Included in this issue of our Governance & Compliance Update: PLSA publishes Corporate Governance Policy and Voting Guidelines, and 2018 AGM Review; FRC consults on a new Stewardship code; Government publishes revised Environmental Reporting Guidelines updated for SECR regime and more...

PLSA publishes Corporate Governance Policy and Voting Guidelines, and 2018 AGM Review

The Pensions and Lifetime Savings Association (PLSA) has published its 2019 Corporate Governance Policy and Voting Guidelines (Guidelines). These are stated to "build" upon the PLSA's 2018 AGM Review and provide practical guidance for pension schemes considering how to exercise their votes at AGMs in 2019. The PLSA Guidelines have been updated to reflect the 2018 version of the UK Corporate Governance Code (Governance Code) and now do not follow a standard AGM agenda, instead highlighting those issues and resolutions which the PLSA believes will be of particular interest - detailed voting guidelines are set out in Appendix 1. On the whole, they remain largely unchanged from the 2018 version.

The following new items are noteworthy:

Section 1 – Board leadership and company purpose

The Guidelines note that one of the key changes to the Governance Code has been the explicit clarification of the company's responsibilities to its shareholders and stakeholders – including its workforce – in addition to the role of the board in determining and assessing a company's culture and values. The Guidelines suggest that shareholders may want to undertake closer analysis of the narrative used in company statements to assess a company’s workforce and stakeholders - for example, does the language used indicate that the company sees its workforce as a source of value or as a risk to be managed?; is there evidence of a clear sense of corporate purpose, culture and values and how these align with the company's strategy?

Section 2 – Division of Responsibilities

The Guidelines recommend that the CEO should not become chair of the company except in exceptional circumstances and following significant engagement with shareholders.

Shareholders should seek to have a clear sense of other demands on directors’ time as well as understanding any significant developments which may have occurred following a director’s appointment and which could impact on their ability to commit sufficient time to the company.

Also mirroring the Governance Code, the Guidelines suggest that:

• details of directors' other current appointments, including any changes over the previous year, should be set out in the annual report; and
• shareholders should ensure that they have a clear understanding of the relationship between the independent non-executives and the company that could compromise the directors’ ability to hold management to account.

Section 4 – Audit, Risk and Internal Control

The Guidelines suggest that shareholders should pay close attention to the composition, skills and experience of the audit committee. Committee members should have recent and relevant financial experience, related to audit, accountancy or investor practitioner expertise. Any committee member’s connections with the current or potential auditor should be clearly disclosed.

Section 5 – Remuneration

The Guidelines recommend that investors should continue to express concerns regarding pay increases of senior executives and should always press companies for clear justification and rationale behind any increases.

The following issues are noteworthy from the detailed voting guidelines:

• shareholders should consider voting against the annual report or the re-election of the chair where they believe that key stakeholder relationships are being neglected and the board is not adhering to the spirit of requirements related to the concerns of stakeholders;
• where, after attempts by shareholders to engage on the issue of climate change, companies fail to provide a detailed risk assessment and response to the effect of climate change on the business, and incorporate appropriate expertise on the board, shareholders should not support the re-election of the chair or other key directors;
• disclosure of the business model which fails to convey how the company intends to generate and preserve value over the longer term may lead to a vote against the annual report;
• in the event of failure to provide a fair and balanced explanation of the composition, stability, skills and capabilities and engagement levels of the company's workforce, a vote against the annual report would be appropriate;
• a lack of, or poor-quality, reporting on environmental, social and reputational risks may warrant, after engagement, a vote against the annual report or the submission of a shareholder resolution;
• in the event of limited or boilerplate disclosure about board evaluations and review of corporate governance arrangements, shareholders may wish to vote against the adoption of the annual report. Subsequently, if practice does not improve (or there is consistently no independent board evaluation conducted), dissent may be escalated to a vote against the chair; and
• shareholders should consider voting against the annual report where a diversity statement is not provided, or is not considered satisfactory. The absence of a policy on diversity or the successful implementation of measurable targets, or insufficient progress towards achieving a satisfactory level of diversity on the board may result in opposition to the re-election of the chair or, where different, the chair of the nomination committee.

FRC consults on a new Stewardship Code

The Financial Reporting Council (FRC) has published its much anticipated consultation on a revised Stewardship Code (Code) which sets out substantially higher expectations of investor stewardship policy and practice. Through a revised definition of 'stewardship', the Code aims to 'increase demand for more efficient stewardship and investment decision-making which is better aligned to the needs of institutional investors' clients and beneficiaries' while at the same time delivering sustainable value for the economy and society as a whole. A broader scope means that investment decision-making and investment in assets other than listed equity are also covered.

The proposed main changes to the Code mirror many of the changes to the Governance Code. Indeed the proposed Code follows the same structure containing Sections, Principles, which work on an 'apply and explain basis', and Provisions, which work on a 'comply or explain' basis. Main changes include:

• Purpose, values and culture: Investors must report on how their purpose, values and culture enable them to meet their obligations to clients and beneficiaries. This is meant to align the Code with the Governance Code and encourage behaviour conducive to effective stewardship in the investor community.
• Recognising the importance of ESG factors: The proposed Code now refers to environmental, social and governance (ESG) factors. Signatories are expected to take material ESG issues into account when fulfilling their stewardship responsibilities (a theme which also pervades the PLSA's Guidelines).
• Stewardship beyond listed equity: The proposed Code expects investors to exercise stewardship across a wider range of assets where they have influence and rights, in the UK and globally.

The Code also sets out more rigorous requirements for reporting, focusing on how stewardship activities deliver outcomes against objectives. Signatories to the Code will be required to submit to the FRC an annual "Activities and Outcomes Report" which will be made publicly available. This will contain:

• details of the signatory's compliance with its Policy and Practice Statement (itself submitted to the FRC on signing up to the Code and containing details of the primary category of Principles and Provisions (and any others) that can best be applied against the signatory's activities, and disclosing relevant policies and practices);
• a description of the activities the signatory has undertaken to implement the Provisions in the preceding 12 months; and
• an evaluation of how well stewardship objectives have been met, and/or enabled clients to meet theirs, and the outcomes achieved.

Comments on the Code consultation are requested by 29 March 2019.

The FRC and the Financial Conduct Authority (FCA) have also published a discussion paper 'Building a regulatory framework for effective stewardship' to advance the discussion about what effective stewardship should look like, expectations for financial services firms, and how this can best be supported by the UK's regulatory framework. The discussion paper requests input on various matters including:

• The proposed definition of 'stewardship'.
• What effective stewardship looks like.
• The key challenges in delivering an effective regulatory framework for stewardship in the UK.
• How to strike the right balance between regulatory rules and voluntary codes of best practice.

Responses are requested by 30 April 2019.

Government publishes revised Environmental Reporting Guidelines updated for SECR regime

The government has published revised Environmental Reporting Guidelines designed to help companies comply with their obligations under the new Streamlined Energy and Carbon Reporting Regulations 2018 (SECR Regulations) regime. As previously reported, the SECR Regulations will apply in respect of financial years beginning on or after 1 April 2019. Entities in scope include:

• quoted companies (companies whose equity share capital is officially listed on the main market of the LSE, or who are officially listed in the EEA, or which are admitted to trading on either the NYSE or NASDAQ);
• unquoted large companies incorporated in the UK required to prepare a directors’ report under Part 15 of the Companies Act 2006 (2006 Act); and
• LLPs considered to be ‘large’ relative to the definitions in section 465 of the 2006 Act.

The Environmental Reporting Guidelines set out various principles which should be applied when collecting and reporting on environmental impacts, including:

• Relevant – Entities should ensure that data collected and reported appropriately reflects the environmental impacts of the organisation and serves the decision-making needs of users, both internal and external.
• Quantitative – KPIs need to be measurable with targets being set to reduce a particular impact. Quantitative information should be accompanied by a narrative, explaining its purpose, impacts, and giving comparators where appropriate.
• Completeness – Entities should quantify and report on all sources of environmental impact, disclosing and justifying specific exclusions.
• Consistent – Entities should use consistent methodologies to allow for meaningful comparisons of environmental data over time.
• Comparable – Entities should report data using accepted KPIs rather than inventing their own versions of potentially standard indicators.
• Transparent – an essential component of reporting. Entities should address all relevant issues in a factual and coherent manner, keeping a record of all assumptions, calculations, and methodologies used.

The Guidelines also set out the steps to take when considering environmental impacts and which KPIs to report on.

CSR - Blackrock letter to CEOs

Blackrock CEO, Larry Fink, has published his annual letter to CEOs of the companies in which Blackrock invests, reiterating a commitment to corporate social responsibility. In the letter he states that Blackrock will pressure company CEOs on five main areas:

• governance, including companies’ approach to board diversity; 
• corporate strategy and capital allocation; 
• compensation that promotes long-termism; 
• environmental risks and opportunities; and  
• human capital management.

Fink also states that ‘if there is no progress on enhancing diversity at the board level within a reasonable time frame, Blackrock may hold nominating and/or governance committees accountable’.

Public censure and fine for AIM company failing to update market and keep Nomad informed

The London Stock Exchange (LSE) has published an AIM Disciplinary Notice publicly censuring and fining Bushveld Minerals Limited (Bushveld) £700,000 (reduced to £490,000 for early settlement) for failing to discharge its obligations of market disclosure under AIM Rule 11 and to provide its nominated adviser (Nomad) with all relevant information under AIM Rule 31.

In the context of a transaction which would have constituted a reverse takeover for Bushveld, the Nomad advised that, on payment of a material fee in relation to an exclusivity undertaking, Bushveld would have committed itself to a binding obligation which required announcement to the market without delay in accordance with AIM Rule 11. The Nomad also advised that Bushveld would need to announce the fact of the transaction as a whole at the same time which, as a reverse takeover, would lead to the suspension of its securities under AIM Rule 14.

Bushveld wanted to avoid a suspension so as to enable it to complete a fundraising for the purposes of the transaction, fund development of its existing assets and reduce the materiality of the exclusivity fee. Bushveld received legal advice which conflicted with that of the Nomad and entered into the exclusivity undertaking on 7 April 2016 without informing the Nomad or the market. When the Nomad discovered the arrangement had been entered into, an announcement was made on 22 April 2016 and the company's securities were suspended from trading.

In censuring Bushveld, the LSE emphasised that AIM Rule 11 should not be approached in a narrow way and stressed the importance of advice from, and the experience of, a Nomad in these circumstances. In particular, the fact that a company had received separate advice did not override that of its Nomad nor justify or mitigate a breach of the AIM Rules. Bushveld knew or ought to have known that, given the Nomad's advice, it was relevant to inform the Nomad that the exclusivity undertaking had been given, not least because it withheld this information at a time when it knew the Nomad was seeking the LSE's guidance as regards the transaction.

FCA's Market Watch focuses on the MAR regime

The FCA has published a Market Watch newsletter focusing on a review of the industry's implementation of the EU Market Abuse Regulation (EU No.596/2014) (MAR). Key conclusions and observations include:

• The FCA has not observed any impact on the ability of issuers to raise capital on UK markets following the introduction of the market soundings regime.
• Issuers, their advisors, the sell-side and the buy-side, have an obligation to identify when they are in possession of inside information and to control it, as well as to ensure those in possession of it are properly trained.
• The FCA ascribes importance to receiving the mandated insider list template in a complete and timely fashion, not least as a means of an issuer demonstrating that robust systems and procedures are in place to comply with MAR.
• The quality of insider lists received to date has been varied. The FCA encourages issuers to ensure that all those with access to inside information, including those who have accessed information according to electronic access logs, are included on insider lists. The FCA also expects all insider list fields, including relevant personal information, to be completed.
• The number of employees on permanent insider lists should not be 'disproportionately large' and should be restricted only to employees who have access at all times to inside information – those that do not have such access should be captured in a deal-specific or event-based insider list.
• The FCA expects completed insider lists to be provided within two days of a request and any chronology of events be provided within five days.
• Issuers should ensure that they can identify and assess whether they have inside information outside of normal reporting timetables and in an accelerated manner. By way of example, the FCA states that where information that may not be in line with market expectations comes to light, such as in weekly sales reports or when preparing monthly management reports, this should be immediately investigated.

If information is deemed to meet the conditions of inside information, issuers are required to maintain an insider list. Using 'confidential' / 'project' / 'prohibited' dealing lists to record individuals who may have access to confidential information that has not been deemed inside information can be an important tool to aid compliance and ease the transition where a change in circumstance means that information meets the threshold for inside information.

IOSCO issues good practices report to assist audit committees

The Board of the International Organisation of Securities Commissions (IOSCO) has published the IOSCO Report on Good Practices for Audit Committees in Supporting Audit Quality.

The report sets out good practices audit committees might consider when:

• recommending the appointment of an auditor;
• assessing potential and continuing auditors;
• setting audit fees;
• facilitating the audit process;
• assessing auditor independence;
• communicating with auditors; and
• assessing audit quality.

FRC to examine the Future of Corporate Reporting

The FRC has announced the launch of a major project to review company reporting which will also consider how companies should better meet the information needs of shareholders and other stakeholders.

It is inviting participants to join an advisory group to support the project. The project will:

• review current financial and non-financial reporting practices;
• consider what information shareholders and other stakeholders require;
• review the different types of corporate communications employed by companies; and
• fundamentally consider the purpose of company reporting and the annual report.

The FRC anticipates that the initiative will prompt calls for changes to regulation and practice. During the second half of 2019, the FRC will publish a thought leadership paper consolidating the outcomes of the project.