Legal development

Ashurst Governance and Compliance Update Issue 8

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    1. Glass Lewis publishes 2022 policy guidelines

    2. ISS launches 2022 voting policy consultation

    Narrative Financial Reporting

    3. TCFD-aligned climate-related disclosures – FCA publishes disclosure expectations and supervisory strategy

    4. FRC publishes 2021 Review of Corporate Governance reporting


    5. Mandatory disclosure of climate transition plans


    6. Investment Association releases revised Principles of Remuneration for 2022


    7. FRC and FCA remind CEOs of ESEF obligations

     Payment practices

    8. Payment practices reporting: BEIS launches review


    9. FRC highlights the elements that combine to make a good audit


    1. Glass Lewis publishes 2022 policy guidelines

    Glass Lewis has published its 2022 proxy voting policy guidelines for the UK.

    Policy changes for voting recommendations in 2022 include:

    • Diversity of ethnicity: In line with the Parker Review recommendations, Glass Lewis will generally recommend against the re-election of the chair of the nomination committee at any FTSE 100 board that has failed to appoint at least one director from a minority ethnic group and has failed to provide clear and compelling disclosure for why it has been unable to do so.

      As regards the issue of gender diversity, Glass Lewis has clarified that its assessment of board-level gender diversity is based on the self-identification of directors.
    • Remuneration Committee performance and accountability: Glass Lewis may recommend that shareholders vote against the re-election of the remuneration committee chair where there are substantial concerns with the remuneration policy presented for shareholder approval and/or the pay practices outlined in the remuneration report.
    • Environmental and social risk oversight: Glass Lewis will generally recommend that shareholders vote against the re-election of the governance committee chair (or equivalent) of FTSE 100 companies which fail to provide explicit disclosure concerning the board's role in overseeing material environmental and social issues.

    Glass Lewis has also clarified:

    • its overall approach to ESG matters and the factors it will take into account;
    • its approach to analysing shareholder proposals;
    • its guidance on the use of environmental and social metrics in the variable incentive programmes for executive directors; and
    • its approach and expectations when assessing equity incentives granted to executives who are also directly or indirectly major shareholders of a company.

    The revised policy will apply to meetings which take place on or after 1 January 2022.

    Glass Lewis' policy on ESG matters, including its approach to 'Say on Climate' resolutions can be found in its ESG Initiatives 2022 Policy Guidelines.

    2. ISS launches 2022 voting policy consultation

    Institutional Shareholder Services has published its 2022 benchmark policy consultation seeking views on amending its existing UK and Ireland voting policies.

    ISS is seeking views on its approach to:

    • Board ethnic diversity: Mirroring the Parker Review targets, ISS is proposing that it will generally recommend against the nomination committee chair (or other directors on a case-by-case basis) of a FTSE 100 company which has not appointed at least one ethnic minority background director to the board. ISS also expects FTSE 250 and FTSE SmallCap constituents, as well as AIM companies with a market capitalisation over £500 million, to appoint at least one director with an ethnic minority background by 2024.
    • Remuneration: ISS proposes that ESG performance conditions may be used in executive compensation but targets used should be material to the business and quantifiable (see the Remuneration section for further information).
    • Climate-related matters generally: For companies that are significant greenhouse gas emitters, ISS proposes that it will generally recommend a vote against or withhold a recommendation from the re-election of the responsible incumbent director, committee, or full board where ISS determines that the company is not taking the minimum steps needed to understand, assess, and mitigate risks related to climate change to the company and the wider economy. ISS also outlines the minimum steps it expects to see in order to understand and mitigate those risks for 2022, including detailed disclosure of climate-related risks and "appropriate" GHG emissions reduction targets.
    • Say on Climate – Board proposals: ISS proposes to take a case-by-case approach to recommendations on proposals that request shareholders approve the company's climate transition action plan, taking into account the completeness and rigor of the plan. A detailed list of information that ISS will consider relative to any proposal is set out.
    • Say on Climate – Shareholder proposals: ISS proposes to take a case-by-case approach to recommendations on shareholder-sponsored proposals that request the company disclose a report providing its GHG emissions levels and reduction targets and/or its upcoming/approved climate transition action plan and provide shareholders with the opportunity to regularly express approval or disapproval of its GHG emissions reduction plan. Again, a detailed list of information which ISS will consider is set out.

    ISS expects to announce its final 2022 benchmark policy changes by or around the end of November 2021. The revised policy will apply to shareholder meetings taking place on or after 1 February 2022.


    3. TCFD-aligned climate-related disclosures – FCA publishes disclosure expectations and supervisory strategy

    Following hot on the heels of its Strategy for ESG Priorities which was published in early November, the Financial Conduct Authority has also published Primary Market Bulletin, Issue No. 36, in which it sets out further information on its TCFD-related disclosure expectations and supervisory strategy.

    To help listed companies, their directors and advisers in this area, the FCA is also consulting on a new technical note on 'TCFD aligned climate-related disclosure requirements for listed companies'. This new note will augment technical note 'Disclosures in relation to ESG matters, including climate change' (TN801.1), which the FCA published in December 2020.

    Both the supervisory statement and new technical note have been prepared on the basis that the proposed extension of the climate-related reporting regime to standard listed issuers set out in CP 21/18 (and which we covered in Ashurst Governance and Compliance update, Issue 2) is taken forward. The FCA have confirmed that they intend to finalise these rules in time for them to apply to financial years beginning on or after 1 January 2022.

    Supervision of TFCD-aligned disclosures

    The FCA emphasises that while it will be responsible for monitoring and, where necessary, enforcing compliance with the TCFD reporting Listing Rules requirements applicable to premium and standard-listed issuers, the FRC will also play a significant role in this regard given that it is responsible for keeping such Listing Rules disclosures under review as part of its regulatory role scrutinising annual reports.

    The FCA recognises that many listed companies will be applying the reporting requirements for the first time. As such, the FCA and FRC intend to collaborate on targeted 'deep dive' thematic work, designed to assess how companies have complied with the requirements, identify areas of concern and disseminate examples of best practice.

    If disclosures do not appear to meet the requirements of the Listing Rules, the FRC is likely, in the first instance, and as part of its routine reviews of annual reports, to contact a relevant company setting out the issues and asking for further information. In light of that engagement, the FRC may ask for corrective or clarifying action to be taken, such as seeking an undertaking to enhance disclosures in subsequent annual reports. If the FRC is unable to reach a satisfactory conclusion through engagement, the matter will be referred to the FCA. Moreover, should the FRC identify potentially false or misleading information, including the omission of material facts likely to cause investor harm or which may breach other FCA rules, this will also be referred to the FCA.

    Where a listed company fails to make the required statement in its annual report regarding the disclosure of climate-related financial information, the FCA will request the statement be published via an RIS as soon as possible. Any non-compliance will be viewed 'seriously' and, according to the FCA, lead to action using the 'full suite' of its powers and sanctions where appropriate. The supervisory statement also contemplates notification of rule breaches by other stakeholders, noting that third party information can make a 'valuable contribution' to FCA supervisory work.

    Draft Technical Note (TN / 802.1): TCFD-aligned climate-related disclosure requirements

    The draft technical note includes, among other things, details of the FCA's expectations where a listed company has not included climate-related financial disclosures consistent with all of the TCFD recommendations and recommended disclosures in either its annual financial report or in another document. In particular, in the context of the "comply or explain" principle under which the disclosures are to be made, the FCA sets out its expectations of issuers should an explanation for non-disclosure be contemplated.

    We will provide another update as and when the technical note is finalised.

    4. FRC publishes 2021 Review of Corporate Governance reporting

    The FRC has published its annual review of corporate governance assessing the quality of reporting against the UK Corporate Governance Code.

    The review finds that there was a general improvement in reporting against the Code compared with reporting in 2020. The review also highlights areas of high-quality reporting, including on stakeholder engagement, audit and some areas of risk while setting out those areas where there is room for further improvement including in relation to succession planning and diversity.

    The review encourages more focus on describing actions and outcomes of governance, which, according to the FRC, provides investors and wider stakeholders with confidence that company leadership is addressing material governance issues.

    The FRC states that there continues to be a need for greater clarity as to how a company is applying the Code’s Principles as well as clearer explanations where there are departures from Code Provisions so that shareholders and stakeholders have greater confidence in the quality of governance. Examples of the FRC's expectations as to explanations for departures from the Code are set out, together with those Provisions of the Code where the FRC has detected "undisclosed non-compliance". Reporting teams are also referred back to the FRC's February 2021 publication: 'Improving the quality of 'comply or explain' reporting'.

    To support improved reporting, the FRC has reiterated its expectations of reporting in 2021 and, where relevant, introduced new expectations. To this end, in 2022, the FRC expects:

    • Governance: Companies to pay greater attention to the alignment between reported good governance and company practices and policies, strategy and business models.
    • Purpose, values and strategy: Further improvements in the quality of disclosures of how purpose, values and strategy are connected.
    • Culture: Increased focus on assessing and monitoring culture by using different methods and metrics. More companies need to take a more rigorous approach to culture and set up effective ways of monitoring and assessing both the culture itself and its alignment with purpose, values and strategy.
    • Stakeholder engagement: Genuine engagement with a wide spectrum of shareholders, not only the largest few, to understand and try to address their concerns as far as practicable. Shareholder concerns should be addressed 'formally and publicly and in a timely manner', including updating the Investment Association's public register where relevant.
    • Stakeholder-related decision-making: Reporting on how the board oversees stakeholder decisions, including how, and on what basis, stakeholder information is passed to the board, as well as how often the board reviews engagement methods and identification of any issues discussed. The FRC also expects companies to report on the actual or intended outcomes of engagement and decisions on both the company's key stakeholders and the business, providing evidence to support statements when reporting on the performance of particular decisions. The impact of engagement with stakeholders, including any areas where the company failed to meet targets, should be made clear.
    • Workforce engagement: Clarity of disclosure to ensure that investors and stakeholders are aware of how companies engage with their workforce, with outcomes of employee engagement illustrated in the annual report, alongside views and workforce concerns that ought to be taken on board.
    • Modern Slavery and communities: Better quality disclosure on modern slavery and how companies are seeking to combat slavery in their supply chains. Companies should also provide more information and transparency on why the board approved community initiatives or programmes, and how these align with strategy.
    • Diversity: Diversity policies to be described in full or a summary provided with a link to the full policy on the company's website to enable easy access.
    • Diversity: Those companies that use promoting and recruiting on merit as a justification for not actively pursuing diversity policies to demonstrate how their approach brings about diversity in the boardroom and workforce.
    • Succession planning: Better reporting of succession planning, and how this links to assuring the make-up of the board and delivering diverse challenge.
    • Risk management and internal control: Increased focus on assessing and ensuring the effectiveness of risk management and internal control systems with commensurate disclosures which clearly demonstrate the way that a company identifies, monitors and mitigates risks.
    • Risk appetite: Clear explanations of the process by which the board determines a company's risk appetite and the risk appetite for each of the company's principal risks.
    • Remuneration: Explanations of how chosen performance metrics support the company's strategic objectives, how each are linked to the successful delivery of long-term strategy, and how they promote long-term sustainable success.
    • Remuneration: Better explanation of how executive remuneration is aligned to a company’s purpose, values and strategy. A company should be clear about engagement with shareholders and the workforce in relation to remuneration, and the impact this has had on remuneration policy and outcomes.
    • Remuneration: Companies to state whether or not the remuneration committee has used its discretionary powers in determining final remuneration outcomes, and clearly explain the reason for doing so or not as the case may be.

    5. Mandatory disclosure of climate transition plans 

    In October and in the run up to COP26, the government published its Greening Finance Roadmap in which it outlined further details of:

    • the Sustainability Disclosure Requirements (SRD) regime relating to climate and other sustainability issues applicable to certain UK companies, the financial sector and those who create investment products;
    • the UK Green Taxonomy; and 
    • its expectations for increased investor engagement with investee companies on matters relating to sustainability.

    As part of the proposals, the government stated that it will introduce mandatory requirements for listed companies (among other organisations) to publish net zero transition plans setting out how they intend to adapt in the transition to a low-carbon economy. To that end, it has published a Fact Sheet which contains guidance and more detail on what a transition plan is and what will be required, as well as stating that it plans to launch a high-level 'Transition Plan Taskforce' to assist in the development of standards for transition plans and associated metrics, which will report by the end of 2022. Note that the government is not proposing to impose mandatory net-zero commitments, instead leaving it to companies and their shareholders to decide how to achieve this, nor is it proposing to ban investments in carbon-intensive activities.

    In outline, transition plan would set out:

    • high-level targets the company is using to mitigate climate risk, including greenhouse gas reduction targets;
    • interim milestones; and
    • actionable steps the company plans to take to hit those targets.

    Other developments of note in this area include:

    • the IFRS Foundation announcing the establishment of the new International Sustainability Standards Board (ISSB), the principal purpose of which will be to deliver a comprehensive global baseline of sustainability-related disclosure standards; and
    • the British Venture Capital Association (BVCA) publishing a report: '10 Steps to Net Zero' which sets out steps which certain PE-backed companies are taking to decarbonise.

    6. Investment Association releases revised Principles of Remuneration for 2022 

    The Investment Association has published revised Principles of Remuneration and an accompanying summary letter sent to Remuneration Committee chairs in which it highlights that the sentiment behind IA's earlier guidelines published in April 2020 on 'Shareholder Expectations on Executive Remuneration during the COVID-19 pandemic' continues to remain relevant.  The IA emphasises that executive pay should take into account the wider experience of a company’s major stakeholders. Linked to this, the IA expects full disclosure as to how a committee has accomplished this. More than ever, it is key that committees ensure executive payouts (in whatever form) are sensitive to the bigger picture – factors such as non-repayment of government aid and redundancies throughout the broader workforce should now be considered before LTIP and bonus pay-outs are determined.

    ESG metric in executive remuneration

    The IA strongly emphasises the need for companies to incorporate ESG performance targets into their LTIP and bonus arrangements. In particular, the IA's summary letter highlights that where companies have already incorporated the management of material ESG risks and opportunities into their long-term strategy, committees should use these pre-identified ESG risks to develop performance conditions for variable remuneration. The IA highlights the importance of ensuring that ESG metrics are quantifiable and clearly linked to company strategy. Further, the rationale for any selected ESG metric must be clearly disclosed to investors. Whilst the IA is sympathetic to the many companies which are still trying to identify their material ESG risks, it indicates that those that have already done so need to explain how they will translate these into ESG performance targets. 

    Key changes to the Principles of Remuneration

    With over twice as many FTSE 100 companies facing significant shareholder dissent in respect of executive remuneration this year compared with last year, there is a real focus on ensuring any increase to any element of executive remuneration is properly justified. Companies should avoid justifying pay increases as a result of ‘vague references to the market-level’ and generic bench-marking data.

    The Principles have been further updated to reflect investor preference for companies to reduce awards at grant where share prices have fallen, rather than relying on discretion when awards vest. This measure was advocated by the IA in 2020 to avoid windfall gains on share awards – a big issue in granting LTIP awards given share prices significantly dropped that year. The rationale for this measure is clear - it is less likely that a committee will scale back awards upon vesting, meaning executives are more likely to inadvertently benefit from a dip in share price caused by the pandemic.

    Pension contributions

    The IA has reiterated its guidance that pension contributions for executive directors should be fully aligned with a company's wider workforce by 31 December 2022. The IA congratulates the 90% of FTSE 100 companies which have already taken this step, however, it notes that for those remaining companies which have not yet complied and remain silent on pension alignment for new and incumbent directors, with no coherent action plan, IVIS will likely Red Top such policies next year.

    Value Creation Plans

    Given the rise in use of Value Creation Plans over the past year, the IA have emphasised the requirement for a maximum limit on the number of shares and the total value of awards deliverable under these arrangements. In doing so, they also emphasise the need for stretching and sufficiently robust targets under these plans. 


    7. FRC and FCA remind CEOs on structured electronic formats for annual financial reports 

    By way of reminder, DTR 4.1.14 of the Financial Conduct Authority Handbook implements the requirements of the European Single Electronic Format (ESEF) regime in the UK and requires issuers with transferable securities admitted to trading on UK regulated markets to produce their annual financial reports in a structured electronic format for financial years beginning on or after 1 January 2021.

    The Financial Reporting Council and the FCA have recently published a joint letter sent to the CEOs of relevant issuers reminding them of their obligations. The letter also sets out their expectations on quality and identifies the actions which may be taken if those expectations are not met. In due course, the FRC (via the Financial Reporting Lab) and the FCA will, together, consider the quality and usability of structured annual financial reports in the first year of mandatory adoption and intend to publish a follow-up to the FR Lab's review of best practices later in 2022. 

    For more on this issue:


    8. Payment practices reporting: BEIS launches review 

    The Department of Business, Energy and Industrial Strategy has announced a statutory review of the payment practices reporting regime for large companies and LLPs which came into force in 2017. In doing so it is seeking views and evidence from stakeholders, including those required to report their payment data as well as suppliers of any size that deal with those reporting entities in order to establish whether the regulations:

    • Have succeeded in meeting their various objectives.
    • Have had any unintended effects.
    • Should remain in effect.

    Responses must be submitted by 4 February 2022. The government is required to report on the findings of its review by 6 April 2022.


    9. FRC highlights the elements that combine to make a good audit 

    With only 71 per cent of inspected audits meeting the required standard, the Financial Reporting Council has published a report, which sets out its understanding of the key elements that make up a good audit. 

    The FRC defines high-quality audits as those which:

    • provide investors and other stakeholders with a high-level of assurance that financial statements give a true and fair view;
    • comply with both the spirit and the letter of auditing regulations and standards;
    • are driven by a robust risk assessment, informed by a thorough understanding of the entity and its environment;
    • are supported by rigorous due process and audit evidence, avoid conflicts of interest, have strong quality management, and involve the robust exercise of professional judgement and professional scepticism;
    • challenge management effectively and obtain sufficient audit evidence for the conclusions reached; and
    • report unambiguously the auditor’s conclusion on the financial statements.

    The report also highlights six key attributes that contribute to the running of high-quality audit practices. These include culture, governance and leadership of firms, investment in well qualified people, training and processes.

    The information provided is not intended to be a comprehensive review of all developments in the law and practice, or to cover all aspects of those referred to.
    Readers should take legal advice before applying it to specific issues or transactions.

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