ShareAction: Fit-for-purpose? The future of the AGM
On January 18, 2020, ShareAction published a report by a working group it established to look at the purpose of the Annual General Meeting (AGM) of the future. The report sets out recommendations for companies, shareholders, stakeholders and policy-makers with a view to making the AGM of the future a key component of corporate governance and investor stewardship.
The working group’s vision for the new purpose of the AGM is that it is a forum for stakeholders, companies and shareholders to engage in transparent, accountable communication, which crystallises how a company’s board is fulfilling its organisational purpose and meeting its Section 172 Companies Act 2006 requirements, and helps participants to find common values and a shared vision with which to take the company forward to tackle the challenges it faces.
The report sets out a number of recommendations, including the following:
Companies and investors at the AGM of the future
In terms of recommendations for asset owners and managers, and recognising that there is no “one size fits all” solution, the report suggests:
- In determining policies for which AGMs to attend, investors will consider the top 10 companies they hold in terms of market value, companies where they hold more than 3 per cent of issued share capital and those where they have significant ESG concerns.
- Investors’ websites will list the AGMs they attended, their rationale for attending and their participation.
- Indirect investors (including pension savers) will be able to attend and participate in AGMs.
- Regulators will have clear guidelines as to their expectations of institutional investor AGM attendance policies, monitor compliance and take action in cases of insufficient compliance.
Stakeholders at the heart of the AGM of the future
The AGM of the future will enable a wider range of stakeholders affected by a company’s activity to attend its AGM. The report recommends that a core list of stakeholders will have the right to register as stakeholders of a particular company, with that list being maintained by the company on its website and a mechanism put in place to deal with disputes around registration (a Stakeholder Ombudsman is suggested as a possibility). Stakeholder groups eligible to register will include:
- Workers of all types (this would include those who are self-employed, those employed through third parties, contractors and those in supply chains) and trade unions and similar bodies representing workers.
- Suppliers, including supplier trade associations.
- Communities directly affected by corporate activity, including those affected locally (in a geographical sense), those affected globally (for example, as a result of the impact of corporate actions on climate change) and those historically or continually oppressed by the company’s actions.
- Communities indirectly affected by corporate activity, including those affected at great geographical and temporal distance.
- Customers, including consumer associations, and product users in relation to the company.
A rhythm of engagement and communication throughout the year
The report suggests that elements of the current one-day AGM would be transferred into outputs spaced throughout the year as follows:
- Process of engagement with registered stakeholder groups throughout the year – Registered stakeholders will have the right to meet (in person or by video call) and have a substantive discussion with board members at least annually and in best practice cases shareholder and stakeholder events will be held throughout the year.
- Pre-AGM Q&A – Stakeholders and shareholders will be able to submit questions once the annual report is published and the questions and responses will be published on the company’s website prior to the AGM.
- The AGM – Shortly after the AGM, companies will post a summary of the AGM discussions on their website with a list of action points.
- Annual shareholder vote – Voting by shareholders on resolutions will take place after the AGM and voting only opened once the AGM event summary and action points are on the company’s website.
The report also includes recommendations relating to access of information and the annual shareholder vote. In relation to information, it is recommended that annual and sustainability reports talk more about the challenges companies face. Section 172 statements could report on meetings with stakeholders and stakeholder groups could write a short statement responding to the company’s account of points relevant to them. That statement could go in the company’s annual report or on its website. In relation to shareholder voting, the report recommends a re-shaping of the resolution agenda , for example, to incorporate recommendations of the Brydon Review which could be voted on as standing items.
The AGM itself – the culmination of a year of engagement
The report sets out a view on the structure of the agenda for the AGM of the future. This will begin with a presentation of the annual report, focussing on the Section 172 statement and an update on the board’s annual learning review (an update on key issues and discussion points from the previous AGM). Stakeholders and shareholders can then ask questions, there may be presentations by investors and other stakeholders as well as the company, and this will be followed by an anonymised poll (non-binding) on whether the company has fulfilled its Section 172 obligations in the past year. The AGM will finish with a free discussion between participants.
- Hybrid AGMs taking the positive aspects of virtual and in person AGMs.
- Regulation and guidance to support hybrid AGMs.
- Support from companies to enable participants to attend virtually if they do not have the means to do so.
ShareAction hopes the report will inspire regulators, investors, stakeholders and companies to take practical short-term steps for the 2021 AGM and then investigate longer-term changes to create the AGM of the future.
(ShareAction: Fit-for-purpose? The future of the AGM, 18.01.2021)
Investment Association: Shareholder Priorities for 2021
On January 18, 2021, the Investment Association published a document setting out investors priorities and expectations for 2021. It also looks at progress made by companies in 2020 on the four areas identified in the January 2020 priorities document as critical drivers of long-term value for companies (responding to climate change, audit quality, stakeholder engagement and diversity). It notes that the importance of these issues has not waned through 2020 or as a result of the COVID-19 pandemic, and sets out how IVIS, the Investment Association’s corporate governance research service, will analyse these issues for companies with year-ends on or after December 31, 2020.
Responding to climate change
In 2020, the Investment Association called on listed companies to make climate-related disclosures in line with the four pillars recommended by the Task Force on Climate-related Financial Disclosures (TCFD). In 2021 investors will expect all listed companies to report in line with TCFD. Companies should also consider and communicate whether their business activities are consistent with achieving net zero emission by 2050 or earlier and how they plan to make the necessary emission reductions. Companies will also be expected to identify the directors or committees that are responsible for the oversight and management of the company’s response to climate change and TCFD-aligned disclosures will be subject to a colour top approach by IVIS for the first time for companies in high risk sectors as specified in the document.
Accounting for climate change
Investment Association members expect companies to reflect climate-related matters in their annual report and accounts and state that they should consider using the framework and educational guidance provided by the IASB and the Investor Expectations for Paris-aligned Accounts published by the Institutional Investors Group on Climate Change (IIGCC).
Directors should affirm that the financial impact of climate-related matters has been incorporated into the company’s accounts by providing a statement in the annual report that the directors have considered the relevance of the risks of climate change and transition risks associated with achieving the goals of the Paris agreement when preparing and signing off the company’s accounts. This statement should reference where the company has adjusted critical assumptions and estimates to reflect climate-related matters, provide a sensitivity analysis and confirm the consistency between the narrative reporting on climate-related matters and the accounting assumptions and judgements, or an explanation of any divergence. Audit committees should ensure that material climate-related matters are being properly considered in the annual report and accounts and by the external auditor and disclose the steps that were taken to ensure this.
In 2020 the Investment Association called on audit committees to clearly disclose how they ensured that their auditors had delivered a high-quality audit. Companies continue to be expected to meet these expectations and demonstrate how they have judged the quality of the audit they have received. If little progress is made in this area in 2021, IVIS will introduce a colour top approach in 2022.
The Investment Association acknowledges that the COVID-19 pandemic has significantly impacted companies and their stakeholders and that COVID-19 will be a common issue which all companies will have had to address in 2020. Investors will expect companies to make quality disclosures outlining the approach taken to engaging, communicating and supporting the company’s stakeholders during the disruption caused by the pandemic and this should include how the board reflected the views of their stakeholders in key decision making.
In relation to ethnic diversity, the Investment Association states that significant progress is needed with investors expecting companies to take actions to improve the ethnic diversity of their boards. This should include greater consideration of how the board reflects their employee base and the consumers and communities they serve. It also states that a company’s credible action plan to reach the Parker Review target (which requires FTSE 100 companies to have at least one director from an ethnic minority background by 2021) should be communicated to investors. It also notes that shareholders would benefit from disclosure of the ethnicity breakdown of the executive committee and their direct reports, aligned with the Change the Race Ratio initiative.
In relation to gender diversity, the Investment Association notes that pressure on those companies that are still falling short of the Hampton-Alexander targets will be maintained and those companies should take action now. Companies should continue to identify and disclose their targets for improving the gender diversity of their boards and leadership teams and the timeframe in which they will seek to achieve those targets. Progress against these targets should also be disclosed, as should the gender composition of the executive committee and their direct reports.
(Investment Association, Shareholder Priorities for 2021, 18.01.2021)
ICSA: Review of the effectiveness of independent board evaluation in the UK listed sector
On January 20, 2021, ICSA’s Chartered Governance Institute released the findings of its review into the effectiveness of independent board evaluation in the UK listed sector. The review, which was carried out at the request of the Department of Business, Energy and Industrial Strategy (BEIS), assessed the quality of evaluations and has identified a number of ways in which board evaluation might be improved.
In terms of board performance reviews conducted by an independent reviewer, the Institute sees the reviewer’s role as being to identify any issues the board should consider. The board’s role is to take appropriate action to address those issues and the role of shareholders and other stakeholders is to hold the board to account for the effectiveness of those actions. As a result the report includes recommendations for boards and reviewers.
The Institute comments that external board reviewing is still developing and so over-prescription in the way independent reviews are conducted could deter innovation and competition. External board performance reviews at the top end of the listed sector are also becoming more competitive and for all these reasons the Institute believes that actions expected of board reviewers and companies as a result of the report should be voluntary, at least initially, with the effectiveness of those actions being kept under review by the Financial Reporting Council (FRC) and BEIS.
The report includes a series of recommendations for the FRC, BEIS, board reviewers and listed companies, as well as an assessment of current practice. Alongside the report, the Institute has also published:
- A voluntary code of practice for providers of external board performance reviews to FTSE 350 companies based around four broad topics: competence and capacity; independence and integrity; client engagements and client disclosure. Reviewers are asked to commit publicly to the standards in the code by becoming signatories.
- Voluntary good practice principles for listed companies. Companies are encouraged to apply these principles when engaging an external board reviewer. The Institute considers that the principles reflect existing good practice.
- Guidance for listed companies when reporting on their annual board performance review. The guidance is designed to assist companies with their reporting obligations under the UK Corporate Governance Code.
The Government has said that it welcomes the Institute’s review, will consider their recommendations carefully, and set out more details on next steps at a later date.
(ICSA: Review of the effectiveness of independent board evaluation in the UK listed sector, 20.01.2021)
(ICSA, Board evaluation review published today shows there’s room for improvement, 20.01.2021)