The Financial Conduct Authority (“FCA”) has launched a consultation on proposals that aim to aid investors in having better access to information regarding the diversity of listed company boards and executive management.
If progressed the proposals will see changes to the Listing Rules that would require a statement to be produced, on a “comply or explain” basis, as to whether the company has met certain targets for gender and ethnic diversity on their boards, as well as provide data on the make-up of their boards and management.
The proposed targets are:
- Boards comprise of at least 40% women.
- At least one of the senior positions on a board (Chair, CEO, CFO, Senior Independent Director) is filled by a woman.
- At least one member of the board is from a non-white ethnic background.
The disclosure and transparency rules are also proposed to be amended so that companies are required to ensure that existing disclosures on diversity address board committees and consider broader concepts of diversity (i.e. disability and sexual orientation).
The proposed new targets under the Listing Rules will not be mandatory, but the FCA hope they will be setting a positive benchmark for reporting against. If adopted, these changes would apply to both UK and overseas companies who have a premium and/or standard listing on the Official List. However, the disclosure and transparency changes would only apply to companies on a regulated UK market.
The consultation closes on 22 October 2021.
These proposals come off the back of the five-year view of the Hampton-Alexander Review and a recent update on the Parker Review. Many of the proposed targets could be seen as a logical expansion of the targets set out in each of those reviews or even a reinforcement of them. They aren’t dissimilar to measures that can be seen being introduced or proposed in other major markets.
We believe the motivation here goes beyond delivering more diverse representation or transparency for the investor community – the goal is for boards and businesses to really benefit from more diverse thinking and experience. We, like others, will look to see how the benefits are explained in forthcoming disclosures.
Future of Corporate Reporting – An Update
Late last year the Financial Reporting Council (“FRC”) issued a paper considering the future of corporate reporting (see our October newsletter). This paper considered how the annual report could be reimagined to better address the needs of all stakeholders, especially as it has been recognised that with an ever-increasing demand on companies to make disclosures of various kinds, the annual report has been twisted and stretched over the years, leading to a potentially confused document.
The paper proposed a radical overhaul which included unbundling an annual report’s existing purpose and its content into a group of interconnected reports.
Now that the comment period has ended, the FRC have published their feedback statement, following a review of the 75 responses. It’s reported that there was support for a new annual report model that both supported interests of investors and wider stakeholders, adopting a digital-first approach as well as the development of a reporting network.
There was some concern from respondents. In particular, this centred on the approach to legislating for the changes, the impact on investors of increased digitalisation and the potential impact the proposals may have on a company’s annual general meeting.
Progressing any proposals will take some time and effort by the market. The FRC will be establishing a few work streams to look into this area further. The work streams will include looking at policy development and transformation. While this is being undertaken, the Council have indicated that they will be issuing principles around clear communication in relation to corporate reporting and improving accessibility of information.
We believe that it’s right that markets such as the UK review their rules associated with corporate reporting, ensuring that they reflect the world in which we now live. With ever-increasing complexity in corporate reporting and the need for transparency on a wide range of topics, an increasingly digital reporting methodology would seem to be an appropriate direction of travel. Increasing the use of digital reporting and adopting more continuous reporting both allows for timely updates and better resource allocation, while introduction of such measures may cause some short term challenges its quite likely that in the long term it will be positive.
We’ve seen in our own business a rapid increase in the utilisation by investors of digital channels for consuming and accessing information. This would indicate that a transition to a more sustainable and environmentally friendly approach to corporate reporting could be achieved with little or no detriment to key stakeholders.
Concerns on Audit Reform
Seemingly to support their response to the Department for Business, Energy and Industrial Strategy (“BEIS”) consultation on Audit and Corporate Governance Reform, the Quoted Companies Alliance have commissioned a survey that identifies concerns and insights from companies.
Some of the findings include:
- Three-fifths of respondents believe that if the proposals are just adopted without amendment, they will have a negative impact on the growth of companies.
- Significant belief amongst companies and investors that the proposals may deter individuals from becoming directors of publicly quoted companies.
- Support for the current enforcement regime, believing it to be effective.
- 33% of respondents believe that the reforms will make the UK less attractive as a listing venue, however investors see that they would have a positive effect.
We eagerly anticipate the findings from the BEIS consultation on Audit and Corporate Governance Reform. We believe that consultations should be a meaningful exercise and would expect proposed reforms to take into account and fully consider the feedback from respondents, who possess a wealth of practical knowledge and experience. A balanced approach, achieved through effective engagement, will continue to solidify the UK as one of the most attractive market for companies to list, whilst the strong governance framework will continue to provide confidence to investors.
The Financial Conduct Authority made changes to the Listing Rules to accommodate greater flexibility for large Special Purpose Acquisition Companies (“SPACs”). The new rules came into force on the 10th August. These changes are being introduced to promote investor protection and aid in the smooth operation of UK markets.
The principal changes are:
- Introduction of a lower minimum amount a SPAC would have to raise during its initial listing.
- Introduction of an option to extend a 2-year time-limited operating period by six months without shareholder approval, so that the SPAC may conclude a transaction that is in its advanced stages.
Stakeholders & Decisions
The Financial Reporting Council (“FRC”) through their Reporting Lab have released a new report that looks at Stakeholders, decisions, and s.172 statements.
While providing examples of best practice, the report also lays out expectations of investors when it comes to a company’s disclosures on the impact of stakeholder engagement on decision making within the firm. Despite more companies increasing their reporting on stakeholder engagement, the Council’s report calls for better information on demonstrating how a company is listening and reflecting on those engagements.
The report makes a number of recommendations which include:
- With reference to the organisations business model and strategy, identify key stakeholders and their interests.
- Clearly describe the engagement processes used, including feedback and outcomes.
- Set appropriate and reliable metrics to monitor stakeholder engagement.
- Link all decisions to an organisation’s purpose and strategy.
- Explain how decisions are reached and how stakeholders were considered.
It is welcome that the FRC have started to provide some guidance on what issuers can be doing to develop the best possible reporting in connection with their s.172 obligations. This guidance will undoubtedly help issuers navigate the disclosure requirements. In our experience, ensuring s.172 is embedded within board discussions, papers and decision making throughout the year, will ensure that you have reference sources when preparing your annual report at the end of the annual cycle.
Independent Board Judgement
The Chartered Governance Institute UK & Ireland (“CGI”), formally the ICSA, have produced a booklet that provides a guide to directors on the 12 elements of independent judgement. The document both provides practical guidance with supporting examples to help interpret what independent judgement is in practice.
The 12 elements identified have been split into three sections consisting of four components which include:
- Give full attention to written and spoken material.
- Taking account of context (objectives, precedents, comparisons, legal and ethical matters).
Attitudes & Feelings
- Develop an informed view.
- Awareness of your own biases, agendas and emotions.
- Environments where diverse views are encouraged.
- Awareness of a need for consultation.
This booklet clearly provides some useful material for new directors and should be considered as a tool to assist with board member inductions. Additionally, we believe it may be interesting to see if it can be used to evidence a director’s continued independence post their 9 years on the board.
Virtual Meetings Post Pandemic
Nasdaq have published Optimizing the Virtual Boardroom, offering guidance for companies that are planning to continue to holder virtual board meetings as pandemic restrictions lift for improving the experience for directors, management and guests.
One of the key recommendations is that companies should build a virtual board table by freezing the screen in the meeting room so that all directors are continually visible, creating a virtual seating arrangement, building, and utilising professional backgrounds for all participants and enabling board materials to be accessible in full screen concurrently with participation in the virtual room.
Georgeson market update
Georgeson is a leading Corporate Governance advisory and Shareholder Engagement company, and part of the Computershare group
Global climate change dawdlers
The Financial Times reports that Global climate change laggards identified by MSCI emissions tracker.
“Analysis of more than 9,000 listed companies points to failures of disclosure and pledges on net zero emissions. The list of climate laggards is led mainly by state-backed publicly listed companies based in India and China, including Coal India, Shaanxi Coal and Chemical Industry and China State Construction Engineering, as well as the US-based oil refiner PBF Energy.”
Opportunity to review and correct
Responsible Investor reports that Proxy advisor’s independent oversight body ‘favours’ giving companies ‘opportunity to review and correct’ research.
“Inaugural report by Committee overseeing industry’s ‘Best Practice Principles Group’ prompts pushback from member Minerva on pre-disclosure.” The underlying report is available here. The BPP Group is also promoting a survey on Best Practice Principles for Shareholder Voting Research which can be submitted here. The deadline for submission is 20 August 2021.
The Financial times reports that Pay revolts at FTSE 100 companies were double that of last year.
“At least a fifth of investors voted against remuneration reports at 12% of AGMs this year.”
Pay linked to Diversity
Sky reports that Top City executives could see pay linked to progress on diversity.
“A joint paper by the sector’s regulators said they wanted to speed up progress against inequalities in areas such as gender and race after data showed evidence that is was becoming sluggish or in some cases even going into reverse.”