As the 2020 AGM and reporting season gets underway, we give an overview of the key changes affecting listed and AIM companies.
Corporate governance reforms
The corporate governance reforms implemented through the Companies (Miscellaneous Reporting) Regulations 2018 (Regulations) and the revised UK Corporate Governance Code (2018 Code) apply to financial periods which began on or after 1 January 2019. In our 2019 bulletin, we outlined the changes being introduced through the Regulations and the 2018 Code including those relating to stakeholder engagement, remuneration, corporate culture and a company's purpose. 2020 will see companies reporting on how they have responded to these changes.
The Regulations and the 2018 Code require directors to identify and engage with stakeholders, other than shareholders, and explain in the annual report how they have done so. In particular, 2020 will see the publication of the “section 172 statement” by qualifying companies (broadly, those which are large for accounting purposes). The section 172 statement should include the issues, factors and stakeholders the directors consider relevant in complying with section 172(1)(a) to (f) Companies Act 2006 and how they have formed that opinion; the main methods used to engage with stakeholders and to understand the issues to which they must have regard; and information on the effect of that regard on the company's decisions and strategies during the 2019 financial year. The FRC and institutional investors have indicated that disclosures should be specific; they must clearly explain a company's strategy for engagement and its impact.
The 2018 Code contains additional provisions relating to workforce engagement including establishing a method for gathering the views of the workforce. The 2018 Code specifies three methods that could be used for engaging with the workforce although the FRC in its Guidance on Board Effectiveness has indicated that they are not the only ways of engaging with the workforce and says that “provided the approach delivers meaningful, regular dialogue with the workforce and is explained effectively, the 2018 Code provision will be met”. Companies should ensure that they carefully explain in their 2020 annual report the engagement mechanism chosen, why such mechanism is appropriate and what impact this has had on the decisions taken by the directors.
Remuneration continues to be an area of focus. 2020 will see increased reporting regarding director remuneration including the reporting of the difference in pay between the CEO and the wider workforce. Companies will be expected to ensure that director remuneration continues to more closely align with wider workforce remuneration, including in relation to pensions.
While some companies voluntarily disclosed the difference in pay between the CEO and the wider workforce in their 2019 annual report, all listed companies with more than 250 UK employees will need to make that disclosure in this reporting season. Given the three year approval cycle for remuneration policies, many listed companies will be proposing a new remuneration policy at their 2020 AGM. When updating their remuneration policy, companies will need to carefully consider the 2018 Code requirements and reflect recent investor guidelines. For example, in relation to pensions, IVIS has indicated that it will “red top” remuneration policies that do not state new directors will have their pension contributions set in line with the majority of the workforce and will “amber top” a remuneration policy where an existing director will receive a pension contribution of 25 per cent or more of salary.
The FRC has recently indicated that it is looking for companies to ensure that the 2018 Code principles are applied in a manner that shareholders can more easily evaluate with a much greater focus on activities and outcomes reporting. The FRC's chief executive, Sir Jon Thompson, has commented that “looking ahead we expect to see much greater insight into governance practices and outcomes reporting on a range of key issues from diversity to climate change”. When preparing their 2020 annual reports, companies should ensure they provide explanations which are specific to their application of Code principles and clearly set out how their approach has led to sustainable benefits for stakeholders.
Brexit related issues will continue to be a focus for many companies, as they look ahead to the end of the withdrawal agreement implementation period on 31 December 2020. The FRC continues to encourage companies to report as fully as possible in relation to their Brexit-related risks and actions taken to manage these.
Energy and Carbon Reporting: with effect from financial years which began on or after 1 April 2019, companies need to report under the new energy and carbon reporting regime. Among other things, this requires UK quoted companies to report on greenhouse gas emissions, energy consumption and energy efficient action.
Diversity: the Hampton-Alexander Review set a deadline of the end of 2020 for actions to improve gender diversity. Companies should therefore continue to consider the gender diversity of their boards, executive committees and direct reports to executive committees. As reflected in the 2018 Code, companies should also be mindful that diversity extends beyond gender and all aspects of diversity should be considered. In particular, ethnic diversity has been highlighted through the Parker Review's recommendations regarding the number of people of colour on boards and the government's consultation on the introduction of mandatory ethnicity pay reporting.
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