Many Main Market companies will now be preparing for their 2022 AGM and FY2021 annual reports. This note summarises some of the key agenda items and our expectations for this year.
Following a survey of GC100 members and certain FTSE 250 companies, the GC100 poll: the 2021 AGM season and beyond confirms that over 70% of respondents indicated their preference to hold separate stakeholder events throughout the year, rather than looking to wider stakeholder engagement at the AGM itself, and 47% of respondents indicated that a hybrid meeting is the preferred format for the future. The respondents recognised that "one size does not fit all" and so any changes in law and practice should afford sufficient flexibility to choose meeting formats that work for their shareholders and stakeholders. For further information on hybrid meetings see the section on Articles of Association below.
With COVID-19 restrictions now lifted in England, and subject to any unforeseen changes, we expect it to be possible for shareholders to attend 2022 AGMs in person. However, companies are likely to continue to offer increased shareholder engagement mechanisms compared to the position prior to the pandemic, such as the ability to ask questions by email in advance and/or broadcasting the AGM via a webinar. Over the past few years there has been a large number of companies amending their articles to include hybrid meeting provisions but we do not anticipate many companies, especially those outside the FTSE 100, using these provisions yet, in particular due to the higher costs and logistical challenges associated with a hybrid meeting compared to one that is only in person. Companies should be mindful that, with all restrictions lifted, shareholders have a legal right to attend AGMs and such attendance cannot be prevented, and should not be discouraged, for so long as there are no COVID-19 measures in place.
There remains uncertainty as to whether virtual shareholder meetings are legally valid under the Companies Act 2006, which requires the notice to state the "place" of the meeting. This has been interpreted as requiring a physical place (i.e. a hybrid meeting, with both electronic participation and a physical meeting place, is valid, but a virtual only meeting is not). For a time during the pandemic, it was possible to hold virtual only meetings under the temporary provisions of the Corporate Insolvency and Governance Act 2020 but the relevant provisions expired in March 2021.
Institutional shareholder bodies have also voiced their concerns about the nature of virtual meetings and, in December 2017, the Investment Association (the "IA") stated that it would not support changes to articles allowing virtual-only meetings. More recently, the Pensions and Lifetime Savings Association (the "PLSA") has stated that, whilst it has continued to support the use of virtual AGMs to ensure participation during the COVID-19 pandemic, it is concerned that "virtual only" meetings may reduce opportunities for shareholder engagement with the board.
Ahead of their 2022 AGMs, companies which do not already have provisions relating to hybrid meetings in their articles should consider proposing these amendments, together with any other updates required to reflect developments in law and market practice since the articles were last amended.
Last year the Financial Conduct Authority ("FCA") published a consultation paper on its proposals to amend the Listing Rules and the Disclosure Guidance and Transparency Rules in relation to diversity on boards and executive committees. A summary of the proposals are set out in our September Bi-Annual Update. The consultation closed on 22 October 2021 and the FCA stated that it was looking to implement the changes in early 2022, although there has been no further update yet.
Building on the work of the Hampton-Alexander Review, the Government announced its support for The FTSE Women Leaders Review which will monitor women's representation in senior leadership positions of FTSE 350 companies over the next five years. The initial progress report was published in February 2022. While the Report notes that there has been another year of good progress in the gender balance of women on FTSE 350 boards and leadership teams, there were still 15 FTSE 100 companies and 57 FTSE 250 companies that did not meet the target of their board comprising one third women. In addition, the Report issued four new recommendations:
In terms of ethnic diversity, the target date for companies to meet the Parker Review aim of at least one director of colour on each FTSE 100 board was 31 December 2021 (and is 31 December 2024 for FTSE 250 boards). The Parker Review Committee recently published an update report on the ethnic diversity of FTSE 350 boards. The report noted that as at 31 December 2021:
ISS and Glass Lewis will recommend a vote against the chair of the nomination committee (or other directors on a case-by-case basis) where there is not at least one director from an ethnic minority background on the board of a FTSE 100 company in 2022. Under the revised IA Shareholder Priorities for 2022, FTSE 100 companies not meeting this target will also be "red-topped". For details of how this will impact voting during the 2022 AGM season, see Proxy Voting Guidelines below.
A helpful overview of board composition and governance practice in the FTSE 150 was published by Spencer Stuart in December 2021 in the form of the 26th edition of its UK Board Index.
The LSE has published its 2022 dividend procedure timetable.
The Economic Crime (Transparency and Enforcement) Act 2022 received Royal Assent on 14 March 2022. Of particular importance for the AGM season is that an offence could be committed by listed companies if they pay dividends to sanctioned shareholders. As recommended by the Corporate Governance Institute, listed companies should be checking their register of members and taking steps, including by the issue of s.793 notices, to identify whether there are any beneficial holders who may be subject to sanctions. Any dividends (and interest on them) payable to sanctioned shareholders should be withheld by the issuer until the sanctions are lifted or the relevant shareholder successfully applies for an exemption from the Government.
The IA has published its 2022 Principles of Remuneration and Letter to Chairs of Remuneration Committees of FTSE 350 Companies. The handful of changes to the Principles include:
In addition, and for the purpose of aligning all executive pension contributions to the majority of the workforce rate by the end of 2022, remuneration policies which do not state that any appointed executive director will have their pension contribution set in line with the majority of the workforce will be "red-topped", as will any remuneration report where executive pension contributions are not aligned to the majority of the workforce rate or there is no credible action plan to align pension contributions for incumbent directors by the end of 2022.
The Letter also confirms that the IA Shareholder Expectations on Executive Remuneration during the COVID-19 pandemic will continue to apply in 2022.
See also Proxy Voting Guidelines below for Glass Lewis' and PLSA's recommendations in relation to remuneration.
In its revised 2022 Policy Guidelines, Glass Lewis states it will generally recommend against the re-election of any FTSE 100 nomination committee chair where the board does not include at least one director from a minority ethnic group and there is no clear and compelling disclosure as to why such person has not been appointed.
Glass Lewis may recommend voting against the re-election of the remuneration committee chair where there are substantial concerns with the remuneration policy presented for approval or the pay practices outlined in the remuneration report (or both). In particularly egregious cases, Glass Lewis continues to recommend a vote against the re-election of all remuneration committee members.
At the beginning of December 2021, Glass Lewis published an updated version of its Approach to Executive Compensation in the Context of the COVID-19 Pandemic to remove references to fiscal years and clarify that it will apply throughout the course of the COVID-19 pandemic, particularly for industries which continue to be affected by the pandemic. Glass Lewis will also expect (amongst other things) lower overall outcomes for executive remuneration than pre-pandemic levels for all companies that continue to be affected by the crisis.
Glass Lewis will recommend voting against the re-election of the governance committee chair (or equivalent) of FTSE 100 companies which do not clearly disclose the board's role in overseeing material environmental and social issues. We expect ESG oversight to gain more focus over the coming years and so companies outside the FTSE 100 who do not already have an ESG or Governance Committee, or who have not incorporated this oversight into the role of an existing committee, may wish to consider this further during 2022.
Glass Lewis announced the introduction, in a new ESG Profile page within individual company reports, of ESG scores and data. This will provide a snapshot of key topics such as emission reduction initiatives and disclosures made regarding ESG risks and performance.
Further, in the paper setting out its views on "Say on Climate" votes, Glass Lewis strongly supports proposals which relate to disclosure by the listed company of climate-related matters (which it notes will help ensure Task Force on Climate-related Financial Disclosures ("TCFD") aligned reporting). However, Glass Lewis will generally recommend against any proposals that offer a shareholder vote on a climate plan or strategy due to the potential unintended consequences. Such plans should be approached with caution until there is greater standardisation of "Say on Climate" votes.
The 2022 Policy Guidelines have been updated to confirm that where the Guidelines recommend voting against a committee chair but the chair is not up for re-election, Glass Lewis may, on a case-by-case basis, recommend that shareholders vote against the re-election of (a) long-serving committee member(s).
Glass Lewis' webinar on its 2022 Policy Guidelines provides further details on the operation of its policies.
As noted above under Board Composition and Diversity, in its latest Proxy Voting Guidelines, ISS states that it will recommend a vote against the chair of the nomination committee (or other directors on a case-by-case basis) where there is not at least one director from an ethnic minority background on the board of a FTSE 100 company.
ISS will generally also, subject to certain mitigating factors, vote against the chair of the nomination committee where:
ISS also recommends voting against the chair of the board where a company has not taken the minimum steps to understand, assess and mitigate climate-related risks to the company and the wider economy.
Further, the revised Proxy Voting Guidelines include new provisions relating to management and shareholder "Say on Climate" proposals and acceptance of the inclusion of ESG metrics as performance measures in a company's variable remuneration schemes, provided the metrics are quantifiable, clearly linked to the company's long-term strategy and material to the business.
The PLSA Stewardship and Voting Guidelines 2022 set out only a few significant updates for this year.
The PLSA would like to see all listed companies referring to TCFD in their reporting and not just those premium- listed commercial companies who are required to report under the Listing Rules. See Task Force on Climate-Related Financial Disclosures below for further information on TCFD reporting obligations.
The board's policy on diversity should also incorporate inclusion, with both protected and non-protected characteristics being covered.
In terms of remuneration, PLSA notes that with the costs of living rising, companies should show restraint on executive remuneration, especially those companies that benefited from Government support during the pandemic. It also welcomes more remuneration packages linked to clear targets for performance against a company's ambitions to meet climate goals.
At the start of March 2022, the IA published its Shareholder Priorities and IVIS Approach for 2022. The publication outlines progress made by companies against the IA's 2021 Shareholder Priorities and sets out investor expectations for the year ahead. The key areas of focus remain the same as in 2021, namely: climate change (both responding to and accounting for it); audit quality; diversity; and stakeholder engagement. In some areas, IVIS, the governance research arm of the IA, has stepped up its expectations and "colour top" approach. In particular:
In relation to stakeholders, the IA continues to expect companies and their boards to identify and disclose material stakeholders; decide on the most appropriate engagement mechanism; articulate how stakeholder views have informed and impact the company's decision-making; and report back to stakeholders on the engagement.
Under the Listing Rules, TCFD reporting obligations apply to premium listed commercial companies, on a comply or explain basis, for reporting periods beginning on or after 1 January 2021. In December 2021, the FCA extended the requirement to make TCFD disclosures to issuers of standard-listed shares or equity shares represented by certificates (global depositary receipts). Such companies must now include a statement in their annual financial reports explaining whether their disclosures meet the recommendations of the TCFD and, if they do not, an explanation as to why. The new rules will apply for accounting periods beginning on or after 1 January 2022. See our latest briefing for further information.
The extension of the TCFD-disclosure requirements to further large companies and LLPs by an amendment to the Companies Act 2006 will come into force on 6 April 2022 and apply to accounting periods starting on or after that date. For further information see our Client Note. BEIS has published guidance in connection with this new obligation to help in-scope entities understand how to meet their new obligations. It contains useful FAQs on various aspects of the new requirement, including its application to group companies and to entities with global operations. The guidance confirms that, although UK listed companies are subject to both sets of requirements (i.e. under the Listing Rules and separately under the regulations), the assumption is that if a listed company is complying with the Listing Rules requirements, it will also be complying with the regulations. For further details of the practical points covered in the guidance, please see our Client Note.
The TCFD has published its 2021 Status Report describing how the alignment of companies' reporting with the TCFD recommendations has developed since its 2020 review of climate-related reporting.
The TCFD reports increased maturity in climate-related disclosures but notes that only 50% of companies made disclosures aligned with at least three of the TCFD's eleven recommendations.
Lessons learned from interviews with preparers include:
Over nine out of ten respondents who identified as users said they find disclosure of financial impacts useful and rating agencies stated that climate-related information is an increasingly important input into their financial impact assessments, informing the rating process. Users have highlighted several areas that would improve the information disclosed on financial impact to support decision-making, including:
The TCFD released two supplemental documents simultaneously with this report: an updated version of Implementing the Recommendations of the Task Force on Climate-related Financial Disclosures, to reflect developments in disclosure practices since the Recommendations were introduced in 2017; and Guidance on Metrics, Targets and Transition Plans.
The FRC Lab has also published a report on developing practice in TCFD to assist premium-listed companies in complying with the mandatory reporting requirement. The report sets out investor expectations and identifies climate-related scenario analysis as an area of key interest but where the disclosures are still developing. The report also sets out questions companies should ask themselves to ensure they disclose the information investors want, providing examples of where companies have done this as a guide.
In addition to the above in its Primary Market Bulletin 36, the FCA sets out its expectations and supervisory strategy in relation to the TCFD aligned climate-related disclosure requirements for listed companies. In particular, where a listed company does not make a disclosure of climate-related financial information under the TCFD framework in its annual report, the FCA will request that the company publishes the TCFD statement via an RIS. Guidance on the FCA's disclosure expectations is set out in a new technical note which was published in final form at the end of February 2022.
The London Stock Exchange ("LSE") has published a Guide to Climate Reporting for Main Market and AIM listed companies with practical advice on integrating climate-related disclosures and TCFD implementation. This guidance is part of the LSE's new Climate Transition Offering to help companies prepare for the transition to a low-carbon economy and produce effective climate reporting. The LSE also introduced the Climate Governance Score and Tool, a confidential online tool for listed companies which is accessible via the issuer services platform and measures companies' carbon management practices, the incorporation of climate change considerations into their business strategies and progress towards the key elements of TCFD reporting. The tool then allows companies to benchmark their performance against their peers.
The FCA has reported on how the financial services industry and listed companies are adapting to climate change. It notes that policy announcements (for example the Government's 2050 net zero target) address the uncertainty as to how net zero commitments interact with business relationships and the report encourages listed companies to proactively engage with clients, customers and suppliers to set out the implications for their relationships. The report also sets out principles for net zero commitments for listed companies to consider and notes that commitments and targets should be realistic, appropriate to companies' business models and supported by suitable resourcing and governance arrangements. The FCA considers that, while there is some overlap with in-scope companies for TCFD-disclosure requirements and similar obligations proposed to be introduced pursuant to the Companies Act 2006, the two regimes can work effectively together.
The FCA's policy statement 21/24 also includes further information on climate-related disclosures by asset managers, life insurers and pension providers. This policy statement and related rules are addressed in more detail in Travers Smith's Financial Services Regulation: New Year Briefing 2022.
In July 2021 the FRC published a Statement of Intent on Environmental, Social and Governance Challenges which identifies production, audit and assurance, distribution, consumption, supervision and regulation as the key challenges faced by companies.
As regards corporate governance and reporting, the FRC's proposed action includes continuing to consider the role of the 2018 UK Corporate Governance Code (the "Code") in ensuring boards are taking appropriate account of ESG issues in their consideration of the long-term success of the company and amending the Code as appropriate.
Following the introduction of new emissions reporting requirements for UK private companies and revised requirements that apply to UK quoted companies ("Streamlined Energy and Carbon Reporting" or "SECR") into FY2020 annual reporting (see our briefing for further information), in September 2021 the FRC published a thematic review on the quality of SECR disclosures. In particular, the FRC it notes that disclosures need to be improved so that they are understandable and relevant for users. The information should be presented in a way that is clear and relevant, include adequate explanations and descriptions (such as the methodologies for calculations) and be integrated with other narrative reporting on climate change.
While section 172 statements are not new, there has been some recent commentary on this topic. The FRC Financial Reporting Lab published Reporting on stakeholders, decisions and Section 172 in July 2021 setting out what investors are looking for in these statements and how companies can improve their reporting to meet investors' needs, including practical tips and questions companies should ask themselves.
In October 2021, the FRC published its Annual Review of Corporate Reporting (2020/21) (the "Annual Review") which highlights both areas of best practice and areas for improvement in corporate governance disclosures. The key messages from the Annual Review are summarised by the FRC in Corporate Reporting Highlights, including the top ten areas that prompt questions to companies from the FRC's monitoring function, the steps to take to avoid challenge and a list of disclosure improvements the FRC expect to see next year. In the FRC's 2022 review it will prioritise the disclosure of climate-related risks (particularly in the context of the new TCFD obligations) and judgements in light of the continuing uncertainty and economic and social impact of COVID-19.
The Annual Review also examines, for the first time, the extent to which companies are reporting on modern slavery risk and strategy as part of their duties to shareholders and other stakeholders. It concludes that overall, "the low quality of reporting on Modern Slavery by companies is concerning" and encourages companies to "build trust with investors and wider stakeholders by explaining how they are combatting Modern Slavery in their supply chains". Companies should ensure the impact of these risks, along with those relating to wider ESG matters, is appropriately reflected in the financial statements and wider annual report.
The FRC summarises considerations for the forthcoming reporting season in its Key matters for 2021/22 reports and accounts, which includes links to all its relevant publications, some of which are referred to below.
In December 2021, the FRC announced its areas for supervisory focus for 2021/22. The FRC's Supervision Corporate Reporting Review team will supplement its routine reviews of corporate reporting with six thematic reviews during 2022 and in selecting corporate reports for review the FRC will focus on the travel, hospitality and leisure, retail, construction and materials and the gas, water and multi-utilities sectors.
In November 2021, the FRC published its Review of Corporate Governance Reporting setting out how a sample of FTSE 350 and small cap companies have reported during the year under the Code. The expectations set out in the FRC 2020 review were not met in key areas (for example, board appointments, succession planning and diversity), boilerplate disclosures and statements unsupported by examples of action remain a concern and companies should be clearer when describing how they comply with the principles of the Code and explaining any departures from it. The review lists a number of areas in which the FRC expects reporting to be improved in 2022, being:
The FRC has published a review of viability and going concern disclosures from a sample of listed and AIM companies' annual reports and accounts with year ends between December 2020 and March 2021, identifying areas for improvement and providing examples of good practice. The review identifies the following key disclosure expectations:
Going Concern Disclosures
The FRC has published a Report on what investors want from corporate reporting in these areas to enable them to understand a company's strategy, resilience and viability. Four areas of focus were identified: (i) the governance and processes in place for risk management; (ii) the nature of the risks, uncertainties and opportunities involved; (iii) the approach taken in responding to risk, uncertainty and opportunity and how that links to the business model; and (iv) the role of scenario or stress testing in strategic decisions and business planning. The Report also helpfully includes examples of high-quality disclosures as a guide.
Five years after the implementation of the ESMA Guidelines on Alternative Performance Measures ("APMs") and IOSCO's Statement on Non-GAAP Financial Measures, the FRC assessed the quality of APM reporting of 20 companies in its thematic review. Key expectations for APM reporting in 2022 include:
In March 2021, the Government launched a white paper on Restoring trust in audit and corporate governance drawing together recommendations and themes from a number of previous reports (including the Kingman Independent Review, the Brydon Report and a CMA market study) to make detailed proposals for the reform of the UK audit industry. The proposed reforms include: introducing a directors' statement about the effectiveness of internal controls and risk management; new requirements to disclose distributable reserves; a directors' statement on the legality of proposed dividends and the effects on future solvency of the company; and an annual resilience statement covering the short, medium and long-term. The consultation period closed on 8 July 2021 and we are expecting the Government's response imminently.
Separately, in January 2022, the FRC commissioned and published Research Paper: Audit Committee Chairs views on, and approach to, audit quality. The Research Paper analyses the views of Audit Committee chairs of Public Interest Entities. There are different views expressed in relation to audit quality and some Audit Committee chairs continue to find it challenging to differentiate between audit quality and the quality of service provided by their audit firm.
The FRC suggests that the research findings support the audit reforms proposed by the Government.
The PLSA published a report on "How do companies report on their 'most important asset'? – An analysis of workforce reporting in the FTSE 100 and recommendations for action". The report, which has been produced in partnership with the CIPD and Railpen, looks at the quality of workforce disclosures made by FTSE 100 companies in their 2021 annual reports. The disclosures have been analysed against seven key themes:
The report notes a significant variation in both the quantity and quality of reporting, and sets out recommendations for improvements in this area. This includes the introduction of a framework for workforce reporting that sets out a baseline of minimum standards.
In May 2021, the FRC published a Report on Workforce Engagement and the UK Corporate Governance Code: A Review of Company Reporting and Practice to explore the approaches taken to providing a workforce voice in the boardroom, why different approaches have been chosen, what these changes have meant in practice and how effective they have been from a management and workforce perspective. Appointing a designated non-executive director is the popular choice for workforce engagement and the Report suggests that the effectiveness of this approach depends on the actions actually taken by the non-executive director and the other processes in place. Companies with an embedded practice of listening, openness and consultation appeared to have more effective workforce engagement mechanisms.
In December 2021, the FRC published a report on Creating Positive Culture. This builds on the FRC Guidance on Board Effectiveness and aims to promote good practice and positive working culture in companies, bringing together a wide range of views from board directors, leaders and senior individuals from across different functions and workforce representatives. Key findings of the report include that a positive working culture is based on transparency, trust, respect and inclusion and creating such an environment requires patience, openness and a commitment to development which is uninterrupted by changes in senior management. Potential challenges to positive corporate cultures are identified and include cultural heritage, fear of the unknown, mergers and acquisitions and clarity and complexity of change.
The European Single Electronic Format ("ESEF"), which requires issuers to publish and file their reports in XHTML format, applies to financial periods starting on or after 1 January 2021, for publication from 1 January 2022 (delayed by a year following the COVID-19 outbreak). For FY2020 issuers could choose to file their reports in XHTML or continue to use the PDF format. In September 2021, the FRC Lab published the results of its survey into how companies are responding to the introduction of the new digital reporting requirements. In November 2021 the FRC and FCA then published a joint letter to remind issuers of this obligation. Together, the FRC and the FCA will consider the quality and usability of the annual reports in the initial year of mandatory adoption and a follow-up of the FRC Lab's review will be published later in 2022, with further action to be taken if expectations on quality are not met.
Changes were made to DTR 6 with effect from 10 January 2022, which mean that listed companies are no longer required to ensure that unedited financial information is included in an RIS in full. Instead, this information can be uploaded to the National Storage Mechanism ("NSM"), with the RIS containing a statement that the regulated information is available on the NSM and must also include an indication of the website on which the documents are available. This change applies to half year reports, full year reports and reports on payments to Governments.
The ICGN has published its updated Global Governance Principles (last revised in 2017) and a summary of the revisions is set out in our September Bi-Annual Update. Of particular note is that sustainability reporting should reflect the complexities inherent in a contemporary business by blending financial, human and natural capital considerations in the context of a company's current and future strategic direction.
During COVID-19, the FCA permitted companies to have additional time to prepare the annual and half year financial results due to the difficulties the pandemic was causing. This gave listed companies 6 months (instead of four) to release their annual results and four months (instead of three) to release their half year results. The FCA has announced that these restrictions will no longer be available for reporting periods ending on or after 28 June 2022, and companies will be subject to the normal deadlines.
While not new for this year, companies should remember that:
For details of upcoming developments relevant to ESG, please see our ESG timeline.
