6.2 Continuing Obligations of LSE Companies

Question 1

What happens once a listing has been obtained?

Answer 1

Certain ongoing obligations have to be met in order to maintain it.

Question 2

What rules must a company listed on the LSE follow?

Answer 2

1. UKLA’s Model Code
2. UK Code of Corporate Governance

Question 3

List the 5 areas of the UKLA’s Disclosure and Transparency Rules that a listed company has an obligation to fulfil.

Answer 3

1. Disclosure and control of inside information
2. Periodic financial reporting
3. Vote holder and issuer notifications
4. Access to information
5. Corporate governance

Question 4

What do the disclosure and transparency rules (DTR) cover?

Answer 4

They cover the requirements for a listed company to keep the market informed of all price sensitive information and to fulfil the requirements under corporate governance

Question 5

What do the disclosure and transparency rules (DTR) attempt to limit?

Answer 5

They attempt to limit the incidence of inside information being disseminated unequally or illegally, and in order to comply with the Market Abuse Regulations and Transparency Directive.

Question 6

List the 3 things the disclosure and transparency rules (DTR) highlight.

Answer 6

1. What type of information should be disclosed
2. How and when the information should be disclosed
3. Procedures for delaying disclosure

Question 7

What do Disclosure and transparency rules (DTR) state about inside information?

Answer 7

Disclosure and transparency rules (DTR) also emphasises that a firm must have effective arrangements in place to deny access to inside information to any person who should not have access to the information.

Question 8

What do the Listing rules state about unpublished price-sensitive information?

Answer 8

Unpublished price-sensitive information must be disclosed to the market as a whole without delay.

Question 9

List the 3 things which are not public knowledge, that a listed company must notify the market of:

Answer 9

1. A change in the company’s financial condition
2. The performance of its business
3. Its expectations as to its performance

Question 10

Who must be notified of price-sensitive information before it is disclosed to anyone else?

Answer 10

Price-sensitive information may not normally be disclosed to anyone else before it has been notified to an RIS (Regulatory Information Service) or PIPS (Primary Information Provider Service).

Question 11

What is the fine balance the Listing Rules seek to maintain?

Answer 11

A balance between ensuring the existence of a level playing field amongst investors on the one hand and ensuring efficient and orderly markets on the other.

Question 12

List 3 Regulatory Information Services (RISs) approved by the FCA.

Answer 12

1. The Regulatory News Service (RNS) of the London Stock Exchange
2. Business Wire
3. PR Newswire Disclose

Question 13

Who is the longest standing Primary Information Provider PIP?

Answer 13

The LSE’s Regulatory News Service (RNS).

Question 14

What are Primary Information Providers responsible for?

Answer 14

Distributing listed company announcements to the newswire services or Secondary Information Providers.

Question 15

Name 2 Secondary Information Providers.

Answer 15

1. Bloomberg
2. Thomson Reuters

Question 16

What is the role of Secondary Information Providers?

Answer 16

They disseminate the information provided by the Primary Information Providers to the general public.

Question 17

What is the name of the document which offers listed companies guidance on the way in which their relationships with analysts should be conducted?

Answer 17

The UK Listing Rules and Guidance Manual. Analysts need to be aware of and operate within this framework if the relationship is to work smoothly.

Question 18

What should analysts refrain from?

Answer 18

Analysts should refrain from putting a company into the position where it is likely to commit a breach of the Listing Rules; in particular, by selectively disseminating unpublished price-sensitive information.

Question 19

What can happen if an analyst elicits the selective dissemination of price-sensitive information?

Answer 19

Analysts should be particularly aware that, while they are not subjected to the Listing Rules, eliciting the selective dissemination of price-sensitive information may leave them open to an FCA investigation of their conduct under separate FCA powers; for example, under the Market Abuse Regime.

Question 20

What is the main purpose of UKLA rules?

Answer 20

That companies ensure that all holders of the same class of listed share are treated equally and fairly.

Question 21

List the 3 UKLA requirements requirements for companies on the London Stock Exchange to publish financial reports.

Answer 21

1. Fully audited annual financial reports available at the latest four months after the end of the financial year
2. Half-yearly financial reports available at the latest two months after the mid-point of the financial year
3. Management reports attached to each

Question 22

What must both sets of financial reports contain?

Answer 22

A balance sheet (statement of financial position) and profit and loss account (income statement).

Question 23

What does the management report contain?

Answer 23

An account of major factors that have affected the company over the period covered and the principal risks and uncertainties for the near future.

Question 24

List 4 things other than price-sensitive information through a regulatory information service (RIS) that a publicly traded company, must give shareholders access to.

Answer 24

1. Any amendment to the company’s constitution, i.e. changes to the articles or memorandums of association
2. Any opportunities for holders of securities to exercise rights, such as vote at meetings, collect dividends, take part in rights issues, et cetera
3. Any information about changes to the rights given to the holders of equity
4. Any capital restructuring, such as the repayment of debt or company share buybacks

Question 25

What must a premium listed company comply with?

Answer 25

The UK Code of Corporate Governance

Question 26

What must a premium listed company show in the published directors’ report?

Answer 26

How its corporate governance functions.

Question 27

What does the UK Code of Corporate Governance stress?

Answer 27

The importance of companies to apportion responsibilities with the company among the directors and to make sure that these responsibilities are being fulfilled.

Question 28

What 2 things must the directors’ report cover?

Answer 28

1. A description of the issuer’s control and risk management systems 2. A description of the issuer’s administrative, management and supervisory bodies and their committees

Question 29

Who is bound by the model code and what does it do?

Answer 29

Persons discharging managerial responsibilities must also be bound by the Model Code, restricting their dealing in own-company shares to avoid suspicions that they are abusing their position and the knowledge that comes with it.

Question 30

What is the current Code on Corporate Governance incorporated into?

Answer 30

The current Code on Corporate Governance is incorporated into the Listing Rules and became effective in 2010. It has been updated regularly since then, the latest update appearing in 2018.

Question 31

List the 5 **Board Leadership and Company Purpose** principles as set out by the Financial Reporting Council.

Answer 31

1. A successful company is led by an effective and entrepreneurial board, whose role is to promote the long-term sustainable success of the company, generating value for shareholders and contributing to wider society. 2. The board should establish the company’s purpose, values and strategy, and satisfy itself that these and its culture are aligned. All directors must act with integrity, lead by example and promote the desired culture. 3. The board should ensure that the necessary resources are in place for the company to meet its objectives and measure performance against them. The board should also establish a framework of prudent and effective controls, which enable risk to be assessed and managed. 4. In order for the company to meet its responsibilities to shareholders and stakeholders, the board should ensure effective engagement with, and encourage participation from, these parties. 5. The board should ensure that workforce policies and practices are consistent with the company’s values and support its long-term sustainable success. The workforce should be able to raise any matters of concern.

Question 32

List the 4 **Division of Responsibilities** principles set out by the Financial Reporting Council.

Answer 32

1. The chair leads the board and is responsible for its overall effectiveness in directing the company. They should demonstrate objective judgement throughout their tenure and promote a culture of openness and debate. In addition, the chair facilitates constructive board relations and the effective contribution of all non-executive directors, and ensures that directors receive accurate, timely and clear information. 2. The board should include an appropriate combination of executive and non-executive (and, in particular, independent non-executive) directors, such that no one individual or small group of individuals dominates the board’s decision-making. There should be a clear division of responsibilities between the leadership of the board and the executive leadership of the company’s business. 3. Non-executive directors should have sufficient time to meet their board responsibilities. They should provide constructive challenge, strategic guidance, offer specialist advice and hold management to account. 4. The board, supported by the company secretary, should ensure that it has the policies, processes, information, time and resources it needs in order to function effectively and efficiently.

Question 33

List the 3 **Composition, Succession and Evaluation** principles set out by the Financial Reporting Council.

Answer 33

1. Appointments to the board should be subject to a formal, rigorous and transparent procedure, and an effective succession plan should be maintained for board and senior management. Both appointments and succession plans should be based on merit and objective criteria and, within this context, should promote diversity of gender, social and ethnic backgrounds, cognitive and personal strengths. 2. The board and its committees should have a combination of skills, experience and knowledge. Consideration should be given to the length of service of the board as a whole and membership regularly refreshed. 3. Annual evaluation of the board should consider its composition, diversity and how effectively members work together to achieve objectives. Individual evaluation should demonstrate whether each director continues to contribute effectively.

Question 34

List the 3 **Audit, Risk and Internal Control** principles set out by the Financial Reporting Council.

Answer 34

1. The board should establish formal and transparent policies and procedures to ensure the independence and effectiveness of internal and external audit functions and satisfy itself on the integrity of financial and narrative statements. 2. The board should present a fair, balanced and understandable assessment of the company’s position and prospects. 3. The board should establish procedures to manage risk, oversee the internal control framework, and determine the nature and extent of the principal risks the company is willing to take in order to achieve its long-term strategic objectives.

Question 35

List the 3 **Remuneration** principles set out by the Financial Reporting Council.

Answer 35

1. Remuneration policies and practices should be designed to support strategy and promote long-term sustainable success. Executive remuneration should be aligned to company purpose and values, and be clearly linked to the successful delivery of the company’s long-term strategy. 2. A formal and transparent procedure for developing policy on executive remuneration and determining director and senior management remuneration should be established. No director should be involved in deciding their own remuneration outcome. 3. Directors should exercise independent judgement and discretion when authorising remuneration outcomes, taking account of company and individual performance, and wider circumstances.

Question 36

What does section 3 of the UK Corporate Governance Code highlight?

Answer 36

The importance of promoting diversity of gender, social and ethnic backgrounds, as well as cognitive and personal strengths when considering the composition of the board.

Question 37

What are directors reponsible for?

Answer 37

Devising strategies through analysis.

Question 38

Why is it important to have a diverse group of director?

Answer 38

One potential problem in the decision-making process in the boardroom is ‘groupthink’, which can be described as a psychological behaviour of minimising conflicts and reaching a consensus decision without critically evaluating alternative ideas. A diverse group of directors with different skills, backgrounds and experiences will approach problems from a greater range of perspectives and raise challenging questions. This helps to mitigate the risk of groupthink. Diverse board members are more likely to possess different personal characteristics, leading to dissimilar leadership, thinking, emotional styles, risk preferences and behaviours. This diversity fosters creativity in identifying solutions to problems and provide a more comprehensive oversight to the operations of the organisation and the company’s sensitivity or propensity to reputational and compliance risk.

Question 39

Who is the Financial Reporting Council's Stewardship Code aimed at and what does it seek to encourage?

Answer 39

Released in 2010, this Code is a set of principles aimed at asset managers (such as Invesco, Fidelity, etc.) and asset owners (such as pension funds) holding voting rights in UK companies. The idea is to encourage such institutional shareholders to take an active interest in the corporate governance of the companies into which their clients’ money is invested. The latest version of the Code is the UK Stewardship Code 2020, sets high stewardship standards for asset owners and asset managers, and for service providers that support them.

Question 40

What does the code contain for asset managers and service providers?

Answer 40

The Code comprises a set of ‘apply and explain’ principles for asset managers and asset owners, and a separate set of Principles for service providers. The Stewardship Code has twelve principles that apply to asset owners and asset managers.

Question 41

Does the code prescribe a single approach for effective stewardship?

Answer 41

The Code does not prescribe a single approach to effective stewardship. Instead, it allows organisations to meet the expectations in a manner that is aligned with their own business model and strategy. They must also send this information to the Financial Reporting Council.

Question 42

List the 5 **Purpose and Governance** principles of the Stewardship Code which apply to asset owners and asset managers.

Answer 42

1. Signatories’ purpose, investment beliefs, strategy, and culture enable stewardship that creates long-term value for clients and beneficiaries leading to sustainable benefits for the economy, the environment and society. 2. Signatories’ governance, resources and incentives support stewardship. 3. Signatories manage conflicts of interest to put the best interests of clients and beneficiaries first. 4. Signatories identify and respond to market-wide and systemic risks to promote a well-functioning financial system. 5. Signatories review their policies, assure their processes and assess the effectiveness of their activities.

Question 43

List the 3 **Investment Approach** principles of the Stewardship Code which apply to asset owners and asset managers.

Answer 43

1. Signatories take account of client and beneficiary needs and communicate the activities and outcomes of their stewardship and investment to them. 2. Signatories systematically integrate stewardship and investment, including material environmental, social and governance issues, and climate change, to fulfil their responsibilities. 3. Signatories monitor and hold to account managers and/or service providers.

Question 44

List the 3 **Engagement** principles of the Stewardship Code which apply to asset owners and asset managers.

Answer 44

Engagement 1. Signatories engage with issuers to maintain or enhance the value of assets. 2. Signatories, where necessary, participate in collaborative engagement to influence issuers. 3. Signatories, where necessary, escalate stewardship activities to influence issuers.

Question 45

List the 1 **Exercising Rights and Responsibilities** principle of the Stewardship Code which applies to asset owners and asset managers.

Answer 45

1. Signatories actively exercise their rights and responsibilities.

Question 46

What do the Financial Reporting Council (FRC) say about service providers?

Answer 46

the Financial Reporting Council (FRC) state that service providers play a key role in the investment community. They provide services that support clients to fulfil their stewardship responsibilities. Service providers applying these Principles include, but are not limited to, investment consultants, proxy advisors, and data and research providers.

Question 47

List the 6 Principles for Service Providers.

Answer 47

1) Signatories’ purpose, strategy and culture enable them to promote effective stewardship. 2) Signatories’ governance, workforce, resources and incentives enable them to promote effective stewardship. 3) Signatories identify and manage conflicts of interest and put the best interests of clients first. 4) Signatories identify and respond to market-wide and systemic risks to promote a well-functioning financial system. 5) Signatories support clients’ integration of stewardship and investment, taking into account, material environmental, social and governance issues, and communicating what activities they have undertaken. 6) Signatories review their policies and assure their processes.

Question 48

Is the Stewardship code compulsory?

Answer 48

No! The Stewardship Code is voluntary and sets a standard that is higher than the minimum UK regulatory requirements.