This checklist is intended to help UK-listed companies keep abreast of key developments in the fast moving areas of corporate governance and narrative reporting.
It sets out our thoughts on some of the main areas of change during the last few months, as well as a list of key developments by area, including links to more detailed summaries of those developments.
Since the 2020 AGM season is fast approaching, it is not surprising that a number of developments in this checklist relate to disclosures that listed companies in particular need to make in their next annual reports. Those listed companies reporting on financial years beginning on or after January 1, 2019 will be reporting on their compliance with the 2018 UK Corporate Governance Code in full for the first time. A number of the Financial Reporting Council's (FRC) publications in this checklist are designed to assist those companies in making disclosures in relation to matters such as the contribution of the workforce, climate change and the source and use of cash, that both meet the expectations of investors and assist with compliance with the requirements of the 2018 Code. At the same time, institutional investors have updated their remuneration and AGM voting guidelines in order to highlight issues that they will be focusing on in 2020 annual reports and at 2020 AGMs.
Looking forward, it is clear that we can expect to see changes in relation to the structure of audits and the audit market given the publication of the recommendations of the Brydon review into the quality and effectiveness of audits, as referred to in this checklist. This follows a recent UK government consultation on recommendations made by the Competition and Markets Authority into the statutory audit and audit market, and recommendations from Sir John Kingham published earlier in 2019.
Annual review of UK Corporate Governance Code (January 2020): The FRC’s report assesses corporate governance in the UK by considering the quality of reporting against the 2016 UK Corporate Governance Code and also comments on FTSE 100 “early adopters” of the 2018 UK Corporate Governance Code. The FRC’s comments will need to be taken into account in future annual reports which comply or explain against the Principles and Provisions in the 2018 Code. See our summary of the key findings in the report here.
ESMA report on undue pressure on corporations (December 2019): ESMA’s report, which follows an earlier consultation, makes recommendations to the European Commission for action in areas including environmental, social and governance disclosures and institutional investor engagement. A summary of the report is here.
AIM good governance review 2019/20 (December 2019): This joint QCA and Hacker Young review focuses on key areas including the strategic report, stakeholder engagement, board dynamics, board expertise and succession planning. A summary of the review is here.
Recommendations for reform to help avoid future corporate collapses (November 2019): A letter from the BEIS Committee to the Secretary of State makes a series of recommendations on corporate governance, executive pay, bonuses and audit reform. A summary of the recommendations in the letter is here.
Updated practice aid on audit quality for audit committees (December 2019): The FRC has updated its practice aid which helps audit committees evaluate audit quality in their assessment of the effectiveness of the external audit process. It has been made more practical in its focus and is more clearly presented. A summary of its contents is here.
Principles-based guidance for board risk committees and risk functions in the financial services sector (December 2019): This guidance has been published by the Risk Coalition following a consultation exercise and is intended to be used by financial services organisations on a “comply or explain” basis. It provides principles to be applied and supporting guidance for both board risk committees and risk functions. A summary of its content is here.
Updated QCA audit committee guide (September 2019): This guide sets out the QCA’s views of best practice for audit committees of smaller listed and AIM companies, and it aims to assist audit committees and their chairs in being effective in their roles. It considers effective audit committees, roles and responsibilities, risk management and internal control issues, the relationship with the external auditor, the annual reporting cycle and the audit committee’s annual report. A summary of the guide is here.
Institutional investor guidelines and codes
PLSA’s 2019 AGM voting review (January 2020): In preparation for the 2020 AGM season, the PLSA has published its annual review of AGM voting results at FTSE 350 AGMs in 2019. This notes that resolutions relating to executive remuneration and to the election and re-election of directors are those resolutions tending to attract dissent levels exceeding 20 per cent. A summary of the review is here.
Updated Glass Lewis UK proxy guidelines 2020 (November 2019): Glass Lewis updates its UK proxy guidelines annually to incorporate global corporate governance best practice and reflect both market practice and standards of exceptional corporate governance. A summary of the key revisions made by Glass Lewis to their 2019 guidelines is here.
Updated ISS UK proxy guidelines 2020 (November 2019): Following a consultation it launched in October 2019, Institutional Shareholder Services has published its updated UK proxy voting guidelines for the 2020 AGM season. A summary of the changes introduced is here.
UK Stewardship Code 2020 published (October 2019): Following consultation, the FRC has published an updated version of its Stewardship Code to take effect from January 1, 2020. This places greater emphasis on the creation of long-term value and on considering beneficiary and client needs. It also expects signatories to work with regulators and industry bodies to identify and respond to the risk of market and systemic failure. A summary of the key changes in the 2020 Stewardship Code is here.
ICGN consultation on global stewardship principles (October 2019): The International Corporate Governance Network is consulting on amendments to its Global Stewardship Principles with a view to a revised draft of those Principles being approved in June 2020. A summary of certain changes proposed to the Principles is here.
Investment Association’s Principles of Remuneration 2020 (November 2019): In its annual revision of its Principles of Remuneration and open letter to the chairs of remuneration committees, the Investment Association considers remuneration structures, discretion on vesting outcomes, pensions, leaver provisions and pay for performance in particular. A summary of the amendments made to its Principles of Remuneration is here.
Guidelines on executive pensions for 2020 AGM season (September 2019): In preparation for the 2020 AGM season, the Investment Association has published new guidelines with regard to pension contributions for executive directors. These reflect the 2018 UK Corporate Governance Code and the Investment Association’s Principles of Remuneration 2020. A summary of the guidelines is here.
Assessment of progress in improving gender balance in FTSE leadership by Hampton-Alexander Review (November 2019): This is the fourth annual report assessing progress against the five key recommendations made by the Hampton Alexander Review in 2016 to increase the number of women in leadership positions in FTSE 350 companies. It notes that, despite progress, a step change is still needed to ensure sufficient women are in leadership roles. A summary of the report’s key findings is here.
Launch of “Lead the Change” initiative (September 2019): A Men As Change Agents board has been created by the UK government to support the Hampton-Alexander Review in increasing the percentage of women at executive level in FTSE 350 companies and to support the Parker Review in promoting ethnic minority directors. A summary of this initiative is here.
Report on workforce-related corporate reporting (January 2020): This FRC Financial Reporting Lab report sets out investors' views on how certain areas of reporting can best reflect the contribution of the company's workforce. It includes both questions for companies to consider in relation to the workforce in those areas and examples of useful disclosures that companies have made in their annual reports previously. A summary of the report is here.
Report on EU issuers’ use of alternative performance measures (APMs) (December 2019): ESMA has reported on issuers’ use of APMs and on compliance with ESMA’s 2016 APM Guidelines in their financial reports and ad hoc annual earnings disclosures. ESMA’s findings show that only a minority of issuers comply with all principles in the APM Guidelines so ESMA believes there is significant room for improvement. A summary of ESMA’s findings is here.
Annual review of corporate governance and reporting (October 2019): This annual review was published by the FRC with a letter to the audit committee chairs and finance directors of listed companies which reflects the review’s findings and highlights areas requiring improvement. Particular areas where there is still scope for improvement include forward looking information, the potential impact of known and emerging risks and opportunities on future business strategy, and the carrying value of assets and the recognition of liabilities. A summary of the review’s findings is here.
European common enforcement priorities for 2019 annual financial reports (October 2019): This ESMA statement sets out the European common enforcement priorities and other considerations for 2019 annual financial statements of listed companies. A summary of those priorities is here.
Report on disclosures by companies on the source and use of cash (September 2019): This FRC Financial Reporting Lab report considers how companies can answer questions about how the company generates cash and how it intends to use that cash. It also provides practical guidance on how companies can provide more information and context around their cash disclosures. A summary of the report’s contents is here.
Environmental reporting and climate change
Report on climate-related reporting and questions for companies to consider (October 2019): The FRC’s Financial Reporting Lab report considers the development of climate-related reporting and recommends that companies should apply the principles in the Task Force on Climate-Related Financial Disclosures (TCFD) framework when thinking about and reporting on climate change. With the report, the Lab has published a series of questions for companies to consider when preparing reports on climate-related information, in line with the TCFD framework expectations, together with examples of the developing disclosures in this area. A summary of the report and the core elements of climate-related disclosures and questions is here.
Feedback statement on climate change and green finance (October 2019): This FCA feedback statement follows an October 2018 discussion paper which sought views on potential FCA action in the areas of climate change and green finance, including climate-related disclosures in financial statements. A summary of the next steps to be taken by the FCA in light of responses to the discussion paper is here.
TEG report and handbook on EU climate benchmarks (December 2019 and September 2019): This report by the EU Technical Expert Group (TEG) on Sustainable Finance sets out recommendations on EU climate benchmarks with a view to helping boost investment in sustainable projects and assets. A summary of the report is here. The TEG handbook on climate transition bookmarks and benchmarks for ESG disclosures has also been published, see further here.
Audit and accounting
Results of Brydon review into quality and effectiveness of audit (December 2019): The independent review led by Sir Donald Brydon into the quality and effectiveness of the statutory audit has resulted in the publication of a final report which makes 64 recommendations. The government will need to consult on a number of the proposed changes set out in the recommendations and a summary of those recommendations can be found here.
Ethical and auditing standards revised (December 2019): Following consultation, the FRC has published a number of revised ethical and auditing standards which became effective on December 15, 2019. Further information can be found here.
Going concern audit standard strengthened (September 2019): Following a consultation, the FRC has published a revised standard for auditors on going concern in light of recent FRC enforcement cases and corporate failures where the auditor's report failed to highlight concerns about an entity's prospects. A summary of certain of the revised standard's requirements is here.