AGMs and Annual Reports: What's on the agenda for premium listed companies in 2023?

In November 2022, the Pre-Emption Group published a revised Statement of Principles for the disapplication of pre-emption rights, alongside new template resolutions.  The revised Statement allows companies to seek disapplications of up to 10% for their general authority and an additional 10% for acquisitions and specified capital investments, with a further authority of up to 2% of issued ordinary share capital in each case to be used for a "follow-on" offer. For further information, see our Briefing.

These new template resolutions are supported by both Glass Lewis and ISS, and the Investment Association's Share Capital Management Guidelines have also been updated to reflect the revised thresholds. 

While it is still early in the 2023 AGM season, we expect a majority of companies to follow the new Guidelines, but some companies may choose a hybrid going forwards (i.e. still seeking 5% for each resolution, but including a "follow-on" offer). When deciding which approach to take, companies should be mindful of their shareholder base and any specific voting guidelines their institutional investors have in place. The approach taken by FTSE 350 companies who have published their AGM notices since mid-December is set out below.

As recommended by the Secondary Capital Raising Review, the updated Share Capital Management Guidelines still regard as routine an authority to allot up to two-thirds of a company's existing issued share capital, but now extend the application of the second one-third authority to all fully pre-emptive offers, not just rights issues as was previously the case.

Last summer the Financial Reporting Council ("FRC") published new guidance containing suggested good practice for listed companies to enhance effective shareholder participation when planning and conducting annual general meetings and other general meetings.

Companies should consider updating the AGM Notice to:

• clearly state any hybrid AGM or webinar details, including clear and timely instructions for participation, details on how to access the meeting and instructions for asking questions and voting;
  
  
• include details as to how shareholders should register for electronic communications; and
  
  
• include a confirmation that unacceptable behaviour will not be tolerated at the AGM and will be dealt with appropriately by the Chair.

To the extent that more postal strikes are announced, companies should keep them in mind when considering AGM notices and postal dates and should consult the relevant provisions in their articles of association.

The key changes in Glass Lewis' 2023 Policy Guidelines for this year are:

• Overboarding: Glass Lewis will consider an executive director to be "overboarded" if they have more than one additional public company board appointment (changed from two);
  
  
• Board Independence: Employee representatives are confirmed as being excluded from the calculation of whether at least half the board (excluding the Chair) is independent;
  
  
• Re-election of Remuneration Committee Chair: Glass Lewis will now recommend that shareholders abstain from voting on (rather than vote against) the re-election of the chair of the Remuneration Committee where it has fewer than the required number of members; and
  
  
• Executive Pensions: In line with the most recent Investment Association (the "IA") Principles of Remuneration, Glass Lewis will generally recommend a vote against a company's remuneration policy where executive pensions are not aligned with the rest of the workforce.
  
  

Glass Lewis has also added new sections this year on: (i) director accountability for climate-related issue; (ii) cyber risk oversight; and (iii) combined incentive plans (or omnibus plans).

The areas of focus (responding to climate change, accounting for climate change, audit quality, diversity and stakeholder engagement) remain the same for 2023 but there have been a number of important changes to the underlying guidance:   

• Climate Change and Environment: (i) Companies are, for the first time, encouraged to start reporting against the Taskforce on Nature-related Financial Disclosures; (ii) where they have not already done so, companies should consider supplementing existing TCFD disclosures with the SASB sector-specific metrics; and (iii) directors are expected to consider the relevance of climate-related matters when preparing and signing off on the company's accounts.
  
  
• Audit Quality: The IA noted that in 2022 a number of companies had failed to adequately address each part of the question as to whether they believe the auditor had provided a high-quality audit, including through challenging management’s judgments and assertions and exercising professional scepticism. The IA will, therefore, be looking for more targeted disclosures, with the use of case studies where appropriate.
   
• Diversity: FTSE 350 companies will now be "red-topped" where women represent 35% or less of the Board (up from 33%) and/or 30% or less of the Executive Committee and its direct reports (up from 28%).
  
  
• Stakeholder Engagement: The IA would like the focus on stakeholder engagement to be extended to include the cost-of-living crisis, with stakeholder engagement disclosures covering the impact of this on employees (particularly lower paid employees), consumers (including vulnerable customers) and suppliers.

The key changes to ISS' United Kingdom & Ireland Proxy Voting Guidelines for 2023 are:

• Board Diversity: Alignment with the Board diversity targets under the FCA Listing Rules of at least 40% of the board being women, at least one senior board position being held by a woman and at least one board member being from a minority ethnic background;
  
  
• Climate Accountability: For companies on the Climate Action 100+ Focus Group List, ISS will generally vote against the Chair of the Board in cases where it determines that a company is not taking the minimum steps needed to understand, assess and mitigate risks related to climate change, both regarding the company and the wider economy;
  
  
• Audit Committee Meetings: A new policy on the frequency of audit committee meetings, with the expectation that FTSE 350 companies will hold at least five audit committee meetings during the reporting period and that FTSE All-Share companies will hold at least four meetings; and
  
  
• Directors' Base Salaries: Clarification around ISS' expectation that increases to directors' base salaries should be low and "ideally lower proportionally than general increases across the broader workforce".

In its most recent Principles of Remuneration and Letter to Remuneration Committee Chairs, having regard to recent rises in the cost of living and inflation, the IA calls for companies to be sensitive to the impact this is having on wider stakeholders when making decisions on executive pay.  Remuneration committees are asked to show restraint in setting executive salaries, to consider increases that are below the rate given to other employees and to be mindful of the knock-on effect that salary rises can have on other aspects of the executive pay package. 

In relation to pensions, the IA also states that it will "red-top" any remuneration policy or report where executive pension contributions are not aligned to the majority of the workforce. For further information, please see our Briefing.  

The Listing Rules and Disclosure Guidance and Transparency Rules were updated last year to include new provisions on diversity, including a new standardised table format for disclosures. The new rules are in force for reporting periods beginning on or after 1 April 2022 but the FCA is encouraging early compliance, which a number of companies have chosen to do, either in whole or in part.  For further information please see our Listed Company Update.

In relation to diversity, the FTSE Women Leaders recently reported that FTSE 350 companies have met the targets early, with women now comprising 40.2% of all FTSE 350 Directors.

In addition to financial reports being prepared in XHTML web browser format, for financial years starting on or after 1 January 2022, any notes to group financials within those reports that have been prepared in accordance with International Financial Reporting Standards must be electronically tagged. This builds on the existing requirement for the primary financial statements to be tagged.

The FRC's Annual Review of Corporate Governance Reporting of FTSE 350 and small cap companies' reporting under the UK Corporate Governance Code ("Code") found that there is now greater transparency as regards departures from the Code but the quality of explanations in this area still needs to be improved. Similarly, whilst reporting on wider stakeholder engagement has improved, there is often insufficient narrative on the outcomes from the engagement. Other areas identified for improvement include reporting on diversity, including at a senior leadership level beyond the recommended external targets, and reporting on how the company's culture and executive remuneration arrangements align with its purpose, strategy and values.

In June 2022, the FRC published an updated edition of its guidance on the strategic report. The guidance has been updated to reflect the new requirements under the Companies Act 2006 for disclosure of climate-related financial information in line with the recommendations of the Taskforce on Climate-related Financial Disclosures. The guidance also included updates to reflect changes to legislation since it was last issued.

The FRC published a report on 'What Makes a Good Annual Report and Accounts', setting out the attributes for a high-quality Annual Report and Accounts. The FRC considers that a high-quality Annual Report and Accounts will:

• comply with relevant accounting standards, laws and regulations, and codes;
  
  
• be responsive to the needs of stakeholders in an accessible way; and
  
  
• demonstrate the corporate reporting principles and effective communication characteristics that are set out in the report.

In terms of corporate reporting principles, the report notes that a good Annual Report and Accounts will be: accurate; connected and consistent; complete; on-time; unbiased; navigable; and transparent.

From a communication perspective, the Annual Report and Accounts should be: company-specific; clear, concise and understandable; clutter-free and relevant; and comparable.

As an overlay across all of these principles, the FRC highlights the importance of determining materiality in order to avoid including information that would make the Annual Report and Accounts overly long, too detailed and therefore less useful. The report also provides a number of good practice examples to illustrate these principles as well as setting out a range of further useful FRC resources on specific parts of the Annual Report and Accounts.