N7 - The Regulatory Environment Flashcards
What four things place constraints and share plans due to the regulatory environment in which they operate?
The UK corporate governance code
Institutional investor influence
Development of executive share incentives
Development of tax advantage plans
What is corporate governance?
How accompany governs itself.
Covers all aspects of how decisions are made, who makes them, what is disclosed to stakeholders and the influence, those stakeholders have.
Good corporate governance is a process, led by decision-making without conflicts of interest with the key aspects of decisions being disclosed where appropriate.
The recent history of corporate governance
UK has had governance codes since the 1992 Cadbury report.
Substantive overhaul in 2018, saw the UK corporate governance code, published by the financial reporting council, with a recent update published in January 2024.
The recent updates followed various consultations in 2022 in 2023. However, only a small number of changes were brought due to this being a low priority for the current government.
Key additions relate to malus and clawback provisions and include new reporting requirements.
Who is caught by the code?
All companies with a premium listing on the London stock exchange, whether incorporated in the UK or elsewhere.
Required under the listing rules to report an how they have applied the code in their annual report and accounts.
If it has not been complied with it, must explain why not.
What are the penalties for not complying with the UK Corporate Governance Code?
There are no penalties for not complying as long as the noncompliance is disclosed and explained as the code is not obligatory.
Comply or explain= flexibility to adapt code to their own circumstances which might not be possible with fixed codes.
Change to people captured?
Concepts of premium listing or standard listing on the London stock exchange are expected to be replaced by simplified and combined commercial companies category of listing in the late 2024.
This change comes from the consultation paper from the FCA, which suggests complier explained disclosure will apply to all commercial companies listed on the London stock exchange, potentially bringing more companies into the remit of the code.
What does the UK corporate governance code primarily impact?
The code mainly impacts from aeration for executive directors. There are some broader impacts, but it’s predominantly awards to executives that the code influences.
How is the code structured and what are the five areas?
Code is broken down into principles and provisions across five areas
Board leadership andCompany purpose
Division of responsibilities
Composition
Succession and evaluation
Audit
Risk and Internal control
Remuneration
What are the key principles in regards to remuneration in the code?
Remuneration policies and practices should promote long-term sustainable success, executive remuneration should align to the companies purpose, and the values and be linked to the long-term strategy
There should be a formal and transparent procedure for developing policy on executive remuneration, and for fixing the remuneration packages of individual, directors and senior management no director should be involved in the deciding of their own remuneration
Directors should exercise, independent judgement and discretion when authorising remuneration outcomes, taking account of company and individual performance and wider circumstances.
What are the key provisions on remuneration set out in the code? 
Remco should determine policy for executive director remuneration, as well as remuneration for the chair, executive directors and seen a management, and she consider wider workforce remuneration and the alignment of incentives in reward with culture.
Should promote long-term shareholding by executives that line with long-term shareholder interests e.g. shares should be on a face basis, and subject to a total resting, and holding period of five years or more.
Should develop a formal policy for post employment, shareholding requirements with both vested and unvested shares
Enable the use of discretion to override formulaic outcomes.
Directors contract should include provisions that would enable the company to recover and withhold sums of the share award, and specify the circumstances in which they, it would be appropriate to do so e.g. MalusClawback provisions
Accompanies annual report and remuneration should include a description of its malice and clawback provisions, including its triggers, and the period in which they can apply.
NEDs should not generally receive share awards or any other performance related element.
In general only basic salary, and not share plans, should be pensionable
What are Institutional Investors?
Are organisationswhich pools large sums of money and invest those in investments like shares in UK listed companies.
As shareholders they will be interested in the terms of any share incentives offered to directors or employees
Name types of institutional investors
Insurance companies
Pension funds
Trade unions
Religious organisations
Why are IIs important?
They are extremely influential their recommendations can influence how shareholders vote.
Investor and proxy advisor guidelines are not ‘legal rules’, but they have persuasive influence. If a company wants to develop plans that can be operated outside of these guidelines, then the relevant
institutional investor may recommend that shareholders vote against the proposed plan at the Annual General Meeting.
What is the Investment Association?
The Investment Association (or ‘IA’) is an organisation that represents 250 UK investment managers (all who invest in British companies), making them one of the most prominent institutional investor voices in
the UK.
The IA covers many investor voices, whether they are domestic or international individuals, discretionary managers, life companies, pension funds, family offices or sovereign wealth funds.
Principles of remuneration
The IA publish the principles of remuneration which sets out their members views on the roles of shareholders and directors in relation to remuneration and the manner in which remuneration should be determined and structured.
