Compliance with the UK Corporate Governance Code
The UK Corporate Governance Code, published by the Financial Reporting Council in 2014 (the Code), sets out standards of good practice in relation to Board leadership and effectiveness, remuneration, accountability and relations with shareholders. The Directors will continue to support high standards of Corporate Governance. The Bank complied with the principles of the 2014 Code during the year.
Role and Responsibilities of the Board
The Board has collective responsibility for the long term success of the Bank. Its role is to provide leadership of the Bank within a framework of prudent and effective controls which enables risk to be assessed and managed. It sets the Bank’s values and standards and ensures that its obligations to its shareholders, customers and other stakeholders are understood and met.
The Board sets the Bank’s strategy and approves plans presented by management for the achievement of the strategic objectives it has set. It determines the nature and extent of the principal risks it is willing to take in achieving its strategic objectives and is responsible for ensuring maintenance of sound risk management and internal control systems.
The Board has approved a schedule of Matters Reserved for the Board and authorities delegated to the Chief Executive Officer (CEO). Both the Matters Reserved for the Board and the CEO’s delegated authorities have been revisited by the Board and re-adopted for 2016 with appropriate enhancements. Such reserved matters include decisions on strategic and long term objectives, the approval of published financial statements, major acquisitions and disposals, significant investments and other capital expenditure, and approval of the Bank’s risk appetite and its Risk Management Framework. Implementation of the strategy set by the Board and the management and day-to-day running of the Bank is delegated to the CEO, with oversight by the Board, with the exception of the Matters Reserved for the Board.
During 2015, the following Directors were appointed: Charles Bralver on 23 April 2015 and Aidan Birkett on 1 July 2015. Aidan Birkett was subsequently appointed as Senior Independent Director on 27 October 2015. Graeme Hardie stood down as Independent Non-Executive Director of the Bank at the AGM on 21 June 2016. The Bank’s Board of Directors comprises two Executive Directors (Niall Booker and John Baines) and eight Non-Executive Directors (including the Chairman). There have been no further changes to the number of Directors since 21 June 2016.
Richard Coates stood down as Interim Senior Independent Director on 27 October 2015. Aidan Birkett was appointed as Senior Independent Director on 27 October 2015.
The Bank regards Richard Coates, William Thomas, Laura Carstensen, Maureen Laurie, Derek Weir and Aidan Birkett as Independent Non-Executive Directors. Dennis Holt has been regarded as an Independent Non-Executive Director, within the meaning of ‘independent’ as defined in the Code and on his appointment as Chairman on 27 October 2014. Charles Bralver was appointed to the Board following nomination by Silver Point Capital under the terms of the Shareholder Rights Agreement. For the purposes of the Code, Charles Bralver is not considered to be independent.
The Code recommends that at least half the Board of Directors (excluding the Chairman) should comprise Independent Non-Executive Directors. The Code states that the Board should determine whether a Director is independent in character and judgement and whether there are any relationships or circumstances which are likely to affect, or could appear to affect, the Director’s judgement. The Directors consider more than two thirds of the Board to be independent.
All the Independent Non-Executive Directors have considerable experience and make valuable contributions to the Bank. The Independent Non-Executive Directors constructively challenge and help develop proposals on strategy and bring strong, independent judgement, knowledge and experience to the Board’s deliberations.
The Independent Non-Executive Directors are of sufficient calibre and number that their views carry significant weight in the Board’s decision making. The Board considers that this will continue as new members are added to the Board during 2016.
Agreements with Shareholders
In anticipation of the completion of the Bank’s LME in December 2013, whereby the Bank ceased to be a wholly-owned subsidiary of The Co-operative Group, and at the time of the Bank’s Placing and Open Offer in May 2014, the Bank entered into certain agreements with its shareholders governing matters such as Director appointment rights, conduct of transactions and other governance related matters. These agreements are:
- A Relationship Agreement entered into between the Bank, The Co-operative Group and The Co-operative Banking Group on 4 November 2013;
- A Shareholder Rights Agreement entered into between Silver Point, Perry Capital, Invesco Asset Management Limited and York Capital (collectively, the Committed Shareholders), the Bank, The Co-operative Group and The Co-operative Banking Group on 9 May 2014; and
- A Variation and Director Appointment Deed entered into between the Bank, The Co-operative Group and The Co-operative Banking Group on 10 May 2014. The following is an overview of the main terms of these agreements.
Director Appointment Rights
- Under the Relationship Agreement, for so long as it remains a bona fide co-operative society, The Co-operative Group may appoint and remove: up to two Directors for so long as it directly or indirectly controls 25% or more of the rights to vote at a general meeting of the Bank; or
- one Director for so long as it directly or indirectly controls 20% or more (but less than 25%) of the rights to vote at a general meeting of the Bank.
The Co-operative Group’s rights were supplemented in the Variation and Director Appointment Deed to the effect that, for so long as it remains a bona fide co-operative society, it may appoint and remove one Director for so long as it directly or indirectly controls 15% or more (but less than 20%) of the rights to vote at a general meeting of the Bank.
With its current shareholding, therefore, The Co-operative Group currently has the right to appoint one Director to the Board.
These agreements also provide that The Co-operative Group’s Directors shall not be entitled to vote where there is a potential conflict of interest between the Bank and its group (on the one hand) and The Co-operative Group and its group (on the other).The Co-operative Group has the right to appoint one of its nominee Directors to the Values and Ethics Committee.
The Relationship Agreement also provided a mechanism, varied by an amendment contemplated by the Shareholder Rights Agreement, for the appointment of up to two persons as Non-Executive Directors who were nominated by certain former bondholders who were the purchasers of additional ordinary shares during the LME. Any Directors so nominated must satisfy the criteria to be independent pursuant to the Code. Two directors, Derek Weir and Aidan Birkett have been appointed pursuant to these rights.
Finally, under the Shareholder Rights Agreement, the Bank has granted to each of Silver Point and Perry Capital (two of its largest shareholders) the right to nominate a Director for appointment to the Board. These rights continue for so long as Silver Point and Perry Capital, as the case may be, directly or indirectly controls 5% or more of the rights to vote at a general meeting of the Bank. Such rights are not transferable, save that they will automatically transfer and be exercisable by another Committed Shareholder if Silver Point or Perry Capital ceases to control such level of voting rights in the Company, provided that such other Committed Shareholder itself directly or indirectly controls 5% or more of such voting rights. Any such Directors so nominated may be, but are not required to be, independent pursuant to the Code. All such Directors are subject to regulatory approval and approval by the Bank’s Nomination Committee (such approval not to be unreasonably withheld). Currently, one Director, Charles Bralver (who was nominated by Silver Point), has been appointed pursuant to these rights.
The Relationship Agreement
The Relationship Agreement’s other key terms as they affect the Bank’s governance are as follows:
- The Co-operative Group is to conduct transactions with the Bank on arm’s length terms and not seek to influence the day-to-day running of the Bank;
- Amendments to existing contracts and arrangements in place between the Bank and The Co-operative Group require the approval of a majority of the Bank’s Independent Directors;
- The Bank is required to have a Values and Ethics Committee and the Agreement stipulates its role, which has been reflected in the Bank’s Articles of Association; and
- Until 20 December 2016, the Bank may not issue or grant any right to subscribe for any shares or other equity linked securities without the consent of The Co-operative Group. This is subject to certain exceptions, including capital raisings required by, or undertaken by the Bank in anticipation of a requirement from, a government authority or regulator.
The Relationship Agreement will continue in effect for so long as The Co-operative Group directly or indirectly controls 20% or more of the rights to vote at a general meeting of the Bank. Certain key obligations of The Co-operative Group will survive any such termination, including its obligations to use the Bank and not to compete with the Bank (described further below).
Shareholder Rights Agreement
The Shareholder Rights Agreement’s other key terms as they affect the Bank’s governance are as follows:
- If any Director appointed under the Shareholder Rights Agreement is independent, such Director may serve on the Board’s Audit and Remuneration Committees, so that at all times at least one such independent Director shall serve on such Committees. If no such Director is independent, at least one of the Directors appointed under the Relationship Agreement by the purchasers of additional ordinary shares during the LME, but only if they are independent, shall serve on the Board’s Audit and Remuneration Committees. All such Directors may only serve on the Audit Committee if the Committee considers, acting reasonably, that they are financially literate.
- Subject to a majority of the members being independent, at least one Director appointed under the Shareholder Rights Agreement will serve on each of the Board’s Risk and Nomination Committees.
- The Bank agreed to establish, and has established, a sub-committee of the Board to assess the feasibility of the Bank listing its ordinary shares on the Official List and make recommendations to the Board with regard to the timing of such a listing (the Initial Public Offering Committee (IPO Committee)). That sub-committee is to be comprised of four Directors, being one Director appointed pursuant to the Relationship Agreement, one Director appointed pursuant to the Shareholder Rights Agreement, one Executive Director and one independent Non-Executive Director who is not a Director appointed pursuant to the Relationship Agreement or the Shareholder Rights Agreement.
- In addition, any of the Committed Shareholders and The Co-operative Group, who together hold 25% or more of the Bank’s issued ordinary share capital, have the right to require the Bank to assist in a secondary offering of their ordinary shares, provided that such shareholders intend to sell shares with a value of at least £100 million. The Committed Shareholders may only exercise this right once in any 12 month period and three times in total. The launch of any secondary offering would be subject to Board approval of the documentation and certain other specified matters relating to that secondary offering. All fees and costs of any secondary offering must be pre-approved by the selling shareholders and will be paid out of the offering proceeds.
The rights of each Committed Shareholder and of The Co-operative Group under the Shareholder Rights Agreement shall continue for so long as each directly or indirectly controls 5% or more of the rights to vote at a general meeting of the Bank.
The fourth Capital Requirements Directive (CRD IV) requires an institution such as the Bank to include a compliance statement on its website in relation to certain articles contained in CRD IV. A statement of the Bank’s compliance with CRD IV governance, remuneration and reporting can be found here