Dear Ms. Horton. The Sage Group plc Response to the FRC s Proposed Revisions to the UK Corporate Governance Code

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1 28 February 2018 Catherine Horton Financial Reporting Council 8 th Floor 125 London Wall London EC2Y 5AS (by to codereview@frc.org.uk) Dear Ms. Horton The Sage Group plc. North Park Newcastle upon Tyne NE13 9AA T F The Sage Group plc Response to the FRC s Proposed Revisions to the UK Corporate Governance Code I am writing on behalf of the Board of Directors of the Sage Group plc (Sage)., in response to the consultation on revisions to the UK Corporate Governance Code (Code). We have chosen to respond specifically to those questions which are relevant to Sage, and so have not addressed the questions pertaining to wider application of the Code to FTSE 350 companies. Summary Sage is publicly committed to doing business the right way, as evidenced by our five Sage values; Customers first, Velocity, Innovate, Do the right thing, and Make a difference. Ensuring that good governance principles and practices are adhered to throughout Sage is key to enabling our strategy and living our values. We welcome the review and refresh of the Code, and support the move towards greater clarity, conciseness and a more mature approach to applying principles versus tick-box compliance. With regard to the specific questions raised in your consultation, please find below Sage s response: Q1. Do you have any concerns in relation to the proposed application date? No. Provided the revised Code is published in the Summer of 2018, as stated in the consultation document we have no objection to the proposed application date. It is worth noting, that as Sage has a financial year ending on 30 September the first period in which we would be required to report under the new Code would be for the year ending 30 September We therefore look forward to seeing the revised Code published in a timely fashion to allow all listed companies sufficient time to consider its implications for their governance arrangements. Q2. Do you have any comments on the revised Guidance? The Sage Group plc. is a company registered in England & Wales. Registered number The registered office is at North Park Newcastle upon Tyne NE13 9AA England

2 We value the steer provided by the Guidance on Board Effectiveness. As a Board of Directors, we consider a variety of market best practice guidance, including from the FRC, when reviewing our own effectiveness and that of the governance framework which underpins it. We support the FRC s view that well-embedded provisions which are not fundamental to the structure of the Code itself can be moved into the Guidance without unduly risking a decrease in compliance standards. We welcome the additional clarity on application of the Principles which is contained within the revised Guidance, in particular with respect to wider stakeholder engagement. The addition of questions to stimulate discussion and review is helpful. Q3. Do you agree that the proposed methods in Provision 3 are sufficient to achieve meaningful engagement? The Board is a risk-taking and risk-governing body where the structural relationships are important in creating a group which will perform both in steady state and at times of stress. Sage s response to the Government Green Paper in 2017 explained our new Board Associate role, and expressed concern regarding any moves to impose a single, one size fits all solution to increase stakeholder engagement. In our view, the option of appointing a designated non-executive director could cause workload issues for the relevant non-executive and on smaller boards it would preclude a nominated director from being considered for committee chair roles. It could also potentially lead to enhanced individual liability for the nominated director. An employee-appointed director or stakeholder advisory panel would also require a new governance structure to support it, and would (for international companies such as Sage) require organisations to take account of existing employee co-determination requirements in jurisdictions in which they operates, adding an additional burden. We feel that individually, none of the options described in the revised Code would have the intended effect of seeking to balance the interests of all colleagues and stakeholders in a large multinational such as Sage. We would therefore prefer to see a more flexible model introduced which would allow companies to implement a proposal for more meaningful engagement which works for them. In Sage s case, this would mean retaining the Board Associate model, in which a rotating Board Associate, selected via an internal nominations process, participates fully in board meetings for a period of 18-months and has an obligation to communicate regularly to the wider workforce. This would be supported by an inwards, intranetbased communications channel for employees to express their view, anonymously should they choose. We are, pleased to see the expanded list of suggested activities contained within the Guidance, as we anticipate enhancing our existing engagement model and improving our reporting in this regard as the most appropriate way forward for Sage. Q4. Do you consider that we should include more specific reference to the UN SDGs or other NGO principles, either in the Code or in the Guidance? Page 2 of 7

3 Whilst we believe it is important for businesses to consider relevant environment, sustainability and governance (ESG) measures when reviewing the impact of their business activities, we do not feel that the inclusion of a specific reference to the UN SDGs or other NGO principles would add value to the Code. Some businesses should, by their nature, pay greater regard to one or more of the UN SDGs than other businesses. As an example, Sage is a software business whose primary impact on the environment arises through consumption activities at our office locations and through colleague travel. Our footprint differs significantly from that of a manufacturer or retailer. We focus our sustainability activities around the Sage Foundation, which provides a framework for us to use our cash, our products and our colleagues time and skills to address a wide range of issues such as food poverty, veteran education and domestic violence in our local communities. Despite this, we often receive relatively low scores in respect of ESG metrics, because we choose not to apply resource to measuring and reporting on elements which are not material to our business model, such as water consumption. The inclusion of specific reference to the UN SDGs or other NGO principles in the Code could drive greater divergence of this sort. We would be more inclined to support reference to the UN SDGs or other NGO principles in the Guidance, provided it was in the form of suggested activities and it was clear that such activities should be linked to the areas of greatest impact relative to each company s business model. Q5. Do you agree that 20 per cent is significant and that an update should be published no later than six months after the vote? Whilst we recognise that a definition is required, we would caution that the proportion of votes that could be considered significant may vary by company based on the composition of the share register. A swing of 10% on a resolution that had previously attracted minimal votes against might be considered significant, whereas an increase to over 20% on a resolution that has always attracted a high number of votes against may not be considered of be of the same concern. 20% feels like a low threshold and risks burdening companies with the additional cost and effort of extra reporting which may be of minimal value. In addition, we would point to the long-established provisions contained within the Companies Act, which set the threshold for passing resolutions at 50% for an ordinary resolution and 75% for a special resolution. To add a further, nonstatutory threshold presents a conflict with the primary legislation intended to govern shareholder meetings. The most effective way of dealing with contentious votes is early engagement with investors, which is an approach we will continue to take. We do however recognise that the revised Code aims to drive engagement improvements at all companies including smaller and non-listed, and that a fixed per cent and an obligation to report on engagement activities could potentially be of value to achieve this aim. Page 3 of 7

4 Q7. Do you agree that nine years, as applied to non-executive directors and chairs, is an appropriate time period to be considered independent? We tend to agree that nine years remains an appropriate time period for directors to be considered independent. We would point out, however, that independence may be affected by many things, only one of which is time spent at one company. It would seem to be against the spirit of the Code to suggest that a director should suddenly lose their ability to exercise independent judgement on such an arbitrary basis. We would therefore favour the retention of a more market-led approach and perhaps clearer direction in the Guidance as to how independence may be tested and measured through activities such as the annual board evaluation. Q8. Do you agree that is not necessary to provide for a maximum period of tenure? Yes, we agree that in light of the elements which define independence there is no need to provide for a maximum period of tenure. We would expect shareholders and other stakeholders to voice concerns over any excessive tenures and for the market to therefore self-regulate in this regard. The imposition of a maximum tenure could result in examples of directors being required to step down at inappropriate times for the company, when continuity may be deemed to be of value. In addition, were Provision 15 to be implemented as currently worded, we would suggest the inclusion of a threshold for the additional remuneration point. Q9. Do you agree that the overall changes proposed in Section 3 of the revised Code will lead to more action to build diversity in the boardroom, in the executive pipeline and in the company as a whole? See response to question 11, below. Q11. What are your views on encouraging companies to report on levels of ethnicity in executive pipelines? Please provide information relating to the practical implications, potential costs and other burdens involved, and to which companies it should apply. Sage values diversity in all its forms, including ethnicity and we welcome the work done by the Parker Review in this area. We reported on the gender diversity of our senior management and our total workforce in our 2017 Annual Report and we have committed to focussing on ethnicity and LGBT diversity as well as gender in 2018, to improve our workforce diversity even further. In all cases, we will make appointments on merit, based on the skills and experience gaps that we identify in our business. By increasing the diversity of our executive pipeline, we hope that more diverse candidates will naturally be considered for these roles. It should be noted however, that the pipeline of STEM graduates has a direct and noticeable impact on the available talent pool for UK technology companies such as ours, and that more must be done to ensure more diversity in the relevant subjects from school age onwards, to complement the actions companies are taking on diversity and inclusion. Page 4 of 7

5 Sage has business operations in many countries, some of which actively seek ethnicity data on colleagues such as South Africa, and others which prohibit the gathering and storing of such data for HR purposes. Whilst we will always seek to meet best practice guidelines, we must remain compliant with local employment and data protection legislation. Q12. Do you agree with retaining the requirements included in the current Code, even though there is some duplication with the Listing Rules, the Disclosure and Transparency Rules or Companies Act? Yes, provided that at all times the Code remains aligned with the relevant duplicated elements. Q13. Do you support the removal to the Guidance of the requirement currently retained in C.3.3 of the current Code? If not, please give reasons. Yes. The requirement to set out clear terms of reference and make them publicly available is well embedded and we do not feel that removal to the Guidance would adversely impact compliance with this requirement. Q14. Do you agree with the wider remit for the remuneration committee and what are your views on the most effective way to discharge this responsibility, and how might this operate in practice? The most recent amendments to the Large and Medium-sized Companies and Groups (Accounts and Reports) Regulations 2008 came into force in 2013, and resulted in significant additional reporting requirements for remuneration committees to understand and comply with. In governance terms, these changes are relatively young and the desired outcomes have been inconsistently embedded across the market. As Directors, we are conscious of the public view that executive remuneration has become disconnected from company performance and the pay outcomes of the workforce as a whole. We understand the need for companies to be seen to be taking action to address this disparity. It would seem logical to widen the remit of the remuneration committee, but only to ensure that executive remuneration outcomes are aligned with that of the wider workforce. We would not support an increase in the administrative burden of the remuneration committee unless it was likely to result in the desired outcome. The remuneration committee, and by inference, the board, should retain the role of oversight and challenge only. This means that oversight of wider workforce policies should not stray into design or approval territory, but consist of a holistic review, discussion and challenge of the company s policies and their outcomes alongside improved reporting. It is for management to implement and monitor those policies. Whilst we would accept the argument that a wider remit could mean more frequent meetings or more time devoted to committee business by its members, we do not feel that it would be appropriate for additional time commitment to be disproportionate relative to the time spent on the committee s core responsibilities as defined in the Principles. In addition, we feel strongly that the Remuneration Committee should not be placed in a position of undermining Page 5 of 7

6 the CEO, whose responsibility it is to set senior management pay levels. The Remuneration Committee s role should remain one of review and comment on proposals and not the setting of senior management pay. One exception to this would be where an executive s pay exceeds 90% of the CEO s total compensation. Q15. Can you suggest other ways in which the Code could support executive remuneration that drives long-term sustainable performance? The Code is held up as an example of best practice globally, not least because it provides a flexible and pragmatic model. Whilst there are some elements of remuneration which are universal, such as the need to align pay with performance, each business should have the flexibility to create a remuneration structure which is right for their business and allows them to remain competitive in their industry whilst staying true to the underlying governance principles. We support the evolution of the Code to reflect changes to overarching principles but we would be less likely to support the inclusion of specific provisions, given the level of disagreement in the market regarding remuneration matters generally. We feel that investors remain the primary stakeholder for remuneration engagement, and that they currently have sufficient opportunities to make their voice heard in the debate. Q16. Do you think that the changes proposed will give meaningful impetus to boards in exercising discretion? The application of discretion is not a new notion, and any remuneration committee which is discharging its duties effectively should use all the tools at its disposal to ensure that formulaic outcomes are avoided when they are not appropriate. In some cases, a long tail of complex share schemes and contractual obligations makes this task more difficult. Market-led pressure from investors and other stakeholders regarding the design of remuneration policy and executive share schemes have made it easier for remuneration committees to apply discretion to ensure appropriate outcomes. It should be noted however, that we strongly believe that the exercise of that discretion must be influenced only by the facts at hand, and not by wider political or moral assumptions applied by others. We welcome the additional clarity that Guidance provides, but we would prefer greater clarity as to the definition of discretion within the Code, rather than the Guidance. General comments Section 1- Principle A: (see also response to Q4, above) The extent to which, and the interpretation of, a company s contribution to wider society may vary considerably. We would support improved disclosure requirements in this area within the Annual Report & Accounts, rather than the inclusion of the words contribute to wider society within the Principle itself. Section 1 Provision 4: We feel strongly that this provision should be deferred and clarified only after the pending statutory instrument has been implemented. Page 6 of 7

7 Section 1 Provision 6: We would like to see the insertion of the words proposed by the board after the word resolution, so as to explicitly exclude resolutions requisitioned by shareholders. The company should not be required to explain a low voting outcome in such situations. Section 5 Provision 36: We feel that if reference to the consideration of longer vesting and holding periods than 5 years, as well as post-employment holding periods must be included, then guidance should also be provided as to how various treatments impact on directors of varying ages. There is a risk that long deferrals act as a disincentive (and are potentially discriminatory) for older directors, and drive outcomes which would be at odds with the Principles. Other than as discussed above, we are in support of the remaining Principles and provisions. We would be happy to discuss our response in further detail should that be useful. Yours sincerely Donald Brydon Chairman The Sage Group plc. Page 7 of 7