The UK Corporate Governance Code 2016 sets out requirements for organisations to follow to ease management effectiveness for its long-term success based on five main areas: Leadership, Effectiveness, Accountability, Remuneration, and Relations with Shareholders. The report concludes that:
- Leadership is one of the main areas for Unite to improve, through increasing diversity in the Board, including a more detailed job and evaluation of the Chairman’s history and independence, and the setting of annual meetings between NEDs to comply with the Code.
- There are various recommendations made to improve the level of compliance in their Effectiveness area, due to the lack of information about their succession plans, recruitment processes, evaluation methods, and NEDs’ appointments to the Board.
- There is reason to believe that their external auditor’s independence may be compromised in the future due to the relationship between Unite and one of the company’s acquisitions who offer non-auditing services.
- The Remuneration and Relations with Shareholders are high compliance areas for Unite, with no recommendations to be made.
Overall, Unite is fairly compliant with the Code, although there are a few recommendations to improve it and attract shareholders and investors.
2. UNITE GROUP’S OVERVIEW
Unite Group was founded by Nicholas Porter in Bristol, in 1991. It is the largest manager and developer of student accommodation in the UK, providing accommodation to 50,000 students across 24 university towns and cities. They locate near university campuses and city centres, and provide tailored services for their diverse students. They also provide other services such as Wi-Fi, insurance, maintenance services, and 24/7 security (MarketLine, 2017).
3. INTRODUCTION
This report will evaluate the satisfactoriness of the corporate governance of the Unite Group. It will analyse whether Unite Group complies with the Corporate Governance Code by the Financial Reporting Council, focused on five main areas (Leadership, Effectiveness, Accountability, Remuneration, and Relations with Shareholders), and based on evidence from their 2017 Annual report.
The references are from the Corporate Governance Code (2016), unless stated otherwise. It will evaluate some compliant aspects with the code, which are believed to be the most important to be pointed out, but otherwise, it will focus on non-compliances with the code.
4. MAIN FINDINGS
4.1. Leadership
4.1.1. The Board
Unite Students’ board of directors is formed by eight members, all present in the annual report. It includes the Non-Executive Director and Chairman, Phil White, three Executive Directors, the CEO, the CFO, and the Group Property Director; and four Non-Executive Directors, plus the company’s secretary. The Chairman and CEO positions are carried out by two different individuals with their different responsibilities clearly set out in the annual report, as well as the Senior Independent Director’s, and approved by the Board. Until the death of Manjit Wolstenholme in November 2017 she was the Senior Independent Director and chair of the Audit Committee, which have been appointed to McMeikan, also chairman of the Remuneration Committee, and Paterson, the new NED appointed on the 21st September 2017, respectively.
There were nine Board meetings which were attended by all seven members, except for Wolstenholme, who attended hers until her death, and the rest were attended by Patterson. It indicates that they meet sufficiently regularly, no more than monthly and less than quarterly. Although, there is no evidence of meetings between only NEDs, and without the Chairman either, to appraise his performance. As well as there is no explanation on how the Chairman’s and each NED’s performance and level of independence is evaluated and agreed upon.
Moreover, both the chairman and the CEO have previously worked together at National Express, filling the positions of CEO and Managing Director of Operations respectively. Therefore, their relationship should be questioned to ensure the chairman’s independence and avoid self-interest issues.
4.1.2. The Chairman
Phil White is currently serving his 9th year as Chairman, and is also the former Non-Executive Chairman of Kier Groups plc, which is considered to be one of the Group’s top competitors. He also owns 4,354 Kier Groups’ shares and had a salary of £188,000, and retired as Chairman and from the board on the 31st of August 2017 (Kier Group, 2017). It should be further looked into to ensure his objectivity; he is also the Non-Executive Chairman of Lookers plc, and Non-Executive Director of Vp plc. It shows that he has many responsibilities and it may affect the amount of time and effort effectively dedicated to the Unite Group.
4.2. Effectiveness
4.2.1. Composition of the Board
The average board size of FTSE350 listed companies is of 8.2 members (Spencer Stuart, 2017), in Unite’s case is 8 board members and more than half are NEDs, which it complies with the Code. Unite does not have any female executives and 20% of non-executives are female which is below the average of 25% (Grant Thornton, 2017).
They do not set diversity targets because they believe it is not in their interest stating that they will consider these when reviewing any appointments to the Board, however, they only have one female out of eight directors, and none of them are of colour. Furthermore, according to PwC, 91% of directors believe that diversity, not only gender but other kinds as well, such as age, makes the Board, and the overall company, more efficient, which is also in the shareholders’ interest. Also, with the Brexit’s uncertainty, it is recommended to diversify the Board to appeal to international markets to attend to the future demands of the business (Grant Thornton, 2017).
4.2.2. Appointment to the Board
All Directors take part in personalised induction programmes. Paterson’s induction programme was also comprehensive and is receiving ongoing training for the rest of his first year. All inductions also consist on visiting their key locations personally and the institutions whom the Group is partners with, and meeting with key senior executives and key advisors of the company. Furthermore, Directors are trained in digital and social media, and corporate governance, which the Board deems to be important due to the type of business.
For those seeking re-election and to ensure continuous independence, NEDs subject themselves to individual performance evaluations, demonstrating their commitment to the role and added value to the Board. Following the lack of bad news or scandals in the media, it can be argued that they are enforcing their roles right.
4.2.3. Commitment
All executive directors have one or none non-executive directorship nor chairmanship in any other FTSE100 company. NEDs must commit to the company at least 20 days per annum, therefore, it has to be taken into account that the SID is committed to four other companies, although, not FTSE100 companies, it raises the question if she has too many responsibilities and can commit to her role fully.
4.2.4. Evaluation
They evaluate the diversity and other factors affecting the Board’s effectiveness, and the balance of skills, experience, independence and knowledge yearly; also, they review the progress made against the previous year’s recommendations. In 2016 they included anonymous searching questions about their corporate culture and governance leadership to their annual evaluation, which they will continue on doing after its success. Furthermore, they conduct an external evaluation every third year, with the last one being in 2017, and they believe that Unite meets the requirements of the Code. However, their weakest point is their lack of diversity in the Board.
Their NEDs’ terms and conditions for appointments are only available in their registered office and at the AGM, which may show lack of transparency along with the lack of information about the recruitment process.
According to their external evaluation recommendations for the future, conducted by Aretai LLP, they should focus on taking more risks to ensure market leadership, to be more challenging to avoid complacency, and to develop a succession plan.
4.2.5. The nomination committee
The committee is formed solely of NEDs, with the chairman as chair.
During 2017, the committee focused on finding and appointing a new NED, since their average tenure was of six years and to ensure timely succession planning. Following the recruitment process, Patterson was appointed to the Board in September of the same year, however, it is not been made clear what the recruitment process is, and it is advised to by Grant Thornton (2017) for the investors’ interest. Furthermore, they are in charge of the Senior Leadership Development Programme to develop potential candidates for executive positions, however, there is no mention of the chairman’s succession plan, which should be already in consideration if he is not believed to be independent since he will have held that position for nine years by the end of 2018.
The committee has also focused on the company’s Diversity and Inclusion initiatives to increase diversity in the whole organisation. Although, the overall gender percentages are near their 40% target (currently 37% are women), their boardroom percentage is below the industry average, as previously stated.
4.3. Accountability
4.3.1. Risk management and internal control
The Board’s meetings are split between strategy, which considers any emerging risks and future investments which may be above certain limits; and routine operational, financial and property updates. This indicates that there is room for discussion which leads to sound risk management. This is further proven by the regular presentations to the Board by various senior leaders from different UK locations, including the Student Experience Director and the University Partnerships Director. Also, external experts, such as University Vice-Chancellors, are invited to present to the Board to provide a more independent and broader perspective.
There is a risk committee in place who is in charge of implementing the Risk Management Framework and a complete strategic planning, budgeting and forecasting procedure that reports financial and performance information monthly to the Board. Their reviews did not identify any significant weaknesses.
4.3.2. Audit committee and auditors
The audit committee is made up of three NEDs, with Wolstenholme as former chair until her death, who was a chartered accountant with Coopers & Lybrand, with obvious relevant and recent financial experience; McMeikan having experience in customer service, and Sir Wilson, in higher education. From the 1st of February of 2018, Patterson has been appointed chair and has relevant experience in finance as he is chair of the Audit committee at Virgin Rail Group Holdings Limited. Overall, the company satisfies the Codes provisions of at least three NEDs, with one of them having relevant and recent financial experience, and another in the relevant sector.
The committee identified the Group’s key issues and is satisfied on how these were addressed. PwC, their internal auditor, was overall satisfied with their controls and no significant issues were found, however, they noted that some improvements could be made, although not explained in the report, they are currently being implemented by management.
The Group appointed Deloitte as their external auditor in 2015 and reviewed their independence and effectiveness a year later after the completion of their first audit. Furthermore, Deloitte is impeded from providing non-auditing services such as assessment work or accounting assistances; on the other hand, the Committee has pre-approved for other services to be provided subject to policies and fee limits, which can still lead directors to seek non-auditing services and compromise the auditor’s independence.
The Group paid £0.4 million for non-auditing services, below the average of £1.16 millions, due to Deloitte’s acquisition of Market Gravity, who had already been offering services to the Group and they still are, since the committee believes that Deloitte’s independence has not been compromised. On the other hand, the Group was charged £0.3 millions for auditing services, also significantly below the £2.74 millions, although, not complying with the EU reform of not having non-auditing fees of more than 70% of auditing fees (Grant Thornton, 2017).
4.4. Remuneration
The remuneration report indicates how the executive and non-executive pays are calculated, aimed to attract, retain and motivate, while also being cost effective and rewarding accomplishments through annual bonuses that create further shareholder value. It is also benchmarked against companies in equivalent industries and magnitude, this data, however, is not present in the report.
The CEO’s base salary is £437,167, which is below the average of £543k (-24%) of FTSE250 companies (KPMG, 2017), and below its competitor Kier Plc of £590,000 (Kier plc, 2017). The CFO’s base salary of £355,833 is lower than the average of £359k (KPMG, 2017) by 1%, and the last executive director’s salary of £330,417 is also lower by 8.95%. Although, their basic salaries are lower than the average, their total earnings are similar or higher than the average, probably due to the other benefits being higher, such as their annual bonuses, of financial (75%) and non-financial (25%) nature, increasing then the level of effort by the directors and reducing their moral hazard of wanting to increase their benefits based solely on increasing short-term profits.
4.5. Relations with shareholders
Shareholders’ views are communicated to the Board through recurring analysts, advisor briefings, and surveys, which they plan to continue in 2018. They also discuss the Group’s performance and other issues after announcements and requirements by shareholders; and seek feedback from shareholders, the investors and stakeholders.
Shareholders are encouraged to ask questions and Directors make themselves available before and after the meeting to meet with shareholders. There is evidence of sufficient contact between the Board and shareholders.
5. RECOMMENDATIONS
These are some recommendations that Unite Group could take into account to better themselves, be more appealing to investors, and further comply with the Corporate Governance Code 2016:
- Increased diversity: the Group should deliberately increase diversity within the Board, including gender, age, nationality, etc., by appointing another NED to the Board. It will help increase efficiency and appeal to a wider community of investors, now paramount due to the uncertainty that is Brexit for the economy; and it will decrease the average tenure, which is currently at 5.2 years.
- Chairman succession: the nomination committee should explain in the annual report the chairman’s succession plan, now more urgently as this is his 9th year and it is recommended to hire a new chairman as the last’s independence might be doubtful, which also aligns with Aretai LLP’s recommendation.
- Chairman’s history: the chairman’s evaluation should be clearly explained in the annual report for investors and stakeholders to better understand how White is independent after being in the company for 9 years, having just stepped down as chairman for one of the company’s obdurate competitors, and having worked in the same company as the CEO, National Express, for many years. There should also be a more detailed job history of every member of the Board.
- NEDs’ meetings: there should be at least annual meetings without the Chairman to assess his performance, and meetings between NEDs without the EDs, which there is no evidence of such, and therefore, does not comply with the code.
- Directors’ appointments: it is advised to explain the Directors’ recruitment process to appear more transparent to investors and shareholders, and include in their report the summarised T&Cs for choosing NEDs.
- Auditing fees: there should be a more complete explanation on how Deloitte’s independence and objectivity is not compromised due to the relationship between Market Gravity and Unite, and the higher costs for non-auditing services incurred, which also does not comply with the EU reform. Lastly, they should include all the services Deloitte is allowed to do to increase shareholder and investor confidence in the company.
6. CONCLUSION
Conclusively, for the most part Unite Group seems to adhere to and want to comply with the Code, except for the few recommendations made where their compliance is questionable and are able to improve. Overall, their corporate governance reporting is strong, and their main issues are in Leadership by low diversity numbers, which is not complex to fix. Consequently, these recommendations will make Unite more appealing to shareholders and world-wide investors, and this reports finds the overall corporate governance arrangements to be acceptable.
10.4.2018