Memery Crystal explores the recently published Corporate Governance updates

The PLSA produces guidelines by reference to principles of the Code, as well as voting recommendations that are intended to reflect current best practise. The principle changes to the 2017 version of the guidelines are as follows:

Audit Accountability

The Guidelines encourage the use of more specific and relevant language in the audit committee and auditor reports, so as to provide shareholders with detail as to the committee’s and auditor’s work during the year; the reports should avoid boilerplate wording, in particular, the reports should include details of the critical accounting policies used, level of materiality adopted, assumptions and judgments, and evidence of professional scepticism by the auditors.

Voting Guidance

Sustainability: This new section of the Guidelines relates to sustainability, focusing on positive relations with key-stakeholders. Boards are encouraged to communicate how stakeholder relationships are managed and how stakeholder perspectives are communicated and considered at board level.

The Guidelines suggest that shareholders should consider voting against the annual report and accounts, or the re-election of the Chairman, where they believe that key stakeholder relationships are being neglected and the board is not adhering to the spirit of, or taking into account, the concerns of stakeholder constituencies.

The section also references climate change as a key sustainability issue and notes the importance of climate change expertise at board level for companies in sectors which are affected by climate change issues. Where shareholders have attempted to engage with the board to provide a detailed risk assessment and response to the effects of climate change on the business and incorporate expertise on the board, and have been unsuccessful, shareholders are encouraged to not support the re-election of the Chairman.

Annual report and accounts: The Guidelines encourage shareholders to vote against the adoption of the annual report and accounts, auditor appointment and/or the appointment of the Chairman of the audit committee, where accounts are misleading (for example as to pension or climate related liabilities).

In addition, a vote against the annual report by shareholders is encouraged where the company fails to provide a fair and balance explanation of the composition, stability, skills and capabilities and engagement of its workforce and where the company provides boilerplate disclosures (rather than specific commentary) as to board evaluation and review of corporate governance arrangements.

Remuneration report: Where shareholders vote against the remuneration report, they are encourage to also vote against the re-election of the members and Chairman of the remuneration committee, where those persons have been members of the committee for more than 1 year.

Auditor appointment and authorising auditor remuneration: Where the auditor has been in place for more than 20 years, a vote against the audit committee chair and auditor should be considered.

Recent public comment by the Competition Commission has recommended that accountancy firms should re-tender for their work every 10 years.

Market purchase of shares: Shareholders should generally support share buy-backs where, in addition to being supported by cash-flows of the business, they are a prudent use of the company’s cash resources.

The accountability of boards has already been highlighted early on in 2018 with the collapse of Carillion, as well as the announcement of several high-street brands running into financial difficulty. While the changes to the Guidelines for 2018 are not extensive, they support the continuing trend in UK corporate governance for greater board engagement and transparency and encourage an increased focus on regular accountability in respect of audit appointment and reporting practices.