UK: Governance in brief – October 2005

Your summary of the latest corporate governance developments
Last Updated: 8 November 2005
Most Read Contributor in UK, August 2017

Deloitte survey shows much work to be done to produce first mandatory OFRs

In Brief: The new regime for the OFR was finalised with the publication of the ASB’s Reporting Standard 1 (RS 1) in May 2005. A Deloitte publication, ‘Hold the Front Pages’ surveys current narrative reporting practices and considers the areas where companies are falling short of RS 1 requirements, which will be mandatory for OFRs prepared in respect of periods commencing on or after 1 April 2005.

The survey found that:

  • 82% of companies are already preparing an OFR or showing ‘clear recognition’ of previous ASB guidance for best practice OFRs;
  • 55% of companies are not disclosing the principal risks facing the business and 59% do not include any key performance indicators (KPIs); and
  • the main gaps between current practices and RS 1 requirements relate to forwardlooking disclosure requirements, KPIs, risks and uncertainties and the need for the OFR to be ‘balanced’.

The publication also includes an outline of the relevant regulations, an OFR checklist based on RS 1 and an illustrative OFR designed to demonstrate how an RS 1-compliant OFR might look. It also refers the reader to the CIMA website which includes a legal opinion from Allen & Overy regarding directors’ liability for OFRs.

Date: 19 October 2005

Source: Deloitte

Further info: www.deloitte.co.uk (Services/Assurance & Advisory/Corporate Governance/Surveys/Hold the Front Pages)

Revised version of Turnbull Guidance published following FRC review

In Brief: The FRC have published a revised version of the Turnbull Guidance on Internal Control which will take effect for periods commencing on or after 1 January 2006. This new guidance includes limited changes to the 1999 Guidance and no obvious changes to the draft revised guidance issued in June 2005 by the FRC review group.

The key changes require the board to review its application of the Guidance on a continuing basis and to confirm that necessary action has been or is being taken to remedy any significant failings or weaknesses identified from their review of the internal control system.

A new preface encourages boards to use their internal control statement as an opportunity to communicate to shareholders and to include ‘such meaningful, high-level information’ necessary to assist the shareholders’ understanding of the relevant system and processes in place for management of risk and internal control.

There has been no introduction of a requirement to give an annual statement on the effectiveness of internal controls or to change the auditors’ responsibilities along the lines of the Sarbanes-Oxley Act Section 404 requirements.

Date: 13 October 2005

Source: Financial Reporting Council

Further info: http://www.frc.org.uk/press/pub0945.html

Applies: Periods commencing on or after 1 January 2006

Government issues draft clauses on voting transparency In Brief: Following consultation on the Company Law Reform Bill, the government has decided that it would be valuable and feasible to require the disclosure of how shares have been voted by institutional investors. Draft clauses have been published and will be included with the completed draft Bill.

These provisions are designed to enable retail investors to obtain information on how assets owned by institutional investors on their behalf are voted. The clauses as drafted may require disclosure "to such persons as may be specified, or to the public, or both" because it is anticipated that, as well as serving the interests of the relevant retail investors, full public disclosure might also improve the governance of listed companies.

Date: October 2005

Source: Department of Trade and Industry

Further info: http://www.dti.gov.uk/cld/clauses.htm

First criminal action finds directors guilty of market abuse Offences

In Brief: In August 2005, the former Chairman and Chief Executive and the former Finance Director of AIT plc were found guilty of "recklessly issuing a statement that was misleading, false or deceptive in a material particular" in the first criminal prosecution of its kind brought by the FSA under the Financial Services and Markets Act 2000. They were sentenced in October 2005 to 3_ and 2 years imprisonment respectively and were disqualified from being company directors for 6 years and 4 years respectively.

Date: October 2005

Source: FSA

Further info: http://www.fsa.gov.uk/Pages/Library/Communication/ PR/2005/106.shtml

Audit Committees may be enshrined in legislation (8th Directive broadened)

In Brief: The 8th Directive on Company Law has now been passed through its approval process and will result in more laws in member states mandating audit committees or other bodies performing audit committee functions. Member states will have two years from early 2006, when the official translations will be finalised, to implement the Directive.

The Directive will result in requirements relating to audit committees monitoring the effectiveness of internal control and risk management systems. The make-up and responsibilities of audit committees, including the need for at least one member ‘with competence in accounting and/or auditing’ and the responsibility for reviewing and monitoring independence of the statutory auditor, would no longer be in the form of recommended practice but would be prescribed by legislation with the related enforcement implications.

Given that there is already a ‘comply or explain’ approach in the UK, supported by the Listing Rules (which have a statutory basis), there is expected to be some form of consultation in the UK on how the new requirements should be implemented.

Source: European Commission

Further information: http://www.europa.eu.int/comm/internal_ market/en/company/company/official/index.htm (8th Directive)

Code of Governance launched for voluntary and community sector In Brief: In response to demand from voluntary and community organisations for guidance on the main principles of governance, on related roles and responsibilities and on effective decisionmaking and accountability, a Code of Governance was issued by the Governance Hub in July 2005. The Code is designed for those involved with governance especially trustees and chief executives.

Date: July 2005

Source: Governance Hub

Further info: http://www.governancehub.org.uk/?Getting_ help_with_governance:A_Code_of_Governance_for_the_Voluntary_ and_Community_Sector

Company Law Reform Bill on its way

In Brief: The deadline for consultation responses to the DTI’s White Paper has ended and the Government is now putting the detail into a draft Bill to be introduced to Parliament in November 2005 and expected to become law by Spring 2006.

The Bill will include the new statutory statement of directors’ duties which seeks to embed the concept of ‘Enlightened Shareholder Value’. This concept means that the directors’ aim should be the success of the company for the benefit of its members as a whole, having regard to employees, customers and suppliers and the community more widely.

There will also be provision for members (holding >5% voting rights or at least 100 of whom each hold >£100 paid up capital on average) to have the power to require the company to publish on its website a statement setting out matters relating to the audit of the company’s accounts or the circumstances of an auditor ceasing to hold office, ahead of the next accounts meeting.

The Bill will also give a statutory footing to shareholder derivative actions, the method by which shareholders are able to enforce the company’s rights where there has been a breach of duty by the directors.

Date: Consultation on White Paper ended in June 2005

Further info: http://www.dti.gov.uk/consultations/consultation-1472.html

Time to take action

  • Consider timetable and process for the production of the mandatory OFR including consideration of inclusion and reliability of key performance indicator (KPI) data and whether to take legal advice (e.g. in relation to forward-looking statements).

On the horizon

  • Finalisation of the 4th and 7th Directives.
  • Publication of Company Law Reform Bill.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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