United Kingdom | Publication | August 2021
This checklist is intended to help UK-listed companies keep abreast of key developments in the fast-moving areas of corporate governance and narrative reporting.
It sets out our thoughts on some of the main areas of change during the last few months, as well as a list of key developments by area, including links to more detailed summaries of those developments.
A key development in the period covered by this checklist is the publication of the Government’s long-awaited White Paper, “Restoring trust in audit and corporate governance”, which sets out a number of proposed wide-ranging reforms in these areas. The White Paper follows on from the earlier Kingman and Brydon Reviews, and the market study of statutory audit services by the Competition and Markets Authority.
The reforms proposed in the White Paper will impact not just UK listed companies, but may also impact the largest private companies in the UK as a new definition of “public interest entity”, to which most of the new requirements would apply, is being considered. The reforms will also impact the directors of such entities as not only is it intended that the accountability of directors for their company’s internal controls, dividends and capital maintenance be strengthened, but also that the new audit regulator’s powers should be widened so that it has investigative and enforcement powers in relation to any wrongdoing by a director of a public interest entity. We will monitor developments in relation to the White Paper.
It is also worth noting the publication of two consultation papers proposing to extend climate-related disclosure requirements to standard listed issuers, as well as large public companies and large private companies and limited liability partnerships. These follow the introduction of such requirements for commercial companies with a premium listing in the UK from the start of 2021. In both cases, such disclosures would need to be made against the Financial Stability Board’s Taskforce on Climate-related Financial Disclosures (TCFD) framework published in 2017, in line with the current Listing Rule requirements. These proposals are aimed at contributing towards the UK’s intention to become the first G20 country to make TCFD-aligned disclosures mandatory across the economy.
ICSA: 2021 general meetings and the impact of COVID-19 (February 2021): ICSA’s Governance Institute has published a guidance note (worked on with a working group) aimed at helping public companies plan for an AGM or other general meeting in 2021, particularly given that the possibility of holding a physical meeting with shareholder attendance is unpredictable and in any event susceptible to change, possibly at the last minute. The guidance note is divided into three sections as follows: Section 1 – Analysis of legal issues; Section 2 – Good practice recommendations; and Section 3 - Sample wording extracts for the AGM circular. Further details are here.
FRC: Thematic Briefing – The audit of cash flow statements (May 2021): The Financial Reporting Council (FRC) has published a briefing document which highlights the results of the FRC's Constructive Engagement key findings and the steps taken by audit firms to strengthen the audit of cash flow statements. Further details are here.
FRC: FRC issues revised auditing standard for the auditor’s responsibilities relating to fraud (May 2021): The FRC has announced the publication of a revision of its UK auditing standard on the responsibilities of auditors relating to fraud - ISA (UK) 240 (Revised May 2021) - The Auditor's responsibilities Relating to Fraud in an Audit of Financial Statements. The revisions to the standard are designed to provide increased clarity as to the auditor's obligations, addressing the concern raised by Sir Donald Brydon in his review of the quality and effectiveness of audit. The revisions include enhancements to the requirements for the identification and assessment of risk of material misstatement due to fraud and the procedures to respond to those risks. Further details are here.
BEIS: Restoring trust in audit and corporate governance – Consultation on the government’s proposals (March 2021): The Department for Business, Energy and Industrial Strategy (BEIS) has published a White Paper which sets out for consultation wide-ranging reforms which aim to modernise the UK’s audit and corporate governance regime. Many of the proposed reforms in the White Paper stem from recommendations made by three independent reviews into audit and corporate reporting. These comprise the 2018 independent review of the Financial Reporting Council (FRC) led by Sir John Kingman, the 2019 review into the quality and effectiveness of audit led by Sir Donald Brydon, and the market study of statutory audit services led by the Competition and Markets Authority (CMA) in 2019. As a result, the proposed reforms include new measures in relation to directors, auditors and audit firms, shareholders and the audit regulator. Our detailed briefing on the White Paper is here and more information can be found here.
ICAEW: Developing a meaningful Audit and Assurance Policy (March 2021): Following publication of the Government’s White Paper on audit and corporate governance reform, which proposes sweeping changes for auditors and company directors, the ICAEW has published a report setting out a number of recommendations for companies that may be required to produce and publish an Audit and Assurance Policy. Further details are here.
FRC: Operational separation of audit practices (February 2021): The FRC has published principles for operational separation of the audit practices of the ‘Big 4’ audit firms. The FRC asked the firms to submit their implementation plans by October 23, 2020. The FRC has now reviewed these plans and discussed them with the firms individually and the firms can move to the next stage of implementation. As part of this process, the FRC has updated the principles. Further details are here.
ISS: Annual Benchmark Policy Survey and Climate Survey (July 2021): Institutional Shareholder Services Inc. (ISS) has launched its Annual Benchmark Policy Survey, a key component of its annual policy development process. The survey seeks views on a broad range of topics, including the use of non-financial ESG performance metrics in executive compensation. On the same date ISS also launched a separate Climate Survey specifically focused on eliciting feedback on a variety of climate-related questions. Further details are here.
FCA: Enhancing climate-related disclosures by standard listed companies and seeking views on ESG topics in capital markets (June 2021): The Financial Conduct Authority (FCA) has published new proposals on climate-related disclosure rules for listed companies and certain regulated firms. The FCA proposes to extend the application of climate-related disclosure requirements for commercial companies with a UK premium listing to issuers of standard listed equity shares (excluding standard listed investment entities and shell companies), as recommended by the Financial Stability Board’s Taskforce on Climate-related Financial Disclosures (TCFD) in 2017. It also proposes introducing TCFD-aligned disclosure requirements for asset managers, life insurers and FCA-regulated pension providers, with a focus on the information needs of clients and consumers. Further details are here.
FRC: Scenario analysis research project (May 2021): The FRC has announced that, building on its 2020 thematic review on climate change, it has commissioned a project to explore the use of scenario analysis by FTSE 350 companies. The objective is to learn more about the processes through which companies develop their scenario analyses, how these processes shape the outcomes produced and how those outcomes in turn influence companies’ strategic planning and decision making. Further details are here.
Glass Lewis: Say on Climate Votes – Overview (April 2021): Glass Lewis has published a note on its initial observations and considerations when evaluating management and shareholder proposals concerning the adoption of an annual shareholder vote on a company’s climate strategies, or Say on Climate, at 2021 AGMs. Glass Lewis intends to codify its approach in advance of the 2022 proxy season, following investor, corporate, and stakeholder engagements. Further details are here.
AFME: ESG Disclosure Landscape for Banks and Capital Markets in Europe (April 2021): The Association for Financial Markets in Europe (AFME) has launched a report highlighting the need for financial institutions to have access to consistent non-financial reporting from corporates to be able to support the transition to a low-carbon economy. Further details are here.
BEIS: Consultation on mandatory climate-related financial disclosures by publicly quoted companies, large private companies and LLPs (March 2021): BEIS has published a consultation paper setting out proposals to mandate climate-related financial disclosures by publicly quoted companies, large private companies and Limited Liability Partnerships (LLPs). These proposals build on the expectation set out in the Government’s 2019 Green Finance Strategy, that all listed companies and large asset owners should disclose in line with the Task Force on Climate-related Financial Disclosure (TCFD) recommendations by 2022. Our briefing on the consultation paper is here and further details are here.
FRC: Reporting on stakeholders, decisions and Section 172 (July 2021): The FRC’s Financial Reporting Lab has published a report which sets out what investors are looking for when companies report on their stakeholders and on how their perspectives are taken into account when key decisions are made. While the Section 172 statement is seen as a helpful bridge between these two types of information, the report looks at how companies can improve their reporting in these areas to better meet the needs of investors. It also provides examples from current reporting practice that reflect possible helpful ways of addressing these needs. Further details are here.
QCA: The QCA Practical Guide to ESG (April 2021): The Quoted Companies Alliance (QCA) published “The QCA Practical Guide to ESG” which provides practical steps that small and mid-sized quoted companies can take to develop how they examine and disclose their approach to those Environmental, Social and Governance (ESG) issues that matter for them. The Guide aims to outline an approach that is proportionate to the resource constraints of smaller companies, whilst giving investors and stakeholders the information that they need in a digestible manner. Further details are here.
ecoDa: Corporate Governance Guidance and Principles for Unlisted Companies in Europe (April 2021): The European Confederation of Directors Associations (ecoDa) has published an updated version of its Corporate Governance Guidance and Principles for Unlisted Companies, last published in 2010 (Guidance). Further details are here.
FRC: Reporting against Wates Principles for large private companies (February 2021): The FRC has published an article by Sir James Wates, Chairman of the Coalition Group that prepared the Wates Corporate Governance Principles for large private companies in December 2018, following an assessment of reporting against the Wates Principles. The article names private companies that have provided good explanations of how their governance arrangements work, examples of self-improvement in light of application of the Wates Principles, explanations by wholly-owned subsidiaries of how the Wates Principles apply to them, and illustrative examples of issues the board is grappling with. Further details are here.
FRC: UK Electronic Reporting - FRC Lab Survey (May 2021): The FRC has announced that its Financial Reporting Lab is conducting a survey to understand the readiness of companies and providers for the publication of annual reports in XHTML format for 2021, as well as the experiences of those who have already trailed or published XHTML annual reports. Further details are here.
FRC: Thematic Review – Interim reporting (May 2021): The FRC has published the results of a thematic review of interim reporting that it has conducted to highlight areas of good practice the FRC have observed in recently published interim reports and to make suggestions for improved reporting to meet the needs of stakeholders. Further details are here.
FRC: New approach to reporting corporate reporting reviews announced (March 2021): The FRC has, for the first time, published summaries of its corporate reporting reviews. These are conducted to assess whether company reports and accounts comply with relevant accounting and reporting requirements. This increased transparency results from a recommendation of Sir John Kingman’s Independent Review of the FRC that such reviews should be made publicly available but currently summaries can only be published with the consent of individual companies. As part of the recent consultation, Restoring trust in audit and corporate governance, the Government is consulting on proposals to allow the regulator to publish summaries without the consent of companies, once sufficient safeguards around confidential information are in place. Further details are here.
Financial Reporting Lab Report – Virtual and Augmented Reality in corporate reporting (February 2021): The FRC’s Financial Reporting Lab (the Lab) has published a report which looks at the potential use of two forms of technology, virtual and augmented reality (VR and AR), in corporate reporting as part of its investigation and reports into the digital future of corporate reporting. The timeframe for use of VR and AR in reporting is more medium term - five to ten years - because first VR and AR need to overcome several regulatory, cost and user challenges before it becomes a key mechanism for company reporting. The Lab plans to consolidate all reports published over the last four years that have considered different technologies for use in corporate reporting and produce a single roadmap of the future, with the aim of a final report being released later in 2021. Further details are here.
FRC: Draft Strategy and Plan and Budget 2021/22 (February 2021): The FRC has published for consultation its draft 2021/22 Strategy, Plan and Budget. It states that this reflects its continued commitment to serve the public interest whilst also moving at pace towards building the enhanced capacity and capability necessary to transform into the new Audit, Reporting and Governance Authority (ARGA). The FRC has assumed a further two-year transition period to the creation of ARGA in 2023 in proposing this Strategy and Plan and Budget. Further details are here.
IIRC: Updated International IR Framework (January 2021): The International Integrated Reporting Council (IIRC) has published an updated version of its International IR Framework, last published in 2013. This latest version applies to reporting periods commencing January 1, 2022. Further details are here.
FRC: Board diversity and effectiveness in FTSE 350 companies (July 2021): The FRC has published the results of research it has conducted with the London Business School Leadership Institute and SQW into both the implications of increased gender and ethnic diversity on FTSE 350 boards (in light of the Hampton-Alexander Review and the Parker Review) and how the resulting changes can be accelerated. Further details are here.
FCA: Consultation - Diversity and inclusion on company boards and executive committees (July 2021): The FCA has published a consultation paper (CP21/24) setting out proposed changes to the Listing Rules and Disclosure Guidance and Transparency Rules in relation to diversity and inclusion on boards and executive committees. The proposals seek to build on progress achieved under existing initiatives to improve diversity on the boards of the largest UK companies (such as the Hampton Alexander Review and the Parker Review and similar initiatives in international markets). They also follow a discussion paper (DP21/1) published jointly by the FCA, Prudential Regulatory Authority and the Bank of England earlier in July 2021 seeking views on regulatory plans to improve diversity and inclusion in the financial services sector. Further details are here.
IBE: The Ethics of Diversity (April 2021): The Institute of Board Ethics (IBE) has published a board briefing summarising the key conclusions and recommendations of a report it published on December 17, 2020, The Ethics of Diversity, on ethics and the diversity of boards. The report is intended to provide a practical guide to why diversity matters for companies, boards and their stakeholders and it notes that while much progress has been made, especially around gender, the push for diversity has not yet delivered on its full potential. Further details are here.
Parker Review: Survey of ethnic diversity of FTSE 100 companies (March 2021): The Parker Review Committee has published the results of a joint survey undertaken with the Department for Business, Energy and Industrial Strategy (BEIS) in November 2020 into the ethnic diversity of FTSE 100 boards. Relying on the voluntary submission of data, the survey results show that significant progress has been made, with 74 FTSE 100 companies having ethnic minority representation on their company boards as of November 2, 2020 (the official feedback cut-off date) compared with 52 in January 2020. Further details are here.
HM Treasury: Women in Finance Charter – Annual Review 2020 (March 2021): HM Treasury has published the latest annual review monitoring the progress of signatories to the Women in Finance Charter launched in 2016 as a result of recommendations resulting from a review of women in senior management across the UK financial services sector led by Dame Jayne-Anne Gadhia. Further details are here.
Hampton-Alexander Review: Improving gender balance – 5 year summary report (February 2021): The Hampton-Alexander Review has published its final report on progress made by FTSE 350 companies in reaching the voluntary targets set for women on boards and in senior leadership positions. The report reveals that the number of women on FTSE 350 boards has risen by 50 per cent in five years, and that all FTSE 350 companies reached the target of women making up at least 33 per cent of boards by the end of 2020. However progress in relation to the number of women appointed to executive committees and their direct reports still needs to be made, particularly among the FTSE 250. Further information is here.
ISS: Annual Benchmark Policy Survey and Climate Survey (July 2021): Institutional Shareholder Services Inc. (ISS) has launched its Annual Benchmark Policy Survey, a key component of its annual policy development process. The survey seeks views on a broad range of topics, including the use of non-financial ESG performance metrics in executive compensation. On the same date ISS also launched a separate Climate Survey specifically focused on eliciting feedback on a variety of climate-related questions. Further details are here.
FRC: Statement of Intent on Environmental, Social and Governance challenges (July 2021): The FRC has published a Statement of Intent which sets out areas in which there are issues with environmental, social and governance (ESG) information if companies are to report in a way that meets the demands of stakeholders, looks at how to address some of these demands and provides information about the FRC’s planned activities in this area. Further information is here.
ISS: Annual Benchmark Policy Survey and Climate Survey (July 2021): Institutional Shareholder Services Inc. (ISS) has launched its Annual Benchmark Policy Survey, a key component of its annual policy development process. The survey seeks views on a broad range of topics, including the use of non-financial ESG performance metrics in executive compensation, racial equity audits, and the continued use of virtual-only shareholder meetings. Further details are here.
PLSA: Stewardship and Voting Guidelines 2021 (March 2021): The Pensions and Lifetime Savings Association (PLSA) has published its Stewardship and Voting Guidelines 2021 to provide practical guidance for pension scheme trustees when considering how to exercise their votes at the annual general meetings of investee companies. The PLSA notes that it has reviewed its 2020 Guidelines and focused on ensuring they remain relevant amid the challenges posed by Covid-19 and a fast moving regulatory environment. For a summary of key changes from the 2020 Guidelines, see here.
PIRC: Shareholder Voting Guidelines 2021 (March 2021): PIRC has published its updated Shareholder Voting Guidelines 2021 which set out what PIRC considers constitutes good corporate governance best practice. For a summary of changes from PIRC’s 2020 Shareholder Voting Guidelines see here.
Investment Association: Good Stewardship Guide 2021 (February 2021): The Investment Association has published a guide which provides an overview of some of the key themes which are common to all UK listed companies and on which shareholders will be focusing in 2021. This reflects issues set out in the Investment Association’s Shareholder Priorities for 2021 published in January 2021. Shareholder priorities this year include climate change, diversity, stakeholder engagement and employee voice, transparency on audit quality and executive pay. Further details are here.
Home Office: Modern slavery statement online registry launched (March 2021): The Home Office has launched an online registry for modern slavery statements. The aim is to improve transparency and accessibility by bringing modern slavery statements together in one place and making it easier for users to find and compare them. Further details are here.
FRC: Workforce engagement and the UK Corporate Governance Code – A review of corporate reporting and practice (May 2021): The FRC has published the results of research into how FTSE 350 companies are meeting the requirements in the 2018 Corporate Governance Code for boards to ensure effective workforce engagement and report on that engagement. The report notes that many FTSE 350 annual reports still appear to downplay the importance of workforce engagement, in many cases relegating it to boilerplate language in a formulaic table of stakeholders. However, it also noted that there is a great deal of innovation and fresh thinking in this area, as exemplified by the pockets of good practice referred to in the report. The report explores the approaches companies have taken to providing a workforce voice in the boardroom, why different approaches have been chosen, what these changes have meant in practice and how effective they have been from both a management and workforce perspective. Further details are here.
FRC: Changes in remuneration reporting following the UK Corporate Governance Code 2018 (May 2021): The FRC has published the results of research conducted by the FRC and the University of Portsmouth which assessed a sample of FTSE 350 companies to determine the extent to which they have applied requirements on directors’ remuneration set out in the UK Corporate Governance Code. The FRC comment that while the Code requirements on directors’ remuneration have had a positive impact on reporting, many company reports still lack detail and outcomes and include boilerplate disclosures. Further details are here.
Glass Lewis: UK Corporate Governance Code – 2020 Compliance Review (March 2021): Glass Lewis has published a paper which reviews the most common provisions of non-compliance in relation to the 2018 UK Corporate Governance Code among the FTSE 350 and smaller Main Market companies, respectively. Further details are here.
FRC: Improving the quality of ‘comply or explain’ reporting (February 2021): The FRC has published a document to help companies improve transparency when reporting against the 2018 UK Corporate Governance Code (Code) and advise them on how to achieve good quality explanations when departing from the Code. This follows publication in November 2020 of the FRC’s Review of Corporate Governance Reporting in which the FRC stated that it found that ‘tick-box compliance’ continues to be preferred over high quality reporting of good governance practice. Further details are here.
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