Governance Readout

A high-level implementation plan has been published by Companies House in relation to the Economic Crime and Corporate Transparency Act 2023 (ECCTA).

The plan identifies that:

• Companies House expects to be able to impose financial penalties for offences in the latter part of 2024. This follows the guidance they released in October on how it will exercise their new enforcement and fining powers.
• The new requirement for identity verification (IDV) is expected to be introduced by spring 2025. Those service providers who are registered for Anti Money Laundering with a supervisory body will be able to register to become an Authorised Corporate Service Provider, so that they can provide IDV services and confirm details to Companies House.
• It is anticipated that by autumn 2025 Companies House will introduce the new requirements for all directors and Persons of Significant Control (“PSCs”) of newly incorporated companies, with existing companies having a further 12-month transition period. IDV will be compulsory for anyone filing a document from spring 2026.
• Following an extensive notice period, all accounts will need to be delivered via Companies House’s software. However, they are not yet able to announce the notice period.
• No firm timetable has been announced for the other elements of the ECCTA that will require c.50 statutory instruments. These are likely to commence over 18 months and implementation continuing until 2027.

Computershare’s view

Through our continued engagement with the Department of Business & Trade and Companies House we have established that, while no firm timetable is set for the changes that will impact the registers of members (s.3, s.46 & s.50 of the ECCTA), they are considering one of two options for its implementation.

The first option would introduce all elements at once with a 6 or 12 month transition before they are mandatory.

The second option would introduce the elements of the Act that will see public companies needing to ensure that their registers have full member names recorded for all existing and new members, and private companies needing to record additional information first, and then allowing a 6 or 12 month period until all issuers need to provide an updated register of members with their confirmation statement.

The latter option would give some companies almost 24 notices of s.50 commencing dependent on where their confirmation statement lands.

We have also raised several questions with our contacts regarding how the IDV requirements will work for those companies that have directors who sit on multiple boards.

If the verification is going to be manual or automatic (the latter being more akin to HMRC verification and therefore potentially simpler to administer), how will those directors become linked to the right organisations when they currently have variations of their names recorded in different places and by different methods? 

We’re waiting for responses to other questions we posed, including an understanding of how Companies House will need to change owing to shortened accounting reference date operation and how the management of historical personal data that is still currently viewable will be managed. As we learn more, we’ll keep you updated.

When the UK Government published the Individual Savings Account (Amendment) (No 2) Regulations 2024 (which made certain changes to the Individual Savings Account Regulations 1998), they introduced the ability to expressly recognise certain ‘fractional interests’ in shares that can be held in stock and shares ISAs.

This change has been sought by many of the retail platforms that offer fractional shares in ISAs, particularly after HMRC made public in March 2023 that such fractional shares were not qualifying investments.

The regulations lay out the specific requirements that must be met for fractional shares to qualify for a stock and shares ISA and include:

• Allows fractional interests in shares issued by a company incorporated anywhere, in an investment trust and a UK Undertakings for Collective Investment in Transferable Securities (UCITS) listed or traded on a recognised exchange to be held in an ISA
• Require fractional interests to be contained in a contractual arrangement
• Require ISA managers to disapply the requirement relating to voting rights and shareholder meeting attendance, thus allowing them not to provide for some form of proportional voting or proxy attendance
• Require ISA managers to retain custody of the relevant whole share as would be done for other ISA investments The regulations are effective from 4 November and when it comes to fractional shares any already held in an ISA should conform to the requirements or be removed. 

Computershare’s view

While ISA managers can issue fractional interests, as noted above they will hold the full share, therefore there may be some questions as we approach the 2025 AGM season about how this could impact proxy instructions or corporate representation at meetings. The requirements noted above suggest that ISA managers no longer must facilitate voting rights or permit requests to attend meetings, therefore companies could see a reduction in voting levels from corporate entities that act as the custodian for ISAs that issue fractional interests.

If organisations have any custodians who hold on behalf of ISA operators, they should consider how a potential reduction in engagement from underlying holders will impact their corporate governance.

The Investment Association (IA) has published a set of simplified Principles of Remuneration for 2025. The updated guidance has been substantially revised. Listed companies should be aware that:

• The 5% dilution limit that applied to discretionary share schemes which prevented the use of new issued or treasury shares from rolling over 10 years has been removed
• The section regarding the treatment of share awards upon a change of control has been scrubbed
• One time the annual LTIP award is seen as an appropriate benchmark for minimum shareholding requirements. Where a company uses a service-based restriction plan, and discounts awards levels, it's understood that the IA would consider the shareholder guidelines to be proportionately increased.
• Some companies have legitimate reasons why executives may be party to a hybrid long-term incentive scheme, where they receive part performance-based and part service-based awards

Computershare’s view

The updated Principles are clearer and more concise than earlier versions and we welcome the flexibility which allows companies to adapt pay structures which best suit their business and market sector.

It also appears that the Principles provide more clarity around when companies can explain their point of view for long-term incentive plans, and it would be hoped that this is taken into account by those who review annual disclosures that are operating under the comply or explain regime of the UK Corporate Governance Code.

Through a recent ministerial statement (made as part of the green paper on the UK’s Modern Industrial Strategy), the Department of Business & Trade (DBT) has announced proposed changes that the UK Government will seek to make to company law and to streamline non-financial reporting. The statement also advised that they intend to lay legislation before parliament before the end of 2024 to change the monetary thresholds used for the classification of companies.

Non-financial reporting

Proposals to streamline this element of reporting began during the previous Government, with a call for evidence being published in May 2023 and proposals set out in March this year. DBT has now said that legislation will be laid before parliament by the year’s end that will raise the monetary threshold for company classifications for large, medium and small companies by 50%, remove reporting requirements that are viewed as redundant and implement technical fixes to the audit framework.

Mid-sized company strategic reports

A summary of responses to the previous Government’s consultation regarding removing the requirement for mid-sized companies to produce a strategic report and to increase the number of employees that factors into their classification as a mid-sized company has been released.

The responses favoured a more holistic review of non-financial reporting and so the current Government has decided not to take these proposals forward at this time until they have conducted a wider review of non-financial reporting in spring 2025.

The statement also confirmed what we had heard from other sources that the government is planning to review shareholder communications and the legal position in relation to virtual AGMs, together with taking forward the recommendations found in last year’s Secondary Capital Review Report.

The US based management consultancy firm Gartner has published their Top Corporate Governance Trends for 2024, but what might be of interest to most of our companies is the trend regarding ‘Enhanced Board Oversight Using AI’.

This trend includes examples of routine board processes that may have a benefit in using Generative AI. It also includes ways in which a company’s management could use it to support reporting and communications to the board.

For instance, GenAI may help to pull together and analyse data that support the board in making strategic and risk decisions, and improve the depth of information provided to the board by using “intelligent assistants”.

The document identifies some actions that companies can take should they be looking to introduce GenAI including hands-on training for board members so that they understand how the technology works, this could include microsimulations to flag the risks AI can pose. It suggests reviewing routine board processes to identify where GenAI could be introduced such as with board skill analysis or gathering information on compensation paid for a peer analysis.

Computershare’s view

It's clear that the role of AI in good governance and the responsibilities of the board and company secretaries continue to be of interest and importance, but there has not yet been any clear leadership.

You can see how it’s a continuing important conversation from our September Readout article looking at AI and Board Minutes and also from the discussions held at one of our previous OpenSpace events following which we released an insight article on AI and Company Secretaries.

The Institute of Directors (IoD) has published its Code of Conduct for Directors which it states is designed to be a practical tool to assist directors make better decisions and provides a behavioural framework that will help organisations build and maintain the trust of the wider public.

The voluntary code has been crafted to not hold directors back or create a new compliance burden. It has been structured around six key ‘Principles of Director Conduct’ which are:

• Leading by example: Directors should demonstrate exemplary standards of behaviour in both personal conduct and decision-making.
• Integrity: Acting with honesty and adhering to strong ethical values.
• Transparency: Making decisions openly and clearly, ensuring honest communication.
• Accountability: Taking personal responsibility for actions and their consequences.
• Fairness: Treating all stakeholders equitably, without discrimination or bias.
• Responsible business: Integrating ethical and sustainable practices into business decisions, considering societal and environmental impacts

Companies are recommended to:

• Encourage directors to commit to the IoD Code to foster a culture of integrity and accountability
• Provide regular training on ethical decision-making and the principles of the Code
• Promote open communication within the organisation to build trust and ensure actions are transparent
• Integrate sustainable practices into strategies to support long-term success
• Carry out periodic reviews of a director’s adherence to the Code to support continuous improvement and association to ethical standards

The IoD has expressed that it hopes boards will publicly commit to the Code such as through disclosure within the Annual Report, on corporate websites, and in communications to employees and other stakeholders. A kitemark has been developed by the IoD for use to signify such commitment.

Computershare’s view

Compliance with the Code of Conduct is entirely voluntary – it is for guidance only and has no legal status. However, the Code should be seen as a set of tools for a behavioural framework to help directors navigate the complex trade-offs they deal with every day.

Primary Market Bulletin 51 includes changes to the Knowledge Base to reflect the new UK Listing Rules launched in July 2024.

Some of the main elements of the bulletin are:

• Consultation feedback
  This bulletin includes feedback from the consultation contained within bulletin 48 that focused on proposed changes to the Knowledge Base for the UK Listing Rules and sponsor regime.
• Knowledge Base changes
  The bulletin includes 12 updated technical notes and one new note related to sponsors. It also outlines amendments to the existing guidance based on feedback from the consultation.
• Practical implications
  It takes the opportunity to emphasise the practical implications of the new Listing Rules for issuers and sponsors, so as to ensure market participants understand their obligations. These are significant following the Listing Rules changes, including:

Enhanced compliance requirements – issuers will need to adapt to the updated technical notes that lay out their obligations including understanding the sponsor regime and complying with the revised guidance on working capital statements, related party transactions and financial forecasts.

Increased scrutiny – issuers may see greater scrutiny from sponsors regarding their financial health and governance practices, therefore issuers will need to ensure internal controls and procedures are robust.

Transaction guidance – clearer guidance on how to handle significant transactions, including refinancing and related party transactions are included and issuers will need to be diligent in preparing disclosures.

It also reminds readers of the planned improvements to the National Storage Mechanism and the deadlines for responding to the FRC’s discussion paper on opportunities for the future of digital reporting.

The Georgeson Corporate Governance team has analysed the FTSE 350 remuneration report votes for July – September 2024. Of the 88 AGMs held during this period, only two of the companies received more than 20% opposition to the approval of their remuneration report.

The memo also provides details based on the industry sector, comparing this quarter's data with previous quarters and years to identify trends in shareholder sentiment.

To discuss the memo in more detail, please contact Nicholas Laugier.

Georgeson’s ESG team has put together a memo covering the recently released ISS Policy Survey, which will feed into the creation of ISS’s updated UK & Europe voting policy for the 2025 AGM season. We have filtered out the questions that are not relevant to the UK & Europe resulting in a total of six topics that are covered within the memo:

• Virtual Meetings
• Auditor Rotation
• Share Issuance (France only)
• Scope 3 GHG Emissions
• Climate-related Shareholder Proposals
• Workforce Diversity

Please contact Hal Dewdney if you have any comments or questions – our ESG team is more than happy to jump on a call if you would like to discuss this further.