EQ Bulletin - April 2022

In This Edition

• Corporate Transparency And Register Reform White Paper
• The Pension And Lifetime Savings Association 2022 Stewardship And Reporting Guidelines
• Investment Association - Shareholder Priorities For 2022
• Financial Conduct Authority - Primary Market Bulletin 38
• European Commission - Proposed Directive On Mandatory Corporate Due Diligence for Companies
• Large Private Companies - Wates Corporate Governance Principles
• HM Treasury - Wholesale Markets Review and UK Prospectus Review: Outcome
• Legislation - The Economic Crime (Transparency and Enforcement) Act 2022
• Parker Review: Update Report On Board Ethnic Diversity 2022

Corporate Transparency And Register Reform White Paper

The Department for Business, Energy & Industrial Strategy (BEIS) has published a White Paper setting out its policy on corporate transparency and register reform. An annexe to this document provides a complete list of the changes proposed and the rationale for the changes.

Amongst other matters, the following changes are being proposed:

• New statutory powers and responsibilities for the Registrar, including a new statutory function to promote and maintain the integrity of the register (effectively a gatekeeper function), a new power to query information either before it is placed on the register or post-registration, expansion of its administrative removal powers, power to require documents to be delivered by electronic means, changes to proper delivery requirements, and powers relating to unauthorised registered office addresses.
• Identity verification and other measures relating to directors, beneficial owners, and third-party agents, including verification of identity for Companies House purposes, increased information held on shareholders, including the requirement for full names of shareholders to be recorded in the register of members. PSCs and RLEs, and adopting a principle-based exception approach to corporate directors with the intention that corporate directorships are restricted to companies registered in the UK and that all directors of any corporate director are natural persons who have undergone the verification process.
• Increased powers for Companies House to share data with law enforcement and regulatory bodies.
• Privacy mechanisms in relation to personal information on the register, including suppression of personal information and sensitive addresses.
• Changes to how companies report their financial information to Companies House, including mandatory filing of accounts in digital format including the tagging of information, a reduction in the filing options available for small companies accounts and the requirement for an eligibility statement for dormant company accounts. Consideration is also being given to a file once approach for financial information to enable companies to file their financial information once a year with the Government, rather than filing different elements of information with each department that requires it, at different times.

Expected timings for when legislation will be introduced to enact the reforms have not been provided.

Read More: Corporate Transparency And Register Reform White Paper.

The Pension And Lifetime Savings Association 2022 Stewardship And Reporting Guidelines

The Pension And Lifetime Savings Alliance (PLSA) has published its 2022 Stewardship and Voting Guidelines. The Guidelines expect listed companies to prioritise climate change and sustainability considerations and reference the Task Force on Climate-Related Financial Disclosures (TCFD) in their reporting. The Guidelines also recommend that companies show restraint on executive remuneration, particularly for those companies that have benefitted from Government support during the COVID-19 pandemic. Additionally, there are amendments from 2021 relating to:

• Virtual AGMs. The move online has not impacted voter turnout, and the PLSA continues to support the use of virtual AGMs to ensure participation during these unprecedented times. (It no longer specifically advises voting against any motion that would make virtual AGMs permanent.) However, it notes concerns that virtual-only AGMs becoming permanent may reduce opportunities for shareholder engagement with the board and urges companies to look at how they can increase investor engagement opportunities.
• Board leadership and company purpose. Companies should disclose how they are responding to the challenges posed by COVID-19 on the workforce.
• Board composition and diversity. The  policy on diversity has been amended to be a policy on diversity and inclusion, which should also include protected characteristics such as: gender and matching the Hampton Alexander Review target of at least 33% of FTSE 350 board members; ethnicity and matching at least the Parker Review target of at least one board member by 2021 (2024 for FTSE 250) and could also include whether they are a signatory to the Race at Work Charter or equivalent; disability, which could include whether they are a Disability Confident employer in the UK; sexuality; gender reassignment; marital status; and religion and belief systems. Other non-protected characteristics should also be considered, such as socio-economic background, neurodiversity, veterans and returners to the workplace. Investors should consider voting against the re-election of the chair if the board has not established a diversity and inclusion policy and strategy.

• In addition to the caution around executive pay the PLSA welcomes the increased consideration of remuneration through the lens of ESG factors and would like to see more packages linked to clear targets for performance against achieving a company’s ambitions to meet climate goals.

Read More: 2022 Stewardship and Voting Guidelines

Investment Association - Shareholder Priorities For 2022

The Investment Association (IA) along with Institutional Voting Information Service (IVIS) have published their shareholder priorities for 2022.

For year ends starting on or after 31 December 2021 IVIS will monitor companies against, amongst other matters:

• Accounting for climate change. Directors should continue to affirm that the financial impact of climate-related matters have been incorporated into the company's accounts, and state in the annual report that they have considered the risks of climate change and transition risks associated with achieving the goals of the Paris Agreement when preparing and signing off the accounts. Auditors should consider the risks of climate change when assessing the accounts. IVIS will monitor whether auditors have highlighted climate change-related risks in key audit matters. Companies will be amber topped where they do not make disclosures against all four pillars of the Task Force on Climate-Related Financial Disclosures (TCFD).
• Audit quality. Companies should continue to meet the 2021 shareholder expectations and demonstrate how they have judged the quality of audit received. IVIS will continue to monitor whether the audit committee has demonstrated how it has assessed the quality of the audit and challenged management's judgements. 
• Diversity. FTSE 100 companies that have not met the Parker Review target of one director from a minority ethnic group will be red topped by IVIS, and they will continue to amber top FTSE 250 companies that do not disclose either the ethnic diversity of their board or a credible action plan to achieve the Review's targets by 2024. It will red top FTSE 350 companies where women represent 33% (previously 30%) or less of the board or 28% (previously 25%) or less of the executive committee and their direct reports. It will now red top FTSE Small Cap companies where women represent 25% or less of the board or 25% or less of the executive committee.
• Stakeholder engagement. Companies should continue to identify and disclose their material stakeholders; decide on the most appropriate mechanism to engage with them; clearly articulate how their views have impacted decision making; and report to stakeholders on the engagement. Disclosures should include the impact of increases to the cost of living and inflationary pressures on consumers and suppliers. Stakeholder experience when determining executive remuneration will continue to be critical.

Read More: Shareholder Priorities For 2022

Financial Conduct Authority - Primary Market Bulletin 38

On 15 November 2021, the Financial Conduct Authority (FCA) published Primary Market Bulletin 36 along with a draft technical note dealing with Task Force on Climate-Related Financial Disclosures (TCFD) requirement for premium listed and standard listed companies (excluding investment companies and shell companies). The FCA has now published Primary Market Bulletin 38 along with the final text of its technical note, TN802.1, TCFD aligned climate-related disclosure requirements for listed companies.

In scope companies need to make a statement in their annual financial report setting out:

• Whether they have made climate-related financial disclosures consistent with the TCFD’s recommendations and recommended disclosures in their annual financial report
• Where they have not made disclosures consistent with some or all of the TCFD’s recommendations and/or recommended disclosures, an explanation of why, and a description of any steps they are taking or plan to take to be able to make consistent disclosures in the future – including relevant timeframes for being able to make those disclosures
• Where they have included some, or all, of their disclosures in a document other than their annual financial report, an explanation of why
• Where in their annual financial report (or other relevant document) the various disclosures can be found.

Where a listed company has not included climate-related financial disclosures consistent with all of the TCFD recommendations and recommended disclosures in either its annual financial report or in another document as referred to in LR 9.8.6R(8)(b)(i) and LR 14.3.27R(2)(a)  the FCA considers that when providing the reasons for not including such disclosures listed companies should provide full, clear and meaningful explanations for not including such disclosures. The explanations should be written in plain language that is easy to understand and leaves no room for ambiguity. Also where a listed company provides details of any steps it is taking or plans to take in order to be able to make those disclosures in the future, and the timeframe within which it expects to be able to make those disclosures (LR 9.8.6R(8)(b)(ii)(C) and LR 14.3.27R(2)(b)(iii)), it should provide enough detail so that investors and stakeholders can fully understand the nature of the proposed action.

Read More: Primary Market Bulletin 38, Primary Market Technical Note

European Commission- Proposed Directive On Mandatory Corporate Due Diligence for Companies

The European Commission has adopted a proposal for a Directive on corporate sustainability due diligence. This Directive aims to foster sustainable and responsible corporate behaviour and anchor human rights and environmental considerations in companies’ operations and corporate governance. The new rules will ensure that businesses address adverse impacts of their actions, including in their value chains inside and outside Europe. This Directive establishes a corporate due diligence duty to identify, bring to an end, prevent, mitigate, and account for negative human rights and environmental impacts in the company’s operations, subsidiaries, and value chains. In addition, certain large companies need to plan to ensure that their business strategy is compatible with limiting global warming to 1.5 °C in line with the Paris Agreement adopted at COP21 in December 2015. 

While primarily European Union entities will be impacted the Directive, if adopted, will also apply to non-EU companies which meet certain thresholds.

Group 1: 500+ employees and net EUR 150 million+ turnover worldwide. It is estimated that around 2,600 non- EU companies will be affected

Group 2: 250+ employees and net EUR 40+ million turnover worldwide, and operating in defined high impact sectors, e.g. textiles, agriculture, extraction of minerals. For this group, the rules start to apply two years later than for group 1. It is estimated that a further 1,400 companies will be affected.

Under the proposals, companies must amongst other things:

• Describe their long-term approach to due diligence;
• Provide a code of conduct setting out rules and principles;
• Describe the processes put in place to implement due diligence and verify compliance;
• Take appropriate measures to bring to an end actual adverse impact.  Where adverse impacts cannot be ended, companies must ensure they minimise the extent of the impact; and
• Set up a complaints procedure.

Read More: Corporate Sustainability Due Diligence And Amending Directive

Large Private Companies – Wates Corporate Governance Principles

The Financial Reporting Council has published a report conducted with the University of Essex on the quality of reporting from private companies who have chosen to follow the Wates Corporate Governance Principles. The report, titled The Wates Corporate Governance Principles for Large Private Companies: The Extent, Coverage and Quality of Corporate Reporting and available from here.

The report indicates that the Wates Principles are the most widely adopted corporate governance code used by large private companies. The report found that the principles are being used as a tool for self-reflection and improvement and that yearly governance reporting is being seen as an opportunity, not a burden. While the report includes examples of good reporting, it also suggests that companies need to:

• Provide more detailed information in relation to the application of the six principles to give readers a fuller understanding of the corporate governance arrangements in place and how they are linked to the respective principles.
• Provide more instances and circumstances relating to a given corporate governance practice to indicate how the principles have been applied.
• Make greater use of cross-references, the disclosure of some items could be found in other sections of the annual reports, but they were difficult to track down without the provision of cross-references.

The readability of corporate governance statements was also highlighted as an issue – the statements were on average 2,000 words long but varied in length from 77 words to over 11,000 words but the research found that “it is inferred that the text of the average corporate governance statement analysed is difficult to read”.

Read More:  Wates Corporate Governance Principles

HM Treasury- Wholesale Markets Review and UK Prospectus Review: Outcome

HM Treasury has published its response to the consultation which was opened in July 2021 on the UK’s regime for wholesale capital markets.

The proposed reforms are intended to:

• Simplify the systematic internaliser regime to provide clarity and remove unnecessary regulatory burdens.
• Remove restrictions on firms’ ability to execute transactions to ensure that market participants can get the best outcomes for investors.
• Reconfigure the transparency regime for fixed income and derivatives markets so that only appropriate instruments are subject to enhanced transparency requirements, removing unnecessary burdens on firms.
• Reduce the scope of the commodities position limits regime and delegate it to trading venues to ensure that market activity is not unnecessarily restricted, while ensuring that markets function efficiently.
• Ensure the Financial Conduct Authority (FCA) can help support the provision of a consolidated tape, which will better enable participants to identify the best available pricing for instruments.

The reforms will be achieved through legislative changes when parliamentary time permits and where changes can be made to the parts of the regime that are already set out in regulatory rules and guidance. The FCA has committed to progress these in line with its normal processes.

Additionally, a response was published to the consultation on the UK Prospectus Regime, which was opened in July 2021.

The Government will replace the regime currently contained in the UK Prospectus Regulation and legislate when parliamentary time allows. There will be a separation of public offers of securities from the regulation of admissions of securities to trading. The Government will delegate a greater degree of responsibility to the Financial Conduct Authority (FCA) to set out the detail of the new regime through rules. The full suite of reforms will take full effect after the FCA has consulted and is ready to implement new rules under its expanded responsibilities.

Changes to the prospectus regime include:

• Facilitating wider participation in the ownership of public companies, including for retail investors. This will allow a broader cross-section of society to benefit from companies’ growth as well as increase market liquidity
• Simplifying the regulation of prospectuses and removing unnecessary red tape
• Improving the quality of information that investors receive
• Ensuring that the regulation of prospectuses will be better able to respond to innovation and change

Read More: Wholesale Markets Review: Consultation Response, UK Prospectus Regime Review: Review Outcome

Legislation – The Economic Crime (Transparency And Enforcement) Act 2022

The Economic Crime (Transparency And Enforcement) Act 2022 received Royal Assent on 14 March 2022 having been introduced as a bill on 1 March 2022. The Act, briefly, among other things requires any overseas entity that wishes to own UK land to take steps to identify their beneficial owners and to register them on a new register of overseas entities, which will be maintained by the Registrar of Companies. A beneficial owner is defined as someone who owns more than 25 per cent of the shares or voting rights, the right to appoint or remove directors or otherwise exert significant control over the company. Information supplied to the register will be required to be verified. Once registered, the entity will be required to update its information annually, until it successfully applies to be removed from the register. Failure to update the register is an offence, as is delivering (or causing to be delivered) misleading, false or deceptive information. Overseas entities will be given 6 months from the date the Act comes into force to register their beneficial owners.

The Land Registry will not register overseas entities as owners of UK property unless they have registered the beneficial ownership at Companies House and received the associated ID number. Overseas entities will also be prevented from selling, mortgaging or granting long leases of their properties unless they have complied with the Companies House requirements. It is proposed that the provisions of the Bill will apply retrospectively to property bought since January 1999 in England and Wales and since December 2014 in Scotland.

Part 1 of the Act which deals with the registration of overseas entities will enter into force on a day appointed by regulations.

Read More: Economic Crime (Transparency And Enforcement) Act 2022

Parker Review: Update Report On Board Ethnic Diversity 2022

An update report has been published by the Parker Committee which includes the results of a survey on the ethnic diversity of FTSE350 Boards.

As at 31 December 2021:

• 89 FTSE 100 companies had met the Parker Review target of at least one director from a minority ethnic group on their board (up from 74 in 2020. Also, a further five companies announced the appointment of new ethnic director appointments since 31 December 2021 with a further three companies engaged in recruiting a director from an ethnic background. The number of female minority ethnic group appointments was 49% of the total.
• Of the 233 FTSE 250 companies that responded, 128 reported they had ethnic diversity on their boards, which represents good progress towards meeting the Parker Review target for all such companies to have minority ethnic representation on their boards by 2024. 73 (44%) of minority ethnic directors across the FTSE 250, are held by women.

As the majority of these positions remain non-executive roles, the report recommends that continued attention is focused on this issue.

The preliminary findings of research undertaken for the Financial Reporting Council (FRC) by the Gender, Leadership and Inclusion Research Centre (GLIC) at Cranfield University, into the barriers preventing individuals from minority ethnic groups achieving senior representation in FTSE 350 companies is also summarised in the report. While the full research will be published later by the FRC, the findings highlighted by the report include:

• Companies are implementing initiatives to meet the objective of increasing ethnic diversity in senior leadership positions, such as data collection, introducing governance structures for diversity and inclusion and setting targets. Companies should aim to prioritise reporting the outcomes alongside the actions themselves.
• Evidence-based, targeted programmes can demonstrate active, direct initiatives to increase the diversity of senior leadership. These programmes and the related reporting could be improved by detailing their design and content, to enable the evaluation of the features that make them effective.
• Intentional recruitment at board level, based on both merit and diversity, is being used by some companies as an effective way to increase representation of minority ethnic groups.

Read More: Improving The Ethnic Diversity Of UK Boards