On 16 November 2016, the IA published new guidelines setting out
the expectations of institutional investors in relation to
viability statements prepared by companies under provision C.2.2 of
the UK Corporate Governance Code. The guidelines include a number
of recommendations concerning the period of the viability
assessment, the prospects and risks considered when assessing
viability and transparency around stress testing and qualifications
Among other things, the guidelines indicate that:
Longer time horizons should be considered when selecting the
appropriate period for assessing a company's future viability.
Three to five years seems to have become standard practice, but the
IA's members expect greater differentiation between companies,
and viability statements addressing longer timeframes given the
long-term nature of equity capital and directors' fiduciary
duties. Viability statements should state clearly why a particular
assessment period was chosen. Factors such as the company's
business and sector and its investment and business cycles should
Directors should look at the current state of affairs, and not
limit their consideration of viability to medium or long-term
Investors would welcome the viability assessment addressing the
sustainability of dividends.
Risks that impact performance should be distinguished from
those that threaten operations; the viability assessment should
focus on the latter.
Viability statements should explain why the disclosed risks are
important, and how they are managed and controlled as well as the
likelihood of a risk occurring and its possible impact. It is
helpful to rank the disclosed risks (for example, low, medium,
high) and indicate whether it has increased or decreased in
likelihood from the previous year.
Investors would welcome greater transparency around stress
testing. The guidelines suggest disclosure of the specific
scenarios considered and likely outcomes, as well as a description
of the specific mitigating actions taken or any remedial actions
which may be necessary. Reverse stress testing is also
Qualifications should be clearly distinguished from
assumptions. Both should be specific to the company rather than
generic, and they should not include matters that are highly
unlikely either to arise or have a significant impact on the
company. Companies are encouraged to treat the guidelines, though
directed at premium-listed companies, as best practice.
An assignment of rights under a contract is normally restricted to the benefit of the contract. Where a party wishes to transfer both the benefit and burden of the contract this generally needs to be done by way of a novation.
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