Essential Corporate News – Week ending November 11, 2022

FRC: PEG issues Statement of Principles following Secondary Capital Raising Review

On November 4, 2022 the Pre-emption Group (PEG) published an updated Statement of Principles and template resolutions. These replace the previous version of the PEG Principles and associated template resolutions and reflect recommendations made in the report (Report) published by the UK Secondary Capital Raising Review in July 2022. 

In its press release PEG notes that it is committed to implementing the Report’s recommendations in full, is working to establish the governance and membership proposed and will make a further announcement when this is complete. 

For more details, please see our briefing New PEG pre-emption guidance: Consequences for listed issuers.

(FRC: PEG: Disapplying pre-emption rights – A statement of principles, 04.11.2022) 

(FRC: PEG: Template resolutions for the disapplication of pre-emption rights complying with the Pre-Emption Group’s Statement of Principles, 04.11.2022)

(FRC: PEG issues Statement of Principles following Secondary Capital Raising Review – Press Release, 04.11.2022)

FRC: Consultation on Audit Committee Standard

On November 8, 2022 the Financial Reporting Council (FRC) launched a consultation (Consultation) on its draft proposal for a minimum standard for audit committees (Standard) intended to increase performance across audit committees in the FTSE 350, by setting minimum standards for both the appointment and oversight of auditors.

The Consultation will close on February 8, 2023 and the intention is for the Standard to be available to audit committees on a voluntary basis by the end of 2023 and to follow it on a comply or explain basis, ahead of the planned legislation that will make it mandatory.

The FRC stresses that the majority of the text in the Standard has been taken from existing FRC publications (including the UK Corporate Governance Code, Guidance on Audit Committees and Audit Tenders: Notes on Best Practice) and that new text included is primarily to reflect the Government’s focus on diversity in the audit market. It also emphasises that audit committees have a wide and evolving suite of responsibilities detailed in the UK Corporate Governance Code and associated guidance and that the Standard is not intended to replace this material, which audit committees should continue to follow on a comply or explain basis. 

The Standard will be applicable to all UK incorporated, premium listed companies on the London Stock Exchange within the FTSE 350 and highlights only the responsibilities of the audit committee that relate to the external audit. It focuses on:

• The appointment of the auditor and the tendering process associated with that appointment.
• The ongoing oversight of the audit and the auditor.

• Reporting on the work the audit committee has done in respect of the audit and on compliance with the Standard.

The FRC notes that there may be updates to the content of the Standard in the future as the Government’s plans for reform and changes to legislation progress.

(FRC: Consultation document – Audit Committee Standard, 08.11.2022)

(FRC: Draft Minimum Standard for Audit Committees, 08.11.2022)

(FRC: FRC launches consultation on audit committees standard - press release, 08.11.2022)

(FRC: FRC Podcast Episode – Audit Committee Minimum Standard, 08.11.2022)

The Investment Association: Principles of Remuneration 2023 and Letter to Remuneration Committee Chairs

Key changes to the Principles of Remuneration

On November 9, 2022, the Investment Association (IA) published its annual Principles of Remuneration (the Principles) setting out its members' expectations in relation to executive pay for 2023. 

The IA has not made any significant changes to the Principles in relation to executive directors' pay. 

In relation to non-executive directors (NEDs), the Principles have been updated to reflect investor support for NEDs to be paid fees that reflect the time commitment, complexity and skillset required and the expectations of the board and shareholders.

Areas of focus for the next AGM season

On November 9, 2022, the IA also published a Letter to the remuneration committee chairs of FTSE 350 companies which highlights current issues of concern for investors that should be taken into consideration by committees when deciding on 2022 outcomes and setting their remuneration approach for 2023. The list of issues comprises the following:

• Cost of living, inflation and the stakeholder experience – given the current economic environment, IA members consider that remuneration committees will need to balance carefully the need to incentivise executive performance when judging 2022 remuneration outcomes and setting remuneration for 2023 against the impact of the cost living crisis. Although the IA previously considered that salary increases for executive directors should, in normal circumstances, be limited to the level of inflation or the salary increases given to all employees, the IA is now calling for additional restraint in awarding inflationary salary increases to executive directors and encourages remuneration committees to consider increases (if needed at all) below the rate given to all employees. All salary increases must be justified within the wider stakeholder context for the company. The IA expects that a majority of companies will seek shareholder approval for their Remuneration Policy in 2023 and also expects companies to show restraint on increases in variable pay. The general economic uncertainty will also impact on the approach committees take to performance outcomes and setting performance targets. Wider ranges and discretion may be necessary to ensure that the appropriate outcomes are achieved, and the IA encourages committees to clearly disclose the issues and the different performance drivers that they have considered when judging the overall performance achieved.
• 2020 long term incentive grants and windfall gains - the IA notes that during 2023, many remuneration committees will make vesting decisions regarding LTIP grants awarded to executives in 2020. These 2020 grants were made in the midst of the pandemic following significant share price falls, so a greater number of shares were granted compared to previous years. To ensure executives do not benefit from substantially lower share prices at the time grants were made, committees should clearly explain to shareholders how they have considered the impact of potential windfall gains when determining vesting outcomes. The remuneration report should explain the reasons for any reduction in the number of shares vested or conversely the rationale behind a decision not to adjust for windfall gains.
• ESG metrics in executive remuneration - the IA highlights an increasing trend for companies to incorporate ESG performance metrics into variable executive pay, particularly those that have made net zero commitments or operate in sectors with material ESG risks. The IA recognises that many companies are still considering how to reflect this element of corporate strategy into their remuneration structures. It considers that companies who have yet to incorporate ESG metrics into variable pay should clearly articulate their current approach to doing so and how this will evolve in future years. The IA expect ESG metrics to be linked to company strategy, quantifiable and avoid unnecessary complexity. The IA notes that investors expect companies to explain how progress against the ESG metrics is measured and for performance against these goals to be disclosed.
• Investor approach to pensions in 2023 - as set out previously, IA members consider that pension contributions for executive directors should be aligned to those available to the majority of the company’s workforce by the end of 2022. In 2023, IVIS will red top any remuneration policy or report where executive pension contributions are not aligned to the majority of the workforce.

(Investment Association: Principles of Remuneration for 2023, 09.11.2022)

(Investment Association: Letter to the Remuneration Committee Chairs of FTSE 350, 09.11.2022)

ISS: Proposed ISS Benchmark Policy Changes for 2023 – Request for comments

On November 4, 2022 Institutional Shareholder Services Inc. (ISS) launched an open comment period on proposed changes to its benchmark voting policies.

Comments are requested by November 16, 2022. ISS expects to announce the final policy changes in or around the first week of December 2022, with the revised policies applying to shareholder meetings taking place on or after Feb 1, 2023 (except where otherwise noted for later implementation). The changes proposed include those summarised below.

UK and Ireland Benchmark Policy: Clarification that keeping directors' annual salary increases low (and ideally lower proportionally than general increases across the broader workforce) is considered to be good market practice.

Global Benchmark Policy: For 2023, for high emitting companies (identified as those in the Climate Action 100+ Focus Group), the extension globally of the policy on climate board accountability first announced last year and introduced in selective markets for 2022 and updating of the factors considered under the policy. The same analysis framework would be used for all Climate Action 100+ Focus Group companies globally, but with differentiated implementation of any negative vote recommendations depending on relevant market and company factors (for example, voting item availability). Additional data and information would be included in the company information section of the ISS research reports for all Climate Action 100+ Focus Group companies in order to support this extended policy application.

(ISS: Proposed ISS Benchmark Policy Changes for 2023, 04.11.2022)

(ISS Insights: ISS Launches Open Comment Period for 2023 Proposed Benchmark Voting Policy Changes – Press release, 04.11.22)

The Transition Plan Taskforce Disclosure Framework and Implementation Guidance: Consultation

On November 8, 2022 the UK Transition Plan Taskforce (TPT) launched the first draft of its Disclosure Framework (Draft Framework) and accompanying Implementation Guidance for consultation. 

The consultation will close on February 28, 2023 with the final version of both the Disclosure Framework and Implementation Guidance to be published during Summer 2023.

The aim of the Draft Framework is to assist entities to disclose credible, useful and consistent transition plans. It builds on existing recommendations of the Taskforce on Climate-related Financial Disclosures (TCFD) and guidance by providing specificity and granularity on what UK transition plans should include and where they should be reported. 

The Draft Framework provides that a good transition plan should cover:

• An entity’s high-level ambitions to mitigate, manage and respond to the changing climate and to leverage opportunities of the transition to a low greenhouse gas (GHG) and climate resilient economy, including GHG reduction targets (e.g. a net zero commitment).
• Short, medium and long-term actions the entity plans to take to achieve its strategic ambition, alongside details on how those steps will be financed.
• Governance and accountability mechanisms that support delivery of the plan and robust periodic reporting.
• Measures to address material risks to, and leverage opportunities for, the natural environment and stakeholders such as the workforce, supply-chains, communities or customers which arise as part of these actions. 

The Draft Framework lays out and explains its three guiding principles: Ambition, Action and Accountability. It considers the approach to transition planning and also provides an overview of its recommended disclosure elements (five disclosure elements and 19 disclosure sub-elements) in a transition plan. The accompanying draft implementation guidance sets out steps to develop a transition plan, as well as when, where and how to disclose it (in a standalone document that sits alongside the annual financial reports and accounts).

(TPT: Disclosure Framework, 08.11.2022) 

(TPT: Implementation Guidance, 08.11.2022)

(TPT: Summary recommendations, 08.11.2022)

(TPT: UK Transition Plan Taskforce launches new ‘gold standard’ for best practice climate transition plans by private sector firms – Press release, 08.11.2022)

Financial Services and Markets Bill: Committee stage in House of Commons completed

On November 4, 2022 HM Treasury published the Financial Services and Markets Bill, as amended in Public Bill Committee – see further our Regulation Tomorrow blog post Financial Services and Markets Bill – latest on the Public Interest Intervention Power. 

(Financial Services and Markets Bill, 04.11.2022)