What should we be looking out for as we embrace the new year?
After a year nobody could have predicted, 2021 promises more change. Corporate governance professionals need to be prepared to tackle post-Brexit issues for registrars, issuers and their EU resident shareholders, as well as its impact on intermediation and dematerialization. COVID-19 will continue to have implications for the way AGMs are managed, and ESG governance will come increasingly under the stewardship spotlight.
Here, I've rounded up some of the key areas governance teams need to look out for in 2021.
The Impact of Recent Changes: Brexit
We are just a month on from the 31 December 2020 Brexit date, and the only material impact so far has been to the way some regulated products are marketed. The removal of passporting rights means that UK firms' ability to market to EU customers has been removed.
Active promotion of share-dealing services and dividend reinvestment plans to those in the EU, therefore, has had to stop; firms can no longer offer these services in their literature to EU clients. What they can continue to do, is to invite non-UK shareholders to view potential choices (not all of which may be available to them, depending on jurisdiction) online, from where they can make their own choices without being actively marketed to.
Looking ahead, the fact that companies based in Ireland can no longer use Crest in London as their central securities depository will impact businesses there, with a new replacement product due go live in mid-March.
COVID Impacts
AGMs - which have already seen huge changes in 2020 due to the pandemic - also need consideration in 2021. The Corporate Insolvency and Governance Act expires on 30 March 2021 and cannot be extended further. Any change to continue to allow virtual or hybrid meetings without a change in company's articles would therefore demand new legislation - something there is probably little government appetite or capacity for at the moment.
The question then arises; should organizations future-proof their articles to allow digital or hybrid meetings, or changes in processing, in future?
Companies face lots of decisions on this in 2021, and what happens beyond 30 March is currently unclear. Whether meetings are held via Zoom, behind closed doors, as webinars, or as a hybrid is something companies need to consider, with shareholder - as well as business - preferences needing to be considered.
A recent survey carried out in conjunction with the UK Shareholders Association found that 81% of shareholders are in favour of hybrid meetings, while 89% are against fully virtual ones. This significant support for hybrid meetings and those making some use of digital attendance - in part driven by the ESG considerations of institutional holders - is something companies need to consider.
The willingness of investors to get involved in AGMs via proxy appointments is increasing; figures show that in 2019, 50.1% of capital voted, while in 2020 this rose to 64%.
Proxy volume by digital channels has also increased, with 39% of proxies voting digitally in 2019, and 53% in 2020. Shareholders are becoming more engaged with issuer companies, and the potential to get involved electronically facilitates this.
The voice of the shareholder - retail as well as institutional - is therefore increasingly being heard when it comes to the evolution of the AGM. Companies that haven't changed their articles to allow hybrid meetings already may therefore want to consider this in 2021, even without legislative imperatives to do so.
Demat and Intermediation
Brexit will also have an impact on dematerialization. The original timeline for change would have seen any new security coming to market needing to be in dematerialized form by 1 Jan 2023; for existing securities, the planned deadline was 1 Jan 2025.
But since Brexit, the conditions contained within the Central Securities Depositories Regulation have not been implemented, and the implications of this are not yet fully known.
With the new central securities depositories coming into play on 12 March and the need to dematerialize from Ireland, the UK is still looking to have fully dematerialized system in place for 1 Jan 2023 - although this will require significant work.
On intermediation and shareholder rights, the industry is awaiting findings of the intermediation study being carried out by the Law Commission, brought about by questions around:
- Where we are on demat
- What intermediation is
- What SRD2 has delivered since it came into force in September 2020
- New Taskforce on Climate-Related Financial Disclosure (TCFD) reporting requirements
- Existing requirements and encouragement to act on this
- Paris alignment; and
- Audit reform
- Do we have a specific committee with capacity and skills to take on climate/ESG matters? Or should our board take on this responsibility? Or should we create a new separate committee for ESG or risk? Only 22% of the FTSE 350 currently have a risk committee, and while this is mandatory for certain financial services companies, and of varying importance by sector to others, it is something that should be considered by all organizations. It's worth remembering that all directors have a duty to consider ESG as part of their responsibilities under section 172 of the Companies Act.
- Do committee terms of reference need to be updated to ensure they're clear on ESG/climate oversight?
- How will different committees stay aligned? ESG and climate matters span all Code Committees; co-ordination is therefore vital.
- Is sufficient time allocated to these matters in committee/board meeting agendas in 2021?
- Are responsibilities clearly set out?
- The Nomination Committee should consider whether climate risks and opportunities are sufficiently material to the business to be included in the directors' skills matrix. If there is no skills matrix, the committee should consider designing an appropriate one, tracking any gaps and using this to help with succession planning. Directors and CoSecs should ensure that their climate change/ESG skills and the contributions they can make are visible in their biographies.
- The Remuneration Committee should explore the place of ESG metrics in exec incentive schemes. Few companies have introduced this approach to date, and where they have, this can be short term. Although this could be seen as counter-intuitive to the long-term nature of climate change risks and responses, this short-termism can reflect the practical challenges in setting realistic targets - challenges that have only been exacerbated by Covid.
- The Audit Committee currently does most of the heavy lifting in terms of ESG/climate reporting, partly as they tend also to be responsible for risk oversight, which climate reporting falls under. There are a few questions all Audit Committees should be asking themselves around the process:
- Are they satisfied that arrangements are in place for the company to meet new disclosure requirements on a timely basis?
- Do their monitoring/review activities show that the company's risk management systems are effective in identifying/assessing material climate risks?
- Has the resilience of the business to material climate-related threats been considered?
- Have climate risks, operations and strategic discussions been disclosed, and are they adequately reflected in the asset and liability valuations? What scenarios have been developed?
- Is the committee satisfied with the metrics and targets that have been chosen?
- And are they satisfied with the level of assurance they have over the integrity of reporting and data on climate matters?
Media Highlights
Environmental, social and governance (ESG) issues have become more complex and multifaceted than ever before. At the same time, ESG continues to ascend on board and leadership agendas.
In this buyer’s guide, we explore what a market-leading ESG solution should look like and highlight the key areas organisations should be prioritising as they embark on their search.