Many listed companies are now starting to prepare for the 2021 annual general meeting (“AGM”) season and plan their next annual report.
This note summarises what we think will be some of the key agenda items for 2021.
Key Considerations at a Glance
- The relaxations afforded by the Corporate Insolvency and Governance Act 2020 (“CIGA”) enabling companies to hold hybrid or virtual meetings (irrespective of wording in their articles of association) have not been extended to cater for shareholder meetings held after 30 March 2021.
- Review articles of association – if required, can a hybrid or virtual shareholder meeting be held and are there adequate postponement/adjournment provisions?
- Ensure compliance with the new shareholder voting confirmation requirements.
- Engagement with the shareholder base is a key focus.
- Consider how to provide highly effective and clear communication before, during and after the AGM.
- Establish how stakeholders will participate in AGMs.
- Section 172 statements – explore how it can be more useful to investors and other stakeholders.
- Align with the guidance on shareholder expectations and the Principles of Remuneration published by the Investment Association.
- Expectation to adopt an approach to executive pay in 2021, in light of COVID-19, that is appropriate to the company and the specific impacts of the pandemic on the business.
- Be cognisant of the evolution of the use of environmental, social and governance (“ESG”) metrics in executive remuneration.
- Task Force on Climate-related Financial Disclosures (“TCFD”) – “comply or explain” regime (premium listed commercial companies).
- The Financial Conduct Authority (“FCA”) is considering moving towards mandatory TCFD disclosures, applicable to a wider set of listed issuers.
- Energy reporting will be required for the first time (streamlined energy and carbon reporting requirements).
- The spotlight will be on diversity reporting.
- FTSE 350 companies – meeting the Hampton-Alexander board gender diversity target. Other main market and AIM-listed companies – consider the board composition.
- The importance of ethnic representation at all levels of the workforce (including at board level).
- The Financial Reporting Council (“FRC”) has emphasised the need for clear and transparent disclosures in relation to the impact of the pandemic on a company’s business.
- Ensure the provision of high-quality forward-looking information in the current environment.
A Further Analysis
The relaxations afforded by the CIGA cover general meetings held on or before 30 March 2021. CIGA permits companies to hold hybrid or virtual shareholder meetings, or to limit the number of attendees to the required quorum, irrespective of the wording in their articles of association. Shareholders do not have the right to attend the meeting in person or otherwise, so companies can hold closed meetings. At the time of press, it is unclear whether such relaxations will be extended.
On 24 February 2021, ICSA published a guidance note on 2021 general meetings and the impact of COVID-19. The note sets out ICSA’s good practice recommendations reflecting the expectations of the Department for Business, Energy & Industrial Strategy, the FRC and major investor groups. It is recommended that companies should plan for holding an AGM based on the restrictions on gatherings at the time the AGM notice is sent out and at the place of the meeting, but should also consider contingency plans as the situation may change ahead of the meeting taking place.
Subject to its articles of association, a company can choose to hold its 2021 AGM in a number of different formats:
- as a closed meeting with the minimum number of participants required to form a quorum (as set out in its articles of association) in attendance at a physical meeting and voting, with the appointment of proxies, conducted by way of poll;
- as a hybrid meeting or partially digital/virtual meeting, enabling shareholders to attend either in person or virtually with proxy and electronic voting; or
- as a fully digital/virtual meeting – both board members and shareholders attend the meeting by using one, or a combination of, methods, such as webinars or conference calls where electronic voting is possible.
Take action – Review your articles of association and consider whether any amendments are necessary. Postponement and adjournments provisions are often overlooked and can prove useful particularly in light of uncertainty regarding how national lockdown measures may change over the coming months.
The FRC’s report AGMs: an opportunity for change, published in October 2020, stressed that good shareholder engagement is critical to maintaining the UK’s reputation for setting high standards for corporate governance. The report includes best practice guidance that companies should consider when planning and conducting further AGMs and explores splitting the AGM into two events. One event would be for presentations, Q&A and consideration of matters in the annual report, and the second for voting on resolutions raised.
The GC100’s discussion paper ‘Shareholder meetings – time for change?’ released in January 2021 centres on electronic participation at hybrid and virtual shareholder meetings and includes a draft code of best practice in connection with such electronic participation.
Take action – Ensure that your shareholders receive information on the venue, attendance and voting procedures in good time and in an effective manner. Consider how you can embrace technology to improve the AGM experience (for example, facilitating virtual interaction, Q&A functionality and the use of voting via an app).
New voting confirmation requirements came into force in September 2020 for traded companies. For votes cast on a poll electronically, the company must confirm to the casting voter, by electronic means, receipt of the vote as soon as reasonably practicable after receipt.
Take action – Liaise with your registrar in advance of your 2021 AGM to ensure that the necessary arrangements are in place.
Companies have often felt ambivalent about the content of the Section 172 statement and market practice is still evolving. However, the FRC has published tips on Section 172 statements and how to make them more useful. In terms of stakeholder engagement, boards should be mindful that investors want to understand what stakeholder management processes are in place (for example, how issues are escalated to the board) and why particular engagement methods were effective.
Guidance by the Investment Association is aimed at main market-listed companies but should be viewed by AIM-listed companies as best practice.
The Investment Association initially published guidance in April 2021, updated in November 2021, together with an addendum in February 2021 on shareholder expectations during the COVID-19 pandemic in relation to executive remuneration.
Such expectations include:
- no annual bonuses paid to executive directors for FY2020 or FY2020/21 if the company has taken government support or additional capital from shareholders;
- where dividends were cancelled or suspended in FY2019 or FY2019/20, this should be reflected in 2019 or 2020 remuneration outcomes;
- remuneration committees should not adjust performance conditions for in-flight annual bonuses or long-term incentive awards to account for the impact of COVID-19;
- an alignment between salary increases (if any) for executive directors and changes to the salaries of the wider workforce; and
- companies significantly impacted by COVID-19 should delay any proposal to make any substantial changes to their remuneration policies, structures or performance metrics until there is clarity on the future of the market.
The Investment Association’s 2021 Principles of Remuneration issued in November 2020 include the following changes from last year’s principles:
- remuneration reports will be “red-topped” (effectively recommending a vote against) if remuneration committees have not set out a credible action plan to align directors’ pension contributions to the majority of the workforce rate by the end of 2022 and the pension contribution received by an executive director is 15% or more of their salary;
- if a bonus opportunity is greater than 100% of salary, a proportion of the entire bonus should be deferred; and
- the principles reflect the range of non-financial performance metrics (strategic, personal and ESG) in variable remuneration;
In December 2020, the QCA published The Remuneration Committee Guide for AIM-listed companies. The guide highlights that effective shareholder communication is one of the most important roles of a remuneration committee and of its chair. In small and mid-sized quoted company space, shareholder engagement will require dialogue both with institutional shareholders and with private shareholders, and different engagement processes should be employed. The guide is wide-ranging and encompasses topics such as the practical aspects of running a remuneration committee, factors to consider in setting remuneration policy and reporting obligations.
Take action – The guidance provided above should be crucial in your consideration of how best to balance the need to continue to incentivise executive performance against the experience of shareholders, employees and other stakeholders.
TCFD – Premium listed companies must make disclosures for the financial years beginning on or after 1 January 2021 consistent with the recommendations of the TCFD or explain any non-compliance. In December 2020, the FCA confirmed its plans to issue a follow-up consultation paper in the first half of 2021 on proposals to extend the application of this rule to a wider scope of listed issuers, and consider strengthening the compliance basis.
TCFD-aligned disclosures will be subject to a colour top approach for the first time for companies in high-risk sectors and such companies ESG report will be “amber-topped” (showing a significant issue to be considered) if it does not address all the four pillars of TCFD (being governance, risk management, strategy, and metrics and targets).
Streamlined energy and carbon reporting requirements – For financial years beginning on or after 1 April 2019, quoted companies and large UK unquoted companies must report on energy usage and energy efficiency measures in addition to carbon emissions reporting.
Take action – Given the increased focus on ESG reporting, you may wish to consider how you can be “ahead of the curve” in terms of having suitable and effective reporting lines within your business to enable you to provide meaningful non-financial disclosures. This means that, to the extent that reporting obligations have not yet been triggered for your business, you will be able to make a seamless transition towards ESG reporting once you are legally obliged to do so.
The Hampton-Alexander review recommended a target of 33% of women on FTSE 350 boards and leadership teams by the end of 2020. Both ISS and Glass Lewis will generally recommend a vote against the chair of the nomination committee of a FTSE 350 company where this target is not met at board level.
The clock is ticking on the recommendations made by the Parker review committee that all FTSE 100 boards should have at least one ethnic minority director by 2021, with FTSE 250 companies required to do so by 2024. There is now an increasing investor focus on transparency around diversity policies.
The FRC’s end of year letter issued in November 2020 sets out its expectations and recommendations on reporting the impact of COVID-19. Investors expect reports to explain clearly:
- currently available cash and other resources;
- key actions that management has taken and is planning to take;
- the longer-term impacts of COVID-19 on the business model and strategy; and
- the board’s assessment of going concern and viability, as well as the methods, judgments and assumptions underlying the assessments.
Extensions of filing deadlines remain in force. For financial periods ending before April 2021, listed companies have an additional two months to publish their annual report and accounts and an additional month to publish half-yearly financial reports. In addition, public companies currently have nine rather than six months to file their accounts at Companies House and this extension expires on 5 April 2021.