As companies look to plan their FY 2020 annual report and prepare for the 2021 AGM season, we have reflected on our experience in 2020. We summarise below key learnings and what we think will undoubtedly be on the agenda and in focus for 2021.
The temporary flexibilities granted by the Corporate Governance and Insolvency Act 2020 ("CIGA") in relation to the conduct of company meetings come to an end on 31 December 2020. There remains considerable uncertainty as to what company meetings will look like in 2021. To ensure that companies are prepared for all eventualities, they should consider the following:
- Follow best practice: the FRC has outlined best practice and suggested "dos" and "don'ts" whether holding a physical, virtual, hybrid or CIGA compliant meeting. Please see our recent Client Alert which summarises the FRC's review of how AGMs were held during 2020.
- Amend or adopt new articles of association: whilst the flexibilities offered by CIGA continue to apply, consider whether it is appropriate to amend your articles to permit hybrid company meetings. Also consider whether your articles include a power to postpone a general meeting once it has been called. As companies can only postpone meetings if their articles permit it, check that you have this flexibility rather than potentially having to follow the more burdensome adjournment process.
- Think "shareholder engagement": whether holding a virtual, hybrid or CIGA compliant meeting, consider what steps you can take to ensure engagement with shareholders. Best practice includes (i) setting up a dedicated website including a 'Directors Q&A' section which allows submission of, and responses to, questions ahead of and up to the deadline for submitting proxy forms, and (ii) providing responses to questions at the AGM, after the AGM on the website, and in that year's Annual Report and Accounts.
- Confirm receipt of votes on a poll: as of 3 September 2020, traded companies holding a poll vote by electronic means must confirm to the casting voter, by electronic means, receipt of the vote as soon as reasonably practicable after receipt. This applies to any vote cast electronically whether during a meeting or in advance of a meeting. Companies should therefore work with their registrars to set up the necessary platforms to enable electronic receipt-of-vote confirmation.
- Report on significant dissent: whilst not a new requirement this year, it is worth remembering that under the 2018 UK Corporate Governance Code, when 20% or more of votes have been cast against the board recommendation for a resolution, the company should:
- explain, when announcing voting results, what actions it intends to take to consult shareholders in order to understand the reasons behind the result;
- publish an update on the views received from shareholders and actions taken no later than six months after the shareholder meeting; and
- provide a final summary in the annual report and, if applicable, in the explanatory notes to resolutions at the next shareholder meeting, on what impact the feedback has had on the decisions the board has taken and any actions or resolutions now proposed.
Shareholders continue to scrutinise executive remuneration decisions. Be mindful of the following for 2021:
- Impact of COVID-19: the Investment Association's (IA's) advice is to "sensitively balance" incentivisation of executives against the effect the pandemic is having on company employees and stakeholders. For example, companies that suspended or cancelled dividends may consider adjusting executive bonuses. If there is a perceived divergence between shareholder experience and executive remuneration, companies can expect a difficult conversation with shareholders.
- Alignment of executive pensions: the 2018 UK Corporate Governance Code expects premium-listed companies to align executive and wider company remuneration and to report on this. Thus far, the significant majority of FTSE 250 companies who were not already compliant have committed to changes to bring executive pension contributions in line with IA recommendations by the end of 2022. As a reminder:
- premium-listed companies should bring executive pension contributions in line with wider workforce policy by the end of 2022;
- IVIS will 'amber top' a remuneration report if an existing director's pension contribution is 25% ≥ of salary; and
- IVIS will 'red top' a remuneration report if the executive director's pension contribution is 25% ≥ of salary and the remuneration committee has not disclosed a credible action plan to align this contribution with the majority of the workforce's rate by the end of 2022.
- ESG metrics: the Institutional Investor Survey for 2019 showed that 89% of investors believe inclusion of sustainability metrics in variable pay is important in both annual and long-term incentive plans. This has not changed in 2020. Stakeholders are increasingly expectant that companies should include ESG metrics in executive remuneration. If not already done so, companies should consider the extent to which ESG metrics can be incorporated into executive pay frameworks.
- Formal post-employment shareholding: FTSE companies who have not yet developed and implemented a formal postemployment shareholding requirement should do so as soon as possible. In its Principles of Remuneration, the IA outlines its expectations in relation to post-employment shareholdings, the following two being supported by ISS in its Proxy Voting Guidelines for UK/Ireland:
- post-employment shareholding requirements should apply for at least 2 years at a level equal to the lower of either the shareholding requirement immediately prior to departure or the actual shareholding on departure; and
- the requirements should be established for all new and existing directors as soon as possible and, in any event, by the company's next remuneration policy vote.
- Shareholder approval of remuneration policy: the IA's public register of companies shows that pay-related resolutions are more likely to receive significant votes of dissent. Companies should keep track of and align with market developments, and be upfront with shareholders ahead of the AGM on key remuneration decisions.
- Investors are demanding more transparency on ethnic diversity on boards. FTSE 100 companies should provide investors with disclosure on steps being taken to ensure at least one non-white board member by 2021.
Environmental, Social and Governance (ESG) matters
- Continued focus on ESG: the focus on ESG continues to increase. Investors want standardised, rigorous, verifiable ESG data and information, which they can incorporate into their own models and use to compare and value companies. Some annual reports still treat CSR and ESG as synonymous - consider whether this is appropriate and whether the language you use needs to be updated.
- Alignment of ESG standards: recent growth in third-party rating agencies that score ESG-related matters based solely or partly on publicly available data means that all public companies are judged, ranked and benchmarked with respect to ESG matters. There are over 600 different rating organisations globally. Companies should consider what standards they wish to follow. By aligning towards the most reputable and relevant market standards, companies can develop their management of ESG impacts.
- TCFD disclosure: the UK Government has recently proposed amending the Listing Rules requiring FTSE premium listed companies to disclose whether they comply with the recommendations of the Financial Stability Board's Taskforce on Climate-related Financial Disclosures (TCFD) and explain any non-compliance. Whilst this is still to be implemented, most FTSE 100 companies already comply in some form and we are seeing an increase in voluntary reporting against the TCFD standards. Companies should consider whether it is appropriate to front run and disclose in excess of what is currently required and increase the detail and rigour of their disclosures so they are prepared for any further legislative changes.
- Whilst we have seen a decline in new activist campaigns and demands since the pandemic, that is no cause for complacency on the part of the boards of UK listed companies. Many activists have adopted a 'wait and see' approach, and there is much activity going on below the surface, with various activists repositioning themselves to take advantage of share price volatility and preparing for strategic engagement once the path ahead is clearer. Companies would do well to prepare now for possible engagement in the coming months.
Key Annual Report and Accounts changes for 2020
- Streamlined Energy Carbon Reporting (SECR) regime: for financial years beginning on or after 1 April 2019, UKincorporated quoted companies and large UK unquoted companies must report on energy usage and energy efficiency measures on top of emissions reporting. Companies should ensure that they have the information needed to comply with the additional reporting requirements.
- Annual Report and Accounts file format: ESMA has published rules requiring companies listed on regulated European exchanges to file their Annual Report and Accounts in European single electronic format (ESEF), i.e. XHTML. The ESEF requirements will take effect from 1 January 2021. The FCA has proposed rule changes to postpone the implementation of the ESEF requirements but these proposals are contingent on the Brexit transition period ending on 31 December 2020, which means that the UK may not be able to opt-out if the transition period is extended. The FCA has yet to provide clarification on how ESEF will be implemented. We suggest you speak to your accountants to ensure that you are able to report in the appropriate format.
- Comprehensive 'Section 172 Statements': the 2019 reporting season was the first year that companies had to include a s.172 Statement in their Annual Report and Accounts so the market is still reaching a view as to what a good one looks like, however the FRC's Financial Reporting Lab has published tips on how to make the statement more useful, in particular:
- Be specific and genuine, avoid box ticking
- Explain the why
- Link to strategy
- Include difficulties not just positives
- Reflect the Board's oversight
- Include material KPIs on key stakeholders
- Include prompts in board materials on stakeholders and s.172 responsibilities
- Address future consequences and planned actions
- Make it visible
- Use cross references to reflect understanding
- Include case studies
- Start early
- Going concern, risk and viability: the FRC has issued a number of reports and guidance in relation to reporting. Most recently the FRC Labs published a report which considers current practice and takes a look forward at how reporting is developing, as well as what useful disclosure looks like around going concern, risk and viability, it recommends the following:
- Discuss the process for identifying scenarios
- Determine the related inputs and adjust these for changes in circumstances and how these are monitored and evaluated over time
- Describe the actions management has taken to mitigate against such changes
- Provide an update about the status of the scenarios outlined and progress against these
- COVID-19 Risk: the FRC notes that disclosing the effects of the components of COVID-19 on other risks, rather than as a separate risk, may provide more useful information to users. COVID-19 was an event that triggered a cascade of other risks. As we move into the longer term, the longevity and nature of impact on the individual components of risk will be different. Therefore, what becomes important is understanding the impacts, the actions and the mitigations at this component level rather than 'pandemic risk' as an individual risk. The component risks associated with it (government regulation, lockdowns, effect on employees, securing funding and financing and the general economic impact, for instance) may extend to the medium and longer term. Hence, instead of an entity removing a principal (or emerging risk), the explanation of the risk can be tailored instead.
UK Public Company Advisory team
The White & Case UK Public Company Advisory (PCA) team advises UK public companies on their day-to-day legal affairs. In particular, the team engages with listed companies outside of their transaction cycle and provides advice across a range of matters, with particular expertise in corporate governance and corporate advisory. The team is experienced in company secretarial matters and regularly provides support to non-legal functions (as well as legal and company secretarial teams) within PLCs. Our clients range in size and maturity from newly listed companies to mature companies and from small-cap companies to global FTSE 350 companies.
The PCA team is part of the network of White & Case offices offering pubic company advisory services, with specialist practice teams in the US, Germany, Italy and France.
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