Corporate weekly highlights—21 October 2016

Corporate weekly highlights—21 October 2016
Welcome to the weekly highlights from the Processed with VSCO with a9 presetLexis®PSL Corporate team for the week ending 21 October 2016, which provide news updates and a comprehensive list of dates for your diary. This week’s edition features: the International Corporate Governance Network’s three new best practice guides on executive director remuneration, non-executive director remuneration and board diversity; the Financial Conduct Authority’s final report on investment and corporate banking and consultation on restrictive contractual clauses; and the new Criminal Finances Bill which aims to overcome money laundering.


Corporate governance

ICGN publishes guidance on executive and non-executive director remuneration

The International Corporate Governance Network (ICGN) has published new guidance which aims to provide a consistent and global perspective focused on major aspects of remuneration policy and practice designed to assist companies in better understanding long-term shareholders’ views, as well as serve as a tool for investors when engaging with companies.

The ICGN is an investor-led organisation of governance professionals with the aim of promoting effective standards of corporate governance to advance efficient markets and economies globally. The ICGN has published three new best practice guides which form part of a suite of guidance on corporate governance that includes the ICGN Global Governance Principles (published in 2014).

The guidance on executive remuneration replaces the 2012 guidance. It includes four main changes to: first, provide greater clarity on committee leadership; second, refer to motivational considerations beyond financial remuneration; third, explicitly provide that base salary is payment for achieving what is expected of the executive, and that variable remuneration is payment for out-performance; and fourth, include environmental, social and governance factors in the assessment of performance to help achieve sustainable long-term value creation. In summary, the guidance discusses the role and composition of, and the support available to, the remuneration committee, conflicts of interest between committee members, advisers and management and disclosure obligations to shareholders; considers the structure of remuneration arrangements, performance-based methodologies, non-financial elements of effective remuneration structures, change in control and other corporate events and post-employment benefits; and states that employment contracts or arrangements should not extend longer than one year and provide guaranteed raises, bonuses or other incentives and that severance payments should be capped and be limited to termination by the company without cause, death or disability.

The guidance on non-executive director (NED) remuneration replaces the 2013 guidance. It includes two main changes: first expectations of NEDs to attain a significant shareholding are more clearly defined; and secondly, explicit reference is made to the remuneration of board chairs. The guidance focuses on the structure of remuneration arrangements, accountability and managing conflicts of interests and ensuring there is adequate transparency of arrangements and disclosure to investors. The ICGN supports the practice of seeking shareholder approval of remuneration arrangements and material amendments to equity-based remuneration plans.

ICGN publishes guidance on board diversity

The ICGN has published new best practice guidance on board diversity. The new guidance is designed to recognise that a range of social and economic factors contribute to a fully diverse board beyond gender diversity.

The new guidance builds on the 2013 guidance and recognises that a range of social and economic factors contribute to a fully diverse board beyond gender diversity. This promotes directors with experience, social backgrounds and competencies to help enable effective board decision-making and leadership. Moreover, relevant board candidates with the needed skills to promote diversity and board effectiveness should not be discriminated against based on gender, age, nationality, race, sexual orientation or gender identity.

The ICGN encourages companies to develop and disclose board diversity objectives and shareholders to establish a dialogue with companies, hold boards accountable, and facilitate greater board diversity by submitting their own nominees for consideration to the board. The guidance also highlights that the nomination committee should, when identifying candidates to recommend for appointment/ election to the board: consider only candidates who are highly qualified based on their experience, functional expertise, and personal skills and qualities; consider diversity criteria including gender, age, ethnicity and geographic background, among other factors; engage independent external advisers to conduct a search for candidates that meet the board's skills and diversity criteria to help achieve its diversity aspirations; aspire towards board composition in which each gender comprises at least one-third of the independent directors. It also discusses the role of the board chair, the existence and maintenance of, and disclosure against, relevant policies, and the importance of annual board evaluation and succession planning.

FCA related developments

FCA issues final report on investment and corporate banking (MS15/1.3) and consultation on restrictive contractual clauses (CP16/31)

The Financial Conduct Authority (FCA) has published the final report on its investment and corporate banking Market Study (MS 15/1.3) containing feedback on the FCA’s interim findings published in April 2016. The FCA’s final findings are that there is a wide range of banks and advisers active in primary market activities. While many clients, particularly large corporate clients, feel the universal banking model of cross-selling and cross-subsidisation from lending and corporate broking services to primary market services works well for them, there are some practices that could have a negative impact on competition, particularly for smaller clients.

In MS 15/1.3, the FCA proposes to: ban restrictive contractual clauses; develop industry guidelines to improve the way in which banks present league table information to clients; remove incentives for banks to carry out loss-making trades to climb leagues tables; carry out a supervisory programme for initial public offering (IPO) allocations; and develop and consult on a revised IPO process.

The FCA has also published Consultation Paper (CP 16/31) 'Investment and corporate banking—prohibition of restrictive contractual clauses', in which it consults on the ban on restrictive clauses proposed in MS15/1.3. The FCA is proposing to ban the use of restrictive contractual clauses in investment and corporate banking engagement letters and contracts where these clauses cover future corporate finance services carried out from an establishment in the UK. This prohibition would apply to all agreements entered into after the commencement date but not to existing agreements.

The consultation is open until 16 December 2016. The FCA plans to publish a Policy Statement in early 2017.

Money laundering

New law enforcement powers to tackle money laundering

The Home Office has introduced the Criminal Finances Bill (the Bill). The Bill aims to reform the UK's anti-money laundering and counter-terrorist financing regime in the following ways: tackle money laundering and corruption; recover the proceeds of crime; and counter-terrorist financing.

The Bill introduces Unexplained Wealth Orders which will require suspects of serious crime to explain where their wealth has come from, or risk having it seized. Criminals will also no longer be able to keep their illegal gains out of the reach of law enforcement by hiding them in assets which officers currently cannot seize. The Bill will allow law officers to seize a range of items including: precious metals; stones; works of art; and criminal or terrorist funds held in bank accounts.

Additionally, the Bill will allow the sharing of information, such as data on financial transactions, between regulated bodies. This aims to strengthen the partnership between the public and private sectors.

The Bill introduces a new criminal offence for companies who fail to prevent tax evasion, which the Home Office believes will send out a clear message that persons doing business in and with the UK must have the highest possible compliance standards.

The Bill extends the reach of disclosure orders to money laundering and terrorist financing cases. This will require suspects to provide information or documents relevant to an investigation. Furthermore, It has enhanced the suspicious activity reports regime to provide more powers to the National Crime Agency and extend the amount of time senior officers have to investigate transactions.

Commenting on the new Bill, PricewaterhouseCoopers' tax partner Stephen Morse stated: 'It will be important for companies to carefully consider the level of risk they face and ensure that procedures are appropriate and properly implemented. If not, the criminal acts of individual employees could result in criminal liability and significant financial penalties for the company'. Transparency International UK noted that 'Unexplained Wealth Orders would fill a key gap in the UK’s anti-corruption legislation, and make sure that the UK is no longer seen as a safe haven for corrupt wealth... this is a chance for the UK to step back from complicity in crimes of corruption'.

Dates for your diary

DateSubjects covered
26 October 2016The deadline for submissions to the inquiry launched by the Business, Innovation and Skills (BIS) Committee in the House of Commons. The inquiry is on corporate governance and focuses on executive pay, directors’ duties and boardroom composition. It follows the BIS Committee's recent inquiries into BHS and Sports Direct, which highlighted certain corporate governance failings, and the commitments to overhaul corporate governance that have been made by the Prime Minister. The BIS Committee will examine executive pay, directors' duties and board composition.
28 October 2016The deadline for responses to the FCA's consultation paper (CP16/19) seeking feedback on the implementation of the Markets in Financial Instruments Directive 2014/65/EU (MiFID II). The consultation follows on from CP15/43, published in December 2015, and covers the following issues: commodity derivatives; supervision; prudential standards; senior management arrangements, systems and controls; remuneration requirements for sales staff; whistleblowing; client assets sourcebook; complaint handling; and fees manual.
10 November 2016The deadline for comments on HM Treasury's consultation paper regarding the transposition of the Money Laundering Directive into UK law. The consultation paper was published by HM Treasury in September 2016.

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