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Greater Transparency and Less Boilerplate for Listed Entities - Sean Smith

Wed, Feb 23, 2011

The Irish Stock Exchange (“ISE”) published new listing rules (the “Irish Rules”) in December 2010 that will apply to all firms with a primary equity listing on the Main Securities Market of the ISE. The Irish Rules implement the nine recommendations of the report on Compliance with the Combined Code on Corporate Governance by Irish listed companies published in early 2010 and will apply on a comply or explain basis in the same way that the UK Corporate Governance Code (“UK Code”) already applies to Irish listed firms. The Irish Rules apply to Irish listed companies with accounting periods beginning on or after 18 December 2010 and supplement, rather than replace, the obligations under the UK Code.

The Irish Rules demonstrate once again a growing trend in Irish regulation for greater corporate governance and more transparency. Initially the ISE considered creating a new Irish code for Irish listed entities but in the end, following resistance from industry, settled on supplementing the UK Code rather than replacing it. The Irish Rules emphasise an adherence not only to the word of the UK Code but also to the spirit of the code. It is clear that listed firms will no longer be able to trot out the same disclosures year after year in its annual report and some significant consideration will now need to be given to ensure that disclosures reflect the actual activity of the board over the previous year. The Irish Rules require that disclosures should seek to inform shareholders in a meaningful way and there should be a move away from descriptions that merely replicate the wording in the UK Code.

Therefore, in the future, Irish listed entities will not only need to meet the standards of the world’s most pre-eminent code of Corporate Governance but they will also need to go beyond that and meet the additional requirements in the Irish Rules. The new obligations under the Irish Rules are as follows:

Comply or explain

The Irish Rules now require Irish listed entities to provide a clear rationale where a requirement in the UK Code or the Irish Rules have not been met, where there has been divergence and where there is an intention to meet the requirement in the future. The rationale should be tailored to the circumstances of the firm and the environment in which it has operated and should not be based on standard generic explanations.

Irish equivalent of FTSE 100 and FTSE 350 firms

The UK Code contains a number of new requirements for FTSE 100 and FTSE 350 firms. The Irish Rules provide that an Irish firm will be the equivalent of a FTSE 350 company where, at the start of the firm’s financial year, it is admitted to trading on the Main Securities Market and is not eligible for inclusion in the ISEQ Small Cap Index. An Irish firm will be equivalent of a FTSE 100 company where, at the start of the firm’s financial year, it is admitted to trading on the Main Securities Market and it has a market capitalisation of €2 billion or above.

Board composition

The Irish Rules now require firms to include a rationale in the annual report for the current board size and structure. It must provide details of why the board structure is appropriate to the activities of the firm and the current business environment. Where less than half the board are non-executive directors, an explanation must be given. The annual report must also contain details of how the specific skills and expertise of the board have been used to best effect. This must be tailored to the specific circumstances of each firm and one would imagine that where a board has been ineffective that appropriate rectifying steps would be taken.

Board biographies

Annual reports must now contain a detailed biography for each director. This should include the date of appointment, the length of service in addition to the length of service on any board committees. The biography should also include details of the skills, expertise and experience that each of the directors brings to the board. Where a director is appointed by shareholders or by the Government an explanation for the appointment should be given or a statement that no such description has been provided should be included.

Board appointments

The annual report should now contain information to allow shareholders assess the effectiveness of the nomination committee. Details of how each appointment was made should be included and whether an external search agency has or has not been used.

Board evaluation and re-election


The disclosure in respect of the board evaluation should detail the methodology used and the rationale for the methodology used. The Irish Rules require that individual disclosures must be made in respect of the evaluation of the board, individual directors and collective board strength. The extent to which external consultants have been or will be used in the future for such assessments should also be stated. The board’s general policy for board renewal should also be included in the annual report. Where a director’s independence has been compromised under the requirements of the UK Code but the board has nonetheless deemed that director to be independent, the factors taken into consideration in that assessment should also be stated.


Audit committee


Details of the actual work carried out during the year should be set out in the annual report and firms should avoid repeating the committee’s terms of reference. In particular, the committee’s function in respect of risk management should be detailed or where a separate risk committee is appointed, its role should be detailed. Minutes of the relevant committee may serve as a good source for this information.




The annual report should also contain a clear and meaningful description of the firm’s remuneration policy and should avoid repeating the remuneration committee’s terms of reference. If the policy contains variable elements of remuneration this, and the extent to which any variable compensation is deferred, should be described. The annual report should also detail whether or not any arrangements are in place to recover payments that are based on information or data that is subsequently found to be materially inaccurate. The vesting period for shares forming part of a director’s remuneration, which should not be less than three years, should be described. Share options, or any other right to acquire shares or to be remunerated on the basis of share price movements, should also not be exercisable for at least three years after the award.


How should firms prepare?

Firms should review the current disclosures in respect of the items mentioned above and then consider whether circumstances have changed sufficiently over the year to warrant a change to that wording. However, the Irish Rules clearly state that there is no requirement to change the wording simply for the sake of doing so. Where a change is warranted or where generic language was previously used and the Irish Rules require tailored language, sufficient records must be retained to draft the appropriate disclosure. Firms should also consider if previous disclosures were clear and comprehensive and if a lay reader could understand the activities of the firm in the areas mentioned above. To the extent that jargon or boilerplate language is used, every attempt should be made to remove it from the annual report.


Sean Smith is a manager in the Enterprise Risk Services department of Deloitte. He is a solicitor and also holds a MBA in Regulation and Compliance. Email: seansmith1@deloitte.ie.

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