EQ Bulletin - January 2022

In This Edition

• FRC: Annual Review Of Corporate Governance Reporting
• FRC: Report On Corporate Culture
• Glass Lewis: Executive Compensation
• ISS Proxy Voting Guidance Updates
• FCA: Primary Markets Effectiveness Review
• FCA: Primary Market Bulletin No.37
• FCA: Climate-Related Disclosures
• Takeover Code
• National Security And Investment Act 2021: Guidance

FRC: Annual Review Of Corporate Governance Reporting

The Financial Reporting Council (FRC) has issued its annual review of corporate governance reporting against the UK Corporate Governance Code 2018. (“the Code”).

The review notes that there is still room for further improvement in areas such as substantive disclosures on Board appointments, succession planning and diversity. In addition, the following was noted:

• Companies need to improve the transparency of non-compliance reporting and provide more informative explanations. The use of boilerplate or declaratory statements is discouraged in the report.
• There has been an improvement in reporting on environmental and social issues, with better quality information on the issues under consideration and how this has been considered at board level. However, very few companies reported on areas where they underperformed or failed to meet targets.
• Diversity and inclusion and succession planning at board level and through the pipeline remain a concern.
• Very few companies explained how remuneration aligns with company purpose and values.
• Nominations committees appear to receive less focus within the annual report than audit or remuneration committees do.
• The low quality of reporting on Modern Slavery by companies is a matter of concern. Although the lack of disclosure may not necessarily reflect a lack of action, companies are encouraged to build trust with investors and wider stakeholders by explaining how they are combatting Modern Slavery in their supply chains.

Several expectations are detailed in the report including:

• The FRC expects companies to report clearly and transparently any non-compliance with any provisions of the Code and provide clear and meaningful explanations of departures from the Code.
• There should be further improvements in the quality of disclosures of how purpose, values and strategy are connected.
• Engagement should be with a wide range of shareholders, not only the largest few, to understand and try to address shareholder concerns as far as practically possible. Additionally, views received from shareholders and other stakeholders, and actions taken, need to be communicated in a clear manner and within a specified timeframe.
• Companies need to report on how the board oversees stakeholder decisions. Issues include how, and on what basis, stakeholder information is passed to the board, as well as on how often the board reviews engagement methods and identification of any issues discussed.
• Companies either need to describe their diversity policies in full in their annual report or summarise them and link to the full document on their website to enable easy access. Companies should promote and recruit on merit and the FRC expects to see an improvement in reporting on succession planning. This is particularly the case for companies that highlight succession planning as an outcome of a board evaluation as an area in which to improve.

Read more: Review of Corporate Governance Reporting

FRC: Report on Corporate Culture

The Financial Reporting Council (FRC)  has published a report on corporate culture entitled 'Creating Positive Culture: Opportunities and Challenges'. This report is intended to build on a report published by the FRC in 2016 ('Corporate Culture and the Role of Boards'). The report found that the COVID-19 pandemic has challenged the resilience and agility of companies, with many having to swiftly change their strategy, business model and their ways of working. There have been changes in stakeholder and investor priorities. There is now a strong emphasis on the importance of environmental, social and governance (ESG) matters, particularly for the workforce and investors, but also other stakeholders. Areas such as well-being, flexible working and working constructively with stakeholders are now seen as important areas of focus. Amongst the conclusions of the report the following matters were highlighted:

• Leadership should come from the top, through actions and attitudes, but the workforce must feel engaged and able to contribute.
• While companies are now collecting a vast amount of culture-related data and information, in many cases the benefits that can be gained from joining up across different functions are not being effectively utilised.
• Creating a positive culture should improve performance. Trust, empathy and psychological safety are crucial to fostering a positive culture.

One way to assess how companies are changing their culture is to look at reporting. The FRC’s Review of Corporate Governance Reporting found that there was room for improvement in both the way that companies promote culture and how it is assessed. The FRC intends to continue monitoring corporate disclosures in this area and build on this report by making available additional information and guidance for companies.

Read more: Creating Positive Culture: Opportunities and Challenges

Glass Lewis: Executive Compensation

Glass Lewis has issued an updated version of its approach to executive compensation in the context of the COVID-19 pandemic for the Europe, Middle East and Africa region. The guidance has changed to remove specific references to fiscal years and clarifies that the guidance will apply during the COVID-19 pandemic, especially for companies and industries that continue to be affected by the pandemic. When judging a board's decisions on executive remuneration, Glass Lewis will expect, among other things, overall lower outcomes than pre-pandemic levels (rather than lower outcomes than in the previous year) for all companies that continue to be affected by the crisis. 

Read more: Glass Lewis Executive Remuneration.

ISS Proxy Voting Guidance Updates

Institutional Shareholder Services (ISS) has published updates to its UK proxy voting guidelines for 2022. This follows on from a consultation that closed on 16 November 2021. The updated policies are intended to apply for meetings being held on or after 1 February 2022.

The final changes to the guidelines relating to say on climate management proposals, say on climate shareholder proposals, board accountability on climate, board gender and ethnic diversity, and the use of ESG performance conditions in variable remuneration schemes, are substantially like the draft changes consulted on. One further change has been made, to its policies for investment companies, to remove share issuance proposals involving the issue of C shares from its general approach to resolutions seeking authority to issue equity. Further detailed guidance is expected to be issued.

Read more: Institutional Shareholder Services.

FCA: Primary Markets Effectiveness Review

The Financial Conduct Authority (FCA) has published a policy statement on its proposed changes to the Listing Rules (and minor changes to Disclosure Guidance and Transparency Rules and Prospectus Regulation Rules) set out in its consultation paper on the effectiveness of its primary markets. The following changes which came into force on 3 December 2021 have been made:

• Allowing a targeted form of dual-class share structures within the premium listing segment to encourage innovative, often founder-led companies onto public markets sooner and so broaden the listed investment landscape for investors in the UK.
• Reducing the number of shares an issuer is required to have in public hands (i.e. free float) from 25% to 10%, reducing potential barriers for issuers created by current requirements.
• Increasing the minimum market capitalisation (MMC) threshold for both the premium and standard listing segments for shares in ordinary commercial companies from £700,000 to £30 million (there was a proposal that the MMC should be £50million). Raising the MMC will give investors greater trust and clarity about the types of companies with shares admitted to different markets.

Minor amendments have also been made, including to the Reform and Modernisation Instrument to also provide that a reference to a copy of a document includes a copy recorded using electronic means. The change to the Reform and Modernisation Instrument is effective from 10 January 2022.

Looking forward the FCA has decided a wider review is necessary, rather than relying on case‑by‑case assessments and waivers to its existing requirements for the financial track record of premium listed companies.

Read more: Primary Market Effectiveness Review: Feedback and financial changes to the Listing Rules

FCA: Primary Market Bulletin No.37

The Financial Conduct Authority (FCA) has published its latest bulletin.

The bulletin includes:

• A further reminder to issuers that mandatory filing of annual financial reports in a structured XHTML web browser format comes into force for financial years starting on or after 1 January 2021 for filing from 1 January 2022, as well as recommendations to review the requirements and take advantage of the opportunity to voluntarily file accounts in the new format before the rules apply, along the lines set out in the FRC and FCA's November letter to CEOs.
• A suggestion that issuers consider setting up and maintaining a second Primary Information Provider account so that, when its usual PIP notifies it of a breakdown in service, it would be able to ensure its regulated information is disseminated in a timely way, as required by Market Abuse Regulations, Listing Rules and Disclosure Guidance and Transparency Regulations.
• The findings of its review of sponsor requirements to identify and manage conflicts of interest. Among other things, it encourages all sponsors to review the findings and refresh their understanding of the rules and guidance, including Technical Note 701.3, and urges them to keep conflict obligations at the front of their minds. It considers it would be useful for sponsors that have not previously contacted the FCA to request guidance on conflicts to reflect on why and identify if there are specific areas not previously considered that may be relevant in future. It reminds sponsors to contact it at the earliest opportunity and ensure their submissions precisely identify the actual or potential conflict and, where applicable, includes an assessment under the reasonable market user test.

Read more: Primary Market Bulletin No. 37

FCA: Climate-Related Disclosures

The Financial Conduct Authority (FCA) has published a policy statement PS21/23 on Listing Rules changes to extend climate-related disclosure requirements to standard listed companies and to provide new guidance for premium listed companies, together with final amendments to the Listing Rules. The instrument comes into force 1 January 2022.

Changes to the FCA's proposed amendments (which, briefly, extend climate-related disclosure requirements to issuers with standard listed equity shares) include:

• Extending LR 14.3.27R to issuers of standard listed shares other than equity shares and to standard listed issuers of Global Depositary Receipts (through LR 18.4.3R) In each case, this excludes investment entities and shell companies such as Special Purpose Acquisition Companies. TR 17(1) provides LR 14.3.27R applies to financial years beginning on or after 1 January 2022. Updated Technical Note 801.1 reflects this wider scope.
• Adding guidance on transitional plan disclosures in new LR 9.8.6FG, which applies to premium listed companies for financial years beginning on or after 1 January 2022 under TR 17(2), and in new LR 14.3.32G, which applies to standard listed companies under the new rules. The guidance provides that where making disclosures on transition plans, a listed company headquartered or operating in a country with a net-zero economy commitment (like the UK) is encouraged to assess the extent to which it has considered that commitment in its transition plan (or explain why not).
• Referring to the Taskforce on Climate-Related Financial Disclosures(TCFD) Guidance on Metrics, Targets and Transition Plans and to the TCFD Annex both published in October 2021 in existing LR 9.8.6BG and LR 9.8.6CG, for financial years beginning on or after 1 January 2022 under TR 17(2)(3), and in LR 14.3.28G and LR 14.3.29G, as part of the new rules.

Read more: Enhancing climate-related disclosures by standard listed companies
Read more: Listing Rules

Takeover Code

The Code Committee of the Takeover Panel published a consultation paper seeking views on proposed amendments to various provisions of the Takeover Code. The consultation closes on Friday 18 February 2022. The proposed amendments include:

• Requiring a publicly identified potential offeror to announce any minimum level, or form, of consideration it is obliged to offer to offeree company shareholders.
• Restricting a mandatory offeror, and any person acting in concert with it, from acquiring additional interests in shares in the offeree company in the 14 days up to and including the unconditional date and the expiry of an acceptance condition invocation notice.
• Amending Note 1 on Rules 35.1 and 35.2, Note 2 on Rule 2.5 and Note 2 on Rule 2.8 in relation to the restrictions following the lapsing of an offer or a statement of no intention to bid.

Read more: Public Consultation Paper: Miscellaneous Code Amendments

Also in a separate statement the Takeover Panel has advised that with effect from 2 December 2022, the Panel Executive will accept offer documentation in electronic form only.

Read more: The Takeover Panel

National Security And Investment Act 2021: Guidance

The Department for Business, Energy and Industrial Strategy (BEIS) has issued guidance to assist acquirers in completing and registering a notification form under the National Security and Investment Act 2021. The guidance includes information on how to register for an account with the National Security and Investment notification service through which notifications must be submitted, complete the notification forms, submit a declaration and withdraw a notification.

BEIS has also published all the questions that notifying parties will be asked when completing a mandatory notification, voluntary notification, retrospective validation application and notification declaration. It states that it is publishing them now so that the parties can collect the necessary information before the service goes live on 4 January 2022.

Further details can be found on Gov.uk below:

• Completing and registering a notification form
• Mandatory notifications
• Voluntary notifications
• Retrospective validations
• Declarations that need to be provided when submitting a notification.