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IoD Directors' Briefing: Your update on Directorship and Governance 9 - 23 July 2020

23 Jul 2020

Welcome to your fortnightly IoD Directors’ Briefing, providing the latest news and insight in the field of directorship and corporate governance. Since our last briefing, tensions between the UK and China have intensified after the British Government announced plans to restrict the role Huawei can play in our 5G infrastructure.

The UK’s audit industry has come in for further criticism as the industry’s regulator found that a third of reviewed audits by the seven main accounting firms failed quality tests. This has led to calls for reform, notably the Chair of the Commons BEIS Committee, Darren Jones, who has urged the Government to press ahead with plans for a stronger statutory audit regulator to replace the FRC.

The Chancellor delivered his Summer Statement which introduced a range of measures including the Job Retention Bonus, a £1000 grant to firms who bring back furloughed staff. A number of notable companies including John Lewis, Primark and William Hill have announced plans to reject the pay-out with some acknowledging that they would have retained staff without the scheme being in place.

This edition’s Governance Perspective focusses on how board evaluation can be made quick, easy and effective. Morgen Witzel and William Harvey write about the approach to board evaluation they developed with the board of Libraries Unlimited, a charity that runs over 50 libraries in the South West, highlighting that time and cost can be a can be a concern for smaller organisations particularly charities with tight budgets.

In response to your comments, we’ve introduced a new section focussing on the third and public sectors. And as the Prime Minister encouraged a to return to the office, we’ve also included a new section featuring podcasts and videos to help you keep informed on your commute.

Companies
Charities and Third Sector
Policy and Regulation
ESG Issues
Investors and Stakeholders
Thought leadership and research
IoD in the news and advocacy
Podcasts and Videos
Responding to the Coronavirus Crisis
Resources for Directors

Governance Perspective

Board evaluation - how to make it quick, easy and effective - Morgen Witzel and William Harvey

Companies

21 July | Elon Musk qualifies for $2.1b payday

Telsa’s chief executive could receive $2.1bn after Tesla’s six-month average market capitalisation reached $150bn for the first time potentially triggering the vesting of the second of 12 tranches of options granted to the billionaire in his 2018 pay package to buy Tesla stock at a discount. The board must still certify the milestone before the vesting option is triggered. [Reuters]

17 July | Netflix adopts twin CEO approach

The S&P 500 video streaming firm announced plans to elevate the company’s chief content officer to co-chief executive – a power sharing arrangement with co-founder Reed Hastings. Such a structure is rare but a small number of firms have experimented with having two chief executives including Salesforce and Oracle although both recently abandoned this approach. [Wall Street Journal]

16 July | Wirecard CEO drew €35m loan from firm’s banking arm

Markus Braun, former CEO of the German payments group, borrowed €35m from the payment group’s banking arm in January. In the UK, such a transaction requires both shareholder approval  and board approval. Similarly, under German law, loans to related parties require the unanimous consent of the management and the supervisory boards and need to be granted at market-based conditions. However, in this instance most of the parent group’s supervisory board only learned about the loan after the money was paid out. [Financial Times]

16 July | NMC Health’s accounts confused with those of founder

Auditors found that debt owed by founder BR Shetty was wrongly assigned to NMC by one of India’s biggest banks, Bank of Baroda. The Abu Dhabi based healthcare firm now in administration had been a FTSE 100 company until its shares were suspended in February. The discrepancy points to serious internal control issues in the company’s dealings with banks. [The Telegraph]

14 July | Huawei to be stripped from UK 5G network by 2027 

Last Wednesday, the Government made the announcement that all of the Chinese telecoms manufacturers equipment would have to be removed from the UK’s 5G infrastructure by 2027. The measures will be put into force by the by the forthcoming Telecoms Security Bill which will be introduced to the Commons in the Autumn. [Sky News]

Charities and Third Sector

20 July | University of Aberdeen Trustees breached duties

The Scottish Charities Regulator found that trustees breached their duties by making substantial settlement payments to the University’s former principal. The regulator found that the charity trustees breached both the terms under which the university received funding from the Scottish Funding Council and the University’s own financial regulations. [Civil Society]

13 July | UK Sport and Sports England launch review of Code for Sports Governance

The Government agency responsible for the Olympics and the public body responsible for community sport in England will jointly review the Code which was first launched in 2017. The review will focus on areas that can help promote greater diversity. According to research undertaken by the two organisations, black, Asian and minority ethnic (BAME) people accounted for just 5.2% of board members across their 130 funded organisations. [BBC] 

Policy and Regulation

21 July | FRC calls for higher quality disclosures to reflect Covid impact

The regulator completed its first thematic review of company reporting since the onset of Covid-19 pandemicThe review found that although companies provided sufficient information to enable a user to understand the impact Covid-19 had on their performance, position and future prospects, some - particularly interim reports - would have benefited from more extensive disclosure.  [Accountancy Daily]

19 July | Firms turn down job retention bonus

Fashion retailers Asos and Primark, holiday park operator Center Parcs, the department store John Lewis,  property website Rightmove, and caterer Compass are all among firms that declined the £1,000 bonus. Some MPs and economists have warned that the job retention bonus represents a dead weight given it could be claimed for staff that would have been returned from furlough anyway. [BBC]

15 July | A third of audits ruled substandard

The Financial Reporting Council’s annual inspection of the seven biggest firms — KPMG, EY, PWC, Deloitte, Grant Thornton, BDO and Mazars — reviewed 88 audits, including those for 45 FTSE 350 companies. It found that 29 of the 88 audits reviewed required more than limited improvements, while seven of these required significant improvements. In response, the Chair of the BEIS Committee has called on Government to bring forward legislation needed to “help improve audit quality and ensure there is a tough and proactive regulator”.  [The Times]

Investors and Stakeholders

19 July | UBS research suggests stocks underperform after pay revolt

The Swiss bank’s asset management arm examined 1,700 incidents finding that companies that lost a vote on executive remuneration at their annual meetings were much more likely to suffer share price underperformance. This was particularly pronounced in the S&P 500, where losses of more than 25 per cent were twice as likely at companies after a failed “say-on-pay” vote. [Financial Times]

15 July | Bondholders criticise ‘earnings before coronavirus’ metric

The Credit Roundtable, a bondholder advocacy group, warned companies against elevating their EBITDA by adding back losses related to the coronavirus pandemic. The group which represents AllianceBernstein, Nuveen and Franklin Templeton and others warned that so-called EBITAC calculations are obscuring credit risks in a letter to global regulators. [Reuters]

14 July  | BlackRock reprimands boards over climate inaction

The world’s largest asset manager voted against directors at 53 companies over failure either to prepare their businesses for a warming planet or for failing to adequately disclose climate risks. BlackRock rejected the election of directors at companies, including at US oil major Exxon Mobil and Swedish automaker Volvo for making “insufficient progress” on climate disclosures. [Bloomberg]

10 July | Standard Life Aberdeen divests from Boohoo

After revelations concerning the online fashion retailers supply chain, the asset manager sold almost all of its shares in Boohoo. The asset manager, which had been Boohoo’s third largest shareholder, claimed that the company’s response to concerns around working conditions had been ‘inadequate’. [Reuters]

ESG Issues

13 July | SASB and GRI announce greater collaboration

The Sustainability Accounting Standards Board and the Global Reporting Initiative announced a collaborative work plan to provide more clarity on how their two sets of standards can be used together for sustainability reporting. The collaboration comes as investors voice concerns over proliferation of conflicting sets of sustainability standards. [Accounting Today]

10 July | Former BoE Governor calls on stock exchanges to back enhanced climate disclosures

Mark Carney and David Schwimmer, the chief executive of the London Stock Exchange Group, wrote to a number of stock exchanges calling on them to back the United Nations Sustainable Stock Exchanges initiative.  The initiative, to be chaired by the LSE, aims to draw up best practice reporting guidance on climate disclosures, which can be used by companies wherever they are listed, to ensure globally consistent disclosures. [Reuters]

Thought leadership and research 

20 July | BlackRock’s approach to sustainability

Writing for the Harvard Corporate Governance Law Blog, BlackRock’s Global Head of Investment Stewardship Sandy Boss outlines the asset manager’s approach to sustainability highlighting efforts to encourage greater disclosure. She notes the way in which BlackRock is seeking to make sustainability central to the way it invests, manages risk, and executes its stewardship responsibilities. [Harvard Law School Forum on Corporate Governance]

20 July | ecoDa and INSEAD to host training programme

The European Confederation of Directors’ Associations will host a two-day training programme focusing on new governance challenges. The programme will compare different models across Europe including the one tier and two tier systems. The Institute’s Head of Corporate Governance, Dr Roger Barker, will be among those presenting. The course will take place on 22 and 23 October. [ecoDa]

10 July | The Upside of Virtual Board Meetings

Writing in the Harvard Business Review Keith Ferrazzi and Sarah Zapp reflect on the way in which virtual board meetings allowed boards to improve governance and collaboration through shorter agendas, crisper presentations, more inclusive and bolder conversations, and broader exposure to key executives and outside experts. [Harvard Business Review]

IoD in the news and advocacy

 21 July | Edwin Morgan, the Institute’s Director of Policy, writing in City AM called on the Chancellor to assist company directors who have fallen through the cracks in the Treasury's support schemes. Edwin argued that if there really can be no movement on dividends, a simple recovery grant scheme could be rolled out quickly.

15 July | We held our quarterly Corporate Governance Policy Breakfast at which we seek out the views of investors, auditors, lawyers and regulators to help inform our policy direction. Naturally, audit reform figured as a prominent topic of discussion given recent scandals at Wirecard, the release of the FRC’s Audit Quality Review and the publication of the FRC’s principles for operational separation of the Big Four. It was broadly acknowledged that operational separation whilst welcome would not act as a silver bullet and that there was need for the reforms called for by Brydon last year to be brought forward. Reflecting on Wirecard, a number of participants described the failure as one of governance rather than of just audit, highlighting that auditors are not trained to look for fraud. Some noted the way in which whistleblowing could have helped expose fraud at the firm. Others highlighted the need for the board to be out and about in the organisation in order to better spot irregularities. Turning to the future of audit more broadly, many participants felt that there was a need for audit to focus more on non-financial information. Some felt that pushing ahead with operational separation would distract from this re-focusing. On the Corporate Governance and Insolvency Act, many felt that the move towards virtual AGMs was welcome given social distancing measures. However, many expressed reservations about measures being adopted in longer term noting the discipline that comes with physical AGMs, the opportunity for retail investors to have an equal voice and the opportunity to engage in a meaningful dialogue

14 July | Charlotte Valeur, the Institute’s Chair, publicly revealed her autism diagnosis as part of a discussion about diversity in UK business. Writing in The Telegraph with Dr James Cusack, Charlotte called for Government and business leaders to help us change decades of neglect and support a strategic approach to how we identify, support and care for autistic people, right across the spectrum. Charlotte also spoke to The Times about her experience of being diagnosed as autistic three years ago and the need for boards to prioritise neurodiversity. Appearing on Sky News to speak to Ian King, Charlotte helped to dispel negative stereotypes.

Podcasts and Videos

20 July | Are Chinese companies arms of the state? (Podcast)

In this episode of The Spectator’s Chinese Whispers podcast, Cindy Yu speaks to Duncan Clark, a China expert who advises western investors on the Chinese economy, and author of Alibaba: The House That Jack Ma Built. [The Spectator]

17 July | The key to audit quality: reform the market and the mindset (Video)

The Centre for the Study of Financial Innovation present a discussion in which David Rule, Executive Director of Supervision at the FRC, explains why separating audit practices from the consultancy work of the Big Four firms will help refocus culture on audit quality. He is joined by Paul Lee, a governance expert, and John Hitchens, audit committee chair and former senior auditor, to discuss how things might be turned around. [YouTube]

16 July | Rethinking reward: can pay ratio disclosures locate the path to fair pay in post-lockdown Britain

The High Pay Centre present a discussion in which Rachel Kay, one of the Centre’s researchers, discusses its findings on pay ratio reporting alongside representatives from the TUC and ShareAction. [Zoom]

15 July | Fast fashion during the pandemic (Podcast)

In this episode of Federated Hermes’ regular podcast Eoin Murray, the firm’s Head of Investment at, is joined by Mike Barry, board member of A Blueprint for a Better Business and Kate Larsen, director at SupplyESChange, to discuss how the lockdown has resulted in a slump in demand for new clothes and had  a ripple effect across the industry’s international supply chains. [Apple Podcasts]

Responding to the Coronavirus Crisis 

The IoD’s Coronavirus Support Hub is being updated frequently.  

New resources include: 

Resources for Directors

UK Corporate Governance Code (Financial Reporting Council) 

The leading source of governance principles and recommendations for companies with a premium listing on the London Stock Exchange.  

Wates Principles (Financial Reporting Council)

Key governance principles for large private companies. 

Corporate governance: Board responsibilities at major banks (Bank of England)

Supervisory guidance from the Prudential Regulation Authority for the boards of regulated firms. 

OECD Guidelines  on Corporate Governance of state-Owned Enterprises (OECD)

The OECD Guidelines provide an internationally agreed benchmark to help governments assess and improve the way Governments exercise their ownership functions in state-owned enterprises.

The European Confederation of Directors Associations (ecoDa) 

The umbrella body for directors associations in Europe. 

The Global Network of Director Institutes (GNDI)

The umbrella body for directors associations around the world. 

IoD Corporate Governance Team

Contact Press Office

Euan Holmes, Press Officer

020 7451 3280


Press office