Legal development

Ashurst Governance and Compliance Update Issue 13

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    In this edition we cover the following

    Narrative financial reporting

    1. BEIS publishes guidance on mandatory climate-related financial disclosures

    2. FCA finalises technical note on climate-related reporting

    3. FRC publishes research report on corporate governance reporting by large private companies


    4. FTSE Women Leaders Review reports on gender balance and sets new targets, including for private companies

    AGMs in 2022

    5. PLSA publishes its 2022 Stewardship and Voting Guidelines

    6. QCA and Peel Hunt publish mid and small-cap market survey for 2022


    7. FRC publishes Audit Committee Chairs' views on, and approach to, audit quality



    BEIS publishes guidance on mandatory climate-related financial disclosures

    The Department of Business, Energy and Industrial Strategy has published guidance for companies and LLPs on TCFD-aligned climate-related financial reporting and in light of the regulations for in-scope entities which come into force and apply to financial periods beginning on or after 6 April 2022. For more detail, including a reminder of which entities are in scope and links to the regulations themselves, please see Ashurst Governance and Compliance update, Issue 12.

    The non-binding, non-exhaustive guidance is intended to be a factual explanation of the legislation. It contains, in Section 1:

    • An overview of the new climate-related financial disclosure requirements and the purpose behind their introduction: to support investment decisions as the economy moves to towards a low-carbon economy.
    • A reminder of the scope of the requirements – i.e. to whom the regulations apply; how they operate, particularly in a group and/or global context; where disclosures should be made; and the extent to which third party information can be relied upon to make the disclosures.
    • Q&A on the operation of the regulations; the way in which they will be policed by the Financial Reporting Council; and the responsibilities of an in-scope entity's auditor.
    • Perhaps most usefully, suggestions on what entities should disclose relative to each element of the reporting requirements and the level of detail to be included. In summary, disclosures should enable a reader to understand the effect of climate-related financial risks on, and opportunities for, the business, without needing to refer to other sources of information; and how those risks and opportunities relate to the other information presented in the annual report.

    The guidance concludes, in Section 2, with an overview of how the regulations interact with other requirements, regulations and frameworks, including the rules mandated for premium and standard listed issuers by the Financial Conduct Authority, and links to additional information.

    FCA finalises technical note on climate-related reporting

    The Financial Conduct Authority has published Primary Market Bulletin No.38 in which it confirms the publication of Primary Market Technical Note: TCFD - aligned climate-related disclosure requirements for listed companies (TN 802.1), after the consultation it launched in Primary Market Bulletin No.36, which we covered in Ashurst Governance and Compliance update, Issue 8.

    This new note sets out the climate-related disclosure requirements for listed companies, together with a reminder of the FCA's disclosure expectations and supervisory strategy. The note augments technical note 'Disclosures in relation to ESG matters, including climate change' (TN801.1), which the FCA published in December 2020.

    FRC publishes research report on corporate governance reporting by large private companies

    The Financial Reporting Council has published an assessment of the quality of reporting from private companies who have chosen to adopt the Wates Corporate Governance Principles for Large Private Companies. The report, which was conducted with the University of Essex, shows that the Wates Principles are the most widely adopted corporate governance code used by large private companies in response to the obligations to report on governance introduced by The Companies (Miscellaneous Reporting) Regulations 2018.

    The research found that two-thirds of companies required to do so reported on their governance arrangements. Of these companies, 57 per cent relied on a corporate governance code to define their arrangements, 35 per cent relied on alternative governance arrangements and eight per cent failed to report meaningfully. The Wates Principles were by far the most widely adopted governance code (with 77 per cent of those companies adopting a single code using Wates), with the financial sector being the biggest proportionate adopter.

    While the FRC acknowledges that it is too early to draw many conclusions, it believes that the research shows that companies are grasping the spirit of the Wates Principles in their governance reporting and that they are using the principles as a tool for 'self-reflection and improvement'. It also believes that companies are seeing annual governance reporting as an opportunity, not a burden.

    The research includes examples of good reporting, noting that the majority of those that used the Wates Principles provided some form of explanation of how each Principle was applied. It states that companies tended to disclose more information about how their governance practices and policies matured over the years, such as in relation to the structure and composition of committees, or the role of independent directors. However, across each of the Principles, reporting could be improved. In particular, the report recommends that companies should:

    • disclose more detailed information in relation to the application of the six Principles to provide readers with a comprehensive understanding of the corporate governance arrangements in place and how these are mapped to the respective Principles;
    • discuss more instances and/or circumstances relating to a given corporate governance practice to evidence how they have applied the Principles; and
    • use more cross-references (for example, in some cases items were disclosed in other sections of the annual report but were difficult to locate without the provision of cross-references).

    Ashurst comment: The requirement for large private companies to disclose governance arrangements received considerable press and was the subject of a reasonable implementation period. That a third of companies required to do so have not complied with the obligation as to the content of their accounts, an obligation introduced in part in response to the high profile failure of BHS, is only going to increase calls for the government to hasten the constitution of the Audit, Regulation and Governance Authority which will come with significantly enhanced powers of scrutiny and sanction over such disclosures. Those companies taking their Wates Principles reporting obligations seriously may want to reflect on the items reviewed relative to each Principle as part of the research with a view to enhancing their reporting in the future.


    FTSE Women Leaders Review reports on gender balance and sets new targets, including for private companies

    The FTSE Women Leaders Review, the successor body to the Hampton-Alexander Review, has published its first report on gender balance in FTSE leadership and revised its aspirational diversity targets, extending them to the largest private companies by sales for the first time.

    Progress on gender diversity

    The Review finds that, as at 10 January 2022:

    • Women held 39.1 per cent of FTSE 100 board positions (up from 36.2 per cent in 2020), and 36.8 per cent in the FTSE 350 (2020: 37.6 per cent). This means that the constituents of the FTSE 100 are ranked second when compared to listed companies in 11 other jurisdictions also working to improve gender balance (2020: 5th).
    • Across the FTSE 350, there were 48 women in the role of Chair (2020: 39), 115 women Senior Independent Directors and 18 women CEOs. However, there were only 75 women executive directors (29 in the FTSE 100), being 12.3 per cent of executive directors in the FTSE 350.
    • 278 boards in the FTSE 350 have met, or exceeded the Hampton-Alexander target of 33 per cent women on boards (2020: 220), which means that 72 companies have yet to do so, with 15 of them in the FTSE 100.
    • The FTSE 350 had no all-male boards, but still had six companies with only one woman on the board.

    The Review also reports that for 'Women in Leadership' (defined as the executive committee and direct reports on a combined basis) – often seen as the true measure of diversity in an organisation:

    • Women held 32.5 per cent of FTSE 100 Leadership roles (2020: 30.6 per cent), and 31.5 per cent in the FTSE 350 (2020: 29.4 per cent) as at 31 October 2021.
    • Women held 25.9 per cent of FTSE 100 executive committee positions (down from 26.5 per cent in 2020), and 25 per cent in the FTSE 350 (2020: 23.6 per cent).
    • The number of all male executive committees now stands at 16 (2020: 28).

    New aspirational targets

    The Review has also set out new voluntary targets as follows:

    • The voluntary target for FTSE 350 boards and for Leadership roles is increased to 40 per cent by 2025; and
    • FTSE 350 companies should have at least one woman as Chair or SID and/or one woman in the role of CEO or Finance Director.

    Both targets mirror those set out in 2021 by the FCA as part of its package of reforms to diversity reporting in the FCA Handbook and which were expected to apply to financial periods beginning on or after 1 January 2022. Feedback on the consultation and final rules are yet to be published but are expected imminently.

    More drivers of progress in the FTSE 350

    The Review recommends that key stakeholders, such as the investment community and corporate governance agencies, should continue to set best-practice guidance, or establish appropriate alternative mechanisms, to encourage any FTSE 350 board that has not achieved the 33 per cent target for 2020 to do so.

    Naturally, the Review also suggests that boards currently below the 33 per cent threshold should look to the under represented gender when considering additional appointments.

    Encouraging progress in private companies

    Of particular note is that the Review will also now consider the largest 50 private companies by sales as being subject to its recommendations. This includes private equity owned companies, partnerships, entrepreneur/founder-owned, family-owned or companies directly owned by management or staff.

    AGMS IN 2022

    PLSA publishes its 2022 Stewardship and Voting Guidelines

    The Pensions and Lifetime Savings Association has published its Stewardship and Voting Guidelines for 2022. The Guidelines are intended for use by investors from across the investment chain and with different levels of knowledge and expertise on stewardship, engagement and voting. Having undertaken a substantial review of the guidelines in 2020, the PLSA has this year focused on ensuring they remain relevant amid the challenges posed by a post-Covid-19 world, a fast-moving regulatory environment and increases in the cost of living.

    Key issues of concern to the PLSA during the 2022 AGM season include:

    • Format of meetings: The PLSA notes concerns that if 'virtual only' AGMs become a permanent feature, this may reduce opportunities for shareholder engagement with the board. The Guidelines urge companies to look at how they can look to increase investor engagement opportunities.
    • Climate change and reporting: Ensuring companies are properly disclosing their environmental footprint in the wake of the ongoing climate emergency is paramount. To that end, the PLSA encourages pension schemes to look for evidence that companies are taking their TCFD reporting seriously and in the context of their own investment plans. If a large company does not reference the TCFD framework, the Guidelines recommend that investors consider voting against the company's climate change and sustainability policy (if any). The PLSA also wants to see better disclosure from companies of their impact on the environment, including Scope 1 and 2 emissions and, where relevant, Scope 3.
    • Executive remuneration: The PLSA expects caution to be shown on executive pay proposals, especially where companies have benefitted from government support during the pandemic, and in light of the increasing cost of living.
    • Diversity: The PLSA continues to focus on ensuring diversity, and FTSE 100 companies that are failing to meet the Parker Review target of ‘no white boards’ by 2021 should expect to see this challenged by investors. The importance of a clear description of the board's policy on diversity is highlighted and the Guidelines recommend that investors consider voting against the re-election of the Chair and the Chair of the Nominations Committee if a board has not established a such a policy and strategy.

    QCA and Peel Hunt publish mid and small-cap market survey for 2022

    The Quoted Companies Alliance and Peel Hunt have published their 2022 YouGov-led market survey of 240 fund managers and small and mid-cap quoted companies: 'The Eye of the Beholder – The differing perspectives on the UK's equity markets'. It finds that:

    • There is an emerging disparity between how companies and investors view the public markets. Investors consider the current conditions are attractive for small and mid-caps while the companies disagree and think the situation is deteriorating.
    • There are concerns about macroeconomic conditions with companies finding it more difficult to forecast their prospects.
    • Investors have seen capital markets days as particularly effective at increasing company visibility. Companies have focused much of their efforts on improving their corporate websites over the past three years.
    • Companies are less convinced than investors that the emergence of ESG funds will make the public markets more attractive to companies which are currently private.
    • There is significant variance in how small and mid-caps should be defined in terms of market capitalisation. This has an impact on views of at what stage a company should consider listing on the Main Market.
    • If a company on the Main Market is below the perceived minimum level of market capitalisation, investors do not think that such companies should be forced off it.

    FRC publishes Audit Committee Chairs' views on, and approach to, audit quality

    The Financial Reporting Council has published its annual research, conducted by YouGov, on the views and approaches of Audit Committee Chairs to audit quality. It covers:

    • The definition of a good quality audit and what Audit Committee Chairs considered to be important elements of, and contributory factors to, achieving one.
    • The process for and factors considered when selecting an auditor.
    • Approaches to the assessment of the quality of an audit and their relative effectiveness.
    • The impact of Covid-19 on audits and the work of Audit Committees in their oversight role.