Board governance lessons arising from the Aviva plc Final Notice
In October 2020 the FCA published a Final Notice against Aviva plc (“Aviva”) for breaches of the Listing Rules and Transparency Rules. This followed the announcement, in March 2018, of Aviva’s preliminary year-end results and the related CEO presentation, which described Aviva’s ability to cancel certain preference shares and which the FCA concluded was misleading.
The case has particular relevance for listed companies, given the breaches concerned the UK listing regime which relies on disclosure and transparency in order that investors can make fully informed decisions, and it is important to note that the FCA made no express criticism of individual directors. A closer look at the notice raises five interesting questions for all Boards to consider.
1. Is your challenge the right challenge?
The decision on whether/how to adjust Aviva’s capital structure was high on the Board agenda, as was the disclosure made by Aviva through the RIS; the FCA notes the Board as having been engaged throughout the drafting process of the announcement. However, the Board was ultimately criticised for having “focused on the accuracy of the literal meaning of the words used”. The FCA seems to be concerned that the Board simply did not ask itself the right questions when deciding what and how disclosure should be made, meaning that their oversight was ultimately ineffective. The Final Notice is clear that the focus in this case should have been the likely impact of the announcement on the market and how retail investors (in particular) might have been reasonably and foreseeably expected to interpret it.
Looking beyond this case, Boards can expect the FCA to test their regulatory ‘frame of reference’, when considering the quality of their decision making, which should include both specifically applicable rules as well as the FCA’s broader Principles for Business. In a speech in February 2020, Mark Steward (Director of Enforcement and Market Oversight) commented that insufficient engagement is given to the FCA’s Principles when planning and organising a firm’s activities and that “if firms and their senior management approach a business activity from the outset using the Principles as a foundational guide, as part of the organisation of activities and as a way of monitoring execution of activities, I am sure we would see considerably less unintended harm caused by misconduct.”
2. Does your paperwork really reflect the Board’s views?
The Final Notice expressly refers to there being “strong disagreement” among Aviva’s Board members, in a discussion about whether and how the company should cancel its preference shares. The FCA attributes views to particular Board members (in particular the Chair and CEO), though it is unclear whether this stems from the minutes themselves or subsequent witness evidence. How much detail to include in Board minutes is a perennial discussion point for Company Secretaries – ensuring that challenge is properly documented and attributable to directors is important both from a Companies Act and SMCR perspective as individuals seek to demonstrate the taking of “reasonable steps”. Minutes were relevant to the FCA’s partial rejection of Aviva’s submissions on the status of Board decision making at the time of the announcement. Whilst accepting that the Board had approved an announcement, which said no decision had been taken on whether/what terms to retire the preference shares, the FCA nevertheless considered such action “unlikely”. In doing so, it placed significant weight on a Board sub-committee minute which described it in such terms (whilst noting that “all options remained under consideration”). This shows the importance of ensuring that Board paperwork accurately reflects the views of the Board and the need to explicitly update the corporate record if/when views evolve.
3. When and what decisions are actually being made at Board level?
The Final Notice surfaces a couple of issues which arise in many contexts, namely: (i) when is a decision made as opposed to an issue simply being discussed? (ii) what is the status of a point which is raised to the Board for decision where that decision is proactively deferred or inactively not decided?
In this case, the Board determined that further work was required to consider the potential options and requested that a further review be completed before a decision could be made. The FCA is clear that “no decision [was taken] to take action” but the Final Notice also indicates that the Aviva Board had taken no decision to take no action: rather the matter was something to be kept under review. In that sense a decision (albeit a procedural one) had been made. Whilst there is no suggestion in this case that the issue of Aviva’s share capital fell from the Board’s radar (quite the opposite), Boards who find themselves in a similar position, i.e. keeping a “watching brief” on an issue or awaiting updates before reconvening to make a further decision on a matter, would be well advised to put some structure around that initial decision as well as the reporting timelines, responsibilities and expectations around issue closure.
4. How much protection does independent advice provide?
Aviva actively considered its announcement obligations together with its external advisers, with such advisers reviewing and commenting on both the Board-approved announcement and the CEO/CFO presentations. The FCA does not criticise individual directors in this notice and it is important that directors are not expected to be expert in all areas. However, the FCA found that Aviva “failed to brief its external advisers expressly...and obtain appropriate advice from them”, this case thereby demonstrating the potential limitations of third-party advice and the importance of adequately carrying Boardroom discussion into operational implementation.
We have seen other examples where individuals have been censured notwithstanding the involvement of external advisers. Particular caution should be taken with respect to the Conduct Rule obligation to make appropriate disclosure to applicable regulators: Mr Kamiya (former Chair of BTMU) being an example of someone who was fined despite receiving and acting upon external advice.
5. How far should oversight go?
Aviva’s market announcement was accompanied by an analyst presentation delivered by the company’s CEO/CFO. The Final Notice concludes that both the announcement and the presentation were incorrect and the FCA also indicates that Aviva “should have taken the intended results presentation into account in considering how holders of the Preference Shares and the market could reasonably be expected to understand the 8 March Announcement.” Whilst this point is not made within the Final Notice, the facts raise a broader question about the extent to which Boards should actively oversee the content of management presentations.
In circumstances where authority has been properly delegated to the executive management team, it will ordinarily be correct to respect the proper divide between the role of the Board and the role of the CEO/CFO. Boards should not be required to review and engage with all external communications. Nevertheless, in circumstances where executive management are set to touch on matters which have triggered “incredibly divergent views” at Board level and/or which are considered to have the potential for significant adverse investor or reputational impact (as was the case in the Aviva Final Notice), providing the Board with advance notice of those communications and the chance to assess consistency, or challenge as appropriate, may be supportive of good governance and enterprise wide risk management.
How we can help
We regularly advise directors on the legal and regulatory expectations for their role, how to contribute effectively to board and committee discussions and decision-making and on the design of reasonable steps frameworks tailored for their role. We have extensive listed company experience, advising on disclosure obligations, and support boards in carrying out effectiveness reviews (including an analysis of management information and decision-making) and in design and implementation of assurance processes to support the provision of regulatory attestations or confirmations.
