Corporate governance

In this section of the bulletin:

• Women on boards: progress so far and further action
• Revised Investment Association Principles of Remuneration
• Updated PLSA Corporate Governance Policy and Voting Guidelines
• Implications of the new Market Abuse Regulation for employee share plans
• Guidance on the reporting of directors' remuneration

Women on boards: progress so far and further action

Almost five years ago, Lord Davies of Abersoch set a target for women's representation on FTSE 100 boards of 25 per cent, to be achieved by 2015 through voluntary means rather than a binding quota. The Davies Review five-year summary, published on 29 October 2015, shows that the target has been reached and that the number of women on FTSE 250 boards has also increased substantially. However, those involved in boardroom recruitment cannot rest on their laurels, as Lord Davies has published some new recommendations designed to build on the progress achieved so far.

Where we started

In February 2011, Lord Davies published a report called "Women on Boards", in which he rejected binding quotas for the number of women on listed company boards in favour of a voluntary, business-led approach. Among other things, he recommended that:

• FTSE 100 companies should aim for 25 per cent of their directors to be women by 2015;
• quoted companies should disclose annually the number of women on the board, in senior management and in the organisation as a whole; and
• the UK Corporate Governance Code should be amended to require listed companies to have a policy on boardroom diversity and to disclose against it annually - this was reflected in the 2012 update of the Code.

The voluntary approach was supported by the Government, and regular progress reports published since 2011 have shown steady improvement towards the target.

Progress achieved

The Davies Review five-year summary shows that the 25 per cent target for FTSE 100 companies was reached in October 2015, with FTSE 250 companies not too far behind. The key figures are set out below.

Key figures from Lord Davies' five-year summary

Percentage of women on FTSE 100 boards

February 2011 - 12.5%

October 2015 - 26.1%

Percentage of women on FTSE 250 boards

February 2011 - 7.8%

October 2015 - 19.6%

Number of FTSE 100 all-male boards

February 2011 - 21

October 2015 - 0

Number of FTSE 250 all-male boards

February 2011 - 131

October 2015 - 15

Percentage of women non-executive directors on FTSE 100 boards

February 2011 - 15.6%

October 2015 - 31.4%

Percentage of women executive directors on FTSE 100 boards

February 2011 - 5.5%

October 2015 - 9.6%

22 per cent of the new female directors had not previously had any listed board experience. 56 per cent of them are classified as "plural", i.e. they hold no current full-time executive role but engage in a portfolio of non-executive activities. The majority of these "plural" women work across a variety of sectors, such as private, not-for-profit, government or academic roles. Lord Davies comments that while the pool of talent has been widened to embrace women in professional services roles, those from other backgrounds have not been considered to any great extent.

Further recommendations

Although the specific 25 per cent target has been reached, that is not the end of the story. Lord Davies emphasises that further work and a renewed focus is required, particularly with regard to boosting the number of women appointed to chair boards and as Senior Independent Directors, as well as to executive director roles and in the executive layer immediately below the board.

Other countries which have introduced quotas for women board appointments have set their goals higher than the 25 per cent target in the UK. For example, the target in France and Norway is 40 per cent and in Belgium and Italy 33 per cent. Lord Davies warns that if the UK does not progress beyond the current 26 per cent level, it will fall behind European and other countries in the near future. The introduction of an EU Directive setting a voluntary target of 40 per cent women non-executive directors by 2020, backed up by an obligation on companies which fall short of that target, to appoint a woman candidate where a male and female candidate are equally qualified, is due to be prioritised in 2016.

Lord Davies therefore makes five "next step" recommendations as follows:

• The national call for action and the voluntary, business-led approach should carry on for a further five years to ensure substantive and sustainable improvement in women's representation on FTSE 350 boards.
• The voluntary target for women's representation on FTSE 350 boards should be a minimum of 33 per cent to be achieved in the next five years with all stakeholders working together to increase the number of women appointed as Chair, Senior Independent Director and executive directors; FTSE-listed companies should promptly address any shortfall in women on their boards.
• FTSE 350 companies should improve the gender balance and fundamentally improve the representation of women on the Executive Committee and senior leadership positions.
• An independent steering body be reconvened to support business, and monitor and report periodically on progress.
• That steering body should publish more detailed comments on the recommendations at the beginning of 2016.

This is an edited version of an article we wrote for the December 2015 edition of PLC Magazine. The full article is available here.

Revised Investment Association Principles of Remuneration

The Investment Association (IA) published the annual update of its Principles of Remuneration on 11 November 2015 (the Remuneration Principles). The only substantive change from last year is to state more strongly that, for equity-based long-term incentive awards, the total performance period and holding period combined should be at least five years. This is a theme which has been taken up by a number of investor bodies, and statistics show that this approach is beginning to be adopted more widely among listed companies.

Aside from this change, the covering letter to this year's update of the Remuneration Principles sets out some issues which are of concern to the IA's members. These may be summarised as follows:

• There has been a notable trend in above-inflation salary increases for executive directors. Any increase in excess of inflation or beyond any increase for the workforce generally should be justified with a clear and explicit rationale.
• Companies are still failing to make adequate retrospective disclosure of bonus performance targets and are relying too heavily on the statutory exemption from disclosure on the grounds of commercial sensitivity. Where companies do not disclose any targets or do not commit to full future disclosure, IVIS (the Institutional Voting Information Service, which is part of the IA) will be asked to issue a "red top", indicating a strong level of concern and, where the relative achievement of targets is disclosed but there is no commitment to disclose the actual target ranges, an "amber top" will be given, indicating a significant issue to be addressed. This policy takes effect for year-ends on or after 1 December 2015.
• IA members are still in favour of notice periods for directors of up to 12 months; new contracts should have equal notice periods for both the company and the director. Companies should also include clauses in new contracts allowing them to withhold pay in lieu of notice where there is any ongoing regulatory or internal disciplinary or misconduct investigation. In relation to this last point, it would in fact be unusual to terminate a director's employment by making a payment in lieu of notice while an investigation is underway and the inclusion of a clause, as suggested by the IA, would create a number of legal and practical difficulties. Nevertheless, the underlying concern to note appears to be that directors should not be receiving windfall PILON payments when they are subject to an ongoing investigation.
• Pension arrangements for executive directors should be in line with those for the rest of the company's employees.
• Recruitment or buy-out awards should not be re-awarded in circumstances where there has been a fall in the value of the company.
• Remuneration committees should take a firm approach in deciding whether a departing executive is a "good" or "bad" leaver; full justification of the treatment of leavers is expected.

The IA has also set up an Executive Remuneration Working Group to put forward proposals for a radical simplification of executive pay. It is due to report in Spring 2016.

Updated PLSA Corporate Governance Policy and Voting Guidelines

The Pensions and Lifetime Savings Association (PLSA), the new name for the National Association of Pension Funds, published in December 2015 an updated version of its Corporate Governance Policy and Voting Guidelines.

The changes from last year are fairly limited. However, in relation to employment and remuneration issues, the following points are worth noting:

• This year, the PLSA is emphasising how corporate reporting should enable an investor to understand how the company is maximising the long-term value of the human capital it has at its disposal. The PLSA says that the composition of the workforce and the sustainability of the employment model are areas which warrant further transparency in order to enable a more holistic view to be able to be taken of the risks and opportunities present within a company.
• The PLSA expects the strategic report to provide a clear articulation of how the company's key assets - both physical and intangible - are engaged in the generation of sustainable value creation, and also that clear connections should be made to the chosen financial and non-financial KPIs and the reciprocal link with executive pay.
• In relation to the role of the remuneration committee, some wording has been added to set out the PLSA's expectation that remuneration committees take ownership of the design and implementation of the company's remuneration policy.
• On the alignment of executive pay policy with pay policies in the company as a whole, the PLSA repeats its statement that ever-widening pay differentials are often difficult to justify credibly and adds a warning to boards to be mindful of the possible negative impact on corporate culture and staff morale of widening inequality within the organisation.

Implications of the new Market Abuse Regulation for employee share plans

The EU Market Abuse Regulation (MAR) comes into force in the UK on 3 July 2016 and will repeal the EU Market Abuse Directive. Because MAR is a Regulation, it has direct effect in EU Member States without the need for implementing legislation (unlike a directive) and so will create a more consistent market abuse regime across EU Member States. There will be many changes in practice for listed issuers.

The European Securities and Markets Authority (ESMA) published its final report in September 2015 setting out draft technical standards on MAR. Then, in November 2015, the Financial Conduct Authority (FCA) issued a consultation paper on how it proposes to implement MAR in the UK. The deadline for responses is 4 February 2016.

Please click here for our briefing, explaining the changes in more detail. Set out below is an outline of the key issues affecting employee share plans.

Market Abuse Regulation: key issues for employee share plans

• The Model Code is partially incompatible with MAR and will be deleted. It will be replaced with guidance for companies to use when developing their own processes to allow persons discharging managerial responsibilities (PDMRs) to deal in the company's shares. The current exemptions in the Model Code for dealings in relation to employee share plans are replicated to some extent in MAR but not completely; for example, the exercise of options under all-employee share plans does not appear to be excluded.
• There will be a new de minimis threshold of €5,000 for the notification of dealings by PDMRs, although there is currently a lack of clarity over how exactly this will operate.
• Dealings by PDMRs must be disclosed within three business days rather than four as currently required. The company must also announce the transaction within three business days of it taking place rather than the company's disclosure obligation being triggered by a notification from the PDMR. The company will be unable to comply with its obligation where the PDMR fails to notify it of the transaction in time (or at all). ESMA recognises this difficulty but cannot correct it, as the rule is contained within MAR.

Guidance on the reporting of directors' remuneration

In 2013, the GC100 and Investor Group (the Group) published its Directors' Remuneration Reporting Guidance (the Guidance) to help quoted companies comply with the new directors' remuneration reporting regime. The Guidance was supplemented by an additional statement in 2014.

In December 2015, the Group announced that, having reviewed the Guidance, they believed that it continued to serve its purpose effectively and that they would not be making any changes to it. They will be conducting a full review of the Guidance in 2016 and will publish an update later this year. Matters which they will take into account as part of the review include:

• The experience of the full three-year cycle and issues that may arise as policies fall due for renewal.
• The research paper published by the Department for Business, Innovation & Skills in March 2015 on how companies and shareholders have responded to new requirements on the reporting and governance of directors' remuneration.
• Any changes to the legislation in this area arising from any revisions to the Shareholder Rights Directive.
• Any relevant proposals which emerge from the IA's Executive Remuneration Working Group.

Please click on the links below for the other articles in the January 2016 edition of Work, rest and pay:

• Looking ahead: timetable for key areas of employment law reform
• Employment highlights
• Pensions update
• Remuneration Code for banking and financial services firms
• Case law round-up
• Consultation catch-up