Corporate governance reforms

Corporate governance reforms

New rules on section 1 statements from 6 April 2020

During the long hot summer of 2018, whilst we were seeking dappled shade in which to count our sunny blessings, the Government’s Department for Business, Energy & Industrial Strategy (BEIS) was busy preparing and publishing a bumper set of recommendations and reforms in response to its 2016 Review of the Corporate Insolvency Framework and 2018 Consultation on Insolvency and Corporate Governance.

Our ‘FRIends’ from our Finance, Restructuring and Insolvency team have commented on the proposed reforms to the UK’s insolvency regime, but the BEIS ‘Insolvency and Corporate Governance Response’, as the name suggests, also contains a noteworthy plan of action to strengthen the UK’s corporate governance framework more generally.  This is summarised below. 

Corporate Governance – proposed reforms

The Government states that it “…will take steps to enhance stewardship of our largest companies, through stronger mandates and greater transparency over group structures and dividend policies”.  It sets out the following key actions to achieve this:

  • Strengthen transparency requirements around group structures.  The Government will pursue options to require groups to provide explanations of their corporate and subsidiary structures in response to concerns about the oversight and control of complex groups and how they are effectively managed and governed.  Measures to improve transparency around group structures could include introducing a requirement for corporate groups of a significant size to provide an organogram of their corporate structures along with an explanation of how corporate governance is maintained through the group.
  • Strengthen shareholder responsibilities. Working with the investment community, the FRC and other interested parties the Government will identify means to incorporate stewardship within the mandates given to asset managers by asset owners and establish safe channels through which institutional investors and others can escalate concerns about the management of a company by its directors, including the discharge of their duties under section 172 of the Companies Act 2006.
  • Strengthen the UK’s framework relating to dividend payments.  Significant concerns were raised that under the current ‘distributable profits’ regime, companies can pay dividends even when in financial distress and that the practice of avoiding an annual shareholder vote on dividends by only declaring interim dividends (approved by the directors without the need for a shareholder vote) is becoming more prevalent.  As a result the Government is exploring the strength of the case for a comprehensive review of the UK’s legal, governance and technical framework within which companies determine dividend payments, and will consider whether such a review should extend to addressing the merits of adopting a solvency based system.
  • Bring forward proposals to improve boardroom effectiveness and strengthen directors’ training and guidance.  Directors have many responsibilities, particularly in larger companies, and suggestions were made in consultation responses for providing more training for directors and improving the quality of the independent boardroom evaluations required under the UK Corporate Governance Code. The Government will therefore invite ICSA: The Governance Institute to convene a group including representatives from the investment community and companies to identify further ways of improving the quality and effectiveness of board evaluations including the development of a code of practice for external board evaluations. It will also bring forward proposals to strengthen access to tailored training and guidance for directors of different sizes of company, including for raising their awareness of their legal duties when making key decisions.  It will also consider whether some level of training should be mandatory for directors of all large companies. 

Making progress

Last week, in response to a Government request, GC100 (the association of general counsel and company secretaries working in UK FTSE 100 companies) published its ‘Guidance on Directors’ Duties: Section 172 and Stakeholder Considerations’.  Section 172 imposes a general duty on every company director to act in the way they consider, in good faith, would be most likely to promote the success of the company for the benefit of its shareholders as a whole. Section 172 also requires directors, in performing their duty, to have regard to a non-exhaustive list of factors, including the interests of employees and how the actions and behaviours of the company affect customers, suppliers, the community and the environment, as well as the company’s reputation.  The GC100 guidance provides practical advice on discharging these duties and provides ‘useful insights and ideas for all company directors’ (not just those of large publicly listed companies and their UK subsidiaries).

A recently implemented Government reform, which takes effect from 1 January 2019, will also require all large companies (including large private companies) to explain in their annual report how directors have had regard to the matters set out in section 172(1) of the Companies Act 2006. 

Hopefully, together, these s172 compliance statements and the GC100 (and other) guidance and training, will encourage fuller disclosure of the rationale for dividend decisions and greater transparency across all key company decision making processes.  The Government has warned it will not be afraid to legislate in favour of a tougher directors’ duties enforcement regime if not.  

Further detail on the proposals are expected ‘in the autumn’ – so watch this space.

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