Governance Readout

Back in July, the UK Government published an interim report from its ‘Digitisation Taskforce’. The government commissioned the Taskforce, which is led by Sir Douglas Flint, to look into how the UK can abolish physical share certificates, improve market digitisation, enhance the interaction between issuers, intermediaries and investors, and better enfranchise beneficial shareholders.

The Taskforce was formed with terms of reference covering:

• Digitisation should provide net benefits, and any model for digitisation will need to be supported by evidence. Paper certificates should be eradicated with costs apportioned in a fair and balanced way. Specifically, digitisation should reduce costs within the system and improve efficiency of communication with shareholders.
• Removal of paper certificates should not degrade rights of those holding them currently.
• Ultimate Beneficial Owners (UBOs) should be able to effectively and efficiently exercise the rights associated with direct share ownership including voting, receiving information and other corporate actions. Ability to exercise such rights should be universal.

Within the interim report the Taskforce have laid out seven key recommendations which are:

The seven principal recommendations are:

1. Legislation should be brought forward, and company articles of association changed as soon as practicable to stop the issuance of new paper share certificates.
2. The government should bring forward legislation to require dematerialisation of all share certificates at a future date, to be determined as soon as possible.
3. The government should consult with issuer and investor representatives on the preferred approach to ‘residual’ paper share interests and whether a time limit should be imposed for the identification of untraced UBOs.
4. Intermediaries should have an obligation, as a condition of participation in CREST, to put in place common technology that enables them to respond to UBO requests from issuers within a very short timeframe.
5. Intermediaries offering shareholder services should be fully transparent about whether and the extent to which clients can access their rights as shareholders, as well as any charges imposed for that service.
6. Where intermediaries offer access to shareholder rights, the baseline service should facilitate the ability to vote, with confirmation that the vote has been recorded, and provide an efficient and reliable two-way communication and messaging channel, through intermediaries, between the issuer and the UBOs.
7. Following digitisation of certificated shareholdings, the industry should move, with legislative support, to discontinue cheque payments and mandate direct payment to the UBO’s nominated bank account.

The Taskforce has clearly stated that they will be weighting the views of Issuers and Investors heavily as they consider the final recommendations, and it is therefore imperative to take the time to understand the initial report recommendations and how they could impact your organisation and your shareholders.

The market had until 25 September to provide their views and feedback on the recommendations so that the taskforce can consider these as they progress to a final report and implementation timetable.

Computershare’s view

We’ve openly stated that we’re long-time supporters of the removal of physical share certificates and improving digital engagement with investors – but have always felt that the route to achieving these goals must be done in a way that is efficient and effective for issuers and investors while minimising significant market disruption.

Since the publication of the interim report, we have taken time to absorb and analyse it and its implications through our international experience and engaging with investor associations, issuers and other market participants to understand their views. It’s fair to say we have some concerns regarding the practicality, complexity and sub-optimal nature of some of the proposals.

We’ve ensured that we’ve kept Issuers up to date on our analysis and what we’ve been hearing in the market and finding ways to make it easier for interested parties to respond to the Taskforce. Over the last few weeks, we have:

• Held and released the recording of our first client webinar, which can be found here. In this webinar we provided a summary of the key recommendations, highlighting both the benefits and some potential areas of concern or where we feel more information or clarity is needed.
• Produced a whitepaper, which can be accessed here. This paper lays out our interpretations of the recommendations and how we see dematerialisation and improved digitisation of the UK market being introduced in a more efficient, cost effective and timely manner than that recommended currently by the Taskforce’s interim report.
• Issued a survey to our clients to enable the capture of sentiment, views and feedback around the recommendations. The survey can be accessed here and it is still open, so we encourage anyone that has not completed it yet to do so.
• Held and released the recording of our second client webinar, which can be accessed here. In this webinar, we focused on what we’ve heard from Issuers, investor groups and other market participants on the recommendations. We also explain how you can make sure your voice is heard either before the Taskforce’s stated deadline or in the period before we expect the final recommendations to be released.
• Released a template Issuer response – the suggested response that we have drafted for issuers to review, amend and utilise to respond to the Taskforce should they wish – if they agree with our assessment of the interim report.

While the official deadline for responses to the Taskforce has now passed, you may still submit your views to them as we understand from our engagement with HM Treasury that this is a period of engagement ahead of the anticipated final recommendations being published towards the end of the calendar year.

If you haven’t yet watched our webinars you can still do that and you can still provide us your thoughts through the survey link, however, we see it as imperative that the Taskforce hear from Issuers, even if it’s that you need more time to consider the impacts else the Taskforce and Government may think that a lack of responses is indication that their proposals are acceptable to the market.

On 26 June 2023, the ISSB published its first two IFRS Sustainability Disclosure Standards (ISSB standards), delivering a global reporting standard for corporate sustainability disclosures:

1. IFRS S1 General Requirements for Disclosure of Sustainability-related Financial Information
2. IFRS S2 Climate-related Disclosures

Full details can be accessed in the FCA’s Primary Market Bulletin, which addresses the standards, the process for implementation and consultation, continuity of supervising existing disclosures and what issuers can do to prepare for any future reporting obligations.

The ISSB states that these standards are “intended to provide internationally consistent, comparable and useful sustainability disclosures to improve the transparency of issuers’ activities.” And will “give investors the information they need to make business, risk and capital allocation decisions.”

Alongside the FCA’s work, the UK Government is creating a framework called the UK Sustainability Disclosure Standards (UK SDS) which will be heavily based on the ISSB’s standards. The FRC is issuing a call for evidence on the standards until 11 October 2023, with the intention of endorsing the ISSB standards and creating the UK SDS by July 2024. The FCA recommends engaging with the UK endorsement and implementation process for the ISSB standards as well as continuing to report in line with existing climate-related disclosure rules (i.e. reporting in line with the TCFD).

Georgeson’s view

This represents another change and another set of standards that companies will have to report against and adhere to. These changes can be draining on organisations and the ISSB will be seen by many as a further complication. But, this standard provides a useful baseline that incorporates many other standards, so it does in fact represent a simplification.

It’s worth considering that if digitisation of the UK market can be introduced in an effective manner, this could aid in moving the requirements to produce and publish disclosures into a more digital and digestible format to better aid investor understanding.

Georgeson recently published a memo on the ISSB standards, providing an overview of what is considered the ‘Global Baseline’ for sustainability reporting. It breaks down the standards to provide you with a simple overview of the context and history behind the ISSB, what the standards are trying to achieve and how it may impact your company in the short- and medium-term.

The memo covers the following topics:

• Investor perspectives and usefulness.
• Specifics of the standards.
• How the ISSB compares to different reporting standards.
• Regulatory focus across the globe and more specifically the UK.
• How companies should prepare for the ISSB standards.
• Frequently Asked Questions.

The memo can be requested by emailing hal.dewdney@georgeson.com.

On 26 July 2023, the Financial Reporting Council (FRC) published a thematic review, assessing the quality and maturity of climate-related metrics and targets disclosures.

The review identifies the following key findings:

• Incremental improvement in the quality of companies' disclosure of net zero commitments and interim emissions targets.
• Concrete actions and milestones to meet targets were sometimes unclear.
• Comparability of metrics between companies remains challenging.
• Many companies find it challenging (given large volume of information) to clearly and concisely explain plans for transitioning to a low-carbon economy.
• Explanations of how climate targets affect financial statements still need improvement.

Computershare’s view

For a long time, when conducting reviews on corporate governance disclosures, the FRC have not just focused on adherence to rules, but also the quality of the disclosures.

It’s not surprising that the FRC feel that whilst there has been improvement, there is more that can be done. After all, disclosures around climate-related matters are relatively new, and until recently there was little clear guidance on how to report effectively. Having said this, the Task Force for Climate-related Financial Disclosures (TCFD) has now been overtaken by the International Financial Reporting Standards (IFRS) Foundation which has recently published the IFRS Sustainability Disclosure Standards (ISSB Standards). In short, the climate disclosures publicly-listed UK companies have to make will most likely be changed by the FRC over the next couple of years. Although the new standards will come under a new acronym (ISSB S2), the standards themselves follow the same structure as the TCFD and overall will remain similar in terms of required content and disclosures.

We encourage Issuers to reflect on this report and consider how their own reporting compares. It’s also worth looking into reliable sources of guidance and where you identify gaps to establish a plan of action to resolve them.

Changes to ‘The Companies (Strategic Report and Directors’ Report) (Amendment) Regulations 2023’ have been laid to Parliament for approval by The Department of Business and Trade. The Regulations are subject to the affirmative resolution procedure and so require approval of both Houses of Parliament and are expected to become law later this year.

The legislation introduces a number of new reporting requirements, including:

• Distributable profits – companies will be required to disclose their distributable profits.
• Distribution policy – in the directors’ reports, directors will be required to set out their policy towards the amount and timing of returns of value to shareholders over the short and medium-term and how that policy has been applied during the financial year. The policy statement should also describe the key risks and constraints relevant to implementing and sustaining the policy.
• Resilience statement – directors will be required to make a new statutory resilience statement, which will form part of the strategic report.
• Audit and Assurance policy – companies will have to publish an Audit and Assurance Policy (AAP) every three years as part of their directors’ report setting out whether and how a company is planning to obtain assurance on: its company reporting, beyond its statutory audit; and the effectiveness of its internal financial controls.
• Material fraud statement – the directors' report will need to contain a material fraud statement which contains a summary of the directors’ assessment of the risk of material fraud and a description of the main measures in place, or proposed, to prevent and detect the occurrence of material fraud.

The Regulations are also part of a wider package of measures, with the Government and Financial Reporting Council (FRC) implementing proposals from the Government’s March 2021 white paper on audit and corporate governance reform, aimed at restoring trust in audit and corporate governance.

Separately, the FRC is consulting on changes to the UK Corporate Governance Code to implement the recommended reforms and suggests that all companies that report against the Governance Code consider, on a comply or explain basis, reporting in a similar way to the new resilience statement and preparing an Audit and Assurance Policy.

The changes impact:

• all UK-incorporated companies (and groups), listed, public and private, if they are companies (or groups) with a "high level of employees and turnover"; that is with both 750 or more employees and an annual turnover of £750 million or more (the 750:750 threshold).
• companies with shares listed on a regulated market first (including the main market of the London Stock Exchange) – for financial years starting on or after 1 January 2025 – and other companies that meet the new 750:750 threshold for financial years starting on or after 1 January 2026.

Computershare’s view

This legislation should be taken with the wider changes to strengthen corporate reporting requirements in the UK, including the FRC Corporate Governance Code. As such these changes have been long-awaited and clarity should be welcomed even if it is arriving in a piece-meal fashion.

The changes proposed in this legislation will replace and build on existing requirements as much as it introduces brand new requirements. Companies will be concerned with the increased burden contained under the legislation and the proposed Code revisions, and they should look out for future guidance from the FRC which will support compliance, as well as alignment with the proposed changes in the UK Corporate Governance Code, particularly those relating to internal control, assurance, and resilience.

Computershare will be reviewing the progress of the legislation and future guidance and will opine further.

We are pleased to present our annual European AGM Season Review which provides a comprehensive analysis of general meeting trends across nine major European markets. As well as the seven markets covered in previous Season Reviews, this year’s report now contains chapters on Belgium and Denmark.

A few highlights in this year’s report:

• Fewer "Say on Climate" proposals were put forward in 2023, due to decreased investor support in 2022 and cases of investor pushback on these proposals.
• Proxy advisors continued their influence on voting outcomes in 2023, though investors are increasingly relying on their own voting policies.
• Resolutions relating to executive compensation maintained their position as the most contested resolution type in Europe as the share of contested remuneration reports continued to rise.
• The seven biggest indices by market cap, except for Spain and Germany, saw fewer contested director elections in 2023.

Read the report to learn about the notable developments and takeaways from the 2023 season and how shareholders’ priorities will change in 2024.

With exclusive insights from the following institutional investors:

• Jocelyn Brown, Head of Governance - EMEA & APAC at T. Rowe Price
• James Upton, Senior Governance Specialist at Pictet Asset Management
• Michiel van Esch, Director Active Ownership of Robeco Asset Management

Institutional Investor reports that Activists Are Targeting Diverse Boards — And Succeeding: “New research shows that activist investors are more likely to succeed when boards are less united and slower to act — two characteristics that are common among diverse boards, where members come from different backgrounds and tend to bring different perspectives.”

The Wall Street Journal reports on Why ESG Ratings Are All Over the Map: “Requiring all companies to disclose a uniform set of ESG data would make it easier for investors to compare funds and companies.”

Pensions and Investments reports that BlackRock voted against a record 91% of all shareholder proposals in 2023 proxy season: “BlackRock Inc. voted against a record 91% of all shareholder proposals — and against 93% of those focused on environmental and social issues — during the 2023 proxy year, its latest report shows. In their annual global voting spotlight report published Wednesday, BlackRock's investment stewardship team — which makes voting decisions on both management and shareholder proposals on behalf of BlackRock's clients — attributed its large number of “no” votes this year to several factors, including a huge influx of shareholder proposals. The vast majority were deemed to be ‘poor quality’ by the BIS team, either because they were "lacking economic merit," were "overly prescriptive" and "sought to micromanage a company's strategy," or were simply redundant, asking a company to do something it had already done, the report said.”

The Times reports that a Third of financial company directors sit on at least four boards: “A third of directors at big British financial services companies sit on the boards of at least four businesses, according to research that will fuel concerns that senior figures in the City are stretching themselves too thinly. The accounting and professional services group EY found that directors at leading UK financial firms each sit on an average of three boards and 33 per cent had four or more seats. Holding multiple jobs was most common in banking, where 65 per cent of directors sat on more than two boards, according to the EY survey, which looked at 19 big UK financial services companies and 208 board members. That compared with 40 per cent in insurance and 39 per cent in asset management. The findings throw a spotlight on the issue of “overboarding”, which is a common corporate governance complaint among investors. Institutional Shareholder Services and Glass Lewis, the two leading investor advisory groups, keep a close eye on the issue and Britain’s corporate governance code stipulates that non-executives should have enough time to carry out their board duties. There are fears that directors who sit on multiple boards are unable to oversee companies properly because they have too many commitments.”