ICSA: 2021 general meetings and the impact of COVID-19
On February 24, 2021, ICSA’s Governance Institute published a guidance note that it has worked on with a working group comprising the City of London Law Society Company Law Committee and Martin Moore QC, with the support of the Department for Business, Energy and Industrial Strategy (BEIS) and the Financial Reporting Council (FRC). The guidance note is aimed at helping public companies plan for an AGM or other general meeting in 2021, particularly given that the possibility of holding a physical meeting with shareholder attendance is unpredictable and in any event susceptible to change, possibly at the last minute. The Institute notes that, given the Prime Minister’s statement on February 22, 2021 on the roadmap for easing lockdown restrictions, it appears likely that general meetings will be required to be held on a closed basis until at least May 17, 2021 and possibly until at least June 21, 2021.
The guidance note is divided into three sections as follows:
Section 1 – Analysis of legal issues
This section provides an analysis of certain legal issues and represents the views of the working group. It has been reviewed by BEIS and is supported by the FRC. It covers the following questions:
- How should companies approach general meetings in 2021?
- Can companies hold closed meetings after March 30, 2021?
- Do companies have to hold physical AGMs and general meetings?
- If the situation changes prior to the meeting, how can companies change the format or venue of the meeting as set out in the meeting notice?
- Should the possibility of a change to the meeting format be addressed in the documentation accompanying the meeting notice?
- Can companies hold a hybrid AGM or general meeting?
- What are the requirements for a valid hybrid general meeting?
- How should questions and answers be conducted at a hybrid general meeting?
- If a company’s articles specify that other places of meeting should be set out in the meeting notice, what should be done with respect to virtual participation?
- If hybrid meetings are permitted even without specific provisions in the articles, why should companies seek to introduce tailored provisions?
- What should companies recommend shareholders do in relation to participating in AGMs or other general meetings?
- How can companies help to ensure the AGM or general meeting remains COVID-19 secure?
- How will a quorate general meeting be held, if shareholders are not able to attend?
- What if the quorum requirement is more than two?
Section 2 – Good practice recommendations
This section of the guidance note sets out the Institute’s good practice recommendations reflecting the expectations of BEIS, the FRC and major investor groups. The key concern is the need to ensure that shareholder engagement should be as effective as it can be given the circumstances, while recognising that shareholder engagement can be undertaken in many different ways.
Areas covered in this section are as follows:
- Different meeting arrangements recognising that one size does not fit all.
- Other forms of participation where attendance by shareholders is not possible.
- Arrangements for electronic voting at a hybrid meeting.
- Proxy voting.
- Shareholder communication.
- Attendance of directors.
- Managing questions.
- Ensuring that the physical place of meeting is safe.
Section 3 – Sample wording extracts for the AGM circular
The following is included:
- Extracts for Notice of Annual General Meeting – ‘Closed’ physical meeting in a restricted local or national lockdown scenario.
- Extracts for Notice of Annual General Meeting – Hybrid meeting (with a ‘closed’ physical place of meeting) in a restricted local or national lockdown scenario.
- Extracts for Notice of Annual General Meeting – In circumstances where shareholders are to attend.
(ICSA: 2021 general meetings and the impact of COVID-19, 24.02.2021)
FRC: Improving the quality of ‘comply or explain’ reporting
On February 26, 2021 the Financial Reporting Council (FRC) published a document to help companies improve transparency when reporting against the 2018 UK Corporate Governance Code (Code) and advise them on how to achieve good quality explanations when departing from the Code. This follows publication in November 2020 of the FRC’s Review of Corporate Governance Reporting in which the FRC stated that it found that ‘tick-box compliance’ continues to be preferred over high quality reporting of good governance practice.
The FRC points out that the Code offers flexibility through its ‘comply or explain’ approach, which is designed to encourage companies to develop governance processes and practices that are the most suitable for their particular circumstances and to report them in a meaningful way. However, the FRC has found from its review that companies seem hesitant to disclose departures from the Provisions of the Code, with some annual reports lacking clarity or transparency in this respect. The FRC encourages companies to embrace the flexibility offered by the Code, consider their circumstances carefully and choose what is best for them, while clearly explaining any departures from the Code. It states that companies and shareholders should not favour strict compliance over effective governance and transparency.
Particular points made by the FRC include the following:
- Companies should offer clarity about the Provisions of the Code that they have departed from by making it easy for a reader to find this in their annual reports and by naming the Provision(s) in the compliance statement.
- Companies should report any departure from any Provision of the Code and provide full and comprehensive explanations. The FRC has noted a particular lack of transparency around the following Code Provisions: Provision 5 (Stakeholders’ interests and workforce engagement where both elements need to be complied with); Provision 19 (Chair tenure); Provision 38 (Executive pensions aligned with workforce); Provision 36 (Post-employment shareholding); Provisions 23, 26 and 41 (Describing work of nomination, audit and remuneration committees); and Provisions 40 and 41 (Engagement with shareholders and workforce on remuneration).
- Companies should provide clear and meaningful explanations for departures from the Code. The FRC says that good explanations should set the context and background, give a convincing rationale for the approach being taken, consider any risks and describe any mitigating actions, set out timescales for when the company intends to comply and be understandable and persuasive.
Appendix A to the document demonstrates how a company can improve its explanation for departure from Code Provision 9, concerning the independence of the board chair. The FRC notes that this Provision had the highest non-compliance rate from the companies in its sample, but none of the 16 non-compliant companies provided a good explanation.
Hampton-Alexander Review: Improving gender balance – 5-year summary report
On February 24, 2021, the Hampton-Alexander Review published its final report on progress made by FTSE 350 companies in reaching the voluntary targets set for women on boards and in senior leadership positions. The report reveals that the number of women on FTSE 350 boards has risen by 50 per cent in five years, and that all FTSE 350 companies reached the target of women making up at least 33 per cent of boards by the end of 2020. However progress in relation to the number of women appointed to executive committees and their direct reports still needs to be made, particularly among the FTSE 250. This is particularly the case in relation to the key functional roles of Finance Director, Chief Information Officer and the CEO.
In his final letter included within the report, Sir Phillip Hampton makes the following further recommendations:
- Companies should, as a matter of best practice, have a woman in at least one of the four roles of Chair, CEO, Senior Independent Director and CFO, and investors should support such best practice.
- Recognising the practical synergies on data gathering as well as the common policy rationale, the Department for Business, Energy and Industrial Strategy (BEIS) and the Government Equalities Office (GEO) should coordinate as much as possible the initiatives Government backs on diversity in business, most notably in respect of gender and ethnicity.
- Companies should publish a gender pay gap for their board and their executive committee.
- In order to maintain the progress championed by the Hampton-Alexander Review, BEIS and GEO should review with the Investment Association and other investor groups annually any voting sanctions (e.g. ‘Red Top’ advice to shareholders) applied to listed companies which fail to meet the gender targets they have set.
(Hampton-Alexander Review: Improving gender balance – 5 year summary report, 24.02.2021)
(Hampton-Alexander press release, 24.02.2021)
Investment Association: Good Stewardship Guide 2021
On February 24, 2021, the Investment Association published a guide which provides an overview of some of the key themes which are common to all UK-listed companies and on which shareholders will be focusing in 2021. This reflects issues set out in the Investment Association’s Shareholder Priorities for 2021 published in January 2021.
Shareholder priorities this year include the following:
- Climate change – This year, companies in high-risk sectors (sectors identified by the Taskforce on Climate-related Financial Disclosures (TCFD) as ‘potentially most affected by climate change’), which do not address all four pillars of the TCFD reporting framework will, for the first time, receive an ‘amber-top’ from IVIS, the Investment Association’s Institutional Voting Information Service.
- Diversity – This year, IVIS for the first time will issue an ‘amber-top’ to FTSE 350 companies that do not disclose either the ethnic diversity of their board, or a credible action plan to achieve the Parker Review targets of having at least one director from an ethnic minority background by 2021. Investors are also seeking greater progress on gender diversity, with companies whose board comprise of 30 per cent or less female directors receiving a ‘red-top’ – an increase on 2020’s 20 per cent threshold.
- Stakeholder engagement and employee voice – Investors are looking for companies to provide more detail on how their board responded to stakeholder views and took account of these views in its decision-making process. In relation to options for engagement with employees, investors expect companies to explain which option they have chosen and why it is the right one for the company and its employees.
- Transparency on audit quality – Investors expect audit committees’ reports to explain the steps taken to ensure a high-quality audit. If there has been a tender for the company audit then the committee should explain why it recommended a particular auditor and how it would provide a better quality audit.
- Executive pay – The Investment Association has already cautioned companies to treat their executives in line with the rest of the workforce and remain mindful of the pandemic’s impact on society. Remuneration committees have also been warned not to compensate executives for reduced pay as a result of the pandemic by adjusting this year’s remuneration, whether through ‘catch up’ awards or disproportionate salary increases. Investors also do not generally expect bonuses to be paid if a company has taken government or shareholder support – any company that choses to do so is expected to provide a clear rationale.
(Investment Association: Good Stewardship Guide 2021, 24.02.2021)
FRC: Operational separation of audit practices
In July 2020, the Financial Reporting Council (FRC) published principles for operational separation of the audit practices of the ‘Big 4’ audit firms. The FRC asked the firms to submit their implementation plans by October 23, 2020. The FRC has now reviewed these plans and discussed them with the firms individually and the firms can move to the next stage of implementation. As part of this process, the FRC has updated the principles.
Changes have been made to the principles as follows:
- To clarify that services provided to non-audited entities should be commissioned by those charged with governance at the entity or be assurance services for third party recipients.
- To increase the minimum proportion of revenue within the ring-fence that must be derived from audit.
- To confirm that the audit practice should not receive fees for introducing business to other parts of the firm and that partners in the audit practice should not be incentivised for sales passed to other parts of the firm.
The firms’ progress will continue to be closely monitored against the milestones in their plans and the FRC will provide feedback and challenge to the firms on their arrangements.
(FRC, Operational Separation Principles – Objectives, Outcomes and Regulation, 23.02.2021)
(FRC, Operational separation of audit practices, 23.02.2021)