Governance Readout

On 19 July the independent review into the Secondary Capital Market, led by Mark Austin was released. Since the publication of the report, we’ve been considering the recommendations and their potential impact.

We wanted to provide an overview of some of the key themes identified in our early assessment, together with some initial thoughts to help in your understanding of the recommendations. We expect to provide a more detailed assessment of relevant elements of the report over the coming weeks.

It is noteworthy that during the subsequent Mansion House speech, the Chancellor announced that the recommendations contained within the report would be accepted in full, demonstrating that this review is more than a theoretical undertaking. The review considers a wholesale evolution of several aspects of the market, hence the importance with which we regard the publication and likely activities that will follow in the near future.

The recommendations fall under a number of themes:

• Pre-emption right enhancements
• Retail investor involvement and digitisation
• Regulatory enhancements

In recent weeks, we have released two discussion papers on the contents of the report. Our first paper focused on the Report’s recommendations regarding digitisation of shareholdings, intended to better facilitate retail investors’ participation in secondary capital raising and to enhance the effectiveness of interactions between issuers and their investors. Significantly, this involves action to achieve full dematerialisation of paper share certificates, as well as steps to enhance issuer communications with all intermediated investors.

The Report highlights that the ‘drive to digitisation’ should:

• achieve the full eradication of paper share certificates;
• ensure that the rights attached to shares flow to end investors quickly and clearly, and that investors are able to exercise those rights effectively; and
• remove all paper-based processes in the securities settlement infrastructure.

The Report therefore sees digitisation encompassing all these elements – dematerialisation, improvements to the enfranchisement of intermediated investors, and removal of paper processes.

Several high-level recommendations are made to achieve this, that we examine in our paper, and which are intended to be subject to more detailed definition by the Digitisation Taskforce. It will be important to break out the specific elements, consider the impact, and appropriate path for each individually, as well as within an over-arching digitisation strategy.

Our second paper focused on some of the key technical recommendations found within the Report, which included providing mechanisms for quick and efficient fund raising, promoting the inclusion of all investors and enhancing the use of electronic solutions for payments.

A key component of the Austin Report is the inclusion and participation of retail investors in capital raising events. This retail investor participation is seen as important in enhancing the operation of the UK market, both for issuers and individuals.

Computershare’s view

As the Report highlights, shareholdings can already be dematerialised via deposit into accounts in the CREST settlement system, and indeed a sizeable proportion of shares are already held in this dematerialised form. However, despite dematerialised holdings in CREST being available since 1996, a sizeable number of investors in UK issuers have elected to hold outside of the CREST system, directly registered in their own name and thus currently hold share certificates. The major UK share registrars have estimated that there are approximately 8.5 million directly registered certificated holdings across UK registers, a number which has remained steady for at least the past 7 years.

The full removal of these share certificates is a key plank in the government’s digitisation strategy, and indeed has been discussed within the market for many years. Computershare has been a longstanding supporter of efficient and effective dematerialisation of UK shareholdings. However, it is important to recognise that removal of paper certificates for these 8.5 million shareholdings will be a significant undertaking, and careful consideration of the most effective model to dematerialise these positions, and the associated impact on the shareholders and their investee companies, will be critical for the UK market to achieve the efficiency benefits of dematerialisation whilst protecting investor and issuer rights.

Some of the recommendations to improve fundraising in the UK market will require improvements to the way in which investors who hold their shares via an intermediary can be identified and communicated with, as well as the speed with which they can engage with issuers and their agent(s). It is a likely assumption that there will be interaction between the work undertaken on digitisation and the plans for implementation of the recommendations on capital raising and consequently, the precise future shape of any changes is not yet entirely clear.

Clearly, technology has the potential to deliver better support for retail investor participation, either in connection with event communications or through the provision of digital platforms so that investors can quickly and efficiently exercise their rights to participate. These opportunities can be made available today for registered shareholders, although there are structural considerations which will have to be addressed for beneficial owners, including:

• what ownership data is made available,
• who has the associated obligations to make rights available (will it be the issuer, or the intermediary?) and
• who pays for these solutions?

The UK government have now laid before parliament the Economic Crime & Corporate Transparency Bill which contains draft amendments to the Companies Act 2006 that will see the largest changes to Companies House since it was originally formed in 1884.

This bill has followed several consultations issued since 2019 and a government White Paper early this year.

Under the bill, Companies House will become less passive and more active in gatekeeping the information it receives. In their role managing the central register of corporate filings, they will be able to query, request further information or even reject any filings that may seem inaccurate, anomalous, or suspicious and which could impact the integrity of the register or the broader business environment. It will be easier for Companies House to remove material from its records. It will also be able to mandate all information to be filed electronically.

The Bill also introduces a requirement for all new and existing directors, PSCs and those making filings at Companies House, that identity verification will have to take place. However, in some circumstances, the rules will permit filings to be made by an agent, for example a party supporting the formation of a company. Failure of a director or PSC to have verified their identity will be a criminal offence and/or incur a civil penalty, and companies with unverified directors will also be committing an offence.

Computershare’s view

The changes proposed by the Bill in connection with Companies House reform have been well signposted for several years. Whilst they have the potential to create some added administrative burden for companies, it is hard to argue that they are not appropriate measures to ensure good governance and minimise the risk of the system being abused by those with nefarious intentions. We would welcome guidance and clarity from companies House on how they intend to implement these powers in practices and what those companies can do to minimise any disruption to filings.

It should also be noted that found within the Bill are changes to the location that some statutory registers will need to be maintained, the use of Companies House by private companies to hold their register of members. Some of these changes are likely to require organisations to consider how they interact with Companies House.

In order to aid companies in improving their disclosures related to digital security strategies, risks and governance, the FRC’s Lab have published their Digital Security Risk Disclosure report.

Data security risk is fundamental to the continuation of successful businesses and reporting on such areas needs to provide relevant information to all stakeholders so that they can assess the company’s ability to remain viable and resilient.

The Lab’s report is designed to be used by reporting and risk teams and audit committees. It recommends that companies focus their disclosures on aspects of their strategy, governance, risk and related events and is accompanied by a bank of practical examples, together with questions for boards and audit committees to consider.

Computershare’s view

With a continued focus on technology security, boards should be mindful of how their disclosures can impact the views of their investors and demonstrate the management of the company’s material risks. The guidance provided by the FRC is welcome and should be seen as useful aid as companies develop their reporting on these matters.

The Financial Conduct Authority (FCA) have released their findings following a review of the Task Force on Climate-related Financial Disclosures (TCFD) which are being aligned to disclosures issued by premium listed companies.

Some of the observations included:

• Over 90% of organisations self-reported that they had made consistent disclosures related to the governance and risk management pillars, but this decreased when reporting on the strategy, metrics and target pillars. The most common gaps in reporting related to the quantitative elements of the recommendations, such as scenario analysis.
• 81% of companies indicated that they had made disclosures consistent with all seven recommendations which they would ordinarily be expected to comply with. However, there are noted instances where the Authority identified that while a disclosure was made, it was exceedingly limited in content, and the Authority are considering these further in the event they need to take appropriate action.

Companies are reminded of the Authority’s expectations for premium and standard listed companies in that disclosures need to be reviewed against the TCFD guidance and existing listing rules and how they work together. It is strongly recommended that listed companies increase their understanding of the TCFD recommendations and further improve their internal processes to ensure that they are ready to disclose, especially once the new International Sustainability Standards Boards (ISSB) standards are adopted within the UK.

The 12-member independent oversight committee (IOC) of the Best Practice Principles Group for Shareholder Voting Research (BPPG) have released their 2^nd annual report that looks at how the proxy advisors (Glass Lewis, ISS, Minerva, PIRC and EOS) have complied with the principles based on their most recent compliance statements. The report has also provided recommendations for improvements, including in relation to disclosures.

PIRC has been cited as a notable example of providing companies a ‘timely’ opportunity to review and correct factual descriptions and data to promote accuracy.

BPPG have also asked that the five firms improve their disclosures in relation to conflicts of interest and issuer feedback policies.

Computershare’s view

Holding proxy advisors accountable for the research they conduct, and base their voting recommendations on, is crucial in establishing trust within the industry as well as ensuring that issuers are being judged upon high-quality and accurate information. This report by the BPPG focuses on the progress that has been made over the past year in trying to ensure the integrity and efficiency of processes and controls related to proxy advisor research services and their alignment with the Best Practice Principles overseen by the IOC.

As the report outlines, this is early days for the IOC and the committee is aware of its responsibility to incorporate the concerns of different stakeholder groups. This is why the IOC hosted their annual Open Stakeholder forum on the 11^th October 2022 to gather market opinion on the industry and on the efficacy, applicability, and suitability of the Best Practice Principles. However, this is not the only way that stakeholders are able to voice their opinions, as the report details the process in which issuers are able to log complaints against signatories of the BPPG when it is believed that that the signatory has failed to be compliant with one of the principles.

The FRC’s Lab have released a review which identifies several lessons from the initial year of mandatory digital reporting under the UK’s onboarded regulations from the Transparency Directive on European Single Electronic Format regulations.

While many companies have reportedly risen to the challenge of producing an annual financial report in digital format, there is much still to be done on data quality and usability, which remain below the level expected of a leading capital market.

Some recommended improvements include:

• Naming and structure of the file submitted to the National Storage Mechanism.
• Improving engagement and education including at management and board level.
• Adopting a continuous improvement mindset and ensuring that the reporting process is future proofed.
• Making the report available on the corporate website with an inline viewer.
• Considering the timing of the report – deadlines are reverting to 4 months after year-end.
• Consider accessibility standards and keeping digital users in mind with the design of the report.

We are proud to present Georgeson’s 2022 European AGM Season Review, a thorough analysis of general meeting trends across seven major European markets.

A few highlights in this year’s report:

• “Say on Climate” advisory votes on company plans and disclosures were put forward for the second consecutive year
• Increasing spotlight on environmental and social resolutions
• Three times as many companies put forward advisory votes on their climate action plans and disclosures compared with 2021
• Proxy advisors maintained their strong influence on voting outcomes in 2022
• Resolutions relating to the remuneration of executives continue to be the most contested resolution type across Europe

Read the report to learn about the notable developments and takeaways from the 2022 season and how shareholders’ priorities will change in 2023.

The Financial Reporting Council issued a statement saying that the FRC and FCA find significant progress, but further improvement needed under new climate rules.

“The Financial Reporting Council (FRC) and Financial Conduct Authority (FCA) have today published two reports which found that premium listed companies have made significant steps forward in the quality of climate-related information provided in their financial reports, but further improvements are needed. Since 2021, premium listed commercial companies have been required to include a statement in their annual financial report, setting-out whether they have made disclosures consistent with the Task Force on Climate-related Financial Disclosures' (TCFD) recommendations.”

Sidley posted an update titled “ISS Provides Guidance on the Universal Proxy Card, Puts ‘Weakest’ Directors on Notice.”

“In its note, ISS declared the new rules the “superior” way for shareholders to exercise their voting franchise and observed that this system will make it “dramatically easier” and “cheap” for activist shareholders to launch proxy fights. ISS also offered perspectives on how the new system could help activists in their campaigns. Public companies should pay close regard to these perspectives in light of the weighty influence of ISS’s proxy voting recommendations on the outcomes of contested director elections. The most notable of ISS’s perspectives are that under the new framework, directors’ individual qualifications may come into greater focus relative to the merits of an overall slate and that a board’s “weakest” members may now become more vulnerable in a proxy contest.”

Bloomberg Law reports that Disability Representation on Boards Is Up, Yet Inclusion Lags:

“An increase in people with disabilities in boardrooms and corporate leadership isn’t always translating to more inclusive workplaces for rank-and-file employees. Of the 415 companies that participated in the 2022 nonprofit Disability:IN’s Disability Equality Index Report, 30% have at least one senior executive who is disabled and 6% have someone who identifies as disabled serving on their corporate boards. The companies surveyed include large employers such as Starbucks Corp., Twitter Inc., and Amazon.com Inc.”

The Financial Standard Sustainability report on ASX300 upping the ante on ESG reporting: Melior.

“ASX300 companies are taking action on carbon intensity and net zero targets while showing only incremental improvements on social indicators like gender diversity on boards and executive leadership teams, according to Melior Investment Management.”