Thought leadership from our experts

Corporate governance anno 2014

In September 2014, the European Union is in post-election flux. Thomas Piketty's Capital in the Twenty First Century is the most talked about book of the summer and the relationship between business and wider society is as much under scrutiny as it has ever been. So now seems a good time to take stock of current corporate governance developments affecting listed companies.

Corporate social responsibility

The EU is preparing new nonfinancial reporting requirements covering not only human rights, with reference where appropriate to the supply chain, and diversity, but also anti-bribery and corruption matters. CSR matters must be covered in the annual strategic report, which companies are urged to keep brief and at the same time 'fair, balanced and understandable'. Some companies are also being faced with requirements to make detailed country-by-country disclosures on profits and amounts paid to governments whether as tax or otherwise. These apply to financial institutions under the Capital Requirements Directive and to companies active in the extractive and logging industries under the Accounting Directive. Such requirements are primarily aimed at increasing transparency and combatting corruption in the countries in which the companies operate.

Similar measures in the US were overturned by a federal court in 2013 but the SEC will at some point issue a revised version of its resource extraction payment disclosure rule. Companies are also having to think carefully about their supply chains, because of consumer expectations and standards such as the UN General Principles on Human Rights, and because of specific rules such as the recently implemented US requirements that public companies make disclosures about their use of conflict minerals

Directors' remuneration

New 'say on pay' rules were introduced at the end of last year in the UK, giving shareholders the right to approve a listed company's remuneration policy at least every three years and making directors personally liable for payments outside the policy unless approved by shareholders. The draft amendment to the Shareholder Rights Directive would give similar rights to shareholders in all EU companies admitted to trading on a regulated market. This would also require disclosure of director pay as a ratio to average employee pay in the company, although a similar provision was considered and not adopted in the UK on the basis that such ratios would be so dependent on the structure of individual businesses that publishing them would not provide useful information. In the US, the SEC has proposed but not yet adopted pay ratio disclosure rules. In the financial sector, variable pay caps have been imposed by the EU with the intention of limiting incentives for risky behaviour. The effect of these caps and the consequent restructuring of remuneration packages has yet to be seen.


In the UK, the March 2014 progress report by Lord Davies on women on boards showed that the proportion of women on the boards of FTSE 100 companies had risen to 20.7%, making the 25% target set for September 2015 within reach. Listed companies must report on gender diversity issues under the UK Corporate Governance Code and must now include senior executive and general employee gender statistics as part of the strategic report. In addition, a directive on non-financial reporting (adopted by the European Parliament in April 2014 and awaiting adoption by the Council) will require EU-listed companies to publish their diversity policy and details on its effectiveness. The draft EU directive on gender balance, which proposes a target 40% representation for the underrepresented sex among non-executive directors by 2020, with sanctions for failing to comply with director selection procedures, was not agreed ahead of the European elections. Some member states argued that EU legislation was not required in this area. Meanwhile some member states have already adopted mandatory targets in their domestic legislation.

Audit Committees

There has been an increasing focus on audit committee reporting in the UK, with the UK Corporate Governance Code now requiring more detailed reporting on the matters considered by the audit committee. The EU Statutory Audit Amendment Directive will reinforce the role of the audit committee by making it specifically responsible for auditor selection. The Directive will also impose new standards on the composition of audit committees, requiring the committee as a whole to have competence relative to the sector in which the audited entity is operating.


The UK and EU have been focusing in parallel on ways to improve the reliability of accounts and increase confidence in the audit process. In the EU, the Statutory Audit Regulation (which will apply directly in the UK without further implementation) has been passed and will require audit firms of public interest entities to rotate after a period of 10 years (though member states may extend this to 20 years where public tenders are carried out or to 24 years where more than one audit firm is appointed). The Regulation also prohibits audit firms providing certain non-audit services to their audit clients. In the UK, the Competition and Markets Authority is currently drafting orders requiring mandatory tendering of audit contracts at least every 10 years.


The UK led the way in creating the voluntary Stewardship Code to delineate the responsibilities of institutional investors concerning voting, shareholder engagement and monitoring of the companies they invest in. Institutional investors have acted on the suggestion in the Stewardship Code that they should be willing to take collective action by forming groupings for collective engagement. Levels of shareholder activism seem to have risen on both sides of the Atlantic, not just from 'traditional' activists such as hedge funds, but also from institutional investors increasing their dialogue with companies. EU proposals in the draft amendment to the Shareholder Rights Directive would impose new obligations on asset managers and institutional investors. These would include disclosure of investment strategies and the terms of management contracts that incentivize managers to focus on long-term performance. Engagement policies and the exercise of voting rights would also have to be publicly disclosed, albeit on a comply or explain basis. As its name implies, the Shareholder Rights Directive is intended to enhance shareholder voting powers, and the draft amendment is also intended to do this by introducing provisions on related party transactions.

Ever since the advent of the financial crisis in 2008 mindful observers of the state of the markets and societal trends in general have been warning us of the impending new world. But as in every crisis the contours of such new world are not immediately apparent to the contemporaries and they are in fact left in the sorry state of having to speculate on their own immediate future. Yet I think that slowly the new world is looming on the horizon.