Market Update:

  • Audit & Corporate Governance Reform
  • Corporate Crime
  • AGM Guidance
  • Single Segment Listing Regime
  • Gender balance on company boards
  • Non-Executive Director Survey
  • Economic Crime (Transparency & Enforcement) Act 2022
  • Dormant Asset Consultation

Georgeson Update:

  • Georgeson 2022 Global Institutional Investor ESG Insights
  • Say on Climate Board Proposals
  • ESG in 2022

Market Update

  • Although there has been a delay in progress of the Audit and Corporate Governance reform agenda, the government have now published their response to their March 2021 consultation. Although most of the original proposals are planned to be implemented, there are a number which, on the basis of the feedback received, will be altered.

    These reforms will see the long-anticipated creation of the Audit, Reporting & Governance Authority (ARGA) as the replacement for the Financial Reporting Council. The new organisation will have a wider remit and increased powers in comparison to their predecessor.

    The reforms will also see the existing concept of a Public Interest Entity (PIE) expanded to include all UK incorporated companies that have both 750 or more employees and an annual turnover of £750m or more. AIM companies which meet this threshold will also fall within scope of the new definition of a PIE.

    A number of fundamental changes to the corporate governance and reporting landscape will be implemented, including:

    • Directors’ Duties
      ARGA will have power to enforce breaches in relation to audit and corporate reporting.

    • Internal Controls
      There will be a change to the Corporate Governance Code to require an explicit statement on the effectiveness of the company’s internal control systems. This was one of several options under consideration. An alternative had been the introduction of a statutory reporting and assurance regime similar to the US’s Sarbanes Oxley, which thankfully isn’t being progressed.

    • Dividends
      PIEs will be required to explain their long-term approach to the return of value to their shareholders and how the policy has been applied in the reporting period. The legality of any dividend proposed or paid in the year will need to be confirmed.

    • Reporting
      New reporting requirements applying to PIEs will include replacing the existing viability and going concern statement with a new statutory resilience statement, to be incorporated into the Strategic Report. Additionally, every three years there will be a requirement to publish an audit and assurance policy and an annual report on its implementation. Directors will also be required to report on steps taken to detect and protect against material fraud.

    Computershare’s view

    This is without a doubt the most significant development in Corporate Governance since 2016. Unfortunately, despite frequent calls to simplify and reduce the size of annual reports, we yet again see sizeable new reporting requirements added, with little taken away. That said, there were concessions from the government following the consultation including the welcomed removal of the proposed shareholder vote on the new Audit and Assurance policy, which would have been a likely protest vote target.

    Nonetheless, governance professionals should watch developments carefully, as the devil will be in the detail. As we see changes to the Code, Listing Rules and eventually the Companies Act the wording will be key. For example, whilst the government did concede on a triennial vote on the new Audit and Assurance Policy, it did state the Boards will have to ‘take into account’ shareholders views on the matter. Although nuanced, ‘take into account’ can have a noteworthily difference in meaning, in terms of engagement and impact on directors' decision-making process, then ‘have regard for’ which directors are familiar with from their s172 duty.

    This should be a prevalent item on the Agenda for all Audit Committees and the Board when the consultation for the amendment to the code is released in Q1 2023 and in the lead up to and during its implementation in 2024. Watch this space!

  • The Law Commission have published their recommendations for how the government can seek to improve legislation to ensure that companies can be effectively held to account for committing serious crimes.

    The review and subsequent recommendations were driven by concerns that the existing laws fail to adequately hold companies, especially large ones, to account, particularly for economic crimes.

    The Law Commission’s paper looks at 10 options for reform to corporate criminal liability, including assigning liability to companies for the conduct of their senior management, expanding the existing ‘failure to prevent’ offences into other economic crimes such as fraud and the introduction of new financial penalties and tougher reporting requirements.

    Computershare’s view

    Not many would disagree that improving accountability is a bad thing. Economic crimes are not victimless and can have significant impact on peoples’ lives. Ensuring consequences to act at as a real and meaningful deterrent, and that the onus is placed on companies to drive appropriate behaviour from senior management is vital to avoid repeats of previous failings. However, to what extent tougher reporting requirements will deter, prevent or catch corporate crimes from being carried out is unclear. Increased penalties, broader accountability and enhanced enforcement is key.

  • Since their first review into AGMs conducting during the 2020 AGM season which considered the impact of the pandemic on shareholder meetings and wider stakeholder engagement, the FRC have been working with key market stakeholders on several work streams to consider the future of the shareholder meeting.

    This week sees the release of the first part of that work, in the form of their AGM Guidance. It has been designed by the authors to recognise the key principle of flexibility in that all companies are different and that when it comes to shareholder and stakeholder engagement every company may do something differently.

    The FRC is encouraging companies to embrace the use of technology to modernise their engagement and the guidance lays out several practical actions that can assist with the approach.

    Computershare’s view

    We’ve worked closely with the FRC on this guidance together with the other market participants, while the guidance may not have come at the right time to support the majority of the 2022 AGM season, it is still none the less welcome to provide all companies regardless of their size guidance for the future. The guidance should be used to aid companies in driving the use of technology for their AGMs, other shareholder or even wider stakeholder meetings by developing appropriate channels of engagement, but also some of the key considerations that should be made prior to, during and following a meeting.

  • The Financial Conduct Authority have released a discussion paper which seeks views on potential reforms to the listing regime. The regulator is proposing, as part of their Primary Markets Effectiveness Review, to introduce a single segment regime for commercial companies. This will see the existing premium and standard segments merged into a single ‘UK Listing’.

    Companies would be subject to the same eligibility criteria and mandatory continuing obligations, but they can adopt supplementary obligations. Mandatory obligations would include adoption of the UK Corporate Governance Code; however, the controlling shareholder regime would become supplementary.

    Some within the market have previously expressed that moving existing premium listed companies to the new structure may not be appropriate. So the FCA is seeking opinions on whether such a change would be subject to a shareholder vote to determine whether the company should follow the mandatory and supplemental requirements, or just the mandatory ones. Existing standard listed companies may be permitted to remain where they are, and should they wish to move to the new regime, they would have to undergo an eligibility assessment.

    Computershare’s view

    Whilst we welcome innovation to help enhance the UK as a premier location for listing, any change needs to be carefully considered and worthwhile. We believe it prudent to consider these reforms alongside the Audit & Governance Reforms to ensure that a holistic approach is taken, as obligations and reporting go hand in hand.

    Companies should consider these proposals and how it could impact them and provide feedback as appropriate. The removal of supplementary obligations by shareholder vote is an interesting one. It will be interesting to see the thresholds required for these resolutions and the potential impact that this will have on the ordinary retail investor. If this does go ahead, it will be interesting to understand what, if any, changes companies would actually make. As this is a discussion paper we must wait and see on the outcome of the final proposals and whether this will drive real change or be more of a surface level label change. There will could be much to consider for your companies if this does proceed and so we would suggest companies closely monitor and start to consider potential wider impacts such changes to reporting, Articles of Association, etc.

  • The European Parliament and the Council have now confirmed their agreement in relation to a Directive that would seek to increase the gender balance on the boards of listed companies. Member states will have two years following its publication on the official journal to implement through national legislation.

    Currently, only a third of non-executive board members within Europe are women and this figure is even lower within executive positions. The Directive will set targets for EU listed companies on EU exchanges of 40% female representation within non-executive director roles and 33% among all directors. Companies will also be required to ensure that board appointment procedures are clear and transparent, and that applicants for roles are assessed objectively based on their own merits.

    Computershare’s view

    We have previously mentioned the importance of gender diversity and we welcome all further change to enhance this not just in the UK, but globally. It is worth highlighting that UK companies are already ahead due to the work undertaken by Hampton-Alexander, and we would further welcome improvements. It is important that Companies have due consideration of senior management and executive directors, and that diversity is present at all levels of the company.

  • The QCA in conjunction with YouGov have published the results of their recent survey that covered an array of subjects including salaries, working hours, what a NED delivers to a company.

    The report identified that some of the areas NEDs are provide value and offering strength to boards is with sector specific experience, accounting and governance knowledge, but that a majority of the responds feel that their boards lack expertise in the field of cyber and IT, followed by ESG.

    Other findings also identified that the number of hours a NED tends to work has dropped over the last few years and that companies who responded believed they should work more.

  • The Economic Crime (Transparency and Enforcement) Act 2022 is aimed at strengthening the UK’s fight against organised crime. The three components of the Act are amendments to UK sanctions legislation, changes to the Unexplained Wealth Order regime and the creation of a new public Register of Overseas Entities to disclose the beneficial owners who own UK property through non-UK entities.

    The amendments to the existing sanctions regime, which came into force on 15 June 2022, are likely to have the greatest impact for issuer clients. The Act made changes to the Policing and Crime Act 2017 so that civil monetary penalties can now be imposed on entities with no requirement that they had ‘knowledge or a reasonable cause to suspect’ that their activity breached sanctions. This creates, in effect, a strict liability regime for civil liability.

    OFSI has updated its enforcement and monetary penalty guidance in light of these changes, which should be read in conjunction with the legislation. The guidance includes matters that OFSI will take into account when assessing the seriousness of any breach and the actions which it ought to take as a result.

    Computershare’s view

    The changes to the legislation may drive a more risk-averse approach amongst UK businesses. Companies should consider their exposure and risk under the new legislation with their professional advisers and continue to review their compliance measures and relevant powers. Should clients have queries related to their register of members, they can contact their Client Manager in the first instance.

    Computershare has robust systems and procedures in place to ensure our compliance with sanctions legislation and all relevant laws and regulatory requirements.

  • As part of the roll out of the expanded dormant asset scheme the Department for Culture, Media & Sport have released a consultation seeking views on what social and environmental causes should see the benefit of the estimated £700m that the expanded scheme may generate.

    Under current legislation there are three broad themes under which money raised by dormant assets can in England be spent on. These are:

    • Youth
    • Financial Inclusion
    • Social Investment

    The consultation which is open until Sunday 9 October is considering if these themes remain the best use of the dormant assets that cannot be reunited considering the countries recovering from Covid and the ongoing cost of living crisis.

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Georgeson market update

  • ESG matters are top of mind for issuers and investors everywhere. In this complex and constantly evolving landscape, understanding how your top shareholders view these can be challenging. Georgeson interviewed 20 top institutional investors in the US, UK and Europe representing $30.5 trillion in AUM to discuss their ESG positions and methods.

    You can read the report here.

  • Georgeson has issued a client memo covering Say on Climate board proposals from January to mid-May 2022 for the UK and Europe.

    You can request a copy of the memo here.

  • Georgeson’s Hannah Orowitz and Daniele Vitale wrote about ESG in 2022 in the Ethical Boardroom’s Spring Edition.

    “Shareholders have increasingly held companies accountable for not sufficiently disclosing or demonstrating progress on a range of environmental, social and governance (ESG) issues in the past few years. Following the unprecedented support for environmental and social (E&S) shareholder proposals in 2021 and the successful unseating of directors by activists as a result of E&S concerns, ESG-related shareholders and board resolutions are at the top of investor’s agendas for the 2022 annual general meeting (AGM) season.”

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