2015 Proxy Season Highlights in the UK

1 Table of Contents

INTRODUCTION...... 1 Highlights...... 1

EXECUTIVE REMUNERATION...... 2 Voting Outcomes...... 2 Contentious Meetings...... 3 Levels of Pay...... 3 Long-Term Focus...... 5 Fair Notice...... 5 Responding to Dissent...... 6

DIRECTOR STATISTICS...... 7 Glass Lewis Vote Recommendations...... 7 Contentious Meetings...... 7 Minority Shareholder Protections: Dual Vote on the Election of Independent Directors at Companies with a “Controlling” Shareholder...... 7 Spotlight on Alliance Trust: A Contested Meeting in the UK...... 9 Progress on Gender Diversity...... 9

OTHER GOVERNANCE DEVELOPMENTS...... 12 Mandatory Audit Tendering...... 12 Pre-Emption Group Makes Changes to Pre-Emption Principles...... 13

I About this Report

This report provides an overview of key developments in the 2015 proxy season, which is defined as January 1 to July 1. Except where indicated, this report focuses on companies that comprise the FTSE 350 Index, excluding investment trusts. The FTSE 350 Index of the London Stock Exchange (“LSE”) includes the UK’s largest publicly traded companies based on market capitalisation, comprising approximately 96% of the market capitalisation for all UK companies on the Main Market, and its constituents are required to comply with or explain any deviations from the UK Corporate Governance Code (“UK Code”).

EDITORS AND CONTRIBUTORS Andrew Gebelin Martin Garcia Mortell Alan O’Brien Natasha O’ Connor Peter Reilly Oonagh Ward Dimitri Zagoroff

ARTWORK LAYOUT AND DESIGN Martin Wickstrom Kate Flanagan http://www.wickillustration.com/

II A Note on Votes In addition to being able to vote “for” or “against” individual resolutions, shareholders of UK companies have a “withhold” or “abstain” option that they may use to indicate their reservations with a resolution without lodging a vote against it. A withhold vote, also known as an active abstention, is not a vote in law and is not counted in the final tally of votes.

Although we generally recommend that shareholders vote “against” a resolution when we have identified significant concerns with a particular aspect of the proposal, we occasionally recommend shareholders abstain from voting to express concerns when a negative vote seems unjustified or inappropriate (e.g., when an independent director chairs the nomination committee and the board is not sufficiently independent). In addition, we may recommend that shareholders abstain when insufficient information has been disclosed by the issuer to provide appropriate analysis. However, due to the frequency with which UK shareholders utilise the withhold option, unless noted the data below reflects overall voting levels, including abstain/withhold votes.

III Introduction While executive remuneration and board diversity remained two of the most important governance topics in the UK during 2015, a number of other the publicised campaigns of certain large investors, developments contributed to an upward trajectory for the discourse on remuneration has certainly shifted shareholder rights in the UK this year. The 2015 proxy toward attempting to ensure that executives have a season was the first full season to which the minority longer-term interest in company performance. shareholder protection of requiring a dual vote on HIGHLIGHTS the election of independent directors at companies with a “controlling” (defined as owning 30% or more) • The FTSE 100 reached the 25% female board shareholder applied. In January 2015, the Financial representation target set by Lord Davies Reporting Council’s (“FRC”) latest updates to the UK • All UK-incorporated FTSE 350 issuers have Code were crystallised. These updates are effective obtained shareholder approval of a three-year for all accounting periods commencing on or after remuneration policy October 1, 2014, and will require FTSE main market • Remuneration policies were resubmitted at 49 companies to produce a “viability statement” relating FTSE 350 issuers, predominantly relating to the to the future prospects of the company. Similarly, the expiry of LTIPs or the removal of matching shares amendments to the Code attempted to strengthen the focus on the longer-term; the section relating • In having its advisory remuneration report to remuneration now refers to the promotion of the rejected, Intertek became only the seventh FTSE long-term success of the company, while also requiring 100 issuer to lose a say on pay vote since 2002 companies to specify circumstances where it would be • Remuneration committees’ use of discretion, appropriate to recover sums paid out, or explain why particularly in relation to recruitment/termination they have not included provisions that would enable payments, rose to the fore as the most contentious them to do so. In conjunction with the embedding of pay issue the forward-looking remuneration policies, as well as

80 RESOLUTIONS THAT RECEIVED LESS THAN 90% SUPPORT 70 63* 63 60 55 52 50

20 10 10 7 6 0 EOD Remuneration 14-Day Share Political Takeover Variable Notice Period Issuance Donations Pay Grant *Includes companies where mutliple directors failed to receive 90% support FIGURE 1.1 1 Executive Remuneration VOTING OUTCOMES Following the trend of each proxy season since 2012’s ‘shareholder spring’, shareholder opposition to advisory say on pay votes continued to decline during the 2015 Proxy Season; indeed, as shown in Figure 1.2, the number of FTSE 350 issuers receiving less than 90% support fell significantly. As such, for the most part it appears that the three-year policy framework exercise of discretion by the remuneration committee has been successful, both in improving overall to address unusual or one-off situations; shareholder incentive structures and in increasing engagement ire appeared to focus on discretionary decisions and dialogue between investors and management, that were out of step with best practice, and/or that thereby reducing the number of companies that fail were not sufficiently explained and justified. More to receive overwhelming support for their advisory broadly, the jump in the number of poorly supported proposals. remuneration reports can be seen as a concentration In line with recent years, while aggregate support of opposition; with engagement, disclosure and pay levels continued to rise 2015 saw an increase in the structures having improved in recent years at the number of companies failing to receive over 70% majority of FTSE 350 issuers, those companies not and 60% support for the remuneration reports. As adhering to investors expectations have become more discussed in our contentious meetings section, many of easily identifiable as outliers. the cases of notable opposition followed a significant FTSE 350 REMUNERATION SUPPORT LEVELS 25% 21% 20% 18% 2013 (excluding abstentions) 2014 (excluding abstentions) 15% 2015 (excluding abstentions) 15% 11% 10% 9% 9% 6% 5% 5% 3% .75% 1% 2% 0% Less than 90% Less than 80% Less than 70% Less than 60% FIGURE 1.2 2 CONTENTIOUS MEETINGS As shown in Figure 1.3, remuneration voting during Rough Lunding the 2015 proxy season may be remembered for the Probably the most publicised spat over an prevalence of hotly contested meetings relating executive’s recruitment, and an apparent presage to executive turnover. With companies having to many of 2015’s remuneration related revolts, was the proposed terms of appointment for established the overall framework for executive pay Helge Lund upon joining BG Group announced through policy votes during the 2014 AGM season, in November 2014. Initially, BG was set to seek this year shareholders’ attention largely shifted to shareholder approval of the recruitment award assessing remuneration committees’ actions within (worth £12 million), as it was outside the limits the approved policy. One of the areas where most included in its approved remuneration policy; however, in light of the public complaints from remuneration policies afford significant leeway to a number of large shareholders, and the fear committees is in recruitment; companies have faced of potential defeat at the EGM, the Company the ire of shareholders for what they perceive as decided to award shares within the approved the failure of committees to exercise that discretion limits (albeit at a generous level), subject to more appropriately. Indeed, of the five companies that transparent and stringent performance criteria. Nonetheless, at the Company’s 2015 AGM, almost received the lowest levels of support for their 20% of shareholders failed to back the Company’s remuneration reports, four had made significant remuneration report. awards to an incoming executive, with Intertek’s remuneration report not receiving a majority of votes, the latest award being made a mere two months prior a rare defeat for a FTSE 100 company (the 7th since to his retirement. 2002). While golden hellos have generally been red It should be noted that often, it may not be the flag issues for FTSE investors, it appears the altered recruitment or severance awards themselves that voting regime in the UK has shone more light on the drive shareholder discontent, but the poor level of issue of recruitment awards. disclosure surrounding the methodology employed Similarly to recruitment, the treatment of executives by remuneration committees in determining the upon departure – which also allows for committee quantum of those awards. Given that executive discretion under remuneration policies – was another turnover is inevitable, shareholders have provided red button issue for shareholders during the 2015 a stinging indication that they will hold companies proxy season. As shown in Figure 1.3, three of the to account if they believe these awards have been most hotly contested remuneration proposals were made in an overly generous way, or have not been likely a result of payments to outgoing CEOs, or their adequately communicated to them. The results also treatment under incentive plans, with three of the ten highlight the importance of sound succession practices lowest support levels surrounding outgoing CEOs. and planning, which can serve to reduce the cost While not included in Figure 1.3, a number of other and uncertainty of turnover – and help boards avoid FTSE 350 companies faced investor backlashes over further bloody noses at the hands of shareholders. executive recruitment and/or termination, most Levels of Pay notably at FTSE 100 issuers Centrica (66.23% support) While levels of pay have ballooned over the past two and ARM Holdings (66.63% support). At the former, decades, the past two proxy seasons have seen a shareholders took exception to the terms under relative level of restraint, with overall remuneration which Ian Conn, former BP executive, was appointed, levels remaining almost stagnant. Such restraint may while ARM’s new CFO and former EasyJet executive, be attributed to a number of things, but likely causes Chris Kennedy, received a portion of his recruitment include the increased focus the binding vote has awards in cash, with none of the awards tied to placed on remuneration, and the resulting increase in ARM’s ongoing performance. Moreover, almost one- active stewardship by investors on pay practices. third of shareholders failed to support Lancashire Holdings remuneration report, likely as a result of the Nonetheless, as shown in figure 1.4, executives con- treatment of the insurer’s founder upon departure; tinue to be well compensated in their roles, andit the committee decided to allow his outstanding LTI appears the most generously rewarded CEOs continue awards to vest without any pro-rata reduction, despite to come from some of the traditional sectors, but 3 MOST CONTENTIOUS PROPOSALS

COMPANY INDEX RESOLUTION LEVEL OF CONTENTIOUS DETAIL RESPONSE SUPPORT ISSUE

Intertek FTSE 100 Remuneration 47.88% Recruitment Recruitment of the Company’s new CEO, André Acknowledgement in RNS. Group plc report Lacroix, was the major cause of discontent. As part of his recruitment, Mr. Lacroix received a guaranteed cash bonus worth £560,000 and an award over 183,149 shares, which was not subject to any performance conditions.

Diploma plc FTSE 350 Remuneration 49.63% Committee Discretionary uplift in the CEO’s bonus payout (10% increase) Acknowledgement in RNS. report discretion made by the remuneration committee.

BBA Aviation FTSE 350 Remuneration 51.67% Recruitment Incoming CFO received a bonus payment for the entire Ongoing shareholder plc report fiscal year, despite being appointed six months in. engagement.

Tate & Lyle FTSE 350 Remuneration 55.86% Recruitment As part of his recruitment, the Company’s new CFO, Company states that it plc report Nick Hampton, received a restricted share award valued will attempt to address at £1.2 million, subject to undisclosed performance concerns prior to the conditions. In addition, Mr. Hapton was initially granted 2016 AGM. an award under the Company’s LTIP worth £1.44 million; however, following a profit warning the committee replaced the PSP grant with an award valued at £700,000, which was not linked to any performance criteria.

Tullett FTSE 350 Remuneration 56.29% Recruitment As part of his recruitment, the Company’s new CEO, Nothing in RNS. Prebon report John Phizackerly, received a discretionary bonus. The bonus plc was designed to compensate him for lower than expected operating profit, the metric used to determine his bonus.

Man Group FTSE 350 Remuneration 56.47% Increased pay Incentive limits under the Company’s remuneration policy Relatively detailed plc policy opportunities were to be increased upwards, from 250% to 300% under response; assertion that the bonus scheme, and from 350% to 525% under the LTIP. shareholders they spoke The committee referred to the previous limits as “restrictive”, to support the policy. despite a bonus of $2.5 million and LTI vesting of $1.4 million.

Morgan FTSE 350 Remuneration 56.81% Termination Outgoing CEO treated as good leaver under the Company’s Acknowledgement in RNS. Advanced report LTIP, which included an award made only nine months before Materials his resignation. Incoming CEO granted an award worth plc £400,000 and a cash sum of £50,000.

Wm FTSE 100 Remuneration 57.72% Termination The outgoing CEO, Dalton Philips, received a bonus payout Acknowledgement in RNS. Morrison report in excess of £1 million, despite overseeing several years of Supermarkets poor performance at the supermarket. plc

Ladbrokes FTSE 350 Remuneration 60.09% Termination Termination payments to outgoing CEO, Richard Glynn, Board committed not to plc report made in accordance with the Companies Act 2006, which pursue similar one-off included payments for damages and benefits, and coincided awards in the future. with his ousting. Mr. Glynn also retained entitlements under the Company’s growth plan, which were worth up to £656,000 in the current fiscal year, and options over 1.2 million shares due to vest in 2020.

Dairy FTSE 350 Remuneration 63.36% One-off award One-off “transformational” award granted to the the CEO Intend to engage with Crest report on its original terms despite a vote against its terms by over shareholders. 35% of shareholders at a December general meeting in 2014; this protest came on the back of low levels of support for the Company’s remuneration report at the 2014 AGM.

FIGURE 1.3

4 have been joined by a couple of high flyers from more modern industries. As might be expected, the top 10 is comprised largely of FTSE 100 leaders, with Ocado’s Code Changes Tim Steiner bucking the trend, due primarily to his Effective for all accounting periods commencing award over 4 million shares at the online grocer. on or after October 1, 2014, the section relating to remuneration in the UK Code was updated, LONG-TERM FOCUS primarily to include a greater focus on the long- term. Firstly, the Code shifted away from the idea As discussed above, the degree of shareholder focus that the retention of talent is sufficient justification on committee exercises of discretion during the 2015 for large pay packages. Previously, the Code stated season is in line with the revised voting structure. In that “levels of remuneration should be sufficient to addition, the reduced emphasis on structural issues attract, retain and motivate directors of the quality required to run the company successfully…” which reflects structural improvements across the market in was revised to provide that: “Executive directors’ recent years. remuneration should be designed to promote the As shown in Figure 1.5, the vast majority of FTSE 100 long-term success of the company.” issuers now employ a deferral mechanism on bonus Other notable changes related to the potential for recovery of remuneration awarded to executives awards, and the possibility of recovering payments and holding restrictions: “Schemes should include has become fully established as part of UK market provisions that would enable the company to practice, for both short and long-term incentives. recover sums paid or withhold the payment of Likewise, shareholding guidelines are absent at only any sum, and specify the circumstances in which a single FTSE 100 company. it would be appropriate to do so” as well as attempts to encourage remuneration committees Companies are also responding to calls for a to require directors “to hold a minimum number greater emphasis on long-termism under incentive of shares and to hold shares for a further period arrangements, with the traditional three-year “long- after vesting, including for a period after leaving the company.” term” incentive being extended through longer performance periods or, more commonly, holding periods on vested awards. As shown in Figure 1.5, Fair Notice extended performance or holding periods now apply One area where best practice continues to evolve on LTIP awards at a majority of FTSE 100 issuers. is in director service contracts. In recent years the In addition to the revised UK Code, takeup of these entitlement to a bonus in respect of a notice period structural features likely reflects the increased level has become increasingly rare (generally, executives and quality of engagement between issuers and are now entitled to salary, benefits and pension shareholders stemming from the introduction of only), and more boards are expressly requiring that binding, three-year remuneration policies. departing executives seek to mitigate their loss during

HIGHEST EARNING CEOs

COMPANY NAME INDEX INDUSTRY SALARY STI LTI* OTHER/BENEFITS TOTAL** Reckitt Benckiser Group FTSE 100 Consumer Goods £865,000 £2,678,040 £15,246,655 £36,304 £18,825,999 WPP Group FTSE 100 Media £1,150,000 £3,590,000 £11,200,995 £1,741,000 £17,681,995 Ocado Group plc FTSE 250 Retail £517,000 £385,000 £13,644,001 £1,000 £14,547,001 Burberry Group plc FTSE 100 Clothing £1,097,000 £1,782,000 £10,564,881 £465,000 £13,908,881 Royal Dutch Shell†^ FTSE 100 Oil & Gas £1,091,440 £2,572,680 £6,797,332 £27,286 £10,488,738 BP plc†† FTSE 100 Oil & Gas £1,176,040 £1,940,756 £7,083,659 £73,382 £10,273,837 GlaxoSmithKline FTSE 100 Pharmaceuticals £1,087,000 £917,000 £7,461,290 £70,000 £9,535,290 AstraZeneca FTSE 100 Pharmaceuticals £1,133,000 £1,926,000 £5,650,767 £108,000 £8,817,767 HSBC Holdings FTSE 100 Banking £2,950,000 £1,290,000 £3,666,663 £642,000 £8,548,663 Unilever FTSE 100 Consumer Goods £975,280 £1,287,899 £5,408,090 £613,545 £8,284,813

*LTI reflects the value of awards at the time of grant, determined by the number of shares awarded and the company’s share price on that date. **The table above excludes pension payments ^Includes payments to multiple executives fulfilling role of CEO †Converted from Euro to Pounds at fiscal year end exchange rate (€1=£0.7796) ††Converted from Dollars to Pounds at fiscal year end exchange rate ($1=£0.6437)

FIGURE 1.4 5 REMUNERATION SAFEGUARDS

98% 99% 100% 95% 93% 95% 83% 83% 80% 76% 76% 70% 63% 58% 60% 54% 45% 40% 25% 20%

0% Recovery Provisions Mandatory Including Deferral Holding Periods Shareholding Guidelines on Bonus and LTIP Bonus Deferral Above a Threshold

2013 2014 2015 FIGURE 1.5 the notice period. Such contractual entitlements can Responding to Dissent be particularly contentious as they have the potential In addition to the remuneration-related amendments, to provide a reward for failure – for example at FTSE the UK Code was also updated to provide that, in the 100 retailer Tesco, where several executives received event that a “significant proportion of votes have been hefty payments in lieu of their 12 month notice cast against a resolution at a meeting”, boards should periods despite overseeing the worst performance provide an explanation of what actions it intends in the Company’s history – amounting to a £7 billion to take to understand the causes of the vote. This loss in 2014. That debacle prompted Old Mutual explanation should be provided when announcing Global Investors to signal its intention to vote against the results of the meeting. Interestingly, at four of remuneration proposals at any company that has the top 10 most contentious meetings, the Company not shortened its notice periods to under a year by failed to indicate the actions they were undertaking March 2016. to understand the low levels of support; however, the The current market standard of 12 month notice possible reasons for this vary, and companies may be periods are fully in line with recommendations of the hesitant to acknowledge that abstain votes (which do UK Code; however, not long ago the market standard not count as votes in law) are being utilised as a form was for three year service contracts, suggesting the of protest on behalf of shareholders. potential for further change should Old Mutual’s campaign gain traction.

6 Director Statistics Figure 2.1 provides a snapshot of those companies in the FTSE 350, excluding investment trusts, based on data we collected from January 1 to June 30, 2015. In calculating board independence, we have excluded chairmen who were independent on appointment, as recommended by the UK Code, and who have no conflicts of interest. GLASS LEWIS VOTE RECOMMENDATIONS For 2015, the bases for Glass Lewis recommending against director nominees remained broadly the same BOARD COMPOSITION AND DIRECTOR STATISTICS as in recent years. Apart from company-specific or (FTSE 350 EXCL. INVESTMENT TRUSTS) otherwise unique reasons, such recommendations were once again generally related to: (i) a director’s TOTAL COMPANIES IN SAMPLE ...... 208 failure to attend 75% of board meetings; (ii) excessive BOARD COMPOSITION ...... 2015 Average age...... 57.18 non-audit fees paid to an auditor; (iii) director overcom- Average board size ...... 9.15 mitment; (iv) affiliate directors serving on key board Percentage of female directors ...... 21.1% committees; (v) insufficient board independence; and Average independence ...... 61.0% (excluding independent on appointment chairmen of the board) (vi) related party transactions. Average tenure...... 5.17 Average outside directorships...... 1.89 CONTENTIOUS MEETINGS CHAIRMAN STATISTICS FTSE 250 private equity investor SVG Capital remains Independent on appointment and no current conflicts of interest...... 79.0% at loggerheads with 23% shareholder Coller Capital, Female chairman...... 3.3% Chairman is also CEO...... 1.0% which is reportedly dissatisfied with management Chairman is former executive...... 7.2% strategy and capital returns, and tops a list of the Board designates senior independent director...... 91.3% ten companies whose directors received the largest COMMITTEE STATISTICS against votes during the 2015 AGM season. Audit committee independence...... 98.5% Compensation committee independence (excluding independent on appointment chairmen of the board)...... 97.6% MINORITY SHAREHOLDER PROTECTIONS: Nomination committee independence ...... 87.1% (excluding independent on appointment chairmen of the board) DUAL VOTE ON THE ELECTION OF Audit committee size...... 3.64 INDEPENDENT DIRECTORS AT Compensation committee size ...... 3.86 Nomination committee size ...... 4.78 COMPANIES WITH A “CONTROLLING” Percentage of women on key committees ...... 27.2% SHAREHOLDER Significant shareholder on key committees ...... 1.7% Non-insider director who serve as executives of Changes to the UK Listing Rules introduced by the other public companies, on audit committee ...... 13.1% UK Financial Conduct Authority (“FCA”) with effect Non-insider director who serve as executives of other public companies, on compensation committee...... 10.80% from May 16, 2014 set out new voting requirements for the election of independent directors at Premium FIGURE 2.1 7 CONCERNS REGARDING INDIVIDUAL DIRECTORS 1.35% 2.70% 1.35% 4.05% 24.32% Overboarded 12.16% Affiliate/insider on committee Excessive non-audit fees Less than 75% attendance Insufficient board independence Related party transactions Compensation issues Failure to address prior year opposition No lead director 13.51%

22.97%

17.57% FIGURE 2.2

SHAREHOLDER DISSENT FROM PROPOSED DIRECTORS

Company Industry FTSE Index Director(s) Dissent (incl. Abstentions) Likely Issue(s) of Shareholder Co GL Rec SVG Capital plc Financial services 250 Chairman Andrew Sykes 39.4% and 31.9%, Opposition to management strategy For and CEO Lynn Fordham respectively from major shareholders Coller Capital (23%) and Standard Life (6%). Pace plc Telecommunications 250 Chairman Allan Leighton 27.2% Mr. Leighton is aﬃliated on the basis Against Equipment of his participation in a performance share scheme and also serves as a member of the remuneration committee. Standard Chartered plc Banks 100 Deputy CEO Michael Rees 22.3% Pay for performance concerns. For International Consolidated Airlines Airlines 100 NED Césareo Alierta Izúel 21.9% Poor attendance for second year running. Against Lonmin plc Mining 250 NED Len Konar 21.8% Overboarded. Against Playtech plc Gambling 250 NED Hilary Stewart-Jones 21.6% Member of audit and remuneration Against committees, and spouse of Jean-Peirre Houareau who provides consultancy services to the Company for an annual fee of £150,000, and who is the ultimate beneﬁciary of a supplier to which the Company advanced a loan of €1.5 m, which is repayable before July 2019. RELX plc (formerly Reed Elsevier plc) Publishing 100 NED Robert Polet 20.5% Poor attendance. Against Inmarsat plc Mobile 100 NED John Rennocks 19.8% Tenured director who serves on audit and For Telecommunications remuneration committees. Mitchells & Butlers plc Restaurants and Bars 250 NED Eddie Irwin 18.6% Representative of 23% shareholder Elpida Group Against and serves on the audit committee. RSA Insurance Group plc Insurance 100 NED Hugh Mitchell 17.4% Remuneration committee chairman. For

FIGURE 2.3

Listed companies with a “controlling” shareholder, shareholders, the Company may propose a further defined as a shareholder that controls 30% or more of resolution to elect the relevant director between 90 a company’s voting power. and 120 days from the date of the annual meeting. Under the new rules, which are intended to provide This further resolution must be passed by a majority additional protections to minority shareholders, the of the shareholders as a whole only, and there is no election or reelection of any director whom a company requirement for an additional vote by independent with a controlling shareholder has determined to be shareholders. Further, the Listing Rules allow any independent under the UK Corporate Governance non-executive director who is not elected by the Code must be approved separately by both (i) all independent shareholders to remain in office until the shareholders as a whole; and (ii) all shareholders further resolution has been voted on. excluding the controlling shareholder(s). Due to certain transitional arrangements, the 2015 If such a proposal to elect any of the independent non- AGM season was the first time that independent executive directors is not passed by the independent shareholders were afforded such voting rights at many AGMs. Figure 2.4 lists the 31 FTSE 350 companies, 8

Spotlight: Alliance Trust: A Contested Meeting in the UK The 127-year-old FTSE 350 investment and savings business Alliance Trust plc found itself the subject of a confrontation with an activist shareholder for the second time in five years in the lead up to its April AGM. On this occasion, Elliott Advisors, a U.S. hedge fund, campaigned to place three new directors on the board, arguing that the Company had consistently delivered poor investment performance while failing to reduce costs. This type of shareholder activism is extremely uncommon in the UK, but New York-based Elliott has established a fearsome reputation for such action across the world. In this case, Elliott went so far as to set up a website and a call centre to engage with the up to 60,000 individual investors who hold 70% of the Company’s shares. Hostilities between the two parties continued to intensify as the Company’s AGM approached, with Elliott accusing the Company of misstating its costs and of not paying sufficiently large dividends. However, the day before the AGM, the Company announced that it had agreed to add two of Elliott’s three nominees to the board and to “accelerate the process to appoint an additional independent non-executive director”. In return, Elliott committed to support management on all other resolutions and to not “seek to agitate against the Company, its board or management publicly until after the Company’s 2016 AGM at the earliest”. The board’s woes did not end there. At the next day’s AGM, shareholders booed directors and attacked them for spending £3 million fighting Elliott’s proposals before going on to reach a last minute truce. Anthony Brooke, a former director at SG Warburg and one of the two Elliott nominees co-opted to the board, sparked further fury when he admitted he had “no knowledge of Alliance Trust other than what I’ve read in the press”. For our part, we remain concerned that the appointments of the two Elliott nominees were not ultimately put to shareholder approval at the AGM, though we acknowledge that they will of course be subject to reelection at the 2016 AGM. comprising the FTSE 100 (large cap) and FTSE 250 PROGRESS ON GENDER DIVERSITY (mid cap) indices, to have been subject to the This summer the FTSE 100 met Lord Davies’ target of aforementioned new rules and which held their AGMs 25% female representation on boards. In the process between January 1, 2015 and June 30, 2015. of doing so, the number of female directors on these As per Figure 2.4, the difference in average support for boards has doubled since the target was first set in independent directors between the entire shareholder 2011, and there are now no all-male boards in the base (column E1) and independent shareholders only FTSE 100. Concerns remain, however, that the less (column E2) is negligible in the vast majority of cases. successful effort to get more women appointed to This would indicate that independent shareholders senior management roles may constrict the pipeline at such companies are broadly satisfied that their of future female board candidates. independent directors are in fact independent of the On the investor side, we note that concerned controlling shareholder(s). shareholders have utilised a fairly eclectic range of In the case of TalkTalk Telecom Group plc, the almost measures (abstaining or voting against nominations 2% gap in average support levels can be attributed to committee members or resolutions to adopt annual independent shareholder opposition to the reelection accounts and reports, for example) when voicing of director Brent Hoberman (5.76% against) on the concern in cases where a board has failed to disclose basis of poor attendance, and that of John Gildersleeve a firm policy on gender diversity. Likewise, boards’ (7.89% against) on the basis, we presume, that he serves reporting in this regard remains inconsistent and, as a non-executive director on two boards (TalkTalk disappointingly, often “boilerplate” in nature. and Dixons Carphone) where Charles Dunstone also Going forward, Lord Davies’ “Women on Boards: serves as chairman. Mr. Dunstone himself, TalkTalk’s 5 Year Summary”, which was published on October 31% controlling shareholder, was, however, more 29, 2015, has set an enhanced target of 33% female forgiving and voted his entire shareholding in support board representation by 2020. However, this new of all directors. target applies to all FTSE 350 companies, rather than We note that of the 31 companies in our sample, only just those in the FTSE 100. two (Easyjet and Playtech) have failed to disclose a separate breakdown of votes cast by independent shareholders only. 9 AVERAGE SHAREHOLDER SUPPORT FOR ELECTION OF DIRECTORS AT CONTROLLED COMPANIES

Avg. Shareholder Support (incl. sbstentions) FTSE Index Company Controlling Shareholder(s) Shareholding All Shs. Ind. Shs. Only

100 Antofagasta plc Chairman Jean-Paul Luksic Fontbona and the Luksic family 60.7 100.0 99.8 100 Easyjet plc Stelios Haji-Ioannou 34.6 99.4 N/D 100 Fresnillo plc Industrias Peñoles 75.0 99.7 98.6 100 Hikma Pharmaceuticals plc CEO/chairman Said Darwazah and Darhold Limited Concert Party 31.2 99.5 99.2 100 Schroders plc Schroder Family 47.9 99.6 99.1 100 The Royal Bank of Scotland Group plc Her Majesty's Treasury 61.8 99.8 99.1 250 Acacia Mining plc Barrick Gold Corporation 63.9 99.8 99.5 250 Allied Minds plc Invesco Asset Mgmnt 42.0 99.7 99.4 250 Brit plc (now delisted) Apollo Global Management LLC, CVC Capital partners 39.7 and 33.6, 100.0 99.8 respectively 250 Cable & Wireless Communications plc The CVBI Holdings (Barbados) Inc, Clearwater Holdings 36.0 99.5 99.1 (Barbados) Limited, Brendan Paddick and Columbus Holding LLC concert party 250 Caledonia Investments plc The Cayzer Trust Company Limited 35.4 99.3 97.9 250 CLS Holdings plc Chairman Sten Mortstedt and family 57.4 99.9 99.8 250 Colt Group SA Fidelity Investments 62.5 99.8 99.1 250 Countrywide plc Oaktree Capital Management 30.2 99.9 99.8 250 Esure Group plc Chairman Peter Wood 30.9 98.9 98.2 250 Euromoney Institutional Investor plc Daily Mail and General Trust plc 67.0 99.8 99.1 250 EVRAZ plc Lanebrook Limited 67.1 99.9 98.8 250 Jardine Lloyd Thompson Group plc Jardine Matheson Holdings Limited 40.2 98.9 97.9 250 JD Sports Fashion plc Pentland Group plc 57.5 99.2 97.9 250 Jimmy Choo plc JAB Luxury Holdings 67.7 99.8 97.3 250 KAZ Minerals plc Former executive chairman Vladimir Kim 32.6 99.9 99.7 250 Millennium & Copthorne Hotels plc Chairman KWEK Leng Beng through City Developments Limited 61.2 100.0 100.0 250 Playtech plc Brickington Trading Limited 33.6 88.1 N/D 250 Regus plc CEO Mark Dixon 34.5 99.5 99.2 250 Saga plc Acromas Bid Co Limited 51.0 99.7 99.1 250 Spire Healthcare Group plc Cinven Funds 48.4 99.8 99.6 250 TalkTalk Telecom Group plc Chairman Charles Dunston 30.8 97.5 95.8 250 Ted Baker plc Raymond Kelvin (Founder and CEO) 35.4 95.0 97.1 250 TSB Banking Group plc Lloyds Banking Group 50.0 99.9 99.7 250 Virgin Money Holdings (UK) plc Virgin Financial Investments Limited, Wl Ross & Co. LLC 35.1 and 33.5, 99.9 99.9 respectively 250 Zoopla Property Group plc DMG Media Investments Limited 31.8 99.3 98.9

FIGURE 2.4

10 WOMEN ON BOARDS: TOP TEN MOST IMPROVED FTSE 100 BOARDS (2010 TO MARCH 2015)

Rank Company Sector 2010 2015 % Increase

1 Old Mutual Life insurance 0% 38.5% +38.5 2 Wolseley Industrial suppliers 0% 30.0% +30.0 3 Intercontinental Hotels Group Hotels 18.2% 45.5% +27.3 4 Kingﬁsher Home improvement retailers 14.3% 40.0% +25.7 5 Aggreko Business support services 0% 25.0% +25.0 6 Land Securities Group Industrial & oﬃce REITs 8.3% 33.3% +25.0 7 GlaxoSmithKline Pharmaceuticals 7.7% 31.3% +23.6 8 Admiral Group Insurance brokers 20% 41.7% +21.7 9 Royal Bank of Scotland Banks 9.1% 30.0% +20.9 10 Next Apparel retailers 11.1% 30.0% +18.9

FIGURE 2.5

11 Other Governance Developments MANDATORY AUDIT TENDERING Under new rules at both the European and national levels, FTSE 350 companies are now required to tender their audits every ten years, subject to the following transitional arrangements: • where an incumbent auditor has been appointed for 20 or more consecutive financial years as at FTSE 350 AUDITOR ROTATION June 17, 2014, there must be a tender in respect (JAN-JUN 2015) of auditor appointments made at the AGM on or after June 17, 2020; AUDITS AUDITS NET LOST WON GAIN/LOSS • where an incumbent auditor has been appointed for between 11 and 19 consecutive financial years (inclusive) as at June 17, 2014, there must BDO 1 0 -1 be a competitive tender in respect of auditor appointments made at the AGM on or after June 17, 2023; or Deloitte 6 4 -2 • where an incumbent auditor has been appointed for fewer than 11 consecutive financial years as at June 17, 2014, there must be a competitive tender in respect of auditor appointments at the Ernst & Young 3 4 1 AGM once the auditor has completed ten audits on or after June 17, 2016. Perhaps counter-intuitively, companies whose auditors have been in place for up to ten years as at June 2014 Grant Thornton 0 1 1 may be required to tender earlier than those whose auditors have been in place for longer still. In anticipation of these new requirements, 2013 (30) KPMG 7 6 -1 and 2014 (56) saw increasing numbers of audit tenders conducted by FTSE 350 companies, though not all such tenders resulted in a change of auditor. During the first half of 2015, 22 companies rotated their auditor with PwC 5 1 2 all but one tender resulting in the appointments of one of the so-called big four audit firms. FIGURE 3.1

12 PRE-EMPTION GROUP MAKES CHANGES The updated Pre-Emption Principles are intended to TO PRE-EMPTION PRINCIPLES formalise the view held by several shareholder bodies that cash box share placings and similar arrangements On March 12, 2015, the Pre-Emption Group published should be subject to the same principles concerning a revised version of its Statement of Principles for the application and disapplication of pre-emptive Disapplying Pre-Emption Rights (“Pre-Emption rights as shares issued directly for cash. Pre-emptive Principles”), the first such update since 2008. The rights do not currently apply to cash box structured Pre-Emption Group was formed in 2005 to produce acquisitions because the company, instead of receiving a Statement of Principles to provide a best practice cash in consideration for the issue of new shares, framework for disapplying pre-emption rights, and receives the entire issued share capital of a cash box was re-formed in 2015 to “consider market changes, company, being a company whose only assets are developments in best practice and whether conse- cash reserves. quential revisions to the Statement of Principles may be appropriate”. The Group’s current membership However, the updated Pre-Emption Principles also includes chairman Robert Swannell (chairman of acknowledge and accommodate circumstances FTSE 100 retailer Marks & Spencer), Matthew Lester where funds are needed for an acquisition or capital (CFO at Royal Mail) and Greg Bennett (head of capital investment and in which having to wait on shareholder markets – EMEA & Americas at Fidelity Worldwide approval or the completion of a pre-emptive offer Investments) among others. may be commercially prejudicial to the underlying transaction. As such, and by bringing cash box placings While there have been no changes to the thresholds within their scope while also allowing more generally for the general disapplication of pre-emption rights for companies to issue up to 10% on a non-pre- routinely sought at UK AGMs, which remain at5% emptive basis where the funds are to be used for an annually and 7.5% in aggregate over a three year acquisition or investment, the Pre-Emption Principles period, the new Pre-emption Principles now allow aim to balance the perspectives of investors and companies to seek authority to issue an additional 5% management alike. of issued capital in any year for use in connection with an acquisition or “specified capital investment”. As We note that of the 257 FTSE 350 companies (incl. a result, shareholders will have noticed a significant investment trusts) which held their AGMs during recent increase in the number of companies seeking the first half of the year, 49 sought a 10%, rather general authorities to issue new shares without pre- than 5%, authority and in doing so cited the updated emptive rights representing up to 10% of their issued Pre-Emption Principles. Of these, two companies share capitals, rather than the 5% that had previously submitted two separate proposals requesting a5% been the norm. authority each, while the remainder submitted a single combined proposal.

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