With the Summer annual general meeting (AGM) season now on the horizon, many company secretaries and general counsel will be considering the preparation for their AGMs and the publication of their annual reports.
In recent years there have been a great number of changes to the requirements for annual reports and those for AGMs, mostly brought in by the Companies Act 2006 (the 2006 Act), but also changes driven by the guidance from shareholder bodies such as the Association of British Insurers (ABI) and the National Association of Pension Funds (NAPF). European legislation has also been a factor, with the Shareholder’s Rights Directive coming into force in 2009, as well as the increased focus on corporate governance that has trickled down to all companies from the initial scrutiny of financial institutions after the recent global financial crisis.
After years of change, things are beginning to settle. However, this article sets out some new developments and important practice points to watch out for in 2011.
There are thankfully far fewer changes to the requirements for the Annual Report and Accounts this year; the business review has been in place since 2007 and the bulk of the accounting requirements have been in force from financial periods that began on or after 6 April 2008. While there is a general focus on narrative reporting, encompassing both the directors’ report and directors’ remuneration report, the only technical change of note this year is by way of an additional requirement for the directors’ remuneration report.
For financial years beginning on or after 6 April 2009, quoted companies will be required to explain how the pay and employment conditions of other employees were taken into account when determining directors’ remuneration. This will therefore apply for the first time to many companies in the 2011 reporting season.
For those firms in the financial services sector, the Walker Report and the Financial Services Authority’s new Remuneration Code have drawn out key themes in directors’ remuneration. These include aligning rewards and risk profile, the appropriate ratio of fixed against variable remuneration, the use of shares for awards, and ensuring effective safeguards (such as deferral of awards and clawback of shares). It has been noted that several companies outside of the financial services sector are including many or all of these features in their new incentive plans and remuneration structures. It is expected that these, and other measures targeted initially at the financial services sector such as the European Commission’s corporate governance green paper, will continue to filter down into the rest of the market. Indicating the focus on remuneration across the market, the ABI has recently written to the remuneration committees of companies on the Main Market expressing concerns about uncapped incentive plans.
NAPF has set out those remuneration practices it feels are likely to cause concern in its updated voting guidelines, which were released last November. These take account of the new UK Corporate Governance Code (the Code). While the reporting obligations under the Code may not apply in the 2011 season, companies may wish to consider the recommendations from the various organisations this year, alongside any early adoption of the Code itself.
Narrative reporting will generally continue to be a theme this season and into the next one. For example, following on from the Financial Reporting Review Panel’s (FRRP) 2010 Annual Report last September, the FRRP has recently announced its concern about how companies are reporting the principal risks and uncertainties facing their business. It states, among other comments, that reports should clearly set out the principal risks and uncertainties (and not provide a long generic list that is inconsistent with the rest of the report), and should explain how they are managed by the company. Looking to the future, the department for Business, Innovation and Skills (BIS) has stated that it intends to develop corporate governance policy proposals following its own consultation on narrative reporting, for which it published a summary of responses at the end of last year, and this will continue the focus on the adequacy of narrative reporting.
UK Corporate Governance Code
The Financial Reporting Council (FRC) published the final version of the Code on 28 May 2010. The Code replaces the Combined Code on Corporate Governance (the Combined Code) for accounting periods beginning on or after 29 June 2010. For most companies, this will mean beginning to apply the Code this year and reporting against it for first time in 2012 (reporting requirements do not have to be complied with until the annual report after the end of the first financial period to which the new rules apply).
The Code remains similar to the Combined Code, and contains similar principles including the ‘comply or explain’ approach. The key changes introduced include:
‘Requirements for greater leadership and commitment from directors – chairmen are now encouraged to report personally in the annual report about how the principles relating to the role and effectiveness of the board have been applied in the hope that, as the leaders of the board, such personal reporting might be the turning point in attacking what the FRC has described as the “fungus of ‘boiler plate’ which is so often the preferred and easy option in sensitive areas but which is dead communication”.’ (Preface to the Code.)
Four new main principles have been introduced, all of which emphasise the increased commitment expected of every director. In particular:
- greater emphasis is placed on the responsibility of the chairperson for leading a board and ensuring its effectiveness;
- non-executive directors are expected to constructively challenge and help develop proposals in relation to a company's strategy;
- the board as a whole should have an appropriate balance of skills, experience, independence and knowledge to enable each director, and the board as a whole, to discharge their duties and responsibilities effectively; and
- each director must be able to devote sufficient time to the role to discharge their responsibilities effectively. It is worth noting that the Pensions Investments Research Company (PIRC), in its UK Shareholder Voting Guidelines 2010, advocates the disclosure of the number of days that directors spend on company business.
Annual re-election of FTSE 350 directors
The Code provides for the re-election of all directors of FTSE 350 companies every year, rather than only once every three years. This provision only applies to FTSE 350 companies. However, unlike the reporting requirements, it will apply from the start of the first financial year after 29 June 2010 (ie from 1 July 2010 for a company with a 30 June year end). Indeed, nearly three quarters of the FTSE 350 that have posted their 2011 AGM notices have proposed annual re-election, even though the ABI and NAPF have indicated that they will allow some time for compliance.
Board diversity: gender mix
The Code now specifically refers to having due regard to the benefits of diversity, including gender mix, when making appointments to the board. Gender mix on boards is an issue that the coalition government is also keen to explore and Lord Davies of Abersoch has been asked to look at the obstacles to women becoming directors of listed companies. His final recommendations on the steps the government and businesses could take to improve the position were expected tobe submitted in February 2011.
External facilitation of board evaluation
The Code provides that the evaluation of boards of FTSE 350 companies should be externally facilitated at least every three years. The Institute of Chartered Secretaries and Administrators (ICSA) published a report on board performance evaluation in April 2010, which included some general observations on the conduct of board performance evaluation, as well as a review of how the top-200 listed companies in the UK carry out their board evaluation process (based on disclosures made in their annual report and accounts).
Business model, risk, transparency and remuneration
The Code includes new measures requiring more transparency around the company’s business model and its approach to risk, including linking performance-related pay to the company’s risk profile and long-term performance. In particular, boards should ensure that an explanation of a company’s long-term business model and strategy for delivering on its objectives is included in the annual report. Both PIRC and NAPF, in their updated shareholder voting guidelines, focus on the need for full disclosure of the means by which a company evaluates and manages risk.
Unlike the previous few years, there are comparatively few changes required to be made to to the AGM notice this year. This article now sets out the key changes resulting from the Companies (Shareholders’ Rights) Regulations 2009 (the 2009 Regulations), which have had effect for AGM notices sent out since 3 August 2009, by way of a reminder and now that practice has developed, together with consideration of the effect of the Code for this year’s AGM notices.
The 2009 Regulations extended the notice period for AGMs for a traded company from 14 days to 21 days. However, if shareholders pass a special resolution every year at the AGM to shorten the notice period to 14 days, and provide a facility to enable all shareholders to appoint a proxy via a website, the traded company can hold general meetings (other than AGMs) at 14 days’ notice. This is also subject to any provisions in the company’s articles that require notice for general meetings to be held on more than 14 days’ notice, and so companies have been looking to amend such provisions if necessary.
Information requirements under the 2009 Regulations
In addition to the information already required by the 2006 Act as originally enacted, the Disclosure and Transparency Rules, and the company’s articles of association, traded companies must include the following information in their AGM notices:
- the website address on which certain mandatory information will be available before the AGM, and for two years from the date the AGM notice is sent;
- the procedures the members must comply with, and by which date, to attend and vote at the AGM;
- a statement confirming members’ right to ask questions about the business at the AGM;
- confirmation that the register of members determines the right to vote at the AGM and that the date for validating members for voting is not more than 48 hours before the meeting (companies can ignore weekends and public holidays when calculating the 48-hour period);
- details of any forms for appointing proxies; and
- the procedure for voting in advance of the meeting or by electronic means if the company chooses to offer this facility and the date by which the procedure needs to be followed.
For AGMs where the notice will be sent more than six weeks prior to the AGM, statements that members have the right to requisition a resolution and a separate right to add a matter to the AGM agenda (subject to the usual participation thresholds and rules on timing and notification) must be included in the AGM notice.
AGM notices for traded companies must also give certain information about members’ rights to require a company to publish a statement on its website setting out audit concerns that members propose to raise at the AGM. Again, this right is subject to minimum qualifying criteria.
Information required under the Code
If companies decide to put their entire boards up for re-election under the Code, the AGM notice will need to include the appropriate resolutions and state whether the director is being elected for the first time or re-elected. Principle B7 of the Code also requires that the following information on each of the directors is set out in the notice:
- sufficient biographical details and any other relevant information to enable shareholders to take an informed decision on their re-election;
- the reasons why the board believes an individual should be elected; and
- confirmation from the chairperson that, following performance evaluation, the individual’s performance continues to be effective and to demonstrate commitment to the role.
The Code operates on a ‘comply or explain’ basis, so FTSE 350 companies with a financial year that commences on or after 29 June 2010 that decide not to put their entire boards up for re-election should include an explanation in their annual report. However, it is recommended that even companies with a financial period that commences before 29 June 2010 should include an explanation for non-compliance with the Code even though it is not strictly required.
Shareholder requisition rights
For all companies, shareholders holding at least 5% of voting rights can requisition an AGM. For traded companies only, in addition to the previous right to requisition a resolution at an AGM, members have a requisition right (at the thresholds of 5% of voting rights or 100 members holding, on average, at least £100 of paid-up capital per member) to require the company to include ‘a matter’ to be considered in the business of an AGM.
It is likely that many companies’ articles will carry provisions that are not consistent with these provisions. This should therefore be borne in mind when reviewing articles of association as to whether any changes should be proposed at this year’s AGM to take account of the October 2009 implementation of the 2006 Act and/or the other changes made by the 2009 Regulations.
Record dates for voting
Traded companies must specify a record date by which a person must be entered on the register of members to have the right to vote at a meeting. The record date cannot be set more than 48 hours before the time of the meeting, but non-working days can be excluded from the calculation. However, there tends to be standard provisions in articles that do not allow non-workings days to be excluded so a change to the articles will be required to take advantage of the change.
Designated Corporate Representative (DCR) method
ICSA considers that the uncertainty surrounding the appointment of multiple corporate representatives was resolved by the changes made to the 2006 Act by the 2009 Regulations. Therefore, the DCR method is no longer necessary. However, the DCR method may still prove to be relevant in answering the problem of multiple corporate representatives in jurisdictions, such as Jersey, where the clarification made by the 2009 Regulations is not effective.
By David Hicks, corporate solicitor, and Paul Arathoon, corporate solicitor, Speechly Bircham LLP.