Newsletter - Page 15 - Tapestry - Global Legal Compliance Partners

COVID-19: Weekly Catch Up on Global Changes

During these unprecedented times, companies are facing a lot of commercial uncertainty. The impacts of COVID-19 are far-reaching and fast-moving and incentive plans do not escape the consequences.

In some countries these changes have impacted:

Reporting: filing and reporting may continue to be required but practically is this still possible? What are countries doing to assist companies in meeting their compliance requirements?
Salary deductions: Governments are assisting in funding wages, but does this impact payroll deductions or wage withholding?
Dividend payments: regulators are requesting dividend payments to be suspended, but do companies have the ability to do so?

With all of these changes taking place all over the world daily and at a high pace, the task of keeping up (both maintaining compliance and grasping opportunities) is enormous!

... so how can we help?

Now more than ever is the time for community and coming together, and we want to help as much as we can.

We have been working with our global community of incentive lawyers to look at the impact on share plans around the globe. Each week we will be sending updates to our clients and subscribers with a weekly COVID-19 Catch Up of key global updates and impacts on incentives to keep you as up-to-date as possible.

Weekly wrap-up:

China - SAFE Filings: China are accepting quarterly filings which have been made late.
Tapestry comment
This is helpful during a time where companies are struggling to get documents reviewed and signed but filing on time is, of course, preferred if possible.

EU - Financial Services: the regulators in both Germany and the UK have given strong guidance to banks that they should not pay dividends at this time.
Tapestry comment
In a time where cash is king, this will be unsurprising news to most but unwelcome to some. Communicating this to participants in the context of their awards will be key.

Luxembourg - Deferral of Tax Filing: the filing date for tax returns has been postponed to 30 June, 2020.
Tapestry comment
This takes some pressure off companies whilst they try to meet their compliance requirements. Companies should think of preparing filings ahead of time to avoid delays in case there are still practical difficulties in June.

Thailand - Securities laws: The Thai Securities Regulator is now accepting scanned copies of signed forms for filings where they normally ask for originals.
Tapestry comment
This is definitely welcome to avoid delays. As we are currently unsure whether regulators will later require originals, it is important that companies keep a copy of the original signed documents.

USA - Employee support: the CARES Act has provisions for payroll loans to employers to incentivise employers to keep employees employed. The loan has to be used for payroll, rent and utilities and the loan is provided tax-free if certain conditions are met.
Tapestry comment
Whilst this does not directly impact incentive plans, this is a welcome benefit during these times of uncertainty. The terms of these loans should be reviewed to ensure they meet the conditions to be offered tax-free.

The Tapestry Team are always available if you would like to speak to us about any of your countries and operating your share plan globally during this time, so please do get in touch.

We are also running a series of webinars on key issues affecting global share plans and will be launching a 'Spring into Spring' series of webinars shortly to do a deep dive into some of the topics which we think may be helpful to you at this time.

Lorna Parkin and Sally Blanchflower

COVID-19: FS: UK PRA's approach to Pillar 3

9 April 2020

The UK’s Prudential Regulation Authority (PRA) has issued a statement outlining their approach to Pillar 3 disclosure for UK banks, building societies, designated investment firms and credit unions in response to COVID-19. This statement follows an earlier statement from the European Banking Authority (EBA) in which the EBA encouraged flexibility from national regulators, including when assessing deadlines for Pillar 3 disclosures.

Key points

The PRA will be flexible in its expectation of firms’ publication timelines for Pillar 3 disclosures and will take a flexible approach to assessing the reasonableness of any delay to a disclosure that would otherwise be published in connection with quarterly, half-yearly or annual financial disclosures that firms would normally expect to disclose on or before 31 May 2020.
The PRA does not currently set a deadline for the publication of Pillar 3 disclosures but expects the Pillar 3 disclosure to be made within a reasonable amount of time following the publication of financial reports.
The European Securities and Markets Authority recently recommended that regulators allow firms with securities traded in a regulated market an additional two months to publish their annual financial report and an additional month to publish their half-yearly financial report. National regulators have started to permit such delays, including the FCA.
The PRA understands there may be a lag time between the publication of financial reports and Pillar 3 disclosures and, as Pillar 3 disclosures need to be made within a reasonable time following the publication of financial reports, the PRA recognises that Pillar 3 disclosures will also be delayed significantly compared to the usual publication date.
Where firms reasonably anticipate that publication of the Pillar 3 disclosure will be delayed, the PRA expects that firms will inform supervisors and market participants of the delay, the reasons for such delay and, to the extent possible, the estimated publication date.

Tapestry comment
It is encouraging that European and UK regulators recognise the operational difficulties caused by COVID-19 and are taking a flexible approach to try and mitigate those difficulties. Although Pillar 3 disclosures cover a broad range of topics, the disclosures also include remuneration disclosures. Impacted firms that have delayed the publication of their financial statements will, therefore, have more time to prepare the connected Pillar 3 remuneration disclosures. Firms should keep an eye out for further developments from the PRA, which can be accessed here.

If we can assist you in any way, please do let us know.

Matthew Hunter

COVID-19 updates / Financial Services updates / Newsletter - 04/09/2020

COVID-19: UK IA letter on expectations & support

8 April 2020

The Investment Association (IA) has sent a letter addressed to FTSE 350 companies expressing support from investment managers for British businesses in the face of the COVID-19 pandemic, and setting out what the IA expects to see in certain key areas, including executive remuneration.

Remuneration

The IA restates its goal of delivering long-term value and security for investors, and despite the current crisis, wants companies to ensure they are thinking long-term too. For remuneration, this means the IA favours companies that reflect cancelled dividend payments and/or changes to workforce pay in their approach to executive pay - as set out in the IA Principles of Remuneration which require pay to be linked to performance and shareholder experience.

Other points

Engagement and communication - shareholders will support a focus on the most business-critical issues, so companies can focus on building a long-term sustainable future.
AGMs - again, shareholders will focus on key material issues affecting businesses, as well as encouraging flexibility to ensure AGMs can go ahead while respecting ‘Stay at Home’ measures.
Dividends - the IA recognises that there is no one size fits all approach here, and the most important thing is that companies act transparently and in the interests of their own sustainability - although where dividend payments are cancelled they should be resumed as soon as possible.
Financial reporting - as we recently reported on in a newsletter which can be found here, the IA welcomes the additional time the UK Financial Conduct Authority has given to companies to prepare their results and reports.
Additional capital - shareholders will look to support companies seeking additional capital where possible.

Tapestry comment
Many companies have already been looking at their own remuneration arrangements for their executives ahead of the IA’s guidance this week and other institutional investors’ letters to companies in the last few days. The arrangements we are seeing being considered include salary reductions, bonus waivers, arrangements which look to defer salary or settle in shares to conserve cash and align with shareholders, and changes to their share plans.

We will be holding a webinar on these alternative arrangements and will send out invitations next week.

It is helpful that the IA are supporting the alternative AGM arrangements being proposed. Many companies have their Remuneration Polices up for renewal this year and as well as other complications of AGMs not happening when they were due to happen, this facilitates the AGM business being done in a timely way.

If you would like to discuss the implications of this letter, or of COVID-19 on your incentives more generally, please do let us know.

Janet Cooper OBE

COVID-19 updates / Global updates / Newsletter - 04/08/2020

COVID-19: FS Regulators act on Dividends, Share Buybacks & Bonuses

2 April 2020

This week, the European Banking Authority (EBA) and the UK’s Prudential Regulation Authority (PRA) have issued statements relating to the suspension of dividends and share buybacks in credit institutions, and asking those firms to assess their variable remuneration policies. The statements are intended to ensure that credit institutions maintain a sound capital base during the COVID-19 crisis and follow a similar recommendation from the European Central Bank (ECB) last week.

Key points from the EBA statement:

The EBA urges all banks to refrain from dividend distributions or share buybacks which result in a capital distribution outside the banking section, in order to maintain its robust capitalisation. Banks should revert to their regulators if they consider themselves legally required to pay dividends or make share buybacks.
Competent authorities should ask banks to review their remuneration policies, practices and awards to ensure they are consistent with and promote sound and effective risk management, reflecting the current economic situation.
Remuneration and, in particular, variable remuneration, should be set at a conservative level.
To achieve an appropriate alignment with risks stemming from COVID-19, a larger part of the variable remuneration could be deferred for a longer period and a larger proportion could be paid out in equity instruments.
The statement follows an earlier EBA statement in which they asked that banks should follow prudent dividend and other distribution policies, including with regard to variable remuneration, to ensure that banks build up adequate capital and liquidity buffers.
The EBA also published a separate statement asking regulators to be flexible when assessing compliance with Pillar 3 report publication deadlines, noting that if firms reasonably anticipate a delay, they should inform the regulator and market participants of the delay, the reason for the delay and, where possible, the estimated publication date.

Key points from the PRA statement:

The PRA has written to the UK’s seven largest systemically important deposit-takers requesting that they suspend dividends and buybacks of ordinary shares until the end of 2020, and that they cancel payments of any outstanding 2019 dividends.
The PRA expects banks not to pay any cash bonuses to senior staff, including all material risk takers.
The PRA is confident that bank boards are already considering and will take any appropriate further actions with regard to the accrual, payment and vesting of variable remuneration over coming months.

Tapestry comment
These statements form part of wider coordinated regulatory action to ensure that banks maintain a sound capital base to enable them to continue key lending functions during this time of global crisis. The statements also show that regulators will focus on the variable remuneration policies and practices of credit institutions to ensure they remain appropriate in the current climate.

Firms should review the key aspects of their remuneration policies and practices to ensure they are appropriate in light of the ongoing crisis and should, in addition to ensuring that the structure and quantum are justifiable to the regulator, ensure that all relevant remuneration rules and guidelines continue to be complied with. If a regulator considers that excessive or otherwise inappropriate variable remuneration payments have been made, they may also take a closer look to ensure that the relevant rules and guidelines have been complied with.

The PRA’s expectation that banks do not pay any cash bonuses to senior staff, including all material risk takers, may be of particular concern to some of the impacted firms. The impacted firms will need to consider how this will be dealt with, particularly where existing contractual commitments have been made to pay those cash bonuses, and will need to consider whether an alternative instrument will be suitable, such as a larger share award.

The prohibition on dividends and buybacks may trigger other remuneration considerations. For example, although material risk takers should not receive dividend equivalents during vesting, employees who are not material risk takers may receive remuneration awards which normally attract dividend equivalents, meaning those employees will lose out on the dividends for this year. Also, if share buybacks are used to acquire treasury shares to hedge a share plan, the prohibition on share buybacks may impact the supply of treasury shares for firms that rely on buybacks for this purpose.

Firms that are not currently caught by the statements published, particularly firms in other jurisdictions, should prepare for comparable statements to be published by their appropriate regulators and consider how their firm will react. In the meantime, firms will be taking note of these developments and will consider the optics of continuing to pay out dividends and large bonuses in these uncertain times when many companies are struggling financially.

All firms should consider if there are any other changes required to remuneration policies and practices as a consequence of the COVID-19 crisis. We published an alert recently setting out a few questions that firms should consider.

If you would like to discuss this alert, or anything else, please do let us know.

Matthew Hunter

COVID-19 updates / Financial Services updates / Newsletter - 04/02/2020

COVID-19: UK: FCA extends the deadline for annual accounts

26 March 2020

The UK Financial Conduct Authority has today published a statement providing temporary relief for listed companies facing the challenges of corporate reporting during the ongoing COVID-19 crisis. The FCA has also published a related Q&A webpage. Those companies who do defer may also need to consider the impact on the timing of their upcoming grants and vesting of share awards.

Key points:

The requirement for companies to publish audited financial statements within four months from their financial year-end has temporarily been extended to six months. Companies may continue to publish within four months, if they wish, but the FCA is urging all companies who feel it appropriate to take the additional time offered.
The COVID-19 crisis will lead to companies re-thinking their financial calendars to ensure that the information disclosed is accurate and carefully prepared, and the FCA encourages this.
The temporary relief does not currently extend to half yearly financial reports (interims) which should be published within 3 months of the half year-end.
The temporary relief is only relevant to companies that are subject to DTR 4.1 and does not include companies with securities admitted only to markets that are not regulated under MiFID, such as AIM.
The EU Market Abuse Regulation remains in force and companies are still required to fulfil their obligations under the Regulation, including the timely disclosure of inside information and respecting the prohibition on insider dealing. The FCA acknowledges that companies will need to carefully assess what constitutes ‘inside information’ at this time - what is material to the business’s prospects may now have shifted.
On 21 March, the FCA requested that all listed companies delay the publication of their preliminary financial statements for at least two weeks, in order to absorb recent events and be able to take them into account when preparing their statements. Whilst voluntary, the FCA has confirmed that the moratorium has been ‘well observed’ and that it will now end on 5 April 2020.
The extension of the publication deadline is intended to be temporary while the UK faces the extreme disruption of the COVID-19 crisis and its aftermath. The FCA will keep this under review and, when the disruption abates, will announce how it will end.

Tapestry comment
For many companies, the ability to delay the publication of the annual results will be a welcome relief at this difficult time. There are, however, a few key share plan related issues that companies should consider, and that will need to be managed and communicated to employees and administrators. These are:

The delayed deadline for audited annual results and the ongoing moratorium for preliminary results may impact when grants can be made. Normally, share plan rules operated by UK listed companies will permit grants to be made within 42 days following the announcement of preliminary or audited results (as expected under the Investment Association’s Principles of Remuneration). Awards that are typically granted during this period would need to be delayed in line with the delay of the relevant preliminary or annual results, impacting the company’s normal grant (and, as a consequence in future years, vesting) cycles.
Under the EU Market Abuse Regulation, ‘closed periods’ of 30 days prior to the publication of preliminary or audited results, during which certain share plan related actions (such as the exercise of an award, or the sale of shares) by persons discharging managerial responsibilities cannot take place. These closed periods will move as a consequence of any delay of the preliminary or audited results, which may result in adverse consequences if they now fall within a ‘normal’ vesting cycle.
Companies should also check their own Share Dealing Code for the terms of any wider closed periods that might apply. These Codes often implement closed periods from the end of a financial period until the publication of the preliminary / annual results. Delaying these results could see considerably extended closed periods during times of ‘normal’ vesting cycles, which again may have adverse consequences as mentioned above.

If you would like to discuss the implications of this statement, or of COVID-19 on your incentives more generally, please do let us know.

Janet Cooper OBE, Hannah Needle FGE and Matthew Hunter

COVID-19 updates / Financial Services updates / Global updates / Newsletter - 03/26/2020

COVID-19: UK Gender Pay Gap Report Filing suspended

25 March 2020

The Gender Pay Gap reporting in the UK has been suspended by the Government. The announcement was made on 24 March to suspend gender pay gap reporting requirements for this year due to the Coronavirus outbreak.

Key Points:

Gender pay gap reporting obligations, which look at the difference between the average earnings of men and women, expressed relative to men’s earnings, were introduced in 2017 and apply to businesses and organisations with over 250 employees. However, in light of the COVID-19 pandemic, the government has decided that companies will not be expected to report their gender pay gap data this year.
Reporting for this year would have covered data from the 2018-19 “snapshot date”, which is 5 April every year. The deadline for reporting this data would have been 4 April 2020, and so any employers that have not reported already will have their reporting obligation suspended. Over 3000 employers have already completed their gender pay gap reporting - about a quarter. The government has noted that any companies that are still in a position to report their gender pay gap data can continue to do so and will be provided with support by the Government Equalities Office.
Under normal circumstances, the Equality and Human Rights Commission would have the power to investigate any employers that fail to satisfy their gender pay gap reporting obligations, and these employers could face an unlimited fine after court action.

Tapestry Comment
Given the difficulties that many companies are facing in the wake of the COVID-19 outbreak, this decision by the government will be helpful to those companies that have not yet completed their gender pay gap reporting for this year or where they cannot now get into their office to do the filing.

Many companies will have already prepared their Gender Pay Gap Report though and will have been waiting until the end of the month to submit. It is likely that many of those organisations, especially where they have good data and progress in their gender equality initiatives, will still want to submit or at least publish on their own website. It has been helpful that the Government Equality Office recognises that as offices have been forced to close some will not have access to their reports to be able to submit. The UK’s Gender Pay Gap reporting requirements have been important in bringing gender equality to the forefront of boardroom discussions and, whether or not a company chooses to submit at a later date, if companies want to make progress on gender equality and show to women in their organisations that it is important, they may want to publish their data when they can.

It is worth noting that, at present, the government decision does not look to have any impact on future gender pay gap reporting obligations and deadlines, meaning that companies will still be expected to submit their gender pay gap reporting data for 2019-20 by April 2021.

If you would like to discuss the impact of COVID-19 on your share plans, please do let us know.

Janet Cooper OBE

COVID-19 updates / Global updates / Newsletter - 03/25/2020

COVID-19: Incentive plans in uncertain times

13 March 2020

Companies are facing imminent grant and vesting events under their incentive plans in times of substantial stock market turmoil, business disruption and general uncertainty. What are the questions you might be being asked by your internal stakeholders and investors, and what decisions might need to be made?

How do we meaningfully value outstanding awards?
Can we delay grants and vestings (and should we)?
Are these the “exceptional circumstances” permitted to grant outside of our usual permitted window?
What grant price should we use to calculate the number of shares under award - is it fair or unfair to use the current share price?
How many shares will we need when granting new awards?
How will this impact our dilution limits?
Should we re-think our hedging strategy?
Are our performance conditions still appropriate, and can they be changed?
Should we exercise discretion when vesting awards - is now the time to override those formulaic outcomes?
What do we do about options that are now underwater?
What does our remuneration policy permit?
For our all-employee plans - do we have the answers if employees want to withdraw funds or stop contributing? Is now actually a good time to launch, re-launch or switch-up our offering?
Are there any clauses in our plan rules that help us step outside our usual practice?
How do we communicate the effects to our participants?

Tapestry comment
The impact of the Coronavirus (COVID-19) is developing globally with alarming speed. More than ever, we are all having to adapt quickly to keep to “business as usual”. Companies are taking steps to protect their businesses and employees, and to mitigate the impact of the virus. These steps will involve accommodating pay and incentives in our shared new normal.

You may wish to reconsider standard or existing practice for your incentives in light of extreme stock market volatility and general business uncertainty. Delaying grants, revisiting whether existing incentives are fit for purpose and mitigating share and cash costs are some of the factors you will have to consider when examining your reward and incentive arrangements. Your individual company situation will, of course, be influenced by the markets and sectors you are in, and the calls from your particular investors.

If you would like to discuss any of the above to see what’s possible under your incentive plan rules and associated policies please get in touch, and look out for our upcoming webinar invite.

On a wider note, we want to let you know that Tapestry has measures in place to ensure business continuity for our clients and the safety of our team. We are confident that we can continue to deliver high quality advice during these circumstances, as we are a flexible business that can adapt well to changes as they evolve. Tapestry will continue to remain available to partner with you in navigating these unique times.

We hope that you and your loved ones are, and stay, healthy and well.

Team Tapestry

COVID-19 updates / Global updates / Newsletter - 03/13/2020

UK Tax: The Chancellor Delivers UK Budget

On 11 March 2020, the Chancellor of the Exchequer (the UK Finance Minister) delivered his budget (financial statement) to the UK parliament.

There was little in the budget of direct relevance to share plans and the main topic today was, inevitably, the potential impact of the coronavirus on the economy and the introduction of measures to address this in the short term.

Key measures:

Some of the announcements affecting employees and employers are set out below:

Enterprise Management Incentive (EMI) schemes: A consultation has been launched to consider whether these tax-advantaged employee option schemes (currently only available to smaller businesses, and subject to certain criteria) should be made more widely available.
Entrepreneurs’ Relief: This relief (which confers a 10% rate of capital gains tax for disposals by shareholders holding more than 5% of a company) was retained, but the lifetime limit was reduced from £10 million to £1 million.
Social security: The earnings threshold for NICs (social security contributions) increased from £8,632 to £9,500. These contributions are normally payable alongside income tax by employers and employees when share awards vest or are exercised.
Corporation tax: The rate of corporation tax remains unchanged at 19% (and will not drop to 17% as had been previously stated).

Tapestry comment
It will be interesting to see whether any significant changes are proposed to the EMI scheme following this consultation. Depending on any restrictions imposed by the UK’s state aid rules after Brexit, it might be that this scheme, and its generous tax benefits, could be made available to larger businesses.

Entrepreneurs’ Relief has not been abolished as some commentators had predicted, however the reduction in the lifetime allowance makes it less attractive, particularly when considered alongside the changes introduced in 2018 which made it more difficult for shareholders to qualify for the relief.

If you have any questions on how these changes may impact your share plans, please do contact us and we would be happy to help.

Global updates / Newsletter - 03/11/2020

FS: Prudential Regulation Authority Publishes Board Diversity Letter

As International Women’s Day (8 March) approaches, the UK Prudential Regulation Authority (PRA) has published a letter addressed to Chairs of regulated firms about the importance of diversity. It reinforces the importance the PRA places on diversity for improving decision-making and providing effective challenge, and reminds regulated firms of the PRA’s rules in this area.

Key points:

The PRA already expects boards to have diversity of experience and capacity to provide effective challenge across the full range of the firm’s business, and already requires firms to have a board diversity policy in place, set a target for the under-represented gender where the firm is required to have a nominations committee, and explain on their website how they comply with the respective requirements.

The PRA asks Chairs to satisfy themselves that their firm meets the PRA’s requirements and to take remedial action where they do not, noting that the recent European Banking Authority report on the benchmarking of 2018 diversity practices (as reported here) showed that 30% of sampled UK firms still did not have a diversity policy in place, despite requirements to do so. The PRA notes that Chairs should expect to discuss the extent to which the diversity policy is embedded in recruitment and succession planning for the board with their supervisors through normal regulatory dialogue.

Tapestry Comment
This letter is a clear reminder of the importance the PRA places on diversity, particularly at board level, and reflects a wider focus on diversity from investors (as reported here) and from society generally. The PRA is particularly concerned that some firms do not appear to comply with long-standing requirements, noting that, although there has been progress since the previous benchmarking report for 2015, 30% of UK firms sampled in 2018 continue to not comply with the requirements to have a board diversity policy.

The PRA's diversity requirements, including the requirement to have a board diversity policy, seek to ensure boards have sufficient diversity, made up of members with different skills, knowledge, experience and values, to reduce the risk of groupthink which they note can adversely affect the safety and soundness of PRA-regulated firms. The PRA's focus is therefore on ensuring the board reflects a broad set of qualities and competencies and, on this basis, we expect to see the PRA actively challenging firms that do not satisfy the requirements.

We reviewed the Remuneration Reports of the FTSE 100 for 2019 and it showed that all the main banks and insurance companies in the FTSE 100 do have diversity policies in place and some link their annual or long-term incentives to diversity targets. Some are gender specific, while some are wider diversity considerations. If you would like to see our FTSE 100 diversity review, please let us know.

If there is anything you would like to discuss, we are here to help.

Financial Services updates / Newsletter - 03/06/2020

UK: IA New report: priorities for 2020 & beyond

The Investment Association (IA) has released a report setting out its vision for driving long-term value in UK listed companies.

Background

The IA is a trade body representing the UK investment market, with 250 members collectively managing over £7.7 trillion worth of investments. It sets corporate governance best practice for UK listed companies and, through its corporate governance research service (IVIS), it assesses FTSE companies against the IA’s guidelines, the UK Corporate Governance Code and corporate governance best practice generally and flags any areas of concern for shareholders, to help inform AGM voting decisions.

The IA’s new report on Shareholder Priorities for 2020 supplements its other corporate governance work and outlines four key areas that the IA’s members have identified as key drivers for future-proofing, diversifying and increasing the long-term resilience and value of the UK’s listed market:

Climate change
Audit quality
Stakeholder engagement and employee voice
Diversity

The report outlines investor expectations in each area, the actions the IA intends to take to improve these areas and the approach IVIS will be taking in monitoring them.

Report highlights

1. Responding to climate change
Climate change poses a significant risk to businesses, society, the environment and, in the long-term, financial markets. Increasing regulation in this area, pressure to reduce emissions and extreme weather can affect supply chains and consumer demand.

Going forward, investors will expect:

Proactive identification and management of climate-related risk; and
Climate change-related disclosures in the company’s annual report – working towards full compliance with the Taskforce for Climate-related Financial Disclosures (TCFD) recommendations by 2022.

To support this, IVIS will introduce a new section to its ESG report highlighting whether the company has made climate-related disclosures in its annual report in relation to governance, risk management, strategy and metrics / targets – aligned with the TCFD recommendations.

2. Audit quality
Audit reform is a hot topic at the moment. The IA wants to encourage greater trust in a company’s audited information by increasing audit quality. It aims to do this by encouraging Audit Committees to challenge management and external auditors on their judgement and depth of analysis. The IA’s members are keen to hold further discussions with Audit Committees to understand barriers to improving audit quality and are willing to target votes on individual members of the committee and a company’s report and accounts where they are found lacking in this area.

To support this, IVIS will have a focussed section highlighting company disclosures on how the Audit Committee has held management and its auditors to account.

3. Stakeholder engagement and employee voice
Employees, customers, suppliers and local communities are key to a company’s success and long-term value. Stakeholder engagement and the employee voice is receiving increased focus following new reporting regulations on how directors have taken stakeholder interests into account and how companies have engaged with the wider workforce. The IA wants to take this one step further and see companies clearly identifying their wider stakeholders and reporting on how they have engaged with them and what impact that has had on board decision-making.

To support this, IVIS will report on whether the company has identified its stakeholders and disclosed how it has engaged with them.

4. Diversity
Diversity is another hot topic at the moment, particularly in relation to corporate governance (see our recent alert on new ethnicity reporting requirements). There is a growing body of research indicating that diverse companies are more productive and sustainable. The IA acknowledges that there has been significant improvement in gender diversity at Board level but believes there is still more to be done, particularly in terms of ethnic diversity and (in terms of gender and ethnicity) greater diversity below Board level.

To support this, IVIS will now report on ethnic diversity at Board level. It will also red top any FTSE 350 company with:

Women representing 20% or less of the Board;
Only 1 woman on the Board (unless there are only 3 directors in total); or
Women representing 20% or less of the executive committees and their direct reports.

IVIS will amber top any FTSE SmallCap company on the same basis as above (except at a 25% level rather than 20%).

Timing

IVIS will start monitoring and reporting on these points this year, for companies with year ends on or after 31 December 2019. Colour-tops will not start in relation to climate change reporting until at least 2021.

Tapestry comment
The IA is an influential body in setting corporate governance principles and best practice guidance for UK listed companies. Its members, together, hold one third of the value of UK publicly listed companies, which gives the IA a powerful voice with which to influence company behaviour and hold businesses to account. UK listed companies in particular will be very interested in the outcome of this report, although IA recommendations often become best practice in the UK industry more widely, so it will be of interest to many companies.

It is no surprise to see that the IA views combatting climate change, increasing diversity, improving stakeholder engagement and high quality audits as critical to the long-term success of a company in 2020 and beyond. These are hot topics that many companies will already be engaging with, but the IA is now pushing them up the investor agenda in order to drive real change, in areas that investors see as critical to a company’s long-term success in the modern world.

As with all new corporate governance changes, there will be a journey towards compliance. Companies should consider the impact of the new IA focus coming out of the report, particularly in relation to new disclosure requirements. For many companies, these areas will be covered in this year’s IVIS reports, and companies currently preparing their annual reports should consider any changes they may want to make to take account of this. Companies should also consider the new approach to colour-topping gender diversity, particularly at below-Board level, the company’s approach to diversity generally, and whether any further improvements can be made. For example, research we conducted last year showed that 32% of the FTSE 100 now include diversity / gender targets in their incentive plans (a 17% increase on the previous year).

Companies who fail to make the improvements and disclosures identified in the report can expect to see increased shareholder dissent in the future – which, if significant, will be recorded and publicised on the IA’s Public Register of shareholder dissent.

Please do get in touch if you would like to discuss the possible impact of the IA’s report for you, or if you would like any help preparing your annual directors’ remuneration report – we would be happy to help.

Global updates / Newsletter - 02/06/2020

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