Global | Publication | November 2023
On 22 November 2023, the Department for Business and Trade published the UK government’s response to a consultation which raised certain questions in relation to the Reporting on Payment Practices and Performance Regulations 2017 and the Limited Liability Partnerships (Reporting on Payment Practices and Performance) Regulations 2017 (Regulations).
The government recently carried out a statutory review of the Regulations which concluded that they remain appropriate. There is an ongoing need to ensure greater compliance in terms of prompt payment and to increase awareness of the payment performance of large businesses. Having considered alternatives that may impose less regulation, the review concluded that the Regulations were the appropriate mechanism to address the policy objectives.
Following the review, the government issued a consultation in early 2023, including the specific question as to whether the Regulations should be extended beyond their current expiry date of 6 April 2024. As part of this, the government consulted on other potential amendments and improvements to the Regulations resulting from the views expressed by those who responded to the review. The response to this consultation forms part of the wider payment and cash flow review.
In response to the consultation, the government will take forward the following actions, amending the Regulations such that:
On 16 November 2023, Glass Lewis published its updated UK Voting Policy Guidelines which will apply to shareholder meetings held after January 1, 2024.
Key changes from the 2023 Voting Policy Guidelines include the following:
Director attendance at board and committee meetings
Glass Lewis have clarified that in their assessment of director attendance, they typically recommend voting against the re-election of directors that failed to attend either at least 75% of board meetings, or an aggregate of 75% of board and applicable committee meetings. However, Glass Lewis will continue to typically grant exceptions to directors in their first year of service on a board or when the company discloses mitigating circumstances for a director’s poor attendance record.
Interlocking directorships
Glass Lewis have expanded their policy on interlocking directorships to specify that they consider both public and private companies. Further, Glass Lewis have specified that they evaluate other types of interlocking relationships on a case-by-case basis (such as interlocks with close family members of executives or within group companies) and review multiple board interlocks among non-insiders ((i.e., multiple directors serving on the same boards at other companies) for evidence of a pattern of poor oversight.
Director accountability for climate-related issues
In 2023, Glass Lewis included a new discussion on director accountability for climate related issues. In particular, Glass Lewis believe that clear and comprehensive disclosure regarding climate risks, including how they are being mitigated and overseen, should be provided by those companies whose own GHG emissions represent a financially material risk. Accordingly, for companies with material exposure to climate risk stemming from their own operations, Glass Lewis believe they should provide thorough climate-related disclosures in line with the recommendations of the Task Force on Climate-related Financial Disclosures (TCFD).
Glass Lewis also believe the boards of these companies should have explicit and clearly defined oversight responsibilities for climate-related issues. As such, in instances where they find either of these disclosures to be absent or significantly lacking, they may recommend voting against responsible directors. While this policy was applied to the largest, most significant emitters in 2023, beginning in 2024, Glass Lewis will apply this policy to FTSE 100 companies operating in industries where the Sustainability Accounting Standards Board (SASB) has determined that companies’ GHG emissions represent a financially material risk.
Cyber risk oversight
Glass Lewis have expanded their policy on cyber risk oversight to outline their belief that, where a company has been materially impacted by a cyber-attack, shareholders can reasonably expect periodic updates communicating the company’s ongoing process towards resolving and remediating the impact of the attack. In instances where a company has been materially impacted by a cyber-attack, Glass Lewis may recommend a vote against appropriate directors should they find the board’s oversight, response or disclosures concerning cybersecurity-related issues to be insufficient, or not provided to shareholders.
Executive remuneration at financial institutions
Glass Lewis believes that remuneration structures at financial institutions often require unique consideration due to the heightened potential for shareholder value to be put at risk by poorly designed incentive programmes. As such, they generally expect financial institutions to provide more robust justifications for any deviations from key best practice recommendations.
With the removal of the variable remuneration cap (or bonus cap) in the UK with effect from 31 October 2023, Glass Lewis comment that if financial institutions want to rebalance their remuneration structures, Glass Lewis believe any increases in variable incentive opportunity should be accompanied by an appropriate reduction in fixed pay and a compelling strategic rationale.
Glass Lewis have also clarified certain of their existing policies as follows:
Accounts and reports
Glass Lewis have clarified that, on a case-by-case basis, Glass Lewis may recommend that shareholders vote against proposals to approve or acknowledge a company’s accounts and reports in instances where the auditor did not provide an unqualified opinion on the financial statements. In these circumstances, Glass Lewis will assess the reasoning provided by the statutory auditor as well as any relevant disclosure from the company.
Executive remuneration voting considerations
Within the “Vote on Remuneration Policy”, “Vote on Remuneration Report”, and “Long-Term Incentives — Structure and Duration” sections of these guidelines, Glass Lewis have clarified certain structural elements that they consider to be best practice and specific circumstances which may lead them to recommend against the company’s remuneration policy and/or report.
Executive shareholding requirements
In a new section of these guidelines, Glass Lewis have outlined their belief that companies should generally adopt minimum executive share ownership requirements that should apply for the duration of an executive’s tenure, and for a period of time post-employment.
Remuneration relative to ownership structure
Glass Lewis have expanded this section of their guidelines to outline a number of company practices that may serve to mitigate concerns when a significant equity award is made to an executive that is also a major shareholder. These include the inclusion of challenging targets attached to a diverse set of performance metrics, meaningful disclosure on the company’s engagement with free-float shareholders on the topic, or a policy that the shareholder executive will not participate in voting on the award.
Remuneration relative to peers
In a new section of their guidelines, Glass Lewis have outlined their expectations surrounding setting remuneration levels relative to peers. Further, they have clarified that they welcome companies disclosing the peer group utilised, including the criteria used in the selection process, for pay benchmarking, particularly in cases where companies consider U.S based peers. Further, Glass Lewis have clarified that they generally believe companies should provide supporting disclosure where key elements of their executive pay plan deviate from prevailing market practice, particularly where multiple exchange listings or other company-specific situation lead a company to benchmark its pay-setting across multiple jurisdictions.
Standard listed companies
Glass Lewis have clarified that, for companies listed on the standard segment of the main market of the London Stock Exchange, they generally apply their policies as they pertain to AIM-traded companies. However, in light of the varied market capitalisation and complexity of standard listed companies, Glass Lewis approach this on a case-by-case basis.
On 22 November 2023, the Capital Markets Industry Taskforce (CMIT) published an open letter concerning the UK’s approach to corporate governance following the Autumn Statement 2023. This was published by HM Treasury, with other documents, alongside the Autumn Statement.
The CMIT is comprised of leading organisations from across the financial markets ecosystem to drive forward the development of the UK’s capital markets and to maximise the impact of capital market reforms. The letter follows a policy update from the Financial Reporting Council (FRC) on 7 November 2023 and a remit letter sent to the FRC by the Secretary of State for Business and Trade on 22 November 2023.
Governance and stewardship
The CMIT believes that the governance and stewardship regimes in the UK must adapt to ensure their relevance to the competitiveness of the markets they apply to. It believes that UK listed companies should not be subject to requirements companies listed on other high-quality exchanges are not subject to, without those incremental requirements being justified and it has been considering what an updated set of high-level principles could look like as part of a recalibrated governance and stewardship regime. These should form part of a reset and updated ‘issuer and investor covenant’ which should emphasise collaboration and the presumption of trust between investors and the issuer boards they have appointed, through the application of the governance and stewardship regimes.
In the CMIT’s view, good stewardship should revolve around committed long term shareholdings and consistent and balanced conversations in relation to a company’s strategy, governance and culture and should recognise that shareholders can, and will, legitimately have strongly divergent views. It also believes that engagement with shareholders must include a balanced and constructive dialogue in relation to remuneration policy, with boards needing to be able to make, and justify, decisions on reward as they do on other strategic matters. It believes investors and issuers should agree that UK listed companies should enjoy a level playing field with regard to the remuneration frameworks accepted for listed and private market peers in Europe and the US and that such equivalence should be implemented by investors in terms of setting out their approach and expectations.
In considering remuneration policy, the question of reward quantum should be separated from structure; this is a matter for boards to justify to investors in their own particular circumstances, with benchmarking appropriate to the relevant competitive environment or phase of development being used to help determine that quantum. The aim should be to encourage simple remuneration structures that clearly align the interests of shareholders and management with simple reporting that is easy for investors to digest and less time-consuming for issuers to produce.
New investor and issuer forum
To drive and embed the reset and enhanced issuer and investor covenant, the CMIT believes a new ‘investor and issuer forum’ should be established to facilitate and promulgate more effective ongoing engagement between boards and their shareholders. It should bring together industry leaders from the boards of listed companies and the investment community to identify key challenges and issues so that they can then jointly develop practical solutions.
The multitude of investor groups’ desire for new disclosures and metrics could be discussed there, distilled and implemented. The CMIT note that the Investor Forum have indicated that they would be willing to take on this evolved role but it would need to be to be fully supported by issuers and investors to be effective and to secure enhanced funding to carry out this enhanced role.
Resetting principles
The CMIT set out some suggested revised principles, spanning both issuers and investors, as well as other critical amendments to the existing UK Corporate Governance Code (Code) that they consider are required. These include the following:
Issuers
The Code should support the promotion of a company’s success, as opposed to the prevention of its failure, to create value for all its stakeholders, including shareholders, employees, customers and society at large. Boards should be seen to hold themselves accountable. If a board member does not perform, their departure from the board should not be characterised as a routine retirement. The presumption within the UK’s governance framework should be that a board will meet the highest standards of governance and transparency, but it should be able to deviate from a conventional application of these standards if it concludes that to do so is in the best long-term interests of the company. Where it decides to do so, it should explain why that deviation is important for the promotion of the company’s success. The board should also clearly explain how its chosen strategy discharges its duties to the company and its members. This should include appropriate metrics, as well as the role that its chosen remuneration system plays in supporting and reinforcing that strategy.
Investors
The governance function and governance view within an institutional investor should reflect the stated governance policy position of the fund management function, including in relation to individual issuers. There should be consistency in the approach taken for UK listed companies and international peers. If the approach with regard to UK listed companies differs, it should be made clear why.
The governance and fund management functions within an investor should be fully integrated, with primacy given to the accountable portfolio managers.
Equity-owning investors should discharge their responsibilities according to best practice. This should include committing to interact directly with individual issuers as necessary. Equity-owning investors should engage in meaningful dialogue and should resist engaging in optical measures such as simply voting against a resolution without meaningful discussion or outsourcing decisions in relation to issuers to proxy agencies without reserving their ability to take back voting decisions on sensitive matters.
Approach in the event of significant votes against resolutions
The express stipulation in the Code that, in the event of 20% or more votes being cast against a proposed resolution a company should explain what actions it intends to take to consult shareholders, should be removed and the Investment Association’s (IA’s) Public Register should be discontinued. This is because the 20% threshold is considered arbitrary and distorting and it should not be necessary. If a resolution is proposed as an ordinary or special resolution, as appropriate, sufficient votes being cast to pass that resolution should be all that is required. Alongside this should operate the principle that boards will engage with shareholders as appropriate, privately and, if appropriate in the circumstances, publicly, to understand any significant votes against a particular resolution. Regular and enhanced engagement should minimise the circumstances when unexpected votes against are received by an issuer.
Comply or explain
While the CMIT states that issuers should feel free not to follow a conventional application of the Code if the circumstances justify it, they state that in reality it has become comply or else, given the focus on reporting rather than sustainable value creation. In their view, one option would be to recast the principle as ‘apply or explain’ to make clear that an explanation can be compliant but this would require investors to make it clear that they are much more accepting of nuanced explanations of divergence from a conventional application of the Code, in appropriate cases, than issuers and their advisers appear to believe. This approach also needs to be reflected within the proxy agencies.
Dilution
The dilution provisions contained in the IA’s Principles of Remuneration should be relaxed. They currently provide that the rules of an issuer’s share scheme must provide that commitments to issue new shares or re-issue treasury shares, when aggregated with awards under all of the company’s other schemes, must not exceed 10% of the issued ordinary share capital in any rolling 10-year period. And should not exceed 5% in any rolling 10-year period in relation to executive schemes. These principles were established many years ago and are now outdated. They have a materially limiting effect on the ability of many issuers, particularly fast-growing companies that use shares as a key part of compensation, to reward their people and remain competitive in the war for talent on the global stage. The limits should either be raised materially or be scrapped altogether, with judgement handed back to boards to decide how best to structure their compensation approach as part of the board’s wider strategic approach.
Restricted share awards
Consistent with this, the current provisions in the IA’s Principles of Remuneration that provide that the discount rate for moving from Long Term Incentive Plans to restricted share awards should be at least 50% of the normal grant level should be removed.
(CMIT, Open letter relating to corporate governance reform, 22.11.2023)
Following the enactment of the Economic Crime and Corporate Transparency Act 2023 (ECCTA) in October 2023, the UK Government has proposed in the Criminal Justice Bill (CJB) to extend the scope of corporate liability for senior managers beyond certain economic offences to all UK criminal offences.
Further information is available in our Regulation Tomorrow blog post here.
On 22 November 2023, HM Treasury published both the results of Lord Harrington’s Review into the UK’s approach to attracting foreign direct investment (FDI) and the UK government’s response to the recommendations in the Review.
Background to the Review
In March 2023, the Chancellor and Secretary of State for the Department for Business and Trade asked Lord Harrington to conduct a Review into the UK’s approach to attracting FDI in the face of increasing competition for internationally mobile investment. The Review focused on the use of tools and structures to secure major FDI investments into the five key growth sectors outlined by the Chancellor – Green Industries, Advanced Manufacturing, Life Sciences, Digital Technologies, and Creative Industries.
Review
The Review engaged with over 200 companies, financial institutions, and sovereign wealth funds to identify how the UK Government can build on its strengths and address key barriers to ensure it is the most attractive destination in Europe for inward FDI.
The Review was published on 22 November 2023 at Autumn Statement. The report of the Review is in two parts. Part 1 sets out the context and analysis underpinning the Review’s recommendations: what FDI is, why it matters for the UK, and how the UK is performing relative to other countries. It examines the drivers of greenfield FDI (the most valuable form of inward investment) and sets out the key opportunities for the UK to increase its share of mobile capital given the challenges it faces. Part 2 sets out six recommendations in detail and it explores the main feedback themes the Review heard from business and investors.
UK government’s response to the Review
The response to the external review sets out how the government intends to respond to the Review’s recommendations. In broad terms these are as follows:
Recommendation 1 – Business Investment Strategy: The government should set out a clear Business Investment Strategy by spring 2024. This should build on existing sector visions and plans for the five key growth sectors to communicate government’s approach to investment over the medium term.
The government accepts this recommendation in principle. It will set out its priorities for supporting growth and attracting investment through the Autumn Statement and at the Global Investment Summit, and the new Ministerial Investment Group will drive forward the government’s strategic approach for delivery.
Recommendation 2 – Focusing government from reactive to proactive: Investment should be prioritised across central government with clear accountability distributed through the system. This requires a fundamental shift in the current culture to transform the way government operates.
The government accepts this recommendation in principle. A new Ministerial Investment Group will be established, chaired by the Chancellor of the Exchequer with the Business and Trade Secretary as Deputy Chair. The Group will drive forward the government’s strategic approach to investment and ensure government can move more quickly to secure investment opportunities.
Recommendation 3 – Driving regional growth: Government should build on the success of Metro Mayors and best practice in the devolved administrations to expand its place-based offer to investors.
The government accepts this recommendation in principle and recognises the opportunity to work more closely with local and regional stakeholders, and those in the nations, to improve the UK’s investment offer and commits to exploring the development of a framework for how national and sub-national investment promotion bodies will work together to deliver a more coordinated and effective UK investment promotion offer. It also agrees with the need for central government to work collaboratively with local government and public and private stakeholders to develop ‘investment-ready’ propositions to actively promote to major investors and support investment into strategic sectors and areas that reflect demand such as large manufacturing sites, data centres, and offshore wind infrastructure.
Recommendation 4 – Improving the business environment: The new Investment Committee should work across government to propose further improvements to the UK business environment, informed by the investor feedback provided to the Review.
The investor feedback will be considered by the Ministerial Investment Group.
Recommendation 5 – A globally competitive Office for Investment: Government should build on the success of the Office for Investment (OfI), and ensure it has access to the right tools from across government to compete internationally. It should have a more targeted and proactive approach to investors, a clearly communicated toolkit, and the flexibility to negotiate strategic partnerships to secure the most strategically important investments.
The government accepts this recommendation in principle and will empower the OfI to make rapid, upfront, and internationally competitive pitches to set out the UK’s offer and opportunities to investors. The government is increasing resourcing for the OfI and the Department for Business and Trade teams which provide direct support to investors. This will strengthen the OfI’s deal-making capability, including through the recruitment of additional commercial specialists to unblock barriers faced by strategically important investment projects. The government is also taking steps to improve and clarify its policy offer to investors through several measures announced at the Autumn Statement, which supports the development of an enhanced OfI toolkit.
Recommendation 6 – Strategically targeted incentives: Recognising the success of its existing funds such as the Automotive Transformation Fund and the Aerospace Technology Institute programme, the government should ensure that the OfI has access to a Business Investment Facility that would support it to initiate proactive discussions with potential investors. The Facility should clearly communicate the kind of investment propositions that will attract capital support.
The government accepts the Review’s findings. In addition to supporting Investment Zones, Freeports and strategic manufacturing sectors, the government will strengthen the UK’s financial incentives approach, particularly grants, to help secure major, strategic investment deals.
More broadly, the Department for Business and Trade will work with HM Treasury and other departments to review the suite of UK government financial incentives, their coverage, how they are structured and delivered to investors, with a view to simplifying and improving this landscape to be more business friendly. This work will be completed, with a detailed response brought forward, by spring 2024.
(HM Treasury, Harrington Review of Foreign Direct Investment, 22.11.2023)
(HM Treasury, the Harrington Review of Foreign Direct Investment, 22.11.2023)
Publication
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