MM&K News

  • April 17, 2020

    Advice for Rem Com Chairs in the light of Covid-19

    We are now living in the strangest of times, certainly the most difficult that the vast majority of us will have ever experienced. We are, for all intents and purposes, in unchartered waters as far as executive remuneration decisions are concerned.

    However, we at MM&K have seen major economic downturns on a number of occasions in the past and we have learnt something from those.

    We feel very strongly that businesses need during these hard times to try to maintain the loyalty and support of all their employees, including their executives. Companies can do this by treating all their employees fairly and with respect during this period. It is vitally important that when the economic tide turns around and when this pandemic is over, businesses are able to call upon their executives and employees to get back to business at a time when those individuals feel enthusiastic, motivated and appreciative and not when they might all be looking to find a new employer because they felt that the business did not treat them fairly or with respect during the hard times.

    Clearly, each company and each business will be different. Some (the few) may be benefitting financially from the pandemic, such as supermarkets and some pharmaceutical and medical appliance businesses. For these firms one would advise that for their executive remuneration policies, it should be business as usual, albeit with some recognition of the huge extra efforts being put in by executives and staff.

    For other types of businesses, the current situation and the outlook may appear bleak.

    It is for these companies that the following advice and commentary is mainly aimed at.

    Base Salaries

    For those companies with 1 January and 1 April salary review dates, most of these will have agreed and communicated the salary increases (if any) for the current year and these will have been implemented. In general, we have seen very modest inflationary increases in base salaries, typically at the 2% or 3% level, for executive directors. A number of companies with 1 April review dates have made a decision to defer any increase in salaries for six months. We are supportive of companies doing this where their business is suffering and recommend that it should be presented as a deferral and not as a decision to freeze salaries for this year.

    In recent days we have also seen a number of companies decide to reduce the salaries of their executive directors and senior executives on a temporary basis until business is back to normal. Clearly this is happening in businesses where the Government’s enforced lockdown has had a dramatically negative effect such as housebuilders, leisure businesses and non-essential retailers. The reduction in salaries has tended to be in the 20% to 40% range and in most cases it has been structured as a deferral and not a permanent loss.

    Clearly each company will need to react to their own particular circumstances.

    However, for most companies who have reasonable levels of reserves and where their business is able to continue, albeit at reduced levels, we believe that companies should keep paying salaries to executives in full where they can. Even PIRC (Pensions & Investment Research Consultants Ltd, Europe’s largest independent corporate governance and shareholder advisory consultancy) seems to accept this. In a recent letter to all listed companies’ company secretaries it has stated that “PIRC calls on companies to suspend all payments to executives other than basic salaries with effect from 1st April.”


    (a) Bonuses payable for last year’s performance

    For those companies with December year ends, most of these companies will have paid the cash elements of their year end bonuses by now. We are aware though of some companies that have deferred the physical payment of cash bonuses for six months (i.e. to September 2020) and have retained a discretion to defer the payments for longer. This seems sensible for those firms that have been severely impacted by the current situation.

    For most of those companies with March year ends, the decision as to what level of bonuses should be paid and whether they should be paid in the normal timeframe is still to be taken.

    PIRC are suggesting no cash bonuses should be paid from now on.

    We do not agree with this. We do recognise that conserving cash will be an important factor for many businesses, so this may necessitate either a deferral of bonus payments for six or nine months or possibly paying part or all of bonus entitlements in shares, possibly with just a one year restriction on selling.

    We do believe that simply cancelling bonus payments for senior executives because there is some political pressure to do so will not endear companies to their executives in the future. The same applies to all employees. If bonuses have been earned because of historic performance, they should be paid, although if the finances of the business require it, yes of course payments should be delayed. If paying bonuses in shares is an option for companies, we believe that this may be a particularly attractive idea and executives should be supportive of this, especially given that they may consider their company’s share prices to be low at the moment. Institutional shareholders should also be supportive of this approach, recognising that it will help businesses conserve cash as well as further align management’s interests with shareholders.

    For most companies with March year ends, bonus payments for executives are not made until after the company has had its accounts audited and it has announced the results to the market. We would advise remuneration committees to alert executives to the fact that the payment of bonuses this year may be delayed because of the current economic uncertainty, or may be paid in company shares. Remuneration committees could even consider offering executives a choice between deferral or payment in shares, where their remuneration policy allows.

    (b) Setting annual bonus targets for the current financial year

    For those companies with December year ends, they will by now have agreed the short term bonus performance metrics and communicated these to executives. In a large number of companies, these metrics will already appear out of reach.

    For these companies we believe that it will be appropriate sometime soon for the remuneration committee to let the executives know that the committee recognises this and that it will use its discretion to review the bonus metrics at say the half year stage when it will consider whether revised targets aimed at incentivising and rewarding performance in the second half may be appropriate. Of course, it is quite possible that even at the end of June, there may still be no real clarity of what will happen in which case the committee may need to adopt a much more discretionary approach to the determination of bonuses come the year end.

    For those companies with financial years commencing on 1 April, in most cases we would recommend that remuneration committees should refrain from setting any targets for the new financial year until there is some more clarity as to what the effects of the pandemic will be. In the meantime, boards should be focusing on what their short term KPIs are in these circumstances and communicating these to their executives as well as to the wider workforce. It is quite likely that these KPIs will be different to the normal ones that the executives are used to seeing and being bonused on. Committees may wish to communicate to executives that year end bonuses are still possible but will be based more on how successful the company is in achieving these new (and maybe temporary) KPIs.

    Having said all that, remuneration committees will need to take into account that the likes of the Investment Association and ISS will expect to see much lower bonuses being paid for current year performance if the effect of the virus has resulted in a significant fall in profits and / or share price. Likewise, if the company has decided to cut its dividend payments to shareholders.

    LTIP Awards

    In our experience, many companies have held off from making new LTIP awards this year. This would seem sensible. We are in extraordinary times and it is nigh on impossible for companies to predict what might happen over the next twelve months let alone over the next three to five years.

    Most company LTIP rules do allow awards to be made at times outside of the normal periods (typically within thirty days after the announcement of results) and we would suggest that remuneration committees take advantage of this to see if things become a bit clearer over the next two to three months.

    Another complicating factor revolves around what quantum of awards (in terms of number of shares) companies should grant in the current climate where in nearly all cases share prices have come down by such a large amount. Since 2 January, the FTSE All Share index has fallen by nearly 30%, while the FTSE Small Cap has fallen by just over 30%. Institutional investors will expect to see companies not taking ‘full advantage’ of these share price falls by basing award levels on a historically higher share price, or possibly simply on typical historical award levels (in terms of numbers of shares).

    The current circumstances should also provide remuneration committees with an opportunity to consider whether the performance metrics that the company has used previously remain the right metrics for forthcoming awards. Clearly care will need to be taken if the committee decides that the metrics should be different in that this may go against the remuneration policy that has been approved by shareholders. This might lead some companies to change their remuneration policies at their forthcoming AGMs to provide greater flexibility for the remuneration committee in terms of types of LTI awards and the performance measures applying thereto.

    One possible outcome for a number of companies may be a decision to change their LTIP policies more fundamentally and move over to just awarding restricted stock rather than performance shares. It is in these types of situations that the benefits of awarding restricted stock on an annual basis really stands out. The decision each year is much simpler. There is no need for companies and remuneration committees to agonise over the setting of long term performance metrics or for participants to worry that their past awards are now not going to vest because events have occurred which are outside their control. Some companies are considering making this change now. For many they will need to change their remuneration policy to enable them to do this. It is certainly something that we believe remuneration committees should be looking at.

    We will be writing a separate article in the coming weeks on the concept of restricted stock or deferred share awards which we will be circulating to all our contacts.

    All employee share schemes

    The recent falls in share prices will have shocked many employees participating in company share plans. However, those employees in SAYE share option plans should take comfort from the fact that their savings are protected and that they can cash those savings in at any time.

    We would suggest that now may be a good time for companies to think about making a new Sharesave invitation to employees, offering them the opportunity to buy into the company’s shares at an attractive price. We also suggest that for those companies that have not got an all employee share plan, now would be a really good time to put one in. Institutional investors have come out recently suggesting that they are supportive of companies having such plans. It should also be well received by employees, if marketed in the right way, instilling in them a feeling that they are recognised as being extremely important to the business.

    Companies may also take the opportunity of considering the introduction of a share incentive plan (or “SIP”) through which employees may be gifted some free shares (in a tax efficient manner) in recognition of their efforts through these difficult times.

    We will be writing and publishing a separate article in the coming weeks on the subject of all employee share plans which will consider further the relative merits of share incentive plans and SAYE share option plans and how introducing such plans may really help with your employee motivation and engagement.


    If you wish to discuss anything arising from the above commentary, please contact your usual contact at MM&K or if you do not have a usual contact please email any of the following executives:

    Nigel Mills:

    Paul Norris:

    Stuart James:

    Margarita Skripina:


    Please note that this article is intended to be a summary of our thoughts and recommendations for remuneration committees in these most challenging of times. The advice given in it is meant to be of a general nature and whether it is applicable to a particular business or company will depend on that company’s actual circumstances. We cannot accept any responsibility for actions taken by any company as a result of reliance on any statements made in the article.

  • March 31, 2020

    Budget 2020 – some things you might have seen and some of the things lost in the details

    Having had an opportunity to revisit the recent Budget, it really can be seen as being a mix of direct responses to the COVID-19 outbreak, as well as planning for the future (including in a post-Brexit world!).  

    Business Loan Scheme

    Of the measures designed to help with the current situation, one of the most talked about so far has been the creation of the Coronavirus Business Interruption Loan Scheme (CBILS).  

    The scheme is open to almost every UK-based business with a turnover of £45m or.  Interestingly, whilst the budget documentation indicated a maximum loan amount of £1.2m, this has now increased to £5m. 

    The loans are designed for “healthy” businesses who would otherwise be viable business concerns, were it not for the short term effects of the COVID-19 outbreak.

    Whilst the Government has indicated that there is no limit to the funding, the facility is initially only available for six months and, therefore, anyone who qualifies and wishes to benefit from this should consider utilising it sooner rather than later

    Time to Pay

    In comparison to the offer of business loans, one of the measures highlighted under the Budget for immediate effect – HMRC’s “Time to Pay” Scheme – has received less attention.  However, for businesses in immediate difficulties, this may be a much more practicable offering.

    Time to Pay was successfully used in response to flooding and the financial crisis, giving businesses a time-limited deferral period on HMRC liabilities owed and a pre-agreed time period to pay these back. Given that tax liabilities can be a major cost, this may be a real life-line for companies who could benefit from freeing up cash.  Time to Pay arrangements are tailored solutions and, in our experience, can effectively lead to much better cash flow conditions than having to meet third party loan repayment terms.

    Entrepreneurs’ Relief (“ER”)

    In terms of changes with longer term impact, the decision to amend Entrepreneurs’ Relief was perhaps unsurprising – although it will have been a real disappointment for those who following the introduction of this Relief around the time of the last economic downturn have been steadily growing their businesses over the last 10 years.  

    It should be noted that the £1m rate was similar to the levels of the old “Retirement Relief” which it replaced and one would hope that with this reduction, ER will remain safe from further future cutting.  Importantly, the retention of the connection of ER with awards of EMI Options continues to make these important tools in retaining and attracting good people.

    EMI Review

    Finally, it would appear that, as part of the post-Brexit landscape, EMI Options will be used to encourage further levels of innovation and enterprise in the UK economy.  

    It will be interesting to see how these conversations develop and MM&K will participate fully in any Government consultation on this topic.  Changes that we would certainly encourage would be the extension of the plan to larger organisations and to a wider range of businesses.  It would be particularly beneficial to the increasing numbers of companies being financed and owned by Private Equity, Venture Capital and the wider Alternative Investment community,  

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

  • March 30, 2020

    258 non-executive directors share their views on Life in the Boardroom

    Less than half of non-executive directors say they receive timely and adequate management information; yet 79% feel that their Boards are fully effective. These are just two of the key findings from the 2020 Life in the Boardroom survey report, published by MM&K.

    Life in the Boardroom is unique insofar as data is collected direct from individual directors, not from company staff or published media, such as annual reports and accounts. Data for the 2020 report was collected and analysed towards the end of 2019. The survey is published biennially and we will start the process of inviting participants and collecting data for the 2022 report next year.

    The survey is extensive. 258 individual directors representing 517 appointments (of which 210 are Board Chairs) contributed data for the 2020 report. The range of companies represented is correspondingly extensive:

    Directors from 15 industry groupings participated. Financial services; IT, media and telecoms; support services; aerospace, manufacturing and construction are the most widely represented sectors.

    In addition to information about fees and fee movements, the 2020 Life in the Boardroom report includes data on share ownership, time commitments and the activities on which time is spent. It also contains insights into individual directors’ views about Board appointment practices, Board effectiveness, development and evaluation and governance (including engagement with shareholders and proxy agents, executive remuneration and the consideration of ESG factors). Life in the Boardroom is able to include these insights because we collect data direct from individual directors.

    The 2020 Life in the Boardroom survey report is now available. In return for providing their data, each participating director receives a complimentary copy. Non-participants and companies can purchase a printed copy of the report.

    To purchase a copy of the 2020 Life in the Boardroom survey report, please click here

    For further information about Life in the Boardroom, please contact Margarita Skripina or Paul Norris.


  • March 30, 2020

    The gender pay gap is narrowing. However, females are still under-represented at the more senior management levels especially in male dominated sectors

    The Gender Pay Gap Regulations, known as the Equality Act 2010 (Gender Pay Gap Information) Regulations 2017 came into force in the UK in April 2017. The regulations require all private and non-governmental, nonprofit organisations with 250 or more employees to publish data on the average difference between the pay of men and women.

    The introduction of the regulations has resulted in a decrease in the Gender Pay Gap on average across UK companies. For example, the Gender Pay Gap halved from almost 20% in 1997 to 8.9% in 2019 among full-time employees (Source: ONS).

    Source: Office of National Statistics (ONS), Statistical bulletin Gender pay gap in the UK: 2019

    The reasons for the narrowing of the Gender Pay Gap vary but the main ones are:

    Improvement of workplace flexibility (part-time work, remote working, job sharing etc.);
    Encouragement of Shared Parental Leave;
    Recruitment of career returners (recruiting individuals who have taken an extended  career break due to caring responsibilities or other reasons);
    Internal targets to ensure employee equality goals.

    The Gender Pay Gap among full-time professional occupations, skilled trades and administrative/secretarial occupations has notably decreased by nearly 2 per cent in 2019 compared to 2018, according to Office for National Statistics (ONS). In contrast, the Gender Pay Gap widened among the high-paying managers, professionals and senior officials from roughly 14% in 2018 to almost 16% in 2019, indicating increasing inequality at the top level.

    The chart below highlights the point that the 10% highest paid women earn a fifth less per hour than the 10% highest paid men (Source: ONS).

    Source: ONS, Statistical bulletin Gender pay gap in the UK: 2019

    Among common reasons for the Gender Pay Gap at the top level are:

    Low representation of females in certain high-paying sectors (e.g. Technology, Energy) in particular at the senior level;
    Caring responsibilities and as a result part-time versus full-time work which could slow career progression;
    Females working in lower paid sectors (Healthcare, Education etc.);
    Equal pay – females earning less for the same job/role as their male peers.

    Overall, the situation with the Gender Pay Gap has been substantially improved during the last two decades. However, females are still under-represented at the more senior management levels especially in male dominated sectors. But, there are a number of measures that could help build the female pipeline of talent in the workplace, for example by introducing measures such as flexible working, shared parental leave, recruitment of carers, returners and many others.

  • February 28, 2020

    2020 MM&K Private Equity / Venture Capital Pulse Survey

    This month MM&K launches its 2020 Private Equity / Venture Capital Pulse Survey.

    The Pulse Survey is a short survey that focuses on the most recent HR and compensation developments in the UK and European Private Equity / Venture Capital industry. The Pulse Survey is run between and for the benefit of MM&K’s PE/VC Compensation Survey participants, and provides them with an outlook on the most up-to-date trends in compensation and staffing levels in the PE/VC industry.

    If you are working in a Private Equity / Infrastructure / Venture Capital House and you believe that your firm might like to participate, please contact Margarita Skripina.

  • February 28, 2020

    CEO Pay Ratio reporting: introduction, implementation and predicted impact

    The “CEO pay ratio” has become a hot topic after the introduction of new legislation demanding UK incorporated companies listed on the FTSE, NYSE and NASDAQ with over 250 employees to disclose in their directors’ remuneration reports the ratio of their CEO’s total pay to the lower quartile, median and upper quartile total pay of their UK employees. This central issue was discussed at the seminar “Working 9 to 5. What will pay gap reporting mean? Will it change anything?” organised by the High Pay Centre on 19 February 2019. Expert opinion was provided by speakers from different organisations: Tom Gosling (PwC), Alun Humphrey (NatCen Social Research), Deborah Hargeaves (High Pay Centre), Euan Stirling (Standard Life), Janet Williamson (TUC), Charles Cotton (CIPD).

    “We are welcoming pay ratio disclosures … they highlight pay inequality. It has been a decade of stagnation for average employees” – stated Janet Williamson, a Senior Policy Officer in the TUC’s Economic and Social Affairs Department. Excessive pay for senior executives and the widening gap between CEO and average employee remuneration has attracted public attention. For instance, in 2017, a £110 million long-term incentive award to Persimmon’s Chief Executive sparked a wave of criticism and generated intense public debate. According to Euan Stirling, an investment director from Standard Life: “Persimmon highlights that something is wrong at both ends of the spectrum, especially at the higher end. We should think about long-term sustainability of the organisations”.

    The Companies (Miscellaneous Reporting) Regulations 2018 (SI 2018/860) require disclosures to show a comparison of CEO’s total pay to other UK employees’ earnings at the 75th, 50th and 25th percentile. However, it seems that there is a number of obstacles in the way to calculating the ratios. As Charles Cotton observed, it is “not easy to get the data for reporting … it requires companies to invest into HRIS1”. On the other hand, “companies need to get over the initial hurdle of publication” – emphasised Euan Stirling.

    Tom Gosling, a Partner and the head of PwC’s UK Reward Practice, acknowledged that there is a significant difference between the pay ratio and Gender Pay Gap reporting, as “Gender Pay Gap gets into heart of the issue and provides new information to the world, while the pay ratio is not a new piece of data coming out … The new pay ratio reporting is expected to shame companies. But a more productive way is to review the pay at the bottom”. According to Tom Gosling: “By far the most impact on the fair pay principles was the change2 to the UK Corporate Governance Code. It encourages more behaviour change than the pay ratio”.

    Undoubtedly, transparency over CEOs’ total remuneration relative to average employee pay should be encouraged. However, a company’s narrative about pay distribution and remuneration principles (who should be rewarded what and why) is more important than a box-ticking exercise on CEO pay ratios.

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


    1HRIS or a human resources information system is a form of human resources software that combines a number of systems and processes to ensure the easy management of human resources, business processes and data;

    2Refers to the 2018 UK Corporate Governance Code, particularly to the Remuneration Section (e.g. Provision 38 states that “The pension contribution rates for executive directors, or payments in lieu, should be aligned with those available to the workforce”)

  • February 28, 2020

    Diversity – what’s happening outside the spotlight of the FTSE 100?

    There is a seemingly strong belief, particularly from Government, that the best way to make change is to do so through the use of “nudge” – influencing the behaviours of those organisations at “the top” to impact upon a wider group.

    A recent survey by the organisation Company Matters prompted us to consider the interesting question as to whether those organisations that were less in the limelight had started to be affected by the changes in diversity – and particular gender diversity – that were occurring at the Board Room Level in the FTSE 100.

    Having met in 2015 the target set by Lord Davies for gender diversity of 25% of Board Roles being filled by women, the next expected target for the FTSE 100 is that this should increase to 33% within 2020.

    Interestingly, the survey shows that the largest 100 companies in the FTSE Small Cap Index have made progress in this direction with 28% of roles undertaken by women – which would seem to indicate that there is a real influence at play.

    However, when the survey at the position of the companies in the AIM UK 50, it found that the number of women on Boards has dropped to 15%.

    Given the disparity between the FTSE Small Cap Index, which is governed by the same principles as the FTSE 100, and the AIM market, it is an interesting question to ponder whether the less strict governance regime for AIM companies might be a factor.

    Given that the value of the AIM UK 50 keeps increasing, it may well be that guidelines and recommendations are pushed wider in the future – which his unlikely to be popular with those on the AIM market. (Although, it will also be interesting to see whether the more recent requirement for AIM companies formally to adopt a recognised governance code will start to have an effect on Board diversity).

    Whatever happens, it is worth noting that diversity, which is not just a Board issue but applies, too, across the business, is increasingly being seen as a contributing factor to those businesses who outperform the market. We would suggest that all businesses consider what they have in place in respect of Board diversity and succession planning, as well as across the wider workforce, to make sure that they are getting the most out of all of their people.

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

  • February 28, 2020

    Some issues with the growing pressure from Investors for Management Teams to have larger and larger amounts of skin in the game, both in listed and private equity situations

    The Principles of Remuneration that were published by the Investment Association (the “IA”) in November 2019 include the following words: “Executive directors and senior executives should build up significant holdings in their company’s shares. Executives are encouraged to purchase company shares using their own resources in order to provide evidence of their alignment with shareholders.” The UK Corporate Governance Code states that Remuneration Committees should develop a policy on post-employment shareholding requirements, which would require an executive to retain a proportion of their shareholding for a time period after they have left the employment of the company.

    It is interesting to compare these words with the words in the 2008 ABI Guidelines which merely stated that: “Shareholders encourage companies to require executive directors and senior executives to build up meaningful shareholdings in the companies for which they work.”

    For some time now we have seen management teams in the Global PE and VC investment management industries being required (by their limited partner investors (“LPs”) to commit to investing their own money into the funds that they are managing. In days gone by (pre 2008) the ability of PE and VC investment professionals to co-invest into the funds that they were managing was seen as an attractive perk of the job. But this was because it was their choice as to whether they did and their choice as to how much they co-invested based on what they could afford. Now, because the LPs are now requiring the investment team to put their own money in to the funds on the same terms (other than in the sense that these co-investments typically are not subject to any performance fee) as the LPs, it is seen no longer as a perk, but a pain!

    ILPA (the “Institutional Limited Partners Association”) in its recently published Principles 3 – “Fostering Transparency, Governance and Alignment of Interests for General and Limited Partners” states that: “The GP should have a substantial equity interest in the fund. The GP commitment should be contributed in cash as opposed to contributed through the waiver of management fees.” In fairness this principle has been evident in the PE industry for many years now, probably longer in fact than in the UK listed company arena.

    We are not surprised to see this increasing pressure on management teams having to put literally their own money into the companies that they work for or into the funds that they are managing. We are, however, concerned that, in some cases, some investors are expecting, nay demanding that the management team co-invest more than they can sensibly afford. Sadly, it appears that the “box-ticking” approach by some investors in PE Funds has become comparable to the approach adopted by some investors in listed companies. If they cannot tick the box, they have to put a “Red-top” on that investment. The result in the PE, VC and Infrastructure investment management world is that if the management team does not commit to co-investing 1% or 2% of their fund personally (even if they genuinely cannot afford to do this) then that investor will not invest in the fund at all. This benefits nobody and means that it is even harder for a new, small but innovative team to go out and raise a new PE, VC or infrastructure fund.

    The same observation can also be applied to some institutional shareholders in listed companies. Not all executive directors have lots of cash tucked away sitting in a bank account somewhere. Many of these executives have children to educate and mortgages to pay off. They should already be massively incentivised to increase the TSR for their company by the LTIPs that they participate in. Is it really reasonable to expect them to put all their eggs into the one basket? Or even worse take out more debt to do so? A more balanced and sensible approach is needed in this area.

    For further information contact Nigel Mills.

  • February 28, 2020

    Taking a listed company private – implications for executive pay and governance

    More and more companies are shunning listed status. Recent research has shown that the number of take private deals in 2019 was 40% higher than in 2018. Aggregate deal value increased from £9.9bn to £21.1bn.

    Whilst the big deals grabbed the headlines (Advent’s £4.0bn offer for defence group, Cobham and the £3.3bn bid by a consortium led by Apax Partners for telecoms business Inmarsat) deals have  been taking place in the small- and mid-market sectors, too, e.g. Charterhouse Capital’s £561m deal to take Tarsus media private and the c. £285m bid from funds advised by Lovell Minnick LLC for Charles Taylor plc.

    What is the cause of this turn of events? A number of factors have combined to bring this about:

    • Private equity fundraising activity in Europe reached record levels in 2019. If the level of fundraising activity falls-off in 2020, as predicted by some analysts, the reason is likely to be that firms will be looking for suitable deals to allocate their record funds, prior to resuming a further round of fundraising in a year or so’s time; private equity firms globally are flush with cash

    • UK and European interest rates remain and are expected to remain, low

    • The yield on the FTSE All-share index is about 4.0%; UK listed companies look attractively priced at present

    • EBITDA multiples for listed versus private companies have narrowed in recent years, attracting the attention of private equity firms.

    In addition, despite publication of the Wates Principles of good governance for larger private companies, privately-owned companies are subject to a lower level of pay disclosure requirements and governance regulation than listed companies, which might be attractive to management. It has been suggested that the decision by the family controlling property group, Daejan Holdings to take the company off the market in the biggest take private deal this year was to step away from the glare of publicity on its Board diversity policy. However, it has also been reported that this has not been referred to specifically by the family owning nearly 80% of the listed company as a reason for its actions.

    The burden of regulation, pay disclosures and governance has increased for both executive and non-executive directors and those who report to them. Many small- and mid-sized companies do not have the in-house resources to keep up. It would be understandable if the boards of such companies were attracted by the prospect of easing the pressure by stepping away stepping away from the public gaze. However, stepping away from the public gaze is not a passport to operating outwith a sound governance framework and, in our experience, most boards would not wish to do so.

    Whatever the reasons for taking a listed company private, they need to be thought through carefully. The financial dynamics of a company controlled by private equity are likely to be different from those of a listed company. What is the investment strategy? Is the PE house looking for long-term value creation or to make a quick return and sell-on its investment? Cash and cash-flow may assume a greater importance in a private equity context than they did in the listed environment (although free cash flow is a value driver in any business).

    MM&K advises extensively in the private equity sector, which is evolving. Sovereign wealth funds and large family offices with significant amounts of capital to invest, together with infrastructure funds, are examples of longer-term investors for whom sustainable value creation over time may be a more relevant yardstick than IRR. This evolution is changing the shape of remuneration structures within the PE houses themselves.

    A listed company which has been taken private should also review and, if necessary, amend its remuneration policies. If the transition into private ownership involves a change of business strategy, remuneration policy should be adapted to ensure that it is consistent with the new strategy. The new private equity investors will have their own investment strategies and expectations, which need to be understood. The company’s strategic KPIs, linked to its executive incentives, whilst supporting the business strategy, will also need to recognise the expectations of the new private investor(s).

    Finally, the company’s governance framework should assist the board to run the company in accordance with a set of principles which are relevant to the business, take account of all stakeholders’ interests and encourage sustainable growth.

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

  • January 30, 2020

    Revised Stewardship Code sharpens the focus on ESG factors

    The UK Stewardship Code forms part of the FRC’s mission to promote transparency and integrity in business. The 2020 version of the Code was published by the FRC earlier this month. Under the Code, it is incumbent on asset owners and asset managers to disclose how they have prioritised ESG factors when assessing investments.

    The introduction to the 2020 Code recognises that, in addition to governance, environmental and social factors have become material issues for investors to consider when making investment decisions and carrying out their stewardship role. The revised Code sets out 12 principles for asset owners and managers. Principle 7 requires asset owners and managers to explain in their Stewardship Reports, which will be public documents, either:

    • how integration of stewardship and investment has differed for funds, asset classes and territories and the way they have ensured that tenders have included material ESG factors as part of a requirement to integrate stewardship and investment, or

    • the processes used to integrate stewardship and investment, including material ESG issues, to align with the investment time horizons of clients and beneficiaries and to ensure service providers have received clear and actionable criteria to support integration of stewardship and investment, including ESG factors.

    The Stewardship Code is not the only set of principles urging corporates and investors to concentrate on sustainability and ESG factors. The Sustainable Development Goals and Principles of Responsible Investment, published under the auspices of the UN, have a similar purpose. Corporates are under increasing pressure to incorporate ESG factors into their executive remuneration policy and practice. And there is evidence that corporates are taking positive action. Interestingly, however (and, perhaps, counter-intuitively) whilst many ESG factors are long term in nature, research indicates that those corporates which have included ESG metrics in their remuneration policies have done so in connection with their short-term incentives.

    Whilst corporates have been required to address a range of Governance issues for some time, under various corporate governance codes, now they are paying closer attention to Environmental and Social factors. One of the difficulties is that ESG is likely to mean different things to different companies. For example, research indicates that oil & gas companies place greater emphasis on employment conditions, safety and physical damage to the environment, whilst financial services companies are more likely to be concerned about customer service.

    Larger companies have established ESG/Sustainability teams or departments and committees. One of the first questions to consider is: what does ESG mean for us? Other important initial questions are: what are we going to do about it? and who is accountable? For a multi-national company, what it is going to do about ESG may well differ for each of the territories in which it operates.

    Not all companies will have the resources to establish a department dedicated to ESG. However, there can be a positive financial advantage for corporates that have developed a coherent ESG policy, as increasingly lenders offer finer rates to corporates with a clear ESG policy.

    To comply with the Stewardship Code, asset owners and managers must ask themselves and address questions similar to those asked of the Boards of the corporates in which they invest. In addition, they must understand the action corporates have taken (or intend to take) to address ESG factors and the reasons for taking such action. That understanding can only be achieved through constructive engagement, as encouraged by the Stewardship Code and a willingness on all sides to listen and to be clear and open. Corporates and their investors will need to start on their respective sides of the bridge and walk to the centre. That will require a good deal of co-operation and commitment (both of time and thought) and flexibility. If the Stewardship Code, adherence to which is voluntary, can help to bring that about, it will have made a stride towards breaking down the antipathy, which has sometimes existed between corporate Boards and their investors, for the benefit of all stakeholders globally.

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