Tag: UK

The UK’s Final Bonus Compensation Rule

Dan Ryan is Leader of the Financial Services Advisory Practice at PricewaterhouseCoopers LLP. This post is based on a PwC publication by Mr. Ryan, Roozbeh Alavi, Mike Alix, Adam Gilbert, and Armen Meyer. Related research from the Program on Corporate Governance includes Regulating Bankers’ Pay by Lucian Bebchuk and Holger Spamann (discussed on the Forum here); The Wages of Failure: Executive Compensation at Bear Stearns and Lehman 2000-2008 by Lucian Bebchuk, Alma Cohen, and Holger Spamann; and How to Fix Bankers’ Pay by Lucian Bebchuk.

On June 23rd, the UK’s Prudential Regulation Authority (PRA) and the Financial Conduct Authority (FCA) [1] finalized a joint bonus compensation rule that was proposed last July. While the industry (including subsidiaries and branches of US banks in the UK) had hoped for a more lenient approach, the final rule generally retains the proposal’s stringent requirements, especially with respect to bonus deferral periods and clawbacks. [2]

The rule applies to “senior managers” [3] and other “material risk takers” [4] at UK banks and certain investment firms. As finalized, the rule establishes the toughest regulatory approach to bonus compensation of any major jurisdiction, going beyond the EU-wide CRD IV. [5] Therefore, unless regulators in other major jurisdictions take a similar approach, institutions that are active in the UK are placed at a competitive disadvantage compared to their peers elsewhere.


The Next Frontier for Boards, Oversight of Risk Culture

Matteo Tonello is managing director of corporate leadership at The Conference Board. This post relates to an issue of The Conference Board’s Director Notes series authored by Parveen P. Gupta and Tim Leech. The complete publication, including footnotes and Appendix, is available here.

Over the past 15 years expectations for board oversight have skyrocketed. In 2002 the Sarbanes-Oxley Act put the spotlight on board oversight of financial reporting. The 2008 global financial crisis focused regulatory attention on the need to improve board oversight of management’s risk appetite and tolerance. Most recently, in the wake of a number of high-profile personal data breaches, questions are being asked about board oversight of cyber-security, the newest risk threatening companies’ long term success. This post provides a primer on the next frontier for boards: oversight of “risk culture.”

Weak “risk culture” has been diagnosed as the root cause of many large and, in the words of the Securities and Exchange Commission Chair Mary Jo White, “egregious” corporate governance failures. Deficient risk and control management processes, IT security, and unreliable financial reporting are increasingly seen as mere symptoms of a “bad” or “deficient” risk culture. The new challenge that corporate directors face is how to diagnose and oversee the company’s risk culture and what actions to take if it is found to be deficient.


Freedom of Establishment for Companies

The following post comes to us from Martin Gelter, Associate Professor of Law at Fordham University.

I recently posted my forthcoming book chapter, Centros, the Freedom of Establishment for Companies, and the Court’s Accidental Vision for Corporate Law (forthcoming in EU Law Stories, Fernanda Nicola & Bill Davies eds., Cambridge University Press 2015) on SSRN.

This chapter attempts to tell a short intellectual history of the debate about free choice in corporate law in the EU. In contrast to the United States, in many EU Member States it was traditionally not permissible to set up a corporation in one Member State in order to run the company with its head office (meaning the center of its actual commercial and financial operations) in another. This changed with three cases of the European Court of Justice (ECJ), namely Centros (1999), Überseering (2002), and Inspire Art (2003). Consequently, EU member states can no longer effectively deny the legal capacity to pseudo-foreign corporations, or apply key provisions of their own corporate law to them. At least in principle, founders can now exercise the freedom of establishment for companies to “pick and choose” the best national legal form.


Comparative Study on Economics, Law and Regulation of Corporate Groups

The following post comes to us from Klaus J. Hopt, a professor and director (emeritus) at the Max-Planck-Institute for Comparative and International Private Law, in Hamburg and was advisor inter alia for the European Commission, the German legislator and the Ministries of Finance and of Justice.

The phenomenon of the groups of companies is very common in modern corporate reality. The groups differ greatly as to structure, organization, and ownership. In the US, groups with 100-per cent-owned subsidiaries are common. In continental Europe, the parents usually own less of the subsidiaries, just enough to maintain control. In Germany and Italy pyramids are frequent, i.e., hierarchical groups with various layers of subsidiaries and subsidiaries of subsidiaries forming very complicated group nets. The empirical data on groups of companies are heterogeneous because they are collected for very different regulatory and other objectives, for example for antitrust and merger control regulation or for bank supervision.


Shareholders in the United Kingdom

The following post comes to us from Paul L. Davies, Senior Research Fellow at Harris Manchester College, University of Oxford. He was the Allen & Overy Professor of Corporate Law from 2009 to 2014 at University of Oxford, Faculty of Law. Work from the Program on Corporate Governance about lobbying includes Investor Protection and Interest Group Politics by Lucian Bebchuk and Zvika Neeman (discussed on the Forum here).

The United States and the United Kingdom are lumped put together as ‘dispersed shareholder’ jurisdictions and contrasted with the concentrated shareholdings found in the rest of the world. This paper, Shareholders in the United Kingdom, argues that it would be better to view the UK, at least over the past half century, as a semi-dispersed rather than as simply a dispersed shareholder jurisdiction, and that there are interesting contrasts between the UK and the US experience.

Whilst the typical company listed on the main market of the London Stock Exchange certainly lacks a single (or even a cohesive small group) of shareholders with legal control, neither does the typical company display atomised shareholdings, for example, where no single shareholder holds more than 1% of the voting rights. Typically, a coalition of six or so of the largest shareholders can put together enough votes to have a fighting chance of carrying a resolution at a shareholder meeting against the wishes of the management. The question thus becomes one of the incentives and disincentives for those shareholders to coordinate their actions.


2014 Year-End Update on Corporate Deferred Prosecution and Non-Prosecution Agreements

Joseph Warin is partner and chair of the litigation department at the Washington D.C. office of Gibson, Dunn & Crutcher. The following post is based on a Gibson Dunn client alert; the full publication, including footnotes and appendix, is available here.

The U.S. Department of Justice (“DOJ”) and the U.S. Securities and Exchange Commission (“SEC”) continue to deploy DPAs and NPAs aggressively. This past year left no doubt that such resolutions are a vital part of the federal corporate law enforcement arsenal, affording the U.S. government an avenue both to punish and reform corporations accused of wrongdoing. In early December, for example, U.S. Assistant Attorney General for DOJ’s Criminal Division, Leslie Caldwell, highlighted the importance of negotiated resolutions that allowed DOJ to “impose reforms, impose compliance controls, and impose all sorts of behavioral change.” She concluded: “In the United States system at least [settlement] is a more powerful tool than actually going to trial.” DOJ and the SEC have used negotiated resolutions, including DPAs and NPAs, to require companies to implement an effective compliance program. In 2014 we witnessed a number of notable developments in negotiated resolutions that demonstrate that the traditional hallmarks of DPAs and NPAs, including post-settlement compliance and reporting obligations, are here to stay.


Public Pressure and Corporate Tax Behavior

The following post comes to us from Scott Dyreng of the Accounting Area at Duke University, Jeffrey Hoopes of the Department of Accounting & Management Information Systems at Ohio State University, and Jaron Wilde of the Department of Accounting at the University of Iowa.

In our paper, Public Pressure and Corporate Tax Behavior, which was recently made publicly available on SSRN, we examine whether public scrutiny related to firms’ tax avoidance activities has a significant effect on their tax avoidance behavior. In contrast to U.S. regulations that only require disclosure of significant subsidiaries, the U.K.’s Companies Act of 2006 (“Companies Act”) requires firms to disclose the name and location of all subsidiaries, regardless of size or materiality. Although the U.K. law went into effect in 2006, in 2010, ActionAid International, a global non-profit dedicated to ending poverty worldwide, discovered that approximately half of the firms in the FTSE 100 were not disclosing the name and location of all subsidiaries. ActionAid’s finding was prima facie evidence that the Companies House was not enforcing the subsidiaries disclosure requirement. More importantly, the fact that some firms chose not to comply with the law suggests that the cost of disclosing detailed information on subsidiaries was greater than the benefit of a more complete information environment for the non-compliant firms.


Stakeholder Governance, Competition and Firm Value

The following post comes to us from Franklin Allen, Professor of Economics at the University of Pennsylvania and Imperial College London; Elena Carletti, Professor of Finance at Bocconi University; and Robert Marquez, Professor of Finance at the University of California, Davis.

Academic literature has typically analyzed corporate governance from an agency perspective, sometimes referred to as separation of ownership and control between investors and managers. This reflects the view in the US, UK and many other Anglo-Saxon countries, where the law clearly specifies that shareholders are the owners of the firm and managers have a fiduciary duty to act in their interests. However, firms’ objectives vary across other countries, and often deviate significantly from the paradigm of shareholder value maximization. A salient example is Germany, where the system of co-determination requires large firms to have an equal number of seats for employees and shareholders in the supervisory board in order to pursue the interests of all parties (see Rieckers and Spindler, 2004, and Schmidt, 2004). Similarly, stakeholders’ interests are pursued through direct or indirect representation of employees in companies’ boards in countries like Austria, the Netherlands, Denmark, Sweden, Luxembourg and France (Wymeersch, 1998, and Ginglinger, Megginson, and Waxin, 2009), or through other arrangements and social norms in countries like China and Japan (Wang and Huang, 2006, Dore, 2000, Jackson and Miyajima, 2007, and Milhaupt 2001).


Board Structures and Directors’ Duties: A Global Overview

The following post comes to us from Davis Polk & Wardwell LLP and is based on a chapter of Getting The Deal Through—Corporate Governance 2014, an annual guide that examines issues relating to board structures and directors’ duties in 33 jurisdictions worldwide.

Corporate governance remains a hot topic worldwide this year, but for different reasons in different regions. In the United States, this year could be characterised as largely “business as usual”; rather than planning and implementing new post-financial crisis corporate governance reforms, companies have operated under those new (and now, not so new) reforms. We have witnessed the growing and changing influence of large institutional investors, and different attempts by companies to respond to those investors as well as to pressure by activist shareholders. We have also continued to monitor the results of say-on-pay votes and believe that shareholder litigation related to executive compensation continues to warrant particular attention.


UK Proposed Register of Individuals with Significant Control over Non-Public Companies

The following post comes to us from Wayne P.J. McArdle, Partner in the London office of Gibson, Dunn & Crutcher LLP, and is based on a Gibson Dunn alert by Mr. McArdle, James Barabas, and Edward A. Tran.

On June 25, 2014, the UK Government published the Small Business, Enterprise and Employment Bill [1] which, among other things, proposes that all UK companies (other than publicly traded companies reporting under the Disclosure and Transparency Rules (DTR5)) be required to maintain a register of people who have significant control over the company. The Bill is part of the UK Government’s initiative to implement the G8 Action Plan to prevent the misuse of companies and legal arrangements agreed at the Lough Erne G8 Summit in June 2013, which we discussed in our client alert entitled “Through the Looking Glass: The Disclosure of Ultimate Ownership and the G8 Action Plan” (June 20, 2013). [2] In broad terms, the G8 Action Plan is designed to ensure the integrity of beneficial ownership and basic company information and the timely access to that information by law enforcement and tax authorities.


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