PLSA Stewardship & Voting Guidelines 2024

The Pensions and Lifetime Savings Association (PLSA) has published its Stewardship & Voting Guidelines 2024, which set out the PLSA’s views and voting recommendations on key issues.

Key new issues covered in the 2024 guidelines include:

  • Cybersecurity – the guidelines note that both the shift to remote working and the geopolitical situation have increased cybersecurity risks and say that companies should reflect this in their policies and procedures. There are voting recommendations for investors where companies make poor disclosures on cybersecurity risks in their annual report or where these risks are not adequately managed;
  • AI – a new section on AI says that companies should monitor their use of AI and adopt frameworks for its acceptable use. Investors should consider voting against the re-election of a director if there is evidence of “egregious conduct” attributable to them in relation to the development or deployment of AI;
  • ESG – new guidance has been included on social factors, which are an increasingly important aspect of environmental, social and governance (ESG) issues for investors. The guidelines state that, as there is no universally adopted framework on social factors, investors should only vote against a company on social issues where all other avenues for engagement have been exhausted. Biodiversity is also included in the guidelines as an area where companies should be taking action to monitor and measure their impact; and
  • Dual class share structures – the PLSA has observed an increase in the use of dual class shares structures. The guidelines state that companies should remove these structures as soon as possible post-IPO and that investors should consider voting against the Governance Committee chair (or equivalent) where companies have these structures without a sunset clause of seven years or less post-IPO.

The guidelines have also been updated to reflect the 2024 UK Corporate Governance Code (see our blog post for further details on the changes to the Governance Code).

The PLSA has also published a summary of the guidelines and its voting recommendations.

 

Isobel Hoyle
Isobel Hoyle
+44 20 7466 2725

Greg Mulley
Greg Mulley
+44 20 7466 2771

Caroline Rae
Caroline Rae
+44 20 7466 2916

Updated FRC guidance to support the 2024 Governance Code

The Financial Reporting Council (FRC) has published updated guidance to support the revised 2024 UK Corporate Governance Code, which will apply to financial years beginning on or after 1 January 2025 (see our blog post for more details).

The updated guidance combines and replaces the three separate FRC guidance notes which accompany the 2018 edition of the Governance Code, namely the Guidance on Board Effectiveness, the Guidance on Audit Committees and the Guidance on Risk Management, Internal Control and Related Financial and Business Reporting.

The updated guidance follows the order of the 2024 Governance Code and includes questions for the board to consider when applying the Code. It also links to other materials for the board to refer to, including the CGI terms of reference for board committees (see above) and other FRC publications, including the guidance on the strategic report. The guidance includes commentary on the enhanced disclosures which the board will need to include in annual reports for financial years beginning on or after 1 January 2026 in relation to the effectiveness of the company’s risk management and internal control framework.

Our snapshot on the changes under the 2024 Governance Code is available here.

 

Isobel Hoyle
Isobel Hoyle
+44 20 7466 2725

Alex Kay
Alex Kay
+44 20 7466 2447

Alan Montgomery
Alan Montgomery
+44 20 7466 2618

 

FRC publishes revised version of the Governance Code

The Financial Reporting Council has published a revised version of the UK Corporate Governance Code following the consultation that it launched in May 2023 (for more details, see our blog post here).  As trailed by the FRC in an announcement in November last year, the scope of the changes being introduced by the revised Governance Code has been significantly scaled back from the proposals the FRC consulted on (see our blog post on the FRC’s November 2023 announcement).

The most significant changes are to the reporting requirements in relation to internal controls in Section 4 of the Governance Code, though changes are being made throughout the Governance Code, including in section 1 on outcomes-based reporting; section 3 on diversity, inclusion and equality of opportunity; and to the provisions on remuneration in section 5.  Proposals which the FRC has not taken forward include those relating to director over-boarding and the remit of the audit committee on sustainability matters, and those derived from the audit and governance reporting regulations which were withdrawn by the government in October last year.

The revised Governance Code will apply to financial years beginning on or after 1 January 2025.  However, companies are being given an extra year to comply with the new disclosure requirements in relation to internal controls, with the revised Provision 29 applying to financial years beginning on or after 1 January 2026.

The FRC is updating the guidance which accompanies the Governance Code.  The revised guidance will be published on 29 January 2024.

We have prepared a short overview of the changes being introduced, which is available here.

 

Isobel Hoyle
Isobel Hoyle
+44 20 7466 2725

James Palmer
James Palmer
+44 20 7466 2327

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 2023, and which are of relevance to UK listed companies.

The briefing is available here.

 

Michael Jacobs
Michael Jacobs
+44 20 7466 2463

Antonia Kirkby
Antonia Kirkby
+44 20 7466 2700

Gareth Sykes
Gareth Sykes
+44 20 7466 7631

 

Updated proxy voting guidelines

Institutional Shareholder Services (ISS) has published a policy update document describing the updates to its proxy voting guidelines for the 2024 AGM season.

Only a few changes have been made to the UK proxy voting guidelines:

  • Board diversity – ISS has streamlined its policy on board diversity in light of the changes to the Listing Rules on diversity and inclusion (see here for further details);
  • Board independence – ISS has clarified that, when assessing whether a director who represents a significant shareholder will be considered independent for the purposes of the UK Corporate Governance Code, a holding of 3% or more will be considered “significant”; and
  • Share issuances – The policy has also been updated to reflect the changes made to the IA’s Share Capital Management Guidelines in February 2023 (see our blog post for further details).

The full updated policy guidelines will be available from the ISS website in due course. The guidelines are effective for meetings held on or after 1 February 2024.

 

Isobel Hoyle
Isobel Hoyle
+44 20 7466 2725

Alan Montgomery
Alan Montgomery
+44 20 7466 2618

Stephen Wilkinson
Stephen Wilkinson
+44 20 7466 2038

FRC review of corporate governance reporting in 2023

The FRC has published its annual review of corporate governance reporting for 2023, which discusses the quality of reporting against the UK Corporate Governance Code in 2023 and its expectations for companies reporting in 2024.

It follows the release of its annual review of corporate reporting for 2022/23, which sets out the findings of the FRC’s corporate reporting review team on the 2022/2023 reporting season more generally, in October (read more on our blog here).

The FRC reviewed the corporate governance reports of 100 FTSE 350 and Small Cap companies – the sample companies change each year. Of these, 37 claimed full compliance with the Code, compared with 36 of its sample in 2021 and 27 in 2022.

The FRC looked at reporting on cyber and information technology issues as part of its review for the first time this year. Although the FRC recognises that the Code does not specifically ask for reporting on these areas, it was pleased to see most companies in its 2023 sample outline the risks, opportunities and medium to long-term importance of cyber security to their business and market.

The review also states that:

  • the most common areas of non-compliance with the Code from the 2023 sample were pension alignment (provision 38) – although most of those companies expect to be in full compliance in 2023 – and chair tenure (provision 19);
  • whilst there have been improvements in how companies report on their application of the Code Principles, the FRC encourages companies to move away from a formulaic Principle by Principle approach (which it says simply adds to the length of the annual report and contains little company specific information), and instead to report clearly and concisely on how application of the Principles has made a difference to actions taken by their boards; and
  • investors, and proxy advisors should not favour strict compliance with the Provisions of the Code but focus on individual company circumstances and the explanations companies provide for their non-compliance, recognising that strict adherence with the Code’s detailed provisions may not be the right approach for every company.

Helpfully the review cites specific examples of companies which the FRC say demonstrate particularly good quality reporting in certain areas, such as reporting on risk management procedures and shareholder engagement, meaningful explanations for non-compliance, and culture and purpose reporting.

 

Sarah Hawes
Sarah Hawes
+44 20 7466 2953

Greg Mulley
Greg Mulley
+44 20 7466 2771

Caroline Rae
Caroline Rae
+44 20 7466 2916

FRC update on Governance Code consultation

The Financial Reporting Council (FRC) has issued an update on the consultation it conducted earlier this year, on changes to the UK Corporate Governance Code and says that it will only be taking forward a “small number of the original 18 proposals” contained in its consultation paper, including in relation to internal controls.

The consultation, which ran from May to September this year, was part of a package of measures to implement the proposals from the government’s March 2021 white paper on audit and corporate governance reform, Restoring trust in audit and corporate governance (see our blog post here). The extent of the proposed changes was thrown into doubt when the government withdrew the draft Companies (Strategic Report and Directors’ Report) (Amendment) Regulations 2023 in October (see our blog post here), and again earlier this month when the King’s Speech did not include an audit and corporate governance reform bill.

The FRC says that it has considered the feedback it has received and, in light of that and the wider debate about business reporting requirements, it will only be taking forward a small number of the proposals contained in its consultation paper and that it will “stop development of the remainder”. The key changes being progressed relate to the internal controls provisions in the Governance Code, which were a central part of the consultation (see our briefing for further details on the consultation). However, there will be modifications to the proposals set out in the consultation, to ensure that the provisions are “targeted and proportionate”.

The FRC intends to publish the revised Governance Code in January 2024. It says it will review the guidance associated with the Governance Code, and the Stewardship Code, next year.

 

Mike Flockhart
Mike Flockhart
+44 20 7466 2507

Isobel Hoyle
Isobel Hoyle
+44 20 7466 2725

Robert Moore
Robert Moore
+44 20 7466 2918

Status of the UK audit and corporate governance reform programme

In May 2022, the UK government published the response to its March 2021 consultation paper Restoring trust in audit and corporate governance (read more on our blog here). It confirmed that the government intends to take forward many of the reforms proposed in the consultation, though some in a modified form. A number of the reforms, including the creation of the Audit, Reporting and Governance Authority (ARGA) as the successor regulator to the Financial Reporting Council (FRC), require primary legislation. To date, a draft Bill has not been published or consulted on, and it has been widely reported that this reform bill will not be included in the King’s Speech scheduled for November 2023 (which will set out the government’s legislative programme for the next parliamentary session, expected to run until the forthcoming general election).

Notwithstanding this delay in the creation of the ARGA, some aspects of the governance reform are already being taken forward, through proposed amendments to the UK Corporate Governance Code and draft secondary legislation:

  • in May 2023, the FRC launched a consultation on its proposed changes to the Governance Code (for a summary of the proposals contained in the consultation, including to strengthen the provisions of the Governance Code on internal controls and to improve transparency in relation to malus and clawback of directors’ remuneration, see our briefing here). The consultation closed on 13 September and the FRC is now reviewing the feedback received. It is anticipated that the revised Governance Code will apply to financial years beginning on or after 1 January 2025; and
  • in July 2023, the draft Companies (Strategic Report and Directors’ Report) (Amendment) Regulations 2023, which will impact all UK-incorporated companies (and groups) that have both 750 or more employees and an annual turnover of £750 million or more, were laid in draft for approval by Parliament (for further details on the draft Regulations, see our briefing here). These are also anticipated to apply for financial years beginning on or after 1 January 2025 and set out new disclosures required in the annual reports, including around distributable profits and a new resilience statement.

 

Isobel Hoyle
Isobel Hoyle
+44 20 7466 2725

Roddy Martin
Roddy Martin
+44 20 7466 2255

Robert Moore
Robert Moore
+44 20 7466 2918

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 January to June 2023, and which are of relevance to UK listed companies.

The briefing is available here.

Heidi Gallagher
Heidi Gallagher
+44 20 7466 2367

Sarah Hawes
Sarah Hawes
+44 20 7466 2953

Siddhartha Shukla
Siddhartha Shukla
+44 20 7466 7474

 

Our briefing on the FRC review of the UK Corporate Governance Code

As we have previously posted, the Financial Reporting Council (FRC) published a consultation paper on changes to the UK Corporate Governance Code on 24 May 2023.

We have now published a briefing in which we discuss the FRC’s proposed changes in more detail and look at their potential impact. The briefing is available here.

The consultation closes on 13 September 2023. The FRC’s intention is that the new Governance Code will apply to financial years beginning on or after 1 January 2025.

Isobel Hoyle
Isobel Hoyle
+44 20 7466 2725

Gareth Sykes
Gareth Sykes
+44 20 7466 7631

Ben Ward
Ben Ward
+44 20 7466 2093