The 2016 update to the Frontis Governance guidelines is available in the section Documents & Links of the site.
As every year, the guidelines have been defined based on the general governance principles set out by the ECGS network partners, applied to the specificities of the Italian market. The 2016 guidelines for European markets will be available shortly on ECGS website.
From this year, the document is comprised of two distinct, albeit connected, sections:
- I principles of corporate governance, which represent the basis on which all analyses carried out by Frontis Governance are performed, including benchmarking analyses and governance ratings, as well as analyses of shareholder meeting resolutions;
- The voting policies, which are defined on the basis of general governance principles, but set out in a more concise format and by type of shareholder resolution.
The new setting aims to make voting policies easier to read, but also to emphasise how any analysis must be primarily based on general principles of corporate governance, rather than on mere compliance or non-compliance with the voting policies adopted by the proxy adviser. All analyses are indeed carried out on a case-by-case basis and any deviations from the guidelines do not, in themselves, represent negative factors, but are evaluated based on the specific characteristics of each issuer, the relevant context, and the reasons provided by the corporate bodies or management.
Below is a summary of the general principles of Frontis Governance and the main new features introduced in the 2016 update.
- Financial statements and allocation of profit/loss: Even in the new version of the guidelines, the need was felt to underline the importance of proposing the allocation of the profit/loss for the year as a separate agenda item from the approval of the financial statements. Proposals on the allocation of the results are analysed based on their consistency with adequate shareholder remuneration (including in comparison with industry averages), long-term strategies, and the issuer's financial and capital strength.
- Composition of the Board of Directors or Supervisory BoardContinuing from previous years, a majority presence of independent Directors is recommended in all organisations, regardless of the broadcaster's size and ownership structure. Among other principles confirmed by the new guidelines, the separation of powers (the Chairman should not hold executive positions) and the representation of the most appropriate professionals are highlighted, professionals capable of both supporting the management's strategic choices and effectively overseeing their operations.
- Audit and Risk CommitteeThe Committee should always be composed exclusively of strictly independent Directors, a majority of whom are experts in financial matters. For financial companies, the establishment of a separate Risk Committee is recommended.
- Appointments CommitteeThe establishment of a separate Nomination Committee is recommended, and it should always be composed of a majority of independent Directors, including the Chairman. Despite the “list voting” mechanism often granting shareholders almost absolute power in determining the Board's composition, the Nomination Committee should always play a fundamental role in suggesting candidates for co-option, should it be necessary to supplement the Board during its term, in defining succession plans for executive Directors and senior management with strategic responsibilities, and in expressing an opinion on the qualitative and quantitative composition of the new Board, which should guide shareholders in their choice of candidates.
- Remuneration policiesThe focus of the analyses is always on the consistency of executive remuneration policies with company strategies and objectives, with the aim of achieving a correct alignment of management's interests with those of shareholders in the long term. In particular, most variable remuneration should be linked to predefined, measurable, and adequately communicated multi-year performance objectives (at least 3 years). No variable remuneration should accrue unless sufficiently challenging minimum performance levels are achieved, but at the same time, the performance conditions should not encourage excessively risky activities for the issuer. All plans should be linked to a plurality of performance conditions: plans linked exclusively to share market value are generally viewed negatively. Particular attention is then paid to the process of defining policies, which should ensure maximum independence from management, and the provision of clauses that allow for the clawback of variable remuneration (so-called clawback clauses). clawbackwhich are effectively able to protect the issuer from fraudulent or excessively risky behaviour.
- Severance paySeverance payments should be defined in advance, adequately communicated, and limited to the equivalent of 2 years' fixed remuneration, or one year's total monetary remuneration (fixed plus average annual monetary incentives).
- Authorisation to increase share capital with limitation or exclusion of pre-emption rights: the new guidelines set out stricter criteria for general authorisations to increase share capital, namely that such authorisations are not required for specific projects described in detail in the report to the general meeting. In such cases, the time limit on the authorisation should not exceed 3 years (instead of 5) and the aggregate amount of all outstanding authorisations should not exceed 5% of the share capital (instead of 10%), excluding any employee share schemes. For issuers that derogate from the Passivity rule (namely whose management bodies can undertake initiatives aimed at hindering a takeover bid without requiring shareholder approval), all authorisations to increase share capital should be linked to specific projects and adequately detailed in the shareholder proposal.
- Increased voteFrontis Governance and ECGS confirm their general opposition to any instrument that allows a deviation from the fundamental principle of “one share – one vote” or that could cause unequal treatment of shareholders, including the possibility of issuing shares with additional voting rights or shares without voting rights.
The 2016 corporate governance principles finally include two new sections relating to related-party transactions and the anti-corruption practices adopted by the issuer (the latter included in the chapter on “Corporate Social Responsibility”), which represent two increasingly relevant factors in the analysis of corporate governance as a tool for risk assessment and management.
Frontis Governance – Corporate Governance Principles and Voting Guidelines 2016