Governance Readout

The Financial Conduct Authority (FCA) have released their latest market bulletin which covers several elements that may be of interest to UK Issuers.

• Multimedia in RIS announcements
  The Authority feels that the inclusion of multimedia content in regulatory announcements can create harm to the market. They feel that it has the potential to reduce clarity on what information is regulated and what might be inside information. There is also a risk that announcements with such content can breach rules including DTR 6.3.5 and Article 17 of the Market Abuse Regulation.
   
• Diversity Disclosures
  The Authority is reminding Issuers of their expectations in relation to their new diversity and inclusion reporting requirements and provide steps that it hopes will aid companies in preparing to make the necessary disclosures. The market bulletin also sets out the Authority’s strategy for supervision and enforcement of the new rules, which could include asking issuers to make corrective action such as conducting enhancements to their disclosures.

Computershare’s view

On the first point, this is truly alarming if regulators are calling out the risks of publishing insider information, albeit inadvertently. And it’s worrying that for all the controls that will be in place, things like this can slip through. This issue has the potential to snowball quickly, and Companies should be ensuring that they have the appropriate checks on all market disclosures, including multimedia in announcements, to ensure that disclosures remain appropriate.

On the second point, we’re seeing a lot of focus on the clarity of disclosures more broadly. As we’ve said in the past, there is a difference between being compliant and being effective. This though looks like “stick” and we must ask whether there is a broad understanding of what “good” look like for D&I disclosures.

HM Treasury and the FCA have issued a joint statement in relation to their review of the criminal market abuse regime.

Criminal sanctions for insider dealing and market manipulation are found within the Criminal Justice Act 1993, whereas civil sanctions are found within UK Market Abuse Regulation. The UK government has committed to reviewing the criminal regime as part of its Economic Crime Plan 2019-22 that they released in July 2019.

According to the statement the review has identified a number of areas, which haven’t been disclosed within the joint statement, where it is believed appropriate to update the criminal market abuse regime and that they will be developed in parallel with the work being done to accept the recommendations of the Fair & Effective Markets Review. The plan is to lay secondary legislation in 2023.

The Treasury and the FCA will also consider amendments to the criminal market abuse regime alongside other reforms to the Market Abuse Regulation which is part of the Future Regulatory Framework, and they’ll seek to produce UK specific legislation.

Computershare’s view

As with everything the devil is in the detail, and until the content of the government’s review is published or they release more information about their plans the true scope of these potential changes will be unknown.

All Issuers can do at the moment is work to ensure they are adhering to the existing requirements of the Market Abuse regime and ensure that they are comfortable that within their own organisation’s risk frameworks and governance processes they are taking account of the potential for a breach to occur resulting in the organisation facing regulatory and/or legislative impacts.

In their 2023 ‘Chief Sustainability Officer Report’ the US recruiting firm Weinreb Group have provided benchmarking around the position of the Chief Sustainability Officer (CSO), which they have found has increased six-fold from 29 CSOs in 2011 to 183 in 2023. The data indicates more than 40 of these appointments were an organisation’s first CSO and 58% are women.

The report has also found that

• On average CSOs have at least 8 direct reports, a figure which has doubled since 2011
• More and more the CSO doesn’t hold other titles within the organisation and that at least 76% of CSOs are part of the senior leadership team.
• It was also identified that most CSOs have regular direct engagement with the boards of their organisation, often a Governance Committee or a dedicated ESG Committee.

The Financial Reporting Council have released their latest insight report from the FRC Lab which looks at the role of Artificial Intelligence (AI) and other emerging technologies in the governance space.

Their report is based on the outcomes of their roundtable held in Manchester with the Centre for the Analysis of Investment Risk and the Centre for Financial Technology. The roundtable identified that existing elements of the Corporate Governance Code and s.172 requirements should be the basis for considering implications of new technologies. However, currently they can present challenges and it must remain the goal to effectively manage an organisation’s risks and opportunities and that boards need to have the requisite knowledge and training on emerging technology.

It was identified that the skills needed in relation to cyber security offer many similarities for boards, as to the types of support and guidance that an organisation may require. Skills in these areas need to be built at all levels of the organisations as the board don’t need to be seen as experts, rather just need to increase their understanding of the topics.

The FRC plans later in the year to consider the publication of case studies and guidance that explore the intersection of AI new technology and governance frameworks.

Computershare’s view

IT security, cyber risk, and AI – there is a lot for boards to get across and risks emerge quickly. So, helping boards to understand the landscape, equipping them with enough knowledge to ask the right questions, and understanding the limits of their oversight and management’s responsibilities are all necessary – but tricky.

We have found this article from Independent Audit to provide some interesting and practical guidance for boards.

The Parker Review have published their Update Report for 2023 looking at the progress made against the targets which were set for improving ethnic diversity on UK boards.

It was originally recommended that FTSE 100 companies should have at least one ethnic minority director on the board by December 2021 and that FTSE 250 companies should have at least one minority director on the board by December 2024.

Within the report it was noted that by December 2022:

• 96% of all FTSE 100 companies have met the target and 18% of all director positions were held by an individual from an ethnic minority;
• Within the FTSE 250 and with two years to go until the deadline, 67% of the 224 companies that responded had at least one ethnic minority director (this equates to 60% of the FTSE 250) and;
• There are a number of companies in each index which had more than one ethnic minority director (49 – FTSE 100 & 28 – FTSE 250)

Being mindful of the fact that the composition and diversity of a board may have limited impact on broader culture of a company, and that there are some significant organisations within the UK who aren’t part of the FTSE index, the Parker Review has set some new targets:

• FTSE 350 companies should set themselves a target for December 2027 for the percentage of senior management that self-identify as being part of an ethnic minority. These targets should be set by December 2023; and
• By December 2027 the top 50 private companies should have at least one director who self-identifies as being from an ethnic minority on their board and that by December 2024 they should also have set themselves a target in relation to their senior management as seen with the FTSE 350.

The definition of top 50 companies is the same that has been used by the FTSE Women Leaders Review. They are seen to be large employers, making real contribution to UK business and the economy and several are household names with significant UK consumer profiles.

The memo is an update from the one produced in January. The new version includes a list of all FTSE 350 companies that sought the now permitted 10%+10% share issuance authority without pre-emptive rights, with details on how much support each resolution received.

Request access by emailing Nicholas Laugier > Business Development Director, Georgeson.

Alex Edmans (London Business School) has published a paper entitled Applying Economics – Not Gut Feel – To ESG.

“Interest in ESG is at an all-time high. However, academic research on ESG is still relatively nascent, which often leads us to apply gut feel on the grounds that ESG is so urgent that we cannot wait for peer-reviewed research. This paper highlights how the insights of mainstream economics can be applied to ESG, once we realize that ESG is no different to other investments that create long-term financial and social value. A large literature on corporate finance studies how to value investments; asset pricing explores how the stock market prices risks; welfare economics investigates externalities; private benefits analyse manager and investor preferences beyond shareholder value; optimal contracting considers how to achieve multiple objectives; and agency theory examines how to ensure that managers pursue shareholder preferences, including non-financial preferences. I identify how conventional thinking on ten key ESG issues is overturned when applying the insights of mainstream economics.”

As issuers head into the peak UK AGM season, we will keep our clients updated on the themes we are seeing related to attendance, activism, meeting format and voting. Our early research shows that:

• For those meetings held or announced within the FTSE 350 and AIM 100, in-person meetings are the preferred format of a meeting (78.8%), followed by in-person meetings that involve other methods of engagement such as webinars) (12.1%), followed by hybrid meetings (6%).
• Where further engagement options are being offered, most issuers are opting for webinars at 85% versus 14% for audio only options.
• The majority of shareholder meetings are starting either at midday or 11am within the borders of London.
• Attendance of corporate representatives are still leading the way at most meetings that have been held so far, outnumbering other forms of voting attendees.
• A majority of shareholders are opting to lodge their proxy instructions through digital channels including CREST and eProxy
• Over 60% of meetings held or announced within the FTSE 350 are opting to permit early submission of questions by their shareholders.