On 17 December 2010, the Irish Stock Exchange ('ISE') published new listing rules requiring all companies with a primary listing on the Main Securities Market of the ISE to comply with a new annex to the rules focussed on corporate governance matters (the 'ISE Annex'). This development follows the publication last year of the new UK Corporate Governance Code ('UK Code'). The UK Code has been incorporated into the ISE's listing rules. Gerry Beausang considers the implications of the heightened compliance standards on both fronts for ISE listed companies.
The UK Corporate Governance Code
In May 2010, the Financial Reporting Council in the United Kingdom published the UK Code, a document updating and amending the earlier Combined Code on Corporate Governance 2008 (the 'Combined Code'). The revisions to the Combined Code came about in the wake of economic decline since the last review which was finalised in 2007.
Some of the key changes contained in the UK Code are:
- Annual re-election of the members of the board of directors.
- External board evaluations at least once every three years. Any connection between the company and the body conducting the review must be disclosed.
- Ensuring the performance-related elements of executive directors' remuneration are designed to promote the company's long term success, while discouraging performance-related remuneration packages for non-executive directors.
The adoption of the UK Code is important, not only to provide for higher standards in corporate governance in Ireland, but also to boost international investor confidence in the Irish market. This is because the UK Code is internationally regarded as the pre-eminent corporate governance standard, a fact which the ISE has specifically acknowledged.
The ISE listing rules oblige every company listed on the Main Securities Market to state in its annual report whether it has complied with all of the provisions of the UK Code and to set out the nature, extent and reasons for non-compliance. In a veiled shot across the bows of listed companies, the ISE has stated that it feels that companies could do more to 'enhance the quality and meaningfulness' of their corporate governance disclosures in annual reports. Specifically, the practice of recycling descriptions that replicate the wording of the UK Code or the ISE Annex is now frowned upon. Companies should now aim to provide shareholders with more insight into the company and the environment in which it operates.
ISE Annex - Not Just 'Painting the Letterbox Green'
The ISE had issued a consultation paper in July 2010 regarding the proposed changes to the corporate governance elements of the ISE listing rules. Considering the feedback received, the ISE decided not to adopt a distinct Irish Corporate Governance Code. However, given the increased concentration in recent times on corporate governance in Ireland, it was felt that the recommendations contained in a joint ISE and Irish Association of Investment in Managers' report were a worthy addition to the corporate governance regime in Ireland. This report, which was released in March 2010, reviewed ISE listed companies levels of compliance with the Combined Code (as was then in force) (the 'Report'). The ISE Annex introduces nine recommendations in the Report which are mainly concerned with board composition, board evaluation, remuneration and the role of and work carried out by the audit committee. It also contains interpretive provisions for companies that are of equivalent size to companies that are included in the FTSE 100 and FTSE 350 indices.
The key proposals set out in the feedback statement which the ISE issued in September 2010 are generally mirrored in the ISE Annex. Several additional provisions have been included, however, concerning remuneration. Interestingly, companies are now required to describe any arrangements designed to achieve the recovery of variable compensation which has been awarded on the basis of assessments or data which are subsequently found to be materially inaccurate or provide an appropriate negative statement.
Practical Implications
ISE listed companies and their boards will now need to review the quality of their corporate governance disclosures in their annual reports, particularly with respect to the remuneration of corporate officers and the question of whether the current board is genuinely fit for purpose given its size and structure. It will be interesting to observe how this affects the Annual Reports of listed companies in the near future. The new ISE listing rules became effective for all relevant companies with accounting periods commencing on or after 18 December 2010. The requirement to comply with the UK Code is already in place and applies to the relevant companies with accounting periods beginning on or after 30 September 2010.
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