How has the AGM and financial report landscape fared in 2022? What lessons can be carried forward into 2023? What topics are going to be the key drivers of conversations at next year’s AGMs? Are companies doing enough with regards to ESG and executive pay reporting?
In November 2022, Slaughter & May hosted an event addressing these questions and more, with valuable insight from representatives of the Financial Reporting Council, The Chartered Governance Institute UK & Ireland and the Investment Association.
Non-compliance is on the up
This year saw an interesting development under the famous ‘comply or explain’ rule of the Corporate Governance Code. Of the FTSE 100, only 27 companies reported full compliance in 2022, versus 58 in 2020, a decrease of more than 53%. The FRC feels that this is fundamentally a positive sign, with more companies taking the time to consider how the Code specifically applies to them rather than choosing to follow it blindly. This year, 68% of FTSE 350 companies surveyed expressed non-compliance with one or more provisions, with the most frequent being pension contribution rates and Chair tenure.
Whilst there have been considerable improvements in explanations for non-compliance, the FRC noted that there is still room to grow. Best practice explanations should cover the context, give a convincing rationale, detail a timescale and weigh up the risks of non-compliance and any mitigation measures taken. Ultimately, the FRC is looking to move towards an ‘activity and outcome’ model for explanations, whereby companies will have to demonstrate a particular activity and its impact, rather than simply refer to a policy. This is likely to be one of several changes in the new iteration of the Corporate Governance Code due for publication in late 2023.
In-person AGMs are back, but with bite
2022 has seen a strong return to in-person AGMs, with hybrid formats generally not resulting in the anticipated higher rates of turnout. Whilst there was a year-on-year decline in the number of significant votes against resolutions, there was an increase in disruption, with the most high-profile cases mostly concerning climate change protests. The Institute’s very own Peter Swabey suggested that Chairs need to be well-briefed on handling possible disruptions prior to next year’s AGMs. Particular attention can be paid to drafting the Chair’s script and providing a reminder (or even a practice run) of their powers to adjourn a meeting, to call for a participant to use the time wisely, or in extreme cases, to eject participants entirely.
Notably, 2022 also saw higher numbers of climate resolutions brought forward at AGMs compared to 2021, matched by higher levels of support for them. This is likely to continue in 2023, though such resolutions largely remain confined to the energy and financial sectors.
ESG disclosure is expected to be of a higher quality
The most commonly cited concerns about ESG reporting in a straw poll of the event’s attendees were greenwashing, TCFD compliance and Net Zero transitions, with others including data accuracy, standardisation of metrics, comparability of data between companies, and defining ESG. This list will no doubt resonate with many board members, particularly at large firms which for the first time have had to comply with the TCFD reporting requirement.
This year, mandatory climate-related disclosure for the largest 1,300 companies has greatly increased the quality of such disclosure. Nevertheless, suggested areas for improvement going forward included increasing the granularity and specificity of disclosures (for example, breaking out separate business units) and adding more balance rather than solely focussing on areas with the largest amounts of progress. Companies could also go further in providing more detailed explanations as to why certain ESG factors are considered material and others not, and in demonstrating the impact of ESG-related narrative disclosures on their financial statements. Inevitably, this will require large amounts of input from cross-functional teams in order to accurately capture the impact of ESG measures on a business.
In terms of upcoming ESG regulation, key developments on the horizon include:
- The Sustainability Disclosure Requirements from the FCA, with a focus on asset managers and consumer-facing labelling.
- A set of accounting standards due to be laid out by the International Sustainability Standards Board (ISSB), an IFRS effort which will be applied and built upon in the UK.
- Upcoming guidelines (which are likely to become mandatory) on how companies should create and disclose their Net Zero transition plans, which are currently being drafted by the Transition Plan Taskforce.
- New listing and disclosure requirements around diversity from the FCA, including gender and ethnic diversity on boards.
Setting remuneration will be challenging amidst high inflation
The perennial question of remuneration is anticipated to be a particularly hot topic as we move into 2023, as a cost-of-living crisis coincides with the long-anticipated windfalls for executives who received shares under LTIP agreements during the period of drastically depressed share prices due to the pandemic.
Companies will be expected to exercise discretion, and take wider stakeholder experience into account, particularly in a highly inflationary environment. As ever, boards will need to demonstrate the robustness of their decision-making process and would do well to consult executives and other stakeholders as to the most relevant factors for these decisions, as well as compare company performance to that of the wider market. In this context, remuneration committees need not shy away from their powers to exercise discretion in overwriting formulaic results but should be prepared to provide healthy justification for their decisions.
Boards will need to keep several plates spinning
The new year promises considerable economic headwinds and continued geopolitical instability. Companies will be expected to demonstrate the strength of their business model and contend with inflation, all whilst juggling increased regulatory and social pressures around climate change and diversity. In these challenging times, the key watchwords for boards to consider will be risk and resilience.
Emily Ford, Policy Adviser
The event ‘2023 AGM and Reporting Season – Looking forward and a look back to 2022’ was hosted and facilitated by Slaughter & May on 29 November 2022.
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