EQ Bulletin - December 2022

Pre-Emption Group updated Guidelines

The Pre-Emption Group (PEG) has issued a revised statement of principles and updated template resolutions following the UK Secondary Capital Raising Review (SCRR), which published its report in July 2022. The revised principles include the following:

• Shareholder approval by special resolution at Annual General Meetings (AGM) for dis-applications of up to 20% of the issued share, on a 10%+10% basis using the first 10% available for any purpose with the second 10% available for an acquisition or a specified capital investment, announced contemporaneously with the issue or occurring in the previous 12 months. In both cases, a further authority of up to 2% is to be used only for a follow-on offer, as detailed in paragraph 3, Part 2A of the statement of principles. Use of the 20% authority is subject to conditions contained in paragraph 1, Part 2B of the statement of principles. For urgent, exceptional circumstances before a company's next AGM, issuers are to follow the transitional arrangements in the SCRR.
• Post-transaction reports on how non-pre-emptive issues under general dis-applications were carried out within a week of the issue, using the format set out in paragraph 10 of Part 2B of the statement of principles to be submitted to the PEG Pre-emption Database, which will be publicly available in addition to a Regulatory Post-transaction reports on how non-pre-emptive issues under general dis-applications were carried out within a week of the issue, using the format set out in paragraph 10 of Part 2B of the statement of principles to be submitted to the PEG Pre-emption Database, which will be publicly available in addition to a Regulatory Information Service announcement. Also, the following annual report published by a company following a non-pre-emptive issue of equity securities under a general dis-application of pre-emption rights should also include the information included in the post-transaction report published in the week following the issue.
• Cash box structures are only to be used for up to the amount of the pre-emption disapplication authority (statement of principles paragraph 2, Part 1).
• Case-by-case consideration of higher disapplication authorities for companies that need to raise more significant amounts of capital more frequently (capital hungry companies). Listing applicants can disclose this in their IPO prospectus and opt to put in place a dis-application on this basis before IPO. These companies can seek disapplication authorities for longer than the period to their next AGM/15 months if this is highlighted with the dis-application request (or disclosed in the prospectus) (statement of principles paragraphs 4 and 5, Part 2A).
• Due consideration is to be given as to whether retail and existing investors shareholders should be able to take part in a placing, as well as how to involve them. In particular, the use of a retail investor platform or follow-on offer (statement of principles paragraph 2, Part 2B). The expected features of a follow-on offer are set out and include a monetary cap of £30,000 per investor (statement of principles paragraph 3, Part 2B).

Read More: PEG_Statement-of-Principles
Read More: PEG_Template-resolutions
Read More: PEG_Transitional-measures-(excerpt-from-SCRR)

Annual Review of Corporate Reporting

The Financial Reporting Council (FRC) has published its annual corporate reporting review for 2021/2022 following a review of the accounts of 252 companies. The report notes that while the overall quality of corporate reporting within the FTSE 350 had been maintained, 27 companies were required to restate aspects of their accounts. The number one topic of concern was cash flow statements which were identified as an area where both companies and their auditors must improve. The review also identified the scope for improvement in reporting on financial instruments and deferred tax assets. 

The Strategic Report and other Companies Act 2006 matters was the number four topic of concern. Several large private companies omitted energy and carbon reporting disclosures, while one listed company did not disclose its energy consumption, separate emission figures and the methodology used to calculate the annual emissions. Concerning section 172 statements, the report found that in several cases, the annual report and accounts of large private companies did not include a statement about the company's engagement with suppliers, customers and others in a business relationship and the effects on the principal decisions taken by the company during the year.

The FRC states that for 2022/23, their expectations include the following:

• Unambiguous description in the strategic report of risks facing the business, their impact on strategy, business model, going concerns and viability, and cross-referenced to relevant detail in the reports and accounts.
• Specific, balanced and well-integrated information about the impact of climate change on the company in narrative reporting, and appropriate reflection of material climate-related commitments, risks and uncertainties in the financial statements;
• Clear, concise and understandable disclosure that omits immaterial information; and
• Companies comply with specific legal requirements around distributions, including filing interim accounts to support distributions over distributable profits shown in the relevant accounts (usually the most recent audited accounts).

Read More: Annual Review of Corporate Reporting 2021-2022
Read More: Annual Review of Corporate Reporting 2021 - 2022 - Corporate Reporting Highlights

The FRC has also produced its year-end bulletin of key corporate reporting matters for companies, which includes the FRC's areas of focus for the coming year. These include the risks and uncertainty in the challenging economic environment, including those relating to climate change.

Read More: Key matters for 2022-2023 Annual Reports and Accounts

Annual Review of Corporate Governance Reporting

The Financial Reporting Council (FRC) has published its annual review of corporate governance reporting.

Read More: Review of Corporate Governance Reporting_ 2022.

This report is based on an assessment of 100 FTSE350 and Small Cap companies. The report notes that while there have been year-on-year improvements in reporting, more companies are disclosing the areas within the UK Corporate Governance Code (Code) that they have chosen to explain rather than comply with. The report also found that more companies need to provide meaningful explanations. A common theme identified was the lack of disclosure about the outcomes and impacts of governance policies and practices. Companies need to demonstrate, within their reporting, how their governance has been improved. The FRC was also disappointed that disclosure about board engagement with major shareholders was minimal - with some companies simply stating that there had been meetings without providing further information on their engagement and its outcome. Such explanations are essential to give investors and the public information, which is critical for market confidence and lowering the cost of capital.

The following areas were highlighted amongst others:

Code compliance. Disclosures on the application of certain Code Principles should be improved, particularly those requiring actions by the board. The overall quality of explanations provided by companies for non-compliance with Code provisions also needs improvement.

Diversity. There is a need to improve explanations of diversity policies with objectives and targets and link them to company strategy. Diversity reporting should go beyond gender and ethnicity-related disclosures, e.g. disability, neurodiversity, social mobility matters and LGBTQ+.

Modern slavery. Reporting often fails to address the effectiveness of policies and procedures. Companies should also provide more information on the outcomes of engagement on modern slavery issues.

To improve disclosures, the FRC has set out several expectations including; moving away from declaratory statements and providing specific disclosures; making clear linkages in the report to policies or disclosures that relate to stakeholder matters and demonstrating how the company’s culture is aligned to its purpose, values and strategy. The FRC expects companies to make it easy for users of the annual reports to find whether the company has fully complied with all elements of the Provisions of the Code throughout the whole financial year; or in the case of departure from the Code, the Provision(s) it has not complied with and the explanation for non-compliance.

Investment Association- Principles of Remuneration for 2023

The Investment Association (IA) has issued its updated Principles of Remuneration for 2023. The Principles are predominantly for companies with a main market listing but is also relevant to companies listed on other public markets, such as AIM, and to other entities. There are no changes in policy although the Principles and accompanying letter to Remuneration Committee Chairs do note the following:

• Salary levels and cost of living- companies should be sensitive to the environment in which they operate. In a period of high inflation, companies should show additional restraint and consider making sub-inflationary (or sub-employee salary) increases for executives. Executive salaries should not increase at a faster rate than salaries of the wider workforce.
• Environmental, social and governance (ESG) metrics- these should be material to the business, linked to strategy and be quantifiable with companies explaining how performance against the metrics is measured and disclosed.
• Executive Pensions- pension contributions for executive directors should be aligned with the rate given to the majority of the company's workforce any company that does not comply with this will be "red-topped".
• Impact of COVID 19 pandemic on remuneration- in 2020, companies were warned by the IA against taking advantage of falls in share prices as a result of the pandemic, to grant long-term incentive awards over a larger number of shares than usual. 2023 will see the maturity of awards made during the pandemic for many companies. There is an expectation amongst investors that companies will take steps to prevent executives from benefitting from windfall gains. Remuneration committees should explain whether they have adjusted vesting outcomes to remove windfall gains and, if not, why not.
• Non-executive director remuneration- the IA acknowledges that there has been more complexity in the role of non-executive directors in recent years. Any increases in non-executive director remuneration to reflect the additional complexity will be supported provided that an adequate explanation of the increase is given.

Read More: Member guidance (White)
Read More: IA Rem Com Chair Letter - Nov 2022

Glass Lewis – Proxy Voting Guidelines 2023

Glass Lewis has issued the latest version of their proxy voting guidelines, which apply to meetings held on or after 1 January 2023.

Read More: UK-Voting-Guidelines-2023-GL

Amendments from the previous version of the guidelines include:

Directors’ external commitments – under the new version of the guidelines Glass Lewis will  consider a director to have a potentially excessive commitment level when they serve as an executive officer of any public company while serving on more than one (not, as previously, more than two) additional external public company boards.

A new section on director accountability for climate related issues states that where companies with increased climate risk exposure have not provided thorough Task Force on Climate-Related Financial Disclosures (TCFD)aligned climate-related disclosure or have not explicitly and clearly defined board oversight responsibilities for climate-related issues, Glass Lewis  may recommend voting against a responsible member of the board.

Additionally, certain items included in the 2022 version of the guidelines have been clarified. This includes clarification that employee representatives are not included in calculations of whether half the board is independent. In relation to the authority to allot shares Glass Lewis have clarified that it analyses each case individually regarding proposals to issue shares for a specific purpose outside of routine authorities normally proposed on an annual basis, considering the total number of shares to be issued and the dilutive impact; the issuance price and discount or premium; and the intended uses of proceeds in the context of the company’s financial position and business strategy.

Institutional Shareholder Services- Benchmark Policy Consultation

Institutional Shareholder Services (ISS) issued its 2023 benchmark policy consultation which closed on 16 November 2022. ISS anticipates issuing its final 2023 benchmark policy changes by around the first week of December 2022 with the revised policies being applied to shareholder meetings held on or after 1 February 2023.

Read More: 2023-Benchmark-Policy-Changes-For-Comment

Changes that are intended to apply to the UK, relate to directors’ remuneration. The consultation notes that part of the current wording of the policy on remuneration could be misunderstood as encouraging companies to increase directors' base salaries proportionally in line with increases made to the wider company workforce. Adopting such a pattern would lead to a widening of the gap between total opportunity available to executives compared to that of the average employee. The proposed change modifies the policy language to clarify that keeping directors' annual salary increases low and ideally lower proportionally than general increases across the broader workforce is considered good market practice.

There is one proposed global change that will also affect UK companies relating to climate board accountability. The consultation notes for those which are deemed to be high emitting companies – proposed to be continued and identified as those in the Climate Action 100+ Focus Group (this includes a small number of UK registered companies) – ISS proposes to extend globally the policy on climate board accountability, first announced last year and introduced in selected markets for 2022, and to update the factors considered under the policy as follows. In cases where a company is not considered to be adequately disclosing climate risk disclosure information, such as according to the Task Force on Climate-related Financial Disclosures (TCFD), and does not have either medium-term GHG emission reductions targets or Net Zero-by-2050 GHG reduction targets for at least a company’s operations (Scope 1) and electricity use (Scope 2), ISS will generally recommend voting against what it considers to be the appropriate director(s) and/or other voting items available. Emission reduction targets should also cover the vast majority (95%) of the company’s operational (Scope 1 & 2) emissions. For 2023, ISS plans to use the same analysis framework 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 will 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.

ESG- UK Transition Plan Taskforce Consultation

The UK Transition Plan Taskforce (TPT) has issued a consultation on its proposed disclosure framework for private sector climate transition plans and accompanying implementation guidance.

he TPT considers that a good practice 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) emissions and climate-resilient economy, including GHG reduction targets (for example, 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 TP 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 accompanying draft implementation guidance sets out steps to develop a Transition Plan (TP), as well as when, where and how to disclose it. It recommends that entities publish standalone TPs at least every three years, and sooner if there are significant changes to the plan; that progress against the TP and material updates be reported annually in general financial reporting; and that if an entity produces a long-form TCFD or sustainability report, the TP be clearly separable.

The consultation closes on 28 February 2023.

Read More: TPT-Disclosure-Framework  
Read More: TPT-Implementation-Guidance
Read More: TPT-Implementation-Guidance-Technical-Annex
Read More: TPT-Summary-Recommendations