Updated 31 March 2021
One of the key decisions companies will be making this year is the format of their AGM. The provisions of the Corporate Insolvency and Governance Act 2020 ("CIGA") which grant flexibility in relation to the holding of general meetings have been extended to cover general meetings held on or before 30 March 2021. Until this date, CIGA permits companies to hold entirely (or partially) virtual meetings, or to limit the number of attendees to the required quorum, irrespective of the wording in their articles of association.
It seems unlikely that CIGA will be extended beyond 30 March 2021 and, therefore, after that date the format of the meeting will depend on the restrictions in place at the time. Post-CIGA (i) closed meetings can continue to be held where the legislation and guidelines in place at the time preclude public gatherings; and (ii) even without permissive wording, hybrid meetings are permitted unless a company's articles of association prevent them. However, without CIGA, there will be legal uncertainty around the validity of entirely virtual meetings. The Chartered Governance Institute ("ICSA") has released a guidance note on the impact of COVID-19 on 2021 AGMs (the "ICSA Note") which provides detailed questions and answers, as well as template wording for AGM notices.
Whether they opt for a closed meeting with an interactive element, a hybrid meeting or a fully virtual meeting (while CIGA remains in force), it is evident that companies must make shareholder engagement a key focus. In October 2020 the FRC published AGMs: An opportunity for change. The paper includes a review of the 2020 AGM season, which was heavily impacted by COVID-19, notes the varying levels of shareholder engagement throughout the AGM season and contains suggestions for improvement. As 2021 AGMs will continue to be affected by the COVID-19 restrictions, the FRC recommends that companies take the following steps:
- prepare now, and consider what changes might need to be made;
- if additional technology is needed, speak to the providers now to assess the options and costs;
- discuss the options with their registrar;
- consider how shareholders will be able to ask questions; and
- set up an area of the investor relations website dedicated to AGMs and keep it regularly updated so shareholders can access the latest information.
Other relevant publications expressing views on the future of AGMs include the following:
- In January 2021, Glass Lewis published its expectations on shareholder meetings - See Proxy Voting Guidelines.
- Also in January 2021, the GC100 published a discussion paper: Shareholders Meetings - Time for Change? which looks forward at how we can build on the changes companies made to their 2020 AGM processes by necessity to improve the efficacy of AGMs in the longer term. Whilst emphasising that companies should have the flexibility to choose the most suitable AGM format for their stakeholders, the GC100 anticipates that by holding meetings which allow virtual participation, and hosting virtual engagement events after publication of the notice of meeting but prior to proxy voting deadline, it would improve the levels of stakeholder participation currently achieved at a single physical meeting. The paper includes a draft code of best practice regarding electronic participation at hybrid and virtual shareholder meetings, as well as pro forma explanatory wording for amending articles of association.
- In November 2020, the GC100 published The 2020 AGM season – a catalyst for change?- this suggests, in the current circumstances, promoting shareholder engagement at AGMs by live streaming the meeting, posting a recording of it on the website, posting transcripts of the chair and CEO's statements on the website and holding separate shareholder engagement sessions before the AGM. The ICSA Note also considers on shareholder engagement and provides good practice recommendations.
- In September 2020, the International Corporate Governance Network ("ICGN") published its views on general meetings. The Viewpoint encourages companies to make arrangements for hybrid meetings and explains what best-practice virtual shareholder meetings look like. The ICGN also encourages companies to see this period as an opportunity to reframe and improve their dialogue with shareholders more generally.
Articles of association
There is some legal uncertainty as to whether virtual shareholder meetings are 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. 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. However, in recent years, companies have been amending their articles to permit hybrid meetings, being meetings with both a physical place and electronic participation. Against the backdrop of this having been interpreted as requiring a physical place and the Investment Association's opposition to concerns about the nature of virtual meetings, the GC100 has recommended in its January 2021 paper Shareholders Meetings - Time for Change? that the Companies Act 2006 is changed to expressly permit virtual meetings.
While the majority of companies chose to hold closed, rather than hybrid, meetings in 2020, companies are continuing to update their articles to permit hybrid meetings to ensure they have more flexibility going forwards. Ahead of their 2021 AGMs, companies which do not already have hybrid provisions in their articles should consider proposing these amendments.
In AGMs: An opportunity for change, the FRC encourages investors to support amendments to articles of association which permit hybrid meetings.
Diversity should remain high on board agendas this year. The Hampton-Alexander Review recommended that, by 31 December 2020, women should represent at least one third of: (i) FTSE 350 boards; and (ii) FTSE 100 executive committees and their direct reports.
Both ISS and Glass Lewis will generally recommend a vote against the chair of the nomination committee of a FTSE 350 company where the Hampton-Alexander target is not met at board level. Additionally, the IA will colour-top the corporate governance reports where similar targets are not met (see IA Shareholder Priorities below).
In terms of ethnic diversity, the target date for companies to meet the Parker Review aim of there being at least one director of colour on each FTSE 100 board is 31 December 2021 (and 31 December 2024 for FTSE 250 boards). For further details on the IA's approach, see IA Shareholder Priorities below.
Pre-Emption Group guidelines
During the COVID-19 pandemic, the Pre-Emption Group ("PEG") had recommended that investors apply additional flexibility in considering issuances of shares of up to 20 per cent of a company's issued share capital on a non-pre-emptive basis. This flexibility ended on 30 November 2020 and PEG has announced that companies must revert to only seeking the authorities set out in the Statement of Principles.
Poll vote changes
Since 3 September 2020, the Companies (Shareholders' Rights to Voting Confirmations) Regulations 2020 have required that traded companies (including main market companies) have adequate processes in place to give: (i) shareholders, proxies or corporate representatives confirmatory receipt of their vote on an electronic poll; and (ii) information to shareholders enabling them to confirm their vote has been validly recorded and counted (on any poll, whether electronic or otherwise). Ahead of their 2021 AGM, companies should work with the registrars to ensure that the necessary arrangements are in place.
2021 dividend procedure timetable
The LSE has published its 2021 dividend procedure timetable – see here.
Principles of Remuneration
The IA has published its 2021 Principles of Remuneration and Letter to Chairs of Remuneration Committees of FTSE 350 Companies. Changes to the Principles include that remuneration reports will be "red-topped" where the remuneration committee has not disclosed a credible action plan to align directors' pension contributions to the majority of the workforce rate by the end of 2022 and the pension contribution received by an executive director is 15% or more of their salary. As with last year, remuneration policies will also be "red-topped" where they do not explicitly state that the pension contributions for new executive directors will be aligned with the wider workforce. These two factors are also considered important by ISS in determining whether to recommend remuneration policies.
Further, a proportion of the entire bonus should be deferred when the bonus opportunity is greater than 100% of salary and the Principles now reflect the range of non-financial performance metrics (strategic, personal and ESG) expected by shareholders in variable remuneration.
See also Proxy Voting Guidelines below for Glass Lewis' recommendations in relation to remuneration.
The IA has published its Guidance on Shareholder Expectations during the COVID-19 Pandemic in which it acknowledges that remuneration committees have to take each company's individual circumstances into account. However, companies must balance the need to incentivise against the experience of other stakeholders.
The IA emphasises that directors should not be isolated from the impact of COVID-19 and sets out a number of circumstances in which it expects the impact on investors and employees to be reflected in the executives' remuneration. For example, where the company received direct government support (such as through the Coronavirus Job Retention Scheme) or raised additional capital, the IA would not expect any annual bonuses to be paid to executives for FY2020 or FY2020/21 unless the circumstances are truly exceptional. In addition, where a dividend was suspended or cancelled in FY2019 or FY2019/20, the IA states that shareholders would expect this to have a corresponding impact on remuneration outcomes.
Further, the IA states that performance conditions for "in-flight" annual bonus or long-term incentive awards should not be adjusted to take account of the impact of COVID-19. Remuneration reports will be expected to set out the approach and factors the remuneration committee will or have considered when judging if there have been windfall gains from long-term incentive awards granted in 2020. Remuneration committees in companies significantly affected by COVID-19 are discouraged from making substantial changes to their remuneration policies until there is clarity on the future of the market.
Glass Lewis' Approach to Executive Compensation in the context of the COVID-19 Pandemic reiterates the importance of consistency between employee and executive pay and enhanced disclosure of any adjustments to remuneration. It is acknowledged that whilst forfeiture of basic salary at a senior level can be a positive signal to the market it not may be sufficient to guarantee pay-for-performance connection at companies severely affected by COVID-19. Conversely, Glass Lewis would support relevant, objective COVID-19 remuneration targets in the next few financial years provided they are not aimed at ensuring full vesting. Where companies have not been negatively affected by the pandemic, Glass Lewis considers there should be no change to the remuneration approach.
ISS has published FAQ: Executive Compensation and the COVID-19 Pandemic providing guidance on how it may approach COVID-19 related pay decisions. In particular, it is likely that it will consider above-inflation pay raises or increases in variable pay opportunity to be inappropriate and, in line with the IA, is not supportive of "in flight" changes to incentive plans or amendments to longer-term plans at the moment. Where amendments are made, the rationale for doing so should be fully explained.
Both Glass Lewis and ISS state that when assessing a company's overall approach to remuneration they will take into account whether companies have received Government support, imposed sacrifices on their workforce or made redundancies as a result of the pandemic.
This sentiment is reiterated by the Pensions and Lifetime Savings Authority ("PLSA") in its 2021 Stewardship and Voting Guidelines which state that executive remuneration should be in line with stakeholder expectations, including workers and wider society. The PLSA suggests voting against a remuneration policy which does not ensure that executive pay-outs take account of the impact of COVID-19, including any taxpayer-funded support received by the Company and the treatment of the wider workforce during the pandemic.
As mentioned above under Board Composition, Glass Lewis states in its 2021 Proxy Paper Guidelines that it will generally recommend a vote against a nomination committee chair at any FTSE 350 company that has failed to meet the Hampton-Alexander board gender diversity target, and at any other main market company that has failed to ensure the board is not solely one gender.
The revised Guidelines state that FTSE 350 companies should provide meaningful disclosure against the board ethnic diversity targets set out in the Parker Review. In addition, where boards have failed to respond to legitimate concerns regarding workforce diversity and inclusivity policies, practices and disclosure, or human capital management practices, Glass Lewis may recommend voting against the relevant committee chair or the chair of the board.
In relation to shareholder meetings, Glass Lewis acknowledges the likelihood of meetings having limited in-person attendance in 2021 and notes its expectation that company disclosures should confirm:
- when, where, and how shareholders will have an opportunity to ask questions relating to the business of the meeting, including a timeline for submitting questions, types of appropriate questions, and rules for how questions and comments will be recognised and disclosed to shareholders;
- in particular where there are restrictions on the ability of shareholders to question the board during the meeting, the manner in which appropriate questions received during the meeting will be addressed by the board; this should include a commitment that questions which meet the board’s guidelines are answered in a format that is accessible by all shareholders, such as on the company’s AGM webpage or investor relations website;
- the procedure and requirements to participate in the meeting and access the meeting platform; and
- technical support that is available to shareholders prior to and during the meeting.
Where inadequate disclosure of the above has been provided to shareholders, Glass Lewis will consider recommending that shareholders hold the chair of the governance committee (or equivalent) or the board chair accountable.
Glass Lewis recommends voting against the remuneration report where there is substantial misalignment between executive director remuneration and: (i) performance; and (ii) shareholder and employee experience. It also recommends voting against the remuneration policy where executive pay or total opportunity increases substantially outpace employee salary increases.
As noted above under Board Composition, in its 2021 Proxy Voting Guidelines, ISS states that it will recommend a vote against the nomination committee chair where it is not satisfied by the gender diversity of the board (which for FTSE 350 companies means compliance with the Hampton-Alexander targets). This is a change from last year when, from ISS' perspective, one female director was sufficient.
The mitigating factors have also changed for 2021 and now require: (i) compliance with the relevant board diversity standard at the preceding AGM; and (ii) a firm commitment, publicly available, to comply with the relevant standard within a year. In addition, for this year only, for FTSE 350 companies, a public commitment to bring the composition of the board in line with the recommendations of the Hampton-Alexander Review by the following AGM will not result in a negative recommendation, regardless of the previous composition of the board.
In respect of FTSE SmallCap, ISS will recommend a vote against the chair of the nomination committee if there is not at least one woman on the board.
The IA's Shareholder Priorities for 2021 continue to focus on (i) responding to climate change, (ii) audit quality, (iii) stakeholder engagement and (iv) diversity. The IA notes that it expects all listed companies to report in line with TCFD in 2021 and will "amber-top" the ESG report of any company in a high risk sector (being (i) financials, (ii) energy, (iii) transportation, (iv) materials and buildings and (v) agriculture, food and forest products) that does not address the four pillars of TCFD (namely, (i) governance; (ii) risk management; (iii) strategy; and (iv) metrics and targets).
On ethnic diversity, the IA will "amber top" the corporate governance report of FTSE 350 companies that do not disclose either the ethnic diversity of the board or a credible plan to achieve the Parker Review targets (see Board Composition above).
In respect of gender diversity the IA will take the following approach in relation to the corporate governance reports:
- "red- top" reports of FTSE 350 companies where there is female representation of 30% or less on their board;
- "red-top" reports of FTSE 350 companies where there is female representation of 25% or less in their executive committee and its direct reports;
- "amber- top" reports of FTSE SmallCap companies where there is female representation of 30% or less on their board; and
- "amber-top" reports of FTSE SmallCap companies where there is female representation of 25% or less in their executive committee and its direct reports.
Finally, the IA encourages FTSE All-Share companies to include a statement in their annual reports that the directors have considered the relevance of material climate-related matters when preparing and signing off the company’s accounts.
Pensions and Lifetime Savings Authority
The 2021 Stewardship and Voting Guidelines provide a comprehensive set of voting recommendations for pension funds and also include a "Stewardship Checklist" for an effective and meaningful stewardship strategy. In these latest Guidelines, the PLSA states its support for virtual AGMs during the unprecedented circumstances in the last year but advises voting against any changes to the articles of associations which would make virtual AGMs permanent.
The PLSA also expressly supports the TCFD approach and expects listed companies to report against it, or be making preparations to do so (not least because it is anticipated that all pension funds will need to provide TCFD reports in the coming years). If a large company is not making progress towards disclosures in line with TCFD, or if a smaller business is not making preparations towards doing so at a pace which is proportionate to its resources and the Government's TCFD roadmap, then the PLSA suggests voting against the re-election of the Director responsible for these disclosures or the Chair of the Board.
Taskforce on Climate-related Financial Disclosures ("TCFD")
The Listing Rules have been amended to require premium listed commercial companies to make disclosures for financial years beginning on or after 1 January 2021 consistent with the recommendations of the Taskforce on Climate-related Financial Disclosures ("TCFD"), or explain non-compliance. The FCA will also consider moving to mandatory TCFD disclosures and extending the scope of the rule to a wider set of listed issuers. While this does not apply to the FY2020 annual reports, investor expectations are that companies will begin to move towards TCFD disclosures.
In relation to TCFD disclosures, IVIS, the IA's Institutional Voting Information Service, is tracking companies' progress and investment managers want to see significant movement towards the above expectation that all listed companies should be reporting in line with TCFD. The IA's Shareholder Priorities for 2021 state that, for financial periods ending on or after 31 December 2020, the IA will now colour top TCFD disclosures for the first time, although this only applies to companies in "high risk" sectors (see IA Shareholder Priorities above).
For further information on TFCD see our client note.
The EU Sustainable Finance Disclosure Regulation ("SFDR") was published in December 2019 and will apply in the EU from 10 March 2021. The SFDR is a core component of the EU's Green Deal, imposing new transparency and disclosure requirements on "Financial Market Participants" ("FMPs"), including fund management companies, investment firms and insurance and credit institutions providing portfolio management. FMPs will be required to disclose various information to investors on how sustainability matters are considered in their investment and business activities. Whilst not specifically directed at listed entities, the SFDR will further inform expectations within financial markets on sustainability related reporting. It now seems clear that the UK will not implement the SFDR in 2021, although it remains possible that there will be a UK version of the SFDR in the future.
Please see our recent article here on the UK's TCFD roadmap on the TCFD in light of the UK's discussion around implementation (or not) of the EU's SFDR. See also the IA's position paper on climate change setting out its commitment to supporting the practical implementation of forthcoming regulatory requirements under the SFDR.
Separately, the Companies (Directors’ Report) and Limited Liability Partnerships (Energy and Carbon Report) Regulations 2018 have introduced new emissions reporting requirements for UK private companies and revised the requirements that apply to UK quoted companies ("Streamlined Energy and Carbon Reporting" or "SECR"). In addition to reporting its annual global emissions, quoted companies must now also report on underlying energy usage and energy efficiency actions from the previous year in their Directors' Report.
SECR applies to financial years beginning on or after 1 April 2019. Energy reporting will be required for the first time in the FY2020 annual report. Please see our detailed briefing for further information.
- This regulation may require some extra energy usage-related data gathering and/or reporting to ensure compliance (in addition to any existing requirements associated with the Energy Saving Opportunity Scheme).
- The FRC Climate Thematic states that boards, companies, auditors, professionals, investors and regulators and standard setters all need to give greater weight to climate-related considerations in business models, governance and reporting. For example, companies will set "net zero" goals but it is unclear how progress will be achieved, monitored or assured.
Section 172 statements
While section 172 statements are not new for 2021, there continues to be commentary on the topic and we expect that the statements will evolve as market practice develops.
There have been several FRC publications which comment on section 172 statements:
- The FRC Lab published advice on how to make section 172 statements more useful to investors and other stakeholders. Tips include presenting the information in a way that makes sense, building in the most useful content and having good processes in place throughout the year.
- The FRC Lab has stated in its subsequent newsletter that it will also be looking more broadly at how companies have reported stakeholder issues across different communication channels.
- In its recent Review of Corporate Governance Reporting, the FRC notes that companies are failing to provide sufficient information for investors and broader stakeholders in their s.172 statements.
- The FRC's end of year letter to CEOs, CFOs and audit committee chairs notes the lack of disclosure on the two-way dialogue with stakeholders and how their feedback has affected decision making.
The Chartered Governance Institute has published updated guidance on directors' duties. Although this is a guide to general directors' duties, it provides additional, practical guidance on section 172 reporting requirements, including examples of the issues that may be considered relevant in relation to each of the factors listed in section 172; the methods for stakeholder engagement; and the effect on company decisions and strategies.
FRC end of year letter
The FRC has published a letter to CEOs, CFOs and audit committee chairs which sets out the topics that the FRC expects to scrutinise this year and its expectations of companies. Topics the letter covers include: COVID-19, Brexit, climate change, section 172 statements, chair tenure and workforce engagement reporting.
Corporate Governance Disclosures
The FCA has published the findings of its review of listed companies' compliance with the FCA's rules relating to corporate governance, concluding that there is room for improvement in the disclosures across all categories of listed issuers. In 2021, when stating they have applied the Principles of the 2018 UK Corporate Governance Code (the "Code"), premium listed issuers should consider carefully whether that they have done so in "a manner which enables shareholders to evaluate how the Principles have been applied, rather than merely stating they have been applied", for example, by including specific examples.
The FRC has published its Review of Corporate Governance Reporting which highlights both areas of best practice and areas for improvement in corporate governance disclosures. Overall, the FRC was disappointed by the response to the Code and too many companies are still regarding Code compliance as a tick box exercise. Rather than offering vague explanations, the FRC encourages companies to declare non-compliance and explain why this approach is right for the company and, if necessary, what actions it has taken to mitigate the impact of not following the Code. The review lists a number of areas in which the FRC expects reporting to be improved in 2021, being:
- having a well-defined purpose (not simply a marketing slogan) and clearly showing the progress towards achieving it;
- a discussion of the issues raised, topics considered, and feedback received during engagement with shareholders and employees;
- showing the impact of engagement with stakeholders, including shareholders, on decision-making, strategy and long-term success;
- increasing focus on assessing and monitoring culture, including consideration of methods and metrics used;
- increasing attention on, and better reporting of, succession planning, diversity and board evaluation;
- clearly showing the impact of engagement with shareholders on remuneration policy and outcomes;
- clearing showing the impact of the engagement within the workforce in relation to the executive remuneration policy; and
- improved clarity by using signposting, linking elements of the report and including clear references to the Code.
The FRC guidance note, Improving the quality of 'comply or explain' reporting, builds on the Review of Corporate Governance Reporting and suggests that the explanations (i) set the background and context, (ii) give a convincing rationale for the approach being taken, (iii) consider any risks and describe mitigating actions, (iv) set out when the company intends to comply and (v) are understandable and persuasive.
The FRC has also published updated Guidance for companies on Corporate Governance and Reporting encouraging companies to make use of the extension for publication of audited financial reports from four to six months, demanding full disclosure around the qualifications and assumptions made in connection with viability statements and explaining the material uncertainties to be disclosed in relation to going concern statements, as well as discussing the approach to take to interim reports.
Glass Lewis has published its UK Corporate Governance Code: 2020 Compliance Review which analyses the level of compliance of FTSE companies with the UK Corporate Governance Code, based on last year's annual reports, and notes the most common areas of non-compliance. It also provides details of Glass Lewis' approach to specific areas of non-compliance and, in particular notes: (i) Glass Lewis will continue to closely scrutinise disclosures relating to chair tenure; and (ii) where executive pension contributions are not aligned with the workforce, remuneration committees should provide disclosures regarding their commitment to reduce pension contributions for incumbent executives by the end of 2022.
Workforce engagement and culture
While the workforce engagement mechanisms are not new for 2021, they are an area which received criticism in the FRC's Review of Corporate Governance Reporting. The FRC has also commissioned a research project into workforce engagement, with the findings to be published early this year. When considering the effectiveness of their current workforce engagement mechanisms in 2021, and when preparing their FY2020 annual reports, companies should note that the FRC expects them to "fully explain why their method of employee engagement is effective", for example, by reporting examples of discussions in relation to the impact of the engagement on decision making. In addition, the dialogue with the workforce needs to be explained clearly and effectively. The FRC's letter to CEOs, CFOs and audit committee chairs also focuses on improved disclosures in this area, for example clearer explanation on what basis employee-related issues and concerns are elevated to the board. Further, the IA's Shareholder Priorities for 2021 expect quality disclosures on how companies have engaged, communicated and supported stakeholders during the Covid-19 pandemic, and in particular how their views have been reflected in the Board's key decision making.
In the Code, for the first time, there is an expectation that the remuneration committee will also engage with the workforce. While many companies stated that they had taken workforce remuneration, workforce related policies and the alignment of incentives and rewards into account when setting the policy for executive remuneration, few companies provided further detail and the FRC notes that they were unable to find any companies who described any feedback that was received from employees by the remuneration committee, and any follow-up actions. The FRC has, therefore, noted that it expects to see an improvement in companies reporting on the steps that they have taken to engage their employees on their remuneration policies.
Similarly, the FRC expects companies to take a more rigorous approach to monitoring and assessing culture and its alignment with purpose, values and strategy, including setting out any actions taken in this area in line with the Code. Although the requirements around culture are not new for 2021, and reporting on culture improved compared to early adoption reporting last year, the FRC says there is still more work to do in this area.
European Single Electronic Format
The FCA has confirmed that the application of the European Single Electronic Format ("ESEF") will be delayed and will now apply to financial periods starting on or after 1 January 2021, for publication from 1 January 2022. ESEF requires issuers to publish and file their reports in XHTML format. For FY2020, issuers may choose to file their reports in ESEF or may continue to use the current PDF format.
While not new for this year, companies should remember that:
- companies who receive 20 per cent. or more votes against a resolution will be included on the Investment Association's public register and should comply with the requirements of Provision 4 of the Code;
- under the Code, chairs should not be on the board for more than nine years (which includes time pre-IPO);
- the terms of reference for the nomination, audit, remuneration and risk committees should be checked and updated where necessary in accordance with the revised ICSA templates published earlier this year;
- the AGM notice should, in relation to director re-election resolutions, include specific reasons why each director's contribution is, and continues to be, important to the company's long-term sustainable success;
- directors who are 'overboarded' are likely to receive a negative recommendation from the proxy advisors; and
- remuneration schemes and policies should include a discretion that will allow award levels given by formulaic outcomes to be overridden.