Frontis Governance has updated its corporate governance principles and voting policies, which will be applied in the analyses of Italian companies and of the general meetings to be held from 1 March 2020. All documentation required by the new regulations introduced by Legislative Decree 49/2019, implementing the Shareholder Rights Directive II, is also available on the Frontis Governance website. These regulations apply one year after the Decree came into force (and therefore from 10 June 2020).
The new regulations stipulate that proxy advisors with a registered office in Italy shall publish an annual report containing a set of information relating to the accuracy and reliability of their activities. According to the proposed amendments to Consob's Issuers“ Regulation, which are still subject to public consultation, this annual report should be published ”by 28 February of the year following the reference year". The first annual report for Frontis Governance should therefore be published by 28 February 2021. Nevertheless, it has been decided to bring forward the compliance exercise, on a voluntary basis, in order to have time to refine its content, if necessary, and make it as compliant as possible with the needs of stakeholders, particularly the regulator and current and potential clients.
In addition to the Annual Report pursuant to the new Article 124-octies of the TUF, and the 2020 Guidelines, in the section Documents & Links of the Frontis Governance site are also available the policies on relations with broadcasters and media outlets (adopted since 2016, but partially amended in December 2019, in particular with the new provision not to share assembly analysis reports with the media), the Activity report of the dialogue with companies listed in 2019, the report on conflicts of interest of Frontis Governance and details of all voting addresses issued per calendar year, from 2011 to 2019.
What's new in the 2020 Guidelines
As every year, the guidelines have been defined based on the general principles set out by the ECGS network partners, applied to the specificities of the Italian market. The process unfolded over multiple phases (internal analysis by each partner for their respective markets, sharing among network partners, and involvement of ECGS clients), which took place between September and December, with the final document approved in the first half of January. The new Frontis Governance guidelines therefore do not incorporate the modifications to Code of Self-Discipline for Italian listed companies, published on 31 January 2020, which will, however, apply from the financial year 2021 onwards.
Below are the main changes to the document, with regard to the various governance issues:
Social and environmental sustainability:
- It has been specified that a recommendation against the approval of the financial statements will also be possible in the event of serious concerns regarding corporate practices related to social and environmental sustainability, but only if it is not possible to express dissent on other agenda items, such as, for example, the re-election of the Chairman of the Board of Directors. It was also highlighted that, in the analysis of aspects related to labour policies, Frontis Governance pays particular attention to equal opportunities and the absence of discriminatory practices of any kind, as well as to staff training and safety.
- Frontis Governance recommends the establishment of a Committee with proposal and monitoring duties on social and environmental sustainability issues, or the assignment of such duties to a pre-existing Committee, preferably the one responsible for risk oversight.
Shareholder remuneration: dividends and share buybacks
- It has been specified that the dividend policy should consider not only earnings, but also cash generation and the company's ability to invest in growth and innovation.
- In line with the ECGS guidelines for 2020, it has been specified that authorisations to buy back own shares that allow the use of derivatives should be limited to 5% of the share capital.
Composition of the Board of Directors
- The minimum number of members typically accepted by Frontis Governance for the Board of Directors has been reduced from 7 to 5, so as to also include smaller companies.
- A specific guideline has been introduced on the application of age limits or term limits for Directors: although they may represent an element of rigidity for defining the optimal composition of the Board of Directors, such limits may be appropriate where shareholders do not have the opportunity to elect its members individually, to avoid the risk of excessive “entrenchment” of Directors, to favour renewal (especially for non-executives) and the definition of succession plans for executives. Precisely because of the specificities of the Italian market (where the list voting mechanism is mandatory), this principle is not included in the European guidelines of the ECGS network and is not used by all partners.
- In cases where the appointment of a Lead Independent Director (LID) is envisaged, it is recommended that this role be granted “enhanced” powers beyond coordinating non-executive directors and the chairman, to ensure proper information flow. It would be appropriate to also grant the LID the power to convene board meetings, collaborate with the chairman in setting the meeting agenda, and play an active role in dialogue with minority shareholders.
Remuneration policies
- In light of the new provisions introduced by Legislative Decree 49/2019, and in particular the provision for an annual advisory vote on remuneration paid in the previous financial year (second section of the annual report), it has been clarified that Frontis Governance's analyses will primarily focus on transparency and the structure of remuneration in the analysis of policies (the vote becoming binding, at least every 3 years or with every policy change), and on the alignment of remuneration paid with policies and short- and long-term results in the analysis of the second section of the remuneration report.
- In line with the new guidelines adopted by the ECGS network, it is recommended that total variable remuneration, at the highest levels of performance, should not exceed 300% of fixed remuneration, or 450% if fixed remuneration is below the median values for the sector and the relevant market and the targets are particularly challenging. In any case, variable remuneration linked to short-term performance (less than 3 years) should not exceed 150% of fixed remuneration. The assessment of the potential level of variable remuneration is, however, based on alignment with the company’s long-term strategies, a comparison with market practices and the specific characteristics of the sector.
- In line with the new regulations introduced by Legislative Decree 49/2019, it has been specified that Frontis Governance’s analyses also take into account the results of previous shareholder meetings: a contrary recommendation may be issued, both with reference to policies and the remuneration paid, if no significant changes have been made to the remuneration policies in the event of a high rate of opposition from minority shareholders at the previous meeting (excluding the controlling shareholders and their related parties from the calculation).
Statutory auditor
- It has been specified that Frontis Governance supports the appointment of a single auditor for all companies belonging to the same group, provided that the selection process is transparent and has involved the Board of Statutory Auditors and/or the Audit Committee for listed subsidiaries.