Governance Readout

The Financial Conduct Authority (FCA) have released a draft that contains most of the new UK Listing Rules, which will see a fundamental restructuring of the existing regime. Whilst the core desire of the changes is to attract more companies to list in London there will be significant impacts on existing listed companies.

A new single segment for new equity shares will be introduced and see the existing premium and standard segments fall away and only create a single set of continuing obligations for normal commercial companies. These changes will also see most of the proposed and trailed components discussed in May 2023 become part of the new listing regime, including;

• Shareholder votes no longer being required for significant/class 1 transactions;
• Shareholder votes no longer required for related-party transactions;
• The Modified sponsor regime will remain as a cornerstone of investor and market protection;
• Relationship agreements with controlling shareholders will remain mandatory;
• There will be significant changes to the eligibility requirements for IPOs with a move to a disclosure-based and not a rules-based regime.

There will be a reliance on greater disclosures – so investors will be expected to do more of their own due diligence.

All existing premium listed commercial companies will be migrated to the new category automatically and those companies with a standard listing will be migrated to a new transition category, that will have the same continuing obligations as their current standard listing ahead of them either remaining as they are or utilising a streamlined application process to join the new category.

The consultation on these draft rules closes in two parts 16 February 2024 for the sponsor proposals and 22 March 2024 for everything else. It is expected that the FCA will publish the final rules in the second half of 2024 and them coming into force a few weeks later.

Computershare’s view

It’s good to see these discussions progress, however the true impact can’t be judged until the market has had their opportunity to respond to the consultation and more certainty is available on which changes will be implemented and when. Time will tell whether the combining of the standard and premium listed status will aid in the improvement that the market wishes to see with the exchange, however there are still questions as to if some of these changes will see a degradation in good governance. Investors also need to become better educated on a wider range of matters related to a listed company if reliance is put on them to judge the success of a company’s activities, commercial, ESG or otherwise as more reliance is placed on the company’s disclosures.

The Financial Reporting Council (FRC) Lab published a report looking at structured digital reporting and sets out areas of focus for companies and suggestions to optimise reporting for the needs of investors and stakeholders.

Under DTR 4.1.15, listed companies are required to publish annual reports in a structured electronic format. The report looks at 50 annual reports published in the second year of the requirements being in force.

The report recommendations relate to three areas:

• Tagging, including creating custom tags only when necessary;
• Design and usability; and
• Process including voluntary assurance of tagging.

The report also summarises findings of research commissioned by the FRC on how investors use structured digital reports which found that over a third of investors are utilising XBRL formatted reports as a source of obtaining financial data.

In our last newsletter of 2023 (read it here), we discussed that the Economic Crime & Corporate Transparency Act (ECCT Act) had received Royal Assent and that much of the new legislation needed further regulations to be implemented and that this would take place over the coming months.

As we headed into Christmas, several draft regulations were laid before Parliament that focused on new powers for Companies House and reforms regarding Limited Liability Partnerships. The ECCT Act will see amendments to the Companies Act 2006 that transform Companies House from a passive entity receiving information to an active gatekeeper. These first draft regulations focus on:

• Registered office Address (Rectification of Register) Regulations 2024 – will allow Companies House to change a company’s registered office address where it is satisfied that the existing address is not an ‘appropriate address’ under s.28 of the ECCT Act.
• Service Address (Rectification of Register) Regulations 2024 – allow Companies House to alter the registered service address of a director, secretary, registrable person or registrable relevant legal entity where it is satisfied that the existing address is not a service address as defined by the Companies Act 2006.
• Principal Office Address (Rectification of Register) Regulations 2024 – introduce similar rectification powers in relation to principal office addresses.

It is worth noting that these regulations only take effect when s.105 – 107 of the ECCT Act come into force, and the commencement orders for these elements are yet to be published.

In the week prior to Christmas, ISS announced their updated guidance for the 2024 AGM season that apply to those shareholder meetings taking place on or after 1 February 2024. ISS have since released a comparison that covers the Benchmark Policy changes in 2024 compared to 2023.

Of interest to those companies within UK & Ireland, the updates consider

• Board Diversity – simplifies policy language and removes transitory provisions so as to reflect the FCAs diversity rules.
  
  For those companies (standard & premium listed companies) with financial years beginning on or after 1 April 2022, ISS may consider recommending against the chair of the nomination committee if the company hasn’t met the reporting requirements of the FCA’s listing rules that require board to have at least 40% of women on the board; and at least one women in a senior position (Chair, CEO, CFO, Senior INED).
• Share Issuance – is reflective of the Investment Association’s updated share capital management guidelines which were updated in line with recommendation 14 of the UK Secondary Capital Raising Review.
• Significant Shareholder definition – it is now specified that a significant shareholder for the purpose of defining when a non-executive director is unlikely to be considered as independent is 3% of issued capital.

Georgeson’s view

The 2024 ISS Policy Voting guidelines update is not as comprehensive as previous years for UK and Irish companies. Yearly, ISS will change how it implements its policies on issues such as governance, executive remuneration and climate-related issues, but will continue to hold companies accountable to high standards even if their change in approach is not fully reflected in the updated policy.

To learn about how Georgeson can support you in understanding how ISS apply their guidelines in practice, please email Nicholas Laugier (Nicholas.Laugier1@georgeson.com) or Daniele Vitale (Daniele.Vitale@georgeson.com).

Glass Lewis released their guideline updates to their main voting policies for 2024 for the UK and Europe. The updates will be effective form the 2024 AGM season. This memo summarises the policy changes that will be applied across the UK, Ireland and Continental Europe.

Following this release Georgeson have published a summary of the UK and European policy updates and you can read the memo here.

It includes key updates on:

• Director accountability for climate related matters
• Cyber risk oversight
• Interlocking directorships
• Director attendance and executive shareholding requirements

In addition, the summary covers country-specific updates for the following markets: Continental Europe, Germany, France, Switzerland, Netherlands, Italy, and Spain.

Georgeson’s view

Glass Lewis’s clients have communicated that they are concerned about the governance of Environmental and Social risks, specifically climate change and cyber-attacks. It has now created objective expectations about how the Governance of Environmental and Social risks should be disclosed and will apply these expectations to companies where climate change is considered a material topic according to SASB.

Beyond these updates outlined above for UK & Europe, the UK policy does not entail any material changes to their 2024 UK policy guidelines relative to 2023.

If you have further questions regarding the updates to the Glass Lewis policy, please email Nicholas Laugier (Nicholas.Laugier1@georgeson.com) or Daniele Vitale (Daniele.Vitale@georgeson.com).