Corporate governance trends in Europe

Focus areas include disclosure, reporting and transparency

This article was produced by ELITE Connect and originally published on the ELITE Connect platform

Good corporate governance is often heralded as one of the key factors in establishing trust between companies and their shareholders – but with a raft of legislation to deal with, what are the current issues IROs should be aware of? 

Main current trends focus on a combination of disclosure, reporting and transparency. The Financial Reporting Council’s (FRC) Financial Reporting Lab recently examined how companies have responded to investor calls for better disclosure of dividends, as highlighted in its November 2015 project report. It finds work is still needed: of the 177 FTSE 350 companies that published an annual report between November 2015 and July 2016, just 28 improved their disclosure of dividends. As a result, the lab advised companies seeking to improve their communication with investors to provide more detailed disclosure on how dividend policies operate in practice, with more clarity on factors considered in both the setting of the policy and in the dividend declaration.

Financial reporting is also in the spotlight, as issuers in the EU move toward the European Single Electronic Format (ESEF), the new required digital format they must use to report company information from January 1, 2020. In response, the European Securities and Markets Authority (ESMA) has published proposals recommending Inline XBRL as the most suitable technology for the ESEF because it enables both machine and human readability in one document. This digital format will enable users to conduct software-supported analysis, as well as compare large amounts of financial information at one time.

The Transparency Directive (TD) issued in 2004 and revised in 2013 is still a hot topic within the investment landscape with the introduction of a new regulatory technical standard on access to regulated information at EU level adopted and published in August 2016. The TD aims to ensure transparency of information for investors through a regular flow of disclosure of periodic and ongoing regulated information and the dissemination of such information to the public. With such transparency, European issuers build sustained investor confidence and contribute to the capital markets.

For many of these regulations, it’s a fair observation that the UK is generally ahead of the game compared with many of its European counterparts, but this can be a double-edged sword. ‘In Britain we have a long track record of honing our corporate governance rules and practice,’ points out Alexandra Hockenhull of Hockenhull Investor Relations and a member of the Quoted Companies Alliance (QCA) corporate governance expert group. ‘The QCA lobbies hard to draw to the attention of EU regulators that a one-size approach does not fit all. Rules designed for large multinationals, particularly in countries still developing their corporate governance frameworks, can be needlessly onerous and simply inappropriate for growth companies.’ 

In terms of corporate governance on the ground, Steve Nightingale, director of IR for FTSE 250 company Britvic, offers an insight into the issues he’s currently facing: ‘The main subject of discussion for us at the moment is around board succession planning, as the chairman has been in the role since 2005 and is due to rotate off. Likewise, the constitution of the board and support/challenge role to the executive team is an important topic. Finally, the principles of remuneration and engaging with shareholders ahead of changes to targets was a key theme last year.’

So how can IROs best communicate their corporate governance topics? ‘We reach out to major holders ahead of proposed changes to remuneration policy or other areas such as audit or succession planning each year before the annual report is published and ahead of the AGM voting season,’ says Nightingale. ‘Likewise, we engage with the main proxy bodies, such as ISS or Glass Lewis, as best we can.’

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