Ashurst Governance & Compliance Update - Issue 49

AGMs in 2024

1.  PLSA publishes 2024 Stewardship Guide and Voting Guidelines

The Pensions and Lifetime Savings Association has published its 2024 Stewardship and Voting Guidelines, together with a summary document. The Guidelines reference the 2024 version of the UK Corporate Governance Code and associated revised guidance (see AGC Update, Issue 48).

Key areas highlighted in the 2024 Guidelines include:

• Social factors: the PLSA has included a new section on social factors, recommending that investors start engaging with this topic and promoting best practice for companies to follow. The section highlights the work conducted by the Taskforce on Social Factors, while also continuing to focus on workforce and well-being.
• AI / cybersecurity: at a time where there is serious political unrest in several parts of the world, the PLSA believe that it is more important than ever for companies to have consistent policies on cybersecurity. Investors should encourage companies to disclose the governance and oversight structures in place to identify and manage cybersecurity risks and to provide timely reporting of any breaches and measures taken in response.
  
  Related voting recommendations include voting against the annual report and accounts where a company’s disclosure on cybersecurity risk and on steps to mitigate it is particularly poor, and voting against the re-election of the chair of the audit committee and reappointment of the auditor if cybersecurity risk (or any breach responses) are poorly managed.
  
  The advent of AI, and how it can and will transform businesses, is also taken into consideration. The PLSA urges investors to ensure that companies are aligned with evolving industry good practice.
  
  The PLSA believes that investors should consider voting against the re-election of a director where there is evidence of 'egregious conduct' attributable to a particular director around the development and deployment of AI.
• Climate change and sustainability: the Guidelines have been expanded to address the importance of biodiversity loss and the need to treat this with the same prominence as climate change.
  
  Investors should consider voting to support resolutions that seek to encourage addressing direct or underlying drivers of biodiversity loss. The PLSA suggests considering voting against directors if efforts to address drivers of biodiversity loss are insufficient. Investors should also consider voting against the re-election of a director where the company's efforts to mitigate agricultural commodity-driven deforestation are considered insufficient.
• Executive pay: in the PLSA's view, the cost of living crisis has again led to an increased focus on executive pay in 2024. Companies should exercise restraint in making executive pay awards, while investors are encouraged to evaluate all aspects of a company's remuneration policy to ensure that it is closely aligned with investors' interests and is in line with wider workforce policies. Investors should consider voting against the remuneration policy where it does not reflect the standards set out in the Guidelines.
• Dual class share structures: investors should consider voting against the governance committee chair (or equivalent) if a company has a dual class share structure without a sunset clause of seven years or less from the date of IPO.

By way of reminder, Glass Lewis has published its guidelines for 2024 – see AGC Update, Issue 44. This applies to meetings taking place on or after 1 January 2024.

ISS has also published its voting guidelines for the 2024 AGM season (for meetings taking place on or after 1 February 2024 – see AGC Update, Issue 46). No substantive changes have been made in this iteration.

2.  Investment Association publishes letter to Remuneration Committee Chairs

Normally, by this time of year, the IA Principles of Remuneration would have been updated. It follows that, by now, we would usually be able to advise on how to implement the updated Principles in remuneration reports and policies for approval during the 2024 AGM season. However, this year the IA has taken a different approach.

Being mindful of recent debates on the UK listing environment and UK remuneration practices, the IA states that its members want a competitive UK listing environment that attracts companies to list and do business in the UK. The IA is, therefore, conducting a more fundamental review of the Principles which will be published later in 2024. As an interim measure, it has written to RemCom chairs ahead of the 2024 AGM season.

As in 2023, the IA emphasises a need for companies to be cognisant of inflation, the cost-of-living crisis and their impact on employees. Further, and another repeat from last year, the IA also encourages a review of LTIP grants made during the pandemic to avoid windfall gains. 

As to the future, the letter reveals that, in September 2023, the IA met with around 100 companies in the FTSE 350 to discuss the Principles. The following themes emerged:

• The need to increase pay opportunities through greater LTIP grant levels: in particular to attract talent from the US and globally, where LTIP grants are generally more significant than in the UK.
• Use of 'Hybrid' schemes: again, taking their inspiration from US companies, encouraging both performance and non-performance-related long term incentives - i.e. so-called 'restricted share plans'.
• Requirements in the UK Corporate Governance Code reduce the perceived value of remuneration: whilst Code provisions such as increased holding periods, shareholding guidelines, post-employment shareholding guidelines and malus and clawback are accepted as a means to increase the long-term alignment of executives and shareholders, in aggregate there is a view from some companies that their perceived impact on the value of remuneration received is disproportionate.

Economic Crime and Corporate Transparency 

3.  ECCTA: Further implementing regulations made

Companies House fees

The Registrar of Companies (Fees) (Amendment) Regulations 2024 and the Registrar of Companies (Fees) (Register of Overseas Entities) Regulations 2024 (together with an Explanatory Memorandum) have been published and laid before Parliament. The regulations amend various Companies House fees, particularly to reflect the expansion of the Registrar's role and functions under the Economic Crime and Corporate Transparency Act 2023 (ECCTA). The regulations come into force on 1 May 2024.

ECCTA expands the scope of activities which can be funded through fees to include the cost of investigation and enforcement activities. 

Companies House has also published an updated list of its fees, effective from 1 May 2024.

Financial penalties

The draft Economic Crime and Corporate Transparency Act 2023 (Financial Penalty) Regulations 2024 have been published (together with a draft Explanatory Memorandum). The regulations will introduce the new civil penalties regime set out in ECCTA to enable the Registrar to impose a financial penalty for many offences under the Companies Act 2006 which currently require a criminal prosecution to be pursued through the courts. Note that the criminal sanctions regime remains in place.

The regulations empower the Registrar to impose a financial penalty on a person if it is satisfied, beyond reasonable doubt, that the person has engaged in conduct amounting to a relevant offence under the 2006 Act. 

The regulations will come into force on 2 May 2024 if they are made on or before 1 May 2024, or, if later, on the day after they are made.

Stewardship

4. FRC announces successful signatories to UK Stewardship Code and launches review

The Financial Reporting Council has announced the identity of successful signatories to the UK Stewardship Code following the latest round of applications. There are now 273 signatories to the Code, representing £43.3 trillion assets under management. This includes 188 asset managers, 66 asset owners and 19 service providers. 81 organisations successfully renewed their signatory status and one organisation was added.

In making its announcement, the FRC welcomed improvements in outcomes-based reporting, and stated that the successful submissions to the Code reflect the general improvement of stewardship practices across asset classes from asset owners, asset managers and service providers. The FRC noted increased reporting on key stewardship themes, including human rights issues in supply chains, nature-based solutions and biodiversity, while climate change continues to be a key area of engagement and focus.

The FRC has also launched a review of the Stewardship Code having concluded its updating of the UK Corporate Governance Code. As part of the review, it is seeking views on whether the Stewardship Code, in its current format, is being used by asset managers, asset owners and other signatories in a manner that drives better stewardship outcomes from engagement with issuers across all asset classes. 

The review will focus on, amongst other topics, the extent to which the Code:

• supports long term value creation through appropriate investor-issuer engagement that drives issuers’ prospects and performance;
• creates reporting burdens on issuers as well as Code signatories; and
• has led to any unintended consequences, such as short-termism in targets and outlook for issuers.

The review will be undertaken in three phases:

• The first phase will be a targeted outreach, focussed around the four main groups affected by the Code’s principles and application – issuers, asset managers, asset owners and service providers, on the topics outlined above. The FRC expects these outreach discussions to uncover a range of issues that will inform the second phase.
• The second phase will be a public consultation, which is planned to launch after the 2024 AGM voting season during the summer months.
• The revised Code will be most likely published in early 2025.

MAR and ESG Stewardship

5.  FCA published Primary Market Bulletin 46

The FCA has published Primary Market Bulletin 46 in which it covers:

• issues raised with it in light of the publication of its final notice concerning Sir Christopher Gent (see PMB 42 and AGC Update, Issue 25), particularly in relation to Article 10 of the Market Abuse Regulation (unlawful disclosure of inside information) in the context of 'ESG stewardship'; and
• sponsor procedures as regards TCFD-aligned disclosures.

Article 10 UK MAR and ESG Stewardship

By way of reminder, the Gent case dealt with the unlawful disclosure of inside information to shareholders. In light of that decision, the FCA has been asked various questions including whether:

• a major shareholder’s voting intentions on significant transactions, potentially influenced by ESG stewardship concerns, may constitute inside information, thus restricting trading by that shareholder;
• Article 10 might apply where major shareholders wish to discuss their stewardship plans for particular issuers with other shareholders with similar ESG strategies; and
• a shareholder may or should disclose its voting intentions to the market.

Noting that PMB 46 does not purport to provide binding guidance, the FCA underlines the continued relevance of prior publications to this analysis, namely:

• the letter sent by the FCA's predecessor, the Financial Services Authority, to the Association of British Insurers titled 'Shareholder engagement and the current regulatory regime' on 19 August 2009 (ABI letter); and
• the FSA’s Market Watch 20 published on 20 May 2007.

The FCA also notes that the decision in Gent does not mark any change in its approach to Article 10 or UK MAR in general. On that basis the decision should not, in the FCA's view, inhibit or stifle engagement between companies and their shareholders, nor should its regulatory requirements prevent collective engagement by institutional shareholders designed to raise legitimate concerns on particular corporate issues, events or matters of governance with the management of investee companies. This includes matters related to ESG considerations.

As a result, and as stated in Market Watch 20, the FCA is unlikely to consider that market abuse rules have been contravened where a shareholder trades based simply on its own intentions and knowledge of its own strategy. It may, however, reach a different conclusion if other market participants also trade based on the knowledge of that party’s voting intentions or stewardship plans.

Where major shareholders are concerned that their voting intentions or broader stewardship plans concerning an issuer may constitute inside information, the FCA encourages them to consider the requirements under Article 8 and 14 UK MAR (insider dealing, prohibition of insider dealing and of unlawful disclosure of inside information) and Article 10 UK MAR (unlawful disclosure of inside information). Where the information is not inside information they may, if they choose to, publish that information.

When collaborating, shareholders should bear in mind their disclosure obligations under DTR 5.2.1R(a), which may require shareholdings to be aggregated in certain circumstances (in relation to issuers subject to those rules). As stated in the ABI letter, under the disclosure requirements the aggregation of voting power is necessary where there is an agreement between two or more persons which obliges them to adopt a lasting common policy towards the management of the issuer through the exercise of their voting rights. The FCA state that this is unlikely to include the kind of ad hoc discussions and understandings which might be reached between institutional shareholders in relation to particular issues or corporate events. However, shareholders should be aware of these rules and take advice as necessary when considering collaborative shareholder discussions in respect of ESG (or other) matters of stewardship.

TCFD-aligned disclosures: sponsor procedures

Following the introduction of the Task Force on Climate-Related Financial Disclosures (TCFD) – aligned disclosure requirements for premium listed commercial companies, the FCA has conducted an initial assessment of how sponsors have made changes to their own procedures to assess whether new applicants to the public markets have procedures in place to enable them to comply with the relevant requirements.

The remainder of the PMB sets out the FCA's initial observations following submissions from a small group of sponsors. Where relevant, it highlights examples of good practice.

Market abuse and trading by organised crime groups

The FCA has also recently published a Market Watch focusing on 'Market abuse and trading by organised crime groups'. This is principally aimed at advisory firms and brokers but fans of Line of Duty may also enjoy our update.

Authors: Will Chalk, Rob Hanley, Vanessa Marrison, Becky Clissmann, Marianna Kennedy and Kseniia Samokhina