As the 2019 AGM and reporting season gets underway, we give an overview of the key changes affecting listed and AIM companies.
The corporate governance reforms implemented through the Companies (Miscellaneous Reporting) Regulations 2018 ("Regulations") and the revised UK Corporate Governance Code ("2018 Code") apply to financial periods beginning on or after 1 January 2019. Whilst reporting on the new corporate governance requirements will not take place until 2020, companies need to prepare for these changes now. One of the key elements of the corporate governance reforms relates to stakeholder engagement.
The Regulations introduce requirements for large companies to report on how the directors have engaged with customers, suppliers and others and had regard to the matters set out in section 172 of the Companies Act 2006 (duty to promote the success of the company for the benefit of the members as a whole). The Regulations also require UK companies with more than 250 UK employees to describe how they have engaged with their employees, how they have had regard to employees' interests and the effect of those interests on the company's principal decisions taken.
For those companies which apply it, the 2018 Code reiterates the need for wider stakeholder engagement and requires boards to understand the views of the company's key stakeholders and describe how stakeholder interests and the matters set out in section 172 of the Companies Act 2006 have been considered in board discussions and decision making.
The 2018 Code also requires boards to have in place a mechanism for workforce engagement. Three options are suggested: (i) a workforce appointed director, (ii) a formal workforce advisory panel or (iii) a designated non executive director, although it is permissible to use an alternative mechanism if the board considers it to be effective.
It is clear from these reforms that a company's stakeholders extend beyond its shareholders. However, the 2018 Code emphasises the continued importance of shareholder engagement with provisions regarding the need for regular engagement with shareholders and a requirement for companies to consult with their shareholders in the event of a vote of more than 20 per cent or more against a board recommended resolution.
Companies should be reviewing their approach to stakeholder engagement and ensuring that stakeholder interests are considered as part of their decision making processes.
Remuneration remains an area of focus. The Regulations have expanded the reporting regime for listed companies to include mandatory reporting on the ratio of CEO to employee pay, the impact of share price growth on share based executive pay and the exercise of discretion in relation to remuneration.
The 2018 Code reflects the focus on remuneration by including provisions expanding the remit of remuneration committees and enhancing their reporting requirements. The need to consider wider stakeholder interests is also reflected in provisions requiring remuneration policies to be set taking into account wider workforce remuneration.
Companies should be reviewing the remit of their remuneration committees and should ensure that they are prepared for the additional disclosures. Whilst most of the additional remuneration related disclosures are required from the 2020 annual report onwards, there are two exceptions. Firstly, any remuneration policy proposed in 2019 will need to contain an illustration of the impact of share price movement on executive remuneration during the relevant performance periods. Secondly, although not mandatory until 2020, the Investment Association has indicated that it expects companies to disclose their CEO pay ratio in 2019 so companies should be mindful of investor expectations in this regard.
Corporate governance code
In addition to introducing new stakeholder engagement provisions and remuneration requirements (as outlined above), the 2018 Code generally places greater emphasis on corporate culture and a company's purpose. The 2018 Code requires the board to establish the company's purpose, values and strategy and ensure that these and the company's culture are aligned and are reflected in its policies, practices and behaviour throughout the business.
The emphasis in the 2018 Code on embedding a company's culture and purpose is evident in relation to remuneration. Remuneration should be aligned with a company's culture and clearer reporting is required, evidencing how remuneration policies and practices support strategy and promote long term sustainable success.
Companies should be implementing changes to reflect the 2018 Code this year, so that they are in a position to report against it in 2020.
In our 2018 bulletin, we predicted that Brexit related risks and uncertainties were likely to be a feature of many companies' 2018 annual reports. A year later, the position has not changed and Brexit related issues will continue to be a focus for many companies, particularly given the ongoing uncertainties relating to Brexit. The FRC continues to encourage companies to report as fully as possible in relation to their Brexit-related risks and actions taken to manage these.
Energy and Carbon Reporting: with effect from financial years beginning on or after 1 April 2019, companies will need to report under the new energy and carbon reporting regime. Among other things, this will require UK quoted companies to report on greenhouse gas emissions, energy consumption and energy efficient action.
Diversity: as the 2020 deadline set by the Hampton-Alexander Review approaches, companies should be considering the gender diversity of their boards, executive committees and direct reports to executive committees. As reflected in the 2018 Code, companies should also be mindful that diversity extends beyond gender and all aspects of diversity should be considered. In particular, ethnic diversity has been highlighted through the Parker Review's recommendations regarding the number of people of colour on boards and the government's consultation on the introduction of mandatory ethnicity pay reporting.
For further guidance on the corporate governance reforms, see our alerts UK Corporate Governance Reforms: How do they affect premium listed companies? and UK Corporate Governance Reforms: How do they affect AIM companies?.