Directors’ Knowhow is a monthly article which highlights changes and updates of relevance to small and mid-size quoted companies.

Reports, guides and regulation

This section features some of the key legislative/regulatory developments and changes, as well as any new reports or guidance issued by industry bodies or regulators, over the last month.

ICSA new guidance on company AGMs

On 24 February 2021, ICSA (The Chartered Governance Institute) and the CLLS Company Law Committee published guidance to help public companies plan for their AGMs and other general meetings in 2021. The guidance, which has been endorsed by the QCA, FRC, BEIS, Investment Association and Investor Forum, is intended to reflect the continuing impact of the Covid-19 pandemic on companies’ ability to hold physical meetings, particularly given the Prime Minister’s statement on 22 February, where it appears general meetings will be required to be held on a closed basis until at least 17 May and possibly 21 June.

As the flexibilities surrounding general meetings will fall away on 30 March 2021 when the measures included in the Corporate Insolvency and Governance Act end, the guidance helps to clarify expectations surrounding company meetings scheduled to be held after this date. The guidance states that companies must adopt a flexible approach to AGMs and other general meetings as the options available depend on the legislation and guidance at the time of the meeting. Companies must still prioritise effective shareholder engagement.

The key considerations outlined in the guidance are as follows:

Without the enabling provisions offered by CIGA, closed meetings will only be possible after 30 March 2021 if legislation and guidelines at the time preclude gatherings of more than a very limited number.

It will be necessary to react to the situation at the time and AGMs and other general meetings will need to reflect any restrictions, such as government health and safety measures that might restrict public gatherings in a particular way. Venue capacities are also likely to be significantly reduced due to social distancing rules and this needs to be factored into planning for the meeting.

If there is no specific legislation in force at the time of the meeting, such as national lockdown restrictions, companies will not be able to preclude shareholder attendance either entirely or by seeking to impose a limit on the number permitted to attend. However, a company can strongly recommend that shareholders do not attend due to the unpredictable circumstances.

Companies can legally organise hybrid meetings even if their articles do not expressly enable this, provided there is nothing in the articles which prevents their doing so.

The guidance also covers a host of other matters, such as:

How the format and venue of a meeting can be changed if the situation changes before the meeting and whether this should be addressed in documentation accompanying the meeting notice;

The requirements for hybrid general meetings and how questions and answers should be conducted at these meetings;

How companies should recommend shareholders participate in meetings; and

How to ensure meetings are Covid-19 secure.

Finally, the guidance includes ICSA’s good practice recommendations and sample wording for AGM circulars for closed physical meetings in a lockdown scenario.

If you wish to view the full guidance, you can download it here.

GC100 discussion paper

At the end of January, GC100 – The Association of General Counsel and Company Secretaries working in FTSE 100 companies – published a discussion paper on the limitations of the current format of AGMs from a company perspective. The paper advocates for a legislative framework that allows companies to choose a meeting format which they consider to be best for their shareholders.

The GC100 intends the work with Government and the regulators to encourage a change to the Companies Act 2006 to permit hybrid/virtual meetings.

Included within the paper is a draft code of best practice for electronic participation at virtual and hybrid shareholder meetings. This includes the following recommendations:

Companies should provide instructions to their shareholders on the processes involved in asking questions and voting through electronic facilities.

Companies should promote engagement and transparency in the same way as if there meeting were taking place physically.

Companies should choose an appropriate meeting format in order to facilitate engagement.

The meeting should be available in audio and video.

Shareholders should have the same rights of participation as they would at a physical meeting.

The questions asked by shareholders should be visible to all shareholders attending.

The chair should exercise their right to manage the conduct of a virtual/hybrid meeting in the same way they would at a physical meeting.

After the meeting, shareholders should be permitted to follow up on any answers given to questions during the meeting.

Q&A transcripts of submitted questions should be made available on a company’s website.

In addition to the above, the draft code also includes wording for proposals to amend the articles of association to permit a virtual and/or hybrid meeting.

To view the paper, please click here.

Hampton-Alexander Review report

On 24 February 2021, the Hampton-Alexander Review released its 5-year summary report. The report finds that the number of women on FTSE boards is up by 50 per cent in just five years, with the number rising from 682 to 1026. The FTSE 100, 250 and 350 all reached the target of women making up 33 per cent of boards by the end of 2020. While men still dominate at the tops of the biggest UK companies, there are no longer any all-male boards in the FTSE 350.

The review also found that there is an overarching culture change at the top paving the way for greater parity across businesses, with women’s representation in senior leadership positions also increasing.

To view the report, please click here.

Investment Association guidance on good stewardship

On 24 February 2021, the Investment Association (IA) published their Good Stewardship Guide for 2021. The guide states that it is important that investment managers hold businesses to account in order to ensure they generate sustainable value over the long-term for their clients. Stewardship involves looking at a range of issues which impact on the long-term performance of the company. Typically, these include strategy and financial performance, corporate governance, productivity and capital management, audit and accounting, and environmental and social issues.

This year, there is a particular focus from the IA on the below issues, which are outlined in their shareholders priorities for 2021:

Climate change, including climate change action, climate risk governance and “Paris-alignment”

Diversity in leadership, including ethnic diversity on boards, ethnic diversity reporting and gender diversity

Employees, customers and the community, including stakeholder engagement and giving employees a voice

Transparency and accountability, including transparency on audit quality and pay for performance

Pay, including explaining pay for all employees, pension contributions and reporting pay ratios.

To view the guidance, please click here.

FCA changes to reporting

Earlier in February, the FCA announced changes to regulatory reporting requirements for companies during the ongoing pandemic. As a result of the challenges faced by companies and their auditors in preparing audited financial statements, the FCA have said it will allow flexibility in the submission deadline for the annual report and accounts.

The FCA is now allowing companies to apply for a 2-month extension to the deadline for submission due up to and including 31 July 2021.

The FCA have stressed that this flexibility should only be utilised by those companies who are encountering difficulties in finalising their audited financial statements.

To view the announcement, please click here.

Updated principles for the operational separation of audit firms

In July 2020, the FRC published its principles for the operational separation of the audit practices of the Big 4 firms and asked the firms to submit their implementation plans to the FRC. The FRC has reviewed these plans and has discussed with each of the firms on how they should move to the next stage of implementation.

Following its conversations, the FRC has made some changes to the principles. This includes:

Clarifying that services provided to non-audited entities should be commissioned by those charged with governance at the entity or be assurance services for third party recipients.

Increasing the minimum proportion of revenue within the ring-fence that must be derived from audit.

Confirming that the audit practice should not receive fees for introducing business to other parts of the firm and that partners in the audit practice should not be incentivized for sales passed to other parts of the firm.

To view the updated principles, please click here.

Government announces extension of insolvency measures

On 16 February 2021, the Government announced that it intends to extend the measures from the Corporate Insolvency and Governance Act in order to relieve pressure on businesses dealing with the Covid-19 pandemic. This will allow the Government to amend or modify the temporary amendments regarding corporate insolvency and governance legislation for an additional year.

The Government laid the regulations in parliament on 11 February ahead of the amendments expiring on 30 April 2021.

To view the announcement, please click here.

ICAEW guidance on the UK Endorsement Board (UKEB)

The Institute of Chartered Accountants in England and Wales (ICAEW) has issued some useful guidance on the new UK Endorsement Board (UKEB) as the responsibility for endorsement of new and amended International Financial Reporting Standards (IFRS) for use in the UK, now lies with the UKEB.

The webpage explains the endorsement process, which includes certain key criteria:

Standard is not contrary to the principle that the accounts must give a true and fair view.

Use of the standard is likely to be conducive to the long term public good in the UK.

Standard meets the criteria of understandability, relevance, reliability and comparability.

In addition, the webpage also highlights how the UKEB will influence the development of IFRS, including:

Contributing to the IASB’s research agenda.

Responding to the IASB’s due process documents.

Seeking views from UK stakeholders on emerging issues.

Engaging with other national standard setters.

Outreach activities on current projects.

If you wish to view the webpage, please click here.

Leading proxy advisors release reports on best practice

In February, the Best Practice Principles Group has published the latest statements from the signatories to the Best Practice Principles for Shareholder Voting Research. This includes the statements of Institutional Shareholder Services (ISS), Glass Lewis, Minerva, EOS, PIRC and Proxinvest.

In the statements, the signatories provide a narrative statement and a summary table of how they have complied with the Best Practice Principles.

In addition to the above, each signatory has provided a feedback contact where you can direct questions in respect of their statements.

To view the list of statements, please click here.

HMRC updates guidance on VAT deferral scheme

On 9 February 2021, HMRC updated its guidance on the VAT deferral scheme to include information on the new payment scheme. The new payment scheme gives businesses the option to spread payment of the deferred VAT, free of interest and penalties. The new payment scheme opened to taxpayers on 23 February 2021.

Therefore, if you deferred VAT payments due between 20 March and 30 June 2020 and still have payments to make, you can either pay the deferred VAT in full before 31 March 2021, or join the VAT deferral new payment scheme. Taxpayers must join by 21 June 2021 and their VAT returns for the last four years must be up to date.

For more information, please click here.

FRC Lab report on virtual and augmented reality

The Financial Reporting Lab of the FRC has published a new report on virtual and augmented reality in corporate reporting. The report considers how virtual and augmented reality might be used to expand the scope and audience for corporate reporting. The report includes examples of current practices and highlights some possible future uses.

Virtual and augmented reality are the application of various technologies, such as motion tracking, sound engineering, animation, stimulation and video, used to create an immersive experience for a user. As companies begin to digitalise, virtual and augmented reality could become increasingly important for companies as a tool for their corporate communications.

The report highlights the accelerated adoption of technologies during the pandemic, which has changed the fundamentals of many aspects of business and points to the potential use of virtual and augmented reality in the future.

To view the report, please click here.

Policy

This section provides an update of any recently submitted QCA consultation responses, as well as the consultation responses the QCA is currently drafting.

QCA policy consultation responses

The QCA’s Accounting, Auditing and Financial Reporting Expert Group contributed to our response to the FRC’s consultation on the proposal to revise ISA (UK) 240.