Essential Corporate News – Week ending July 22, 2016

Welcome to Essential Corporate News, our weekly news service covering the latest developments in the UK corporate world.

On July 15, 2016 the European Securities and Markets Authority (ESMA) published version 25 of its questions and answers on prospectuses. These were previously updated in April 2016.

The new questions relate to the dissemination of amended advertisements and the inclusion of Alternative Performance Measures (APMs) in information disclosed about the offer to the public or the admission to trading on a regulated market:

How the requirement to disseminate an amended advertisement at a minimum through the same means as the original advertisement should be applied when the advertisement in question is a roadshow.

ESMA states that the general requirement to amend the roadshow advertisement still applies and therefore, the issuer, offeror or person asking for admission to trading on a regulated market should disseminate an amended version of the information provided in the roadshow through the means which it considers most suitable to reach the participants of the roadshow. Depending on the type of roadshow conducted and the nature of the participants, this might, for example, be by way of a press release, publication on the website of the issuer, offeror or person asking for admission to trading or by direct correspondence with the roadshow participants.

How the issuer, offeror or person asking for admission to trading should proceed in case a participant at a live presentation (e.g. a roadshow/interview) requests information about an APM which is not included in the prospectus, given that Article 12 of Commission Delegated Regulation (EU) 2016/301 states out that only APMs included in the prospectus can be included in information disclosed about the offer to the public or the admission to trading on a regulated market.

ESMA states that, before the prospectus is approved and published, the issuer, offeror or person asking for admission to trading is free to provide information on the APM in question. However, in order to ensure that no APM is included in information disclosed about the offer/admission to trading without being included in the prospectus, the issuer, offeror or person asking for admission to trading should afterwards include the APM in the draft prospectus before this is approved and published, it being understood that the ESMA Guidelines on Alternative Performance Measures should be taken into account.

After the prospectus is approved and published, the issuer, offeror or person asking for admission to trading can proceed in two ways. It can decide to provide information on the APM and afterwards publish a supplement containing this APM, thereby ensuring consistency between the prospectus and the information disclosed about the offer/admission to trading. In such case, the ESMA Guidelines on Alternative Performance Measures should be taken into account. Alternatively, if the issuer, offeror or person asking for admission to trading does not wish to publish a supplement, it should decline to provide information on the APM as there will otherwise be a breach of the requirement set out in Article 12.

(ESMA, Questions and Answers: Prospectuses 25th updated version – July 2016, 15.07.16)

On July 20, 2016 the Financial Reporting Council (FRC) published a report, “Corporate Culture and the Role of Boards”, which looks at the increasing importance which corporate culture plays in delivering long-term business and economic success.

The Report is the culmination of the FRC’s Culture Coalition project in collaboration with a number of partners as well as interviews with more than 250 chairmen, CEOs and leading industry experts, from the UK’s largest companies. The report explores the importance of culture to long-term value and how corporate cultures are being defined, embedded and monitored.

The FRC outlines key elements boards should take into consideration to create a healthy corporate culture:

• Recognise the value of culture: A healthy corporate culture is a valuable asset, a source of competitive advantage and vital to the creation and protection of long-term value. It is the board’s role to determine the purpose of the company and ensure that the company’s values, strategy and business model are aligned to it. Directors should not wait for a crisis before they focus on company culture.
• Demonstrate Leadership: Leaders, in particular the chief executive, must embody the desired culture, embedding this at all levels and in every aspect of the business. Boards have a responsibility to act where leaders do not deliver.
• Be Open and Accountable: Openness and accountability matter at every level. Good governance means a focus on how this takes place throughout the company and those who act on its behalf. It should be demonstrated in the way the company conducts business and engages with and reports to stakeholders. This involves respecting a wide range of stakeholder interests.
• Embed and Integrate: The values of the company need to inform the behaviours which are expected of all employees and suppliers. Human resources, internal audit, ethics, compliance, and risk functions should be empowered and resourced to embed values and assess culture effectively. Their voice in the boardroom should be strengthened.
• Assess, Measure and Engage: Indicators and measures used should be aligned to desired outcomes and be material to the business. The board has a responsibility to understand behaviour throughout the company and to challenge where they find misalignment with values or need better information. Boards should devote sufficient resource to evaluating culture and consider how they report on it.
• Align Values and Incentives: The performance management and reward system should support and encourage behaviours consistent with the company’s purpose, values, strategy and business model. The board is responsible for explaining this alignment clearly to shareholders, employees and other stakeholders.
• Exercise Stewardship: Effective stewardship should include engagement about culture and encourage better reporting. Investors should challenge themselves about the behaviours they are encouraging in companies and reflect on their own culture.

A number of case studies are included in an Appendix to the Report and the FRC proposes to take feedback to the Report into account when reviewing its Guidance on Board Effectiveness in 2017. It will also continue to encourage debate on culture and to identify and share good practice.

(FRC, Corporate Culture and the Role of Boards: Report of Observations, 20.07.16)