Corporate Law Update

• The Parker Review Committee publishes an update report on ethnic diversity on UK company boards
• The Investment Association has set out its priorities (and those of its research arm, IVIS) for 2020
• AFME publishes updated selling restrictions for equity transactions
• The Takeover Panel publishes new checklists for use when submitting an offer document or scheme circular for approval
• A few other items

Parker Review issues update report on board ethnic diversity

The Parker Review Committee, led by Sir John Parker, has published an update report on ethnic diversity in business leadership.

The Committee was established in 2015 to conduct an official review into levels of ethnic diversity on UK company boards. The Committee published its first report, setting out its findings, in October 2017. The report found that the boardrooms of the UK’s leading public companies did not reflect the ethnic diversity of the UK. It made various recommendations, which included the following:

• There should be at least one director of colour on each FTSE 100 board by 2021 and on each FTSE 250 board by 2024.
• FTSE 100 and 250 nomination committees should ensure qualified people of colour are considered for board appointment when vacancies occur.
• Companies should develop mechanisms to identify, develop and promote people of colour within their organisations to ensure there is a pipeline of board-capable candidates.
• Companies should set objectives for pipeline development, track progress against those objectives and report to the board on a regular basis.
• The annual report should include a description of the board's policy on diversity.
• Companies that do not meet board composition recommendations by the relevant date should disclose the reasons why in their annual report.

The new report provides an update to the original report and sets out observed progress against the 2017 report’s recommendations. In particular, the new report notes the following:

• Although the target deadlines have not yet passed, 37% of FTSE 100 companies and 69% of FTSE 250 companies had not met the target at the time of the report.
• Interestingly, however, of FTSE 350 board positions held by directors of colour, on average 43% were held by women, suggesting near gender-parity among BAME directors.
• 31% of FTSE 100 companies and 52% of FTSE 250 companies failed to mention ethnic diversity in their annual report.
• Only 14% of FTSE 100 companies and 2% of FTSE 250 companies set any measurable objectives for board ethnic diversity.
• No company in the FTSE 350 reported publicly against board ethnic diversity objectives.

The Financial Reporting Council (FRC), which contributed data to the report, has also commented on the findings, calling UK companies’ current approach “unsatisfactory” and stating that it expects to see “better quality commentary on all aspects of diversity” in future annual reports.

Investment Association sets out priorities for 2020

The Investment Association (IA) has published its shareholder priorities for 2020. The priorities will help to determine how the IA will interact with companies and how its corporate governance research service – Institutional Voting Information Services (IVIS) – highlights area of concern.

The IA has highlighted four areas of particular focus for 2020:

• Climate change. Listed companies should proactively identify climate-related risks and opportunities and make disclosures. They should discuss in their annual report how they are managing the impact climate change will have on their business. IVIS will introduce a new section to its ESG report highlighting whether companies have made climate change-related disclosures.
• Audit quality. IA members are increasingly willing to “target votes on individual members of the audit committee” where audit quality is lacking. IVIS will ask whether committees have shown how they assessed the audit quality and challenged management’s judgements.
• Stakeholder engagement. IVIS will check whether the board has reported on its company’s material stakeholders and how it engaged with them. It will also be reviewing which options for workforce engagement in the UK Corporate Governance Code the company has adopted.
• Diversity. The IA supports the Hampton-Alexander and Parker Review objectives on gender and ethnic diversity. IVIS will red-top any FTSE 350 company where women represent 20% or less of the board or if there is one or no female directors. It will amber-top FTSE SmallCap companies on the same basis but with a 25% threshold. Finally, IVIS will be checking whether companies have disclosed the percentage of their board that come from an ethnic minority background.

Other items

• AFME updates selling restrictions. The Association for Financial Markets in Europe (AFME) has published an updated version of its selling restrictions wording for use in equity transactions. The wording reflects the fact that, on 31 January 2020, the United Kingdom left the European Union and the European Economic Area (EEA). Otherwise, the wording remains unchanged.
• Directors’ duties do not end on insolvency. The High Court has held (Hunt v Michie [2020] EWHC 54 (Ch)) that a directors’ statutory duties in sections 171 to 177, Companies Act 2006 do not come to an end when the company enters administration or creditors’ voluntary liquidation. A director had argued that, on entering a formal insolvency process, a director’s managerial powers are limited and so their general duties could not apply. The court disagreed and said it was clear that a director’s duties extended beyond the exercise of their powers as a director (especially, for example, duties to avoid a conflict of interest and not to accept a secret benefit).
• Takeover Panel publishes new checklists. The Takeover Panel has published two new checklists designed to assist practitioners with including the appropriate information in offer-related documentation. The first checklist covers an offer document or offeree board circular on a contractual offer. The second checklist covers the scheme circular for an offer proceeding by way of scheme of arrangement. The new checklists should be used with immediate effect.
• Auditors. The Statutory Auditors and Third Country Auditors (Amendment) (EU Exit) Regulations 2020 (SI 2020/108) have been published. The Regulations grant provisional adequacy status for Chinese and South African auditors for transitional periods after the UK/EU implementation period ends and remove provisional adequacy for Indonesian auditors. They also introduce a formal procedure for deciding whether a third country’s audit framework is adequate for UK purposes.
• Market abuse. The Financial Conduct Authority (FCA) has published a speech by its Executive Director of Enforcement and Market Oversight on the FCA’s ongoing approach to tackling market abuse. Our colleague, Aalia Datoo, has written a blog on this topic.