Business Briefing
Business Briefing | 1
A CAPITA COMPANY SECRETARIAL SERVICES MAGAZINE
JULY 2013
Inside this issue
A quarterly publication from
Capita Company Secretarial
Services keeping you updated
on current industry issues
4
Corporate Social
Responsibility – Non
financial reporting
7
The Glass Ceiling - still
not yielding
11
Directors and Officers
Liability Insurance –
Dispelling the Myths
14
First fine for breach
of the Model Code – a
lesson for us all?
16 AND FINALLY
• QCA publishes revised
Corporate Governance
Code
• New ICSA guidance note
on cyber risk
• Model Articles amended
by Mental Health
Discrimination Act
Supporting you throughout the IPO process
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
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 georgina.morgan@capita.co.uk
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.
Business Briefing | 3
INSIDE THIS ISSUE
Business Briefing
Mark Cleland
takes a look at
what we have to
offer readers in
the latest issue of
Business Briefing
W
elcome 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.
Mark Cleland,
Director of Corporate Services, Capita Registrars
We hope you find this edition informative and
welcome your comments and queries - please
email: bus.brief@capitaregistrars.com
We are pleased to be
able to confirm that
this publication is
CPD accredited so
counts towards your
annual professional
learning objectives.
Please email
capitatraining@
capita.co.uk if you
would like to be sent
a certificate.
4 | Business Briefing
CORPORATE SOCIAL RESPONSIBILTY
Corporate Social Responsibility
– Non-financial reporting
The focus on nonfinancial reporting has
increased steadily in
recent years.
M
ost 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.
From its
investigations
and research,
the Commission
concluded that only
a limited number
of EU companies
regularly disclose
non-financial
information
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.
Business Briefing | 5
CORPORATE SOCIAL RESPONSIBILTY
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 organisation’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 multinational groups and the disclosure of these
arrangements.
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.
6 | Business Briefing
CORPORATE SOCIAL RESPONSIBILTY
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
georgina.morgan@capita.co.uk
Business Briefing | 7
GENDER DIVERSITY
The Glass Ceiling
- still not yielding
Update on gender diversity in the boardroom
P
rogress 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.
2013
6.7% in 2010
8 | Business Briefing
2010
GENDER DIVERSITY
For the second year running,
all-male boards are in the
minority at 26.8%
There are currently 183 boards
with female representation
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);
12.5%
2010
12.2%
2009
15%
2011
11.7%
2008
9.4%
2004
6.2%
1999
1999 - 2013
FTSE 100
% of woman
directors
17.4%
2012
17.3%
2013
• there are currently 94 boards with female
representation; and
• there are now 192 women directors on FTSE
Source: Professional Boards Forum BoardWatch.
100 boards, out of a total of 1,110.
Source: Professional Boards Forum BoardWatch. Data kindly provided by BoardEx and The Female FTSE Board Report
Data kindly provided by BoardEx and The Female
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 decisionmaking. This is not just about equality at
the top of our companies. It is about good
business sense.”
How can the momentum be refreshed?
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
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.
FTSE Board Report.
The important thing is that the
The figures
are clear – there is an issue around
overall trend should remain on
executiveandirector
appointments
upward trajectory
to achieve and the
the LordOn
Davies
talent pipeline.
therecommendations
outside it sounds quite
of 25% women to be on boards
simple; organisations
need to attract the best
by 2015.
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 allmale 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
Business Briefing | 9
GENDER DIVERSITY
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.
Country
Date adopted
Requirement
% of women on
Sanctions
Comments
Yes – financial impact
Listed and state-
on directors
companies
Yes – nullification of
Listed and non-listed
board elections &
companies with more
suspension of director
than 500 employees
benefits
and over 50million Euro
boards – Jan 2012
Belgium
July 2011
33% of under
11%
represented sex
France
January 2011
20% of each sex by
22%
2014, 40% by 2017
revenue
Italy
July 2011
33% of each sex by
6%
2015
Yes – warnings, fines &
Listed and state-owned
forfeiture of positions
companies
of elected board
members
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
11%
2015
No – but may not
Large companies only
be awarded public
contracts
Germany
No quota yet
30% women on board
16%
suggested
Denmark
1990
Equal representation
16%
Suggested – contesting Debating flexi-quota
appointments to board
plan
No
State-owned companies
only
Finland
1986
Equal representation
27%
No
State-owned companies
only
Greece
Austria
2000
March 2011
33%
25% women by 2013
7%
11%
Yes – nullification of
State-owned companies
appointments
only
No
State-owned companies
35% by 2018
Slovenia
2004
40% of each sex
only
15%
No
State-owned companies
only
UK
2012
25% women by 2015
16%
No – comply or explain
Diversity to be explained
and voluntary target
10 | Business Briefing
GENDER DIVERSITY
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
Creating a
genuine pipeline
of intelligent,
talented and
experienced
women is the key
Business Briefing | 11
INSURANCE
Directors and Officers
Liability Insurance
Dispelling the Myths
M
any 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
12 | Business Briefing
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
Business Briefing | 13
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
sarah.turpin@klgates.com
Creating a
genuine pipeline
of intelligent,
talented and
experienced
women is the key
14 | Business Briefing
THE MODEL CODE
First fine for breach
of the Model Code
– a lesson for us all?
R
ecent 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.
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.
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.
Business Briefing | 15
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
tracey.brady@capita.co.uk
Policy might
include a process
to obtain signed
acknowledgements
from employees
16 | Business Briefing
And finally
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-smalland-midsize-quoted-companies-2013downloadable-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.
Contact us
If you would like to get in touch with any of our senior
contributors please email them at the addresses below:
georgina.morgan@capita.co.uk
phil.kershaw@capita.co.uk
michael.kempe@capita.co.uk
If you would like to register to receive future editions
of this publication by email or recommend a colleague
please contact bus.brief@capitaregistrars.com
www.capitacosec.com
Capita 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
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
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negligence) in respect of any loss or damage
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