Governance Readout

The Association for Financial Markets in Europe (AFME) have published a briefing note which calls on all issuers to adopt CREST Pay (a method for making electronic payments to shareholders who hold their shares in CREST) when making distributions.

AFME see the adoption of this facility as one of the ways that the UK market can improve the level of digitisation for shareholders as during the height of the covid-19 pandemic, many institutional investors experienced challenges with processing cheque-based payments.

Their letter comes off the back of recent work by Euroclear to improve the adoption of CREST Pay. Whilst this method of making payments is not mandatory at this time, AFME have been working to ensure that all CREST members can at least receive distributions through CREST in GBP. Euroclear may look to make CREST Pay mandatory later in 2023, requiring all issuers to enable the functionality.

Computershare’s view

Computershare have been early and continuous supporters of the introduction of CREST Pay and have worked with a number of issuers since 2017 to ensure that their dividend payments are made through the CREST system when possible.

Following recent Euroclear consultations on developments to CREST Pay and discussions about making it mandatory we have again promoted this service to our clients in November.

Adoption of this service has a number of benefits for all issuers (where it can be used):

• eliminate an element of print, production and postage costs,
• mitigate risk of disruption to paper supply chains and inflation,
• provide a demonstratable metric for meeting sustainability commitments and
• meet investor demand.

It’s easy to utilise CREST Pay, you just need to consider the following

• Are dividends I pay made in either GBP, Euro or US Dollars?
• Are the Articles of the company sufficiently drafted to allow electronic payments?

If the answer is yes to both and you are an existing Computershare customer, then get in touch with your client manager who can help you make the necessary arrangements for your next eligible dividend. If you are not, but these elements are still relevant to you, speak with your registrar as they may be in a position to support you.

In one of the Financial Conduct Authority’s (FCA) latest primary market bulletins (Bulletin 42) they have taken the opportunity to remind companies of their guidance and standards for making climate-related disclosures. This is following the first batch of annual reports that have included such disclosures.

Whilst the FCA have been encouraged overall by the developments of the disclosures made to date, they have identified that the percentage of companies which have made self-reported disclosures that are consistent with the Taskforce on Climate-related Financial Disclosures (TCFD) framework is not where it needs to be.

The report provides a range of examples that the Authority believe demonstrate good practice and compliance with relevant accounting standards, laws, regulations, and codes. The Authority expresses within the report that the Annual Report and Accounts disclosures need to show that Issuers are listening to stakeholder needs as well as demonstrating good corporate reporting principles.

Computershare’s view

It is clear that as more and more requirements are introduced for companies to comply with, information such as this will be released. However, such information needs to be clear and provide genuine guidance to ensure effective disclosures are made, also all too often a focus solely on climate matters can detract from wider ESG matters and necessitate the creation of new business functions to support disclosure demands. There are so many different requirements now, it can be hard to see the wood for the trees and whilst this is an interesting piece of work it lacks the necessary practicality that would provide most organisations with the tools they need. It does, however, give those earlier in the disclosure journey a reasonable starting position.

Both Institutional Shareholder Services (ISS) and Glass Lewis have released their updated proxy voting guidelines ahead of the 2023 AGM Season.

Both organisations have expressed their support for the Pre-Emption Group Statement of Principles and have explained that they will not recommend voting against resolutions that are in line with those principles.

• ISS
  Key changes for ISS include a focus on Audit Committees, where they will highlight where there have been four or fewer committee meetings of FTSE350 companies in a financial year and for FTSE All-Share they will highlight if there have been three or fewer meetings. They make reference to the 206 FRC guidance which states there should be a minimum of three meetings but note that for a large or mid-cap company three audit meetings might appear insufficient. The other focus of their changes relates to board diversity. For financial years beginning on or after 1 April 22, they may recommend voting against the chair of the Nomination Committee (or other director) of a premium and standard listed company where new board diversity and inclusion targets haven’t been met. 
  
  These and any other changes are effective for meetings being held on or after 1 February 2023
  
  
• Glass Lewis
  Key changes for Glass Lewis include
  
  • Overboarding – they have clarified what they consider to be excessive levels of commitments. Consequently, they will therefore generally recommend a vote against an executive director serving on more than one public board or taking on more than one non-executive role within a FTSE100 company, and for instance they would also a director to have excessive external commitments if they sit on more than five public company boards.
  • Director accountability for climate issues – If companies fail to make disclosures in line with the TCFD recommendations or they have not clearly defined board oversight responsibility then they may recommend voting against the chair of the committee (or board) responsible for such oversight. This could be the chair of the governance committee or an equivalent committee.
  
  
  The updated Glass Lewis guidelines will apply to meetings from 1 January 2023.

Computershare’s view

The updated voting guidelines highlight some interesting elements that could be explored more, and you can see within the Georgeson section of this newsletter that they have produced some helpful memos looking at each organisation’s guidance.

It’s worth noting that for instance the guidance had highlighted the recent changes made by the pre-emption group regarding the authority to issue shares without preemptive rights, that was changed following a recommendation in the Austin Report. This is a significant increase that could have a 22% dilutionary effect on Companies Issued Share Capital. It is not surprising that there are some rumblings from certain institutional investors as to whether this is truly in their best interest. Notwithstanding the practical considerations, including the wording of resolutions in the Notice of Meeting, companies need to question whether they need this full authority and if they do not, it may be in their best interest to wait and see the market reaction in this year’s AGM season before reassessing in 2024. Why put one’s head above the parapet when in reality the full authority granted since 2015 is rarely used for most. Look out for more insight on this topic from Georgeson in the coming weeks.

It’s clear that there is a focus on Committees and their activity, but while there are recommendations around the volume of meetings, it is the quality of meetings that matters most. Therefore, organisations should ensure that they have the appropriate material focus on matters and are able to articulate these in the appropriate manner to their stakeholders.  They should also reflect on ensuring that committees are clear in their focus and oversight and where necessary ensure that terms of reference are updated to take account of changing market demands or material elements of the organisation that are to be the committees’ focus.

The Financial Reporting Council (FRC) has, as part of their ‘What Makes a Good’ series of publications, put out guidance for companies preparing their annual report and accounts.

Two core principles underpin the guidance:

• Reporting through principles – principles that issuers should follow when drafting their report and accounts and include accuracy, completeness, transparency, and timeliness; and
• Effective communication principles – to help investors identify key information and understand how different parts of the report link together, the Council explains that disclosures should be specific to the organisation, be clear and concise, clutter free and comparable.

The FRC have also expressed that they see materiality as the “bedrock of corporate reporting” and that this remains an overarching concept.

The principles laid out in the guidance will be applicable to all companies regardless of size, listing status or which GAAP are applied.

Computershare’s view

For those organisations are new to drafting a set of Annual Report & Accounts that accommodate the expansive requirements of most markets and need to consider how to structure their reports, then this document is likely to be of use by helping an organisation develop the process documents that sit behind the creation of the reports. It calls out several organisations that the FRC feel have elements of their report that can be signposted for others to adopt.

As they identify that the materiality of any report is the bedrock of good reporting, then organisations evidentially need to ensure that as they draft the reports and disclosures, they are concise and relevant and can be connected throughout the reports.

From 5 January 2023, the EU Corporate Sustainability Reporting Directive will enter into force, and despite the UK’s exit from the EU, the Directive is likely to have an impact on UK companies because of its extra-territorial application.

Companies within the scope of the Directive will be required to include detailed sustainability disclosures in their narrative reports and will be building upon and expanding significantly the disclosures required under the EU Non-Financial Reporting Directive (“NFRD”) which was implemented into UK law through the Companies Act 2006, s. 414CA and 414CB.

The obligations under the Directive may apply to UK companies in two situations.

1. Where securities are listed on an EU-regulated market; or
2. Where the net turnover in the EU of the company is over €150 million for each of the last two consecutive financial years and has either
   
   1. An EU subsidiary has securities listed on an EU regulated market or is classed as a large undertaking (i.e., meets two criteria of the following (i) total assets of €20 million; (ii) net turnover of €40 million; and (iii) an average of 250 employees over the financial year)
   2. An EU branch which has generated a net turnover of more than €40 million in the previous financial year.

The application of the Directive is being phased in for the following financial years:

• 1 January 2024 – Listed undertakings with over 500 employees which are already within scope for reporting under the NFRD
• 1 January 2025 – Other large undertakings not currently required to report under the NFRD
• 1 January 2026 – Listed small and medium sized entities, and
• 1 January 2028 – Groups with non-EU parent and either an EU subsidiary or EU branch meeting the requirements set out above.

Computershare’s view

It’s clear that this directive is attempting to pull together several existing requirements. But with  still further guidance and directives likely to be released in the coming years from national and international organisations, such as the potential Taskforce on Nature-related Financial Disclosures (TNFD), this area of reporting is likely to continue to be confusing and ever-so time consuming for organisations. In reality, many of the ESG related reporting requirements do overlap, but the sheer number of compliance requirements in this area will likely drive defensive reporting in which companies are more concerned with meeting the regulatory requirement than giving meaningful narrative around their ESG activities.

It is certainly worth UK organisations to be mindful of the extra-territorial nature of this directive and consider if their EU subsidiaries will be impacted –  and therefore by extension the wider group. EU-incorporated companies will obviously be impacted if they meet the necessary criteria but should consider how the requirements of this directive are different from the reporting they currently do or may need to do if they too have global reporting responsibilities.

Investors want transparency and action on how companies are managing ESG risks and opportunities to grow and create long-term value.

To help issuer companies prepare for 2023 annual general meetings, Georgeson is launching the second edition of our Institutional Investor Survey Insights Report. In the report, you'll read about investor views and expectations on ESG trends, and what's driving engagement, voting and investment decisions.

Georgeson interviewed 30 global institutional investors that represent $47 trillion in assets under management and cover voting and engagement in the UK, Europe, US, Japan and ASEAN markets to create the report.

Read our Institutional Investor Survey Insights Report.

Join Georgeson’s webinar on Tuesday 24 January at 3pm GMT/10am ET to hear directly from global institutional investors including, Allianz Global Investors, Schroders and Federated Hermes, about their plans, focus areas and priorities for engagement and voting this year — and what they expect at 2023 company annual meetings.

Topics:

• Investor views on ESG metrics and executive pay
• Climate transition and what they expect to see this year
• What Social ‘S’ engagement themes might appear at the 2023 annual general meetings
• What investors expect to be other key ESG focus areas

Speakers:

• David Shammai – Senior ESG Analyst, Allianz Global Investors
• Pippa O’Riley – Corporate Governance Analyst, Shroders
• Louise Dudley – Portfolio Manager, Federated Hermes
• Kiran Vashantham – Head of Investor Engagements, UK/Europe, Georgeson

You can register for the webinar here.

This memo provides an overview of FTSE 350 remuneration report votes that received more than 20% opposition between July and September of 2022. During the period, 89 FTSE 350 companies held their AGM. Eight of these issuers received more than 20% opposition on their remuneration reports.

You can request access to the report by emailing Daniele Vitale, Head of ESG at Georgeson. 

As discussed above ISS have published their latest voting guidelines and in response to this Georgeson has published a memo covering the ISS European voting guideline updates for 2023.

As discussed above Glass Lewis have published their latest voting guidelines and in response to this Georgeson have published a memo covering the Glass Lewis European voting guideline updates for 2023.

Georgeson have published a memo that provides insight into the key takeaways from the PRI 2022 in-person conference and the ESG trends which we may continue or begin to see in 2023. These insights come from the panels, workshops and discussions our team members had with asset owners, asset managers and stewardship teams who attended the conference during networking sessions.

You can request access to the report by emailing Daniele Vitale, Head of ESG at Georgeson.