Corporate Governance

Corporate Governance and Exec Compensation 2021

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Shearman & Sterling LLP 27 | Recent Corporate Governance Developments in the UK Corporate governance reform has been under the spotlight recently in the U.K., with three major reviews being carried out into U.K. company audits and, more generally, corporate governance practice and regulation. The first review (the so-called Kingman Review) reported in December 2018 and was concerned with the work and structure of the U.K.'s independent audit and corporate governance regulator, the Financial Reporting Council (the FRC) and its proposed replacement by a new regulator. The second review reported in April 2019 and was carried out by the U.K.'s antitrust regulator, the Competition and Markets Authority (CMA), into the statutory audit services market. The third review (the so-called "Brydon Review") reported in December 2019 and was concerned with improving the quality and effectiveness of statutory audits in the U.K. In March 2021, the Government published its conclusions and responses to these three reviews, setting out very significant (and in some cases controversial) proposals for reform in its "Restoring trust in audit and corporate governance" White Paper (the Paper). THE GOVERNMENT'S WHITE PAPER The bulk of the Paper addresses the Kingman Review proposals for a new regulator to replace the FRC and its new and enhanced powers and responsibilities, as well as the Brydon Review and CMA report on reform of the audit function and audit market. The Paper also proposes significant changes to director liability and responsibility in relation to corporate or financial reporting and payment of dividends and to enforcement and malus or clawback action in relation to director remuneration that might be taken against directors in respect of any breaches of their existing and proposed new duties and responsibilities. The Government has accepted in principle all the findings of the three earlier reviews but, conscious of the pressures many companies will be under as they emerge from the pandemic, is proposing a phased introduction of the reforms. Any necessary legislation will be introduced as and when Parliamentary time allows, and it is proposing introducing The earlier reviews were prompted, in part, by a number of very notable corporate failures in the U.K., which have raised serious questions about the adequacy of existing risk and internal control processes and strategy in U.K. corporates and about the work and oversight of U.K. corporate financial reporting and governance by the FRC. Consultation on the Paper's proposals closed in July 2021, and the Government is now reviewing the feedback it has received on its proposals. certain reforms (e.g., corporate reporting) initially for premium-listed companies and possibly two years later for certain other unlisted public interest enterprises (PIEs). The Government is consulting on the tests to be applied for the extension of the current PIE status (which attracts certain corporate reporting and governance requirements) from listed to large unlisted companies or groups, focusing on number of employees and turnover or balance sheet size. Depending on the tests adopted, a further 1,000 to 2,000 companies could be brought into this expanded regime for U.K. PIEs. There are four principal areas in the Paper's proposals concerned with corporate governance: (i) corporate reporting, (ii) director liability in relation to dividend payments and corporate reporting generally, (iii) the work of audit committees and (iv) the role and powers of a new regulator to replace the FRC. Recent Corporate Governance Developments in the U.K. Phil Cheveley and Michael Scargill Insights

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