Essential Corporate News – Week ending April 14, 2023

Home Office: New corporate offence of failure to prevent fraud being introduced

The UK Government intends to introduce a new "failure to prevent fraud" offence as an amendment to its Economic Crime and Corporate Transparency Bill. On April 11, 2023, the Home Office published a Fact sheet and tabled an amendment to introduce the failure to prevent fraud offence, which is supported by the Serious Fraud Office and the Crown Prosecution Service. The new offence is likely to come into force by the end of 2024 and will form part of broader reforms of UK corporate criminal liability.

Coupled with the renewed focus of the Serious Fraud Office, Financial Conduct Authority and other authorities on the prevention of fraud, this will significantly shift the landscape for organisations carrying on a business in the UK, in a similar way to the impact of the UK Bribery Act more than a decade ago. In particular, it will shift the focus from organisations as victims of fraud (inward fraud) to make it easier for organisations to be prosecuted for fraud committed by employees or third parties that the organisation benefits from (outward fraud). It will also require many organisations to make significant changes to fraud compliance programmes in order to prevent a wide range of fraud offences.

For further information about this new offence, see our briefing Proposed UK failure to prevent fraud offence: What do you need to do now?

PIRC: Shareholder Voting Guidelines 2023

PIRC has published the latest issue of its UK Shareholder Voting Guidelines. These set out voting recommendations for its clients and PIRC applies these to listed companies (UK and overseas) and investment companies (with modifications). 

Key changes from the 2022 Voting Guidelines include the following:

• Voting on election of auditors – In this section, PIRC refers to a 2020 consultation by the International Auditing and Assurance Standards Board (IAASB) “Fraud and Going Concern” and states that this refers to the “expectations gap” in the sense that the public expect more of auditors than is expected of them. PIRC believes that the IAASB model of auditing is based on auditors certifying information that is “useful to users” but that that construct side-steps the crucial duties auditors have for the benefit of the company itself. In PIRC’s view that model fuels an unwarranted expectations gap and, if audits are limited by the standards, misdirect the focus of audits to being “useful for users”, a delivery gap because the legal standard and duty is broader than the standards themselves. As a result, PIRC reports that it has asked the IAASB to reissue its consultation and has asked the UK’s largest accounting firms to confirm that the concept of an ‘expectations gap’ does not limit the scope of their work. PIRC has also looked at the responses of those firms to the earlier IAASB consultation to see if they refute or encourage the “expectations gap” concept. In light of this, and other public statements, PIRC states that it cannot support the election or re-election of PwC, KPMG, EY or Grant Thornton as auditor, but will support Deloitte, BDO and Mazars.
• Maintenance of capital – In this section PIRC notes that different industries have very different share price, profit, and capital ratios and it sets out a table comparing the shareowners’ funds (capital and reserves) position for a large listed pharmaceutical company to that of a bank.  In the example, 78.0% of the market value (share price) of the bank is supported by the realisation of the existing balance sheet and in the case of the pharmaceutical company, 9.7% of the share price (market value) is supported by the realisation of the existing balance sheet.
• Voting turnout - Starting from the 2023 proxy season, PIRC will include voting turnouts for companies included in its governance plus service, including investment trusts. It notes that low voting turnout is a potential governance concern as it magnifies the impact from fewer shareholders on voting matters.
• Investment trusts and performance-related fees – PIRC views the impact of management fees and performance related fees as putting the interests of the fund manager in conflict with the interests of the company and its shareholders. It considers this particularly evident where a client services director of the fund manager has attended all board meetings and it is reported that the board asked the fund manager’s representative to comment and engage on matters that relate to matters for the board. While PIRC understands why the fund management representative who manages the money might need to attend some parts of some meetings, it is concerned that where a representative of the fund manager, who does not manage the money, attends all board meetings and answers questions that are matters for the board, then the board may not be run by the chair, but rather by the fund management company itself. One issue is that fund manager fees are a cost factor to be considered before recommending buybacks, and the fund manager should not be advising boards on a matter relating to their fees. PIRC may recommend opposition to the chair’s re-election in those circumstances. 
• Investment trusts and share buy back authorities - PIRC expects a fully independent board of an investment company to assess the effect of the costs and performance in deciding whether to seek authority to buy back shares and to execute buybacks and to negotiate, rather than to take instructions, on buyback resolutions and whether to seek and execute them. It is concerned that otherwise, the buybacks may be dealing with the symptoms not the cause, due to costs being too high, and/or fund management underperformance. For example, PIRC notes that the measure under the term of “Ongoing Charges Figure” (OCF) is misleading as it does not include all ongoing charges. From the 2023 AGM season, PIRC will start collecting total expected costs  information, as set out in “Key Information Documents” (KID). PIRC also expects to see the cost ratio from the KID included in the annual report and accounts alongside any reference to the OCF. From the 2023 AGM season, if that number is not disclosed PIRC will recommend voting against the report and accounts and the Chair.
• Reporting on ESG issues – PIRC sets out its approach to “Say on climate” resolutions which will include reviewing how transition plans put to the vote illustrate that those companies are aiming to be leaders in decarbonisation strategies, identify credible actions for implementing realistic short- and medium-term targets for aligning with a 1.5 degree scenario, and whether the climate governance at the company allows the people in leading roles to understand the commitments that are needed at company level to mitigate and adapt. PIRC sets out what it will look for, including whether the Chair has responsibility for the decarbonisation strategy and whether at least one director has decarbonisation skills.
• Managing climate risk at major emitters – For the first time, Section 8 of the Voting Guidelines, setting out reporting on ESG requirements, includes a section with a specific focus and additional requirements on companies included within the CA100+ investor initiative (ie high emitting companies). PIRC expects these companies to have made a commitment to have net zero GHG emissions by 2050 at the latest (covering Scope 1, 2 and 3 emissions), and to have set targets (1.5°C aligned and covering Scope 1, 2 and 3 emissions) for short-term (up to 2025) GHG reductions, medium-term (2026-2035) GHG reductions and long-term (2036-2050) GHG reductions. From Spring 2023, failure to meet one of these four indicators will result, where there is a resolution on the agenda, in a vote against the Chair, with voting recommendations escalating depending on whether a company has a net zero commitment and a short-term target(s). For those companies without a net zero commitment and no 1.5 degree aligned short, medium or long-term targets, PIRC will recommend voting against all directors proposed for election at the AGM and against the report and accounts. In those markets where the financial statements are not on the agenda of an AGM, opposition will be recommended to the election of board members. 

PIRC’s Shareholder Voting Guidelines 2023 are not freely available but can be purchased from PIRC.