Governance Readout

Ahead of the peak of the 2023 AGM season our Georgeson colleagues have released a memo looking at what investors expect, and how they are applying pressure on companies in relation to Say on Climate proposals put forward by boards. It also considers what the proxy agents’ approach is and what the implications are for companies.

The memo covers the following topics:

• Investor expectations and Letters from Investors to Companies – an overview of the spectrum of opinion towards Say on Climate votes amongst investors, sample investor guidelines and the results of the most recent ISS Policy (Investor) Survey with regards to climate change. Here we include letters from investors across Europe including Amundi, Norges, Ossiam, Aviva and LAPFF (who recently sent letters to all UK Chairs – we answer the questions, who are they? How influential are they?).
• Proxy Advisor Opinions & Guidelines – An overview of the guidelines ISS and Glass Lewis have published for 2023 on board-sponsored Say on Climate proposals.
• Trends from the 2021 and 2022 AGM Season – an overview of the board-proposed Say on Climate votes which took place in the UK & Europe during the 2021 and 2022 proxy seasons.
• Summary – Georgeson insight on what questions companies should consider before putting forward a Say on Climate, how Say on Climate has developed over the past two years and what the implications are for companies going into their 2023 AGM.

The Investment Association have released their statement on its Shareholder Priorities for 2023, setting out expectations of investors in listed companies.

The document also lays out how the Institutional Voting Information Service (IVIS) will analyse these expectations for financial years ending on or after 31 December, including what its ‘colour-top’ (aka voting recommendations) will be for each issue at a company’s AGM.

Three key areas for 2023 are:

• Climate change – there will be a continuation of an amber-top for all companies that do not make disclosures against all four pillars of the TCFD recommendations and IVIS will monitor if associated risks in relation to an organisation’s transition to net-zero have been considered when accounts are approved.
• Diversity – targets for FTSE 350 companies will be increasing so that a ‘red-top’ will apply where women represent 35% or less of the board, or 30% or less of the executive committee and their direct reports. FTSE small cap companies will receive a ‘red top’ where 25% or less of the board consists of female representation. There will be no change to the approach of IVIS to ethnic diversity and so there will be a continuation to ‘red-top’ FTSE 100 companies who have not met Parker Review targets.
• Stakeholder engagement – there is now an expectation that companies extend their focus to the cost-of-living crisis and therefore disclosures should include the impact of the increases in the cost of living and inflationary pressures on employees and other stakeholders.

Computershare’s view

While the IA recognise the progress made by companies to report against the TCFD recommendations, it notes that the quality of this reporting still has a way to go. Indeed, companies will be increasingly expected to produce high-quality climate transition reports that clearly outline the company’s strategy for absolute emission reductions.

Additionally, the IA highlighted the upcoming ISSB standards that will be favoured by investors. It is advisable to prepare for these standards by reporting against the TCFD, GRI and SASB frameworks, keep track of the ISSB developments, and understand what your shareholders’ expectations are when reporting on sustainability-related matters. We hear from many company secretaries that there are simply too many standards to report against and are sending warning signals that being compliant doesn’t always mean that “good is being done”.

FTSE Women Leaders Review has set a target of 40% female representation on the Boards and Executive committees (including direct reports) of FTSE 350 companies by 2025. ISS, Glass Lewis, and the FCA have been more ambitious with their targets relating to board composition as they currently look for companies to reach 40% female representation. However, they have not yet set targets relating to the representation of women on executive committees. The updated IVIS guidelines have set a lower target for the female representation on Boards in 2023 (35%). However, they have also set a target for the representation of women on executive committees, again including direct reports (30%).

When it comes FTSE 100 companies, the new IVIS guidelines are consistent with the Parker Review and FCA targets, as well the guidelines from both ISS and Glass Lewis. However, the approach of IVIS to issuing an Amber top to FTSE 250 companies that have not disclosed the ethnic profile of their board or have a plan to reach the Parker Review’s goals by 2024 is different to that of the other proxy advisors.

The Investment Association have published an updated version of its Share Capital Management Guidelines, laying out the expectations of the Association’s members as institutional investors on various aspects of share capital management.

The Guidelines apply to premium listed companies, with standard-listed and AIM companies welcomed to adopt them. The updated version has been enhanced to reflect the recommendations of the Austin Report into secondary capital raising (you can read our papers on this report here & here).

Such recommendations include:

• Companies should continue to be able to seek annual allotment and pre-emption rights disapplication authorities from shareholders. Authority to allot up to two thirds of their issued share capital will be considered routine, although anything above one third of the existing issued shares should be on the basis of pre-emptive offers only
• Statement of Principles to be updated – which occurred in November 2022.

The IA is expecting companies to explain why they have chosen their specified capital raising structure and why it is appropriate. They are encouraged to be mindful that some retail investors prefer a rights issue. Therefore, IVIS will ‘red-top’ any company which seeks a routine disapplication of pre-emption rights more than 24% of the issued share capital or seeks a disapplication of pre-emption rights up to 24% but doesn’t follow the Statements of Principles.

Computershare’s view

As we noted in our February Readout and our dedicated Georgeson memo on pre-emption rights, for the time being a number of FTSE 350 companies are currently taking a cautious approach to the expanded guidance and are sticking to previous thresholds (for total authorities disapplying pre-emption rights of up to 10%). Additionally, the survey of investors appears to indicate that some investors may take a sceptical approach to the expanded guidance. Therefore, it may be advisable to only pursue the additional flexibility if you consider that it is realistically needed.

The law firm White and Case have published an interesting look at the subject of overboarding within the UK and questions how many seats are too many.

The short piece considers the current Corporate Governance Code stance on the subject, that a top executive should only take on one FTSE 100 non-executive directorship, but that for Chairs and NEDs there is no limit.

It also brings together in a handy table a summary of the views of several of the major investors and proxy agents. They also feel that the level of investor and media interest isn’t going to go away any time soon.

Computershare’s view

Whilst this isn’t new per se, it continues to be a key area of focus in ensuring that directors have sufficient time to discharge their duties and is not a topic that is likely to become less prominent in the near future. Whilst a formulaic approach can provide a helpful steer, it shouldn’t be the sole measure (i.e., contributions to the Board also considered) – Corporate governance isn’t a tick box exercise.

The US based Association of Corporate Counsel have released their 2023 Chief Legal Officers Survey which has revealed some interesting data on the roles of CLOs and their contact with the boards. The survey, which had responses from approximately 900 CLOs based in organisations across a range of industries and companies worldwide, found that:

• Majority of respondents also service as the Corporate/Company Secretary while another 6% advised that individuals performing that role report into the CLO.
• The vast majority of respondents (77%) report directly into the CEO. This percentage is higher if you consider just US based companies at 84%, while non-US based companies see only 66% of CLOs reporting into the CEO.
• In addition to overseeing the legal function, c.20% also oversee at least one or more other functions including compliance, privacy, risk, ESG and cybersecurity.

Computershare’s view

Whilst interesting, this is a principally US centric report where the requirements for a company to have a Company Secretary are very different. At a recent event we held with some individuals who hold both a General Counsel and Company Secretary role, it was clear that the latter element of their role was the more time consuming and therefore they often relied on a highly competent deputy to manage the governance and compliance elements.

It was also felt that those holding a combined role tended to find it easier to build the relationships with senior management, whereas someone only acting in the Company Secretary capacity could come up against a ‘finance wall’ and maybe find that a lot of their work is invisible, misunderstood or even unrecognised.

A view was also expressed that a legalistic way of thinking about risk was a key differentiator when being appointed to the No.1 position. It was also noted by those attendees at the session that the Company Secretarial profession is still struggling to articulate its purpose well whereas General Counsels have a stronger brand and the business understands what they are there to do. Some even expressed a view that despite the competence of Company Secretaries their title may be seen as denigrating, all of which reflects why the role is going through a market wide rebranding to be a Governance Professional.

Prior to the department’s announced restructure, the Department for Business, Energy & Industrial Strategy published a consultation paper on its proposals to enhance the Reporting on Payment Practices and Performance Regulations 2017.

The existing regulations have applied since financial years beginning on or after 6 April 2017 and required those entities within scope to report on their invoice payment practices every six months. The report needed to be submitted to a government website for publication.

Back in April 2022 the government reported that the regulations have seen an increase in transparency and symmetry to the payment practices and performances of large businesses, but it felt that more needed to be done. This report followed a call for evidence as part of the government’s statutory review, during which 90% of respondents felt that the regulation should remain in force following its current expiry date of 6 April 2024.

The consultation which closes on the 28 April 2023 is seeking views on:

• The extension of the regulations beyond April 2024,
• Introducing an additional requirement to disclose the total value of payments not paid within agreed terms,
• Imposing a new requirement to report on a group’s payment practices in the annual report.

Computershare’s view

Yet again the Annual Report is being used as the place to house everything and anything. While this information will be important to some stakeholders, the question needs to be asked as to whether it is of sufficient importance to warrant inclusion.

It has to be questioned as to the value that including this information in the Annual Report will bring. Could it not be reported separately with the same or more impact. The UK market needs to avoid turning the Annual Report into tick box exercise and ensure that as the nature of business changes the Report remains a meaningful document for investors.

Throughout what could be described as another tumultuous year, Georgeson observed several trends around Australia, including an increase in the number of proxy fights in the market and an increase in investor support for remuneration reports in the ASX300. To discover more about the trends we observed, read our insights below.

Access the Australian 2023 AGM Intelligence Report.