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Business BriefingA CAPITA COMPANY SECRETARIAL SERVICES MAGAZINE JULY 2013

Inside this issue4

Corporate Social Responsibility – Non financial reporting7

The Glass Ceiling - still not yielding11

Directors and Officers Liability Insurance – Dispelling the Myths14

First fine for breach of the Model Code – a lesson for us all?

16 AND FINALLY

A quarterly publication from Capita Company Secretarial Services keeping you updated on current industry issues

• QCA publishes revised Corporate Governance Code

• New ICSA guidance note on cyber risk

• Model Articles amended by Mental Health Discrimination Act

Share registration and associated services are provided by Capita Registrars Limited. Registered in England No. 2605568. Regulated services are provided by Capita IRG Trustees Limited, which is authorised and regulated by the Financial Services Authority (FSA Register number 184113). Registered in England No. 2729260.

Supporting you throughout the IPO process

To learn more about how we can help you throughout this process, please contact:

Georgina Morgan, Director, Capita Company Secretarial Services on +44 (0)7736 385 663 or email [email protected]

Your IPO is an exciting and challenging time. To help you with these challenges Capita‘s collective experience in Company Secretarial Services, Accounting, Share Registration and Investor Relations enable us to provide you with proactive support before, during and after your IPO.

Our areas of expertise means we can:

• Prepare your company to join AIM or the LSE main market

• Offer you a wide breadth of IPO services in a joined up and cohesive manner

• Help you with IPO project management and delivery

• Work alongside your existing team and advisers to ensure your new regulatory obligations are met

• Ensure you meet best practice and investor expectations


INSIDE THIS ISSUE

Mark Cleland takes a look at what we have to offer readers in the latest issue of Business Briefing

Welcome to the summer edition of Business Briefing. In this issue we look at the European Commission’s new directive on non-financial reporting, including the

key Corporate Social Responsibility, the key requirements and the Commission’s intentions behind these.

With the number of women being appointed to board level slowing down, Phil Kershaw looks at the latest figures and the progress being made to encourage greater board diversity, according to the Davies and Cranfield reports.

K & L Gates will be examining the Directors’ and Officers’ liability insurance policies and shedding light on the cover provided by them, the benefits they offer and some of the key issues that directors and officers need to be aware of.

After recent events, Tracey Brady will be reminding us of the importance of understanding and complying with the Model Code on directors’ dealings. We look at the necessary policies and procedures that all listed companies need to be aware of.

We hope you find this edition informative and welcome your comments and queries - please email: [email protected]

We are pleased to be able to confirm that this publication is CPD accredited so counts towards your annual professional learning objectives.

Please email [email protected] if you would like to be sent a certificate.

Business Briefing

Mark Cleland, Director of Corporate Services, Capita Registrars

Share registration and associated services are provided by Capita Registrars Limited. Registered in England No. 2605568. Regulated services are provided by Capita IRG Trustees Limited, which is authorised and regulated by the Financial Services Authority (FSA Register number 184113). Registered in England No. 2729260.

Supporting you throughout the IPO process

To learn more about how we can help you throughout this process, please contact:

Georgina Morgan, Director, Capita Company Secretarial Services on +44 (0)7736 385 663 or email [email protected]

Your IPO is an exciting and challenging time. To help you with these challenges Capita‘s collective experience in Company Secretarial Services, Accounting, Share Registration and Investor Relations enable us to provide you with proactive support before, during and after your IPO.

Our areas of expertise means we can:

• Prepare your company to join AIM or the LSE main market

• Offer you a wide breadth of IPO services in a joined up and cohesive manner

• Help you with IPO project management and delivery

• Work alongside your existing team and advisers to ensure your new regulatory obligations are met

• Ensure you meet best practice and investor expectations

4 | Business Briefing

CORPORATE SOCIAL RESPONSIBILTY

From its investigations and research, the Commission concluded that only a limited number of EU companies regularly disclose non-financial information

Most organisations are now familiar with reporting against non-financial measures of performance and

providing narrative descriptions of their key activities and developments alongside financial reporting.

Reporting specifically on matters of Corporate Social Responsibility (“CSR”) is perhaps, however, less familiar to many organisations, with the exception of large, high profile organisations, or those with specific social or environmental remits. This is something that the European Commission would like to see change in the not too distant future.

The Commission has published a new draft Directive on enhancing the transparency of certain large companies on social and environmental matters, which will amend the Fourth and Seventh Accounting Directives on Annual and Consolidated Accounts. In this article we will consider the key requirements of this Directive and the Commission’s intentions behind these.

A Directive shaped over 15 years

The background to the Directive is complex, having been shaped by numerous EU driven consultations, stakeholder workshops and recommendations in this area over the past 15 years. Most recently, these include its consultation on ways to improve non-financial disclosures in 2010, its consultation on the EU Corporate Governance Framework in 2011, and

its communication in October 2011 regarding a renewed strategy for 2011 – 2014 for Corporate Social Responsibility.

From its investigations and research, the Commission concluded that only a limited number of EU companies regularly disclose non-financial information, and that the quality of such information varied considerably.

In February this year, in response to the recommendations of the Commission, the European Parliament adopted two resolutions on CSR as follows:

1. CSR: Accountable, transparent and responsible business behaviour and sustainable growth

2. CSR: Promoting society’s interests and a route to sustainable and inclusive recovery

The publication of the draft Directive followed in April 2013.

Increased transparency through two new requirements

The Commission’s intention is that the implementation of the Directive increases EU companies’ transparency and performance on environmental and social matters which will, in turn, contribute effectively to long term economic growth and employment within Europe.

The focus on non-financial reporting has increased steadily in recent years.

Corporate Social Responsibility – Non-financial reporting


From this statement, the message is clear, that good CSR practice (and disclosure of this) is no longer seen as a ‘nice to have’, but as necessary for the optimum growth and development of European businesses and markets.

The Directive will introduce two new specific requirements:

1. Disclosure by certain large companies and groups on policies, risks and results regarding environmental, social and employee related aspects, respect for human rights, anti-corruption and bribery issues and diversity on boards of directors.

2. Disclosure by large listed companies on their diversity policy, covering age, gender, geographical diversity and educational and professional background, setting out the objectives to the policy, its implementation and the results obtained. Where they do not have a diversity policy they will be required to explain why not.

A large company is defined by the Commission as having more than 500 employees, and balance sheet total of €20m or net turnover of more than €40m.

Anticipated benefits for companies

The Commission is resolute that the proposals will bring many benefits for European organisations, investors and the wider economy. At the recent Global Reporting Initiative 2013 Conference, Michael Barnier, European Commissioner for Internal Markets and Services reaffirmed the Commission’s commitment to bring in this directive, stating:

“The EU proposal on non-financial corporate reporting can be part of Europe’s economic recovery, as well as a source of inspiration for other jurisdictions. Experience shows that transparent companies have lower financing costs, attract and retain talented employees, and are more successful in the long term.”

The proposals also stress the importance of CSR being considered at board level, in order that this becomes an integral part of an organi-sation’s strategy. If we look to the wording of the resolutions adopted by the Commission in February, there can be no doubt that the Commission wants to shed CSR’s reputation as a costly activity and replace this with CSR as a

commercial tool that can stimulate growth and even redress some of the negative sentiment resulting from the financial crisis.

Some of the key assertions made within the resolutions are that transparency of CSR practices will:

• Enable investors to contribute to a more efficient allocation of capital and better achieve longer term investment goals

• Make enterprises more accountable and contribute to higher levels of citizen trust in business

• Strengthen the link between competitiveness and CSR

• Forge a link between commercial strategies and social environment in which businesses operate

It is worth noting that these competitive and commercial benefits of sustainable operations outlined above are also highlighted in the Commission’s recently published Green Paper on Long Term Financing of the European Economy, which similarly links transparency through non-financial reporting with business success.

The expanding scope of CSR

Interestingly, the European Parliament’s communications refer to certain corporate practices that might not traditionally be thought of as falling within the CSR remit, thus widening the scope of responsibility. Executive salaries and bonuses is one such area, with the Parliament clearly stating that ‘excessive’ executive salaries and bonuses are not compatible with socially responsible behaviour. Another is tax policies – its position is that there is no room for tax avoidance or exploiting tax havens within a socially responsible approach. This development will no doubt open up interesting debates around the tax planning arrangements of many multi-national groups and the disclosure of these arrangements.




Who is responsible for CSR?

In recent years, there has been much debate around whether adherence to, and disclosure of, CSR principles should become mandatory or remain voluntary. The Commission’s proposals aim to reduce the dichotomy between mandated and voluntary CSR reporting, by advocating a ‘report and explain approach’ for larger companies.

While the EU has stressed that it recognises that a one size fits all approach would not be appropriate, and believes that CSR policies should remain predominantly voluntary, it believes that building certain reporting requirements into a regulatory framework will provide the necessary impetus and incentive for businesses to promote CSR. Therefore, EU companies will not be obliged to adopt certain CSR provisions (even larger companies), but they will be required to provide an explanation for their decision making in this area.

The proposals address the continuing debate over whether CSR should lie with public bodies or corporations, stressing the fact that this must be a matter of joint responsibility. While the proposals are clear that corporations cannot, and should not, take over public authorities’ responsibility for promoting, implementing, monitoring social and environmental standards, it also recognises that CSR at a corporate level can play a vital part in restoring lost confidence in market, and directly contribute market recovery, for example through providing jobs and local investment.

The proposals also stress the importance of CSR being considered at board level, in order that this becomes an integral part of an organisation’s strategy. However, the need for governments to provide organisations with support in this area is also recognised, as member states are urged to provide ‘concrete information on education and training in CSR’.

Small and Medium Sized Entities

While the new Directive will only require larger companies to report on CSR, smaller and medium sized companies are by no means excluded from the European Parliament’s thinking – unsurprising given that SMEs account for 90% of businesses within the EU.

The message is one of caution, however, rather than recommending immediate or drastic action in relation to their CSR strategies. An examination of the existing practices and reporting habits of SMEs is called for, as it is recognised that many already undertake CSR activities without being aware of

this fact. This could be because they are not familiar with the terminology, or simply because good CSR is so inherent to their activities and strategy that they are intangible to them.

Practicalities leading up to compliance from 2017

The new Directive set minimum requirements for larger companies, but the Commission has clearly stated that companies will be able to rely on existing national, EU based and international frameworks for the disclosure statement, and they will be required to disclose which framework it is that they have relied upon.

Large UK companies are already accustomed to providing non-financial information, particularly within their annual Business Review. Furthermore, the UK has recently published its own updated narrative reporting requirements which will take effect in October of this year. While these have many similarities with the Commission’s proposals, the UK requirements are less onerous in comparison and the additional EU requirements would need to be incorporated into these if adopted.

CSR disclosures are typically included in an organisation’s governance statement within its annual report, however, some companies do choose to publish stand alone governance or CSR reports. Those that do (within the same financial year) will not be required to duplicate this information in the annual report. Furthermore, group structures will be able to fulfil their reporting obligations at group level, rather than individual subsidiaries having to report separately.

The Directive is still in draft form at present and will need to be agreed at EU level before being adopted. It is unlikely that organisations will be required to make these disclosures before 2017 and there is also the possibility that it will grant non-listed companies an additional transitional year.

Further information:

The full text of the Directive, the European Parliament resolutions, and a FAQ document published by the Commission can be found at: http://ec.europa.eu/internal_market/accounting/non-financial_reporting/index_en.htm

ABOUT THE AUTHOR

Georgina Morgan, Director Capita Company Secretarial Services

Tel: +44 (0)7736 385 663 or email [email protected]


GENDER DIVERSITY

Progress in appointing more women to board-level roles at top UK firms has slowed. The Cranfield School of

Management said that in the first half of 2012 44% of board level appointments at FTSE 100 firms went to women, but that slowed to 26% in the second half. Are companies becoming complacent or is the glass ceiling even tougher than everyone thought?

In its first report published this month, the Women’s Business Council, an independent working group set up by the coalition in 2012, called for a sea change in employers’ attitudes to ensure women fulfil their potential in the workplace. Britain’s “macho” workplace culture and resistance to flexible working were cited as part of the problem blocking women from senior management positions. The pipeline of talented senior managers is cited as key to delivering gender equality in the boardroom.

There have been some high profile changes on the Boards of FTSE 100 companies with two women CEOs stepping down over recent months at Pearson and Anglo American. This is perhaps the normal churn of board changes at the highest level and indeed non-executive director board appointments, for good corporate governance reasons, are not forever. The important thing is that the overall trend should remain on an upward trajectory to achieve the Lord Davies recommendations of 25% women to be on boards by 2015.

The Business Secretary, Vince Cable, said he was still not inclined to introduce compulsory targets (favoured by the EU): “Government continues to believe that a voluntary led approach is the best way forward. But today’s report also serves as a timely reminder to business that quotas are still a real possibility if we do not meet the target.” The co-author of the Cranfield report, Professor Susan Vinnicombe, said the gender balance at the top bore little relation to the situation elsewhere in companies. “Despite women dominating the fields of human resources, law and marketing, this is not reflected at executive director level, where the positions are still going to men, who are being promoted internally over experienced female candidates.”

Among leading companies, Burberry stood out as the only leading company with two women executive directors, giving it three female directors out of eight. Diageo was next, with four women directors out of 11. In joint third place were Capita, GlaxoSmithKline and Standard Life, each with a third of their boards being female.

Board diversity – progress

The Davies Review steering board has published its 2013 report on the progress being made in implementing the recommendations contained in the 2011 Davies Report on women on boards. Cranfield School of Management has also published its 2013 report on women on boards, reflecting on progress during 2012.

Update on gender diversity in the boardroom

The Glass Ceiling - still not yielding


Both reports note that, two years after the Davies Review, there are more women in the boardrooms of the UK’s top companies. As of 1 March 2013, within the FTSE 100:

• women account for 17.3% of all directorships;

• women accounted for 34% of all board appointments in 2012 (45 out of 134 appointments);

• there are currently 94 boards with female representation; and

• there are now 192 women directors on FTSE 100 boards, out of a total of 1,110.

In the FTSE 250 the figures show:

• women account for 13.2% of directorships

• women have accounted for 26% of board appointments

• there are currently 183 boards with female representation

• for the second year running, all-male boards are in the minority at 26.8%.

Lord Davies said: “The onus was firmly placed on business to bring about this necessary change, and I am pleased to say that evidence clearly shows that they have, and are, stepping up and responding…If we are to fend off the prospect of quotas and regulation then business cannot rest on their laurels and think the job is done”. Business Secretary Vince Cable said: “they (women) bring fresh perspectives and ideas, talent and broader experience which leads to better decision-making. This is not just about equality at the top of our companies. It is about good business sense.”

How can the momentum be refreshed?

Lord Davies has talked about the “Executive Pipeline Challenge”. Whilst progress has been good overall the current percentages mean that there are just 18 female FTSE 100 executive directors compared to 292 males, and just 32 female FTSE 250 executive directors compared to 558 males.

The figures are clear – there is an issue around executive director appointments and the talent pipeline. On the outside it sounds quite simple; organisations need to attract the best people at the start of their careers, spot and nurture their talent and ensure that they have good development routes, offering challenges, variety, role models, mentoring and career progression in a supportive environment. Succession plans help to ensure that senior management pools are well developed and that the company is well equipped to handle any unforeseen events. Of course this takes time and we could not expect to see well developed pipelines overnight. Nevertheless, companies really need to think about what they are doing to develop talent across their organisations to ensure that they are well equipped for the future.

BIS are keen to keep the pressure on and Secretary of State Vince Cable wrote to all-male FTSE 100 boards in January asking them what steps they were taking to increase the diversity in their boardrooms. In April he wrote to the remaining all-male boards in the FTSE 250 with the same request.

Can we learn anything from others?

In Europe many countries have quotas that have operated to increase gender diversity numbers, though the evidence is

Progress in appointing more women to board-level roles at top UK firms has slowed.

2012H1 H2

Source: Professional Boards Forum BoardWatch. Data kindly provided by BoardEx and The Female FTSE Board Report

The Cranfield School of Management found that in the first half of 2012 44% of board level appointments at FTSE 100 firms went to women, but that slowed to 26% in the second half.

Are companies becoming complacent or is the glass ceiling even tougher than everyone thought?

In joint third place were Capita, GlaxoSmithKline and Standard Life, each with a third of their boards being female.

Diageo was next, with four women directors out of 11

4426

Among leading companies,

Burberry stood out as the only

leading company with two women

executive directors, giving it three

female directors out of eight.

2

3

1

There are now 192 women directors on FTSE 100 boards, out of a total of 1,110

For the second year running, all-male boards are in the minority at 26.8%

As of 1 MARCH 2013 within the FTSE 100

Women account for 17.3% of all directorships, up from 10.5% in 20102013

2010

Women accounted for 34% of all board appointments in 2012 (45 out of 134 appointments)2012

There are currently 183 boards with female representation

As of 1 MARCH 2013 within the FTSE 250

Women account for 13.2% of directorships, up from 6.7% in 20102013

2010

Women accounted for 26% of all board appointments

There are currently 94 boards with female representation

19996.2%

20049.4%

200811.7%

200912.2% 2010

12.5%

201115%

201217.4%

201317.3%

The important thing is that the overall trend should remain on an upward trajectory to achieve the Lord Davies recommendations of 25% women to be on boards by 2015.

The Glass Ceiling is still not yielding Update on gender diversity in the boardroom

1999 - 2013 FTSE 100

% of woman directors

Source: Professional Boards Forum BoardWatch. Data kindly provided by BoardEx and The Female FTSE Board Report.

GENDER DIVERSITY

Vince Cable wrote to all-male FTSE 100 boards in January asking them what steps they were taking to increase the diversity in their boardrooms


not conclusive that quotas backed by sanctions are completely successful. Below is a summary of the use made of quotas by Member States in relation to gender diversity.

GENDER DIVERSITY

Country Date adopted Requirement % of women on

boards – Jan 2012

Sanctions Comments

Belgium July 2011 33% of under

represented sex

11% Yes – financial impact

on directors

Listed and state-

companies

France January 2011 20% of each sex by

2014, 40% by 2017

22% Yes – nullification of

board elections &

suspension of director

benefits

Listed and non-listed

companies with more

than 500 employees

and over 50million Euro

revenue

Italy July 2011 33% of each sex by

2015

6% Yes – warnings, fines &

forfeiture of positions

of elected board

members

Listed and state-owned

companies

The Netherlands June 2011 30% of each sex 19% No – comply or explain Large private companies

& listed public

companies

Spain March 2007 40% of each sex by

2015

11% No – but may not

be awarded public

contracts

Large companies only

Germany No quota yet 30% women on board

suggested

16% Suggested – contesting

appointments to board

Debating flexi-quota

plan

Denmark 1990 Equal representation 16% No State-owned companies

only

Finland 1986 Equal representation 27% No State-owned companies

only

Greece 2000 33% 7% Yes – nullification of

appointments

State-owned companies

only

Austria March 2011 25% women by 2013

35% by 2018

11% No State-owned companies

only

Slovenia 2004 40% of each sex 15% No State-owned companies

only

UK 2012 25% women by 2015 16% No – comply or explain Diversity to be explained

and voluntary target


GENDER DIVERSITY

Creating a genuine pipeline of intelligent, talented and experienced women is the key

Public sector - something to offer?

Listed companies might consider looking at how other sectors have achieved a better pipeline of women in senior roles. Bernadette Barber, in her March 2013 article “Framing the future” in Governance & Compliance, makes the case that public sector organisations have been better at achieving board-level diversity than the private sector. A 2009 Government report (“International Increasing Diversity on Public and Private Sector Boards” Cranfield 2009 Dr R Sealy, E Dolder and Prof S Vinnicombe) found that public sector boards had an average of 33.3% female members in 2008, compared to 11.7% representation of women achieved on FTSE 100 boards in the same year. The report identified working practices in the public sector, with less emphasis on a “long hours” culture and emphasis on the possibility for part-time or flexible working arrangements, as a key factor in how the public sector does much better than the private sector in improving numbers of women appointed to board-level roles.

Creating a genuine pipeline of intelligent, talented and experienced women is the key to increasing the number of women who become directors, while avoiding claims of tokenism. As mentioned earlier, this argument is supported by the Women’s Business Council who call on companies to improve procedures for encouraging women to remain in work, including “keep in touch” schemes for women on maternity leave, mentoring networks and regular work experience for those on career breaks.

Further action

The Davies and Cranfield reports show that progress in implementing some of the specific recommendations in the original Davies Report remains slow. Only 39 FTSE 100 companies have set targets for the number of women they aim to have on their board by 2013 and 2015. The 2013 Davies progress report recommends that:

• FTSE 100 chairmen review their targets for 2015 and companies which have not yet set targets do so;

• FTSE 250 companies set targets for the number of women they aim to have on their board by 2015, with a minimum 25% target to be aimed for; and

• By the end of September 2013, FTSE 350 Chief Executives set out the percentage of women they aim to have in senior management by 2015.

• Executive committee members should be released to serve on the boards of other companies as part of the overall executive development plan.

• Companies to conduct a pilot for advertising director opportunities to test the benefits and pitfalls of advertising.

EU Directive – progress

The proposal for a draft Directive to address the issue of gender imbalance on boards and create quotas continues to make progress in the European Parliament. Following the support received from the Economic and Social Committee, the Internal Market and Consumer Protection Committee issued a draft opinion on 11 April 2013. Once this advisory committee has voted on any amendments at the end of May, the next stage will be the first reading (or single reading) in the European Parliament – currently planned for 19 November 2013.

The Davies progress report is available on the BIS pages of the gov.uk website and the Cranfield annual report is available on the Cranfield School of Management website.

ABOUT THE AUTHOR

Phil Kershaw, Senior Manager, Industry & New Products, Capita Registrars


INSURANCE

Many companies purchase Directors and Officers liability insurance for the benefit of the companies’ directors and officers.

However, the extent of cover provided by the D&O policy and how it operates to the benefit of the directors and officers is not always fully understood.

Much emphasis is often placed on the amount of cover provided by the policy in terms of the monetary limits. However, the D&O policy will only cover losses and liabilities which fall within the scope of cover. There will typically be a number of policy exclusions which serve to restrict or exclude cover in certain circumstances. There may also be terms and conditions which, if not complied with, may enable the D&O insurer to deny or limit the amount of cover provided.

It is vital that directors and officers understand the policies that they are offered, the limitations of their cover and the steps which they may take to maximise the cover provided. This article we will consider some of the key issues that directors and officers need to be aware of in relation to these policies.

What should be covered by your D&O policy?

The D&O policy should provide cover for liabilities arising from civil claims brought by third parties and this should include the cost of defending such claims. Most D&O policies provide cover for claims brought by the company although the cover will often be limited by means of an “insured v insured” exclusion which seeks to exclude cover for certain types of claim brought by other directors or by the company against the director or officer. The wording of these exclusions requires careful attention to ensure that claims brought by shareholders or by the company at arm’s length are not excluded. It is particularly important to ensure that claims brought by liquidators or receivers of the company are covered and that the D&O cover does not lapse in the event of insolvency. It is in these circumstances that the directors and officers of the company are often most at risk.

The D&O policy should also provide cover for the cost of defending criminal proceedings. This is important as directors can get caught up in prosecutions arising from a variety of

Directors and Officers Liability Insurance

Dispelling the Myths


INSURANCE

sources including heath and safety, environmental protection and competition measures. Findings of fraud and dishonesty cannot be insured as a matter of public policy and most policies include express exclusions for claims arising from fraudulent or dishonest conduct. The language of the exclusion can be critical and it is important to ensure that the exclusion applies only to those individuals caught up in the fraud and only where fraud or dishonesty is actually proven. The aim should be to ensure that a director’s legal defence costs continue to be covered pending or in the absence of any finding of fraud or dishonesty and that the fraud of one individual does not affect the D&O cover as a whole.

The extent of cover provided in relation to regulatory investigations and proceedings varies enormously although this can prove an important element of the D&O cover as the costs incurred by directors caught up in regulatory matters can be significant. D&O insurers will often seek to restrict the cover available by means of monetary limits and by restricting the circumstances in which the cover applies. The cover under many D&O policies is only triggered by a formal investigation where the regulator exercises their statutory powers to compel the director’s attendance for

interview. The problem is that in practice many regulators, for example the newly formed Financial Conduct Authority (FCA), conduct investigations on an informal basis which may not be sufficient to trigger the legal costs cover under the policy. Cover is not commonly provided for internal investigations although in practice directors and officers caught up in an internal investigation may require independent legal representation.

The D&O policy will not provide cover for criminal or regulatory fines and penalties resulting from deliberate dishonesty as these cannot be insured as a matter of public policy. Some D&O policies provide cover for civil and regulatory fines and penalties to the extent insurable in the relevant jurisdiction although some regulators (including the FCA) have prohibited regulated persons from recovering any fines or penalties they impose from their insurers.

What happens if you need to make a claim under the D&O policy?

Most D&O policies operate on a “claims made” basis. This means that it is the making of the claim against the director or officer which triggers the insurance cover. The notification of any claim to the insurer is therefore important as this

is the first step in the insurance recovery process.

D&O policies typically impose time limits for the notification of claims and this can vary from a specified time period to “immediately” or “as soon as practicable”. Such requirements may operate as conditions precedent to policy cover which means that failure to give notice on a timely basis may result in a denial of cover which would otherwise have been available. In practice, the D&O policy will often provide that the company has authority to give notice on behalf of the directors and officers. However, it is important to ensure that directors and officers understand the notification requirements and know the person within the company who is responsible for giving notice to the D&O insurers. It is also worth considering whether improvements can be made to the wording of notice provisions prior to the policy being taken out so as to reduce the scope for non-compliance.

Most D&O policies provide not only for the notification of claims but of circumstances which may or are likely to give rise to a claim (or investigation) involving the directors and officers. While such provisions are common, they are generally considered as extensions of cover because they can result in cover


INSURANCE

being extended to claims made outside of the policy period. If notice of a circumstance which the insured becomes aware of is not given during the particular policy year, there is a risk that it will be excluded under next year’s policy, either by means of an express exclusion or a general exclusion which applies to all claims or circumstances which have or should have been notified previously.

The notification of circumstances is therefore an important element of “claims made” cover. However, while it is relatively easy to identify what constitutes a “claim” for the purpose of notification to insurers, the identification of “circumstances” and the type of claim or investigation they may or are likely to give rise to can prove rather more difficult. In practice, the most obvious example would be an oral complaint or intimation of a claim or some form of adverse publicity regarding the conduct of the director or officer. However, there does have to be some prospect of a claim or investigation arising and this is a matter on which legal advice may be required.

Most D&O policies provide that the policy will only cover defence costs incurred with the insurer’s prior written consent. This is another reason why the prompt notification of claims is important. If defence costs are incurred without the insurer’s prior written approval, the insurer may seek to deny liability for those costs purely on the basis that consent was not given. There is also a risk that the insurer will take issue with the choice of defence counsel. D&O policies do not always make clear that the directors and officers are entitled to appoint their own chosen lawyers to defend the claim. This approval is worth requesting in advance of any claim being made.

There may be circumstances where directors and officers require urgent legal advice, for example in the event of regulatory intervention or a request for extradition. D&O policies are not always designed to accommodate this speed of reaction and insurers do not always respond to requests for approval in a way which reflects the urgency of the situation. It may therefore prove beneficial to have an agreed panel of lawyers

approved by the D&O insurer which the directors and officers can call upon for advice in an emergency situation. This should at least serve to avoid arguments over the choice of lawyer appointed.

The other important point for directors and officers to be aware of is that there may be a need for separate legal representation. D&O policies will typically allow for separate legal representation in the event of a material conflict of interest between the directors or officers implicated in a particular claim. However, there may be other circumstances where separate legal representation is required, for example because there is significant scope for a conflict of interest to arise or where criminal or regulatory investigators insist on certain individuals having independent legal representation. It may therefore prove beneficial to include policy language which specifically allows for separate legal representation in these circumstances.

Conclusion

The ‘devil is in the detail’ when it comes to policy wordings and that is particularly so for D&O cover, as the extent of cover provided varies enormously. Policy wordings need not be accepted on a “take it or leave it basis” as there is often scope for negotiation. Time and effort spent upfront in negotiating improved policy terms which serve to maximise the cover available and limit the opportunities for D&O insurers to deny or refuse cover for valid D&O claims can prove invaluable at a later date should you need to rely on this policy.

ABOUT THE AUTHOR

Sarah Turpin, partner in the Insurance Coverage group of the law firm K&L Gates and advises directors and officers in relation to policy wordings at the pre-contract stage and in relation to claims management and claims notification issues

+44 (0)20 7360 8285 or email [email protected]

Creating a genuine pipeline of intelligent, talented and experienced women is the key


In the most basic terms; it is not enough to merely draft and approve share dealing procedures, systems and controls, they must be fully implemented and understood.

THE MODEL CODE

Recent events have highlighted the importance of compliance with the Model Code and the ability to

demonstrate strict adherence to the Code and also to internal policies and procedures.

For the first time the FSA (now the FCA) fined a company in relation to its share dealing provisions, stating that the company failed to ensure their persons discharging managerial responsibility (“PDMRs”), including directors, fully understood the requirements of the Model Code. The company failed to take the necessary steps to comply with the Model Code and for this breach the FSA issued a final notice with a fine of £175,000.

The company in question had taken steps to comply with its other obligations under the code, such as issuing six-monthly reminders to PDMRs reminding them that they were not permitted to trade during a close period. All of the PDMR dealings were reported to the market as required by DTR and there was no evidence of any insider dealing. There was a share dealing policy in place which had

been drafted by external legal advisers, in order to secure compliance with the Model Code. However, the company failed to do the following:

Awareness of the share dealing policy

No reminders were given or training undertaken in relation to the share dealing policy resulting in the PDMRs forgetting about the policy.

Directors’ experience/knowledge

Reliance on directors’ experience and knowledge was insufficient to meet the requirements of the Model Code and increased the risk of breach.

Reviewing share dealing arrangements

Failure to review the adequacy of share dealing arrangements and in doing so overlooking a method by which poor practice could have been identified.

First fine for breach of the Model Code – a lesson for us all?


Policy might include a process to obtain signed acknowledgements from employees

THE MODEL CODE

Combined chairman and chief executive

When the roles of chairman and chief executive are combined the whole board need to approve any share dealings undertaken by the person filling both roles. Approval here was only received from a single board member.

Dealing as soon as possible

Deals not undertaken promptly and far in excess of the two business days stipulated by the Model Code.

Recording share dealings

Failure to keep and maintain records of share dealing requests from PDMRs in addition to the response and any clearance given.

The Listing Principles in respect of director’s share dealing refer to ‘reasonable steps’ and maintaining ‘adequate procedures, systems and controls’ and the failing identified by the FSA in making its decision makes it clear that strong expectations are attached to these statements.

In the most basic terms; it is not enough to merely draft and approve share dealing procedures, systems and controls, they must be fully implemented and understood. The tenet of the policy must be met and all practical requirements fulfilled before permission to deal is granted. A share dealing policy, and those tasked with maintaining and enforcing it, should be imbued with sufficient authority to be able to refuse the request of any person seeking permission to deal without the appropriate documentation and approval. To this end it is vitally important that PDMRs understand how the share dealing policy complies with the Model Code and why all elements of the share dealing policy must be satisfied WITHOUT EXCEPTION and a clear audit trail maintained.

• PDMRs need to be regularly made aware of the requirements of the Model Code and share dealing policy (including the practical requirements in respect of obtaining authority to deal);

• The share dealing policy needs to be reviewed and updated in respect of the requirements of the Model Code and also in respect of the structure of the company;

• Those subject to the share dealing policy and those tasked with enforcing it should be subject to ongoing training and regular reminders in respect of their obligations;

• Policy might include a process to obtain signed acknowledgements from employees confirming they have read and understood the share dealing policy and will comply with it;

• The importance of share dealings only taking place with the necessary authority and timeframe as outlined in the share dealing policy (and in line with the Model Code) should be understood by all PDMRs and regularly communicated to them as a matter of importance;

• Full records of clearance to deal requests and the associated clearance need to be kept by the company and all such requests and clearances MUST be recorded on the documents prescribed by the share dealing policy in the format required;

• Additional care must be taken regarding additional obligations on certain individuals arising from the Model Code or the share dealing policy. Such as the obligation of a dual chairman and chief executive to seek and obtain the approval of the entire board before dealing in the shares of the company.

Further information:

Should you wish to discuss any of the matters raised in this article, or would like to understand how we can support your organisation with its continuing obligations under the Model Code, please contact: Tracey Brady. See below for contact details.

ABOUT THE AUTHOR

Tracey Brady, Senior Manager Capita Company Secretarial Services

+44 (0)7747 066905 or email [email protected]


QCA PUBLISHES REVISED CORPORATE GOVERNANCE CODE

The Quoted Companies Alliance (“QCA”) has launched a new version of its Corporate Governance Code for small and mid-sized quoted companies. The revised code has a renewed focus on board effectiveness and communication with shareholders and investors, and new provisions on developing an effective board and a table of minimum corporate governance disclosures. The new version of the Code and further information about the QCA can be found at: http:// www.theqca.com/shop/guides/70717/corporate-governance-code-for-small-and-midsize-quoted-companies-2013-downloadable-pdf.thtml

NEW ICSA GUIDANCE NOTE ON CYBER RISK

At the request of BIS, the Institute of Chartered Secretaries and Administrators has published a new guidance note on dealing with cyber risk. The note provides directors and company secretaries with practical advice on how to identify and address risks in this area and explains why cyber risk differs from other risks faced by organisations. The guidance note can be found at: https://www.icsaglobal.com/assets/files/Guidance%20notes/gn06-2013cyberrisk.pdf

MODEL ARTICLES AMENDED BY MENTAL HEALTH DISCRIMINATION ACT

On 28 April 2013, an interesting change to the Model Articles took effect. The Mental Health Discrimination Act 2013 (MHDA) revoked Article 18(e) of the private company model articles and paragraph 22(e) of public company model articles. Previously, these articles enabled a company to treat a director as having ceased their appointment following a court order preventing them from ‘exercising any powers or rights which that person would otherwise have’, as this reflects a now outdated view that a person with mental health issues can never recover.

These changes will not apply to companies incorporated prior to this date and there is no requirement for those companies to amend their articles, however, they may wish to do so to reflect current good practice and the new anti-discriminatory regulations. If so a special resolution will need to be passed in the usual way to amend the existing articles or to adopt the new model articles.

And finally

If you would like to get in touch with any of our senior contributors please email them at the addresses below:

[email protected]@[email protected]

If you would like to register to receive future editions of this publication by email or recommend a colleague please contact [email protected]

www.capitacosec.com

Contact us

This document is provided for general information purposes only. Whilst we take all reasonable care in the preparation of this document, we make no representation or warranty as to the accuracy or completeness of any information or content. This document does not purport to contain, or constitute, legal or professional advice. You should not rely on it for any purpose and you should always either verify the information yourself or consult a suitably-qualified adviser before taking or

refraining from any action as a result of the contents of this document. We exclude all liability (including, without limitation, for negligence) in respect of any loss or damage which may arise as a result of your reliance on the content of this document, to the full extent permitted by law. This document is not for distribution or use in any other jurisdiction outside of the United Kingdom.

JN6886Capita Company Secretarial Services is a trading name of Capita Registrars Limited. Registered office: The Registry 34 Beckenham Road Beckenham Kent BR3 4TU. Registered in England No: 2605568. Part of Capita plc. www.capita.co.uk

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