Corporate governance review
FRC: Coalition Group to develop new corporate governance principles for large privately-owned companies
In January 2018 the Financial Reporting Council (FRC) and the Department for Business, Energy and Industrial Strategy (BEIS) both announced that James Wates CBE, Chairman of the Wates Group, will chair the Coalition Group to develop new corporate governance principles for large privately-owned companies. The Coalition Group, of which the FRC is secretariat, has been established in light of the Government’s response to its Green Paper consultation on corporate governance reform published in August 2017.
The Coalition Group comprises the FRC and senior representatives from the Institute of Directors, the Confederation of British Industry, the Institute for Family Business, the British Private Equity & Venture Capital Association, the Institute of Business Ethics, the Investment Association, the Climate Disclosure Standards Board, ICSA’s Governance Institute and the Trades Union Congress. The Coalition Group will develop and deliver principles that aim to promote:
- best practice in corporate governance and reporting arrangements;
- public trust and confidence through greater transparency in the manner in which large privately-owned companies conduct their business;
- strong corporate culture and integrity within large private businesses, encourage broader consideration of workforce and wider stakeholder representation and interests; and
- investor, lender and creditor confidence to facilitate long-term value and improved productivity.
FRC: Proposals for a revised UK Corporate Governance Code and revised Guidance on Board Effectiveness
In December 2017 the FRC published proposals for a revised UK Corporate Governance Code (Code) and updated Guidance on Board Effectiveness. The proposals reflect the changing business environment and the revised Code aims to promote the long-term success of companies by achieving the highest standards of corporate governance.
The UK Corporate Governance Code
The revised Code is much shorter and sharper than the current April 2016 Code,reduced from 32 pages to 13 and from around 11000 words to 5000. The FRC has taken findings from its 2016 Culture Report, engaged with stakeholders and incorporated suggestions from the Government’s response to its Green Paper on Corporate Governance Reformsto produce a Code that is fit for purpose.
The revised Code strives to raise standards further and sets out good practice that ought to be adopted by the boards of UK companies. It is now made up of five sections: 1 Leadership and purpose; 2 Division of responsibilities; 3 Composition, succession and evaluation; 4 Audit, risk and internal control; and 5 Remuneration.
Section 1 – Leadership and purpose
Key points for boards to note from this section are:
- Establish a company’s purpose, strategy and values: The revised Code recognises the importance of corporate culture and stresses that the board should satisfy itself that the company’s purpose, strategy, values and culture are aligned.
- Engage with wider stakeholders: The revised Code includes references to the board’s responsibility for considering the needs and views of a wider range of stakeholders to improve trust and achieve mutual benefit, and generally to have regard to wider society.
- Incorporate views of the workforce: To ensure that the workforce voice is heard in the boardroom, a new requirement is included in Provision 3. The revised Code states three ways in way this could be achieved: (i) appoint a director from the workforce; (ii) establish a formal workforce advisory council; (iii) or appoint a designated non-executive director.
- Communicate with shareholders over significant votes against resolutions: The revised Code states that when more than 20 per cent of votes have been cast against a resolution, as under the current Code, the company should explain, when announcing the voting results, what actions it intends to take to consult with shareholders in order to understand the reasons behind the result. However, in addition, no later than six months after the vote, an update should be published before the final summary is provided in the next annual report.
Section 2 – Division of responsibilities
Key points for boards to note from this section are:
- Clarity of roles: This Section considers the separation of duties within the board, with the chair required to demonstrate independent and objective judgement and the chief executive responsible for proposing and delivering the board’s agreed strategy.
- Independent non-executives to constitute a majority: In all companies, including those below the FTSE 350, the independent non-executive directors, including the chair, should comprise a majority of the directors. All current exemptions for companies below the FTSE 350 (including the requirement to have an independent board evaluation every three years) have been removed from the revised Code as the FRC believes even smaller companies should strive for the highest corporate governance standards.
Section 3 – Composition, succession and evaluation
Key points for boards to note from this section are:
- Increase diversity on boards: The revised Code asks boards to intensify their efforts to promote diversity to avoid group think. Diversity includes different gender, social and ethnic backgrounds, cognitive and personal strengths. The FRC reiterates that inclusive and diverse boards will understand their customers and stakeholders more, which in turn, leads to better decision-making.
- Development of diverse pipeline for succession: Responsibility for this is placed on the nomination committee.
Enhance transparency in respect of progress on diversity: Under Provision 23 of the revised Code, the FRC encourages reporting on actions taken to increase diversity and inclusion, and the outcomes in terms of progress on diversity. This extends to reporting on the gender balance of the senior management (the company’s executive committee or the first layer of management below board level, including the company secretary) and their direct reports.
Section 4 – Audit, risk and internal control
This section remains mostly unchanged, though all companies, including those below the FTSE 350, will require an audit committee of at least three independent non-executive directors.
Section 5 – Remuneration
Key points for boards to note from this section are:
- Give remuneration committees greater responsibility: The remuneration committee is given responsibility for determining the policy for director remuneration and setting remuneration for the board and senior management. The remuneration committee should also oversee remuneration and workforce policies and practices and ensure that these align with company’s strategic objectives.
- Exercise independent judgement and discretion: The revised Code emphasises that the board should establish a remuneration committee of independent non-executive directors with a minimum membership of three. Provision 32 includes a requirement that the remuneration committee chair will have served for at least 12 months on a remuneration committee before taking on this role.
- Further reporting requirements: The Code includes a reporting requirement for companies to explain what workforce engagement has taken place to explain how executive remuneration aligns with wider company pay policy.
Guidance on Board Effectiveness
The FRC has also published new proposed Guidance on Board Effectiveness (Guidance) which is set out in Appendix B to the consultation paper.
The Guidance has been amended to support the proposed changes to the revised Code and it follows the structure of the revised Code. Some of the more procedural aspects of the current April 2016 Code have been moved to the Guidance as these are still important but are now common place in many businesses.
The Guidance includes possible questions for boards, management and remuneration committees and the FRC proposes that boards should use the questions posed in the Guidance to consider how they report on their application of the Code’s Principles.
The proposed Guidance includes:
- more information about how the views of a wider range of stakeholders might be heard in the boardroom; and
- provisions supporting the remuneration committee with its new wider role and its new responsibility for wider workforce pay and policies.
The FRC notes that the Guidance will need further updating once the outcome of the consultation on the revised Code is known.
Proposed amendments to the UK Stewardship Code
The consultation also includes questions to help shape the future direction of the UK Stewardship Code, which will be published for consultation in mid-2018. The FRC consults on two ways in which the UK Stewardship Code could be improved:
- Relevance to different signatory categories: Should the Stewardship Code be more explicit about the expectations of those investing directly or indirectly and those advising them? Would separate codes or enhanced separate guidance for different categories of the investment chain help drive best practice
- Whether to adopt a best practice format: Should the Stewardship Code focus on best practice expectations using a more traditional "comply or explain" format? If so, are there any areas in which this would not be appropriate? How might the FRC go about determining what best practice is?
- Shareholder Rights Directive: Consider how the measures introduced in the 2017 amended Shareholder Rights Directive could be best transposed.
- Consider the amendments to the UK Corporate Governance Code: Are there elements of the revised UK Corporate Governance Code that the FRC should mirror in the Stewardship Code?
- Long-term factors and other issues relating to investment: How could an investor’s role in building a company’s long-term success be further encouraged through the Stewardship Code? Would it be appropriate to incorporate "wider stakeholders" into the areas of suggested focus for monitoring and engagement by investors? Should the Stewardship Code more explicitly refer to ESG factors and broader social impact? If so, how should these be integrated and are there any specific areas of focus that should be addressed?
- Best practice content elements: How can the Stewardship Code encourage reporting on the way in which stewardship activities have been carried out? Are there ways in which the FRC or others could encourage this reporting, even if the encouragement falls outside of the Stewardship Code?
- Asset classes: How could the Stewardship Code take account of some investors’ wider view of responsible investment?
Content elements of other codes: Are there elements of international stewardship codes that should be included in the Stewardship Code?
- The role of independent assurance: What role should independent assurance play in revisions to the Stewardship Code? Are there ways in which independent assurance could be made more useful and effective?
- Voting in pooled funds: Would it be appropriate for the Stewardship Code to support disclosure of the approach to directed voting in pooled funds?
- Diversity: Should board and executive pipeline diversity be included as an explicit expectation of investor engagement?
UK committee on climate change: Should the Stewardship Code explicitly request that investors give consideration to company performance and reporting on adapting to climate change?
- Purpose of stewardship: Should signatories to the Stewardship Code define the purpose of stewardship with respect to the role of their organisation and specific investment or other activities? Should the Stewardship Code require asset managers to disclose a fund’s purpose and its specific approach to stewardship, and report against these approaches at a fund level? How might this best be achieved?
Responses to all the proposals should be submitted by February 2018. The FRC plans to publish the final version of the Code by early summer of 2018 and it will apply to accounting periods beginning on or after January 1, 2019. Its detailed consultation on specific changes to the UK Stewardship Code will be published in mid-2018, once the review of the Code has been finalised.
House of Commons: Briefing paper on corporate governance reform
In November 2017 the House of Commons Library research service published a briefing paper for Members of Parliament and their staff on the corporate governance reform programme. The briefing paper looks at the current corporate governance framework and at the current reform programme, including the Government’s August 2017 response to its 2016 Green Paper on corporate governance reform and the Business, Energy and Industrial Strategy Select Committee report into the subject (BEIS report) published in April 2017.
The briefing paper also looks at the German example of workers on boards and it includes a section on pay ratios in the UK based on data from mainly FTSE 350 companies. It compares the “comply or explain” and the “comply or else” approaches to corporate governance and also sets out the BEIS report recommendations and the Government’s response in appendices.
Developments in institutional investor/proxy adviser guidelines
Pre-Emption Group: Expectations for disapplication thresholds
In March 2018 the Financial Reporting Council (FRC) announced the expectations of the Pre-Emption Group in relation to pre-emption disapplication thresholds.
When the Prospectus Regulation came into force in July 2017, it introduced a new exemption from the obligation to publish a prospectus in relation to issues of securities representing up to twenty per cent of the company’s securities already admitted to trading.
In light of the new threshold, the Pre-Emption Group has confirmed that no change to the flexibility permitted by the 2015 Statement of Principles is expected as a consequence of the Prospectus Regulation. The Pre-Emption Group continues to support the overall limit of ten per cent in the Statement of Principles (the first five per cent being for general corporate purposes and, when applied for, the second five per cent for use only in connection with an acquisition or specified capital investment).
The Pre-Emption Group notes that, whilst decisions about specific placings are a matter for individual shareholders, the Statement of Principles reflects a generally agreed position supported by the Investment Association and the Pensions and Lifetime Savings Association and that companies should be mindful of the expectations included within it.
ISS: Launch of Environmental & Social QualityScore
In February 2018 Institutional Shareholder Services Inc (ISS), a US proxy adviser, announced the launch of its Environmental & Social QualityScore which will measure the quality of corporate disclosures on environmental and social issues, including sustainability governance, and identify key disclosure omissions.
ISS notes that expectations regarding disclosure practices are defined by industry groups and reflected in standards such as the Global Reporting Initiative, the Sustainability Accounting Standards Board standards and the Taskforce on Climate-related Financial Disclosures recommendations. The ISS scores will measure the depth and extent of companies’ disclosures and the information in the ISS reports will be sourced from company publications including mainstream filings, sustainability and CSR reports, integrated reports, publicly available company policies and information on company websites.
Initially six industry groups are being covered. These comprise energy, materials, capital goods, transportation, automobiles and components, and consumer durables and apparel, as these are considered to be sectors based on industries most exposed to environmental and social risks. Later in 2018 ISS plans to add 18 additional industry groups to its coverage and these will include consumer services, media, retailing, food, pharmaceuticals, banks, real estate and utilities.
In measuring a company’s level of environmental and social governance disclosure risk, this will be considered both overall and within eight broad categories. So far as environmental disclosures are concerned, the areas that will be considered include management of environmental risks and opportunities, carbon and climate, natural resources and waste and toxicity. Human rights, labour, health and safety, stakeholder and society and product safety, quality and brand will be the topical areas for social-related disclosures.
PLSA: Corporate Governance Policy and Voting Guidelines 2018
In January 2018 the Pensions and Lifetime Savings Association (PLSA) published their latest Corporate Governance Policy and Voting Guidelines (Guidelines) to assist PLSA members in promoting the long-term success of the companies in which they invest and ensuring that the board and management of those companies are held accountable to shareholders.
The PLSA notes that since the changes proposed by the Financial Reporting Council (FRC) to the UK Corporate Governance Code (Code) in December 2017 will not come into effect for some time, the Guidelines relate to the application of the current Code. Key changes in the Guidelines from those published in January 2017 include the following:
The PLSA expects both audit committee and auditor reports to provide sufficient “colour” to enable shareholders to form a judgement about their work in the year. Particular areas of interest are:
- critical accounting policies used;
- level of materiality adopted;
- assumptions and judgements;
- evidence of professional scepticism by the auditor;
- main findings and actions taken to respond to any recommendations where the FRC’s Audit Qualiy Review Team has undertaken a review; and
- oversight of auditor independence by the audit committee.
Auditors are also expected to maintain a healthy level of scepticism over management accounts, rigorously test them and be willing to challenge their own past judgements. A maximum 20 year audit firm tenure is a minimum expectation and the audit tender process should focus on auditors’ independence and processes to ensure professional scepticism, as well as audit quality.
Approval of annual report and accounts
The Guidelines note that if the audited accounts are deemed to fail to provide a true and fair view of profit or loss, assets or liabilities,(for example, because they overstate profit or assets or understate likely liabilities such as pension or climate-related liabilities) then shareholders should consider voting against the adoption of the report and accounts and/or the auditor and/or the audit committee chair.
The Guidelines also stress the need to provide a fair and balanced explanation of the composition, stability, skills and capabilities and engagement levels of the company’s workforce and recommend a vote against the annual report where this is not provided.
If there is boilerplate or limited disclosure about the board evaluation and review of corporate governance arrangements in the annual report, the Guidelines recommend a vote against adoption of the report and accounts.
Approval of remuneration report
Circumstances in which shareholders may wish to consider voting against the remuneration report include where the remuneration committee has failed to exercise discretion and pay awards fail to reflect wider circumstances such as serious corporate conduct issues.
If shareholders vote against the remuneration report, the Guidelines recommend that in most circumstances shareholders should also vote against the re-election of the remuneration committee chair and other remuneration committee members if they have been in post for more than one year.
Appointment of auditor and authorisation of auditor’s remuneration
Where the auditor has been in place for more than 20 years, the Guidelines suggest shareholders should consider a vote against the audit committee chair and auditor. They also stipulate that companies should spend no more than 50 per cent of the audit fee on non-audit services (or a material monetary sum - £500,000) unless an explanation of exceptional circumstances that may apply is provided. If that figure is exceeded, a vote against the audit committee chair, auditor and/or audit fees may be appropriate.
Similarly, if there are major concerns about the audit process or quality of the accounts (relating to a failure to provide a true and fair view or visibility over the dividend paying capacity) which are not satisfactorily resolved by the board, then a vote against the re-election of the audit committee chair or reappointment of the auditor may be appropriate.
Market purchase of shares
The Guidelines state that shareholders will generally support buy-backs if they are a prudent use of the company’s cash resources and are supported by cash-flows of the underlying business, and do not introduce excessive and unsustainable leverage.
The Guidelines include a new section headed “Sustainability”. This notes that positive relations with key stakeholders is of clear importance to a company’s long-term performance and it recommends that shareholders should consider voting against the annual report and accounts or the re-election of the board chair where they believe key relationships are being neglected and the board is not adhering with the spirit of requirements to have for the concerns of stakeholder constituencies.
Climate change is noted as a key sustainability issue and the Guidelines state that companies in sectors affected by climate change and efforts to mitigate it should undertake rigorous examinations of whether their business model is compatible with commitments to mitigate global temperature increases and how they plan to address the issue of climate change. This also requires climate-related expertise at board level. The Guidelines stipulate that where, after shareholders have attempted to engage on this issue, companies fail to provide a detailed risk assessment and response to the effect of climate change on their business, and incorporate appropriate expertise on the board, shareholders should not support the re-election of the board chair.
ISS: Updated UK Proxy Voting Guidelines
In January 2018 Institutional Shareholder Services (ISS) announced updates to its 2018 benchmark Proxy Voting Guidelines (Guidelines) for various regions, including the UK, Ireland and Europe.
Changes to the UK and Ireland Guidelines include the following:
- Virtual meetings: ISS will generally recommend voting for proposals allowing for the convening of hybrid shareholder meetings if it is clear that it is not the intention to hold virtual-only AGMs. ISS will generally vote against proposals allowing for the convening of virtual-only shareholder meetings.
- Overboarding of directors: The definition of an excessive number of board roles at listed companies (which may result in ISS recommending a vote against a director) has been amended to state that any person who holds more than five mandates at listed companies will be classified as overboarded. Furthermore, any person who holds the position of executive director (or a comparable role) at one company and non-executive chairman at a different company will be classified as overboarded.
- Overboarding in relation to chairs and CEOs: For chairs, negative vote recommendations will be applied first to non-executive positions held but the chair position will be targeted where where in aggregate the individual has three or more chair positions (as well as where they are being elected as chair for the first time or if the chair holds an outside executive position).
- Audit and remuneration committees: These should be made up of independent directors only in order to align the Guidelines with the UK Corporate Governance Code and PLSA 2017 voting guidelines on the composition of the remuneration and audit committees.
- Threshold vesting levels for Long-Term Incentive Plans (LTIPs): The Guidelines have been amended to make it clear that while threshold vesting should generally be no higher than 25 per cent, a 25 per cent vesting threshold may be considered inappropriate if LTIP grants represent large multiples of salary.
- Share issuances without pre-emption rights: ISS has amended the Guidelines to clarify that a cash-box structure will be treated as a share issuance for cash and so using a cash box structure to issue more than the authority approved at the previous AGM will be considered an example of an abuse of that authority.
The updated Guidelines will be applied to shareholder meetings taking place on or after February 1, 2018.
Glass Lewis: 2018 Proxy Paper Guidelines
In December 2017 Glass Lewis published their updated Proxy Paper Guidelines (Guidelines) for 2018.
Key changes from Glass Lewis’ 2017 Guidelines include the following:
- Board skills and diversity: The Guidelines have been updated to reflect Glass Lewis’ belief that companies should disclose sufficient information to allow a meaningful assessment of a board’s skills and competencies. If a board fails to address material concerns regarding the mix of skills and experience of the non-executive element of the board, Glass Lewis will consider recommending voting against the chair of the nomination committee or equivalent (for example, the board chair). From 2018, Glass Lewis’ analyses of director elections at FTSE 100 companies will include board skills matrices in order to assist in assessing a board’s competencies and identifying any potential skills gaps. The Guidelines have also been updated to reflect the recommendation of the Parker Review Committee that each FTSE 100 and FTSE 250 board should strive to have at least one director of colour by 2021 and 2024 respectively.
- Pay ratios: The Guidelines have been updated to reflect Glass Lewis’ position on the disclosure of pay ratios. They recognise that the disclosure of pay ratios between the CEO and the median or average UK-based employee may be useful in contextualising the levels of executive remuneration both within a business and within industries. As such, Glass Lewis encourages companies to disclose such pay ratios, accompanied by a description of the methodology for their calculation going forward.
- Restricted share plans: Glass Lewis will assess all restricted share plans on a case-by-case basis. However, in line with the Investment Association’s November 2017 Principles of Remuneration, Glass Lewis will expect, at a minimum, the discount rate from moving from a long-term incentive plan to restricted share awards to be a minimum of 50 per cent, the total vesting and post-vesting holding period should be at least five years, the grant of restricted shares should be accompanied by significant shareholding requirements and restricted share awards should be subject to an appropriate underpin.
- Incentive plan targets: Glass Lewis may recommend voting against a remuneration policy where performance targets are set below targets provided in guidance to shareholders, absent any compelling rationale for lowering the target. Glass Lewis will also generally expect performance metrics to have a clear and direct link to a company’s strategy, including explicit references, where appropriate, to key performance indicators described in relevant business cycles such as transformation plans.
- Response to shareholder dissent: Glass Lewis have clarified that they consider that the board generally has an imperative to respond to shareholder dissent from a proposal at a general meeting of more than 20 per cent of votes cast, particularly in the case of a compensation or director election proposal. Glass Lewis will continue to take into account a company’s shareholder structure when determining what constitutes “significant dissent”.
QCA and Hacker Young: Corporate Governance Behaviour Review 2017
In December 2017 the Quoted Companies Alliance (QCA) and UHY Hacker Young published their annual review of corporate governance behaviour, which focuses on the disclosures made by 100 small and mid-size quoted companies taken from the Main List, AIM and ISDX and compares these disclosures against the minimum disclosures set out in the QCA Corporate Governance Code for Small and Mid-Size Quoted Companies (the QCA Code).
The results were discussed with a group of institutional investors at a roundtable discussion and the QCA has used the feedback received to create five recommendations for companies to follow in order to improve the way they address corporate governance disclosures.
The recommendations for companies are as follows:
- Describe the relationship between your company’s strategy and your governance arrangements effectively, and explain your board’s role in realising the company’s objectives: The generic language that is used in many disclosures is unhelpful to investors. They want to see a clear articulation of strategy (Disclosure 20 of the QCA Code) and an explanation of how the application of their chosen corporate governance code supports the company’s long-term success and strategy for growth (Disclosure 3 of the QCA Code). The review encourages companies to produce a clear depiction of the company’s business model and how their strategy relates to this. Companies should make it clear how the strategy and corporate governance arrangements benefit shareholders in the long term.
- Articulate your company’s story in an engaging way and take the time to avoid ‘boilerplate’ disclosures: Companies should provide clear and concise information in their reports. The key performance indicators (KPIs), the description of the business model, together with the company’s strategy and its implementation, must be set out transparently.
- Set out clearly how your board’s performance is evaluated and what is being done as a result: An effective board regularly evaluates its own performance and effective companies tell shareholders the outcome of such assessments. Disclosures on board evaluation provide a good opportunity to illustrate the culture within the business, and help to establish confidence and trust between the company and shareholders.
- Provide a single total remuneration figure for each of your directors in a focused report: Clarity and transparency in matters of remuneration are vital in creating trust between companies and shareholders. Companies should establish well-structured remuneration arrangements as this indicates good governance and the arrangements ought to be articulated effectively to all shareholders.
- Explain each director’s role to demonstrate how your board has the appropriate balance of skills and experience: Investors are particularly interested in the board structure and why each director is on the board, namely the specific skills he or she brings to the team (Disclosure 9 of the QCA Code). Companies should clearly distinguish between executive and non-executive directors and clarify whether the chair is executive or non-executive.
Corporate social responsibility developments
BEIS: Government review to see how employers are improving ethnic minority progression in the workplace
In February 2018 the Department for Business, Energy & Industrial Strategy (BEIS) announced plans to review how employers are improving ethnic minority progression in the workplace. The review is part of BEIS’s ambition to create better, higher-paying jobs in every part of the UK and ensure that people from all backgrounds can be successful in the workplace.
The research findings will reveal whether companies are reporting their ethnicity pay gap, which is a key recommendation of the independent McGregor-Smith Review published in 2017. The results will also show what action employers are taking to prevent bullying and harassment of black, Asian and minority ethnic people in the workplace, and help to establish whether any further action is needed to ensure workplaces are inclusive.
BEIS: Government response to the Taylor Review of Modern Working Practices
In February 2018 the Department for Business, Energy and Industrial Strategy (BEIS) published the Government’s response to the Taylor Review of Modern Working Practices (the Taylor Review) which was published in July 2017.
The Taylor Review made 53 recommendations designed to deliver an overarching ambition - that all work in the UK economy should be fair and decent with a realistic scope for development and fulfilment. A number of the recommendations related to agency workers and zero-hour contracts, holiday and statutory sick pay, and the relationship between tax law and employment law.
Recommendation 16 was that the Government should introduce new duties on employers to report (and to bring to the attention of the workforce) certain information on the structure of the workforce. This would involve companies above a certain size making public their model of employment and use of agency services beyond a certain threshold, reporting on requests received and accepted from zero hours contract workers for fixed hours and reporting on requests received and accepted from agency workers for permanent positions.
The response notes that the Companies Act 2006 already requires companies to report on a range of employee-related issues, with these requirements being extended for quoted companies by the implementation of the Non-Financial Reporting Directive. The Government is also proposing that companies will have to report on how their directors, in pursuing their duties, have taken account of wider matters, including the interests of employees and fostering relationships with suppliers. It believes this will result in larger companies being more transparent about their workforce structures, particularly where these are an important aspect of their business model.
The Government is to work with the Financial Reporting Council (FRC) to determine how the FRC’s Guidance on the Strategic Report can be revised to encourage companies to provide a fuller explanation of their workforce model and practices. It will review the impact of these changes on reporting practices and if there is no change, further action could include a requirement for companies to publish a “People Report”. This could bring together existing employee-related reporting requirements (including gender pay gap and diversity data), with additional specific metrics relating to workforce structure. However, the Government notes that this would place an additional burden on business and believes that more comprehensive reporting under the existing and forthcoming legal framework is preferable, but is interested in views on the potential value of such a report.
PLSA: AGM Voting Review
In January 2018 the Pensions and Lifetime Savings Association (PLSA) published its annual AGM Voting Review. This examines AGM results for the FTSE All Share Index in 2017, highlighting resolutions that attracted ‘significant’ levels of dissent. The PLSA has taken dissent levels of over 20 per cent to be ‘significant’ in line with guidance from the GC100 and Investor Group and the threshold for publication on the Investment Association’s Public Register.
Across the FTSE 350, there were 117 AGM resolutions that attracted dissent levels of over 20 per cent at 73 different companies in 2017. Around 20 per cent of companies in the FTSE 350 experienced significant dissent over at least one resolution at their AGM.
The PLSA found that executive pay was the most controversial aspect of corporate governance, with remuneration-related resolutions being the most common source of dissent.
The PLSA surveyed pension fund members’ views on the executive pay gap between companies’ executives and their wider work force and found that, overall, 85 per cent were concerned. When asked why remuneration is too high, 63 per cent of members responded that ‘large pay packages for under-performing executives are particularly inappropriate, but executive pay is disproportionately high across the board’.
In terms of accountability, the PLSA encourages disaffected shareholders to vote against the re-election of remuneration committee chairs responsible for pay practices when voting against a company’s remuneration policy or report, in order to introduce greater individual accountability over pay. In 2016, average dissent levels over remuneration policies were four times higher than dissent over the re-election of remuneration committee chairs as directors. In 2017, they were less than twice as high, suggesting that most shareholders are now voting against the remuneration committee chair if they vote against the remuneration policy.
In addition to remuneration related-resolutions, the election and re-election of directors’ resolutions also attracted shareholder dissent at 2017 AGMs. The PLSA notes that, overall, there was a slight increase in dissent over directors’ elections in 2016 and 2017 from previous years.
While there has been some progress on individual accountability, the PLSA argues that there is much more to be done. Companies are still failing to effectively explain their employment models and working practices to their shareholders and must improve reporting.
These findings have informed the update to the PLSA’s corporate governance policy and voting guidelines published in January 2018.
Investment Association: Public Register launched
In December 2017 the Investment Association launched its Public Register of listed companies which have had significant shareholder rebellions during their AGMs. The Public Register aims to increase transparency, accountability and scrutiny of listed companies by shareholders, media and the wider public.
The Public Register incorporates all FTSE All-Share companies that received 20 per cent or more votes against any resolution during their AGM in 2017. It also includes those companies that withdrew a resolution prior to their AGM. It is hoped that the Public Register will encourage these companies to respond to the concerns of their investors as it will highlight their public statements. So far, almost one third (31 per cent) of companies named on the Public Register have provided a public response explaining how they are addressing their shareholders’ concerns.
Investment Association: Position statement on virtual-only AGMs
In December 2017 the Investment Association published a position statement outlining the views of its members on virtual-only annual general meetings (AGMs). It notes that Investment Association members are unlikely to be supportive of amendments to articles of association which allow for virtual-only AGMs.
In the position statement, the Investment Association comments that its members view AGMs and other shareholder meetings as fundamentally important to the exercise of their shareholder rights and as an integral component of the UK corporate governance system. They note that AGMs ensure that boards are publicly accountable and shareholders can make statements and ask questions of the board and so raise particular concerns in a public forum. While investors accept that using technology, such as webcasting the meeting, to complement the physical AGM can be beneficial and increase retail and institutional investor participation, they do not believe companies should adopt a “virtual-only” approach since virtual-only AGMs remove the board’s public accountability and makes it harder for participants to identify the views of fellow participants and register agreement or disagreement.
As a result, Investment Association members will not support amendments to articles of association in relation to electronic meetings that allow for virtual-only AGMs and they expect any amendments to articles to confirm that a physical meeting will be held alongside an electronic meeting element. In addition, the Investment Association’s Institutional Voting Information Service (IVIS) will red-top any company that will have the ability to hold virtual-only AGMs following any amendments to their articles.
BEIS: Government to research whether companies buy back their own shares to inflate executive pay
In January 2018 the Department for Business, Energy & Industrial Strategy (BEIS) announced new research that will help the Government to understand how companies use share buybacks and determine whether further action is needed to prevent them from being misused.
The research will address concerns that companies may be repurchasing shares to artificially inflate executive pay. The Government has appointed PwC to undertake the research into share buybacks and PwC will be supported by Professor Alex Edmans from the London Business School. The findings will be published later in 2018.
ICSA: Challenges to effective board reporting
In December 2017 the Institute of Chartered Secretaries and Administrators (ICSA) Governance Institute and Board Intelligence published a summary of their research into how board reporting (the preparation of reports and other papers discussed at board meetings) operates in organisations. They surveyed 80 governance professionals representing organisations of all sizes and sectors with the aim of identifying the main challenges to effective board reporting so that organisations can be helped to address these challenges.
The main findings from the research are as follows:
- Board packs are too long: 74 per cent of respondents believe that their board packs are currently too long and this rises to over 80 per cent from respondents of larger organisations (over £100 million turnover).
- Board packs are very time-consuming to prepare: 78 per cent of total respondents felt that board packs were too time-consuming to prepare. In particular, all respondents from smaller organisations (those with turnovers less than £10 million) found them too time consuming.
- Getting the focus and balance of board packs right is a challenge: 68 per cent of respondents believe that their board packs are too focused on operational rather than strategic issues; 56 per cent believe that they are focused too heavily on internal rather than external developments; and 59 per cent think that board packs are not sufficiently forward-looking enough. The figures rise when considering smaller organisations only.
- The process of preparing board packs can be improved: respondents were given the chance to identify other challenges to effective board reporting. 30 per cent of respondents did so. Of those who took part, 40 per cent complained about receiving papers after the deadline. Other issues identified included the lack of standardised reporting formats and managing the revision and collation of the various reports.
Board Intelligence and ICSA intend to produce three tools to help organisations with the preparation and presentation of their board reporting:
- a ‘cost calculator’ which will enable organisations to quantify how much time and money they spend on producing their board packs - this will become available in the first quarter of 2018;
- a self-assessment tool to enable organisations to assess the length and balance of their board packs and identify ways in which they might be made more user-friendly and better focused – this will be published in July 2018; and
- guidance to help company secretaries and governance professionals in addressing some of the challenges identified by the research - this will be published in July 2018.