EZINE > July 2011 inside this issue: what you need to know about CSDR HM Treasury Policy Analyst Alan Barnes on central securities depositories regulation AGM end-of-season review What did the 2012 AGMs tell us? DIRECTORS' PAY Richard Carter from BIS on the Government's plans for reform The barclays perspective Company Secretary Lawrence Dickinson on openness and debate it's a confidence thing Andrew Verity from BBC Radio 5 Live reveals his take on the global economic crisis
Directors' pay
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Alan Barnes
HM Treasury Policy Analyst Alan Barnes discusses the potential impact of the Commission’s proposal for a central securities depositories regulation
Commission Proposal for Central Securities Depository Regulation and Dematerialisation The European Commission published a proposal for a regulation on central securities depositories and securities settlement (CSDR) in March 2012. The CSDR is part of a wider package of legislative reforms that the Commission is rolling out to strengthen European post-trade financial market infrastructure following the financial crisis and to address the barriers to the creation of a true competitive single market in post trade financial services. The CSDR is currently being discussed by Member States in the Council and by MEPs
in the European Parliament. The CSDR is expected to be agreed by the Council and Parliament in early 2013. The CSDR covers three main areas. Firstly, it sets out an EU-wide regulatory and prudential regime for the authorisation of central securities depositories. This sets out various operational, business, and legal requirements for the provision of services by CSDs. This will be similar to the FSA and the Bank of England’s existing regulatory regimes for the authorisation and supervision of CREST as the UK central securities depository CREST. continued on Page 3
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Alan Barnes Secondly, the CSDR looks to harmonise member states national securities settlement rules to support and encourage cross border securities settlement. This will cover rules for the length of time required for settling securities and the application of penalties for the failure of securities settlement transactions. Thirdly, the CSDR looks to establish access arrangements between central securities depositories and between central securities depositories and other financial market infrastructure so that they can obtain access to each others’ services. This should help to establish a competitive single market in post trade financial services which should reduce costs and improve services. The CSDR has two specific areas which directly impacts upon companies and shareholders. The Commission’s current proposal, which is subject to negotiations between Member States in the Council and MEPs in the European Parliament, intends to mandate the dematerialisation of bonds and equities. However, negotiations will determine where dematerialisation is actually mandated, when dematerialisation might be required, and whether it will apply to
This should help to establish a competitive single market in post trade financial services which should reduce costs and improve services
new and old securities. We understand from informal discussions with various market participants, registrars and companies that a key issue might be how dematerialisation would impact upon the legal rights of paper share holders who are the legal owners of their shares and can exercise their rights and entitlements directly vis-a-vis the issuing company. There is also the issue of whether companies and shareholders would benefit from dematerialisation given the potential cost of dematerialising existing paper shares and depending on what charges shareholders
might incur from holding electronic book entry shares with brokers and custodians against any potential reduction in securities settlement transaction charges. Secondly, the Commission’s current proposal intends to allow companies to issue their shares through foreign central securities depositories. This could create a more competitive market for issuance services as companies would not be restricted to using their national central securities depository. However, enabling companies to issue their shares through foreign central securities continued on Page 4
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Alan Barnes depositories could raise legal uncertainties as regards whether the foreign central securities depositories’ national law or the issuing companies national law might be applied to determine any disputes concerning the ownership, rights, and entitlements to those shares. Depending on what law is applied, shareholders might have different ownership and shareholder rights. Separately, in the Council and in the European Parliament, we are seeking to ensure that EU financial services legislation supports ‘open access’ arrangements between financial market infrastructure (exchanges, central clearing counterparties, and central securities depositories) so that they can access each others’ services. This would support establishing a single market in post trade financial market services. This is important as regards allowing market participants and users to choose where they wish to trade, clear, and settle their securities. Some financial market infrastructures operate anti-competitive practices that force market participants and market users to use their exchanges, central clearing counterparties, and central securities depositories which potentially enables them to increase their
charges and invest less in improving their services. Enabling access between financial market infrastructures would increase competition in post-trade financial services which should reduce costs and improve services. Such open access and a competitive single market in post trade financial market services could be important for you, as it could allow your brokers to switch services and reduce their trading, clearing, and settlement costs, which in turn could be passed down to you as market users.
peter swabey page 5
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peter swabey
Peter Swabey, Company Secretary & Industry Leadership Director at Equiniti, highlights some early trends from the 2012 AGM season
What did the 2012 AGMs tell us? So far, the 2012 AGM season has given us some interesting insights, probably the most important of which is the significant increase in average voting levels. For meetings up until the end of May, this figure stands at 71% in the FTSE100. In the same period in 2011 it was 67% in the FTSE100 and 46% in the FTSE250. It could be argued that this elevated figure is, to some extent, related to a wider sample of meetings. But with the highest scoring company reporting 96%, and 10 others in the FTSE100 getting more than 80% capital voting at their AGM, it does seem to be the case that voting levels are steadily rising – and that must be a good thing. Another hot topic has been shareholders’ questions at general meetings – unsurprisingly, they tend to turn the spotlight on remuneration. These questions can be particularly testing if a company has either reduced or failed to pay dividends whilst at the same time making continued on Page 6
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Peter Swabey
With the current emphasis on the Commission, you might think that the UK Government has been keeping a low profile – far from it
significant increases in director’s remuneration. Share buy-backs and allotment of shares also gather a lot of attention Diversity was also a big source of discussion. With the response from the Commission to their recent consultation still pending, we looked at the number of women on boards. Overall, 13% of directors who were up for election were females – 15% in the FTSE100 and 11% in the FTSE250. But in that group, there were seven FTSE100 and 22 FTSE250 companies with no female directors at all. This is something to think about. The Commission is busy looking at a number of other issues, and we are expecting an action plan around October. They are
currently discussing board structures, shareholder identification, stewardship, company communications and reporting and, of course, executive remuneration. We don’t know what this will involve yet, but you should be aware that this is coming. With the current emphasis on the Commission, you might think that the UK Government has been keeping a low profile – far from it. Up for debate closer to home is executive remuneration, narrative reporting, the Kay Review and board diversity. There are also a number of people looking at trying to harmonise market standards and using Europe as a benchmark in their planning. Considering other models is a good thing, but in complying with Europe’s way of doing things, are we benefiting or just compromising? Dividends in CREST, interim securities and vote confirmation are issues that various parts of the industry are now asking registrars to address. Ultimately, we can do these things, but we have to question whether, from a client’s perspective, these initiatives have a positive impact or are the best use of funds? I’ll leave you to decide.
for more information: Please contact Peter Swabey at Peter.Swabey@Equiniti.com or your Relationship Manager. richard carter page 7
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Richard Carter
Richard Carter, Director of Business Environment for the Department of Business, Innovation and Skills, talks about the intended impact of directors’ pay reform
Changing the headlines on directors’ pay Directors’ pay just cannot seem to escape the media spotlight. How will the publication of UK Government reforms of directors’ pay (due to be in place by October 2013) change the headlines? Above all, these reforms will empower shareholders who feel they haven’t been listened to over recent months and years. But how? To start with, we need to completely disregard the current directors’ remuneration report, and start afresh. In future, companies will need to outline much more clearly how they have arrived at their directors’ pay policy – producing a policy report that is useful and will enable shareholders to decide whether or not they want to show their support. In the coming months, investors will start intimating what
they think a good pay policy will look like, but I also anticipate that they will want to engage on a company-by-company basis with the chairman of the remuneration committee, and not their professional assistants. The reasoning behind this is simple – if the chairman can’t succinctly explain what the pay policy is, there’s a good chance that it is not up to scratch. As well as a table setting out the key elements of pay, investors have made it very clear that they want to see how bonuses relate to the achievement of the companies’ strategy. To support this, I think it would be helpful if companies were explicit about how rewards are connected to success. Similarly, outlining the consequences for directors’ pay if a company was to underperform would also prove beneficial. Why do I think this will help continued on Page 8
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Richard Carter directors? If you have been clear and open from the beginning – and have the approval of your shareholders – you have evidence for the public forum when it becomes common knowledge that you have been rewarded for leading your company well. In my experience, rewards for success don’t gather media coverage. It’s the rewards for failure or mediocre performance that attract the scathing headlines. In recent years, remuneration reports have grown longer and more complex. With so many figures, it’s hard to decide whether they help or hinder, hence the desire for something more streamlined. With this in mind, each report will in future need to include a single total remuneration figure for each director. This should be accompanied by an explanation of performance against metrics for longterm investments. Information on pension entitlements, variable pay, details on the total shareholdings of directors and something to graphically compare company performance to the CEO pay should also be included. Exit payments also cause temperatures to rise. And so being clear about how the company proposes to deal with these and clearly stating the case for any exit payments is a good idea.
The policy report will be put to shareholders for approval. As the Prime Minister made clear in January, it is essential that shareholders are given a ‘binding’ vote on these issues. The details of the voting reforms have now been finalised. The binding vote on pay policy will take place at least once every three years, and include the companies’ policy on exit payments. The emphasis is very much on the concept of a ‘binding’ vote. This means that companies won’t be able to pay anything that falls outside the scope of that policy, unless it presents this separately to shareholders for approval. Although there is a minimum requirement for the policy to be approved once every three years, some companies may choose to do this more often. This will largely depend on a company’s size, circumstances, or as a result of a discussion with shareholders. If for any reason a company fails to secure shareholder support for its pay policy then it will have two choices. It could continue with the last policy to have been approved by shareholders, or if it’s essential to get a new policy in place, call an EGM to put this forward. The threshold for passing the binding vote has been subject to much debate. Government
consulted on this and decided that the law should require that this be an ordinary resolution and require a simple majority to support it. However, we are pleased that the Financial Reporting Council will consult on a potential change to the Corporate Governance Code, requiring companies to formally respond where a substantial minority of shareholders vote against the pay proposals. Companies would have to make a statement explaining what they intend to do to address shareholders’ concerns. These reforms are all about empowering the owners of companies. They are not about Government looking to micro-manage company business. Success will mean better engagement between companies and their shareholders throughout the year, not just in the run up to an AGM. Going forward, I would rather see newspapers reporting on successful engagement with shareholders than reverting back to the tired headlines on directors’ pay.
Lawrence Dickinson page 9
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Lawrence Dickinson
Lawrence Dickinson, Company Secretary at Barclays, explains why openness and debate are the backbone of successful corporate governance
Corporate governance: a Barclays perspective Corporate governance issues ranging from directors’ pay, board effectiveness and new regulation in response to the financial crisis have been prominent in the first half of 2012. These issues have received media coverage provoking public debate and detailed dialogue between companies and their owners. Directors’ remuneration was a significant issue during the shareholder spring. Many companies, including Barclays, had their remuneration reports approved by lower majorities than in previous years. Engagement with shareholders on remuneration was very important ahead of the AGM and will continue to be essential. A key message from investors was that pay should be linked to performance. Shareholders had no objections
to high levels of pay in principle provided it was linked to performance. They wanted to see a rebalancing of the distribution of reward between employees and investors in the banking sector. In the UK, where the media and government have kept the remuneration issue in the public eye, shareholders’ voices have been louder than in other countries. This can cause difficulties for companies operating in a global market place for talent. The volume of regulation and consultation since the financial crisis has been overwhelming. It is important that regulation is tightened although it is also vital the response is proportionate. It’s hard to argue against the aims of each individual regulatory change or consultation in its own right but
when taken together from both a UK and EU level there is a danger of over-reaction. If we are swamped by new rules and regulations growth in the UK will be stifled. It will be harder for businesses to deliver growth and guide the country out of recession. There has been some scepticism in Brussels around ‘comply or explain’. In the UK, we have an obligation to demonstrate that ‘comply or explain’ does work. Open discussion and engagement with shareholders is vital to make principle based governance effective. There needs to be a genuine engagement where shareholders, if presented with compelling arguments, are willing to support companies and likewise companies must be prepared to adapt their behaviours and policies when explanations are not continued on Page 10
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Lawrence Dickinson
A critical element of a properly functioning board lies in a culture of openness and debate, facilitated by the chairman
accepted. To a greater or lesser extent this approach has worked through the AGM season and corporate behaviour has changed. Diversity has been another key focus area and we see this as broader than gender diversity. Barclays adopted a Board Diversity Policy recognising that increasing diversity at board level is an essential element in maintaining a competitive advantage. The Board is aiming to ensure that at least 20% of the Board is made up of women by the end of 2013 and for that position to have exceeded 25% by the end of 2015. All candidates will be judged on merit against objective criteria with due regard to the benefits of diversity.
A key aspect of the company secretary’s role is to support the chairman in ensuring that the Board is effective. In particular, the company secretary should ensure the Board is effectively addressing the most pertinent issues. A critical element of a properly functioning board lies in a culture of openness and debate, facilitated by the chairman. Although an ethos that encourages debate is firmly in place at Barclays, we do an external board evaluation every year. As you would expect, it allows us to monitor what’s going well at the Board, whilst highlighting emerging issues. A key issue is ensuring timely information flows to the Board. It is also essential to ensure that the right information flows to the Board. There is always a difficult balance between ensuring directors are properly briefed whilst ensuring they are not swamped by too much data. Non-executive directors can provide a wealth of experience from different areas of industry to aid the debate around the board table. Non-executive directors are not only there to challenge, but also to advise the chief executive. As a company secretary, it is essential you form a close relationship with non-executive directors as you support them
in understanding the organisation. This does require a time commitment on their part to invest in an induction programme and ongoing training. In conclusion, open, robust debate around the board table and genuine engagement with shareholders in a principle based ‘comply or explain’ regime are vital components of successful corporate governance.
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Andrew Verity
Andrew Verity, Finance Journalist and Presenter of BBC Radio 5 Live’s Wake Up To Money, argues that pessimism and doom-mongering is holding us back
It’s all about confidence Five years have passed since it was declared that Britain’s financial status was considered anything but great. Whether this can be attributed to economic stagnation or the crisis in the Eurozone is up for debate. The crisis afflicting our European counterparts has been compared to a slowmotion train crash. My view paints a less accelerated picture – I would describe it as a freeze frame. The situation in the Eurozone has remained fairly static for the past few years, which begs the question, why do so many people assume our whole economic future depends on what happens in Europe? It seems that we are frozen in crisis mode at the moment. Sir Mervyn King recently highlighted two obvious things about our economic situation. The first, and one that is a surprise to everyone, is that five years later we still haven’t succeeded in burying the financial crisis of 2008/9. And the second point, that pessimism is the general consensus, is tangible. continued on Page 12
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Andrew Verity The double-dip recession was supposed to be a nightmare scenario, and one that we were keen to avoid. Presented with the figures that confirmed the worst, there was still a reluctance to accept that we were now living the nightmare. These figures are a further kick in the teeth for economic confidence, with fear slowly taking over. The current situation in both Italy and Spain is testament to this. As fear over their ability to pay back their debts increases, so do the yields on the bonds covering the potential risk. Currently standing at 7%, this is unsustainable, and in equivalent terms, it’s like taking out a credit card to pay your mortgage. Lending has also fallen victim of consumer perceptions. A lack of confidence has reduced consumers’ desire to borrow – the general consensus that banks don’t want to lend is slowly being disproved. But regardless of whether the banks win this argument, housing transactions are continuing to fall, and they are already at their lowest level. Measures have been put in place to try to restore this confidence, but so far they don’t appear to have had much success. Budget cuts have so far failed to reduce the deficit, and as of yet the only positive thing to come out of
this is the willingness of international markets to lend us money at a more favourable rate. But we don’t want to borrow money, we want to do the opposite, which is the way to get the country thriving again. Sir Meryvn’s sombre outlook has us all imagining the worst. But there are ironies that suggest the Governor may well have practised his poker face. In the same week that he spelled doom and gloom for the economy, unemployment fell by 50,000 and inflation was sitting within the Bank of England’s target for the first time in years. Additionally, oil prices started to come down, and it is anticipated this may continue as energy companies showed reluctance in locking into existing prices. And surprisingly, a 3% rise in private sector wages has gone unreported. That’s higher than the rate of inflation, something we haven’t seen in years and is cause for celebration. Unemployment levels are reducing, house repossessions are far lower than expected, and the squeeze on living standards is starting to relinquish its grip. From a corporate perspective, things are also looking good. Wage costs have been below inflation for a sustained period of time, which has had huge benefits for the sector.
But they could be doing more. By spending some of the £754 billion (half the value of the economy), corporations could get us out of recession. So, why the reluctance to spend? The fear of a lack of return on investment means that companies are mirroring households in their ethos of battening down the hatches. I can understand why corporations are doing this, but in real terms, the value of their money is shrinking, which is dealing another blow to economic recovery. To make a full recovery, the economy depends on confidence, which has depleted in supply. This is something money can’t buy, and despite the billions of pounds invested in the Eurozone, confidence is far from palpable. One reason for this lies with many of the optimists, who have in recent years, been proved wrong. This has done little to restore faith. So what does this all mean for our situation now? Are we so preoccupied with potential doom that we are unwilling to take a risk, even if there is promise of a reward? Rather than learning from our previous mistakes, we seem crippled by them. If this level of fear continues, you may well be reading something very similar from me in another five years.