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Global | Publication | noviembre 2020
The COVID-19 pandemic has impacted the AGMs of most UK companies held in 2020. For many companies, arrangements for the meeting had to be changed at short notice, extra communications were sent to shareholders to keep them updated as to those arrangements, and in some cases resolutions to be put to the AGM had to be withdrawn or amended in light of the impact of the pandemic on the company’s business. Those issues were considered in our earlier briefings COVID-19: What does this mean for AGMs? and Impact of COVID-19 on UK AGMs: An update.
The pandemic will continue to have an effect on the arrangements for 2021 AGMs, as well as on aspects of corporate reporting in the annual report to be put to shareholders for approval at the 2021 AGM. Other developments during the past year will also have an impact. This briefing considers all of these issues and is intended as a form of checklist to help companies prepare for the 2021 AGM season, as well as setting out key areas of focus for the next annual report and accounts.
Currently, the temporary relaxations of certain requirements in the Companies Act 2006 (CA 2006) relating to company meetings, whether AGMs or general meetings, are still in place. These were initially introduced with effect from June 26, 2020 by the Corporate Insolvency and Governance Act 2020 (CIGA) and applied to company meetings held up until September 30, 2020. The relaxations were further extended for company meetings held up until December 30, 20201, and then for company meetings held up until March 30, 20212.
As a result, while the position for companies planning their AGM before the end of March 2021 is clear, it is very uncertain for those companies planning on holding an AGM after March 30, 2021. Primary legislation would be required to extend relaxations similar to those in CIGA beyond that date and it is not yet clear whether such legislation is planned or could be passed in sufficient time to help those companies.
In brief, the CIGA relaxations mean that:
The key point is that these provisions override anything in a company’s constitution or other applicable rules or legislation, so, at least while these provisions remain in place, they do provide flexibility, with a number of options available for companies planning an AGM in early 2021.
In light of the above relaxations, companies currently have the option of holding their 2021 AGM in one of the following ways:
In determining the most appropriate format for their 2021 AGM, companies should take note of the observations, particularly in relation to the subject of shareholder engagement, made by the Financial Reporting Council (FRC) in its October 2020 report AGMs: An opportunity for change. This report looks back at the conduct of 2020 AGMs and suggests a number of ways in which engagement with shareholders around the AGM can be improved and made more effective, particularly in the current environment. These include splitting the AGM into two events, with the first being for presentations, Q&A and consideration of matters in the annual report, and the second for voting on the AGM resolutions. Annex 1 to the report sets out “Best practice guidance for AGMs”, whatever their format, and this includes preparatory steps, matters to consider before the AGM, dealing with questions at the AGM and guidance on voting issues.
Companies considering a virtual or hybrid AGM in 2021 should consider the tips provided in the FRC’s Reporting Laboratory report, Video in Corporate Reporting, also published in October 2020. This looks at the advantages and disadvantages of a more digital approach to AGMs, and includes a number of specific tips for those looking at digital AGMs to increase shareholder participation. In addition, companies might be interested in the views on hybrid and virtual AGMs expressed in a poll of FTSE companies conducted by the GC100 and published in November 2020.3 Mixed views were expressed on the holding of such meetings, with advantages being wider shareholder participation, but disadvantages including concerns about the robustness of the necessary technology and the associated costs of such meetings.
Traded companies (broadly, those whose shares carry voting rights and are admitted to trading on a UK regulated market such as the main market of the London Stock Exchange, or an EEA regulated market) also need to be aware of new regulations which came into force in September 20204. These provide as follows:
As a result, traded companies need to ensure, when planning the 2021 AGM, that their registrars and any other third parties involved with their poll voting and electronic voting arrangements at the AGM, have in place the necessary procedures to ensure the traded company will be able to meet these confirmation requirements in relation to voting at the AGM.
In view of the issues that companies with AGMs planned for late March 2020 onwards faced, including determining how to proceed with their already convened meeting and considering whether it could be postponed or adjourned, companies that have not reviewed their articles of association recently would be advised to do so prior to the 2021 AGM to determine whether a resolution proposing new or amended articles should be put to the AGM.
Key areas of articles to consider are as follows:
Those companies that generally seek approval of a final dividend at the AGM will, as will all companies, need to consider whether or not it is appropriate (and, in some sectors, permissible) to pay that final dividend in 2021. In 2020, there were many examples of companies announcing prior to their AGM that they would not be putting the final dividend resolution to the vote at the AGM, and a few cases of companies announcing a reduced amount from that specified in the resolution. A number decided to satisfy their final dividend via a bonus issue of shares rather than pay cash.
If withdrawal or amendment of the dividend resolution becomes an issue prior to the 2021 AGM, companies should bear in mind the ICSA Governance Institute’s helpful Guidance Note on this topic published in April 2020. This notes that if a board wants to withdraw or amend a dividend resolution as it no longer feels it is appropriate to recommend that dividend, or one at the level recommended in the AGM notice, then that can be done at any time before the resolution is put to the AGM. If the notice has not yet been published, the resolution recommending or declaring a final dividend can simply be removed or amended before the AGM notice is published. Where the AGM notice has already been published, the company must notify shareholders accordingly and explain the reasons for the amendment or cancellation6.
Any company that usually proposes a resolution at its AGM to approve political expenditure should be aware that a change to Part 14 CA 2006 with effect from the end of the Brexit implementation period, means that the wording of that resolution should be reviewed7. Currently Part 14 enables shareholders to approve political donations or expenditure to UK and EU political parties, organisations and candidates. However, amendments to Part 14 in light of Brexit mean that shareholders will only be able to authorise donations and expenditure relating to UK political parties, organisations and candidates. As now, donations and expenditure to parties, organisations and candidates anywhere outside the UK, including in the EU going forward, will be governed by the laws and guidelines of the relevant country (and require disclosure in the company’s directors’ report).
In considering executive remuneration issues prior to the 2021 AGM, companies should be mindful of both the guidance provided by the Investment Association this year in relation to shareholder expectations on how remuneration committees should reflect the impact of COVID-19 on executive pay, as well as the Investment Association’s 2021 Principles of Remuneration. There will be increased scrutiny of company disclosures around remuneration in 2021 since a key expectation is that the remuneration of executive directors will be impacted in line with the approach taken to the general workforce.
First published in April, and updated in November 2020, the Investment Association guidance notes that remuneration committees will have to adopt an approach to executive pay in 2021 in light of COVID-19 that is appropriate to their company and the specific impacts of the pandemic on its business. However, shareholder expectations will include the following:
The Investment Association’s Principles of Remuneration set out shareholder expectations in relation to executive remuneration, as well as good practice in this area. Companies and their remuneration committees should be aware of the changes from last year’s Principles which include the following:
So far as pensions in 2021 are concerned, as in 2020, Investment Association members believe that pension contributions for executive directors should be aligned with those available to the majority of the company’s workforce. As a result, for new directors, if any new remuneration policy does not explicitly state that any new executive director appointed will have their pension contribution set in line with the majority of the workforce, IVIS, the Investment Association’s Institutional Voting Information Service, will Red Top (i.e. effectively recommending a vote against) that remuneration policy. If there is any new executive director or director changing role whose pension contribution is not aligned with the level of the majority of the workforce, IVIS will Red Top the remuneration report.
In addition, Investment Association members want to see all pension contributions, including those for incumbent directors, aligned to the majority of the workforce rate, as soon as possible. As a result, when analysing companies with year-ends starting on or after December 31, 2020, remuneration committees should set out a credible action plan to align the pension contributions of incumbent directors to the majority of the workforce level by the end of 2022. Where the remuneration committee has not done this, IVIS will Red Top the remuneration report if the pension contribution received by any executive director is 15 per cent or more. The Investment Association points out that, in most circumstances, fixing the monetary value of pension contributions over time will not be considered a credible action plan to bring pension contributions in line with the majority of the workforce.
Since the deadline, originally set in 2016, for FTSE 350 companies to meet the recommendations of the Davies Review to improve the representation of women on boards and in leadership positions, expires at the end of 2020, there will be particular focus on reporting in this area at 2021 AGMs.
The Hampton-Alexander Review recommended a target of 33 per cent women on FTSE 350 boards and leadership teams (the executive committee and their direct reports) by the end of 2020. Latest figures released in September 20208 showed that while more than one-third of all board members in the FTSE 350 were women, 41 per cent of FTSE 350 companies had not reached the target in relation to female board representation. 18 FTSE 250 companies had only one female director and there was still one all-male FTSE 250 board.
Institutional investors and proxy advisers support these gender diversity targets and generally recommend a vote against the re-election of the nomination committee chair (and possibly other directors or the board chair) where progress towards meeting them is not being made. Institutional Shareholder Services Inc (ISS), a US proxy adviser, has updated its 2021 UK policy guidelines to specifically state that it will generally recommend a vote against a nomination committee chair (and other directors on a case-by-case basis) of a FTSE 350 company (other than an investment trust) if it does not have 33 per cent of women on the board, and will do the same in relation to smaller listed and large AIM companies that do not have at least one woman on the board. ISS is providing a one year grace period in 2021 for FTSE 350 companies that publicly commit to reaching the 33 per cent target by their next AGM. Glass Lewis has also updated its 2021 Proxy Paper Guidelines for the UK and is taking a tougher stance in this area too. These policy changes are indicative of investors’ focus on board diversity at the moment.
Institutional investors and proxy advisers also support the recommendations made by the Parker Review Committee in 2017 following its review of the ethnic diversity of boards, including the recommendation that all FTSE 100 boards should have at least one ethnic minority director by 2021, with FTSE 250 companies required to do so by 2024.
In October, the Investment Association called on companies to be more transparent in reporting on their board’s ethnic diversity in their annual report so that investors can better understand the progress companies are making in meeting these recommendations, which also concern enhanced transparency around diversity policies and developing the internal pipeline9. Investors want companies to state not just whether they meet the relevant targets, but also to disclose the percentage of the board from a minority ethnic background.
Some institutional investors have strengthened their voting policies in this area. Legal & General Investment Management Limited (LGIM) is one which has done so this year and in October it wrote to FTSE 100 companies without any ethnically diverse directors on their board. That letter set out the importance of capturing and reporting data on board ethnicity and also alerted companies to a new LGIM voting intention. From 2022, LGIM will vote against the re-election of the nomination committee chair or board chair if the company fails to meet LGIM’s expectations on ethnic diversity10. Glass Lewis has indicated in its updated UK 2021 Proxy Paper Guidelines that it will take a similar approach in 2022.
As a result, greater transparency in reporting in this area, including on ethnic representation at executive level, at management level and throughout the workforce, will be critical in 2021.
In working on narrative reports and financial statements to be presented at the 2021 AGM, companies will need to be mindful of the myriad of reports prepared by the FRC in particular during 2020, which aim to provide guidance and examples of best practice in several areas, including the impact of COVID-19 on corporate reporting. A number of these reports are considered briefly below, but for information on areas that the FRC will scrutinise over the coming year, and the FRC’s expectations in those areas, reference should be made to the FRC’s End of year letter to CEOs, CFOs and audit committees of listed companies published in November 2020. Further good practice guidance is included in the FRC’s Annual Review of Corporate Reporting published in October 2020, alongside a short Corporate Reporting Highlights document which provides a high-level summary supplementing the Annual Review.
One factor which has a bearing on the date of an AGM is the publication and filing deadline for a company’s annual report and accounts.
In light of the impact of COVID-19 on businesses, the statutory filing deadline under the CA 2006 has been extended, along with certain other filing deadlines, pursuant to regulations published under powers included in CIGA11. As a result public companies currently have nine rather than six months to file their accounts at Companies House under the CA 2006. These regulations currently expire on April 5, 2021.
While listed companies obliged to comply with the Financial Conduct Authority’s (FCA) Disclosure Guidance and Transparency Rules (DTRs) have a shorter filing deadline of four rather than six months12, the FCA granted temporary relief to listed companies back in March, granting them an extra two months to publish their annual report and accounts13. The FCA has recently confirmed that this temporary relief will, at a minimum, continue to be available to listed companies with financial periods ending before April 2021 and it has stated that when it decides to bring this and other temporary measures to an end, it will give companies notice so that they have time to plan for the change14. In its End of year letter, the FRC encourages companies to consider carefully whether they should extend their 2021 reporting timetables to take advantage of this extension.
As far as AIM companies are concerned, in March 2020, AIM Regulation provided a three-month extension to the reporting deadline for the publication of annual audited accounts pursuant to AIM Rule 1915. This extension was initially available for AIM companies with financial year ends between September 30, 2019 to June 30, 2020 but in August 2020, AIM Regulation announced the continuation of this extension until further notice16.
The first Section 172 statements, reporting on how directors have had regard to the matters in Section 172(1) CA 2006 in performing their Section 172 duties, appeared in strategic reports this year, and, as a result, the FRC has been able to review a number of these and provide guidance on how they can be improved. Companies should take account of this guidance as, in its End of year letter, the FRC comments that many companies “did not sufficiently explain how their directors discharged the section 172 duty, and in particular the responsibility to have regard to the consequences of decisions in the long term”.
In October 2020, the FRC’s Financial Reporting Lab published a short tips document setting out tips on how to make Section 172 statements a tool that provides better insight and more accountability. The tips are also aimed at helping companies consider what content to include in such a statement, how to present it, and how to facilitate the preparation process. These include ensuring it is not a compliance exercise but an authentic reflection of what happened and what is material to the company, and starting its preparation early (considering key decisions and engagement activities to be included as they happen and not at the year-end).
In addition, in August 2020, ICSA’s Chartered Governance Institute published an updated Guidance Note which provides practical guidance for directors of companies about their duties under the CA 2006, and that includes new guidance on Section 172 statements to which companies can refer.
When considering how to report on workforce/employment issues, whether as part of the Section 172 statement or otherwise, companies should consider the guidance (including on how to make reporting in this area more effective and comprehensive) and best practice examples in the FRC’s Financial Reporting Lab report Workforce-related corporate reporting – Where to next? published in January 2020.
In November 2020, the FRC published its annual review of corporate governance reporting against the 2018 UK Corporate Governance Code (Code)17. This includes an assessment not only of Section 172 statements, but also of how the Section 172 factors have been applied across the strategic report. The review includes further guidance on Section 172 statements that should be taken into account. It is worth noting that the FRC states in it that, with growing focus on social issues, the FRC will review how directors are discharging their Section 172 duty, in particular the quality of stakeholder engagements, the extent to which they have informed board decisions and how effectively companies are responding to concerns raised.
In its End of year letter, the FRC sets out its expectations of company reporting on COVID-19 in 2021, including the need for clear and transparent disclosures in relation to the impact of the pandemic on a company’s business. However, other guidance on the impact of the pandemic on corporate reporting produced during 2020 should also be referred to as that provides further detail and commentary.
The FRC first produced guidance in a joint statement with the FCA and Prudential Regulation Authority in March 2020 and that was updated in May 2020. Two Financial Reporting Lab reports were then published in June 2020, Covid-19: Going concern, risk and viability and Covid-19: Resources, action, the future (and subsequently updated in October 202018), followed by the results of a thematic review of the effects of COVID-19 on corporate reporting in July 2020.
A central theme in the March and May 2020 statement and the Financial Reporting Lab reports was the importance of providing high quality forward-looking information in the current environment, also a theme in the thematic review. That resulted from a review of a sample of March 2020 interim and annual reports and accounts and it includes guidance and better practice examples for companies preparing annual and interim accounts, identifying areas where disclosures affected by COVID-19 can be improved.
In preparing cash flow statements and liquidity risk disclosures, companies should note the results of the FRC’s thematic review of these published in November 2020. As well as examining many of the issues faced in their preparation, the review provides insights into how the quality of cash flow statements can be improved, including in relation to disclosures of accounting policies and judgements related to the cash flow statement.
The review also addresses the disclosure of liquidity risk. While the majority of companies in the review sample that published their accounts from April 2020 onwards disclosed key liquidity information such as availability of cash, undrawn borrowing facilities, use of supply chain finance and compliance with covenants, the FRC notes that some companies could improve their disclosures of covenant testing, and assumptions and judgements around going concern and viability.
The FRC is encouraging all companies to review this report in detail and consider the findings carefully when preparing future reports and accounts.
When considering corporate governance disclosures in the next annual report, companies required to “comply or explain” against the Code pursuant to Chapter 9 of the FCA’s Listing Rules, should be aware of the recent FCA review of corporate governance disclosures linked to in Primary Market Bulletin No.31 published in November 2020.
The FCA notes in that review that there are several areas where required disclosures could be improved and it encourages companies to consider carefully whether, when stating how they have applied the Code’s Principles, they have done so in a manner which enables shareholders to evaluate how the Principles have been applied rather than merely stating that they have been applied. It also encourages companies to consider including specific details of how they have applied the Principles in the relevant accounting period, using examples and cross-references where appropriate.
The FCA comments that it will use the results of this review to inform its decisions about future surveillance and monitoring efforts in this area so companies would be advised to take account of those results.
In its recent review of corporate governance reporting against the Code19, the FRC echoes the FCA’s findings and states that while it has found examples of good reporting, overall it is disappointed with the response to the Code. Companies should consider the results of the review since, in it, the FRC sets out the ways in which it expects reporting to be improved, This includes reporting on the issues raised, topics considered, and feedback received during engagement with shareholders and employees, increased focus on assessing and monitoring culture, including consideration of methods and metrics used, increased attention and better reporting of succession planning, diversity and board evaluation and reporting on the impact of the engagement within the workforce in relation to executive remuneration policy.
In its conclusion to the review, the FRC notes that the year ahead brings even more challenges, with boards needing to ensure that the varied risks associated with Brexit, COVID-19 and climate change are effectively managed and mitigated in company operations and strategy. Over the next year the FRC states that it will be carefully monitoring how companies are reporting on the impact of risks which have manifested themselves and how boards are responding in terms of improving their governance.
It had been intended that for financial years beginning on or after January 1, 2020, financial reports of listed companies would be prepared for the first time in Extensible Hypertext Mark-up Language (XHTML), making them machine readable, with basic financial information tagged, and so this would have applied to annual reports prepared by listed companies in 2021. This results from a new rule introduced into the DTRs in December 2019 to implement a Transparency Directive requirement that listed companies on regulated markets such as the Main Market in London prepare their annual reports in a single electronic reporting framework, the European Single Electronic Format (ESEF)20.
However, in light of the COVID-19 pandemic, that requirement has been postponed following an FCA consultation. The FCA announced in Primary Market Bulletin No 31 that the first annual reports required to be published using the ESEF framework (and so requiring them to be prepared in XHTML and with basic financial information tagged), will be those for financial years beginning on or after January 1, 2021, for publication in 2022. In the meantime, listed companies can publish and file annual reports in ESEF voluntarily for financial years starting on or after January 1, 2020, from January 2021, if they wish to do so and in any event this is a development that listed companies need to gear up for so that they can meet the requirement in 202221.
While the requirements for quoted companies, large unquoted companies and large limited liability partnerships to report on greenhouse gas emissions, energy consumption and energy efficiency action have existed for some time, the streamlined energy and carbon reporting (SECR) requirements only came into effect for financial years beginning on or after April 1, 201922 so many companies will be reporting under the SECR regime for the first time in 2021. This requires information to be included in the directors’ report as to carbon emissions and energy usage. Companies required to report under the SECR regime should have already put in place the systems and processes to enable them to meet these reporting requirements, but Defra’s environmental reporting guidelines should also assist.
There is ever-increasing focus by investors and other stakeholders on disclosures in annual reports around environmental, social and governance (ESG) issues, including climate-related disclosures. In its updated 2021 Policy Guidelines for all markets, ISS has stated that it will consider recommending a vote against the election/re-election of any director that ISS believes has been involved in material failures of governance, stewardship or risk oversight, “including demonstrably poor risk oversight of environmental and social issues, including climate change.”
Particular developments have emerged in relation to climate-related disclosures as set out below.
The FRC has recently published the results of a thematic review its Financial Reporting Lab undertook in 2020 in relation to climate-related issues as they affect governance, reporting and audit, as well as the role of investors and certain other market participants23.
In terms of governance, the review notes that while it is the board’s responsibility to consider climate-related issues, “there is little evidence that business models and company strategy are influenced by integrating climate considerations into governance frameworks”. The particular report on governance findings includes examples of good practice in this area and companies are advised by investors to continue to ask themselves the questions in relation to governance, strategy, risk management and metrics and targets that were sent out in the FRC’s Financial Reporting Lab report into climate-related reporting issues published in October 2019.
In terms of corporate reporting, the review notes that while an increasing number of companies are providing narrative reporting on climate-related issues, with minimum legal requirements often being met, users of annual reports are calling for additional disclosure to inform their decision-making. The review states that while some companies have set strategic goals such as ‘net zero’, it is unclear from their reporting how progress towards these goals will be achieved, monitored or assured, and consideration and disclosure of climate change in the financial statements lags behind narrative reporting. The particular report on corporate reporting includes the FRC’s expectations of how relevant reporting requirements should be addressed for both narrative reporting and for financial statements and so should be taken into account when preparing disclosures in the next annual report.
In January 2020, the Investment Association set out its members’ expectation that FTSE-listed companies should explain in their annual report the impact climate change will have on their business model and how these risks are being measured and managed24. In November 2020, the Investment Association published a position paper on climate change and it states in it that it “will be expecting companies to improve their reporting to set out the impact of climate change on their strategy and capital allocation decisions”. Companies should continue to work on and improve their disclosures in this area in the next annual report, as the Investment Association is expecting to see significant movement towards reporting in line with the recommendations of the Financial Stability Board’s Taskforce on Climate-related Financial Disclosures (TCFD) by 2022 and better explanations of how companies will adapt and strengthen their business model in response to climate risks.
In March 2020 the FCA consulted on the introduction of a new Listing Rule disclosure requirement that would apply to commercial companies with a UK premium listing. This would require such companies to state whether they comply with the TCFD recommendations and to explain any non-compliance. It is proposed that this new disclosure requirement will take effect for financial years beginning on or after January 1, 2021 and such disclosures could in due course become mandatory, so companies impacted should ensure that they have the systems and processes in place in the coming year to be able to meet this reporting requirement in 2022.
The FCA is intending to consult in 2021 on whether this new disclosure requirement should extend to a wider group of listed issuers, and the UK government is also planning to consult on introducing a similar disclosure requirement into the CA 2006 so that more UK companies, including very large private companies, could be required to make TCFD-aligned disclosures in their annual reports in due course. Further information is available in a report published in November 2020 by the UK’s TCFD Taskforce25.
As is clear from this briefing, there are a lot of issues and developments for companies to take into account when planning the 2021 AGM, not least the format of the AGM and the need for shareholder engagement whatever format is deemed the most appropriate for the company. Shareholders will expect lessons to have been learned from the issues that arose in the 2020 AGM season, and are likely to be less forgiving if their ability to participate is as limited as it was in many cases in 2020, given the time that companies have had since to plan for 2021.
Also in relation to preparing the next set of annual reports and accounts, there are many areas of the report that will require careful thought. The impact of COVID-19 on the business environment is likely to mean that there will still be a focus on executive pay at 2021 AGMs, as there was in 2020, and shareholders are also likely to take into account decisions made by audit and remuneration committee members, particularly the chairs of those board committees, when considering the election/re-election of particular directors in 2021. Climate-related issues as part of the “E” in ESG have risen up the agenda and investors will expect more emphasis and transparency on such reporting, with clear links to the company’s strategy. Similarly, in terms of governance, there will be a lot of attention on how the board has managed the company’s business during the pandemic, on its Section 172 statement and on its compliance with the best practice recommendations relating to the gender and ethnic makeup of the board and its senior management.
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