Corporate reporting – FRC Lab report on disclosures around stakeholders and decisions

The Financial Reporting Council’s Financial Reporting Lab has published a Report on stakeholders, decisions and Section 172 statements. The report sets out investors’ expectations in relation to disclosures on stakeholders and the impact of decisions on them and gives best practice examples.

The requirement for companies to report on how directors have had regard to the matters in section 172 of the Companies Act 2006 (see our briefing for further detail) has driven companies to increase reporting on their stakeholders. However, the Report says that there are still calls for better information on how companies are having regard to their stakeholders and taking their perspectives into account.

Recommendations in the Report include:

  • Stakeholders – When providing information on stakeholders, companies should:
    • identify key stakeholders and their respective interests by reference to the company’s business model and strategy, noting where particular stakeholders’ importance may vary over time;
    • describe stakeholder engagement processes, including feedback received, outcomes identified and the impact on decision-making;
    • assess opportunities and risks which could impact stakeholder relationships and describe what measures are being taken to manage these relationships; and
    • determine appropriate and reliable metrics to monitor stakeholder engagement and report against these metrics consistently.
  • Decisions – When setting out the significant decisions taken during the year, companies should:
    • link each decision back to the company’s purpose and strategy;
    • explain how the decision was reached, including how stakeholders were considered and the potential impact of the decision on each group of them;
    • be open about any difficulties or challenges in making the decision, including any prioritisation of particular stakeholder groups or offsetting of short-term negative consequences for long-term benefits; and
    • cover the expected and/or actual outcomes of the decision and the long-term implications for the company.

The report also considers the section 172 statement more broadly, cautioning that the statement should cover all aspects of the section 172 duty, not just stakeholders.

Alongside the report, the Lab has also published a summary of key questions, which companies can use to enhance the quality of information provided to investors on stakeholders and decisions, and further guidance on Section 172 statements.

Sarah Hawes
Sarah Hawes
+44 20 7466 2953

Alex Kay
Alex Kay
+44 20 7466 2447

Ben Ward
Ben Ward
+44 20 7466 2093

Audit reform and corporate governance – consultation paper on audit and corporate governance reform

The Department of Business, Energy and Industrial Strategy has today published its long awaited consultation paper on audit and governance reform, Restoring trust in audit and corporate governance.

The consultation paper follows three separate reviews into audit and the audit market over the last few years:

Together, these reviews made over 150 recommendations for reform. The consultation paper states that the government is planning to takes forward the vast majority of the recommendations.

Audit reform

Under the government’s proposals:

  • Director accountability – The Audit, Reporting and Governance Authority (ARGA), the successor regulator to the FRC, will have power to sanction directors of all large companies for breach of their duties under the Companies Act 2006 in respect of reports and accounts, including the duty to approve accounts only if they give a true and fair view, and the duty to provide information to auditors.
  • Audit process – There will be new reporting obligations on both auditors and directors around internal controls and detecting/preventing fraud. It is consulting on different options, including a regime similar in scope to the US’s Sarbanes-Oxley Act on auditor assurance on internal controls.
  • Annual accounts – The current mandatory going concern statement and viability statement will be replaced with a ‘resilience statement’, requiring directors to focus their minds on short term survival, medium term reliance and long term threats to resilience.
  • Audit market – In order to increase the number of firms participating in the audit market, FTSE 350 companies will be required to use a smaller “challenger” firm to conduct a meaningful portion of their annual audit (e.g. one or more subsidiaries would be audited solely by a challenger firm), referred to as a managed shared audit.

Corporate governance proposals

The consultation paper also proposes a wider range of governance reforms, including in relation to:

  • Executive pay – Under the UK Corporate Governance Code, listed companies will be expected to be able to recover bonuses or share awards from executive directors if they have failed to protect customers’ and employees’ interests; and
  • Dividends – Directors will be required to make a formal statement about the legality and affordability of any proposed dividend.
    The consultation period will close on 8 July 2021. Subject to the outcome of the consultation, the government will bring forward primary legislation to implement the proposed reforms when parliamentary time allows.

We will publish a fuller briefing on the detailed proposals in due course.

Sarah Hawes
Sarah Hawes
+44 20 7466 2953

Gareth Sykes
Gareth Sykes
+44 20 7466 7631

Ben Ward
Ben Ward
+44 20 7466 2093

Corporate governance – Supreme Court allows appeal relating to UK parent company duty of care

The UK Supreme Court handed down its judgment in a high profile jurisdictional challenge relating to group claims brought against Royal Dutch Shell Plc and its Nigerian subsidiary in connection with alleged pollution in the Niger Delta.

The claimants (some 42,500 individuals from the Niger Delta region) brought proceedings in the English courts against Royal Dutch Shell Plc (incorporated in England and Wales) and its subsidiary Shell Petroleum Development Company of Nigeria Ltd (SPDC). The claimants allege environmental damage resulting from the operations of a joint venture operated by SPDC in Nigeria. The claimants allege that Royal Dutch Shell Plc owed them a duty of care which arose from the significant control which it allegedly exercised over SPDC’s operations.

In a decision which will be of interest to all UK domiciled holding companies, the Supreme Court unanimously held that the English court does have jurisdiction to hear the claims. This means that the case can now proceed to a trial on the merits in the English court.

Our disputes team has published analysis of the Supreme Court’s decision on our Litigation Notes blog.

Sarah Hawes
Sarah Hawes
+44 20 7466 2953

Gareth Sykes
Gareth Sykes
+44 20 7466 7631

Stephen Wilkinson
Stephen Wilkinson
+44 20 7466 2038

Pensions – implications of the Pension Schemes Act 2021 for corporates

The Pension Schemes Act 2021 introduces significant reforms of the regulatory regime for defined benefit (DB) pension schemes.

The Act introduces new criminal offences and civil sanctions which could be applied to company directors, lenders, investors, sellers, purchasers and advisers who take action which, broadly speaking, is materially detrimental to a DB scheme and where they do not have a reasonable excuse for their actions.

These new offences and sanctions are broad and have the potential to:

  • impact corporate activity, including M&A and the payment of dividends in certain circumstances;
  • restrict the scope for distressed businesses with DB pension schemes to secure fresh investment or take on additional debt, particularly where the scheme has a material deficit; and
  • impact the feasibility, manner and desirability of restructuring a business or group with a DB scheme.

These new powers are not expected to come into force until mid-2021 at the earliest to give the Pensions Regulator time to consult on and issue guidance on how and in what circumstances it plans to exercise them.

Our pensions team has published a briefing which discusses the implications of the Act in more detail.

Mark Bardell
Mark Bardell
+44 20 7466 2575

Julie Farley
Julie Farley
+44 20 7466 2109

Robert Moore
Robert Moore
+44 20 7466 2918

 

 

FRC Lab report on section 172 statements

The FRC’s Financial Reporting Lab has published a guidance note on section 172 statements.

The Companies (Miscellaneous Reporting) Regulations 2018 (SI 2018/860) introduced a range of stakeholder reporting measures, including a requirement for certain companies to include in their strategic report a statement that describes how the directors of the company have had regard to the matters set out in section 172(1)(a) to (f) of the Companies Act 2006 when performing their duty under section 172 (see our briefing for further detail).

The FRC Lab guidance note seeks to help companies consider what content to include in a section 172 statement, how to present it and how to facilitate the process of preparing the statement.

Key points discussed in the guidance note include:

  • Content – The statement should explain why particular stakeholders are considered to be key; why particular engagement methods were effective; and the key decisions and planned actions in light of engagement and feedback. There should be appropriate linking to the company’s strategy and business model. The report also says that the statement should include discussion of the board’s oversight of stakeholder engagement.
  • Presentation – The statement should be clearly labelled, and cross-refer to further detail in other parts of the annual report. Case studies of significant decisions taken during the year are also helpful.
  • Process – Board agendas and board papers can be used to include helpful prompts on stakeholder-related issues.

 

Gareth Sykes
Gareth Sykes
+44 20 7466 7631

Antonia Kirkby
Antonia Kirkby
+44 20 7466 2700

Alex Kay
Alex Kay
+44 20 7466 2447

Updated ICSA guidance on the duties under the Companies Act 2006

ICSA, the Chartered Governance Institute, has updated its guidance note on directors’ duties under the Companies Act 2006. It now includes a section on the requirement to report on compliance with the section 172 duty to promote the success of the company. The guidance is particularly aimed at public companies but will also be useful for directors of private companies.

Under the section 172 reporting requirement (contained in section 414CZA of the Companies Act), the strategic report of a large company must include a statement describing how the directors have had regard to the factors set out in section 172(1)(a) to (f) when performing their duty under section 172. The updated guidance sets out matters that could be included in the section 172(1) statement for each of these factors. For example, on relationships with suppliers, customers and others, the guidance says that the statement could include information on: a company’s methods to engage with suppliers and customers and others to obtain their views, and the effect on board decisions; customer relations; prompt payment to suppliers; supply chain sustainability and resilience; and responsible sourcing.

The guidance has also been updated generally in relation to compliance with the duties set out in sections 171 to 177 of the Companies Act and a section has been added on the consequences of a breach of duty.

The guidance is available to members and subscribers on the ICSA website.

Sarah Hawes
Sarah Hawes
+44 20 7466 2953

Barnaby Hinnigan
Barnaby Hinnigan
+44 20 7466 2816

Ben Ward
Ben Ward
+44 20 7466 2093

Covid-19 – latest developments for corporate practitioners

Further guidance for companies has been published in light of the Covid-19 pandemic.

Company meetings

  • Shareholder meetings – Relaxations to the company meeting requirements contained in the Companies Act 2006 (as well as the meeting requirements for certain other entities) came into force on 26 June 2020. Under the relaxations, which were made by the Corporate Insolvency and Governance Act 2020, shareholder meetings can take place by electronic or any other means, notwithstanding the provisions contained in the Companies Act 2006 and the company’s articles of association. The participants need not be in the same place and shareholders do not have a right to attend in person. The relaxations apply to company meetings held between 26 March and 30 September 2020. ICSA: The Chartered Governance Institute and the City of London Law Society have published guidance on holding meetings under the Act. The guidance is available to members on The Chartered Governance Institute’s website.

Company filings

  • Temporary extension to filing deadlines The Companies etc. (Filing Requirements) (Temporary Modifications) Regulations 2020, which were made under the Corporate Insolvency and Governance Act 2020, temporarily extend various filing deadlines under the Companies Act 2006 and other legislation for companies and other entities, including:
    • Accounts: extended by three months, to 12 months for a private company and nine months for a public company. The extension, which is automatic, applies to the original filing deadline. It will not be added to any filing extension already granted by Companies House;
    • Confirmation statement: extended from 14 days to 42 days;
    • Events-driven filings (such as changes in details of directors): extended from 14 days to 42 days; and
    • Charges: extended from 21 days to 31 days.

The longer filing periods apply to filing deadlines that fall between 27 June 2020 and 5 April 2021 (inclusive). Companies House Guidance notes that the revised filing dates can be checked via the Companies House Service.

  • Extension of Companies House upload service – Companies House has extended its temporary upload service (see our corporate update 2020/13) to enable companies to file articles of association and related forms and resolutions online, rather than in paper format. The list of documents and forms which can now be uploaded using this service is available here.

Insolvency regime and directors’ duties

As well as relaxing the requirements for company meetings and allowing extensions to the filing deadlines for certain documents, as discussed above, the Corporate Insolvency and Governance Act 2020 has also made changes to the insolvency regime in the UK. The changes include:

  • Suspension of wrongful trading – When determining what contribution, if any, a director should make to a company’s assets following a finding of wrongful trading, the court must assume that a director is not responsible for any worsening of a company’s financial position between 1 March 2020 and 30 September 2020.
  • Ipso facto (termination) clauses – Contractual clauses permitting a supplier of most goods or services to terminate supply as a result of the customer’s entry into an insolvency procedure will cease to have effect.
  • Winding up petitions – Winding up petitions cannot be presented if based on statutory demands dated 1 March 2020 to 30 September 2020. Creditors will also be prevented from winding up a company unless the creditor has reasonable grounds to believe that Covid-19 has not had a financial effect on the company.
  • New company moratorium – A new moratorium is available for companies, which will give a company up to 40 business days of protection from creditors, without court or creditor approval. The moratorium prevents legal processes against the company, including commencing insolvency proceedings and crystallising a floating charge.
  • Restructuring plan – This new form of restructuring, similar to a scheme of arrangement, allows the court to impose a compromise on a company’s creditors and shareholders, including a cross-class cram-down.

We have previously published briefings on the impact for supply chains, landlords, banks and pension scheme trustees.

Other relevant materials

  • ESG – Corporate purpose and environmental, social and governance (ESG) issues dominated headlines in the months leading up to the Covid-19 outbreak. The intense public scrutiny of corporate conduct, governance and investment behaviours during the pandemic has served to accelerate the conversation around ESG issues. To help make sense of this new paradigm, we have published a guide in which we set out some of the ways in which Covid-19 is impacting the key ESG considerations confronting businesses, asset managers, asset owners and lenders.
  • Investment and acquisition opportunities – We expect the crisis to operate as a catalyst for change. As we transition to a new normal, there will be opportunities for those with access to capital and a desire to invest or participate in industry consolidation. In our latest guide we look at possible options and issues for those looking to invest.
  • Land Registry and electronic signatures – The Land Registry has issued draft practice guidance setting out the basis on which it will accept electronic signatures. The consultation closes on 18 July 2020 and the final practice note will be issued in the “next few weeks”.
  • Service of proceedings – The High Court has set aside default judgment obtained against a defendant Council where the claim form and particulars were posted to its offices shortly after the start of the Covid-19 lockdown. For further information, see our Litigation Notes blog post.

For further Covid-19 related publications, see our COVID-19 Hub.

Mark Bardell
Mark Bardell
+44 20 7466 2575

Sarah Hawes
Sarah Hawes
+44 20 7466 2953

Antonia Kirkby
Antonia Kirkby
+44 20 7466 2700

Proposed insolvency reforms – impact on supply chains and their customers

As previously noted, the new Corporate Insolvency and Governance Bill, currently expected to be enacted in mid-June 2020, is likely significantly to impact many supplies of goods and services to companies that are or may be in financial distress. However, the effects are sufficiently far-reaching that they could impact the balance of rights in all supply chains and particularly the drafting of supply contracts, with an impact on both suppliers and their customers or clients.

Suppliers may seek to act now to mitigate or address the likely impact of the Bill and to maximise the prospects of obtaining full payment. Since each supplier is likely also to be another supplier’s customer or client, any impact on one supplier is likely to have a knock-on impact on its suppliers and so on throughout the supply chain.

Our Restructuring, Turnaround and Insolvency team has analysed the likely impact on supply chains in this note on our website. For an analysis of the effect on other key groups, see the team’s notes on the impact on secured and unsecured bank debt and on landlords’ recoveries in an insolvency process.

Terms of reference for risk committees

ICSA: The Chartered Governance Institute has published a guidance note and terms of reference for risk committees.

The guidance note and terms of reference reflect the risk management requirements of the 2018 edition of the UK Corporate Governance Code and the 2014 FRC Guidance on Risk Management, Internal Controls and Related Financial and Business Reporting. ICSA says that the terms of reference will be of particular relevance to regulated companies such as banks and insurance companies, but will also be relevant where a board considers that a risk committee, separate from the audit committee, is necessary or desirable.

The document discusses the essential elements of a risk committee, including membership, duties, risk appetite, strategy and narrative reporting requirements.

The guidance is intended to complement the updated Audit, Nomination and Remuneration guidance notes and terms of reference published earlier this year.

Sarah Hawes
Sarah Hawes
+44 20 7466 2953

Roddy Martin
Roddy Martin
+44 20 7466 2255

Gareth Sykes
Gareth Sykes
+44 20 7466 7631

Investment Association statement on shareholder priorities

The Investment Association (IA) has published a document discussing Listed company shareholder priorities for 2020. It focuses on four areas that IA members consider to be key drivers to long-term value. It also discusses the approach that IVIS, the IA’s corporate governance research service, will take in these areas when highlighting issues relevant to shareholders exercising their votes.

The four areas of focus are:

  • Climate change – The IA says that investors are looking for significant progress from listed companies in implementing the Financial Stability Board’s Task Force on Climate-related Financial Disclosures (TCFD) recommendations (see our corporate update 2017/14).  IVIS will introduce a new section to its ESG report (on environmental, social and governance issues), highlighting to investors whether a company has made climate change-related disclosures.
  • Audit quality – The document notes that the quality and robustness of the audit is essential for investors but that, in practice, audit committee disclosures are often generic. The IA says that audit committee reports need to properly disclose where challenges have been raised, how professional scepticism has been applied and how a quality audit has been delivered. IVIS will revise its questions to encourage better disclosures around audit.
  • Stakeholder engagement and employee voice – The IA says that investors are keen to better understand how directors are fulfilling their duties and taking account of the views of the company’s material stakeholders. IVIS will introduce two new questions to ascertain whether the board has identified a company’s material stakeholders and its engagement with them, and which of the four options for workforce engagement outlined in the Corporate Governance Code a company has adopted.
  • Diversity – The IA notes the progress that has been made in relation to gender diversity on boards in light of the Hampton-Alexander Review. It also notes that investors expect companies to place  greater emphasis on ethnic diversity, in particular in light of the Parker Review (see item 1 above). The IA says that IVIS will red top any FTSE 350 company where:
    • women represent 20% or less of the board;
    • there is one or less women on the board (unless the one third target is achieved i.e. a board of three directors); or
    • women represent 20% or less of the Executive Committees and their direct reports.

For FTSE Small Cap companies, IVIS will amber top any company where women represent 25% or less of the Board; there is one or less women on the Board (unless the one third target is achieved); or women represent 25% or less of the Executive Committees and their direct reports.

Alex Kay
Alex Kay
+44 20 7466 2447

Caroline Rae
Caroline Rae
+44 20 7466 2916

Gareth Sykes
Gareth Sykes
+44 20 7466 7631