Corporate Law Update

In this week’s update: the Asset Management Taskforce sets out new stewardship recommendations, the FRC publishes a review of compliance with the 2018 UK Corporate Governance Code, PERG delays its annual report on compliance with the Walker Guidelines, the Law Society publishes its comments on the National Security and Investment Bill, Glass Lewis publishes its proxy voting guidelines for the 2021 AGM season, the FRC publishes a review of audit quality among PIEs and the ICGN is consulting on revisions to its Global Governance Provisions.

Covid-19 is affecting the way people conduct their business, retain their staff, engage with clients, comply with regulations and the list goes on. Read our thoughts on these issues and many others on our dedicated Covid-19 page.

Asset Management Taskforce sets out new stewardship recommendations

The Asset Management Taskforce (AMT) has published a report setting out recommendations to improve stewardship and responsible investment in the UK.

The AMT is a Government initiative, established in 2017 and backed by the Investment Association (IA), comprising representatives from central government, regulators, investor associations and institutional shareholders.

In its report – “Investing with Purpose” – the AMT sets out 20 recommendations in relation to corporate governance, corporate reporting and shareholder engagement. The recommendations span the range of asset classes, from listed securities to investments in private companies, and so touch on all kinds of investor from pension funds to private equity houses.

Key points for companies and shareholders arising out of the report include the following.

  • The Financial Reporting Council’s UK Stewardship Code should be endorsed as the standard for company stewardship and investment managers should become signatories to it.
  • There should be more emphasis on stewardship in private markets. Asset owners and managers should identify best practice for stewardship in private asset classes, and the IA should consider the quality of UK Stewardship Code disclosures in relation to private markets.
  • Shareholders should be more proactive in requisitioning resolutions to escalate issues with investee companies and develop model resolutions for critical concerns, such as climate change.
  • The Government should review whether the threshold for requisitioning a shareholder resolution is a barrier to stewardship. (Currently, a resolution can be requisitioned by at least 100 shareholders who hold on average £100 of paid-up capital, or by shareholders who hold at least 5% of a company’s voting rights that could be cast on the resolution.)
  • Investors should set out clear expectations of companies in post-Covid-19 recovery, particularly those that are seeking additional capital from investors.
  • Work should continue to prioritise ways to ensure greater shareholder participation in annual general meetings, including through the use of technology.
  • Large private companies should explain their governance arrangements and impact on stakeholders by improving disclosures in their section 172 statements and by disclosing against the Wates Principles.
  • The Government should amend the law to require all large UK companies (public and private) to report against the Taskforce for Climate-related Finance Disclosure’s Recommendations.

FRC publishes report on Corporate Governance Code compliance

The Financial Reporting Council (FRC) has published its annual report on compliance with its UK Corporate Governance Code (the Code). Notably, this is the first year in which all UK premium-listed companies have been required to report against the 2018 version of the Code.

On a general note, the FRC feels that reporting has “failed to live up to expectations” and that some companies are treating the Code as a “box-ticking exercise”. This is not surprising, as it reflects the FRC’s high standards and continuing desire to improve corporate governance and reporting.

The review covered a sample of 100 FTSE 100 and FTSE 250 companies. Key points arising out of the report are set out below.

Code compliance

  • Level of compliance. Only 58 companies (including 29 in the FTSE 100) reported full compliance with the Code. 21 companies reported non-compliance with only one Code provision, and 12 with only two provisions. No company reported non-compliance with more than five provisions.
  • Independence of chair. The most frequently deviated Code provision was Provision 9 (16 companies), which requires the company’s chair to be independent on appointment and the roles of chair and CEO not to be combined. This is not surprising. Historically, this has been the least complied-with requirement. The FRC has asked companies to explain clearly why the chair is not independent on appointment and how this benefits the company and its stakeholders.
  • Pension contributions. This was followed by Provision 38 (11 companies), which requires executive pension contributions to be referenced to basic salary and aligned with those for the general workforce. This requirement is new, having not appeared in the 2016 Code, and is an area of significant focus for investor bodies, such as the Investment Association.
  • Tenure of chair. The third-most deviated provision was Provision 19 (9 companies), which requires the chair of a company not to remain in post for more than nine years. Again, this is a new requirement in the 2018 Code, so it is interesting that it has immediately made the top three.
  • Other deviations. Other provisions with which companies did not comply included Provision 36 (6 companies), which requires phased vesting and holding of share awards over at least five years, and Provision 11 (4 companies), which requires at least half of a company’s board (excluding its chair) to be independent non-executive directors (NEDs).

However, the FRC is concerned that companies are over-reporting compliance. It states that 43 of the companies which reported full compliance had not in fact aligned executive directors’ pension contributions with the workforce or scheduled alignment for a later date (as required by Provision 38).

The FRC also cites a report published by Grant Thornton which notes that, of 48 companies whose chair had been in place for over nine years, only 31 reported any non-compliance with Provision 19.

As noted above, provisions 19 and 38 are new requirements. It is possible that failure to disclose non-compliance has resulted simply from unfamiliarity with the new provisions. However, premium-listed companies must remember that Rule 9.8.6R of the Financial Conduct Authority’s Listing Rules requires them to state which provisions of the Code they have not complied with and to explain why.

Workforce engagement

Provision 5 of the Code requires a company to employ one of three methods for engaging with its workforce, or to describe what alternative arrangements it has put in place.

  • Designated NED. 40% of companies designated responsibility for the workforce to a NED, making this the most popular approach. However, the FRC found that the description of the NED’s role was often “ambiguous and limited”, with insufficient information on outcomes.
  • Workforce advisory panel. The report notes that formal advisory panels provide a “more robust and structured process” for obtaining employee views, but only 11.7% of companies adopted one. Some companies adopted both an advisory panel and a designated NED, which the FRC praises as providing “two-way communication” between employees and the board.
  • Director from the workforce. Only 2 companies appointed a director from the workforce.
  • Alternative arrangements. Finally, a notable 31.7% of companies adopted arrangements, stating that their workforce was either too small or too large to adopt one of the options in Provision 5. The FRC notes that some companies stated they were enhancing their current engagement processes but did not provide any additional information on how they will deliver this.

Other key points

For the first time, the 2018 Code encourages companies not only to explain which Code provisions they have not applied, but also to articulate their purpose, values and culture in narrative form.

  • Statement of purpose. 86% of companies disclosed their purpose. However, according to the FRC, 22% of those companies disclosed only a “vague purpose” and 11% simply used a “marketing slogan” or conflated vision with purpose. The FRC has asked for clearer statements describing the company’s market sector, what it is seeking to achieve and how it intends to do so.
  • Company culture. The report strikes a positive note, stating that almost all sampled companies commented on their culture, 52% of companies did so in a “meaningful way”, and a good 75% linked their culture to their values. Better reporting tended to establish KPIs for improving culture and provide a link to the wellbeing of the workforce and diversity and inclusion initiatives.
  • Succession planning. The report states that companies provided minimal insight into succession planning, focussing more on the appointment process. The FRC expects to see better reporting, particularly where succession is highlighted by board evaluations as an area to improve.
  • Diversity. 26% of sampled companies did not have a diversity policy. The report states that all companies should adopt a policy, describe or summarise it in its annual report, and provide a link to the full policy on their website.
  • Remuneration. The report notes that disclosures relating to workforce pay and discretion were improved, but there could be better disclosure of KPIs and pension contributions. The FRC is encouraging companies that have not yet done so to include non-financial KPIs in their remuneration measures. The report also notes that over half of companies did not address the six specific items in Code Provision 40 and encourages clearer reporting in this respect.
  • Stakeholder engagement. Many companies identified their various stakeholder groups and the issues relating to them, but the majority of companies did not provide specific examples of how they had engaged with these issues. The FRC is encouraging the use of KPIs, case studies and risk analyses for specific stakeholder groups, as well as performance-weighted outcomes.

Also this week…

  • PERG delays annual Walker Guidelines report. The Private Equity Reporting Group (PERG) has announced that it is delaying the publication of its 13th report on compliance with the Walker Guidelines due to the Covid-19 pandemic. The Guidelines are designed to assist private equity firms and their portfolio companies with improving transparency in financial and narrative reporting. Among other things, they require portfolio companies to make certain specific disclosures in their annual report and on their website. PERG is expecting to publish the report in January 2021.
  • Law Society publishes recommendations on national security regime. The Law Society has published a parliamentary briefing on the National Security and Investment Bill 2019-2021. The Law Society is broadly supportive of the Bill but notes concerns relating to the definition of “national security”, the time limit for serving call-in notices, the definitions of “qualifying entity” and “qualifying assets”, the effect of the mandatory notification regime, the procedure for making voluntary notifications, the potential for large volumes of voluntary notifications, and the quasi-judicial powers of the Secretary of State.
  • Glass Lewis publishes 2021 voting guidelines. Shareholder proxy advisor Glass Lewis has published its 2021 UK Proxy Paper Guidelines, which set out the basis on which it will advise shareholders how to vote on resolutions proposed by a FTSE listed company during the 2021 AGM season. Areas of enhanced focus in 2021 include human capital management and diversity, environmental, social and governance (ESG) issues, executive remuneration and virtual general meetings.
  • FRC publishes research on audit quality. The Financial Reporting Council (FRC) has published a research report, carried out by YouGov, into audit quality. The report is based on 50 interviews with the audit committee chairs of public interest entities (PIEs), including FTSE 100 and 250 companies, other listed companies and listed PIEs. According to the FRC and YouGov, the results of the review lend weight to proposals for reforms in the audit sector, including the introduction of standards for Audit Committees.
  • ICGN consults on revised Global Governance Principles. The International Corporate Governance Network is consulting on updates to its Global Governance Principles. The consultation is part of a periodic three-year review cycle to ensure the Principles are relevant and aligned with market practice. The proposed revised Principles place greater emphasis on company purpose, directors’ fiduciary duties, sustainability, board diversity, stakeholder relations, systemic risks, ESG frameworks and board independence. The ICGN has asked for comments by 31 January 2021.