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.
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:
- 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;
- Sets outs IA member expectations for 2021; and
- 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.
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.
The 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:
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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.
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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.
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Post-employment shareholding requirements – companies should explain what mechanisms are in place to enforce shareholding policies once a director has left the company.
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.
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.
Some 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:
- whether they have made disclosures consistent with the recommendations of the TCFD and recommended disclosures in their annual financial report
- 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;
- 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
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.
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:
- 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.
- 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.
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.
What is legal privilege? Continue Reading
