succession.

    The topic was introduced by MM&K’s CEO Paul Norris who contended that Management Succession was an important matter, not always given the priority it deserves.

    The following are excerpts from his opening address:

    “It may be a universally accepted principle that succession planning is important but it does not seem to have been universally embraced. One listed company, when asked about succession planning replied: “We are a small head office team and don’t have the time to be thinking about that.”

    Many family-owned companies are reluctant to do any succession planning at all. For those companies, the closer relationship between shareholding and management and the potential conflicts between the interests of the family and the interests of the business are complicating factors. The key decision of whether to select the next CEO from inside or outside the family may be influenced as much by family needs or preferences, as it is by business requirements. Objectivity can lose-out to emotion.

    Another reason for hesitation might be that deciding to embark on a succession planning is like deciding to buy life assurance. It’s a sensible thing to do but having to grapple with the inevitable is something we would rather not be reminded about and, in any case, it’s way off into the future, isn’t it? But the future is uncertain, which simply strengthens the case for planning.

    There are good reasons to plan

    • Avoiding unwanted disruption: Because management change can affect many aspects of a business:

    – culture and values
    – risk management
    – business continuity
    – strategy and growth
    – diversity
    – board effectiveness,

    the absence of planning create potential for unwanted disruption.

    • Knowledge transfer: The Baby-Boomers are approaching (or have reached) retirement. Remuneration policy can play a major part in how to motivate those workers to stay and educate their younger colleagues in Generations X and Y, some of whom will be tomorrow’s top management?

    Older employees are not necessarily less motivated than their younger colleagues but they are likely to have different priorities and need to be motivated differently. Where it is important to retain them to pass on their knowledge and experience, flexibility around working times and pay policy can help.

    • Maintaining a strong governance framework is important for all companies: The UK Corporate Governance Code requires Nominations Committees of quoted companies to maintain an effective succession plan, based on merit and objective criteria and which promotes diversity, cognitive and personal skills.

    Remuneration committees are responsible for ensuring remuneration policy promotes long-term growth in shareholder value in accordance with strategy and the company’s succession and risk policies.

    Governance principles set down the requirement but leave it to companies to determine the policy which works best for them. So, there is plenty of scope. Nomination and remuneration committees should combine to:

    – identify the core competencies required to be a member of the board/leadership team; and

    – develop a pay policy to assess and reward performance against those core competencies.

    Remuneration policy can help employees see their relationship with the company in a long-term perspective and thereby retain the talent for the future.”

    Having established the benefits of considering succession planning, Paul went onto address the potential dangers and made the observation that a failure to plan involves risk.

    “A failure to grapple with the issue of succession might give rise to stakeholder concerns about stability, competitiveness and growth because how well it is managed represents a key measure of board effectiveness.

    The company also risks the prospect of having to take unplanned, reactive action, which might result in unwanted cultural and value changes on the arrival of a new CEO and delay in finding a new CEO may be disruptive and have an adverse effect on performance, morale and confidence.

    Following on from this thoughtful introduction, a wide range of practical issues were addressed in discussion over dinner. Whilst the Chatham House Rule applies, a note of the topics aired will be circulated and will provide the basis for an article in the December edition of our Newsletter. In the meantime, the following are some of the key aspects arising from the evening:

    Drawing the strings together

    • Succession planning is part of risk management; it is a vital task for boards to address; how well it is managed represents a key measure of board effectiveness
    • Identifying, developing and assessing the competencies required for leadership are essential
    • Knowledge transfer from more experienced employees plays a key role in succession planning
    • Remuneration policy has a major role to play in the development, assessment, retention and recognition processes
    • Nomination and remuneration committees should combine to develop and retain the next generation of leaders.

    For more information about remuneration planning and management succession please contact Stuart James or Paul Norris.

  • November 19, 2019

    Towards the wider use of deferred share plans

    Study by the “Purposeful Company”

    The Purposeful Company is an independent voluntary think tank set up in 2015 with the support of the Bank of England to help transform British Business by identifying with like-minded companies changes to policy and practice aimed at creating long-term value. The think-tank has published extensively on policy matters relating to Executive Pay, Corporate Governance and Investor Stewardship.

    In October 2019, it published a report which considered the use of deferred share plans by British companies. Increased use of such plans was the main recommendation of the Investment Association Working Group in July 2016 (a body comprising investors and major companies, to address the future of executive remuneration which was seen by many commentators to be broken). The Working Group’s headline recommendation was to simplify pay structures and get away from existing long-term incentive plans which were recognised as not working effectively for most companies. Shareholders wanted companies proactively to consider whether alternative performance incentives may better align pay with a company’s strategy.  In particular the earlier report sought to encourage the use of Deferred Share Plans, such as restricted stock plans, in preference to the ubiquitous Performance Share Plans (LTIPS). The latter were considered to be the cause of undue complexity in executive pay packages.

    In the three years since this report, very few companies have taken up this recommendation.  Only about 5% of FTSE 350 companies use them.  This new report seeks to address this problem and re-open the initiative – to find out if there is still support for greater adoption of deferred share plans amongst investors and companies (there is), to explore further their benefits and to find what the barriers are to wider adoption.  The report is in two parts – the Key Findings and Recommendations and the Full Report.

    The report steering group comprises five people, mostly business school academics.  They engaged with over 100 organisations (asset owners, asset managers, companies, proxy advisors and remuneration consultants) and reviewed the experience of 19 companies that are currently operating deferred shares. Three-quarters of investors and companies believe that deferred shares are the best approach in the right circumstances. Deferred shares include restricted shares (awards of shares with no further performance conditions, other than possibly a minimum performance underpin condition prior to vesting) deferred bonuses or performance-on-grant awards.  For full effect the deferral should be very long-term and ideally include a period when the executive is no longer in the role.

    Academic research in the UK and the US indicates that share ownership alone can provide sufficient motivation to increase share value.  There is also evidence that companies using restricted stock outperform those using LTIPs. It is not necessary to have performance hurdles. However, not everyone accepts this view and there is, potentially, considerable resistance to the introduction of a deferred share plan. Whilst such a plan is simpler than an LTIP, there is likely to be a lot of work and consultation persuading shareholders and proxy agencies that it is a measure to support.  The two reports provide a lot of evidence and recommendations to help companies that wish to implement a plan.  They consider that IA guidelines and proxy advisor guidelines will be revised in time for the 2021 season and companies planning a deferred share plan can use this to set their timetable for change.

    For further information contact Damien Knight or Stuart James.

  • October 25, 2019

    MM&K has published its 2019 Survey Report on Compensation in the UK and European Private Equity and Venture Capital Fund Management industry.

    Nigel Mills reflects on some of the key findings in the Report which supports the hypothesis that this sector is in boom times.

    On 14th October MM&K published its 2019 European Private Equity and Venture Capital Compensation Report. The Report is derived from the Survey that we conducted in the year into pay and incentive practices in the European PE and VC fund management industries. This is the 25th consecutive year that we have conducted a survey of this kind. This year we collected data from 44 different European PE and VC fund management firms who provided us with data on 1,700 incumbents.

    This is our most comprehensive survey for a number of years (since 2008) and it has provided us with another fascinating insight into the world of private equity and venture capital fund managers’ pay.

    The 44 firms can be broken down as follows in terms of investment strategies:

    (i) Buyout, mezzanine, growth capital and infrastructure – 23 firms;

    (ii) Venture capital – 16 firms; and

    (iii) Fund of funds and secondaries – 8 firms.

    Three firms invested in more than one strategy.

    Some of the key findings from the survey are set out below.
    The headline takeaway is that the market for top quality talent in the sector remains extremely competitive. We see that the sector generally is booming with a large number of firms recruiting, either with a view to simply increasing their headcount to deal with the strength of the business pipeline or in some cases to move into the sector for the first time.

    About 67% of firms across all investment strategies reported increasing their investment staff numbers (100% of Venture Capital firms) and, 56% their support staff in 2018.

    Around 75% of firms are expecting to increase the number of their investment professionals in 2019, and about 58% are expecting to increase their back-office staff numbers.

    The median 2017 to 2018 increase in total short term cash for investment professionals across all investment strategies ranged from 19% to 40% depending on grade, with the more junior positions seeing the largest increases in take home pay. Within these figures it was the more junior positions in the venture capital houses who fared best of all, although across the board Associates and Analysts all saw healthy increases in their take home pay. Part of these increases were the result of generous increases in base salaries (typically between 6% and 12%) but the main component was the increases in bonus levels.

    The reason why the more junior roles seem to be seeing the largest increases in their bonus levels is, we believe, a recognition by their bosses that these individuals are the future lifeblood of the business, the rising stars and perhaps the most difficult to retain given the competitive market that they are in.

    We are not surprised to see the venture capital investment managers having such large increases in their bonus levels for the 2018 performance year. VC generally had a great year in 2018 with venture capital funds raised in the year exceeding previous highs.

    Also, in the UK, venture capital investment increased by 21%, more than double what it was in 2015. 698 companies were venture-backed: a 44% increase.

    In contrast to management buyouts which seem to have had a bit of a slowdown, the venture capital industry appears still to be booming with European VCs still deploying capital at a record pace. The total amount of venture capital invested in European companies was up 61% in in the first half of 2019.

    It is not surprising to see that over 40% of firms are expecting their bonuses to be paid to their investment professionals for 2019 performance to increase again over 2018. And no firms are expecting bonus levels to fall, either for partners or non-partners.

    Next month we will provide some further commentary on the findings from our European Report and also from the North American Report which has also recently been published.

    Readers wishing to obtain more information on this survey should contact Nigel Mills or Margarita Skripina.

    MM&K has had a particularly busy year advising alternative investment management firms on their pay levels and remuneration structures. Our clients this year have included family offices, buy-out and venture capital fund managers and infrastructure fund managers.

  • October 25, 2019

    Global Trends in Corporate Governance – new research by MM&K and our partners in the GECN Group

    The global investment landscape is changing. Investors are under increasing pressure to consider carefully the long-term sustainability of their investments and to demonstrate that their engagement and investment strategies are designed and executed with the best interests of the end-beneficiaries in mind. The revised UK Stewardship Code, published on 24 October is evidence of this. Consequently, investors are making more demands from their portfolio companies particularly in the area of engagement.

    MM&K, together with our partners in the GECN Group (Global Governance and Executive Compensation Group) recently interviewed 25 global investors to understand the issues which are of most concern to them, their views on the way companies engage and their thoughts about the most important future trends.

    Board effectiveness is a key issue for investors and from Australia and Asia to the EU, UK and US, three high-profile issues consistently emerged in connection with environmental, social, and governance (ESG) concerns:

    (1) Climate change

    (2) Human capital and diversity

    (3) Executive pay.

    During the interviews, investors expressed deep concerns that corporations are not providing enough transparency in their disclosures to show alignment between shareholder, other stakeholder and executive interests on these issues.

    The research highlights the importance of corporate responsiveness and engagement with investors and provides insights into the areas in which investors and other stakeholders are challenging corporations and governments to look beyond shareholder value and “do the right thing”.

    The report on this research, which also identifies approaches companies can usefully adopt to gain most value from their investor engagement programme, will be available shortly. An executive summary is available now. To receive your free copy, please click the link below.

    For more information, please contact: Margarita Skripina or Paul Norris.

    Click here to reserve your free copy of the executive summary

  • October 25, 2019

    FRC’s transition to ARGA sailing into in the Doldrums

    In our July Newsletter, we wrote about the Financial Reporting Council’s (“FRC”) programme of transition into the Audit, Reporting and Governance Authority (“ARGA”), a statutory body with enhanced regulatory powers to address corporate governance failures and audit malpractice.

    What, if anything, has happened in the meantime to demonstrate progress? This is, clearly, a question exercising Sir John Kingman, whose 2018 report was severely critical of the FRC and was the catalyst for its transition to ARGA. But the recent Queen’s Speech contained no reference to the legislation required to provide statutory underpinning for ARGA and to bestow the powers it needs to operate effectively. This has prompted Sir John to write to BEIS expressing concern that this omission will allow the FRC to drift along in a toothless, half-reformed state.

    That is not to say that no progress has been made and Sir John Kingman recognises this. Former HMRC CEO, Sir Jon Thompson and former GlaxoSmithKline CFO, Simon Dingemans have taken-up their roles as CEO and Chair respectively of the FRC (ARGA), in place of Stephen Haddrill and Sir Winfried Bischoff. Simon Dingemans is also a former partner at Goldman Sachs. Both new men have strong financial and commercial credentials, augmented in Sir Jon Thompson’s case by leading roles within Government departments – an indication perhaps that ARGA’s new leadership team is unlikely to have any trouble managing relationships with company boards, auditors or Government.

    The FRC’s goal is to recruit an additional 80 employees in 2019/20. Its 2018/19 Annual Report indicates that the Enforcement Team has been increased by 25% to deliver more timely and effective enforcement of audit standards. Whilst audit may grab the headlines, the FRC’s remit extends far beyond, including the UK Corporate Governance Code, to which far-reaching amendments were made in 2018 and the Stewardship Code.

    On 24 October, the FRC published a “substantial” and “ambitious” revision to the Stewardship Code. The revised code, which comes into force on 1 January 2020, extends to service providers as well as asset managers, to help the investment community develop and align a consistent approach to stewardship.

    Signatories’ annual reports must describe their stewardship activities across all asset classes (including alternative investments) wherever situated and the results of those activities, including engagement and their voting records. Signatories will also be expected to take ESG factors into account and will be required to explain their investment strategy and culture, and how they relate to their stewardship activities. Finally, signatories will be expected to work together with regulators and industry bodies to identify and manage systemic risks.

    This signifies a move towards greater transparency, which is to be applauded. However, it also means there will be a greater workload, which will require higher resource levels. And importantly, if the FRC is to operate as an effective partner and regulator (not only for the investment community but for UK companies and audit firms, as well) it must also have the legislative underpinning as recommended by Kingman. This raises questions about the incursion of political bias into the equation and the need for adequate safeguards, but the path has been laid and the failure to include proposed legislation in the recent Queen’s Speech leaves the FRC potentially becalmed as a regulator without the teeth to deliver its remit. If that comes to pass, all the good work may count for nought.

    To discuss any points arising from this article, please contact: Paul Norris.