Investment Association: Shareholder Priorities for 2023
On February 13, 2023 the Investment Association (IA) published its Shareholder Priorities for 2023, being those which its members have identified as critical drivers of long-term value for companies. It has retained the four set in 2020 (responding to climate change and accounting for climate change, diversity, audit quality and stakeholder voice) but has set out progress against each priority (based on an analysis of the 2022 AGM season), investor expectations for the 2023 AGM season, and the IVIS approach to assessing companies against these expectations in 2023.
Responding to climate change
While the number of companies reporting against all four pillars of the Taskforce on Climate-related Financial Disclosures (TCFD) framework has increased, improvements could be made on climate-related disclosures concerning metrics and targets, scenario analysis and transition plans in particular.
In 2023, IVIS will continue to Amber top all commercial companies that do not make disclosures against all four pillars of TCFD.
In relation to metrics and targets, IVIS will monitor the following additional questions:
- Has the company disclosed the framework or methodologies used to set these targets?
- Over what time periods have the targets been set?
- Has the company included narrative disclosures on the achievement of these targets?
In relation to scenario analysis, in addition to asking companies whether they make specific reference to the impact of climate-related risks and opportunities in their approach to capital management, IVIS will ask whether the company has disclosed how the results of the company's scenario analysis have impacted its business model and strategy?
Audit quality
To date, IVIS has monitored whether the Audit Committee demonstrated how it assessed the quality of the audit and how it has challenged management's judgements. For 2023, IVIS will look to companies to provide targeted disclosures (with case studies to help illustrate the points if they wish) on:
- how the Audit Committee has assessed the quality of the audit;
- how the auditor has demonstrated professional scepticism; and
- how the auditor has challenged management's assumptions where necessary.
Diversity
In relation to gender diversity, for 2023 IVIS will increase its existing diversity targets by 2% (aligned with the ambition to hit the FTSE Women Leaders Women on Board targets by 2025) and so it will Red top FTSE 350 companies where women represent 35.0% or less of the Board and/or 30.0% or less of the Executive Committee and their direct reports. IVIS will also continue to Red top FTSE Small Cap companies where women represent 25.0% or less of the Board and/or 25.0% or less of the Executive Committee.
IVIS will also assess whether companies are meeting the new Listing Rule requirement for companies to disclose on a comply or explain basis whether one of the four senior positions on the Board (Chair, SID, CEO or Finance Director) is held by a female. At this stage, IVIS will not colour top on this issue.
In relation to ethnic diversity, IVIS will continue to Red top FTSE 100 companies that have not met the Parker Review target of one director from a minority ethnic group, and Amber top FTSE 250 companies that do not disclose either the ethnic diversity of their board or a credible action plan to achieve the Parker Review targets by 2024.
Stakeholder engagement
The IA notes that investors were generally pleased with the way that Boards responded to the needs of various stakeholders through the pandemic. For 2023, companies should continue this good practice by extending the focus on engagement, supporting and communicating with stakeholders through the cost-of-living crisis. Company disclosures should include the impact of the increases to the cost-of-living and the inflationary pressures in the economy on employees (particularly lower paid employees), consumers including vulnerable customers, and suppliers. Investors will expect Boards to demonstrate how they have reflected the views of their stakeholders in key boardroom decision making.
IVIS will monitor and highlight areas of the Annual Report which reflect engagement with stakeholders on the cost-of-living crisis.
Biodiversity and ecosystems
In addition to the four Shareholder Priorities specified, the IA notes that good governance requires boards to monitor emerging risks, such as biodiversity loss and it encourages companies to start reporting against the Taskforce on Nature-related Financial Disclosures (TNFD) to help them assess their nature-related risks and opportunities, assess those over different forward-looking scenarios, and quantify the financial impacts.
(Investment Association, Shareholder Priorities for 2023, 13.032.2023)
Investment Association: Updated Share Capital Management Guidelines
The Investment Association has updated its guidance on various aspects of share capital management (Share Capital Guidance), last published in July 2016. The updates, primarily to the guidelines on the expectations of Investment Association members where companies seek shareholder authorisation for the general allotment of new shares and any disapplication of pre-emption rights, result from a review following the Report of the Secondary Capital Raising Review published in July 2022.
The Share Capital Guidance applies to premium listed companies, though standard listed, AIM and companies on the High Growth Segment are encouraged to adopt it.
Background to updates
The Secondary Capital Raising Review made recommendations on improving further capital raising processes for publicly traded companies in the UK and it included a recommendation for the Investment Association to update the Share Capital Guidance as follows:
"Recommendation 14 - Companies should continue to be able to seek annual allotment and pre-emption rights disapplication authorities from their shareholders of up to two thirds of their issued share capital, but with the authority extending not just to rights issues as is currently the case but to all forms of fully pre-emptive offers made on the basis of the updated pre-emption provisions set out in Recommendation 15 below, and any follow-on offer as described in Recommendation 6."
General power to allot shares
Investment Association members will continue to regard as routine an authority to allot up to two-thirds of the existing issued share capital but any amount in excess of one-third of existing issued shares should be applied to fully pre-emptive offers only, the reference to fully pre-emptive rights issues having been removed in line with the Recommendation above.
However, the Investment Association states that despite this change, companies will still be expected to explain why they have chosen their capital raising structure and why it is appropriate for the company and its shareholders. It notes that some retail shareholders have highlighted that rights issues continue to be their preferred method of fully pre-emptive capital raising.
General power to disapply pre-emption rights
The guidance around disapplication of pre-emption rights has been updated to support the new Pre-emption Group Statement of Principles and template resolutions which allow annual disapplication of pre-emption authorities of up to 20% of the issued share capital and an additional 4% for a follow-on offer.
However, where a company is seeking disapplication authorities which do not follow the Pre-emption Group's template resolutions, companies will be expected to confirm in their Notice of Meeting that they will follow the shareholder protections and approach to follow on offers as set out in paragraph one and paragraph three of Part 2B, respectively, of the Statement of Principles. Failure to do this, or to seek authority for a general disapplication of pre-emption rights in excess of 24% of issued share capital, will result in IVIS Red topping the relevant company.
There is recognition in the Share Capital Guidance that capital hungry companies may have reason for raising larger amounts of equity capital. IVIS will Amber top the pre-emption authorities in excess of 24% of the issued share capital for companies who have disclosed at the time of their IPO in their prospectus that they are a capital hungry company.
Own share purchases
The introduction to the guidance on authorities for own share purchases now states that while Institutional investors are supportive of companies' efforts to return surplus funds to shareholders, they want companies to set out their proposed approach to returning capital to shareholders, including how this is aligned with the company's long-term strategy and business model. This should be supplemented with details of any distributions made to shareholders during the year under review and any expectations for the current financial year.
Share issues by investment trusts
IVIS will Red top pre-emption authorities sought by investment trusts greater than 20% of the issued share capital (excluding shares held in treasury).
Future developments
The Investment Association will continue to keep the Share Capital Guidance under review as market and regulatory approaches develop, including the recommendation on the definition of pre- emption rights in the Companies Act 2006, referred to in recommendation 15 of the Secondary Capital Raising Review.
(Investment Association, Share Capital Management Guidelines, 15.02.2023)
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.