8 min. read

Boardroom Briefing

July 2019

Shareholder votes on dividends

Last year the Government asked the Investment Association to investigate a growing trend whereby companies avoid a shareholder vote on dividend payments. The IA's Report has found that in 2018 22% of all companies in the FTSE All-Share index that paid dividends had no vote on the distribution (either because only interim dividends were paid, with no shareholder vote required, or Articles permitted a final dividend without a vote). The practice was widespread amongst the top 20 in the FTSE 100 and with investment companies. Reasons for avoiding a vote included the fear that it would delay the final payment where companies provide a regular income stream of quarterly or even monthly payments; problems with Solvency II capital requirements where a final dividend is treated as a debt; and the requirements of other regimes where a company is dual-listed.

The IA maintains that investors do not always welcome aggressive dividend policies and the lack of a vote robs shareholders of the opportunity to engage with a company on its capital allocation policies and to signal their approval of dividend policy (though no evidence is offered that shareholders ever vote against a dividend). The IA wants companies to articulate clearly a distribution policy, including dividends, share buy-backs and other capital returns. Guidance on such a policy will follow in Autumn 2019 (building on the IA's Long Term Reporting Guidance) and the IA will then recommend to Government if it thinks a shareholder vote should become mandatory.

Board evaluations

The UK Corporate Governance Code requires all listed companies to have a formal and rigorous annual evaluation of the board, its committees, the chair and other directors. The FTSE 350 should use an external facilitator for such an evaluation at least every three years, and other companies are asked to consider doing the same. Responding to concerns as to the quality of these evaluations, the Government asked the Institute of Chartered Secretaries and Administrators to identify possible improvements. ICSA's consultation suggests a code of practice for service providers, a set of voluntary principles to be applied by corporates and guidance for them on reporting the conduct and outcomes of the evaluation.

The market in FTSE 350 evaluations is highly concentrated, with 63% undertaken by four firms and 30% by just one. The code of practice will invite service providers to sign up to its minimum standards, with companies having to explain if they choose to use a non-signatory. Although no required qualifications are proposed, evaluators would need to demonstrate certain competencies, independence and procedures to address conflicts of interest. The provision of other services to the company during the course of an engagement or subsequently would be banned if that creates a conflict risk. Three consecutive evaluations should be the maximum for any one reviewer. The question is raised whether shareholders should be involved in the appointment and whether the reviewer might quiz external stakeholders. There is also a suggestion that what is said in the annual report about the evaluation and its outcomes should require approval from the evaluator.

Directors fined for failing to announce bad news

The Financial Conduct Authority has fined a London listed company £411,000 for failing to update the market on its deteriorating financial performance and other breaches of the Listing Principles. The CEO and CFO were also fined £214,300 and £40,200 respectively for being knowingly concerned in those failures. Cathay International Holdings Limited, a Hong Kong based healthcare business operating in China, lacked proper procedures, systems and controls to monitor its performance and compare against market expectations, in breach of Listing Principle 1. That meant the company failed to disclose its worsening position as soon as possible, in breach of Premium Listing Principle 6 and the predecessor to Article 17.1 of the Market Abuse Regulation. Cathay had rejected its broker's advice on the need to announce, wanting instead to wait until other bad news could be disclosed at the same time. When the announcement was finally made, the share price dropped 18.2%. To compound these errors, when investigated by the FCA, the information Cathay gave the regulator was materially different to what had actually happened, in breach of Listing Principle 2 which requires a company to deal with the FCA in an open and co-operative manner. In a relatively rare move, the FCA also fined the two directors because they had actual knowledge of the relevant facts and were aware that their failures were in breach of the rules.

Round Up

  • AIM fine – AIM company Real Good Food plc has been publicly censured and fined £450,000 (discounted to £300,000 for early settlement) for multiple breaches of the AIM Rules: disclosing misleading or incomplete information on expected trading; failing to disclose related party transactions with directors; the chairman dealing in a close period; and failures in its procedures and controls. A new board is now in place.
  • FAQs on the Remuneration Report and Policy – we referred last month to small changes being made to the requirements for a listed company's Directors' Remuneration Policy and the Remuneration Report. A helpful set of FAQs now summarises the changes and provides answers to some of the trickier questions.
  • Audit Committee guidance for smaller listed and AIM companies - the FRC and the ICAEW have published a short guide for audit committees of smaller listed and AIM companies on improving financial reporting. It suggests questions the audit committee should ask itself and others to be directed to the auditors. Some practical tips are offered (but with little that is new).
  • Corporate governance in the rest of the world – the OECD has published its 2019 Factbook detailing corporate governance requirements in 49 jurisdictions across the world.
  • Workforce reporting – the Pensions and Lifetime Savings Association, representing 1,300 pension schemes with £1 trillion in assets, wants FTSE 100 companies to discuss and report on diversity, pay practices and mental health as well other workforce issues. The PLSA believes that a company's workforce is critical to long-term success. New rules requiring pension schemes to develop a policy on environmental, social and governance issues come in on 1 October 2019 and the PLSA has recently published guidance on that for scheme trustees.
  • Index – changes to our website mean we cannot include our usual link to an index of past editions of Boardroom Briefing. If you have used the index and would find it useful to continue to have access, or if you are searching for a past article, please contact Martin Webster via his profile below.