Essential Corporate News: Week ending February 7, 2020

BEIS: Update report from The Parker Review – Ethnic diversity enriching business leadership

On February 5, 2020, an update report was published by The Parker Review Committee. This follows its first report at the end of 2017 which made a number of recommendations, including that FTSE 100 companies should have at least one non-white director by 2021, with FTSE 250 companies having at least one non-white director by 2024. Recommendations were also made in relation to developing the internal pipeline and enhanced transparency around diversity policies and reporting. The update report looks at progress in meeting those recommendations and it includes data on the current profile of FTSE 350 boards and other information.

Key findings in the update report include the fact that of all FTSE 350 directors where the ethnicity of the individuals is known, only 7.5 per cent are of colour. In addition, 37 per cent of FTSE 100 companies and 69 per cent of FTSE 250 companies did not meet the target of having at least one director of colour on their boards. The update report notes that there is a concentration of directors of colour in a small number of companies and, across the FTSE 350, there are only 15 directors of colour (among those who responded to the survey conducted by The Parker Committee) who occupy the position of chair or CEO.

Further recommendations are included in relation to measuring board level diversity and to building a pipeline for ethnically diverse board candidates. As far as measurement and transparency are concerned, companies are urged to report fully on their ethnic diversity policies and activities as part of their Section 172 reporting requirements and in complying with Principles J and L of the 2018 UK Corporate Governance Code. It is also recommended that executive recruiters, in terms of building a pipeline, should be much more proactive in marketing highly talented ethnic minority candidates.

The update report includes “companies’ success stories” and a “directors’ resource toolkit,” developed by Ernst & Young, which sets out key questions companies should ask themselves to drive a top down strategic approach, which looks at broader aspects of an inclusive culture.

At the same time, the Financial Reporting Council (FRC) issued a press release stating that most UK companies’ approach to board ethnic diversity is unsatisfactory. They note that over half of FTSE 250 companies fail to mention ethnicity in their diversity policy and most of the FTSE 350 do not set measurable ethnicity targets. The FRC notes that it expects to see better quality commentary on all aspects of diversity in future reports.

(BEIS: Update report from The Parker Review, Ethnic Diversity Enriching Business Leadership, 05.02.20)

(FRC, Most UK companies’ approach to board ethnic diversity is unsatisfactory, 05.02.20)

Investment Association: Shareholder priorities for 2020 – Supporting long-term value in UK listed companies

On February 5, 2020, the Investment Association published a document setting out the expectations of its members on four areas that its members believe can be critical drivers of long-term value. These are responding to climate change, audit quality, stakeholder engagement and diversity. The document outlines why investors consider these four areas to be important areas of focus for companies and it also sets out their expectations for change in 2020. It notes that for companies with year-ends on or after December 31, 2019, IVIS, the Investment Association’s Corporate Governance research service, will assess the progress made and highlight where companies are not meeting investor expectations.

Comments on the four areas covered by the document include the following:

• Responding to climate change – IVIS is to introduce a new section to its ESG report, highlighting to investors whether the company has made climate change-related disclosures. The Investment Association believes that all listed companies should disclose in line with the Taskforce for Climate-related Financial Disclosures (TCFD) recommendations by 2022. The new section in the ESG report will be informed by four questions aligned with TCFD, including whether the company describes its governance of climate-related risks and opportunities. The Investment Association notes that companies are still trying to fully comprehend the impact of climate change on their long-term viability and how best to communicate their response to investors. As a result, IVIS will not be introducing any colour top for these disclosures in 2020 but this will be kept under review for future years.
• Audit quality – IVIS is to ask two revised questions of companies to encourage a better focus on audit quality and company disclosure. It will be looking at whether the audit committee has demonstrated how it assessed the quality of the audit, including how the auditor demonstrated professional scepticism and challenged management’s assumptions where necessary. It will also look at whether the audit committee has demonstrated how it challenged management’s judgements and what has happened as a result.
• Stakeholder engagement and employee voice – Investors expect companies to identify and engage the key stakeholders and factor their interests into the board-decision making process. IVIS is to introduce two new questions to its report. The first is whether the board has identified the company’s material stakeholders in its engagement with them in the year under review? The second is which of the four options for workforce engagement outlined in the 2018 UK Corporate Governance Code have been adopted by the company?
• Diversity – So far as gender diversity is concerned, IVIS is to red top any FTSE 350 company with women representing 20 per cent or less of the board, where there are one or less women on the board (unless the one-third target is achieved, i.e. a board of three directors) or where women represent 20 per cent or less of the executive committees and their direct reports. So far as FTSE small cap companies are concerned, IVIS will amber top any company with women representing 25 per cent or less of the board, where there are one or less women on the board (unless the one-third target is achieved) or where women represent 25 per cent or less of the executive committees and their direct reports. So far as ethnic diversity is concerned, IVIS will ask a question of all companies, namely whether the company has disclosed the percentage of its board that comes from an ethnic minority background.

(Investment Association, Shareholder priorities for 2020 – supporting long-term value in UK listed companies, 01.20)

FRC: Draft Plan and Budget 2020/21

On February 5, 2020, the Financial Reporting Council (FRC) published its draft Strategy 2020 for consultation. This sets out the FRC’s initial response to the report of Sir John Kingman but it notes that this strategy will be replaced in 2021 with a longer-term strategy once the Government’s final positions on several key public policy issues are finalised.

The FRC proposes to move forward with a revised business model that will be reorganised into four divisions. These are Regulatory Standards and Codes, Supervision, Enforcement and Corporate Services. Priorities for each of these divisions for 2020 are set out in the consultation document.

The consultation ends on February 28, 2020.

(FRC, Draft Plan and Budget 2020/21, 05.02.20)

(FRC, FRC Plan for greater regulatory oversight, 05.02.20)

European Commission: Possible revision of Non-Financial Reporting Directive

On January 30, 2020, the European Commission published a consultation document relating to possible revision of the Non-Financial Reporting Directive (2014/95/EU). This requires certain companies to report information regarding the environment, social and employee issues, human rights, and bribery and corruption, on an annual basis and it applies to large listed companies, banks and insurance companies with more than 500 employees.

The consultation document notes that there is inadequate publicly available information about how non-financial issues and sustainability issues in particular impact companies and about how companies themselves impact society and the environment. For example, reported non-financial information is not sufficiently comparable or reliable and while companies do not report all non-financial information that users think is necessary, many companies report information that users do not think is relevant. In addition, companies incur unnecessary and avoidable costs related to reporting non-financial information. The consultation document also notes that the reporting requirements in the Non-Financial Reporting Directive are not detailed, are difficult to enforce, leave a lot of discretion to reporting companies and do not apply to some companies from which users say they need information. As a result, the objectives of the consultation are to ensure that investors and others have access to adequate non-financial information from companies and to reduce unnecessary burdens on business related to non-financial reporting.

The European Commission has identified three policy options on which it seeks views:

• Continue the current approach of non-binding guidelines to assist companies when reporting in line with the Non-Financial Reporting Directive - Non-binding guidelines were published by the European Commission in 2017 to help companies and in June 2019 the European Commission published additional guidelines on how to reporting climate-related information. The 2017 guidelines could be revised and/or additional guidelines on particular themes issued.
• Explore the use of standards – For example, the EU could endorse an existing or possible future standard on non-financial reporting which would remain voluntary for companies to use if they wish to.
• Revise and strengthen the provisions of the Non-Financial Reporting Directive – For example, specifying in more detail what non-financial information companies should report and requiring some or all companies under the scope of the legislation to use a non-reporting standard.

Responses are requested by February 27, 2020. Feedback will be summarised in a synopsis report along with the European Commission’s response. The European Commission proposes to organise a further online public consultation in the first quarter of 2020.

(European Commission, Inception Impact Assessment, 30.01.20)

(European Commission, Proposal for revision of Non-Financial Reporting Directive, 30.01.20)

FCA: Handbook Notice No 73

On January 31, 2020, the Financial Conduct Authority (FCA) published Handbook Notice No 73 which covers, among other things, the impact of the European Union (Withdrawal Agreement) Act 2020 (Withdrawal Act) on the FCA Handbook rules and Binding Technical Standards (BTS).

The FCA notes that during the implementation period to 11pm on December 31, 2020, EU law will continue to apply in and to the UK. As a result, the Withdrawal Act automatically defers the commencement of amendments that have already been made to FCA Handbook rules and BTS in connection with the UK’s exit from the EU from exit day (11pm on January 31, 2020) to 11pm on December 31, 2020 (IP completion day). To the extent that the Withdrawal Act does not defer the commencement of the exit instruments the FCA made in 2019, or certain provisions within them, such as in relation to guidance, the FCA has now made a further Instrument, “Exiting the European Union: Implementation Period (Guidance) Instrument 2020” that does this. It introduces a new chapter GEN 2A to the General Provisions in the FCA Handbook. This states that during the implementation period, the entire FCA Handbook and other documents issued by the FCA should be read in light of section 1B of the Withdrawal Act. Section 1B of the Withdrawal Act makes cross-cutting provisions to ensure that UK legislation gives effect to the implementation period at Part 4 of the Withdrawal Agreement.

The FCA has also published a further Instrument, “Exiting the European Union: Deferral of Commencement and Miscellaneous Fees Instrument 2020”, which defers until the end of the implementation period the commencement of Handbook guidance.

The FCA notes in the Handbook Notice that it has not yet amended all references to “exit day” in the annexes of the exit Instruments it made in 2019, or certain provisions within them, but it plans to address this later in 2020.

(FCA, Handbook Notice No 73, 31.01.20)

(Exiting the European Union: Implementation Period (Guidance) Instrument 2020)

(Exiting the European Union: Deferral of Commencement and Miscellaneous Fees Instrument 2020)

CMA: Guidance on the functions of the CMA after the UK’s exit from the EU

On January 28, 2020 the Competition and Markets Authority (CMA) published a guidance document to explain how the UK’s exit from the EU affects its powers and processes for competition law enforcement, merger control and consumer protection law enforcement during and after the transition period until the end of December 2020, following the UK’s departure from the EU on January 31, 2020.

The guidance also explains the treatment of “live” mergers and “live” competition law cases which are those cases that are being reviewed by the European Commission or the CMA during and at the end of the transition period.

The press release accompanying the guidance notes that at the end of the transition period, on January 1, 2021, the CMA is expected to take on responsibility for larger and more complex merger, cartel and competition enforcement cases that were previously reserved to the European Commission. It also notes that it is for the UK Government to decide how any new UK subsidy control or state aid rules will operate in the future, including whether the CMA has a role to play in a new regime.

(CMA: UK exit from the EU: Guidance on the functions of the CMA under the Withdrawal Agreement, 28.01.20)

(CMA: UK exit from the EU: Guidance on the functions of the CMA under the Withdrawal Agreement – Explanatory Note, 28.01.20)

(The UK’s withdrawal from the EU – the CMA’s role post-Brexit, 28.01.20)

European Commission: 2020 Work Programme

On January 29, 2020 the European Commission published the Work Programme that it has adopted for 2020. This sets out six policy objectives and a total of 43 new initiatives that relate to those policy objectives.

The policy objectives are as follows:

• European Green Deal – This includes a review of the Non-Financial Reporting Directive
• Europe fit for the digital age – This includes a review of SME strategy as part of a new industrial strategy for Europe
• An economy that works for people – This includes an action plan on the Capital Markets Union
• A stronger Europe in the world
• Promoting our European way of life
• New push for European democracy

The European Commission has also set out the 34 proposals currently awaiting decision by the European Parliament and the Council that it is proposing to withdraw and repeal, together with a list of proposals for regulatory simplification.

(European Commission, 2020 Work Programme, 29.01.20)