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