FRC strengthens Stewardship Code

FRC strengthens Stewardship Code

The Financial Reporting Council has published a consultation paper on a new Stewardship Code that sets substantially higher expectations for investor stewardship policy and practice.  The proposed changes call for higher transparency regarding institutional investors’ stewardship activities and encourages more engagement with issuers (ie companies).  The FRC and the FCA have also published a discussion paper “Building an effective regulatory framework for stewardship”.

Among the proposed changes to the Stewardship Code, which broaden its scope and require signatories to make public disclosures about their stewardship activities, there is an increased focus on the societal purpose and responsibilities of investment institutions.  There are explicit links to the new UK Corporate Governance Code, which came into effect this year, as well as the EU Shareholder Rights Directive II, expected to be implemented in May.  Behind the scenes, the US Stock Exchange Commission hosted a roundtable on the proxy process in November and BlackRock’s Larry Fink’s letter to CEOs last month encourages companies to establish a purpose and embrace their social responsibilities.

The proposed changes have significant consequences for investment organisations and the companies in which they invest.  MM&K will be studying the new Code and researching the context surrounding it in depth.  We will be publishing our insights and guidance for boards of directors in next month’s newsletter.

Contact Harry McCreddie for further information.

Companies’ social purpose

Companies’ social purpose

Over the last few years we have seen companies come under increasing scrutiny from the public, media and politicians.  In response, we have seen a new Corporate Governance Code, new disclosure regulations and extra requirements for investors.  One theme that has emerged is a new emphasis on companies’ social responsibility.  This trend has the potential to shape the corporate landscape as well as impacting wider society.

In July 2018, the UK Corporate Governance Code was updated, applicable to accounting periods from 1 January 2019.  The new Code requires companies to consider their contribution to society.  Principle A used to state that “Every company should be headed by an effective board which is collectively responsible for the long-term success of the company”.  In the new Code it is now “A successful company is led by an effective and entrepreneurial board, whose role is to promote the long-term sustainable success of the company, generating value for shareholders and contributing to wider society”.  The UK Corporate Governance Code is not alone in this assertion.  The QCA Corporate Governance Code, tailored for small and mid-size quoted companies, also advocates social responsibility.  The Code’s third Principle is “Take into account wider stakeholder and social responsibilities and their implications for long-term success”.

Larry Fink, Chairman and CEO of BlackRock, the world’s largest investment management corporation, published his annual letter to chief executives last month.  The letter focuses on corporate purpose, with the theme following on from last year’s letter in which he posits that society is losing faith in governments’ ability to address social and economic issues and “increasingly is turning to the private sector and asking that companies respond to broader societal challenges”.

This year’s letter continues the theme. It states “Trust in multilateralism and official institutions is crumbling”, and reiterates that “Society is increasingly looking to companies, both public and private, to address pressing social and economic issues”.  Fink also urges companies to define their purpose beyond profit.  “Purpose is not the sole pursuit of profits but the animating force for achieving them … profits are essential if a company is to effectively serve all of its stakeholders over time – not only shareholders, but also employees, customers, and communities.”

Although Fink proclaims that society has lost faith in governments and is now looking to businesses, there are many who would argue that companies have lost the public’s trust as well.  In an article for the Financial Times, Standard Life Aberdeen’s Keith Skeoch writes that trust needs to be restored in businesses, citing Carillion and Lehman Brothers as examples of corporate failures that have done long-lasting damage to workers and communities.  He also argues that “asset managers need to recognise that what is good for equity shareholders is not always in the interest of everyone who matters”.  He notes that this is a big shift, “since the 1930s investors have believed that what is good for equity shareholders is also good for the corporation and other stakeholders”.

There are others who are pushing for investment institutions to fulfil a societal purpose, namely through stewardship of the companies they hold shares in.  In a Financial Times article on stewardship, Catherin Howarth and Paul Dickinson of ShareAction reason that “effective stewardship of companies is not simply a tool to enhance long-term financial returns, it is the central device by which investment organisations can deliver on their purpose in society”.  They point out that “big investors are strongly placed to encourage boards to invest in people through fair wages, adequate opportunities to learn and train, better health and safety and preparing workers for the future”.

So what is meant by a company’s social purpose?  The UK Corporate Governance Code says “businesses underpin our economy and society by providing employment and creating prosperity”.  It would seem that businesses should make decisions that will benefit their workers well into the future.  This could mean having reasonable pension schemes in place, avoiding ‘short-terminism’ and taking responsibility for the environment.  Larry Fink says companies are responsible for issues ranging from protecting the environment, to retirement, to gender and racial inequality.  There is a clear trend towards companies being held to standards beyond simple financial returns, and that this will be enforced through the ever-tightening regulatory requirements.

Last month the Financial Reporting Council published a consultation paper on a new Stewardship Code.  The proposed changes include a new definition of stewardship, which says that investors should “create sustainable value for beneficiaries, the economy and society”.  We will be publishing an article on the consultations next month.

The changes we are seeing will have a significant effect.  It is crucial that boards of directors are aware and prepared for new regulatory changes and shareholder expectations.  MM&K is a leading advisor with a wealth of experience providing advice to remuneration committees on a range of issues surrounding corporate governance and regulatory requirements.

For queries and further information, please contact Harry McCreddie

Update on the changes announced in the Budget to the rules for entrepreneurs’ relief and their impact on employee incentives

Update on the changes announced in the Budget to the rules for entrepreneurs’ relief and their impact on employee incentives


In the Autumn Budget, the Chancellor had announced that the definition of ‘personal company’ for the purposes of ‘entrepreneurs’ relief’ for capital gains tax purposes would be tightened so that, with effect from 29 October 2018, a company will qualify as a ‘personal company’ only if, in addition to the existing requirements relating to share capital and voting rights, the individual is also beneficially entitled to at least:

• 5% of the company’s distributable profits, and

• 5% of its assets available for distribution to equity holders on a winding up.

Amendment to the proposed definition of ‘personal company’ in the Report Stage

In the Report Stage in the House of Commons, an amendment was made to the definition of ‘personal company’, effectively relaxing the requirements proposed in the Autumn Budget (see above).

The amendment would enable an individual to qualify for entrepreneurs’ relief on disposal of shares on or after 29 October 2018 if, in addition to the existing requirements relating to share capital and voting rights, the individual is beneficially entitled to either (or both) of the following:

• 5% of the company’s distributable profits and, on a winding up, 5% of its assets available for distribution to equity holders;

• 5% of proceeds in the event of a disposal of the whole of the company’s ordinary share capital (“5% Proceeds Test”).

For the purposes of determining whether the 5% Proceeds Test is met, the following three assumptions apply:

• the whole of the ordinary share capital is disposed of for market value consideration

• the individual’s share is what the individual would be beneficially entitled to at that time

• the effect of any tax avoidance arrangements would be disregarded.

How does this change affect employee incentives?

The position of EMI Option holders, including holders of EMI Options over ‘growth shares’, remains the same as before i.e. EMI Option holders continue to enjoy the benefits of entrepreneurs’ relief on the disposal of their qualifying shares.
In respect of other employee shareholders, for example, holders of ‘growth shares’ (holding 5% of the issued share capital with voting rights), while the amendment is certainly a relaxation on the changes to the rules originally announced in the Autumn Budget, most such employee shareholders are unlikely to benefit from it.

For more information on employees’ share schemes contact Mike Landon 


Executive Director Pensions and Post-Employment Shareholding

Executive Director Pensions and Post-Employment Shareholding

Our December e-news described the new Investment Association (IA) Remuneration Principles published on 22 November 2018.  On 23 January 2019, the IA announced the specific approaches which IVIS will take at AGMs in 2019 on two of its new requirements: Executive Director Pensions and Post-Employment Shareholding Periods.  These apply to companies with year ends on or after 31 December 2018.

Executive Director Pensions
The new Principles recommend that pension contribution rates for executives should be aligned with those available to the rest of the workforce.  The IA has announced that, to avoid a “Red top” header:

• New Remuneration Policies seeking shareholder approval in 2019 should make it explicit that any new appointees will have their pension contributions set in line with those provided to the majority of the workforce; and

• New appointees from 1 March 2019 must not have pension contributions at a higher level than a majority of the workforce.

Resolutions to approve Remuneration Policies and Remuneration Reports will be “Amber topped” if an existing Executive Director receives a pension contribution of 25% of salary or more.
Companies are asked to disclose the pension contribution level which they consider to be available to the majority of the workforce and to confirm whether or not contributions to Executive Directors are at that level.

Post-Employment Shareholdings
The new Principles recommend that companies should require Directors to continue to meet shareholding requirements for a period of at least two years after their employment ends.  The number of shares to be held should be not less than the lower of the company’s shareholding requirement in force immediately before leaving and the Director’s actual shareholding at that time.

The IA has announced that if there is a Remuneration Policy vote this year it should include post-employment holding periods in line with these new Principles; otherwise the Policy will be “Amber topped”.

A “Red top” header in IVIS reports shows the strongest level of concern.  An “Amber top” header raises awareness to particular elements of a report.

Contact Mike Landon or your usual MM&K contact for more information on 020 7283 7200.


New Financial Reporting Lab report on Performance Metrics – what Remuneration Committees should take away

New Financial Reporting Lab report on Performance Metrics – what Remuneration Committees should take away

The Financial Reporting Lab was launched in 2011 to provide an environment where investors and companies can come together to develop pragmatic solutions to today’s reporting needs. The Lab has worked with 65 different companies, 60 investment organisations and over 300 retail investors to bring insight and understanding to a number of key areas of disclosure.

At the beginning of 2018, it launched a project to look at the investor’s perspective of performance metrics. In June, it published a brief report carrying guidance for companies about the way their reports can best serve the needs of investors. In November 2018, it produced a fuller report, Performance metrics – Principles and practice, which contains examples of good practice for various aspects of reporting.

The Lab identifies five principles for reporting, designed to consolidate the views of a range of investors. The findings are of high importance for the choice and application of metrics for management incentive plans and the linkage of the Annual Remuneration Report to the company’s Strategic Report. MM&K has studied the Lab’s findings carefully in order to provide guidance to remuneration committees.

Principle One: Aligned to Strategy

Understanding how the management and board measure the success of its strategy is crucial for shareholders. Performance measures, especially in terms of management incentive plans, provide insight into the company’s business model, strategy, and the potential for creating long-term value.

“Many investors expect a clear link between the metrics used by management to monitor and manage performance and remuneration. Some investors expressed more scepticism about the application of wider metrics on remuneration, as they felt that the boundaries and reliability could be less clear, giving an impression that these could be more easily managed”.

The Lab gives two examples of companies explaining the link between KPIs and remuneration. Great Portland Estates plc present their KPIs with an ‘alignment with remuneration’ narrative, explaining links to annual bonuses and long-term incentives. InterContinental Hotels Group use symbols to identify the link between their KPIs and long-term and annual remuneration.

RemCos should ask themselves:

• Is there a clear link between the metrics that drive our business model and strategy and our remuneration policy?

• Further, do our management incentive plans’ performance metrics clearly link to our company’s strategy and value drivers?

Principle Two: Transparent

“Transparency” is considered a key principle, which adds to understanding and builds credibility. Understanding how metrics are calculated and defined, and clear explanations of why metrics are used and reported, are key to the transparency of a metric.

“There is a range of views about the use of metrics for remuneration that have been further adjusted from the KPIs and metrics reported elsewhere. There is a view among some investors that such adjustments are not appropriate. Other investors are more accepting of ‘adjusted adjusted’ metrics, as they consider that they can help them more accurately assess the value added by the current executives”.

The Lab urges companies to “provide full explanations and justifications for the metrics used to determine remuneration outcomes, particularly where these have been adjusted from metrics disclosed elsewhere”. In terms of management incentive plans, this is essential. If shareholders cannot understand or trust a performance metric, then they cannot use it to reliably assess potential long term value.

RemCos should ask themselves:

• Is it clear to shareholders why management incentive plans’ performance metrics are used and how they drive the company’s strategy?

• Are we transparent about the way in which our metrics are calculated and defined?

Principle Three: In Context

Information that is presented in context allows for an understanding of the positioning of a company. This information could relate to the context of the performance achieved, the context of the company in the market, or some other context-setting which aids an understanding of the company and its prospects.

“Providing information on a company’s aims builds credibility and can help create alignment and understanding of incentives, provided that they do not encourage management to short-term targets. Ranges or longer-term objectives are well received where specific numbers might prove commercially sensitive or difficult to determine”.

The Lab advises that where companies feel they cannot disclose specific targets they may be able to provide ranges and longer-term targets. An example shows Halma plc presenting current targets, a graphical illustration of the past five years performance, and the link to remuneration. Another example comes from Anglo American; they provide information about progress towards their targets.

RemCos should ask themselves:

• Do we explain performance measures in relation to targets and what we actually achieved? Is the reasoning behind incentive plan pay-outs sufficiently explained?

• Do we explain what performance our metrics are trying to achieve in the future, and provide an understanding of our overall long-term objectives?

Principle Four: Reliable

The Lab’s fourth principle, “Reliable”, relates to trustworthiness and credibility. It is about understanding which metrics are used, how they are put together and who has oversight over the process.

Some companies report that strong oversight processes over externally reported information could prevent them from reporting other information that could potentially be of use to investors. The Lab takes the view that just because information is not audited does not mean it is not of interest. Instead of omitting them, explaining the levels of scrutiny to which metrics have been subjected is valuable. Rentokil Initial plc is given as an example, they disclose internal employee engagement scores alongside relevant external metrics from Glassdoor.

RemCos should ask themselves:

• Do we provide an overview of how our management incentive plans’ performance metrics have been developed and monitored to allow investors to assess their reliability?

• Do we outline where we have had oversight and/or considered the appropriateness of metrics or adjustments relating to management incentive plans?

• Do we explain what additional scrutiny may be given to adjusted metrics being used in remuneration?

Principle Five: Consistent

“Consistent” metrics and messaging builds credibility over time. Comparisons with industry benchmarks or standards can allow assessment against a consistent base and help companies present their performance in context. Companies note that certain sectors lend themselves more easily to standardisation and comparison. However, the desire for standardisation may raise a tension for companies that are seeking to tell their story.

Some companies use benchmarks in response to the challenge of comparability. Derwent London plc is provided as an example; they illustrate five-year performance against an industry benchmark. Another, Great Portland Estates plc, also include five years’ worth of data against relevant benchmarks each year.

RemCos should ask themselves:

• Are our performance metrics relating to management incentive plans, especially long term incentive plans, consistent year-on-year? If our metrics have changed, do we provide a clear explanation as to why the change has been made and why the new metric is better? Do we provide comparatives for a number of years?

• Is a track record of performance measures provided? If not, would including one help to justify and explain executive pay to shareholders?

• Are our performance metrics consistent with an industry standard or our close competitors? If not, do we explain why our metrics are more appropriate?

Identifying appropriate performance measures and setting targets for executive incentive plans is essential for a company with ambitious goals. MM&K have extensive experience advising on and designing incentive plans and their performance measures. If you would like to discuss these issues and what they mean for your company, please contact Harry McCreddie


The 5th Annual GECN Conference in Sydney

The 5th Annual GECN Conference in Sydney  – “MM&K continues to develop its global reach”

Between 4th and 7th January, Paul Norris and Nigel Mills attended the fifth Annual Conference of the Global Governance and Executive Compensation Group (“GECN”) in Sydney.

The GECN is a group of independent firms, whose logos appear below, 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.

It is consistent with good corporate governance principles for remuneration committees to have access to high quality independent advice on executive pay. Increasingly, clients need advice which combines best in class local know-how and a deep understanding of policies and practice on a global scale, so a core theme of this year’s conference was how GECN member firms can work even more effectively together to serve this need.

A practical example of GECN’s ability to present a global perspective was the lunch organised by our Australian member, Guerdon Associates, with one of Australia’s largest investment banks, which also has a significant global presence. MM&K advises the bank’s alternative investment arm in London. The lunch was attended by the bank’s Chairman, CEO, Remuneration Committee Chair, Committee members and Global Head of HR. During lunch, GECN members (who, in addition to Guerdon and MM&K, included Farient Advisors, from the USA and HCM, from Switzerland) were able to recount their first-hand experiences of advising other global banking entities in the world’s financial centres on dealing with challenges similar to those confronting our hosts, whose feedback clearly indicates that they found the discussion stimulating and helpful.

Collectively, the GECN gathers and analyses a large amount of data. Swiss member firm, HCM, has established a data collection and analysis centre in Kiev. Recognising the importance of data and its role in providing clients with intelligence and independent advice, conference spent some time considering how best to harness GECN’s collective resources to provide clients with relevant data, intelligence derived from that data and sound, independent advice.

Conference also considered important external issues concerning executive pay and good governance. Ms Pru Bennet, who heads BlackRock’s governance and voting for all Asia Pacific, gave a presentation and answered questions on the challenges and potential in China. Ms Bennet’s colleague, Ms Flora Wang, who has specific responsibility for the People’s Republic of China and Hong Kong, attended by phone to contribute some specific local knowledge. This was a most informative session, which added to our global font of knowledge.

Conference was not all work over a long weekend. It was summer in Sydney (a welcome change from winter in London!) and conference organiser, Guerdon Associates, made sure we had opportunities to enjoy both Sydney’s hospitality and its culture. Next year’s conference moves back to Europe, where it will be hosted by our Swiss member firm, HCM.

To learn more about the services offered by the GECN and MM&K, please contact Paul Norris or Nigel Mills


Wishing all our clients a successful and prosperous 2019

Wishing all our clients a successful and prosperous 2019

Regardless of what happens concerning the UK’s continuing relationship with the rest of Europe as the PM seeks to re-open negotiations, life will continue, decisions will have to be taken, strategies formulated and business plans executed. It’s going to be a busy year. News of potentially the biggest ever gas discovery in the North Sea is good news for the energy sector and the jobs of those who depend on it – albeit amid warnings from environment groups that it is bad news for the climate.

The climate for executive remuneration is also changeable. The forthcoming AGM season promises to be lively. Numbers of listed companies will be submitting their future remuneration policies to a binding shareholder vote after a year which has seen the heat turned up on disclosures, executive pay levels and remuneration committee members, many of whom work diligently within a solid governance framework to ensure their remuneration policies are genuinely fit for purpose.

Remuneration Committee Chairs and committee members will need to prepare thoroughly for this year’s AGM season. A particular challenge will be the edict from the Investment Association that the pension contribution rate for executives must be aligned with the contribution rate for the majority of the workforce. This is the subject of an article in this Newsletter by my colleague, Mike Landon.

Last year, changes were made to the Directors’ Remuneration Reporting Regulations to strengthen the disclosure requirements required by law. The changes come into force for financial year-ends on and after 1 January 2019, which means that most companies will not be required to comply until 2020. However, numbers of companies are taking the opportunity of a dry run in this year’s Directors’ Remuneration Report, which will give them an opportunity to test the waters and to ensure that they are fully prepared for their reports in 2020.

Finally, MM&K has always advocated that remuneration policies and incentive plans in particular, should be designed to meet the specific requirements, business strategy, culture and philosophy of the company. A solid governance framework is essential to provide necessary checks, balances and disciplines but remuneration strategies work best if they are tailor-made.

Current code provisions and investor guidance appear to support this view but attempts by some companies to introduce plans which do not adhere to the norm have failed. There may have been good reason for this. I hope, however, that remuneration committees will not be deterred from adopting policies and plans which are demonstrably fit for the purposes of the businesses whose interests they serve – but which may not conform to a standard template. This will be a challenge for those who chair remuneration committees, who face both internal and external pressures and who must balance the interests of all stakeholders in the business.

Paul Norris

Chief Executive