- September 24, 2019
“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.
- August 28, 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.
- July 30, 2019
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.
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.
- July 29, 2019
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.
- July 29, 2019
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.
- July 25, 2019
Green Finance Strategy will increase companies’ disclosure requirements
On 2 July 2019, the UK Government published its Green Finance Strategy: Transforming Finance for a Greener Future, which is intended to ensure that “our financial system is robust and agile enough to respond to the profound challenges that climate change and the transition to a clean and resilient economy bring with them”. The paper includes proposals which will increase the requirements for listed companies and pension funds to disclose climate-related risks.
Climate change presents companies with far-reaching financial risks from physical factors, such as extreme weather events, and transition risks that arise from the adjustment to a low-carbon economy. There are also great opportunities: the expected transition is estimated to require around $1 trillion of investments a year for the foreseeable future.
There are already requirements for companies to disclose these risks and opportunities:
• The UK Corporate Governance Code 2018 requires that a company’s annual report should include a description of its principal risks, what procedures are in place to identify emerging risks, and an explanation of how these are being managed or mitigated.
• The FRC’s Guidance on the Strategic Report states “an entity should consider the risks and opportunities arising from factors such as climate change and the environment, and where material, discuss in its Strategic Report the effect of these trends on the entity’s future business model and strategy”.
However, the Task Force on Climate-related Financial Disclosures (TCFD), in its Final Report (June 2017), found that there were inconsistencies in companies’ disclosure practices and warned that inadequate information about risks can lead to a mispricing of assets and misallocation of capital. The report recommended a new framework for disclosing:
• The organisation’s governance around climate-related risks and opportunities.
• The actual and potential impacts of climate-related risks and opportunities on the organization’s businesses, strategy, and financial planning.
• The processes used by the organization to identify, assess, and manage climate-related risks.
• The metrics and targets used to assess and manage relevant climate-related risks and opportunities.
Action against climate change has become more urgent following the publication in October 2018 by the Intergovernmental Panel on Climate Change (IPCC) of its Special Report: Global Warming of 1.5 ºC, which highlighted the potential catastrophic impacts of global warming if it exceeds 1.5°C above pre-industrial levels. Following considerable political pressure, the UK Government recently legislated to reduce carbon emissions to net zero by 2050.
In the Green Finance Strategy, the Government set out its expectation for all listed companies and large asset owners to disclose in line with the TCFD recommendations by 2022. It has established a joint taskforce with UK regulators to “examine the most effective way to approach disclosure, including the appropriateness of mandatory reporting”.
In addition, from October 2019, occupational pension schemes will be required to publish their policy on financially material considerations, including those arising from climate change.
Companies will therefore need to demonstrate not only that they have a good understanding of how the risks and opportunities arising from climate change will affect them but also that they have integrated their response to these in their business strategies and governance procedures. The Government has promised further guidance on these issues. In the meantime, some companies will find it helpful to participate in initiatives such as CDP (formerly the Carbon Disclosure Project), the Transition Pathway Initiative (TPI) and Science-Based Targets.
Once companies have fully integrated their plans to deal with climate change and the transition to a low carbon economy within their business strategies, they must ensure that their performance targets for executive incentive arrangements are aligned with them. The Investment Association’s Principles of Remuneration state that “Remuneration committees may consider including non-financial performance criteria in variable remuneration, for example relating to environmental, social and governance (ESG) objectives, or to particular operational or strategic objectives. ESG measures should be material to the business and quantifiable”.
The Shell Sustainability Report 2018 demonstrates how Royal Dutch Shell has already included climate change targets as part of its executive incentives.
For further information contact Michael Landon.
- July 22, 2019
Competition for Talent in the UK Private Equity Industry is as keen as ever
There is no doubt that the Private Equity and Venture Capital landscape is becoming even more crowded, with new funds successfully being raised and an almost unbelievable level of “dry powder” available to be invested worldwide. Apparently, the global figure has recently reached $2.5trn.
Geographically, the majority of dry powder is still targeting North America, although that proportion has been declining in recent years. However, a steadily increasing proportion of available capital is focused on Asia. Europe-focused dry powder, meanwhile, has remained consistent, accounting for around a quarter of total available capital. Nonetheless, the amount available in Europe is at a staggeringly high level. There seems little doubt that the big corporate investors are more attracted to the private ownership model than the listed one in today’s heavily bureaucratic environment.
From MM&K’s own direct experience, we have seen a healthy number of new clients in London, who are choosing to deploy some of their capital into UK and Continental European markets. This has involved them deciding to set up brand new offices in London and they are now looking to recruit whole new investment and back office teams from the London market place.
MM&K conducted a pulse survey earlier this year, seeking to identify what the latest trends were in UK PE and VC compensation levels. The results indicated that the typical level of increase in salary for investment professionals below Partner level at the most recent pay round (i.e. mainly January 2019) was above 10%. We see this as an amazingly high figure.
PE firms that are looking to invest large amounts of money into European deals need to ensure they have a happy and committed workforce, particularly in their front offices. The last thing they need is to be worrying about investment staff being tempted to look elsewhere by large new salary and bonus offers.
We are currently marketing our 2019 PE and VC Compensation Survey and are pleased with the high levels of interest we are seeing from participating houses this year. We have no doubt that firms are recognising the need to know what is happening to PE pay levels right now.
There seems little doubt that the PE, VC, Infrastructure and Real Estate sectors are entering into a new boom time period in the UK. A small part of this may be to do with the low value of the £ at the moment making investing in the UK even more attractive, counteracting the uncertainty being caused by the debacle of the Brexit process. But we are sure the larger part is just simply to do with the wall of money out there just waiting to be invested. Retaining and keeping motivated the best talent among one’s investment professionals has probably never been quite so important as it is today.
- July 20, 2019
Loans from EBT – recent HMRC developments on disguised remuneration schemes
Disguised remuneration schemes include tax avoidance arrangements that seek to avoid Income Tax and National Insurance contributions (NICs) by paying scheme users their income in the form of loans. Typically, the loans will have come from a “third party” such as an Employee Benefit Trust (“EBT”). In the view of HMRC, the loans were never intended to be repaid and so they are no different to normal income and are taxable.
These plans became popular in the mid-2000s but have been the subject of HMRC review for a number of years – with settlement terms being issued in November 2017.
As part of the continued developments in respect of those who have not settled with HMRC a “charge” on any outstanding loans was introduced as from 5 April 2019. This applies to all loans made since 6 April 1999.
Importantly, the loans are effectively deemed to be taxable income and will be subject to income tax and NICs.
Whilst it is likely that any organisation which has made these loans, now or historically, is already dealing with them, anyone who is unsure whether the loans connected to their EBT will be liable for the charge should ensure that it is compliant with the regulations.
For further information or to discuss any questions you may have, contact Stuart James.
- July 19, 2019
All change at the FRC – or is it?
The Financial Reporting Council (FRC) is embarking on a transition programme to morph into the Audit, Reporting and Governance Authority (“ARGA”) accountable to Parliament, after coming under heavy fire from the Kingman Review and others, including a report by the Competition and Markets Authority (CMA) on competition in the audit sector, which prompted BEIS to launch its own review of audit quality.
Kingman was scathing, calling the FRC a “ramshackle house, cobbled together with all sorts”. Key planks in its transition plan are diversity, culture and audit reform, with the last of these attracting much of the attention in light of recent corporate scandals. Also, the CMA has proposed that accounting firms should split their audit and advisory divisions and that FTSE 100 and 250 audits should be carried out by two firms, one of which is not in the “Big 4”.
Whilst Kingman called for the FRC to have statutory recognition and funding, it remains dependent in part on contributions from audit firms. Not surprisingly, perhaps, responses from some of those firms focus on and raise a number of questions about the FRC’s increased budget proposals for 2019/20.
The FRC’s transition plan includes the recruitment of 80 additional staff. What will they do? Some of them will be needed to resource the planned increase in the number of corporate reviews it plans to carry out. However, questions have been raised about the FRC’s ability to recruit in large numbers in a period of change and uncertainty. Scottish accountancy body, ICAS, has made the thoughtful observation that FRC has struggled to recruit at senior level and, to operate optimally, needs to address any perceived skills gaps. It should consider whether “existing resources need to be recalibrated”. In other words, does the FRC have the right people? Is it fit-for-purpose?
Kingman picked-up on the FRC’s methods of recruiting top staff, observing that it did not often employ open advertising or use headhunters and sometimes relied on the alumni networks of the largest audit firms. When the FRC transforms into ARGA, Kingman recommends that there should be limited overlap in senior management. Time will tell if this comes to pass. The FRC has committed to promote transparency, integrity and diversity in business and to reverse a loss of confidence in audit. Success in achieving those noble goals will depend, in part, on there being no perception of double standards for regulator and regulated.
Whilst audit has grabbed the headlines, the FRC (ARGA in future) also sets the UK corporate governance and stewardship codes. One of the consequences of the transition to ARGA is that the new regulator will have enhanced powers. There is a strong implication that the new regulator will be tougher than the old.
High standards of corporate governance are essential for a sustainable and successful business community and the UK leads the way. The case for change at the FRC is strong. The adoption of Kingman’s recommendations is evidence of that. Few (neutrals) are likely to disagree that everything practicable should be done to ensure that recent audit scandals are not repeated or that examples of excessive executive pay are not checked. However, care is needed to ensure that the freedom of the majority is not restricted and the burden on them is not increased unnecessarily, through the behaviour of the minority. Political intervention in executive pay, for example, has increased. The risk that this might increase further when the regulator, ARGA, is accountable to Parliament should be resisted strongly insofar as the UK continues to operate a free market society. Quis custodiet ipsos custodes?
For further information contact Paul Norris.
- June 27, 2019
PE/VC Fund Manager Compensation Survey
MM&K has been running its PE / VC compensation survey for more than 20 years now. Our survey is not just about the numbers, although it does cover that very well. It also provides invaluable insights into trends and direction of travel in the Private Equity / Venture Capital industry. Not only do we analyse compensation trends, we look at headcount, revenues, the structure of management fees, carried interest plans and GP commitment levels.
In terms of some recent remuneration trends, MM&K’s Pulse Report conducted in April showed an average 10% increase in Base Salary across all investment professionals in the latest pay rounds. This is a staggeringly high figure!
The PE and VC world in the UK and Europe seems to be growing larger and larger. The competition for talent is increasing all the time as new houses are coming to and opening up in the UK with big chequebooks willing to pay handsomely to recruit the best talent.
Our PE/VC Compensation Report is only available to participants, so don’t miss out on the opportunity to participate in our 2019 PE/VC Compensation Survey. Our submission deadline is coming soon, so please do contact us now to find out more.