EQ Bulletin – December 2020

EQ Bulletin – December 2020

03 December 2020

Welcome to our monthly bulletin of what’s happening within the regulatory environment that impacts the share registration and employee share plans space.

As we enter the final month of the year, we're approaching 2021 with a sense of optimism after the recent news of a number of potentially viable COVID-19 vaccines. The news provided a welcome boost to the stock market and whilst this is being treated with caution, we maintain a positive yet realistic outlook. On the Brexit side, talks continue and negotiators are seeking Ministerial direction on final technical details.

Paul Matthews (1) Paul Matthews CEO - EQ Boardroom

At EQ, we have been working on an exciting project with our new partner, Proxymity, an end-to-end proxy voting platform, which will provide you with enhancements to the proxy voting process. You can find more information about Proxymity and what benefits this can bring to you later in the bulletin.

This month, we explore the FRC's annual review of corporate reporting and the recently published 2021 Principles of Remuneration from the IA.

As always if you have any questions on the content of this month’s bulletin, please contact your Relationship Manager.

Articles in this Edition cover:   

Dates for your diary:

The EQuivalence Forum - Wednesday 27 January

Join EQ and other like-minded professionals, to gain knowledge and share experiences.

In this webinar, chaired by Simon Maynard, Assistant Director at Prism Cosec, we discuss the latest Corporate Governance updates impacting Company Secretaries in 2021.

If you would like to attend this webinar, please register here

Government approve an extension of temporary AGM measures

An amendment to the Corporate Insolvency and Governance Act (2020) was passed on 25 November extending the temporary modifications to the law on company meetings to 30 March 2021.  For AGMs and general meetings in particular, this means that companies will be able to benefit from holding virtual or hybrid meetings regardless of the provisions in a company’s articles of association.

Statutory instrument

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The FRC’s annual review of corporate reporting

The Financial Reporting Council (FRC) has published its annual review of Corporate Reporting for 2019/2020.

Key findings of the review are:

  • There has been a gradual improvement in the quality of reporting in certain areas
  • Fewer inconsistencies have been found between the judgements and estimates in the accounts and related disclosures in other sections of the report
  • The use of Alternative Performance Measures (APMs) has improved
  • Strategic report concerns relate to lack of detail rather than non-compliance

However, the areas that the FRC has raised most queries about in the last three years still includes Judgements and Estimates, APMs and the Strategic Report as well as the Impairment of Assets, Revenue, Financial instruments, Statement of Cash Flows, Provisions and Contingencies, Fair Value Management and Business Combinations.

To improve further corporate reporting, the FRC advises companies not to lose sight of the objective of the financial statements which is to provide financial information that is useful to a wide range of users.  In addition, they are looking for material information to be included which is communicated clearly and concisely and the avoidance of immaterial disclosures that can obscure useful information.  Specific and granular disclosures are of most help to investors.

The FRC also sets out its priorities for the 2020/21 reporting season which are to focus on:

  • Disclosures on risk, judgement and uncertainty in the light of Covid-19
  • Potential consequences of geopolitical tensions and the UK's exit from the EU
  • Climate-related risks.

FRC Review

The FRC’s annual letter to CEOs, CFOs and Audit Committee Chairs

The Financial Reporting Council (FRC) has published its annual letter to CEOs, CFOs and Audit Committee Chairs setting out reporting expectations for annual report and accounts.  Key areas highlighted include:

  • Covid-19 and its impact on reporting – reporting needs to be clear and transparent, and companies are urged to refer to the FRC's published guidance and reviews in this area
  • Brexit – reporting needs to cover company-specific risks and uncertainties, including the potential impacts on different parts of the business and effects on the financial statements
  • Climate change – full information about the future impact of climate change on the business and how the company’s activities affect the environment should be provided
  • Strategic reports should clearly describe environmental policies rather than just listing them
  • Cash flow and liquidity – clear explanation of matters considered in assessing going concern, viability and liquidity should be provided as well as disclosure of methods and assumptions used in assessing going concern and viability
  • S172 statements – many companies did not sufficiently explain how directors discharged their s172 duty, in particular, the responsibility to have regard to the consequences of decisions in the long term. Companies are encouraged to use the recently published tips on s172 reporting by the Financial Reporting Lab
  • Chair tenure – succession plans should anticipate departures and ensure sufficient time is built into the recruitment process to enable a transition without the need to extend the tenure of the Chair or other directors. Succession plans should include details of proactive measures taken to identify individuals from diverse backgrounds and any diversity targets.

FRC’s letter

Government maps out steps towards mandatory climate-related disclosures

The UK government has published 'A Roadmap towards Mandatory Climate-related Disclosures' setting out an indicative path towards mandatory climate-related disclosures aligned with the 11 recommendations of the Task Force on Climate-related Financial Disclosures (TCFD).

The roadmap sets out a timeline of proposed regulation or legislation applying to seven categories of organisation: listed companies, UK registered companies, banks and building societies, insurance companies, asset managers, life insurers and occupational pension schemes.  Most of these organisations will be covered by climate-related reporting requirements by 2023.

The roadmap confirms that premium listed companies will need to report on a 'comply or explain' basis against the TCFD recommendations for financial years beginning on or after 1 January 2021. The Financial Conduct Authority will also be seeking views on making the disclosure mandatory and including other listed companies.

Government roadmap

The FRC’s message to companies on climate change and sustainability reporting

The Financial Reporting Council (FRC) has issued a statement on Non-Financial Reporting Frameworks in which it welcomes initiatives by the IFRS to develop international standards on non-financial reporting but acknowledges this will take time to develop.  The FRC, therefore, recommends that in the next annual report companies should:

  • Report voluntarily against the 11 recommendations of the Task Force on Climate-related Financial Disclosures (TCFD); and
  • Use the Sustainability Accounting Standards Board (SADB) metrics for their sector

Future work in this area by the FRC will include:

  • Increased focus on climate change reporting in the Corporate Reporting and Audit Quality reviews
  • Review of reporting under Energy and Carbon Reporting regulations
  • Review of climate-related reporting in the UK Corporate Governance Code (Code) monitoring work and consideration of whether changes are needed to the Code and Guidance on the Strategic Report
  • Investigating better practice reporting under TCFD and SASB
  • Highlighting areas in UK GAAP where climate change could be a consideration
  • Looking at the role of audit committees in this area.

FRC’s statement

The FRC reviews how climate-related issues are addressed by different organisations

The Financial Reporting Council (FRC) has published a thematic review of climate-related considerations by boards, companies and others.  The key findings of the review are:

  • It is the responsibility of the board to consider climate-related issues but there is little evidence that climate considerations influence business models and strategy
  • More companies are providing narrative reporting on climate-related issues with minimum legal requirements being met. However, investors are calling for greater disclosures, including how any targets set will be achieved and monitored.
  • In audit practices, the support, training and resources provided in this area vary widely, and auditors need to improve consideration of climate-related risks when carrying out audits.
  • Investors want to see companies report against the Task Force on Climate-related Financial Disclosures framework but also expect to see disclosures on financial implications of climate change.

FRC’s review

Alongside the thematic climate review, the FRC has published a number of more detailed climate reviews in the areas of:

  • Governance
  • Corporate Reporting
  • Audit
  • Professional Oversight
  • Investor reporting and TCFD disclosure

FRC reviews

UK Principles of Executive Pay published by Legal & General Investment Management

Legal & General Investment Management (LGIM) has published its 2020 UK Principles of Executive Pay. Major changes from 2019 include:

  • Requiring existing directors’ pension contributions to be aligned with the majority of the workforce by 2023. LGIM will vote against the remuneration policy where there are no proposals to address this issue.
  • LGIM expect that where there has been a significant decrease in share price (>20%), the size of share awards should be reduced and they will vote against the remuneration report where this does not happen.
  • Any retrospective changes made to performance targets for LTIP awards should be the subject of shareholder consultation if these changes result in a beneficial outcome for directors.
  • Changes around performance measures and targets, including where personal performance measures are used, should be aligned to strategic targets, be meaningful and quantifiable.  LGIM may vote against the remuneration report if the weighting for personal performance is high and measures not clear.
  • A threshold level of financial performance should be achieved for any bonus to be made.
  • ESG performance targets should not be used to provide additional reward but to modify outcomes.
  • Post-employment Shareholding requirements should be set at no less than 80% of the in-post requirement

LGIM principles

ISS publishes its Proxy Voting Guidelines for 2021

Institutional Shareholder Services (ISS) has published its proxy voting guidelines for 2021.  Changes to last year’s guidelines include:

  • Adding poor-risk oversight of environmental, social and climate change issues as considerations when recommending a vote against individual directors
  • Recommending a vote against the Chair of the nomination committee (or other directors) where the company is in the FTSE 350 and the board does not comprise at least 33 % of women or where the company is an FTSE SmallCap or listed on AIM with a market capitalisation of over £500 million, and there is not at least one woman on the board. Mitigating factors include compliance with the relevant board diversity standard at the preceding AGM and a public commitment to comply with the relevant standard within a year.  In 2021 only, for FTSE 350 companies, a public commitment to bring the composition of the board in line with recommendations of the Hampton-Alexander review by the following AGM will not result in a negative recommendation.
  • Adding the considerations of whether pension contributions are aligned with the wider workforce and if an appropriate post-employment shareholding requirement is in place as to whether to vote to approve the remuneration policy

ISS Proxy Voting Guidelines

The Financial Services Bill includes changes to PDMR notification timescales

The Financial Services Bill, currently going through Parliament, will introduce, amongst other things, changes to PDMR notifications previously announced by the EU.  From 1 January 2021, companies will have two days from the notification by the PDMR of dealing, to disclose the dealing to the market.  The changes in the Financial Services Bill will pass this change into UK law following the Brexit transition period, which ends on 31 December 2020.

The Financial Services Bill

FCA confirms delay to the introduction of European Single Electronic Format for accounts

The Financial Conduct Authority (FCA) has issued a Policy Statement setting out its position in relation to the delay in requiring companies to publish financial statements in European Single Electronic Format (ESEF). The FCA has confirmed that the requirement will now come into force for financial years beginning 1 January 2021 rather than 1 January 2020 although companies may voluntarily publish and file their accounts in ESEF. The delay to implementation was introduced as a result of the coronavirus pandemic. However, the FCA has decided to keep to the original timetable in respect of mandatory tagging of the notes to annual financial statements.  This will apply to financial years starting on or after 1 January 2022. 

The Policy Statement also confirms that the temporary relief granted to companies to delay publication of financial statements will continue for listed companies with financial years ending before April 2021.  If any changes are proposed to these measures, the FCA has stated that they will give companies notice in order to plan ahead.

FCA Policy Statement

Review of audit quality and the audit market by the FRC

The Financial Reporting Council (FRC) has published Developments in Audit 2020, which sets out findings of a review of audit quality and developments in the audit market. The key message is that audit quality is still unacceptably inconsistent.  Across the 130 audits inspected over 2019/2020, only 62% were assessed as good or requiring limited improvements. The areas highlighted as needing most improvement were:

  • The challenge of management;
  • The audit of going concern;
  • Group audit oversight; and
  • Quality control over the audit.

In relation to the audit market, the report highlights that:

  • There was a 9% increase in overall auditor fees between 2018 and 2019
  • The Big Four firms derived around 75% of their revenue from companies they were not auditing
  • There is a downward trend in the proportion of revenue earned by the Big Four from non-audit services from 12% in 2015 to 6% in 2019
  • The Big Four were the auditors of 96% of FTSE 350 companies in 2019, slightly lower than 97% in 2017
  • The proportion of FTSE 350 companies switching auditors was around 9% per year between 2015 and 2019, but turnover rates are inconsistent from year to year with no clear trend emerging
  • There is some evidence of a switch away from a Big Four firm to a challenger firm with 13% of switches away from a Big Four firm and 6% moving from a challenger firm to a Big Four firm. The average move away from a Big Four firm for 2015-2019 was 5%
  • The proportion of companies whose current auditor’s tenure is over five years has decreased over time, but there are still 5% of companies who had had the same auditor for over 20 years

FRC Audit Developments

The FCA publishes Primary Market Bulletin No. 31

The Financial Conduct Authority (FCA) has published Primary Market Bulletin No. 31.  Content includes:

  • Confirmation of announcements made by the FCA on delays to the implementation of the European Single Electronic Format and continuation of the extension of time periods in which to release financial statements
  • Update on changes to the Prospectus Regulation
  • Future treatment of guidance produced by the European Securities and Markets Authority after Brexit
  • Dealing with enquiries from the FCA in relation to the Market Abuse Regulation and Listing Rules
  • A review of listed companies’ compliance with the FCA’s rules on corporate governance disclosures including the UK Corporate Governance Code
  • A review of Delayed Disclosure of Inside Information notifications received by the FCA

Primary Market Bulletin

FCA’s review of compliance with corporate governance regulations

The Financial Conduct Authority (FCA) has published a review of listed companies’ compliance with FCA rules relating to corporate governance, which includes the UK Corporate Governance Code (the Code).  A sample of annual reports from different sectors covering 2016- 2018 year ends were reviewed.  A summary of the FCA’s recommendations for improvements includes:

  • Premium listed companies should consider setting out their statement on how they have applied Principles of the Code in a manner that enables shareholders to evaluate how the Principles have been applied rather than merely stating that they have been applied
  • Giving specific details of how the company has applied the Principles of the Code using examples
  • Avoiding boiler-plate disclosures by including examples and/or cross-references to evidence good corporate governance
  • The quality of Board Diversity reporting needs improving particularly by Standard listed companies

Primary Market Bulletin

FCA’s review of Delayed Disclosure of Inside Information

The Financial Conduct Authority (FCA) has published a review of the Delayed Disclosure of Inside Information (DDII) notifications received by the FCA under the Market Abuse Regulation (MAR) for the period from July 2016 to November 2018.  The main findings of the review are:

  • Periodic financial information – the FCA reminds companies that they should assume that information relating to financial results could constitute inside information. If the disclosure is delayed, then they need to provide a DDII notification to the FCA
  • Unscheduled financial information, such as trading statements, were delayed on average longer than the release of periodic financial information which was not in line with FCA expectations. In addition, a large number of trading statements are made by companies but relatively few DDII notifications in this area. This could indicate that companies are failing to recognise that the information in trading statements is inside information and failing to comply with DDII requirements.
  • Director/Board changes – the average delay for disclosing board changes was fairly small, but the FCA were surprised by the number of notifications in this category.
  • Only a quarter of companies/issuers reviewed had submitted a DDII notification and the FCA are concerned that companies may not be aware of the requirement to submit a DDII notification.

As a result of the review, the FCA will be increasing its oversight into the areas of concern identified. Companies need to ensure that they are receiving advice in respect of disclosure of inside information, staff are receiving sufficient training, and appropriate governance procedures are in place.

It should be noted that after the end of the Brexit transition period on 31 December 2020, the requirements of the Market Abuse Regulation will be onshored into UK law and the DDII requirements will therefore continue to apply.

Primary Market Bulletin

Investment Association publishes its 2021 Principles of Remuneration

The Investment Association (IA) has published its annual guidelines ‘Principles of Remuneration’ (the Principles) together with a letter to Remuneration Committee Chairs highlighting changes to the Principles.  Key messages in the IA letter are:

  • The Remuneration Committee should not isolate executives from the impact of Covid-19 and should apply a consistent approach with that taken for the workforce
  • Use of Non-Financial Performance Measures – the Principles have been made clearer on investor expectations on the range of non-financial performance metrics.
  • Post-Employment Shareholding Policies – Shareholders want to see what enforcement mechanisms are in place to ensure these guidelines are enforced
  • Deferral of bonuses – investors expect that a proportion of the bonus will be deferred if the bonus opportunity is greater than 100% of salary

In respect of executive pensions IVIS (the IA’s voting body) will continue with its current approach:

  • Any new remuneration policy that does not explicitly state that a new executive director will have a pension contribution set in line with the majority of the workforce will receive a Red Top
  • Any new executive director or director changing a role whose pension contribution is not aligned with the majority of the workforce will result in a Red Top on the remuneration report

With effect from financial years starting on or after 31 December 2020 IVIS will:

  • Red Top the remuneration report if pension contributions received by an executive director are 15% or more if a credible action plan to align directors' pension contributions to the majority of the workforce by the end of 2022 has not been set out.

IA’s Principles

IA’s Letter

Update on the IA’s Shareholder Expectations during the Covid-19 Pandemic issued

The Investment Association (IA) has published an update to its guidance on Shareholder Expectations during the Covid-19 pandemic first issued earlier in 2020. 

IA’s Shareholder Expectations

The IA’s Position Paper on Climate Change

The Investment Association (IA) has published a position paper on climate change, reflecting the views of the investor community.  The paper sets out three commitments made by the investment industry to:

  • Engage with investee companies on climate-related disclosures  
  • Work with pension fund clients to help them meet climate-related disclosure requirements 
  • Develop Investment managers’ Task Force on Climate-related Financial Disclosures (TCFD)
  • Support improvement of sustainability-related disclosures at fund-level 
  • Link with advanced initiatives to support Disclosure of Paris-Alignment of Portfolios 
  • Support the FCA-PRA Climate Financial Risk Forum work 
  • Support creation of investable opportunities

The paper also requests the government to:

  • Amend company law to require all large UK incorporated companies (public and private) to report in line with TCFD recommendations. 
  • Make good on its stated intention to issue its first sovereign green bond in 2021 as this will be an important signal and demonstrate the UK government's commitment to its 2050 net-zero target, clean growth and a green economy.
  • Facilitate sector-specific pathways to transition and work together with the UK government to ensure the requisite policy interventions are brought in to facilitate the transition to Net Zero for different sectors

IA’s Paper

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