A “cultural” resignation at the Financial Reporting Council?

In the same week that the Financial Reporting Council – the UK’s independent regulator responsible for promoting high quality corporate governance – published its annual report, one of its senior figures resigned following an apparent breach of the FRC’s own Corporate Governance Code (the Code).

Jim Sutcliffe had been on the FRC’s Board and, more relevantly, on its Codes & Standards Committee until he stood down on 16 January 2015. This followed Mr Sutcliffe’s appointment as an executive director of Quindell, the troubled AIM-traded company, which was announced on 12 January 2015. Upon appointment, Mr Sutcliffe was granted options over 10.9 million Quindell shares, to vest over the next twelve months.

The Code and option grants to executive directors: were these “normal circumstances”?

This grant of options is an apparent breach of Schedule A of the Code, which says that:

“In normal circumstances, shares granted or other forms of deferred remuneration should not vest or be paid, and options should not be exercisable, in less than three years. Longer periods may be appropriate.”

Given Quindell’s recent history, it could be argued that these are far from “normal circumstances” for the company, and so the grant of options all exercisable within a year was not technically in breach of the Code.

In addition, the Code does not apply to AIM companies unless they voluntarily choose to comply with it. Quindell states on its website that “so far as is practicable, taking into account the size and nature of the Company, the directors comply with the main provisions of the Combined Code” (a former name for the Code). Again, it is arguable that in this situation – the perceived importance of recruiting Mr Sutcliffe – compliance with the Code was not practicable.

Nevertheless, to have the chair of the FRC’s own Codes & Standard Committee in a position where his own company’s compliance with the Code could be brought into question was, presumably, not a great situation for the FRC. Mr Sutcliffe stepped down four days after his Quindell appointment.

The Code and option grants to non-executive directors

Alongside Mr Sutcliffe’s executive appointment at Quindell, Richard Rose was appointed as the non-executive chairman. Mr Rose also received an options package vesting over the next year, not subject to shareholder approval. This is a clearer breach of paragraph D.1.3. of the Code, which states that:

“Remuneration for non-executive directors should not include share options or other performance-related elements. If, exceptionally, options are granted, shareholder approval should be sought in advance and any shares acquired by exercise of the options should be held until at least one year after the non-executive director leaves the board.”

The FRC and a company’s “culture”

In its latest annual report, the FRC’s Chairman, Win Bischoff, explains in his introduction that “the governance of individual companies depends crucially on culture…boards have responsibility for shaping the culture, both within the boardroom and across the organisation as a whole and that requires constant vigilance”. It may be against that “cultural” background that Mr Sutcliffe stepped down from his positions at the FRC; notwithstanding that it is debatable, on the facts publicly available and given Quindell’s current position, that Quindell had breached the Code in granting options to Mr Sutcliffe.