Corporate governance – FRC report on workforce engagement

The Financial Reporting Council (FRC) has published a report on Workforce Engagement and the UK Corporate Governance Code: A Review of Company Reporting and Practice.

The report considers the approaches taken to workforce engagement by FTSE 350 companies in light of the requirements introduced in the 2018 edition of the UK Corporate Governance Code (the Code). Provision 5 of the Code requires that companies put in place a mechanism for workforce engagement and gives three core options that companies can use for doing so (a worker director, a designated non-executive director (NED) and an advisory panel).

Based on the annual reports of FTSE 350 companies employing at least 50 staff (excluding investment trusts), the report says that:

  • one company appointed a director from the workforce;
  • 12% of companies established a formal workforce advisory panel;
  • 40% of companies appointed a designated NED for workforce engagement;
  • 16% of companies established an advisory panel and designated a NED; and
  • 32% of companies adopted alternative workforce engagement arrangements.

The report contains analysis of the approaches that companies have adopted in practice for the different methods of engagement, including the activities being undertaken by a designated NED and how workforce advisory panels operate. It also looks at how boards considered which engagement mechanism to adopt and how the engagement mechanisms support other workforce engagement activities. It also includes case studies highlighting best practice.

 

Sarah Hawes
Sarah Hawes
+44 20 7466 2953

Gareth Sykes
Gareth Sykes
+44 20 7466 7631

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 Podcast Episode 1: Corporate Governance Reporting – a view from the FRC

In our first corporate governance podcast, we discuss the Financial Reporting Council’s Review of Corporate Governance Reporting with Maureen Beresford, Head of Corporate Governance at the FRC. The Review is the first to consider reporting in accordance with the 2018 edition of the UK Corporate Governance Code and considers issues including, compliance with the Code; purpose, culture and values; succession planning; diversity and stakeholder engagement. We discuss each of these themes in this podcast and look ahead to the 2021 AGM season.

To listen to the full conversation please visit SoundCloud, Spotify or iTunes.

FRC report on improving “comply or explain” reporting

The Financial Reporting Council (FRC) has published a report on improving the quality of “comply or explain” reporting under the UK Corporate Governance Code.

Where companies do not comply with a provision in the Code, they are required under the Listing Rules to disclose that and give the reasons for non-compliance (LR 9.8.6(6)). In its Annual Review of the UK Corporate Governance Code (see our blog post here), the FRC found that an unexpectedly high number of companies in its sample claimed full compliance with the Code but could not demonstrate this in their reports.

The report states that companies should be clear about the provisions of the Code that they have departed from during the year in review and make this information easily accessible in the annual report. They should also include a full and comprehensive explanation for non-compliance that shows that an alternative arrangement is more appropriate and beneficial in upholding high standards of governance. In particular, a good explanation should:

  • set the context and background;
  • give a convincing rationale for the approach being taken;
  • consider any risks and describe any mitigating actions; and
  • set out when the company intends to comply with the provision.

The report also sets out the FRC’s expectations in relation to compliance with a number of specific provisions of the Code, including those relating to stakeholder interests and workforce engagement (provision 5), the chair’s tenure (provision 19), the work of committees (provisions 23, 26 and 41), and a number of remuneration-related provisions including post-employment shareholdings (provision 36), pensions-alignment (provision 38) and engagement with shareholders and the workforce (provisions 40 and 41).

Sarah Hawes
Sarah Hawes
+44 20 7466 2953

Gareth Sykes
Gareth Sykes
+44 20 7466 7631

Ben Ward
Ben Ward
+44 20 7466 2093

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 Corporate Governance Code in 2020, and the FRC’s expectations for companies reporting in 2021. The report is based on an assessment of the annual reports of up to 100 companies, including FTSE 350 and FTSE Small Cap companies.

Companies were reporting on their application of the 2018 edition of the Code for the first time in 2020 and overall the FRC says that reporting does not demonstrate the high quality of governance that it expects. It says that reporting often took a formulaic and box-ticking approach at the expense of effective governance and reporting.

The FRC says that it expects companies to move away from boilerplate statements and provide a more meaningful narrative in support of their application of the Code’s principles.

Other key messages from the report include:

  • Compliance with the Code – The report discusses Code compliance and the provisions that companies most often said they did not comply with. The FRC expresses concern that an unexpectedly high number of companies in its sample claimed full compliance with the Code but could not demonstrate this in their reports. The FRC says that it expects companies to be clear and transparent about the provisions of the Code which they have not complied with.
  • Purpose, culture and values – The FRC says that the quality of purpose statements was variable. In particular, a number of companies conflated purpose statements with marketing slogans, mission statements or vision statements. It also says that it expects companies to take a more rigorous approach to culture and establish effective ways of monitoring and assessing both the culture and its alignment with purpose, values and strategy.
  • Stakeholders – The FRC says that companies should identify their key stakeholders and explain their relevance in the context of their strategy, as well as identifying key issues relating to each group. It also says that reporting on stakeholder engagement should include a discussion on how feedback received from stakeholders has informed company decisions and strategy. Companies should also report on how stakeholder information is passed to the board and how often the board reviews engagement methods. The report also discusses the workforce engagement mechanisms adopted by companies in line with provision 5 of the Code.
  • Succession planning – The FRC says that it found little improvement in the quality of succession planning disclosures. It says that the reports it reviewed provided minimal insight into succession planning, with many focusing on the appointment process rather than providing information on how companies plan for succession.
  • Diversity – The FRC says that companies should have both a board and a workforce diversity policy and that it expects companies which have not published those policies to do so in 2021. Guidance is also provided on how to improve diversity-related disclosures.
  • Remuneration – Reporting on remuneration issues is of mixed quality according to the FRC. It says that improvements have been made in reporting on workforce pay, discretion, and the requirements of provision 40 of the Code, but that reporting is disappointing in relation to KPIs, pension contributions, and workforce engagement.
Gareth Sykes
Gareth Sykes
+44 20 7466 7631

Antonia Kirkby
Antonia Kirkby
+44 20 7466 2700

Ben Ward
Ben Ward
+44 20 7466 2093

Recent FCA publications

The Financial Conduct Authority (FCA) has published Primary Market Bulletin 31 (PMB 31), and through it publicised two recent reviews it has undertaken into delayed disclosure of inside information and corporate governance disclosures by listed issuers.

Delayed disclosure of inside information

The FCA has reviewed the delayed disclosure of inside information notifications (DDIINs) it has received. Under Article 17(4) of Market Abuse Regulation (MAR), where a UK issuer delays disclosure of inside information, once it announces that information it must notify the FCA that it has been delaying its disclosure.

The FCA notes that only one quarter of issuers have submitted a DDIIN at all, leaving it concerned that issuers may not be aware of the requirement to submit them. It also identifies a number of areas where it will increase its oversight, including:

  • Unscheduled financial information – The FCA was surprised that the delays associated with disclosing unscheduled financial information were longer than those relating to periodic financial information, as it is more challenging to establish circumstances in which it is legitimate to delay unscheduled financial information. It also notes that it has only received a low number of DDIINs in this area, when compared with the number of unscheduled trading statements issued.
  • Director/board changes – The FCA was also surprised at the number of DDINs it received in relation to director/board changes, given that it is not specified in the (non-exhaustive) situations in the European Securities and Markets Authority (ESMA) guidelines on legitimate interests for delay where an issuer may have a legitimate interest in delaying disclosure.

Corporate governance disclosures

Following a review of a sample of annual reports from 2016-2018, the FCA makes a number of observations and suggestions in relation to compliance with the FCA rules relating to corporate governance, including:

  • Compliance with the Principles of the Governance Code – The FCA encourages premium listed issuers to consider carefully, when stating how they have applied the Principles of the Governance Code as required under Listing Rule 9, whether they have done so in a way that enables shareholders to evaluate how the Principles have been applied (rather than merely stating they have been). To avoid boilerplate disclosures, more examples and cross-references to other parts of the annual report could be included.
  • Board diversity reporting – Overall the FCA felt the quality of board diversity reporting could have been better, particularly in relation to Governance Code Provision 23 (work of the nomination committee), and Principles J (board appointment processes) and L (annual board evaluation).
  • Standard listed companies – A number of standard listed companies provided little or no information on their internal control and risk management systems, and management bodies and committees (as required by DTRs 7.2.5 and 7.2.7). The FCA also noted that a number of standard listed issuers state that they have applied the Provisions of the Governance Code “as far as relevant” without providing any further detail (which does not meet the requirements of DTR 7.2.3).

Extension of relaxations to deadlines for financial reporting

In response to the difficulties being faced by listed companies as a result of the Covid-19 pandemic, earlier this year the FCA published statements which, in effect, give listed companies an additional two months to publish their annual report and accounts (to within six months of their year-end) and an additional one month to publish their half-yearly reports (to within four months after the end of the half-year). In PMB 31 the FCA confirms that this temporary relief will, at a minimum, continue to be available to listed companies with financial periods ending before April 2021.

 

Mike Flockhart
Mike Flockhart
+44 20 7466 2507

Sarah Hawes
Sarah Hawes
+44 20 7466 2953

Stephen Wilkinson
Stephen Wilkinson
+44 20 7466 2038

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

PLSA Stewardship Guide and Voting Guidelines 2020

The Pensions and Lifetime Savings Association (PLSA) has issued its Stewardship Guide and Voting Guidelines for 2020. The document sets out the PLSA’s views on current market best practice and its voting recommendations for AGMs in 2020.

The document has been substantially rewritten to reflect the 2018 edition of the UK Corporate Governance Code, the 2019 edition of the UK Stewardship Code and the stewardship requirements introduced as part of the implementation of the EU Shareholder Rights Amending Directive (SRD II).

It also contains a new section on climate change and sustainability, which sets out the PLSA’s expectations in relation to corporate behaviour in this area. It notes that climate change is a systemic issue affecting nearly every industry and firm, which means that there is a heightened focus on this and other environmental, social and governance (ESG) issues.

The PLSA has also published a 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

Gareth Sykes
Gareth Sykes
+44 20 7466 7631

Ben Ward
Ben Ward
+44 20 7466 2093

 

Investment Association review of 2019 AGM season

The Investment Association (IA) has published a summary of voting trends during the 2019 AGM season.

According to the IA’s public register of significant votes against resolutions, which tracks when there is a vote of over 20% against a resolution at a FTSE company’s shareholder meeting:

  • 158 companies and 298 resolutions were added to the register for 2019 (up slightly from 151 companies and 294 resolutions in 2018);
  • executive pay and director re-election continued to top the list of concerns in 2019, with 62 companies appearing on the register for pay-related resolutions and 103 individual director re-election resolutions appearing on the register;
  • 39 companies appeared on the register for the same resolution in both 2018 and 2019; and
  • over 80% of companies made a public statement acknowledging shareholder concerns and outlining how they plan to engage with shareholders following the significant vote against, in accordance with provision 4 of the Corporate Governance Code.
Sarah Hawes
Sarah Hawes
+44 20 7466 2953

Gareth Sykes
Gareth Sykes
+44 20 7466 7631

Stephen Wilkinson
Stephen Wilkinson
+44 20 7466 2038

Updated ICSA board committee terms of reference

ICSA: The Chartered Governance Institute has published updated guidance notes and model terms of reference for board committees.

The audit committee, nomination committee and remuneration committee guidance notes and terms of reference have been updated to reflect the requirements of the 2018 edition of the UK Corporate Governance Code.

Roddy Martin
Roddy Martin
+44 20 7466 2255

Caroline Rae
Caroline Rae
+44 20 7466 2916

Gareth Sykes
Gareth Sykes
+44 20 7466 7631