November 6, 2012
We promised to keep you updated on the legal and regulatory developments which we identified as pending developments in our Alert “From the Shareholders’ Spring to the Autumn of Activism . . . Power without Accountability — A look at the latest developments in activism and related regulations in the UK and EU” dated 10 August 2012. Since that time there have been a few new developments as summarised below:
1. Institute of Chartered Secretaries and Administrators (ICSA): New Guidance for Shareholder Engagement — Issue of Consultation Paper (October 2012)
In July 2012, ICSA announced that it would partner with the Investor Stewardship Working Party to develop a good practice guide to supplement (not replace) the guidance in the UK Stewardship Code (see 3 below).
Together the groups concluded that in addition to improving the process of holding engagement meetings with shareholders, the very tone of conversation between companies and their investors should change.
ICSA published its consultation paper on 12 October seeking views on:
- Improving the quality of the engagement process: Whether the nature of the discussion between a company and its institutional investors needs to change.
- Improvements to the process of holding engagement meetings: Views on a range of practical measures which could make meetings more productive for all parties are being sought.
- Provision of feedback: Whether companies and institutional investors should seek direct feedback on the quality of meetings as an integral part of the engagement.
- Other considerations: The paper also discusses other issues, including some flagged in the recent Kay Report including the merits of the establishment of an Investors’ Forum.
The consultation period ends on 30 November 2012, and the group intend to issue its guidance in March 2013.
2. Changes to the UK Code on Corporate Governance and Guidance on Audit Committees — Feedback from the UK Financial Reporting Council (FRC) on Proposed Revisions (September 2012)
As previously reported, the FRC issued a consultation document in April 2012, seeking views on proposed changes to the UK Corporate Governance Code (the CG Code) and the Guidance on Audit Committees (the Guidance). In September 2012, the FRC issued a feedback statement on its consultation and has now issued new editions of both the CG Code and the Guidance.
The FRC is proceeding with the majority of proposals set out in the original consultation. A few amendments however have been made to the final editions of the documents in response to feedback including the following:
- The board must confirm that the annual report and accounts, taken as a whole, are fair, balanced and understandable and provide the information needed for shareholders to assess the company’s performance, business model and strategy. This is a change from the initial proposal that the board set out the basis on which it had made that assessment.
- The revised guide recognizes the interests of other providers of capital to the Company and the need to engage with them (such as bond holders) but now goes on clarify that the interests of shareholders are nonetheless the primary responsibility of the board.
- FTSE 350 companies should put the external audit contract out to tender at least once every ten years. This proposal which had been put forward in the original consultation has been adopted but there has been clarification on the tender process which companies should run. In particular, the FRC has made it clear that while it continues to believe in the merits of regular tendering of the external audit contract (such as reducing the perception of (over) familiarity and an opportunity for new personnel and audit techniques to be deployed for the better of the audit process), there is no presumption that the tendering process must result in a change of auditor.
The new editions of the CG Code and Guidance will apply to reporting periods beginning on or after 1 October 2012.
3. Changes to the UK Stewardship Code — Feedback from the FRC and new edition of the Stewardship Code 
The FRC has issued a new edition of the UK Stewardship Code. In April 2012, the FRC issued a consultation document containing proposals to amend the Code. Industry was generally supportive of the proposals outlined by the FRC and the majority of changes have been implemented in the new edition of the Stewardship Code, some with modifications. These include:
- Definition of Stewardship: Inserting wording stating that the Code is directed in the first instance to institutional investors with equity holdings in UK listed companies but also that, where signatories apply a stewardship approach to assets other than equities, they are encouraged but not required to disclose that they do so.
- Transparency on Collective Engagement: Revisions on collective engagement to encourage disclosure of when investors might collectively engage.
- Transparency on Stock Lending: Additions requiring disclosure of an organisations’ approach on stock lending.
- Transparency on Proxy Voting Services: Extending the revisions that encourage investors to disclose the use made of any proxy voting or other advisory services (by describing the services employed and specifically identifying these third–party service providers) and the extent to which they follow, rely upon or use recommendations made by such services.
- Ultimate Responsibility: Clarifying that even if investors outsource some of their stewardship activities to service providers, they retain responsibility for ensuring those activities are carried out in a manner consistent with their own approach to stewardship.
- Becoming an ‘Insider’: Expanding the proposal that investors should indicate whether or not they are willing to be made insiders to also suggest that, where they are, they should indicate the mechanism by which this could be done.
As with the CG Code and Guidance, the new Stewardship Code is effective from 1 October 2012. The FRC has also flagged that it will review the need for further changes in relation to the use of proxy voting or other voting advisory services, in light of market and regulatory developments.
 See client alert (Fn 1) for a summary of the review being undertaken by ESMA
Gibson, Dunn & Crutcher lawyers are available to assist in addressing any questions you may have about these developments. Please contact the Gibson Dunn lawyer with whom you work, or any of the following lawyers in the firm’s London office:
Selina S. Sagayam (+44 20 7071 4263, firstname.lastname@example.org)
James Barabas (+44 20 7071 4253, email@example.com)
Jeffery Roberts (+44 20 7071 4291, firstname.lastname@example.org)
© 2012 Gibson, Dunn & Crutcher LLP
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