Essential Corporate News: Week ending May 14, 2021

FRC: Changes in remuneration reporting following the UK Corporate Governance Code 2018

On May 12, 2021, the Financial Reporting Council (FRC) 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 (2018 Code). The FRC commented 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.

For the purposes of the research, the remuneration policy disclosures of a sample of FTSE 350 companies during periods both before and after the introduction of the 2018 Code were analysed. Shareholder voting on companies’ revised remuneration policies at their 2020 annual general meetings was also analysed and evidence of the impact of the Code’s new Principles and Provisions in this area was assessed.

The research found the following:

• The extent of disclosure of remuneration policies has increased since the introduction of the 2018 Code.
• There has been more use of non-financial KPIs and an improvement in the clarity of reporting.
• Most of the companies in the sample were keen to report shareholders’ engagement although few mentioned the detail of this engagement with the workforce in the remuneration committee report.
• FTSE 100 companies adhere to the 2018 Code requirements to a greater extent than FTSE 250 companies.
• Companies paid more attention to Principle P (concerning the design of remuneration policies and practices) than Principle E (concerning consistency of workforce policies and practices with the company’s values), with a variation in the disclosure extent for the provisions among sectors.
• Shareholder dissent on changes to directors’ remuneration policy appears not only to be about maximum pay, but also about other issues surrounding those pay packages, for example changes within the company or external factors such as the level of directors’ pay relative to income and pay of other employees in difficult times due to COVID-19.
• Companies’ comments on shareholder dissent were mixed, with some companies being defensive, but most companies appearing genuinely concerned, wishing to find out the reasons for shareholder dissatisfaction, and to seek remedies.

(FRC, FRC: Changes in remuneration reporting following the UK Corporate Governance Code 2018, 12.05.2021)

Parliament: Rating (Coronavirus) and Directors Disqualification (Dissolved Companies) Bill

On May 12, 2021, the Rating (Coronavirus) and Directors Disqualification (Dissolved Companies) Bill was introduced to Parliament, together with accompanying Explanatory Notes. One of the purposes of the Bill is to address public concerns about the abuse of limited liability, by extending the powers of the Secretary of State (and, in Northern Ireland, of the Department for the Economy) to investigate the conduct of company directors to include former directors of dissolved companies, to commence disqualification proceedings against them where public interest criteria are met, and to seek compensation where their conduct has caused loss to creditors.

New powers in the Bill include the following:

• The Secretary of State will be able to investigate the conduct of former directors of dissolved companies without there being a requirement to first restore the company to the register.
• The disqualification regime will be extended to directors of dissolved companies which should discourage the use of the dissolution process as a method of fraudulently avoiding repayment of Government-backed loans given to businesses to support them during the coronavirus pandemic, such as loans made under the Bounce Back Loans Scheme.

These new powers will have retrospective effect so the conduct of former directors of dissolved companies that took place prior to commencement of the measure may be investigated, and where appropriate disqualification action may be taken with regard to that conduct.

In addition, existing provisions which allow the Secretary of State to seek compensation from directors subject to disqualification orders or undertakings where their actions can be shown to have caused loss to creditors of insolvent companies, will include former directors of dissolved companies, and will be expanded to include creditors of those companies. This will also have retrospective effect, so that conduct which was considered in the disqualification proceedings and which took place prior to commencement of the measure can be considered for compensation.

(Rating (Coronavirus) and Directors Disqualification (Dissolved Companies) Bill, 12.05.2021)

(Explanatory Notes to the Rating (Coronavirus) and Directors Disqualification (Dissolved Companies) Bill, 12.05.2021)

Parliament: Dormant Assets Bill

On May 12, 2021 the Dormant Assets Bill was introduced to Parliament, together with accompanying Explanatory Notes. The purpose of the Bill is to bring forward provisions to deliver on the Government’s commitment to expand the Dormant Assets Scheme (Scheme) which enables unclaimed funds to be transferred to a reclaim fund and reinvested for the benefit of social or environmental purposes. This commitment was included in the Government’s response document on the subject published in January 2021.

The provisions in the Bill expand the scope of the Scheme to include additional dormant assets as follows:

• Dormant proceeds of life insurance and pension policies.
• Dormant proceeds of shares or units in collective investment schemes and other investment assets.
• Dormant share proceeds, including proceeds of shares (as defined in section 540 Companies Act 2006) or distributions relating to shares in traded public companies (being public companies whose shares are traded on a UK regulated market or a UK multilateral trading facility).

The Bill sets out the definitions of dormancy in relation to each type of asset.

In line with how the Scheme operates for dormant bank and building society accounts, where the proceeds of an asset are transferred to the reclaim fund by a participant, any liability of the participant to repay the customer is cancelled. Instead, the customer is able to claim repayment from the reclaim fund. The Bill also includes provision to enable unwanted assets of the same asset types to be transferred to the reclaim fund. Where an unwanted asset is transferred to the reclaim fund, the customer will not have a right to repayment from the reclaim fund.

The Bill provides a power for the Secretary of State or the Treasury to expand the scope of the Scheme in the future to cover other assets, by making secondary legislation which would amend the Bill (or the Dormant Bank and Building Society Accounts Act 2008).

(Dormant Assets Bill, 12.05.2021)

(Explanatory Notes to the Dormant Assets Bill, 12.05.2021)

FRC: Scenario analysis research project

On May 10, 2021, the Financial Reporting Council (FRC) 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.

Recognising that use of scenario analysis in climate-related reporting is a relatively recent development, the project will investigate both climate and non-climate applications of scenario analysis. The project is being carried out by Alliance Manchester Business School (AMBS), University of Manchester. The AMBS team will survey FTSE 350 companies initially with a questionnaire, followed by in-depth interviews with relevant teams and individuals from a representative sample of companies. The extent of scenario reporting in 2020/21 annual reports will also be analysed.

The AMBS team is seeking participants for the project. A questionnaire will be launched in mid-May 2021 and interviews will be carried out during May, June and July 2021.

(FRC, Scenario analysis research project, 10.05.2021)

QCA: The QCA Practical Guide to ESG

On April 15, 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.

The Guide details five steps that companies can take to further develop their approach to ESG and sets out recommended actions in relation to each:

• Develop a clear purpose statement.
• Undertake an ESG materiality assessment.
• Be aware of what others are saying and be prepared to respond.
• Understand what data you have and what data you will need to gather.
• Take control: decide what to disclose and where; be proactive in your communication.

The Guide also provides some guidance on ESG frameworks and regulations. It can be purchased from the QCA.

(QCA, The QCA Practical Guide to ESG, 15.04.2021)