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.

COVID-19: The Investment Association’s Position

The Investment Association (IA) has written to the chairs of FTSE 350 companies setting out the position of the IA in relation to certain issues which have arisen due to the COVID-19 pandemic. The letter emphasises the IA’s position as a representative of long-term investors and clarifies the views of its members as regards the need to support businesses which, although impacted by the current situation, remain fundamentally capable of delivering “sustainable long-term value for savers and investors”.

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AGM (Coronavirus) Season 2020

The 2020 AGM season is upon us at a time of the fast escalating coronavirus pandemic. This briefing looks at the implications of coronavirus on AGMs.

Public companies must hold an AGM within six months of their financial year end. By their very nature, AGMs entail people travelling to gather in one place. This raises questions over possible government bans on travel and limits on the number of people who may gather in any one place. Also, the venue for the AGM may have to close at short notice for deep cleansing. This all presents companies with significant uncertainty around planning the AGM and deciding what contingency plans are available.

How a company decides its approach to its AGM will in part depend on where it is in its reporting cycle and how it perceives the pandemic playing out.

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LR, DTR, Prospectus Regulation and MAR: FCA consultation on climate-related and other ESG disclosures

Climate change is clearly something which is at the forefront of the minds of communities and governments. Increasingly, climate change and its impacts are being considered by companies and investors alike, as they become more aware of the potential impact – both directly and indirectly – that climate change may have on the value of assets and prospective profits. In the US for instance, the Sustainability Accounting Standards Board has assessed that climate change is material for companies in 72 out of 79 industries, which equals 93% of the US equity market.

Equally, as the UK seeks to turn to a low-carbon economy, investors are becoming increasingly interested in committing their money to companies and projects that will support this transition.

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