Governance News 26 May 2021

According to analysis by ISS Corporate Solutions Inc, following the events of 2020, there has been a significant uptick in the number of newly appointed Black S&P 500 board members. ▪ During the period 1 July 2020 to 19 May 2021, 32% of all newly appointed directors were Black (up from 11% in the period 1 July 2019 and 19 May 2020) ▪ There was also a spike in the number of S&P500 companies that appointed a Black director. During the period 1 July 2019 to 19 May 2020, only 52 companies did so. During the period 1 July 2020 to 19 May 2021 this had increased to 148. ▪ ISS also found that companies were more willing to appoint Black directors with no previous board experience. During the period 1 July 2020 to 19 May 2021 49% of newly appointed Black board members had no previous experience on the board of a publicly traded company board (up from 36% in the previous period). ▪ Overall ISS found that the proportion of Black directors on S&P500 boards has increased 2.3% on last year. As at 19 May 2021, Black directors make up 10.6% of S&P500 directorships compared (up from 8.3% at 19 May 2020). Commenting on the findings, Head of ISS Corporate Solutions Marija Kramer commented, 'The needle has clearly moved…As companies respond to the chorus of investors and other stakeholders who since last summer have called for greater racial and ethnic diversity within corporate boardrooms…It is particularly notable that the newest cohort of Black directors is more likely to be new to board service, compared with previous groups, and suggests the pipeline of minority director talent is growing at a faster rate than previously evidenced'. [Source: ISS media release 25/03/2021] In Brief | How to do better at gathering diversity data and meaningfully reporting on diversity for maximum business benefit: The Diversity Council of Australia has released a practical guide on how organisations can improve their approach [Sources: Diversity Council of Australia media release 18/05/2021; Synopsis report: Counting Culture: Towards A Standardised Approach to Measuring and Reporting on Workforce Cultural Diversity in Australia] In Brief | Beyond gender: The Canadian Securities Administrators (CSA) have announced their intention to conduct further research and consultation on the need for/possible introduction of broader diversity disclosure requirements (ie beyond minimum gender diversity requirements) for boards and executive officer positions. The work will take into account the extent to which corporate governance practices and the disclosure needs of investors have 'evolved' since the introduction of the 'women on boards' disclosure requirements [Source: Canadian Securities Administrators media release 19/05/2021]  Governance News | Weekly wrap up of key financial services, governance, regulatory, risk and ESG developments. Disclaimer: This update does not constitute legal advice and is not to be relied upon for any purposes MinterEllison | 5 ME_183543315_1 Other Shareholder News Ensuring the voices of workers are heard in the boardroom: New report considers how FTSE 350 firms have responded to the introduction of workforce engagement requirements in the 2018 Corporate Governance Code Key Takeouts ▪ The report found that overall the introduction of the new workforce engagement requirements in the 2018 Corporate Governance Code has not triggered a radical shift in approach in most cases. Rather, firms have tended to evolve their existing approaches to a greater or lesser extent. ▪ Reporting around workforce engagement efforts tends to be fairly minimal with little information about the practical steps that have been implemented or their impact ▪ Most firms have elected to appoint a non-executive director, or (less commonly) to establish an advisory panel (in some form). In some cases, firms have taken a hybrid approach appointing both a NED and an advisory panel. ▪ The report includes a number of case studies providing insights into emerging best practice. The Financial Reporting Council (FRC) has released a report, compiled by Royal Holloway, University of London and the Involvement and Participation Association, into the way in which companies have responded to the introduction of worker engagement requirements in the UK Corporate Governance Code, including insights into the reasons why they have elected to adopt a particular approach, the practical changes they have implemented and emerging best practice. Overall the report found that despite the progress being made by some firms, and despite the increased focus on the diversity and inclusion following the events of 2020, a number of firms continue to be resistant to/sceptical about the value of ensuring workers' voices are heard at board level and this is reflected in their approach. The report is based on analysis of company reports, a survey of FTSE 350 firms and interviews with directors, executive and workforce representatives.  Governance News | Weekly wrap up of key financial services, governance, regulatory, risk and ESG developments. Disclaimer: This update does not constitute legal advice and is not to be relied upon for any purposes MinterEllison | 6 ME_183543315_1 Most firms have taken some action in direct response to the 2018 Code The Corporate Governance Code provides for three main options for workforce engagement: 1) appointing a worker director; 2) designating a non-executive director (NED); or 3) establishing an advisory panel. The report found that: ▪ 68% of firms sampled adopted one (or more) of these options because of the Code. ▪ In the 'majority of cases' workers were not given any say on the approach to workforce engagement, rather the decision was made by the board without consultation. ▪ Designating a NED was by far the most popular option (40% of companies in the sample took this approach). – The report comments that reporting is often brief and fairly vague about the activities designated NEDs undertake. The most common reported activities are site visits and references to 'talking to employees'. – The report also found that it is often unclear why particular individuals were considered by the board, to be suitable for the designated NED role, based on their skills/expertise. – Where firms made stronger statements in annual reports about NEDs 'facilitating' two way communication between the board and employees, few details were given around what this actually entailed/evidence of how the process works in practice. – The report concludes that many firms (though not all) who have opted for this approach, continue in practice, to rely heavily on the findings of annual employee engagement surveys as reported to the board by HR, and on site visits, with the designated NED essentially 'complementing' or supplementing these existing processes. – Having said this, the report observes that that the revised Code has only been in effect since 2019, and that a number of firms have indicated that they plan to expand/evolve the role of the designated NED. ▪ Advisory panels: – 12% of companies opted to establish some form of advisory panel and 16% of companies have opted for a hybrid approach – both designating a NED and establishing some form of advisory panel (though few firms use this term). – Composition: The report found that in most cases, advisory panels tend to be composed of a combination of representatives selected by management and by the workforce (though this was not always the case). – Understanding and responding to annual surveys is a key focus for most advisory panels: The report found that as well as scope for discussion of broader issues, the agenda of advisory panels is often primarily structured around consideration of issues arising from annual staff engagement surveys with feedback from the panel shared with the board either via the designated NED or through another board member. The report comments that it was rare for worker representatives on the panel to report to the board directly on the outcome of meetings. Panels were also found to play a role in many instances in 'providing input' into action plans to address any issues identified through annual staff surveys. 68% 32% Most firms have adopted one (or more) of the three core options Implemented one of the three core options in response to the Code No action NED Advisory Panel Both NED and Advisory Panel worker director none of these options Appointing a designated NED was the most popular option  Governance News | Weekly wrap up of key financial services, governance, regulatory, risk and ESG developments. Disclaimer: This update does not constitute legal advice and is not to be relied upon for any purposes MinterEllison | 7 ME_183543315_1 – A structured mechanism for communication between the board and the workforce: The report observes that advisory panels are still a relatively new innovation and that processes are still evolving. Having said this, the report comments that having an advisory panel provides a structured/formalised mechanism for obtaining employee views and feeding these into board decision-making. Commenting briefly on the hybrid approach (having a designated NED and an advisory panel) the report suggests that this may allow for more scope for structured/formalised two way communication between the board and the workforce (though the report comments that there were 'relatively few concrete examples' of where the views of the panel influenced board decisions/advice). ▪ Worker directors: – By far the least popular option (only one company sampled) opted to appoint worker director following the release of the Code. In total, there are now five FTSE 350 companies with worker directors (four of which predate the Code). – The report includes discussion around why firms opted not to adopt this approach. Generally, firms expressed the view that: a) one worker could not represent the views of the whole workforce; b) there would be various 'practical problems' with having an employee take on director responsibilities eg workers may lack the experience/technical background required; and c) concern that worker directors would be 'too loyal to the CEO who appointed them'/distrusted over time by the workforce. The HR director of a firm with a worker director suggested that boards may be reluctant to adopt this course because of 'perceived loss of control' and concern that workers may not have the skills required/require support. – The report observes that a common argument against appointing worker directors is that the 'company is too big, too multinational, or too complex to be represented by a single person or panel of people'. The report challenges this, pointing out that 'firms tend not to argue in their annual reports that they are too large or complex to be governed by a single board of directors or single Chief Executive'. – The report also suggests that companies may be underestimating the abilities of worker representatives (whether as directors or members of advisory panels), commenting that interviews 'revealed many examples of excellent workforce representatives'. – The report makes clear that the appointment of worker directors is not considered (by firms in the sample who have adopted this course) to be sufficient in itself. Rather it's perceived as supplementing or complementing other engagement mechanisms/practices. ▪ Almost a third of companies did not adopt any of these options: – The remaining 32% of FTSE 350 firms in the sample did not adopt any of these three options, either opting to adopt 'alternate arrangements' (which is allowable under the Code), or 'claiming that their existing engagement mechanisms are adequate to satisfy the Code’s requirements'. ▪ The most common 'alternative arrangements' adopted were: – Systems that 'sounded very much like an advisory panel' (though the firms did not identify them as such). – Various 'ad hoc arrangements' eg site visits, town halls, staff focus groups or other informal conversations with employees. The report comments that a number of firms place 'heavy reliance on an annual employee survey as their primary tool for engagement with the workforce', sometimes supplemented with site visits/other informal discussions with employees. Impact on board practices/decision making? ▪ The report found that the introduction of the Code requirements appears to have had little significant impact on the range of issues discussed at board meetings: 63% of firms indicating that it had made little difference. ▪ Overall, the report found that workforce issues arise at relatively few board meetings – with most firms indicating the workforce issues came up either 'a few times' or 'once or twice' over the last 12 months. ▪ 42% of firms identified only one or two occasions over the past year when workforce engagement led to a 'change in approach' and 25% indicated that this had not ever occurred. An evolution of existing practices, rather than a radical shift in approach? ▪ The report found that overall the introduction of the new requirements in the Code has not triggered a radical shift in approach in most cases, but rather that firms have tended to evolve their existing approaches to a greater or lesser extent. For example, only 16% of firms said that their approach to workforce engagement had 'completed changed' in response to the 2018 Code. ▪ The majority of firms (80%) self-described their current approach as an 'evolution' of existing arrangements already in place before the 2018 Code