Governance Readout

The Financial Conduct Authority (FCA) have released several engagement papers where they are seeking market feedback on how they can adapt their rules under the new Public Offers & Admission to Trading Regime (POATR), as part of the Edinburgh Reforms.

• EP23/1 – Admission to trading on a regulated market
  This paper considers how the regulator will adjust the admission rules to account for issuers who will have securities admitted to trading on regulated markets under the new regime. There are several key areas of focus such as when a prospectus should be required; what should be included in the prospectus for initial admissions; the format and purpose of the prospectus.
• EP23/2 – Further issuances of equity on regulated markets
  The FCA is trying to better understand the requirements for further issuances of equities, considering the findings of the Austin Report on secondary capital raising. They are considering how they can tailor and/or scale back the process under the new regime.
• EP23/3 – Protected forward-looking statements
  With this paper the focus is on how the regulator should define such statements and how related information should be presented within prospectuses, while recognising that currently there is a negligence liability and a reverse burden of proof which can deter inclusion of such statements in prospectuses.

The FCA are actively reviewing the future of the listing regime. They have announced that they will be moving away from their original plans for a single listing segment with mandatory and supplementary obligations (as highlighted in our July 2022 Governance Readout) and instead intend to opt for a single segment with simplified eligibility and a single set of continuing obligations for all standard commercial companies.

The new proposed regime will include:

• Shareholder votes will no longer be required for significant/class 1 transactions,
• Shareholder votes will no longer be required for approving related party transactions,
• Significant changes to eligibility requirements for new prospective IPO candidates by moving to a disclosure-based regime.

The FCA’s consultation closes on 28 June and a second paper containing draft rules is planned for the autumn with the hope that the implementation of the final rules will be accelerated. It’s worth noting that for existing listed companies, transitional arrangements will be announced in due course.

Computershare’s view

It’s welcome to see further progress on making the UK a more attractive location for companies to list. However, improving flexibility needs to be done while ensuring that strong investor protection and good corporate governance remain. After all, the UK has had a very good reputation for strong governance for many years. So, there’s a fine balancing act here and the FCA seems to be taking a pragmatic approach to ensuring flexibility without important controls and investor protections being lost.

It will be interesting to see how these proposals interact with the proposed revisions to the Corporate Governance Code (discussed below) and whether companies that find it easier to join a new single segment will be equipped to comply with the sheer amount of additional reporting requirements and audit scrutiny. From our experience, becoming listed is only half the battle, many newly listed companies find it difficult to adjust to life after IPO.

The Financial Reporting Council (FRC) have published a consultation on the proposed revisions to the UK Corporate Governance Code and follows their white paper on restoring trust in audit and corporate governance.

These are the first revisions to the Code for five years and have five areas of primary focus:

• The parts of the Code that called for a framework of prudent and effective controls so that there is a stronger basis for reporting on their effectiveness,
• The responsibilities of the board and audit committees in relation to sustainability and ESG reporting.
• Adjustments to account for the new Audit Committee Standard.
• Strengthening “comply or explain” where reporting is seen as being weaker.
• Alignment with changes to legal and regulatory requirements as set out in the Government’s response to the Council’s white paper.

This will also be an opportunity for the FRC to review the supporting guidance to the Code. The consultation closes on 13^th September.

Computershare’s view

The proposed revisions to the Code, which form part of this consultation, should not be underestimated. This is the most significant change since 2016. It goes without saying that the Code should not be something that only garners attention as a company approaches Annual Report season. Effective implementation of the Code is an ongoing, day-to-day process. The proposed amendments, particularly those relating to internal control, assurance, and resilience set out a standard that must be imbedded within one’s culture to be adequately reported upon for shareholder and wider stakeholder consideration.

The proposal further emphasises effective reporting. In a time where many feel that reporting requirements are already somewhat burdensome, notwithstanding the general criticisms of Annual Reports being too long for most people to reasonably digest, the increase in reporting requirements in terms of quantum and quality should be a matter that is high on-Board agendas.

It is worth noting that the proposed revised Code has embedded the Audit Committees and the External Audit: Minimum Standard directly within the main roles and responsibilities as well as annual report requirements for the Audit Committee, as opposed to a footnote. By doing so, the FRC has stealthily inserted several pages of additional standards which must be cross referenced and could become a document which is as salient as the Code and the Listing Rules in the Company Secretary’s arsenal.

Computershare will be reviewing the proposals in the lead up to the consultation closing date and will opine further.

A number of institutional investors have collectively provided practical guidance for UK and US companies on how they can consider and appoint employee directors to better understand the “employee voice” at board level.

The guidance is split across four areas:

• Role – this area looks at how engagement can be done alongside other mechanisms, ensuring that interested parties are aware of their other duties as a director, ensuring that an employee director is appointed on the same basis as their board peers.
• Recruitment – organisations must get the input of the workforce but could consider the use of board recruitment firms to assist in the process, adopt a hybrid selection/election appointment.
• Retention – ensure that the board is inclusive to the employee director and that they undertake a structured induction and training programme, make sure that meetings are set with consideration to the employee’s priorities and that meeting discussions don’t become segregated.
• Reporting – include the employee director in plan for reporting back to the workforce and ensure that workforce issues are disclosed in line with best practice.

Computershare’s view

The guidance appears to stem from a need to help companies feel more confident in taking an alternative approach to ensuring the board remains conscious of the employee voice. To date, the preferred workforce engagement tactic is to appoint a NED to act as the employee voice, rather than appoint a director from the workforce to the board.

Companies should do what is best for them, but they should be mindful to ensure that if they appoint from the workforce, inductions are potentially greater than they would be for an experienced NED or other individual with pre-existing board experience. Companies could for instance consider providing a mentor to the employee such as an existing NED.

Alternatively, if companies continue to see their solution as having an existing NED acting as the connection between the Board and employees, they should be mindful to ensure that the NED really is hearing and seeing the real employee experience. This is the point – how do boards assure themselves they are getting the right picture?

The UK Government have released their guidance for organisations on the voluntary ethnicity pay gap reporting.

It’s hoped that the guidance will help organisations in building transparency and trust among their employees and broader stakeholders. Thus, the guidance is designed so that all companies wishing to adopt it can do so using a consistent approach.

The guidance provides advice on:

• Collecting pay data from employees
• Considering of data issues such as confidentiality, aggregating ethnic groups and employee locations
• Step by step instructions on how to calculate the data
• Reporting an organisation’s finding

Computershare’s view

Throughout the 2023 AGM season, we have seen a continued interest in ethnicity pay gap reporting from ShareAction and other investor groups. It's clear that investors are expecting to understand the position a company is taking in relation to ethnicity pay gaps and that it should be done in alignment with the mandatory gender pay gap reporting.

Companies should review the guidance and make clear plans to begin collecting and reporting on the necessary data or be prepared to provide an explanation to their investors in forthcoming disclosures.

This consultation published by HMRC is the latest in a multiyear review of the tax regime used for shares. Previously, we have seen a review undertaken by the Office of Tax Simplification (2017), an HMRC consultation (2018), a call for evidence by HMRC (2020) and most recently a market participant working party of which Computershare were a member.

COVID provided evidence to HMRC that there was scope to modernise and potentially align Stamp Duty Reserve Tax (SDRT) and Stamp Duty (SD) to achieve the aims of simplifying the tax regime. It’s also an opportunity to try to resolve other areas of uncertainty that market participants feel exist.

The 50 questions within the consultation that closes on 22nd June, consider a range of matters including:

• How a new single tax regime would operate, such as the introduction of an online portal for those conducting off-market transfers to inform HMRC of the transaction and where necessary, pay any stamp duty.
• Who would be considered liable and accountable for the tax and at what point in the transaction would it be due.
• The geographical scope of the new tax regime and what reliefs should be maintained or adapted for a single regime.

Computershare’s view

We’ve talked to clients for several years about the early ideas around aligning SDRT and Stamp Duty and have taken a leading role within the marketing working group that helped the government get to this stage of consultation. So, we think it’s important that companies should take time to review the consultation and note the proposals around tax reliefs for debentures and share buy-backs. It’s also worth noting that within the proposals is a view that the existing £1k de-minimis level for stamp duty be removed, this is something we think will make the new regime far more burdensome for the average shareholder than the current system is.

Computershare are considering the consultation and a potential response carefully. If you have views that you would like us to consider as part of our response or wider market discussions, please let us know as soon as possible.

In our February Readout we brought to you our memo laying out the updated recommendations of the Pre-emption Group following the recommendations of the Austin Report. At that time, we explained that a significant majority of FTSE 350 companies were taking a cautious approach. In our latest memo, we provide you an update.

The memo looks at what has transpired since February, including the proportion of FTSE 350 companies seeking the 10% + 10% authorities together with the level of support generally received. It also considers the current European best practice and proxy advisor guidance.

Prior to the peak of the 2023 AGM season Geogeson released their memo looking at Say on Climate proposals (read it here in March’s Readout). They’ve now given us their latest update to share with you.

The update memo covers the following areas:

• Trends from the 2023 AGM Season
• Georgeson’s insight into the trends we are seeing
• Overview of investor expectations and letters from investors

The memo identifies that the volume of Say on Climate resolutions has dropped over the first five months of the year when compared to last year, that proxy advisors are taking differing positions when it comes to their recommendations, but that support for the proposals by investors has so far seen an increase compared to 2022.

This Bill, currently making its way through Parliament, is the latest measure in the UK Government’s attempts to reduce economic crime and improve corporate transparency. It looks to impose some changes to operations and interactions with Companies House. Beyond that, the Bill incorporates changes to the Companies Act 2006, some of which could have serious impacts on a range of issuers, including yourselves.

As the legislation passed through the House of Lords, amendments were introduced that, if accepted when the Bill returns to the House of Commons (within the next few weeks), will require a subset of companies to make modifications to their public register of members and impose additional requirements on shareholders regarding the provision of information.

More specifically:

1. Shareholders will be legally required to communicate changes to registration data within two months of any change taking place
2. When notifying changes, shareholders will be obliged to inform the date that the change occurred, which must be captured in the register
3. Failure to comply will be deemed a criminal offence, and persons found guilty will be liable to imprisonment for up to two years
4. All historic information will be required to be retained in the register

The companies currently within scope of these changes are:

1. Overseas branch registers of UK PLCs,
2. UK PLCs with a primary register maintained outside of the UK (such as in the US) or
3. Private UK PLCs without a UK listing,

Should these changes become law, in-scope Issuers will be responsible for the implementation practicalities. Shareholders will need to be educated as to the requirements and implications for breaches, and systems and associated operational procedures will need to be updated and maintained. This is likely to come at considerable cost. By extension, we also anticipate that Issuers will also bear some monitoring responsibilities in the event of non-compliance, although these have not yet been defined.

Since being made aware of these proposed amendments we have engaged with the Department of Business and Trade (DBT) to raise concerns on your behalf. We have questioned the overarching policy goal and business case, bearing in mind that we see no evidence that shareholders avoid informing changes in a timely manner today, and emphasised that criminalisation for breaches (that are most likely to be accidental) is inappropriate. We have also highlighted concerns that any increase in publicly available shareholder information would potentially increase fraud risk (contrary to the aim of the Bill) and pointed out that, as the requirements only apply in relation to directly registered shareholders, investors can simply avoid the new requirements by holding their investments via a nominee arrangement.

Through our continued representations, DBT have indicated that some changes may be considered which could see a reliance on existing exemptions found within the Companies Act being relied upon, but until any further details or amendments are made there is no certainty. Given the current status of the Bill, there is a very narrow window to further influence policymakers, therefore if your organisation is in scope of these proposed amendments, we would welcome support in this endeavour. Please feel free to contact us to discuss this further.