Half-yearly corporate update – our latest briefing

We have published our half-yearly update briefing which summarises the major developments in UK corporate law and regulation that have occurred over the last six months, that is from July to December 2022, and which are of relevance to UK listed companies.

The briefing is available here.

Julie Farley
Julie Farley
+44 20 7466 2109

Mike Flockhart
Mike Flockhart
+44 20 7466 2507

Sarah Hawes
Sarah Hawes
+44 20 7466 2953

Investment Association Principles of Remuneration for 2023

The Investment Association (IA) has published its annual letter to remuneration committee chairs setting out shareholder expectations for 2023, as well as an updated version of its Principles of Remuneration.

In its letter to remuneration committee chairs, the IA highlights the key areas of focus for its members when considering the remuneration practices of companies in the forthcoming AGM season. Topics covered include salary levels and the cost of living, windfall gains and the use of ESG metrics in executive remuneration.

It also notes that IVIS (the Institutional Voting Information Service, which is part of the IA) will red top any remuneration policy or report where executive pension contributions are not aligned to the majority of the workforce.

There are no significant changes to the Principles of Remuneration for this year.

For further information see this post on our Remuneration and Incentives blog.

Mark Bardell
Mark Bardell
+44 20 7466 2575

Antonia Kirkby
Antonia Kirkby
+44 20 7466 2700

Caroline Rae
Caroline Rae
+44 20 7466 2916

PLSA Stewardship Guide and Voting Guidelines 2022

The Pensions and Lifetime Savings Association (PLSA) has issued its Stewardship Guide and Voting Guidelines for 2022. The 2022 Guidelines set out the PLSA’s views on current best practice and its voting recommendations for AGMs in 2022.

Three key areas covered by the 2022 Guidelines are:

  • Climate change – The PLSA wants to see all listed companies refer to the TCFD framework and include better disclosure on the company’s impact on the environment.
  • Executive remuneration – Restraint should be shown on executive pay proposals in light of the increasing cost of living, and especially where companies benefitted from Government support during the pandemic.
  • Diversity – The PLSA says it is seeing significant progress on diversity on boards and welcomes the direction of travel. It calls for a continued focus on ensuring diversity, and says that investors should vote against re-election of the Chair and/or Chair of the Nominations Committee of FTSE 100 companies that are consistently failing to move closer to the Parker Review target of ‘no white boards’ by 2021.

The Guidelines also contain the PLSA’s voting recommendations summary chart, which sets out its recommendations on particular issues including executive remuneration, audit, company leadership and dividends.

Alex Kay
Alex Kay
+44 20 7466 2447

Antonia Kirkby
Antonia Kirkby
+44 20 7466 2700

Gareth Sykes
Gareth Sykes
+44 20 7466 7631

Half-yearly corporate update – our latest briefing

We have published our half-yearly update briefing which summarises the major developments in UK corporate law and regulation that have occurred over the last six months, that is from July to December 2021, and which are of relevance to UK listed companies.

The briefing is available here.

Sarah Hawes
Sarah Hawes
+44 20 7466 2953

Roddy Martin
Roddy Martin
+44 20 7466 2255

Ben Ward
Ben Ward
+44 20 7466 2093

Updated institutional investor voting guidelines

Institutional Shareholder Services (ISS) has published its UK proxy voting guidelines updates for 2022 and Glass Lewis has updated its Approach to Executive Compensation in the Context of the Covid-19 Pandemic.

ISS Proxy Voting Guidelines

The key changes to the current ISS UK proxy voting guidelines are set out in an executive summary document and include:

  • Board diversity – In addition to its expectations on gender diversity (see our blog post from last year here), ISS has created a new policy on ethnic diversity based on the recommendations of the Parker Review (see our blog post here). For FTSE 100 companies, ISS will generally recommend a vote against the (re-)election of the chair of the nomination committee if the company has not appointed at least one director from an ethnic minority background.
  • Board accountability on climate-related issues – In 2022, for companies that are currently featured on the Climate Action 100+ Focus Group list, ISS will recommend a vote against the (re-)election of the chair of the board where a company does not have both detailed disclosure on climate-related issues, such as reporting in line with the Task Force on Climate-related Financial Disclosures, and quantitative greenhouse gas emission reduction targets covering at least a significant portion of the company’s direct emissions.
  • Non-financial ESG performance conditions in executive remuneration packages – ISS has confirmed that environmental, social and governance (ESG) metrics can be included as performance measures for executive remuneration, provided that the metrics are clearly linked to the company’s long-term strategy, material to the business and quantifiable.

The 2022 proxy voting guidelines apply to shareholder meetings taking place on or after 1 February 2022, save where otherwise noted.

Glass Lewis approach to executive compensation

Glass Lewis’s Approach to Executive Compensation document is designed to provide guidance on the application of its policy on executive remuneration in the context of the ongoing Covid-19 pandemic. Glass Lewis has updated the document to remove references to specific fiscal years, noting that the guidance will continue to apply throughout the course of the pandemic.

Sarah Hawes
Sarah Hawes
+44 20 7466 2953

Greg Mulley
Greg Mulley
+44 20 7466 2771

Caroline Hagg
Caroline Hagg
+44 20 7466 6311

Latest IA guidance on executive remuneration

The Investment Association (IA) has published its annual letter to remuneration committee chairs as well as its updated Principles of Remuneration.

The Principles have been updated to reflect developments in market practice and investor expectations, including:

  • Linking executive pay and ESG targets – Where companies link executive pay and bonuses to ESG metrics, the rationale for doing so should be robust and clearly explained to investors. ESG metrics should be quantifiable and linked to the company’s strategy. Where companies have incorporated climate-related risks and opportunities into strategies, these risks and opportunities should be similarly reflected in remuneration structures (or where this has not been done yet, companies should explain how this will be done in future years).
  • Grant size – Where share prices have fallen, the Principles now reflect investor preference for remuneration committees to reduce the size of awards at the point they are granted, rather than relying on discretion when awards later vest.
  • Increasing remuneration – Remuneration committees should provide a clear justification for an increase to any element of, or the overall level of, remuneration. The IA notes that even a small increase to salary may lead to a substantial increase in overall remuneration as a result of the “multiplier effect”.

As previously announced, to support the alignment of executive pensions with those of the workforce by 2022, the Principles reiterate that IVIS will red top:

  • any new remuneration policy that does not explicitly state that any appointed executive director will have their pension contribution set in line with the majority of the workforce; and
  • any remuneration report where executive pension contributions are not aligned to the rate for the majority of the workforce or there is not a credible action plan to align pension contributions for incumbent directors by the end of 2022.

The IA has also confirmed that its additional guidance on shareholder expectations on executive remuneration during the Covid-19 pandemic will continue to apply during the 2022 AGM season. The guidance covers how remuneration committees should approach executive remuneration in the context of various Covid-19-related topics, including where the company has received Government support, raised capital from shareholders or suspended or cancelled its dividend.

Ben Ward
Ben Ward
+44 20 7466 2093

Caroline Hagg
Caroline Hagg
+44 20 7466 6311

Sarah Hawes
Sarah Hawes
+44 20 7466 2953

FRC annual review of the UK Corporate Governance Code

The Financial Reporting Council (FRC) has published its Annual Review of the UK Corporate Governance Code. The report discusses the quality of reporting against the UK Corporate Governance Code in 2021 and the FRC’s expectations for companies reporting in 2022.

The FRC notes that reporting has improved overall since last year (see our blog post on last year’s annual review here), in particular where companies have been reporting on environmental and social issues.

Other key messages from the report include:

  • Compliance with the Code – Further to last year’s report, which raised concerns about companies reporting, but not demonstrating, full compliance with the Code, the FRC found an increase in declarations of non-compliance this year. The report reiterates that companies should be clear about any departures from the provisions of the Code and give a full explanation for any deviation (see our blog post on the FRC’s report on improving ‘comply or explain’ reporting here).
  • Focus on impact and outcomes of engagement – The report welcomes improved reporting on stakeholder engagement and now encourages companies to focus on the outcomes of this engagement. The report also offers specific guidance on how to improve reporting around suppliers, communities and modern slavery.
  • Effectiveness of risk management and internal control systems – The report notes that it is not sufficient for companies to confirm in the annual report that the board or audit committee has reviewed the effectiveness of the company’s risk management and internal control systems. Instead, the report should set out a detailed description of the review process and identify any actions that will be taken as a result.
  • Diversity and succession planning – The FRC remains concerned about inadequate disclosures around succession planning. Many disclosures are focused on process, rather than demonstrating coherence between the company’s succession plans, diversity and inclusion policies, and strategy.
  • Remuneration – Companies should explain how their remuneration arrangements support the company’s strategic objectives and promote its long-term sustainable success. Reporting should also demonstrate how remuneration aligns with the company’s purpose and values by referring to specific performance measures which incentivise executives in these areas. The report also provides specific guidance on workforce engagement.
Sarah Hawes
Sarah Hawes
+44 20 7466 2953

Alan Montgomery
Alan Montgomery
+44 20 7466 2618

Gareth Sykes
Gareth Sykes
+44 20 7466 7631

Updated Glass Lewis voting guidelines for 2022 AGM season

Glass Lewis has published its 2022 Policy Guidelines and 2022 Environmental, Social and Governance Initiatives Policy Guidelines. The documents set out its views on current market best practice and its voting recommendations for AGMs in 2022.

Key updates to the Glass Lewis Guidelines for 2022 include:

  • Board diversity – In line with the recommendation of the Parker Review (see our blog post here), Glass Lewis will generally recommend against the re-election of the nomination committee chair of any FTSE 100 board that has failed to appoint at least one director from a minority ethnic group and failed to provide a clear and persuasive explanation as to why this is the case. Glass Lewis’s recommendations on gender diversity continue to apply (see our blog post here).
  • Executive remuneration – It may recommend that shareholders vote against the re-election of the remuneration committee chair where there are substantial concerns with the remuneration policy and/or pay practices outlined in the directors’ remuneration report. The Guidelines include substantive amendments to the sections on remuneration reporting, incentive plan formats and linking executive pay to environmental and social criteria.
  • Committee chairs – Where the guidelines would indicate a recommendation to vote against a committee chair, but that chair is not up for re-election, it may instead recommend that shareholders vote against the re-election of one or more long serving committee members.
  • Approach to ‘Say on Climate’ votes – Glass Lewis will generally oppose shareholder proposals requesting that companies adopt a Say on Climate vote, on the basis that a company’s business strategy is best determined by the board. However, where management is asking shareholders to vote on a climate transition plan or similar, it will evaluate such resolutions and plans on a case by case basis.
  • Disclosure of environmental and social risks – It will generally recommend that shareholders vote against the re-election of the governance committee chair (or the chair or senior independent director) for FTSE 100 companies that fail to include disclosures on the board’s role in overseeing material environmental and social risks in the annual report.
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 – PLSA Stewardship Guide and Voting Guidelines 2021

The Pensions and Lifetime Savings Association (PLSA) has issued its Stewardship Guide and Voting Guidelines for 2021. The document sets out the PLSA’s views on current market best practice and its voting recommendations for AGMs in 2021.

The key changes contained in the 2021 Guidelines are:

  • Virtual shareholder meetings – The Guidelines state that, in light of concerns that virtual shareholder meetings may reduce investor engagement, the PLSA would recommend voting against a proposal to allow virtual shareholder meetings, unless the proposal is time limited.
  • Executive remuneration – The Guidelines state that maximum pay-outs to executives must remain in line with the expectations of shareholders and other stakeholders and should take into account the impact of Covid-19, any taxpayer-funded support that the company has received from government and the treatment of the wider workforce.
  • Climate-related reporting – As the largest pension schemes will likely be required to report in line with the recommendations of the Taskforce for Climate Related Financial Disclosures (TCFD) from October 2021, there is increasing focus on listed company disclosures in relation to climate change and TCFD-aligned reporting.

The Guidance also incorporates the PLSA’s voting recommendations summary chart, which sets out its voting recommendations on certain issues including executive remuneration, audit, company leadership and dividends.

Antonia Kirkby
Antonia Kirkby
+44 20 7466 2700

Greg Mulley
Greg Mulley
+44 20 7466 2771

Gareth Sykes
Gareth Sykes
+44 20 7466 7631

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