The Investment Association – Shareholder Priorities for 2021

On 18 January 2021, the Investment Association (“IA”) published its shareholder priorities for listed companies in 2021.  The publication:

  1. Assesses the progress made by listed companies on the four areas identified by investors as critical drivers of long-term value at the time of publication of the shareholder priorities for 2020;
  2. Sets outs IA member expectations for 2021; and
  3. Describes the approach which its corporate governance research service, the Institutional Voting Information Service (“IVIS”), will take to analyse these issues for companies with year-ends on or after 31 December 2020. This includes a summary of the IVIS questions and colour top approach for 2021.

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Limit on Corporate Directors: Consultation Opens

The Department for Business, Energy and Industrial Strategy has opened a consultation on the Government’s proposed approach to restricting the use of corporate directors as part of its larger package to enhance corporate transparency, reform Companies House and fight economic crime in the UK.

On the one hand, corporate directors may be seen to weaken corporate governance by preventing individual accountability yet on the other, they may be a useful and legitimate option.

Business meetingThe law as it stands requires that only one director on a company’s board be a “natural” person and any number may be corporate directors. Provision to prohibit the use of corporate directors was made in the Small Business, Enterprise and Employment Act 2015 but this has yet to come into force. Accordingly, the consultation is looking at what exceptions to the prohibition on corporate directors should be introduced so as to achieve an effective balance between their legitimate and “smoke-screen” use.

  • The Government intends to introduce regulations that create a “principles” based exception to the prohibition. The principle is essentially that a company can be appointed as a director if:
    all of its directors are, in turn, natural persons; and
  • those natural person directors are, prior to the corporate director appointment, subject to the Companies House identity verification process.

Responses are due by 03 February 2021.


The Investment Association Publishes Views on 2021 Executive Remuneration

On 16 November 2020, the Investment Association (“IA”) published amendments to its principles of remuneration for 2021 and updated its guidance on COVID-19 and executive pay.

IA Principles

The covering letter to chairs of remuneration committees of FTSE 350 companies highlights the main (minor) changes to the IA principles which essentially seek to clarify investor expectations on the following issues:

  • The use of non-financial performance measures, in particular environmental, social and governance (“ESG”) related measures – on trend with companies increasingly incorporating material ESG risks into their incentive plans, companies will need to ensure ESG performance conditions are clearly linked to the company’s strategy. However, the IA’s view remains that financial targets should comprise the majority of any annual bonus.

  • Deferral of bonuses – where a bonus opportunity is more than 100% of salary, a proportion should always be deferred into shares, not given as cash.

  • Post-employment shareholding requirements – companies should explain what mechanisms are in place to enforce shareholding policies once a director has left the company.

Approach to Pensions in 2021

The theme remains strongly one of alignment between pension contributions for the executive directors and those available to the majority of the company’s workforce. A credible action plan will be required to align the pension contributions of incumbent directors to the majority of the workforce rate by the end of 2022. Alignment with new directors’ remuneration will also be required. Non-alignment may result in a Red Top on both the remuneration policy and remuneration report in 2021.

Executive Pay and COVID-19

The IA has updated its April 2020 guidance on executive pay in the midst of the pandemic. The main thrust is to strike a balance between significant demands on executives during these testing times but to be mindful not to isolate executives from the impact of COVID-19 in a manner that is inconsistent with the approach taken to the general workforce.

Coins and pen over chart

The resounding message is again one of alignment between executive remuneration and the overall experience of the company, its shareholders, employees and other stakeholders. So, where a company has raised additional capital from shareholders, or has taken government support through the Job Retention Scheme, government loans or similar financial support, shareholders expect this to be reflected in executive pay and generally would not expect the payment of any annual bonuses for FY2020 or FY2020/21, unless there are truly exceptional circumstances.

As a result of COVID-19, many employees were furloughed, asked to take pay-cuts or made
redundant. Remuneration Committees need to be ever more mindful of this wider employee context and the impact that it has on pay for the executive directors. In this context, shareholders expect greater transparency about the impact of government measures on remuneration outcomes. Companies should confirm in their Remuneration Committee Chair’s statement that they have not adjusted performance targets during the year and should not be compensating executives with higher variable remuneration opportunity in 2021 for lower remuneration received in 2020 due to the pandemic. And, as regards long term incentive plans,  Remuneration Committees will be expected to use their discretion to reduce vesting outcomes where performance outcomes are not consistent with overall company performance or windfall gains have been received.

The Future of Annual Reporting?

The FRC have published a discussion paper in which they question whether the traditional concept of the annual report remains fit for purpose. Arguably, annual reports are too long, impenetrable and fragmented. In looking at the future of corporate reporting, the challenge is how to balance the need for more concise reporting against demands for more transparency.

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Stewardship Code 2020: Early Reporting

The Financial Reporting Council’s ambitious UK Stewardship Code 2020, effective 1 January 2020, required a new mandatory annual Stewardship Report to be published. This is challenging for investors as it requires reporting on stewardship activities actually undertaken and the outcomes actually achieved, not just stating intent or policy.

Business meetingSome institutions have already reported early and the FRC has published a report, “Review of Early Reporting“, which scrutinises those reports and concludes that whilst there are some early good examples of reporting, more needs to be done.

Set that in the context of growing societal expectations and regulatory demands that investors be engaged stewards of the assets entrusted to their care, and that environmental, social and governance issues, including climate change, are included in their stewardship and investment decision making. It is clear that in relation to all things ESG (including remuneration) related, investors will increasingly engage more actively when challenging the companies they invest in as they will need to be able to report on specific behaviours with practical examples to evidence their compliance with the Stewardship Code.

FCA Consultation on Climate-Related Financial Disclosures For 2021

The Financial Conduct Authority’s consultation paper (CP 20/3) on climate-related disclosures proposes that a new listing rule will take effect for financial accounting periods beginning on or after 1 January 2021.

There is a growing ground-swell around disclosure of all environmental, social and governance (“ESG”) related matters as issuers and investors become increasingly engaged with these issues. The FCA is not proposing to mandate disclosure at this point given that issuers’ reporting practices are still evolving, however this is an area of disclosure that will predictably only expand over time. Indeed, the FCA anticipates that all listed issuers will be disclosing in accordance with the Financial Stability Board’s Task Force on Climate-related Financial Disclosures (“TCFD”) recommendations by 2022.

The proposed new Listing Rule will require premium listed companies to include a statement in their annual financial report setting out:

  1. whether they have made disclosures consistent with the recommendations of the TCFD and recommended disclosures in their annual financial report
  2. where they have:
    • not made disclosures consistent with some or all of the TCFD’s recommendations and/or recommended disclosures; or
    • included some or all of the disclosures in a document other than their annual financial report,
    • an explanation of why;
  3. where in their annual financial report (or other relevant document) the various disclosures can be found.

Guidance on the proposed new disclosure requirements (through a draft new Technical Note) is also set out in the consultation paper.

UK IPO Trendwatch – the Outlook for Autumn 2020

Deal volumes over the past 18 months

Looking back at IPO volumes in 2019 compared to 2018, we saw a 51% decrease in the aggregate number of IPOs across both the Main Market and AIM which is perhaps unsurprising given the uncertainty surrounding Brexit and concern stemming from global trade tensions.

IPO activity levels since 2015

IPO activity levels since 2015

During the first quarter of 2020, as COVID-19 began to impact, we saw a handful of publicly announced postponements in relation to IPO transactions. No doubt behind closed doors a multitude of similar decisions have been made.

Whilst the financial markets grappled with economic lockdown, the second quarter of 2020 has seen IPO activity nearly reach freezing point with IPO volumes down 81% compared to the second quarter of 2019.  During this time, AIM did not see any new issuers on-board. The Main Market saw the listing of two VCTs (Blackfinch Spring VCT plc and Puma Alpha VCT plc) together with China Pacific Insurance (Group) Co., Ltd., operating in the Chinese insurance sector with its shares already listed on the Hong Kong and Shanghai Stock Exchanges. Now we are at the mid-way point of the third quarter of 2020 and we have gradually seen the easing of global lockdown restrictions, AIM has welcomed Elixirr International plc (a management consultancy) and AEX Gold Inc (a special purpose vehicle focusing on the exploration and development of gold in Greenland) to its market.

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Shareholder Rights Directive: New Regulations to Provide Confirmation of Shareholders’ Votes

The Companies (Shareholders’ Rights to Voting Confirmations) Regulations 2020 (“Regulations”) have been published and are due to come into force on 3 September 2020. The Regulations complete the UK’s transposition of Chapter 1a of EU Directive 2017/828 (amending Directive 2007/36/EC), or more commonly known as the Shareholder Rights Directive.

New rule

The Regulations apply to “traded companies”, which is defined in section 360C of the Companies Act 2006 (“Act”). Companies which have their shares listed on the Official List of the Financial Conduct Authority and traded on the Main Market of the London Stock Exchange will satisfy the definition. The Regulations will require traded companies to comply with additional obligations, which will be added into the Act as sections 360AA and 360BA:Ballot Box

  1. Where a vote is cast on a poll by electronic means, a traded company must send a confirmation of receipt of such vote to the shareholder who casts the vote. This also includes a proxy or a representative (as authorised by section 323(1) of the Act) who casts the vote in the shareholder’s place.
  2. A shareholder can request information from the company to enable the shareholder to determine that their vote at a general meeting has been validly recorded and counted. A company must comply with such a request if:
    • The shareholder makes a request for the information no later than 30 days from the date of the general meeting; and
    • The member has no other reasonable means by which to determine that their vote has been validly recorded and counted by the company.

Practical implications
Companies which are “traded companies” for the purposes of the Act must ensure that they have adequate processes in place before the Regulations come into force in September. It is suggested that a system which provides automated tailored receipts for a vote cast by a shareholder/proxy/representative is implemented. This is because any confirmation of receipt of a vote must be provided to the relevant shareholder as soon as reasonably practicable.

It is also suggested that a duplicate copy of such receipt is retained by the company, with an electronic record of how the vote was recorded and counted, maintained and kept. This is essential as upon receipt of a shareholder’s request, confirmation that their vote was recorded and counted must be provided within 15 days beginning with whichever is the later of the first working day after the day on which the request is received by the company or the result of the poll is declared.

Legal Privilege In The Current Climate and How Not To Lose It

Company directors will deal regularly with questions and issues that require some legal input, whether that comes internally or from private practice. Most will be aware that some legal communications attract privilege but less well-understood are the myriad pitfalls that can cause an inadvertent waiver of that legal protection. The post COVID-19 environment sees an ever-increasing volume of work, including board meetings, being carried out remotely by email and telephone or video conference, regulators aggressively policing company conduct and boards needing to justify corporate actions in dealings with suppliers, customers and employees. In times like these it is more important than ever that appropriate steps are taken to ensure that legal privilege is obtained and maintained where possible and appropriate to do so.

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International Corporate Governance Network – Governance Priorities During the COVID-19 Pandemic

On 23 April 2020, the International Corporate Governance Network (ICGN) published an open letter, setting out governance priorities aimed at executive management, board directors and investors, which aims to help companies maintain viability during the COVID-19 outbreak and its aftermath.

The ICGN letter advocates that board directors and investors have a “shared interest” and therefore a “shared responsibility” to promote the success of companies in a way that “preserves and enhances long-term value, contributing to strong economies and healthy societies”.

Prioritise employee safety and welfare while meeting short-term liquidity requirements to preserve financial health and solvency

It is recommended that companies should treat the workforce “equitably” in order to ensure the health and well-being of all staff. Where possible, companies should seek to avoid redundancies and offer paid sick leave and medical benefits for furloughed workers. Enhanced sensitivity should be given towards female workers, who often make up a higher proportion of part-time and low-income positions compared to male counterparts, and who are often considered first for redundancy.

Pursue a long-term view on social responsibility, fairness and sustainable value creation and publicly define a social purpose

Executive remuneration polices should reflect the overall workforce experience, therefore a company’s long-term financial health must take precedence over bonus considerations. Remuneration policies should aim for an “equitable” treatment of ordinary staff with that of senior executive management.Stock Market

The ESG agenda is still to be front and centre. Ultimately, COVID-19 presents a risk that needs to be prioritised immediately, however investors should continue to encourage boards and executive management to ensure that the effects of climate change are “identified, monitored and managed” in their business models and risk management systems.

Take a holistic and equitable approach to capital allocation decisions, considering the workforce, stakeholders and providers of capital

Companies should ensure that capital raising and dividend payments fully reflect the companies’ performance and business model.

Some companies will need to raise additional capital in order to continue business operations. To assist with this, The U.K.’s Pre-emption Group has recently amended its normal stance, encouraging investors to support equity issues that could be 20% dilutive, up from the current recommended limit of 10%. While the ICGN supports regulatory efforts to enable a more efficient approach to capital raising, the preference is for any new capital raisings to be offered to existing shareholders first to minimise dilution to shareholdings.

In respect of dividends, companies that face a downturn in business activity may need to reduce or completely suspend dividend payments. While we expect dividend payments to fall, ordinary pensioners and long-term savers should not be forgotten about. And, if companies have the ability to continue dividend payments, they should pay them, providing it is in the long-term interests of the company.

From an investors’ perspective, there should be an expectation that capital allocation decisions will be made in accordance with the long-term interests of the company. Companies should look to the level of capital reserves and balance sheet resilience.

The ICGN letter strongly encourages investors who wish to benefit from current market volatilities to do so in a responsible manner.

Communicate comprehensively with all stakeholders to instill confidence and trust in a company’s approach to build resilience into strategy and operations

Throughout the COVID-19 pandemic, many companies are holding their Annual General Meetings virtually. My colleague, Hannah Crosland, has provided a useful insight into the implications of COVID-19 on AGMs (the link can be found here).

Investors may attempt to seek assurance of a company director’s competence in performing their duties. Thus, it is important that companies continue to report on their current position. The ICGN letter confirms that “investors and auditors are focusing more attention on cash flow statements, risk scenario planning and capital allocation approaches”. In addition, investors should be “flexible” and supportive to companies while ensuring that companies’ activity is monitored for deviation from corporate governance standards.

Social, economic and environmental governance factors should be upheld in order to promote the company’s long-term success. Directors should ensure that capital allocation and distribution decisions are sustainable and in the best interests of the company. In other words, we are all in this together, be fair and take the long view.

My colleague, Matthew Kirk, has written an interesting article on what considerations directors should take into account when making decisions at this time (the link can be found here).

In response to the COVID-19 pandemic, we have set up a resource hub to assist businesses during these challenging times and this can be accessed here.