EQ Bulletin – March 2021

EQ Bulletin – March 2021

04 March 2021

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

Paul Matthews (1) Paul Matthews CEO - EQ Boardroom

The relationship between the UK and the EU remains strained with increasing signs of economic friction after Brexit. However, there are new reasons for optimism in the UK with the Government announcing that the easing of the third lockdown will aim to be cautious, but irreversible.

At EQ, preparations for a lively AGM season continue. We hope our recent tips and advice on navigating the second AGM season impacted by the coronavirus pandemic were helpful. In case you missed it, you can watch our AGM briefing on-demand here.

In this month’s bulletin, we look at the GC100 and ShareAction contribution to the AGM reform debate, review the recent guidance from Glass Lewis on executive remuneration policies, and much more.

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

An insight from Prism Cosec


Kathy Cong
Managing Director, Prism Cosec
 

Board evaluation forms an important part of the processes a company needs to have in place to ensure good governance. If this is the year for your external board evaluation it is worth taking a look at the Chartered Governance Institute’s review of the effectiveness of independent board evaluations undertaken at the behest of the Department of Business, Energy and Industrial Strategy (BEIS).  Although BEIS has yet to comment on the proposals, the review provides useful best practice guidance on issues companies may wish to consider when organising an external board review.  This includes a set of draft Principles of Good Practice for companies using external board reviewers and guidance on reporting on the board evaluation process as required by the UK Corporate Governance Code.

Prism Cosec has extensive expertise on all aspects of corporate governance reporting, including board evaluation, and can assist companies to produce a coherent governance statement in the annual report.

Review of the effectiveness of independent board evaluation published

The Chartered Governance Institute (CGI) has published a review of the effectiveness of independent board evaluation. The review was set up at the request of the Department of Business, Energy and Industrial Strategy (BEIS) to identify ways of improving the quality and effectiveness of board evaluations. BEIS also requested that a code of practice be developed for external board evaluations and the CGI has published a proposed Code of Practice (the Code) in the report. The CGI has also drafted Principles of Good Practice for listed companies using external board reviewers and guidance on reporting on board performance reviews.

The CGI report, “Review of the effectiveness of independent board evaluations in the UK listed sector”, sets out 15 recommendations these include:

  • Those conducting external board performance reviews for FTSE 350 companies should be encouraged to become signatories of the Code.
  • BEIS should issue the Code or identify an organisation to become the owner of the Code who will also keep a public register of signatories.
  • Board reviewers should be given a reasonable time to adjust before the register goes live hopefully by the end of 2021.
  • Listed companies should be encouraged voluntarily to adopt the proposed Principles of Good Practice.
  • The FRC should issue guidance to listed companies on how to report on board evaluation disclosures under the UK Corporate Governance Code.
  • Listed companies should disclose whether the reviewer was a signatory to the Code of Practice.
  • Board reviewers should not be prevented from providing other services to their clients, but explanation should be given as to how conflicts of interest are managed in these circumstances
  • The FRC should assess board performance review practice and reporting as part of its monitoring of the UK Corporate Governance Code.
  • BEIS should conduct a review of the impact of these measures three years after the register of board reviewers becomes active.

BEIS will now need to consider whether it agrees with the report’s recommendations and a timetable for implementation.

ICSA report

Contributions to AGM reform debate put forward by GC100 and ShareAction

The debate on the future of AGMs has been ongoing following the difficulties encountered last year in holding shareholder meetings due to COVID-19. Two recent contributors to the debate have been the GC100 and ShareAction with differing views on how AGMs should be held.

The GC100 has issued a discussion paper, “Shareholder Meetings – Time for Change?” which considers the future format of AGMs. The suggestions and recommendations in the report include:

  • Allowing companies the flexibility to choose the meeting format that best serves their shareholder base
  • Ensuring there is clarity in the Companies Act 2006 regarding the legality of virtual AGMs
  • Encouraging separate virtual shareholder engagement events in addition to the AGM
  • Working with Government, investor bodies and the Financial Reporting Council on a code of best practice for virtual meetings which addresses areas of shareholder concern

The GC100’s discussion paper includes a draft Code of Best Practice for electronic participation at hybrid and virtual meetings.

GC100 discussion paper

ShareAction has written to the Chairs of FTSE 350 companies asking them to put in place best-practice measures for 2021 AGMs, particularly during the ongoing crisis. These include:

  • Live, interactive question and answer sessions with the whole Board
  • Video conferencing
  • Voting that takes place after the discursive portion of the AGM.

Share Action has also published a report “Fit for purpose? The future of the AGM” setting out its visions for the purpose of the AGM. ShareAction sees the AGM as a forum for stakeholders, companies and shareholders to engage in communication and assess how the Board is meeting its Section 172 requirements. It is suggested that the AGM cycle is split into:

  • Engagement with registered stakeholder groups throughout the year
  • Pre-AGM Questions and Answers
  • The AGM
  • Annual shareholder vote

The report sets out a series of recommendations for investors, regulators and companies.

ShareAction report

Guidance on executive remuneration policies issued by Glass Lewis

Glass Lewis have supplemented their standard voting policies with guidance on how their existing policies will be applied to executive remuneration in the wake of the pandemic. Glass Lewis’s focus for 2021 includes:

  • Dividends: If a company has cancelled, reduced or has not resumed payment of dividends due to the crisis, this should be reflected in executive pay.
  • Employees: Where there have been significant redundancies, furloughs or cuts in workforce salaries this should be addressed in the remuneration report explaining how these were taken into account when determining variable pay outcomes and salary adjustments for executives.
  • Stakeholder Perspectives: Where relevant stakeholders (eg government agencies, investor associations) publicly express concerns over proposed payouts or pay policies, the company should provide a compelling explanation of how it has accounted for those perspectives.
  • Key Financials: In addition to the performance of metrics under incentive plans, Glass Lewis may take into account performance against other KPIs such as TSR, EBITDA, net profit.
  • Equity Grants and Share Price: the company's disclosure around the determination of the grant value and number of shares will be reviewed when assessing the appropriateness of long term incentive grants. Companies should address the potential inflation of the final value of the award on vesting, where the share price has been significantly affected. Where the potential for windfall gains on grants appear significant Glass Lewis would expect a Board to adjust the grant value accordingly and/or implement adjustments to other elements of executive pay.

Glass Lewis guidance

A reminder for companies of temporary reliefs allowed due to COVID-19

The Financial Conduct Authority (FCA) and the Financial Reporting Council (FRC) have issued a joint statement reminding companies of temporary reliefs allowed due to COVID-19. The statement asks companies to take advantage of these to ensure high-quality financial information is maintained. The reliefs include:

  • The extension of the publication of annual financial reports from 4 to 6 months and of half-year reports from 3 to 4 months which is in place for financial years ending before April 2021.
  • Extension of filing at Companies House by three months

Companies are also reminded that the provisions of the Market Abuse Regulation (MAR) remain in force, and companies must report inside information as soon as possible unless there is a valid reason for delay.

The joint statement is available from: https://www.fca.org.uk

The London Stock Exchange has issued an Inside AIM confirming that temporary measures for reporting deadlines for annual and half-yearly results remain available for AIM companies until further notice. As a reminder, if a company wishes to take advantage of the relaxation for annual results, it must apply to AIM Regulation for an extension of up to 3 months. The request must be made by the company's nominated adviser and submitted before the end of the current reporting deadline. To extend the timetable for publication of half-yearly reports by up to one month, a company must notify its intention to do so via an RNS. The company's nominated adviser must inform AIM Regulation of this separately.

Inside AIM

A review of reporting by private companies under the Wates Principles

Sir James Wates has carried out a review into governance reporting by private companies under the Wates Principles. Highlights are:

  • Many companies provided good explanations of how their governance arrangements work for example in the reports of Allianz Holdings UK, Heathrow, Jaguar Land Rover and Tata Steel
  • Heathrow provides an excellent one-page overview with cross-referencing to other information
  • There are also good examples of wholly-owned subsidiaries applying the Wates Principles and not just referring to their holding company governance report
  • There is a balance needed to provide useful information on governance whilst keeping the report short and clear in line with the spirit of the Wates Principles. One way to do this is to have ‘evergreen’ material in the Directors’ Report with the Corporate Governance report focussing on changes in the year
  • There are some poor examples of minimal effort, for example, one sentence to describe Risks and Opportunities
  • As with the UK Corporate Governance Code, companies often find it difficult to describe and embed the companies purpose. Statements on purpose are more often marketing slogans than governance statements.
  • Not many companies make the Corporate Governance report easily accessible on their website as it is generally found in the Annual Report PDF.

FRC report

Increased audit fees for smaller companies

The Quoted Companies Alliance (QCA) has published its latest survey in conjunction with YouGov of 141 small and mid-sized quoted companies. The survey looked at whether audit fees had increased. Findings were that:

  • 64% of companies reported an increase in audit fees. 7% reported a decrease.
  • The average annual audit fee for these companies was £138,000
  • The average annual change was an increase of 26%

Some respondents voiced concern over the increases with a potential crisis for small companies in the next 18-24 months being priced out of the market.

QCA survey

CMA keen not to obstruct environmental initiatives

The Competition and Markets Authority (CMA) has issued a document to help companies with competition law in relation to sustainability matters. The CMA states that it does not want competition law to become an obstacle to businesses wishing to take part in environmental initiatives. The document sets out key legal considerations companies should be aware of when entering into sustainability agreements.

CMA document

Guidance on executing documents electronically published

The corporate Professional Support Lawyers group has published a checklist setting out a list of points to consider for the electronic execution of documents using an online platform.  It includes information on:

  • Signing instructions for both signatories and witnesses.
  • Arrangements for authenticating the identity of signatories.
  • Arrangements for witnessing signatures, and dating and circulating the signed documents.

PSL’s checklist

Research published on FTSE 100 black and ethnic leaders

The diversity consultancy agency Green Park has published research which shows that for the first time in six years there are no black Chairs, CEOs or CFOs in the FTSE 100 and says that companies are failing black leaders. Only 3.4% of leaders in the Top 3 roles have ethnic minority backgrounds, the same percentage as in 2014. Green Park is calling for organisations to tackle issues facing race equality both for moral and business reasons.

Green Park report

​What are the priorities for companies in 2021?

The Chartered Governance Institute, in conjunction with The Core Partnership, has published the results of a poll asking companies what their priorities for 2021 will be. Environmental, Social and Governance matters, remote working risk, climate change and diversity were the issues mentioned most. Other issues raised included:

  • Enabling greater remote participation at AGMs
  • Regulatory change following Brexit
  • Audit, auditors and audit quality
  • Board meetings and communication generally and the Board’s ability to govern effectively in the face of COVID

ICSA press release

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