FRC: AGMs – An opportunity for change
On October 6, 2020 the Financial Reporting Council (FRC) published the results of a review it has undertaken into the different ways companies held Annual General Meetings (AGMs) in the first half of 2020 and whether the approaches taken best served shareholders’ interests. Annex 1 to the review sets out best practice guidance that the FRC asks companies to consider when planning and conducting future AGMs as it is concerned to ensure that shareholder engagement is improved and made more effective. The FRC also believes technology should be used more to facilitate robust virtual interaction during AGMs so that shareholders are able to hold boards to account.
Findings of the review
The FRC found that 202 FTSE 350 companies held AGMs between March and August 2020 and, of these, 30 did not enable any shareholder engagement through Q&A before or during the AGM, while others provided facilities for on the day via audiocasts or webcasts and live voting. The FRC refers to Principle D and Provisions 3 and 4 of the UK Corporate Governance Code which set out good practice for stakeholder engagement, and comments that to achieve good governance in difficult times, boards should continue to engage with shareholders and other stakeholders, and even increase engagement activities if possible, as business models and long-term strategy come under increasing pressure.
The FRC’s review groups the 2020 AGMs reviewed into three broad categories, namely “closed” meetings with a quorum in attendance, meetings with some shareholder engagement and those with more shareholder engagement. It also analyses the processes employed for the submitting of shareholder questions at closed meetings and gives examples of poor practice (for example, a cap set on the number of characters allowed in a question or unrealistic timeframes set for the submission of questions) and good practice (for example, questions could be submitted electronically to a dedicated website, emailed or mailed and all questions and answers were put on the company’s website after the AGM). In addition, it considers meetings with some engagement from board members and shareholders, generally through hybrid or virtual meetings.
The review considers the benefits of and issues surrounding fully digital AGMs, as well as those associated with hybrid or partially digital AGMs. It also considers voting at meetings, noting that it is best practice for companies to make every effort to ensure that shareholders are able to vote following board presentations rather than prior to the AGM. It suggests that one way to achieve this would be to split the AGM into two events. The first (delivered via an audio or visual presentation with a facility for questions) would deal with presentations, Q&A and consideration of matters in the annual report. The second (a smaller event with a quorum) could be for voting on the resolutions. The FRC also suggests that engagement with shareholders would be improved if all shareholders are asked to provide the company with an email address when purchasing new shares so that electronic communications become the principal form of contact between companies and their shareholders.
Best practice guidance in Annex 1
Since the FRC expects 2021 AGMs to be impacted by COVID-19 in some way, it sets out guidance under a number of headings for companies planning their 2021 AGM and wanting to achieve effective engagement with shareholders even if they cannot attend the AGM in person. These headings are as follows:
- Preparatory steps to be taken now – for example, to consider whether technology could be used more effectively and whether the company’s articles need amending.
- Steps prior to the meeting – for example, providing more information in the notice of meeting about how to join the meeting electronically, including registration and verification information if needed, and how to ask questions prior to the meeting.
- Questions at the AGM – for example, uploading Q&A transcripts of all submitted questions onto the company’s website after the AGM, explaining how submitted questions are to be grouped if that is the case and, where possible, enabling questions and answers submitted at the AGM to be visible to members attending the AGM and ensuring shareholders have sufficient time at the AGM to submit questions.
- Webcast without voting – for example, providing information about how to download any specific software needed in the notice of meeting, and supporting audiocasts and webcasts with transcripts and other materials.
- Webcast with voting – for example, explaining how to vote prior to the meeting, with links to instructions and FAQs on voting in the notice of meeting, and informing shareholders (where it is possible) that votes can be changed during the meeting.
- Voting by proxy – for example, ensuring guidance on proxy voting is clear and issued in good time and, if voting can happen via an app on the day, the ability for shareholders to change their vote should be enabled.
The FRC is to establish a stakeholder group (including government, companies, investors and their representatives) to consider recommendations for legislative change and propose alternative means to achieve certain flexibilities while maintain the integrity and objectivity of the AGM. The FRC will also work with the Department for Business, Energy and Industrial Strategy (BEIS) on measures to ensure that virtual and hybrid AGMs can take place in 2021 and on measures to provide additional clarity on the interpretation of Sections 311 and 360A Companies Act 2006 (which are currently seen by many as providing uncertainty as to whether UK companies can hold purely virtual AGMs) so as to introduce flexibilities for all companies.
The FRC also urges proxy advisers and investors to support resolutions amending articles of association to introduce flexibilities into company meetings where clarity on the use of such flexibilities is built into the resolution and supporting documents.
(FRC, AGMs – An opportunity for change, 06.10.2020)
(FRC, COVID-19 disruption forces UK companies to embrace virtual AGMs, 06.10.2020)
FRC: Discussion Paper – The future of corporate reporting
On October 8, 2020 the Financial Reporting Council (FRC) published a Discussion Paper to explore ideas for changes to the system of corporate reporting with a view to making it more effective and engaging for those with an interest in the company. The FRC believes the traditional annual report is outdated and that a more agile approach, with a reporting framework that can be flexed to the nature of the business concerned, is now required.
The new framework discussed has been developed for public interest entities (which include UK listed companies), but the FRC believes other entities could apply it by considering the objectives of each report and its relevance for entities of different sizes.
Principles-based framework for corporate reporting
Aims of the new model being proposed include the following:
- To unbundle the existing purpose, content and intended audience of the annual report by moving to a network structure of multiple reports, with each report in the network having a distinct communication objective.
- To facilitate a more holistic approach to corporate reporting, with an overarching set of principles, recognising different reports and stakeholder needs. These involve system level attributes so as to ensure corporate reporting is coherent and informative (accessibility; connectivity; consistency; and transparency), report level attributes (fair, balanced and understandable; and true and fair) and content communication principles (brevity, comprehensibility and usefulness; relevance; company specific-information; and comparability).
- To move towards an objective-driven reporting framework around principles of effective communication, embracing the opportunities available through technology and a framework that is consistent with recommendations made by Sir John Kingman and Donald Brydon.
The reporting network
The FRC proposes three reports – the Business Report, the full Financial Statements and a new Public Interest Report. Additional “network reports” would sit alongside the Business Report and be accessible on a standalone basis. They could be a mixture of mandatory and voluntary reports.
- Business Report – its objective would be to provide information enabling users to understand how the company creates long-term value in accordance with its stated purpose. The FRC sees this as a concise Strategic Report, with the Strategic Report evolving into the Business Report which would be mandatory. Non-financial information would be included in it where it is material to meeting the objective of the Business Report. A Business Report would have to be prepared by medium and large companies.
- Network reports – these could provide more detail on information in the Business Report (for example, detailed information about operating segments), information for a specific purpose or audience (for example, investor presentations), standing data such as policy information which remains unchanged from year to year, or be additional periodic reports provided at different times, such as half-year reports and ad hoc announcements.
- Financial Statements – the full set of audited financial statements would be presented in a standalone mandatory network report.
- Public Interest Report – its objective would be to provide information so that users can understand how the company views its obligations in respect of the public interest, how it has measured its performance against those obligations and to provide information on future prospects in this area. The non-financial information in the Public Interest Report would focus on the positive and negative effects of the company’s activities on stakeholders and society i.e. the external outcomes of the company’s “societal impact”. The FRC envisages that it could incorporate existing mandatory reports such as gender pay gap, supplier payment and modern slavery reports/statements so that all related information is in one place. It sees it as akin to current sustainability reports “but with a greater degree of rigour”. The FRC proposes that only public interest entities would have to prepare this report.
Other issues considered in the Discussion Paper are the concept of “materiality”, with it being defined at both the report level and the network level, and the use of technology in corporate reporting.
Comments on the Discussion Paper and the particular questions it raises are requested by February 5, 2021.
(FRC, Discussion Paper – The future of corporate reporting, 08.10.2020)
FRC: Financial Reporting Lab Report – Video in corporate reporting
On October 8, 2020, the FRC’s Financial Reporting Lab published a report which looks at how FTSE 350 companies currently use video in corporate reporting and how it might be used in the future. It identifies four categories of video used currently (news-focused, insight-focused, aspirational and narrative-focused) and considers the effectiveness of their use and highlights interesting practice in each case.
Such videos are often used for results days, corporate news, analyst/investor days and AGMs. The report comments that those that worked well share a clear message (delivered with confidence and by a credible company voice such as the CEO), provide context for the video (for example, the half year 2020 results announced on a particular date), give deeper insight with more details and narrative rather than repetition of key metrics, and/or support other material with clear links to additional material such as full statements and transcripts.
These provide more detail on a specific aspect of a company’s business such as the business model, process, product, divisions and operations. Examples that worked well are those that provide real insight by providing detail and context and those that are not overly choreographed and feel more like a physical interaction, visit or meeting.
These look forward to a state the company would like to achieve so may be used to explain the business model, future visions and purpose. Those that work well focus on longer-term goals and aspirations so do not date quickly, those that engender trust by using senior leaders, employees or external partners to provide credibility, those that inspire, are business relevant and/or focus on themes and goals of interest to a wide range of stakeholders.
These tell a story about the company so have been used to discuss sustainability actions, corporate history, stakeholder and community actions. Examples that worked well are those that resonate with stakeholders as they expand and enrich their understanding of an aspect they know about, those that tell a connected story with a proper narrative flow and those that are appropriately leveraged across different communication channels, periods and audiences.
In some cases, the report provides tips on what to do, for example in relation to digital AGMs, and it also provides tips on what not to do in relation to particular sorts of videos. It notes that video is not being used to its full potential in corporate reporting but believes that innovation in video-based reporting may result from a longer-term regulatory outlook, increased use in the UK of digital reporting and virtual and augmented reality for communication, something the Lab is currently reviewing and will report on later in 2020.
(FRC, Financial Reporting Lab Report – Video in corporate reporting, 08.10.2020)
BEIS: Women make up more than a third of all board members across FTSE 350 for first time
On September 22, 2020 the Department for Business, Energy and Industrial Strategy (BEIS) reported that more than one-third of board members of the companies in the FTSE 350 are women, meeting the overall target set by the Hampton-Alexander review in 2016, but 41 per cent of such companies have not yet, individually, got 33 per cent female board representation. The Business Secretary has called on those companies to meet the target before the end of December 2020.
The data also shows that 18 FTSE 250 companies only have one woman on the board, with one still having an all-male board (although 152 companies had an all-male board in 2011).
(BEIS, Women make up more than a third of all board members across FTSE 350 for first time, 22.09.2020)