EQ Boardroom Bulletin – December 2019

Articles in this edition cover: 

• The Investment Association highlights changes to its Principles of Remuneration for 2020
• Glass Lewis and ISS publish their Voting Policy Guidelines for 2020
• Focus on climate change reporting by regulators
• Matters for Audit Committees to consider for 2019/20 annual reports
• Hampton-Alexander Review publishes its fourth annual report
• Help with the complexities of the Register of People with Significant Control
• BEIS Committee publishes corporate governance recommendations following the collapse of Thomas Cook
• Developments in Audit report
• Revised Stewardship Code is published by the Financial Reporting Council

News from across Equiniti:

• Our new Digital Experience Centre launched in Krakow
• Expansion in the US with our acquisition of Corporate Stock Transfer Inc
• Executive Remuneration Challenges and Understanding the Long Term Incentive Landscape

Dates for your diary:

Wednesday 11 December – Equivalence Forum

Join like-minded professionals and hear the latest updates and industry news impacting Company Secretaries. If you would like to attend, please speak to your Relationship Manager or email eqevents@equiniti.com.

Monday 16 December - Preparing for a Successful Remuneration Policy Renewal Webinar

With Brexit uncertainty and many economists predicting an economic downturn in 2020, it could pose an interesting challenge for some companies seeking approval of their remuneration policy.

Join Adam Rose, Head of Corporate Governance and Industry Research and Karoline Herms, Senior Corporate Governance Consultant from Boudicca to explore the trends we are likely to see in the upcoming proxy season and how you can prepare for a successful renewal.  If you would like to attend the webinar, please register here

The Investment Association highlights changes to its Principles of Remuneration for 2020

The Investment Association (IA) has written to Remuneration Committee Chairs outlining the key changes to the IA’s Principles of Remuneration for 2020 (the 2020 Principles).  The revised IA guidelines were published on 1 November 2019.  The letter highlights the areas of focus for investors in the forthcoming AGM season.  These include:

Alternative remuneration structures - The IA indicates that there are concerns over the operation of traditional long term incentive plans and that committees should review remuneration structures pointing out that a report by the Purposeful Company has shown investors are more willing to consider other structures such as restricted stock plans as long as these are linked to strategic outcomes.

Discretion on vesting outcomes - The 2020 Principles contain a recommendation that incentive schemes have a discretion for Remuneration Committees to limit vesting outcomes if a specified monetary value is exceeded. 

Pensions - Pension contribution rates for executive directors should be aligned with the majority of the workforce and a plan should be in place to reduce contributions of existing directors to this level by the end of 2022.

Shareholding and post-employment shareholding requirements - Post-employment shareholding requirements should be introduced in all new remuneration policies put to shareholders.

Remuneration levels - The IA continues to be concerned about excessive levels of remuneration for directors and Remuneration Committees are urged to use constraint when increasing fixed and variable pay.

Pay for performance - Reporting on financial, strategic and personal targets for performance pay should be robust and transparent so that the link between pay and performance is clear.  Strategic and personal targets and outcomes should be disclosed separately.

The IA’s letter is available here and the Principles of Remuneration 2020 are available here

Glass Lewis and ISS publish their Voting Policy Guidelines for 2020

Glass Lewis has published its Policy Guidelines for the 2020 voting season and the key changes are:

• Gender diversity – Glass Lewis may vote against the Nomination Committee chair of a FTSE 350 board that has not met the 33% Hampton-Alexander Review target and has not put forward any cogent explanation or plan to address the issue.
• Board skills – Glass Lewis will include board skill matrices in their analysis of director election proposals for all FTSE 350 companies (previously just the FTSE 100).  A vote against the Nomination Committee Chair may be recommended if a Board has not addressed major issues of Board composition.
• Audit Committee meetings – A vote against the election of the Audit Committee chair may be recommended at a FTSE 350 company where the Audit Committee has not held a minimum of 3 meetings during the year without explanation.
• Smaller Premium listed companies – In line with the 2018 UK Corporate Governance Code exemptions for smaller companies outside of the FTSE 350 will no longer be made.  In relation to the balance of independent directors, Glass Lewis will generally accept explanations for non-compliance in 2020 where the company intends to comply going forward.  In 2021 Glass Lewis will expect the Boards of smaller companies to comply.  
• Salaries and pensions – salary increases and pension contribution levels should reflect those awarded to the wider workforce.
• Incentive plans – awards for incentive plans should be subject to clear and transparent limits ideally expressed as a multiple of base salary.
• Post-employment shareholding requirements – these are expected as best practice features of remuneration policies.
• Remuneration Committee discretion – Remuneration Committees should consider using downward discretion where there has been an exceptional negative event (including a sharp decline in share price) even if targets have been met. 

Glass Lewis will also review compliance with the Investment Association’s Principles of Remuneration when considering voting recommendations. 

The Glass Lewis Proxy Guidelines are available here

Institutional Shareholder Services (ISS) has also published updated Proxy Voting Guidelines which will be effective for meetings on or after 1 February 2020.  The main changes to the 2019 ISS guidelines are:

• Gender diversity – ISS will recommend a vote against the Nomination Committee chair where there are no female directors on the board.  Mitigating factors include where there was a female director on the board at the preceding annual meeting and a firm commitment to appoint at least one female director to the board within a year has been made.
• Tenure of the Chair - ISS will consider the re-election of the chair on a case-by-case basis, taking into account such factors as succession planning, diversity, and board independence, in addition to tenure.
• Pension contribution rates – rates for new executive directors should be aligned with those of the wider workforce, and companies should disclose whether or not this is the case. For incumbent directors, companies should seek to align the contribution rates with the workforce over time.
• Annual bonus targets – Detailed targets for financial and non-financial objectives should be disclosed preferably with a full target range (e.g. threshold, target and maximum) set out. ISS expects disclosure of sensitive targets to be provided no more than one year after the end of the relevant performance year immediately following the reporting year.
• Remuneration and ESG factors - The remuneration committee should disclose how it has taken into account any relevant environmental, social, and governance (ESG) matters when determining remuneration outcomes. This may include workplace fatalities and injuries, significant environmental incidents, large fines or sanctions from regulatory bodies and/or significant adverse legal judgments or settlements.

Further information on the new ISS guidelines is available here

Focus on climate change reporting by regulators

The Financial Conduct Authority (FCA) has published a Feedback Statement which summarises responses to the FCA’s Discussion Paper on climate change and green finance published in October 2018.  The FCA identifies priorities which include disclosures made by companies on climate change, regulated firms’ approach to climate change risk and opportunities in their decision-making and consumers’ access to green financial products and services.   The FCA has said its next steps are to:

• Consult on new rules to improve climate-related disclosures and clarify existing reporting obligations.
• Finalise rule changes requiring Independent Governance Committees to oversee and report on regulated firms’ environmental, social and governance policies.
• Publish a feedback statement in response to a joint discussion paper with the Financial Reporting Council on actions to address barriers to effective Stewardship.

The Feedback Statement is available here

The Financial Reporting Council (FRC) has published a report by the FRC’s Financial Reporting Lab (the Lab) on climate change reporting.  The report makes recommendations to improve corporate reporting in this area and the sort of information that shareholders would like to see which includes information on:

• how boards consider and assess the topic of climate change.
• whether, and how, the business model may be affected by climate change, whether it remains sustainable, and how the company may respond to the challenge posed by climate change.
• what the opportunities and risks are, including the prioritisation of risks and their likelihood and impact. 
• what changes the company might need to make to strategy to capitalise on a changing climate and related opportunities. 
• what climate-related scenarios might affect the company’s sustainability and viability, and how the impact is measured. 

The Lab recommends companies use the Task Force on Climate-related Financial Disclosures (TCFD) framework to report on climate-related issues not least because the UK Government expects all listed companies and large asset owners to disclose in line with the TCFD recommendations by 2022.

The Lab’s report is available here

Matters for Audit Committees to consider for 2019/20 annual reports

The Financial Reporting Council (FRC) has published a letter to Audit Committees and Finance Directors on matters that the FRC considers are important for 2019/20 annual reports.  The FRC highlights the following:

• The requirement for the largest companies to publish a non-financial information statement has met with a mixed response in terms of content and presentation.  The FRC highlight that the statement should be separately identifiable but can cross-refer to disclosures provided they are in the strategic report.  Disclosures should include information on policies, due diligence processes and outcomes in respect of environmental, social, anti-corruption and anti-bribery matters, employees and human rights.
• The content of S172 statements should include: 
  • Issues, factors and stakeholders they consider relevant and basis on how they came to that view 
  • The main methods used to engage with stakeholders
  • Information about the effect of stakeholder issues on the company’s decisions

• Environmental disclosures
  The FRC has published a statement setting out what it expects climate change reporting to include.  It points out that neither the non-financial information or S172 statements specifically require companies to disclose the impact of climate change on their operations.  However, the UK Corporate Governance Code does focus on emerging risks and therefore companies should report on the effects of climate change on their business.

The letter also reports on the findings of the FRC’s monitoring work carried out in the year on critical judgements and estimates, reporting on cash and use of Alternative Performance Measures. 

The FRC’s letter is available here

Hampton-Alexander Review publishes its fourth annual report

The Hampton-Alexander Review has published its fourth annual report into female representation on the boards of FTSE 350 companies.  The report highlights that the drive to address the shortfall of women in leadership has continued and progress has been made.  The FTSE 100 will likely achieve the 33% target for women on Boards ahead of the December 2020 deadline.  The FTSE 250 has had its best year to date increasing the number of women on Boards to 29.6%.  Just under half of the FTSE 250, 111 Boards have already met or exceeded the 33% target.  The FTSE 350 is expected to meet the target by the end of 2020. 

However, in terms of the executive pipeline progress has not been so good:

• In the FTSE 100, the number of women in the Combined Executive Committee and Direct Reports category has increased to 28.6% from 27%.  However, the appointment rate for women has remained low at 36%.  Around two-thirds of all available senior FTSE 100 roles go to men.  Therefore, many companies are short of the 33% target in this sector and will not achieve this by the end of 2020.
• The FTSE 250 has seen better progress with the number of women at the Combined Executive Committee and Direct Report level increasing to 27.9% in 2019, up from 24.9%. The appointment rate for women has increased by 5% to 35%.  However, as for FTSE 100 companies, two-thirds of positions go to men and therefore the FTSE 250 will not achieve the 33% representation target in senior management by the end of 2020. 

The Hampton-Alexander report is available here 

Help with the complexities of the Register of People with Significant Control 

The Law Society and the City of London Law Society have produced a set of Q&As aimed at providing guidance with some of the complexities of the requirement to produce a Register of People with Significant Control (PSC Register).  

The Q&As are available here

BEIS Committee publishes corporate governance recommendations following the collapse of Thomas Cook

A Select Committee of the Department for Business, Energy and Industrial Strategy (BEIS) looking at the collapse of Thomas Cook has sent a letter and series of recommendations to the Secretary of State for BEIS.  The Committee notes that its inquiry has been cut short by the general election and also sets out concerns that the recommended audit reforms and replacement of the Financial Reporting Council (FRC) have not been progressed.  The Select Committee’s key recommendations include:

Bonus criteria – measures should be pre-defined and not ambiguous designed to address a balance of company objectives.  The FRC should develop guidelines on bonuses to ensure they are stretching and reward exceptional performance only.

Late payments – The Small Business Commissioner should be given powers to tackle the issue of late payments and a statutory limit of 30 days for suppliers to be paid should be introduced.  A company’s payment practices should be a measure by which CEO performance is measured.

Role of the Board – previous recommendations are re-stated – that directors should not be appointed to the board solely on the basis of one particular background or expertise to promote cognitive diversity and therefore an effective challenge.

Goodwill – the use of goodwill and its impairment should be reviewed.

Audit – reform of the audit sector is urgently required. There should be a clear separation between audit and non-audit parts of the auditor’s business.

Developments in Audit report

The Financial Reporting Council (FRC) has published its latest Developments in Audit report.  Highlights are:

• Audit quality is not consistently achieving high standards particularly in the area of challenging management and audit teams except too readily what company management tells them.
• Routine audit procedures also showed shortcomings in some areas such as in relation to revenue recognition. 
• Auditors were often not identifying relevant internal controls in areas of significant risk.
• Familiarity with the company can lead to the same approach being followed every year and therefore lack of challenge.
• Unrealistic audit deadlines placed on the audit team can lead to inadequate work.

The Developments in Audit report is available here

Revised Stewardship Code is published by the Financial Reporting Council

The Financial Reporting Council (FRC) has published a revised UK Stewardship Code (the 2020 Code) which it heralds as being ‘a substantial and ambitious revision’ to the 2012 Stewardship Code.  It is to be seen in the context of the revision of the UK’s corporate governance framework that included the introduction of the 2018 UK Corporate Governance Code.  The 2020 Code consists of 12 Principles for asset managers and owners and six for service providers and sets out the information that the signatory to the code should publicly report. Key amendments to the previous code include:

• The extension of the 2020 Code to asset owners such as pension funds and insurance companies as well as asset managers.
• A requirement to report annually on stewardship activity and expectations for greater transparency.
• Environmental, social and governance factors, including climate change, should be taken into account by a signatory to the 2020 Code.
• Explanations on stewardship are expected for assets beyond listed equity such as fixed income and private equity.
• Signatories should explain their organisation’s purpose, investment beliefs, strategy and culture and explain how these help with stewardship.  

The 2020 Stewardship Code takes effect from 1 January 2020 and is available here

News from across Equiniti

Our new Digital Experience Centre launched in Krakow

Last month, we opened our Digital Experience Centre, EQ Tek, which is a new R&D facility for our client-facing applications. Headquartered in Krakow, Poland, EQ Tek will create an additional 150 roles for high-calibre developers as well as systems and UX experts within Equiniti. The team will be developing best-in-class applications and product delivery systems across all divisions of the business. 

This focused operation is expected to transform the services Equiniti can offer its entire client-base, delivering a sophisticated suite of applications and a market-leading digital experience for end customers. 

James Hughes, Minister-Counsellor for Economic Affairs (British Embassy) and Ms Katarzyna Wysocka, Director of the Entrepreneurship and Innovation Department (Krakow) joined our Chief Executive Guy Wakeley and Kevin O’Connor (Group Chief Information Officer at Equiniti) to cut the ribbon on Equiniti’s newest office.

Kevin O’Connor gives us the lowdown on Krakow, tech meet-ups, and EQ’s fast developing IT capabilities here

Expansion in the US with our acquisition of Corporate Stock Transfer

In November, we completed our acquisition of Corporate Stock Transfer Inc (CST), a US transfer agent based in Denver, Colorado.  CST will become part of our US division, EQ.  

Read the Press Release here

Executive Remuneration Challenges and Understanding the Long Term Incentive landscape

Following our two annual flagship client conferences held recently, the Employee Services Forum and the Share Registration Conference, we have written a series of articles covering some of the main themes and hot topics discussed at the events.  To start, here are three of these from our Employee Services Forum

• Current Governance Challenges with Executive Remuneration – Boards have their work cut out keeping up with government, investor and proxy adviser pressure.  We gathered four perspectives on the current challenges of corporate governance here
• Nine big trends in Long Term Incentive policy – Do you want to understand changes in the Long Term Incentive landscape? Thanks to research from EY, we can bring you nine key trends here
• Unbundling the joy of data - How can we manage change in uncertain times? And how can we use data to help us do it? These were two of the big themes at this year’s absorbing Employee Services Forum, featuring a fascinating analytical insight from TV and radio presenter Dr Hannah Fry here