Welcome to our digest of developments from a corporate perspective covering the period from December 2019 to date…..

Company Law

Reporting discrepancies about beneficial owners on the PSC Register

To coincide with the entry into force of the Fifth Anti-Money Laundering Directive in the UK, by virtue of the Money Laundering and Terrorist Financing (Amendment) Regulations 2019, on 10 January 2020, Companies House has published guidance on how to report a discrepancy about beneficial owners on the PSC register of a UK company, limited liability partnership, or Scottish limited or qualifying partnership. For more information, please read our Governance & Compliance update, Issue 150.

Law Society and CLLS publishes Q&A on the PSC regime

The Law Society and the City of London Law Society, have jointly published a Q&A document in relation to the Register of Persons with Significant Control regime. The purpose of the Q&A is to highlight certain areas of complexity within the regime which are not specifically covered by the legislation or the related guidance issued by the Department of Business, Energy and Industrial Strategy.

Regulation in practice

FCA issues first fine for notification failures by a PDMR under MAR

The Financial Conduct Authority (FCA) has published a Final Notice imposing a fine of £45,000 on Kevin Gorman, formerly a member of the executive committee and a person discharging managerial responsibility (PDMR) at Braemar Shipping Services plc for breaches of the notification regime under Article 19 of the EU Market Abuse Regulation (MAR). This is the first sanction the FCA has imposed for a breach of Article 19. For further information, please read our Governance & Compliance update, Issue 150. 

FRC issues advice on coronavirus risk

The Financial Reporting Council (FRC) has published guidance for companies on the disclosure of risks and other potential reporting consequences arising from the emergence and spread of Coronavirus. It has also been discussing with audit firms whether the virus affects their ability to review component audits in China and the consequences to delivering timely audit opinions.

Audit

Brydon review into the quality and effectiveness of audit

The government has published the report of the independent review by Sir Donald Brydon into the quality and effectiveness of audit. The recommendations of the report focus on improving the audit standards of "public interest entities" – i.e. companies with securities admitted to regulated markets, such as the main market of the London Stock Exchange. An overview of the recommendations can be found in our Governance & Compliance update, Issue 149.

FRC updates Ethical Standard and Auditing Standard

The FRC has published major changes to its Ethical Standard and Auditing Standard in order to encourage auditor independence, stop conflicts of interest and increase investor protection. The changes include provisions prohibiting auditors from providing recruitment and remuneration services or playing any part in management decision-making, and state that auditors of public interest entities can only provide non-audit services which are closely linked to the audit itself or required by law or regulation.

The changes are intended to "dramatically reduce" the risk of damaging conflicts of interest, where the commercial interests of an auditor are perceived to be the most important factor in an audit relationship, rather than the focus being on high quality audits. The revised Standards can be found here. The FRC has also published implementation guidance, dealt with in our Governance & Compliance update, Issue 153.

FRC's definition of Other Entity of Public Interest acts to restrict the provision of non-audit services to larger AIM and certain private companies

The FRC has published a revised Glossary of Terms in relation to Auditing and Ethics to include a definition for an "Other Entity of Public Interest". The Glossary defines terms used in the FRC's Auditing and Ethical Standards which were themselves updated in December 2019. For more information, please read our Governance & Compliance update, Issue 152. The FRC has also published implementation guidance, dealt with in our Governance & Compliance update, Issue 153.

FRC updates Practice Aid for Audit Committees

The FRC has updated its Practice Aid for Audit Committees. The Practice Aid provides guidance on audit quality evaluation to help Audit Committees with their assessment of the external audit process. For more information, please read our Governance & Compliance update, Issue 149. 

Diversity

Parker Review update report on ethnicity in UK boards published

The Department of Business, Energy and Industrial Strategy (BEIS) has published an update report from The Parker Review on the issue of the ethnic and cultural diversity of UK boards. The original Parker Review was published in October 2017.

The original report recommended that there should be at least one non-white director on the boards of FTSE 100 companies by 2021, and at least one non-white director on the boards of FTSE 250 companies by 2024. The update report shows that 37% of FTSE 100 companies, and 69% of FTSE 250 companies, do not currently meet these aspirational targets and that meeting the targets will be "challenging" given the current rate of progress. For more information, please read our Governance & Compliance update, Issue 152.

Voting Guidelines and related publications

Investment Association publishes statement on shareholder priorities for 2020

The Investment Association (IA) has published a document setting out "Shareholder priorities for 2020" in which it develops its expectations for listed companies in areas which its members believe can be critical drivers of long-term value, namely:

• responding to climate change;
• audit quality;
• stakeholder engagement; and 
• diversity.

In each area, the IA outlines the expectations that investors now have of companies and describes the approach that its corporate governance research service, Institutional Voting Information Service (IVIS), is taking. Thus, for companies with financial years ending on or after 31 December 2019, IVIS will assess the progress made and highlight where a company is not meeting investor expectations as against these priorities. For more information, please read our Governance and Compliance update, Issue 152.

Investment Association publishes updated Principles of Remuneration

The IA has published an updated version of its Principles of Remuneration (Principles). It has also sent a letter to the Chairs of remuneration committees which outlines the key changes to the Principles and to highlight areas of focus prior to the 2020 AGM season. In doing so, the IA reiterates its belief that a high level of executive remuneration is a "reputational risk to companies, individual directors and their shareholders". For that reason, the IA believes it is increasingly important that remuneration committees consider the wider employee pay context and fairness of executive pay when setting pay levels and deciding on remuneration outcomes. For more information, please read our Governance & Compliance update, Issue 146.

IA publishes 2019 voting trends analysis

The IA has published analysis of voting trends during the 2019 AGM season. The analysis highlights the following: 

• 158 FTSE companies were added to the public register as regards 298 resolutions compared with 151 companies (294 resolutions) in 2018. 39 companies appeared on the register for dissent in relation to the same resolution as last year.
• Executive pay continued to feature at the top of investors' concerns with 62 companies appearing on the register in 2019 for pay-related resolutions. 31 FTSE 250 companies appeared on the register for such resolutions – an increase of over 29%.
• Opposition to individual director re-election also remained a key theme, with 103 director re-election resolutions encountering significant dissent in 2019 (2018: 105).
• As the register reaches its third year, it appears that companies are doing more to acknowledge shareholder dissent, with over 80% of companies now making a public statement acknowledging concerns and outlining how they plan to engage with shareholders – an increase from 55% in the first year of the register. 

ISS updates its Proxy Voting Guidelines for use in 2020

Institutional Shareholder Services (ISS) has published updates to its Europe, Middle East and Africa Proxy Voting Guidelines, which are effective for meetings held on or after 1 February 2020. 

For companies listed in the UK and Ireland, the key changes largely reflect the application of the 2018 version of the UK Corporate Governance Code (2018 Governance Code). For more information, please read our Governance & Compliance update, Issue 147.

Glass Lewis publishes 2020 Voting Guidelines

Glass Lewis has published its 2020 proxy voting guidelines with changes reflecting, in many areas, the 2018 Governance Code and with which Glass Lewis expects to see the emergence of widespread compliance and / or reporting against its provisions in 2020. In doing so, Glass Lewis acknowledges the 2018 Governance Code's stated desire for investors and proxy advisers to move away from a "prescriptive approach" to comply or explain, instead paying due regard to a company's individual circumstances when evaluating performance. For more information, please read our Governance & Compliance update, Issue 146.

PLSA publishes Stewardship Guide and Voting Guidelines

The Pensions and Lifetime Savings Association (PLSA) has published the 2020 version of its Stewardship Guide and Voting Guidelines (PLSA Guidelines). The PLSA Guidelines have been extensively updated in light of the revised disclosure requirements of the Stewardship Code, so as to "help owners hold their [scheme] managers and service providers to account" and, to that end, now include checklists on stewardship, engagement and voting. The PLSA Guidelines follow the publication of the PLSA 2019 AGM Voting Review in January.

The substantially revised voting recommendations now include separate sections on "Climate Change and Sustainability", and "Capital Allocation and Structure". A final section encourages investors to "take a step back" and assess each company holistically, in line with the PLSA's Corporate Governance Policy.

The PLSA has also published a summary of its voting recommendations on an issue by issue basis. For more information, please read our Governance & Compliance update, Issue 153.

Practical Law analysis: AIM 50 2019 annual reporting and AGM season

Thomson Reuters Practical Law has published its annual trends report (available to Practical Law subscribers only) on the 2019 AGM season for AIM companies. The report covers data from 51 AIM companies which both published their AGM notice and held their AGM between 1 January and 31 December 2019, whilst being members of AIM UK 50.

Among other issues, the report examines:

• how companies have adapted their board composition and developed greater gender diversity at board level (in part response to the Hampton-Alexander report - see Governance and Compliance update, Issue 147); and
• the application of a company's chosen corporate governance code compared to previous years.

For an overview of the notable findings, please read our Governance & Compliance update, Issue 154.

Stewardship

FRC publishes revised UK Stewardship Code

The FRC has published the revised version of the UK Stewardship Code (Stewardship Code) following the consultation it launched in January 2019. The FRC believes that the new Code "substantially raises expectations for how money is invested on behalf of UK savers and pensioners".

The revised Stewardship Code focuses on the responsible investment of money with a new emphasis on creating long-term value and on considering beneficiary and client needs. It directly addresses the issues raised by Sir John Kingman’s independent review of the FRC in respect of the previous Code. It comprises a set of 12 "apply and explain" principles for asset managers and asset owners, and a separate set of six "apply and explain" principles for service providers. Each principle is supported by reporting expectations which signpost the information that organisations should include in their report, and which underpin the assessment of reporting quality. For more information, please read our Governance & Compliance update, Issue 145.

Equity Capital Markets

FCA issues guidance ahead of launch of new NSM portal

The FCA has updated its designated webpage ahead of the launch of the new National Storage Mechanism (NSM) portal, and in readiness for when it will take over from Morningstar as NSM operator. The FCA is also making changes to its Electronic Submission Service (ESS) to enable issuers and their representatives to upload regulated information. Key issues to note include:

• Each uploader will need an ESS account. They will also be required to provide proof that they have issuer authorisation to file regulated information.
• The FCA will send issuers a link to the new NSM portal before its launch. Issuers should continue to use the existing Morningstar portal in the meantime. 
• Those without an ESS account will need to apply for one, particularly those who think they will need to upload a document in April, May or June 2020. Each person who requires access must register separately.
• All those submitting information will need to be authorised to do so by the relevant issuer by application through the ESS. The FCA has provided a template letter for this purpose. 

FCA's Market Watch focuses on insider lists and access to inside information

The FCA has published the 60th edition of its Market Watch magazine, in which it considers insider lists and the control of access to inside information as required by Article 18 of MAR and in light of the conviction for insider dealing of a former compliance officer at a major investment bank.

The FCA uses the publication to issue a reminder that it is crucial for it to be able to establish who had access to inside information at a particular point in time. Nevertheless, it frequently encounters insider lists omitting the names of people who were provided with or who had access to inside information as well as evidence of individuals not named on relevant insider lists accessing inside information. It views such an inability to respond accurately to a regulatory request as an indication of underlying weaknesses in systems, procedures and policies.

Narrative Financial Reporting

Chartered Governance Institute publishes revised specimen audit, remuneration and nomination committee terms of reference

The Chartered Governance Institute has published revised guidance notes on terms of reference for audit, remuneration and nomination committees, primarily to reflect the 2018 Governance Code and the FRC's revised Guidance on Board Effectiveness. 

FRC publishes Annual Review of the UK Corporate Governance Code

The FRC has published its Annual Review of the UK Corporate Governance Code in which it sets out its expectations for governance reporting in 2020 (Review). The Review covered reporting against the 2016 UK Corporate Governance Code while also assessing FTSE 100 "early adopters" of the 2018 iteration of the Code, of formal application to reporting periods beginning on or after 1 January 2019. For further detail, please read our Governance & Compliance update, Issue 150.

FRC's Financial Reporting Lab report on workforce-related corporate reporting

The FRC's Financial Reporting Lab (Lab) has published a report on "Workforce-related corporate reporting – Where to next?". The Lab has also published a summary of the key issues and questions for companies to consider. For further information, please read our Governance & Compliance update, Issue 151.

ESMA publishes report on issuers' use of APMs

The European Securities and Markets Authority (ESMA) has published a report on EU issuers’ use of Alternative Performance Measures (APMs) and their compliance with ESMA's 2015 Guidelines (2015 Guidelines). The report covers:

• the use of APMs in management reports, ad hoc disclosures and primary financial statements; and
• the compliance of issuers with the 2015 Guidelines in management reports, ad hoc disclosures and prospectuses.

For more information, please read our Governance & Compliance update, Issue 150.

AIM Good Governance Review analyses governance disclosures

The Quoted Companies Alliance has published the AIM Good Governance Review 2019–20 which analyses the governance disclosures of 50 AIM companies. The Review is divided into five specific areas dealing with the strategic report, stakeholder engagement, board dynamics, board expertise and succession planning. The Review also includes the views of leading small & mid-cap fund managers.

PERG publishes annual report on disclosure and transparency in PE

The Private Equity Reporting Group (PERG) has published the twelfth annual report on disclosure and transparency relative to the Guidelines for Disclosure and Transparency in Private Equity, formerly the Walker Guidelines. PWC has also published its latest Good Practice Reporting Guide for portfolio companies. For more information, please read our Governance & Compliance update, Issue 149.

Climate Change Reporting

FCA consults on climate-related and other ESG disclosures

The FCA has published a consultation paper containing proposals for new climate-related disclosures by premium listed issuers. 

A new Listing Rule will require all commercial companies (and therefore not investment companies) with a premium listing, including sovereign-controlled commercial companies, to either make climate-related disclosures in their annual report consistent with the approach set out by the Taskforce on Climate-related Financial Disclosures (TCFD) or explain why they have not done so. The FCA will consider extending this requirement to more issuers in due course. 

The FCA states that it recognises that standards for disclosure and companies' understanding of the financial impacts of climate change are evolving. For this reason, where companies are not yet able to make full disclosures, they should provide an explanation of the reasons why.  The new requirements will apply in relation to accounting periods beginning on or after 1 January 2021. Feedback on the consultation should be submitted by 5 June 2020.

For an overview of the key proposals, please read our Governance & Compliance update, Issue 154.

European Lab publishes report on improving climate-related disclosures

The European Lab on climate-related reporting has published a report: "How To Improve Climate-Related Reporting – A Summary of Good Practices From Europe and Beyond" prepared by the Project Task Force on Climate-related Reporting (PTF-CRR), part of the European Corporate Reporting Lab.

The primary focus of the PTF-CRR was to identify good reporting practices and assess the level of maturity in the implementation of the TCFD recommendations, while also taking into consideration the climate-related reporting elements of the EU Non-financial Reporting Directive and the related European Commission non-binding guidelines.

The report consists of a main document and two supplements and provides a general review of climate-related disclosures (in the first supplementary document), and an in-depth review of scenario analysis reporting (in the second supplementary document). The main document outlines the key messages and contains a synopsis of the findings.

By way of reminder, the FRC's Financial Reporting Lab's report on climate change disclosures was published in October 2019. For more information, please read our Governance & Compliance update, Issue 145.