As previously reported, the Irish Stock Exchange (“ISE”) has recently published new listing rules which require Irish listed companies to comply or explain against additional corporate governance provisions.  These new rules, which are contained in a new Irish Corporate Governance Annex, supplement the existing provisions which require Irish listed companies to comply or explain against the requirements of the UK Corporate Governance Code.  The new rules are effective immediately and therefore Irish listed companies with accounting periods commencing on or after 17 December 2010 will be required to comply or explain against the Irish specific corporate governance provisions.  The requirement to comply with the UK Corporate Governance Code (the “UK Code”) is already in place having applied to Irish listed companies with accounting periods beginning on or after 30 September 2010.

The Irish Corporate Governance Annex (the “Annex”) contained in the new rules implements the nine recommendations arising from the report commissioned by the ISE and the IAIM in early 2010 on compliance with the Combined Code on Corporate Governance by Irish listed companies. The additional requirements are principally concerned with board composition, board evaluation, remuneration and the work undertaken by the audit committee. 

The Annex applies to companies with a primary equity listing on the main securities market of the ISE. 

The Annex generally reflects the proposed terms set out in the feedback statement published by the ISE in September 2010 in response to submissions to the ISE’s proposals for a standalone Irish Corporate Governance Code, however, there have been certain changes of emphasis and several additional provisions have been included under the heading of “Remuneration” as regards disclosure of variable elements of compensation. The Annex also specifically provides that share options or any other right to acquire shares or to be remunerated on the basis of share price movements, should not be exercisable for at least three years after the award.
 
The Annex also includes interpretive provisions for companies that are of an equivalent size to companies that are included in the FTSE 100 and FTSE 350 Indices.  The ISE will regard a company as being of an equivalent size to a company included in the FTSE 350 Index where at the start of the company’s financial year it is admitted to trading on the main securities market of the ISE and is not eligible for inclusion in the ISEQ small cap index.  The ISE will regard a company as being of an equivalent size to a company included in the FTSE 100 Index where at the start of the company’s financial year it is admitted to trading on the main securities market of the ISE and it has a market of capitalisation of €2billion or above.  The relevance of these interpretive provisions is that companies which are regarded as being equivalent to a FTSE 350 company are required to have annual re-election of all their directors.  In addition, where a company is equivalent to a FTSE 350 company, an evaluation of the board of such a company should be externally facilitated at least every 3 years.  The UK Code also provides that a board should not agree to a full-time executive director taking on more than one non-executive directorship in a FTSE 100 company nor the chairmanship of such a company – this provision now applies to full-time executive directors of Irish listed companies who might be considering an appointment to the board of the Irish equivalent of an FTSE 100 Company.

The Annex reinforces the ISE’s continued emphasis on improved disclosure in respect of compliance with UK Code and the Annex.  Where companies diverge on the provisions of the UK Code or the Annex, the ISE expects companies to include explanations that more clearly reflect the environment in which they operate and provide a rationale for the divergence.  Where a company does not comply with the provision of the UK Code or the Annex but actively intends to do so in the future, it should, as part of its explanation, provide an indication of how and when it will comply.  Where a company has decided not to implement a particular provision it should clearly outline its rationale.  The Annex further provides that companies should provide meaningful descriptions of how they apply the provisions of the UK Code and the Annex.  In this regard, the Annex provides that companies should:

• move away from the practice of recycling descriptions and replicating the wording of the UK Code or the Annex’s provisions;
• provide informal disclosures that will provide shareholders with greater insight into the company and the environment in which it operates; and
• also avoid the practice of copying wording contained in the corporate governance disclosures year on year as this practice does not reflect compliance with the spirit of the UK Code or the Annex. 

The Annex emphasises that this should not be interpreted as imposing an obligation on companies to change the wording of their corporate governance disclosures simply for the sake of change.  In assessing whether wording changes are required to prior disclosures, companies are encouraged to consider whether circumstances have remained sufficiently constant to justify no wording changes.

The Annex includes specific provisions which reflect the recommendations from the ISE/IAIM report and the specific provisions are as follows:

(a) Board Composition

In the Annual report companies should outline the rationale for the current board size and structure and explain why a company believes it to be appropriate and provide details of any planned or anticipated changes to the board size or structure.  Where less than half of the board of a company is comprised of non-executive directors, the Company must give a reasonable explanation for this departure from the requirements of provision B1.2 of the UK Code.  There are detailed provisions requiring additional information to be included in the annual report in respect of the directors and in particular their biographies.  A detailed description of the skills, expertise and experience that each of the directors bring to the board must be included in the annual report.  Where a company’s directors have been nominated by shareholders or government, a reasoned explanation for such appointments including a description of the skills and expertise these directors bring to the board as provided by the shareholders or government or a statement that no such description has been provided to the company must also be included in the annual report.

(b) Board Appointments

Companies should include an explanation for each new appointee to the board of the process followed by the nomination committee in identifying a pool of candidates and selecting and recommending the candidate.  Where an external search agency and advertising has been used, this should be made clear in the annual report and if none were used, an appropriate negative statement should be included.

(c) Board Evaluation

A company should state in the annual report the objective and scope of the evaluation review and methodology applied and the rationale of the methodology.  A distinction should be made between the evaluation of the board process, of individual directors and of the collective board strength.  The statement should specify when the most recent externally facilitated performance evaluation was undertaken or when the board expects to engage an external facilitator.  If the evaluation is conducted by the board itself, the board should include an explanation of the steps that were included in the methodology to achieve as robust and objective an approach as possible.

(d) Board Re-election

The annual report should state the board’s general policy for board renewal.  Provision B1.1 of the UK Code sets out various circumstances where the independence of a director may be compromised and where a director falls within those circumstances and the board nonetheless deemed him to be independent, the board should set out in the annual report, the factors it took into account when determining whether that director should be regarded as independent. 

(e) Audit Committee

The annual report should include a meaningful description of the work carried out by the Audit Committee and not merely recycle the committee’s terms of reference.  The description should explain the work done by the audit committee relating to oversight of risk management on behalf of the board.  If there is a specific risk committee, a meaningful description of the work carried out by that committee should also be included.

(f) Remuneration

Companies should provide a clear and meaningful description of their remuneration policy and not simply recycle the remuneration committee’s terms of reference.  Where the remuneration policy includes variable components of remuneration, companies should describe the components of bonus or other variable elements of remuneration and disclose what components of variable compensation are deferred and for how long.  Companies should also describe any arrangements that are designed to achieve the recovery of variable compensation awarded on the basis of assessments or data which are subsequently found to be materially inaccurate.  If there are no such arrangements, companies should provide an appropriate negative statement.  The company should describe the vesting periods for shares forming part of a director’s remuneration and such terms should not allow for vesting for at least 3 years after the award.  Share options or any other right to acquire shares or to be remunerated on the basis of share price movements, should not be exercisable for at least 3 years after the award.

The provisions under the heading Remuneration concerning share options and variable elements of compensation are new additions to the Annex from that set out in the feedback statement issued in September 2010.  These new provisions, however, should really be read as one with Schedule A of the UK Code and in essence sit side by side with those provisions as opposed to an additional layer of compliance.

The Annex is yet another layer of corporate governance disclosure for Irish companies and compliance with these new disclosure requirements will be closely monitored by the ISE. Companies will need to consider carefully how they are going to comply with the new disclosure requirements in a meaningful manner – the ISE will not be satisfied with the use of industry-wide boilerplate text. Although the Annex will apply for all accounting periods beginning on or after 17 December 2010, the ISE does anticipate that several Irish listed companies will provide a compliance statement against the Annex on a voluntary basis in their next Annual Report. William Fry is already working with companies to assess the impact of the new disclosure requirements.

For further information, please contact David Fitzgibbon or Susanne McMenamin or your usual William Fry contact.