Getting in is easy. But are you sure you know how you are getting out?

Getting in is easy.  But are you sure you know how you are getting out?

The recent changes proposed by the FCA due to the Woodford Investments situation should be an important reminder to private companies as well as listed ones

Recently, the FCA advised that it would finally be going ahead with a rule change that it proposed last October. Under this change of rules, a new investment category of ‘funds investing in inherently illiquid assets’ (FIIA) will be created. Funds that fall into this category will be subject to additional requirements, including increased disclosure of how liquidity is managed.

Whilst these changes will not come into effect until 30 September 2020, it is worth considering whether your business – and in particular any privately held, owner led businesses – would fall into this definition of a FIIA (despite being unlisted).

Without doubt, long term incentive plans (“LTIPs”) are important in all companies and businesses as a tool to assist with both long term retention and productivity. Studies undertaken into this area show that the mere act of having some form of LTIP increases retention by about 1/3rd.

However, it is the prospect of a meaningful pay out under an LTIP which can be the motivating factor for many executives and employees.

Unfortunately, over the past few years, we have seen many LTIPs which are ultimately ineffectual because there is no practical and cost effective way for payments to be made – the most typical example of this is where a private company issues shares but there is no subsequent sale of the business to third parties. The individual is left holding a share which will not have any value unless the existing shareholders (directly or via the company or an EBT) purchase the shares – methods which may not be popular due to the increased costs involved.

Should you consider that your LTIP might have fallen into this category, there are incentive structures that could still deliver your key commercial aims.

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

New UK Stewardship Code comes into force on 1 January 2020

New UK Stewardship Code comes into force on 1 January 2020

The Financial Reporting Council (FRC) has made significant changes to the UK Stewardship Code which will come into effect in January 2020. The Code will then require Investment Companies to report annually on their “stewardship activity”.

Changes to the code include:
• Extending the Code to include asset owners (pension funds and insurance companies) service provides and asset managers
• Annual reporting on stewardship activity (including voting records in their investee companies)
• Particular emphasis on environmental, social and governance factors during decision making
• Asset owners laying out their stewardship across different asset classes (including investments outside of the UK)
• Setting out stewardship practice within the organisation including how they have demonstrated this in the previous year

The full code can be downloaded from the FRC here

Nigel Mills will be giving his views on how this may effect asset owners including in particular Private Equity Fund Managers in our November newsletter. To sign up for our newsletters please click here.

Board Effectiveness: the next lever of value creation

Board Effectiveness: the next lever of value creation  

Increasingly investors look into how organisations are governed and how effective the top decision-making bodies of organisations really are. In this white paper, Dr Sabine Dembkowski of better Boards Ltd, sheds light on research findings and reveal the seven hallmarks of effective boards. The seven hallmarks are proven to create more effective boards and are set to be the next lever in the value creation process. Read more or contact Paul Norris for further information.

Issues which are of most concern to investors and how they are dealing with them

Issues which are of most concern to investors and how they are dealing with them

MM&K is the UK member firm of the Global Governance and Executive Compensation Group (GECN), a consortium of independent advisory firms specialising in executive compensation and corporate governance and jointly serving clients in more than 30 countries.

As investors are demanding more today than ever before from the companies in which they invest their capital, successful engagement between corporates and investors is an essential element of good corporate governance.  GECN is about to publish a report on Global Trends in Corporate Governance: Investor Expectations in Corporate Governance and Executive Compensation, which examines investors’ perspective on these and other issues that are important to them, and how they are raising these issues as part of their engagement with their portfolio companies.

The report’s contents are based on feedback obtained from 25 comprehensive interviews with some of the largest asset owners and managers, including both active and index investors, as well as organisations which advise them.

In addition to direct quotes from participants, the report also includes an analysis of quantitative data relating to corporate governance practices and the differing approaches investors take when they feel management and the board fail to address their concerns.

Using the interview feedback, the report identifies seven approaches companies can adopt to help ensure that their investor engagement is both constructive and successful.

This research provides a global and regional perspective on the issues of greatest importance to investors and suggests how corporates can anticipate these issues and respond to them in the most effective manner.

To obtain a copy of the report or to discuss corporate governance and investor engagement in general, please contact Paul Norris.

The World of Private Equity and Remuneration Therein

The World of Private Equity and Remuneration Therein

The private equity world continues to come up with ever more impressive and somewhat surprising stories.

In the last few days EQT, the Swedish private equity fund management group has IPO’d on the Swedish Stock Exchange, valuing the business at an astonishing €7bn. The shares made an impressive debut, gaining more than 30% in their first day of trading. The offering, more than 10 times oversubscribed and priced at the high end of its range, is one of the largest—and most successful—involving a private equity firm in years. The firm raised close to €1.3bn from the public listing.

EQT manages around €40bn of assets on the behalf of investors, and reported €295m of revenue for the last six months to end of June.

In another story, the word on the private equity street is that Blackstone’s eighth flagship buyout vehicle has raised a record $26 billion – yes $26billion!

And in another story that came out this month, US private equity firm Advent International has won their takeover bid to acquire the FTSE 250 defence and aerospace group Cobham for $5bn (£4bn) after months of negotiations.

There certainly seems to be no slowing down of private equity activity, whatever the doom-mongers are saying about the world economy. The same can be said also for the world’s venture capital community which is also thriving, with record numbers of deals being done and fund raising too.

And to add even more excitement to the alternatives fund management space, a recent headline in an alternative assets’ news publication stated that “A ‘Golden Age’ of infrastructure fundraising is upon us”.

In our minds, all this activity in the PE, VC and Infra space can mean only one thing for remuneration levels in these industries. They are going up and quite a bit faster than the average rate of wage inflation.

With the raising of more and more and larger and larger funds, the fund managers themselves will be receiving greater revenues from management fees. No doubt they will also be looking to recruit more investment professionals.

But perhaps more importantly, these entities will also be in a position to offer larger amounts of carry at work to their partners and managers.

So there is likely to be a dual impact on pay and incentive levels in the industry. Many firms will have more to spend on remuneration. But there will be a scarcity in the supply of talent, especially at the junior partner and investment director levels.

MM&K will be publishing the findings from our PE and VC compensation survey in October. We are pleased to report that we have had the largest number of firms participating that we have had since 2008. We are sure that this is in some part to do with the fact that firms are concerned about their pay levels, particularly for their senior and mid ranking investment professionals.

We look forward to summarising some of our findings from this survey in our next newsletter.

For further information contact Nigel Mills.

“Diversity is not just a female issue”. Are you missing easy opportunities to improve performance and productivity?

“Diversity is not just a female issue”. Are you missing easy opportunities to improve performance and productivity?

In the summer, as part of its wider remit on governance, the Financial Reporting Council (“FRC”) launched the Female FTSE Board Report, created in conjunction with Cranfield University. The central theme was the advantages of diversity for everyone.

As the Director-General of the CBI, Carolyn Fairbairn states in the Report:

“The case for workplace equality is watertight: companies with diverse boards perform better. Embracing diversity is one of the greatest opportunities available to businesses today”.

However, obtaining diversity needs to be more than just having an underrepresented group on the short list for a particular role. All too often, there are wider structural considerations which make hiring on a diverse basis more difficult and expensive.

Areas which are often overlooked can include:

– Recruitment policies. Has the need for “ease” or “efficiency” in the recruitment process meant that the talent pool you are choosing from is less diverse from the outset?

– Working practices. Rigid working structures, focused on “being present” may stop people (both men and women) applying for roles as they require more flexibility to meet their wider commitments.

– Performance reviews. Are you measuring for diversity?

Changes made within an organisation that encourage a more diverse workforce will assist greatly in creating a diverse leadership team in the future.

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

Updates to the GC100 Directors’ Reporting Guidance for 2019

Updates to the GC100 Directors’ Reporting Guidance for 2019

The GC100 is an industry group for general counsels and company secretaries working in FTSE 100 companies. As part of their work, they produce the “GC100 Directors’ Remuneration Reporting Guidance”.

The Guidance is a useful tool for anyone in a mid-sized or large listed company who has to produce a Directors’ Remuneration Report. Despite a substantial revision in 2018, there have been further changes in 2019 – following to the introduction into UK law of the Shareholder Rights Directive (SRD II).

Key changes to the guidance include:

• Extension of coverage to include those considered to be CEO or Deputy CEO, even where they are not appointed as directors (paragraph 2.1).

• Regulatory definitions for the employee comparator group and directors that are required when calculating percentage change in pay (paragraph 3.8).

• Discussion of the measures which may be taken to avoid or manage conflicts of interest in relation to determination, review and implementation of the remuneration policy (paragraph 4.2).

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

Latest statistics for all-employee share plans

Latest statistics for all-employee share plans

ProShare issued its Save-As-You-Earn (SAYE) & Share Incentive Plan (SIP) Report in respect of the 2018 calendar year on 25 June 2019.  HMRC published its latest statistics on tax-advantaged share plans for the tax year 2017-18 on 27 June 2019.

This article extracts details from the two data sources about current practice for these two tax-advantaged all-employee share plans.  Figures differ between them due to differences in the time periods and samples of companies.


Number of companies operating SAYE

Both sources give three sets of figures about the number of SAYE schemes in place.  But both show that about 300 companies actually granted SAYE options during the latest year.  (This represents a substantial fall from the more than 1,000 SAYE schemes operated throughout the 1990s.)

Terms of SAYE offers (ProShare)


Although SAYE legislation allows a qualifying period of up to five years, most companies either have no eligibility period at all or only require up to three months of service.  They apparently take the view that a commitment to save for three or five years is more relevant than past service.


During the year, 82% of companies offered an option exercise price at the maximum permitted 20% discount.

3-year versus 5-year options

64% of companies offered 3-year options only, with the remainder offering a choice of 3-year and 5-year options.  In practice, 86% of options granted during the year were for three years.

Employee participation in SAYE (grants during the year)

The higher number of grants from the ProShare figures suggests that some of these options may not have been tax-advantaged or were granted to overseas employees.

We estimated monthly savings from the HMRC data assuming the same division between 3-year and 5-year options as reported by ProShare.


Number of companies operating SIPs

The figures show that about 80% of the companies awarded Partnership Shares and about two-thirds of these also awarded Matching Shares.  Just over a quarter of the SIPs awarded Free Shares.

HMRC figures show that more companies awarded Dividend Shares than other types of award because entitlement to Dividend Shares continued for past awards even if companies made no new offers in the current year.

Terms of SIP offers (ProShare)


The SIP legislation allows an eligibility period of up to 18 months before the award date for Free Shares.  This enables companies to make awards only to employees who were employed for a complete financial year.  Despite this, more than 60% of companies either have no eligibility period at all or set it at less than 12 months.  This suggests that most companies use Free Shares as a future retention tool, as opposed to a profit share which rewards past performance.

ProShare does not report eligibility periods for Partnership Shares.  In our experience, as for SAYE, there is usually either no eligibility period or a maximum of three months.

Matching ratio

The SIP legislation allows companies to match each Partnership Share (bought with employee contributions) with up to two Matching Shares.  The ProShare report shows the following range of market practice.

70% of SIPs with Partnership Shares either offer no Matching Shares at all or a matching ratio of less than 1 for 1.

Employee participation in SIPs

In the above table, the HMRC figures for annual awards of Partnership and Matching Shares have been divided by 10 on the assumption that most (but not all) awards of these types of shares are made monthly.  However, the ProShare participation levels suggest that a higher proportion of Partnership Shares are now acquired only once a year and that the HMRC figures should only be divided by, say, 5.  (An alternative explanation is that the ProShare figures include some non tax-advantaged awards and those made to overseas employees.)

ProShare reports that 26.5% of companies offering Partnership Shares allow lump sum contributions and 12% operate an accumulation period, instead of monthly purchases.  This may suggest a trend towards awards being made less frequently than once a month.

The HMRC figures in £ above for Partnership and Matching Shares represent the average value of shares awarded on each award date (whatever the frequency).  Nevertheless, the average Partnership Share award value of £100 is close to ProShare’s average monthly contribution of £99.

For further information please contact Mike Landon.

Government response to BEIS Select Committee

Government response to BEIS Select Committee

The Business, Energy and Industrial Strategy Committee of the House of Commons (the BEIS Select Committee) published on 26 March a further report on Executive Rewards.  It contained 16 recommendations to Government.

The Government’s response to the report (HC2306) was published on 13 June

The Select Committee comprises six Labour MPs (including the Committee Chair, Rachel Reeves) five Tory MPS and one SNP MP.  Not surprisingly, the Committee’s conclusions and recommendations on executive pay and corporate governance reflect the political balance of its membership. It starts with an acceptance that executive pay is disproportionate and not linked to performance and that differentials are growing; it looks for measures to control and reduce executive pay, particularly using new powers to be given to the new Regulator due to replace the FRC.

The Government’s response is measured and, whilst it “welcomes” the Committee input, it accepts practically none of the recommendations.  Its position is that a lot of corporate governance changes have been introduced in the past 18 months: a revised UK Code, a new set of corporate governance disclosures including the pay ratio publications; most recently changes to the Directors’ Reporting Regulations to comply with the requirements of the Shareholder Rights Directive II.  In parallel the IA “name and shame” register has been introduced as have the Wates principles for private companies.  It wishes to allow these measures to bed down and be appraised before introducing any new measures.  It also takes the view that the requirements of companies and shareholders vary widely and changes are principally a matter for shareholders, not government prescription.

MM&K believes this is a sensible response.

Particular recommendations and responses include the following:

Further recommendations for change (e.g. on pension contribution alignment and revisions to the Stewardship Code) appear to be already under way.

For further information, contact Damien Knight.

2019 Global Trends in Corporate Governance– progress update

2019 Global Trends in Corporate Governance– progress update

GECN is a group of independent firms, specialising in advising corporate clients on executive compensation and good governance. GECN member firms have offices in London, Geneva, Zurich, Kiev, Singapore, Melbourne, Sydney, Los Angeles and New York. MM&K has been the UK member firm since 2015

For a few years now, GECN has conducted annual research on trends in corporate governance and published reports on its findings.

Our reports address such topics as executive compensation, board structure and composition, and shareholder rights and give a truly global outlook on the trends in corporate governance. The 2018 Report covered 19 countries across six continents and we are aiming just as high this year.

The 2019 Report will focus on investor perspectives about executive compensation and corporate governance, and on where investors will be directing their attention in 2019 and beyond. GECN member firms have already completed 25 in-depth interviews with leading institutional investors, proxy advisers and investment funds to identify current investor concerns and trends for the future.

We are preparing the first draft of the 2019 Report and aim to publish the 2019 Global Trends in Corporate Governance Report by the end of August or early September.

To request a copy of previous Global Trends in Corporate Governance Reports or for further information please contact Margarita Skripina.