Corporate Law Update

• The FRC publishes its review of reporting against the UK Corporate Governance Code in 2020/2021
• The London Stock Exchange fines an AIM company in relation to the payment of cash bonuses
• The FRC publishes a report on disclosures under the 2021 Stewardship Code
• The Law Commission publishes a paper on smart legal contracts

FRC publishes review of corporate governance reporting

The Financial Reporting Council (FRC) has published a report on the quality of reporting against the UK Corporate Governance Code by UK premium-listed companies during 2020/2021.

The report notes a continued overall improvement in reporting (particularly when taking into account the testing circumstances brought about by the Covid-19 pandemic) – but that the FRC’s expectations from last year’s report remain unfulfilled.

Reporting on stakeholder engagement, audit and in some areas of risk was good, but reporting on board appointments, succession planning and diversity reporting remained weak. In addition, in many cases reporting did not provide insight into the actions and outcomes of governance.

The key points arising from the report are set out below.

• Non-compliance. There is room for improvement on the quality of explanations for non-compliance with the Code. Interestingly, in 2020/2021 the Code Provision with which the fewest companies complied was Provision 38, which requires executive pension contributions to be aligned with those of the workforce. There was a marked increase in non-compliance from 2019/2020.
• Boilerplate disclosures. The FRC noted the use of boilerplate or declaratory statements that were seldom substantiated by actions or examples and so did not offer insight into company governance.
• E&S matters. There was improvement in reporting on environmental and social issues, including better quality information on how E&S matters were considered at board level. However, the FRC notes that very few companies reported on areas of underperformance or failure to meet targets.
• Diversity and inclusion. The FRC cites a frequent “lack of cohesion” between D&I policies and succession plans, both at board level and through the pipeline. There was also “minimal information” on how D&I policies and objectives linked to company strategy, with reporting in this area typically restricted to processes.
• Covid-19. All companies reported that they had reviewed their systems in light of the pandemic. However, very few commented on how they reviewed the effectiveness of their systems.
• Remuneration. Most companies confirmed that their remuneration arrangements support their company’s strategy, but only some companies explained how. Very few companies explained how remuneration aligns with company purpose and values.

The FRC has set out 12 reporting expectations for the forthcoming year. These include the six reporting expectations the FRC set out last year, which it notes have not been met.

1. Greater attention to alignment between reported good governance and company practices and policies, strategy and business models.
2. Increased focus on assessing and monitoring culture by using different methods and metrics.
3. Better reporting of succession planning, and how this links to assuring the make-up of the board and delivering diverse challenge.
4. Improved reporting on outcomes and actions, rather than declarations or statements of intent without detail.
5. Increased focus on assessing and ensuring the effectiveness of the risk management and internal control systems.
6. Better explanation of how executive remuneration is aligned to a company’s purpose, values and strategy.
7. Clarity on departures from Code provisions and a detailed explanation.
8. Clearer reporting on engagement with shareholders and the workforce in relation to remuneration, and the impact on remuneration policy and outcomes.
9. Explanations of the impact of engagement with stakeholders, including any areas where the company failed to meet targets.
10. Reporting on the impact of engagement with stakeholders, including shareholders, on decision-making, strategy and long-term success.
11. Explaining diversity policies with objectives and targets and demonstrating their connection to company strategy.
12. Clarity on the relationship and level of oversight between the board and committees.

AIM company fined for not disclosing or consulting on bonus payments

The London Stock Exchange has announced that it has fined an AIM company £406,000 (discounted from £580,000) for failing to disclose cash bonuses paid to its directors or to discuss them fully with its nominated adviser.

Three months after admission to AIM, the company resolved to pay cash bonuses to its CEO and CFO in a total aggregate amount of just over £1 million.

The cash bonuses had not been mentioned in the company’s AIM admission document.

In addition, the cash bonuses amounted to “related party transactions” for the purposes of the AIM Rules for Companies. Under AIM Rule 13, if a related party transaction exceeds 5% of any of the “class tests” in the AIM Rules (which these bonuses did), the company must (among other things):

• issue a notification of the terms of the transaction without delay; and
• consult with its nominated adviser (“nomad”) to be able to provide a statement that the terms of the transaction are fair and reasonable (a “fair and reasonable statement”).

In this case, the company did not make an announcement. It did inform its nomad of the bonuses, but in terms that led the nomad to believe that the bonuses had merely been proposed and not that they were about to be paid. It was therefore unable to provide the support required for the company’s directors to make a fair and reasonable statement.

When the company did finally disclose the bonuses, the nomad was still unable to provide the support required for the fair and reasonable statement.

The Exchange found that the company had breached:

• AIM Rule 13, by failing to disclose the terms of the bonuses without delay and, when it disclosed them, failing to make a fair and reasonable statement; and
• AIM Rule 31, for various reasons, including by failing to properly understand its obligations under the AIM Rules, to properly engage with its nomad and take its concerns into account, or to have policies and procedures in place to minute the consideration given to the bonuses.

The Exchange decided to publish the censure to clarify the standard it expects of AIM companies. In particular, it reminds AIM companies to engage openly and transparently with their nomads so that nomads are in a position to advise and guide on the AIM Rules on a fully informed basis. A company cannot do this simply by mentioning a matter or providing incomplete and/or misleading information.

Other items

• FRC reports on disclosure under the Stewardship Code. The Financial Reporting Council (FRC) has published a report examining reports from the first signatories to its revised Stewardship Code that was published in September 2021. The FRC notes continued high-quality disclosure concerning governance, resourcing, and integrating stewardship and ESG factors with investment, but there is room for improvement in explaining stewardship-related conflicts of interest and on review and assurance of stewardship activities. 
• Law Commission publishes paper on smart legal contracts. The Law Commission has published a paper setting out its advice to Government on the status of smart legal contracts. The paper provides a background to smart legal contracts, how they are formed and interpreted, remedies that are available in relation to smart legal contracts, as well as specific issues relating to consumers and jurisdiction.