EQ Monthly Bulletin - 2023

In This Edition

• Proxy voting guidelines
• Audit Quality Indicators and Mandatory Registration of Public Interest Audit Firms
• Corporate Reporting: What makes a good annual report and accounts
• Corporate Reporting: FCA Consultation

Proxy Voting Guidelines

Institutional Shareholder Services (ISS) have published updates to its UK proxy voting guidelines for 2023. 

Read More: EMEA-Policy-Updates

In relation to directors’ remuneration, the updated policy notes that annual increases in salary are expected to be low and ideally lower proportionally than general increases across the broader workforce, as detailed in the consultation document issued in November 2022.

Further changes affecting UK companies include the following:

Gender diversity: A new guideline has been included for companies with financial years beginning on or after 1 April 2022. For standard and premium listed companies, ISS may consider recommending against the chair of the nomination committee (or other directors on a case-by-case basis) if the board has not met the targets of at least 40% women and at least one senior board position (chair, Chief Executive Officer, Senior Independent Director, or Chief Financial Officer) is a woman. For ISEQ 20 constituents and AIM-listed companies with a market capitalisation over £500 million, ISS will generally recommend against the nomination committee chair (or other directors, case-by-case) if there is not at least one woman on the board.�

Ethnic diversity: new guidelines apply for companies with financial years beginning on or after 1 April 2022. For standard and premium listed companies, ISS may consider recommending against the nomination committee chair (or other directors, case-by-case) if there is not at least one member of the board from a minority ethnic background. Mitigating factors include compliance with the relevant board diversity standard at the preceding AGM and a firm commitment, publicly available, to comply within a year and other factors as applicable. For ISEQ 20 constituents and AIM-listed companies with a market capitalisation over £ 500 million, ISS will generally recommend against the nomination committee chair (or other directors, case-by-case) if they have not appointed at least one board member from an ethnic minority background by 2024.

Audit committees: a new policy has been inserted, specifying that for FTSE 350 companies, ISS will note where four or fewer audit committee meetings have been held during the reporting period. For FTSE All-Share companies, excluding investment companies, ISS will note where three or fewer meetings have been held.

Authorising issue of equity with and without pre-emptive rights: The policies have been updated to reflect changes to the Pre-Emption Group Principles following the issue of the revised principles in November 2022.

Additionally, the global change in policy contained in the consultation has also been adopted for those companies which are deemed to be high emitting companies – as identified by the Climate Action 100+ Focus Group (this includes a small number of UK registered companies). 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 will use the same analysis framework for all Climate Action 100+ Focus Group companies globally but with the 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 to support this extended policy application.

Audit Quality Indicators And Mandatory Registration Of Public Interest Audit Firms

The Financial Reporting Council (FRC) has published its new firm-level Audit Quality Indictors (AQI). These are intended to provide stakeholders with comparable indicators of audit quality. 

Read More: Feedback Statement

The FRC has decided that: 

• The requirements should apply to all firms that audit more than 20 PIEs or at least one FTSE350 company.
• The AQIs should include all audit engagements, but only some must be presented separately for PIE and non-PIE audits (those relating to quality monitoring and the extent of involvement in audits by partners and certain responsible individuals).
• Firms may produce the data covering any 12-month period but should provide FRC with their data, specifying the period, by mid-June each year.
• Firms may include narratives, with an indicative word count of 500 words in total, but not links to firms' own websites. The FRC plans to include guidance on what should be included in its forthcoming definitions note.
• It will implement a phased approach. All firms in scope will participate in a pilot to collect AQI data for private reporting in summer 2024. The FRC will consider publishing some indicative overall ranges of AQI data without firm-specific numbers. It will also consider whether it will undertake some verification of the AQIs.  In summer 2025, firms will be asked to provide AQI data, segmented between all audits, PIE audits, and non-PIE audits, where possible. The FRC will publish the data segmented between all and PIE audits. The previous year’s data should also be published for each AQI. A senior partner should attest to the accuracy of the information.

All audit firms and responsible individuals (RIs) who undertake statutory audit work for Public Interest Entities (PIEs) must be registered by the FRC. By directly registering audit firms and individuals signing PIE audit reports, it is anticipated that the FRC will be able to act decisively when it identifies systemic issues that risk affecting audit quality. The registration regime is intended to enhance the FRC’s ability to drive improvements, ensure firms are growing sustainably, and more closely monitor the auditor’s work, as well as enabling the FRC to apply conditions or undertakings when concerns are identified. 

Read More: PIE Auditor Register

Corporate Reporting: What Makes A Good Annual Report And Accounts

The Financial Reporting Council (FRC) has published guidance on what makes a good annual report and accounts based on their perspective as a regulator.

Read More: What-Makes-a-Good-Annual-Report-and-Accounts

The report notes that an annual report and accounts (ARA) should be company-specific (avoiding the use of boilerplate disclosures), clear, concise, understandable (use straightforward language, defines specialist terms and acronyms), clutter-free (avoid duplication which obscures other relevant information as this can attract regulatory comment) and comparable.

The report also focuses on the following matters:

Materiality. Evidence of qualitative factors (that is, factors other than size) being used to increase quantitative materiality for certain transactions, events, or conditions is likely to prompt regulatory challenge.

Accuracy. Management should consider both the sufficiency and effectiveness of the controls over information prepared solely for the ARA as perceived material errors may attract regulatory enquiry.

Consistent and complete. Identify interdependencies between parts of the ARA at the planning stage, with teams preparing connected parts and communicating regularly. Read the ARA as a single document before publication. Incomplete descriptions of the nature of certain events and transactions or poor explanations of the accounting applied are likely to prompt regulatory challenges.

On-time and unbiased. In addition to complying with regulatory timing requirements, the ARA should not be biased. It may attract regulatory attention if its use as a marketing tool undermines the need for the ARA to be fair and balanced.

Navigable and transparent. Regulators may raise unnecessary questions if it is difficult to locate information in relation to a material transaction, event, or other condition, as well as raise enquiries where accounting policies lack clarity, are not company or transaction-specific or are inconsistent with other information in the ARA.

The report includes examples of what the FRC considers to be high-quality reporting.