Ashurst Governance & Compliance Update - Issue 56

Corporate Governance

1. AIC publishes updated version of its Code of Governance

The Association of Investment Companies has published an updated version of its Code of Governance for investment companies (AIC Code) which reflects the publication of, and incorporates many of the relevant changes to, the updated 2024 UK Corporate Governance Code (UK Code). You can find our overview of the principal differences between the 2024 UK Code and the 2018 version here; our overview of the related updated Guidance on Board Effectiveness is here.

By way of reminder, the AIC Code sets out a framework of best practice in respect of the governance of investment companies. It is endorsed by the Financial Reporting Council and the Guernsey Financial Services Commission and is supported by the Jersey Financial Services Commission. This means that AIC member companies may make a statement that, by reporting effectively against the AIC Code, they are meeting their obligations under the UK Code (and associated disclosure requirements under the UK Listing Rules) and as such are not required to report further on issues contained in the UK Code unless they wish to do so on a voluntary basis.

The revised AIC Code continues to work in the same way: it requires meaningful reporting on the application of its Principles, and detailed explanation for departures from its Provisions. Those seeking guidance on its application should refer to the FRC's Guidance on Board Effectiveness. Additional guidance of relevance to investment companies is also embedded within the AIC Code itself.

The revised AIC Code will apply to accounting periods beginning on or after 1 January 2025, with the exception of Provision 34. This means that, among other changes, additional expectations in relation to reporting on corporate culture, and an expectation that the board will not only establish but also maintain an effective risk management and internal control framework, will apply from that date. 

Provision 34, which requires the board to carry out an annual review of the effectiveness of material controls within a company's risk management and internal control framework and, among other disclosures, report on the effectiveness of those controls at the company's balance sheet date, is applicable for accounting periods beginning on or after 1 January 2026. 

Equity Capital Markets

2. 2025 Dividend Procedure Timetable published

The London Stock Exchange has published its 2025 Dividend Procedure Timetable. 

The Timetable is published on an annual basis as a guide for companies with shares listed on the Official List or admitted to trading on AIM when setting their interim and final dividend programmes. The Timetable works in the same way as in the past, although additional guidance has been added for issuers which have their most significant listing on an overseas exchange.

3. FCA publishes latest Primary Market Bulletin

The Financial Conduct Authority has published Primary Market Bulletin, Issue 51 in which it explains changes made to formal guidance contained in the FCA's Technical Notes, as consulted on in PMB 48, to reflect the new listing regime. By way of reminder, the new listing regime came into effect in July 2024 following the publication of FCA Policy Statement 24/6 and the final form of the new UK Listing Rules (UKLRs). See our update here.

In summary, in PMB 51 the FCA finalises a range of Technical Notes on both sponsor and non-sponsor related topics and deletes a number of others. 

In view of consultation feedback and, in some cases, changes to the UKLRs, the FCA has stated that it is considering the relevant guidance further (for example, its guidance on aggregating transactions) and plans to update and consult on further Technical and Procedural Notes in future PMBs. In the meantime, the FCA expects market participants to interpret purposively references to the previous Listing Rules given the provisions of the UKLRs that have come into force.

Narrative and Financial Reporting

4. FRC publishes Annual Review of Corporate Reporting 2023

The FRC has published its annual review of corporate reporting for 2023/2024. This sets out the findings of its monitoring of UK companies' annual reports and accounts alongside its expectations for the forthcoming reporting season.

Overview of findings

The FRC believes that the quality of reporting in the FTSE 350 has been maintained, and that there have been improvements in several reporting areas, with provisions and contingencies falling out of the ‘top ten’ issues for the first time in over five years. The FRC also questioned significantly fewer companies in relation to their disclosure of judgements and estimates, another area that has featured in the top ten issues for many years.

The FRC states that there has, however, been an increase in the number of restatements in relation to impairment of assets and cash flow statements, predominantly in companies outside the FTSE 350. These will remain areas of particular focus. 

The FRC will continue to take a proportionate and targeted approach to its monitoring to ensure companies comply with relevant reporting requirements, noting that it does not expect companies to provide information in their annual reports and accounts that is not material or relevant to users.

In relation to sustainability reporting, the FRC was encouraged that, despite the complexities of the requirements, there were comparatively few compliance issues in premium-listed companies’ reporting against the Taskforce for Climate-related Financial Disclosures (TCFD) framework.

Monitoring activities

In 2023/24, the FRC performed 240 reviews (2022/23: 263) with FTSE 350 companies making up 40 per cent of such reviews (2022/23: 59 per cent). 'Substantive' letters, where the FCA request more information or additional explanations in light of a review, were written in 47 per cent of cases (2022/23: 43 per cent), with 61 per cent of those letters written to companies outside the FTSE 350 (2022/23: 52 per cent), an increase which suggests a widening gap in reporting quality. There were 26 'required references' in annual reports – where more significant changes are made as a result of enquiries, typically when the company restates comparative information in primary financial statements (2022/23: 25). 

By way of reminder, in December 2023 the FRC announced its priority review sectors for 2024/25 as:

• Construction and materials
• Food producers
• Gas, water and multi-utilities
• Industrial metals and mining
• Retail

Priority sectors are considered by the FRC to be higher risk for corporate reporting and audit by virtue of economic or other pressures. 

Top ten issues raised with companies

The top ten issues raised with companies as part of monitoring activity in 2023/24 were:

1. Impairment of assets
2. Cash flow statements
3. Use of financial instruments
4. Revenue
5. Presentation of financial information
6. Disclosures in strategic reports and Companies Act 2006 issues
7. Judgements and estimates
8. Income taxes
9. Fair value measurement
10. TCFD and climate-related reporting

Key narrative reporting issues raised

As regards narrative reporting, the FRC focused on the following issues:

Disclosures in strategic reports and Companies Act 2006 issues

While fewer substantive questions were raised in this area than in the prior year, the most common issues raised were:

• fair, balanced and comprehensive analysis, particularly where strategic reports did not discuss issues such as material balance sheet and cash flow items, and significant changes in those balances, as well as litigation claims mentioned in other publications;
• the prominence given to alternative performance measures;
• reports that discussed only parts of the business, gave excessive prominence to green initiatives, or no information about KPIs; and
• the lawfulness of dividends.

TCFD and climate-related reporting

Correspondence in this area focused on:

• companies' statements of consistency with the TCFD framework;
• inconsistencies between disclosures made and elements of the TCFD framework, particularly the strategy and metrics and targets pillars;
• the level of prominence given to green initiatives with relatively little discussion of core activities that generated the majority of the company's carbon emissions; and
• a lack of clarity on how the impact of climate change had been reflected in impairment assumptions.

For the next review round, the FRC will also focus on compliance with the Companies Act 2006 Climate-related Financial Disclosure / CFD requirements.

Key expectations for 2024/25 annual reports

The FRC states that it expects directors to apply careful judgment in the preparation of annual reports and will only ask a substantive question where it appears that there is, or may be, a material breach of the relevant reporting requirements. Its advice for forthcoming reporting is as follows:

1. Pre-issuance checks – ensure the company has a sufficiently robust review process to identify common technical compliance issues given that many questions, corrections and restatements could have been avoided by reviewing against the top ten issues listed above.
2. Risks and uncertainties – ensure clear and consistent disclosures about uncertainty and risk are given that are sufficient for users to understand the positions taken in financial statements.
3. Narrative reporting – ensure that the strategic report includes a fair, balanced and comprehensive review of the company's development, position, performance and future prospects. Companies should take care to comply with the applicable climate-related reporting requirements, ensuring disclosures are concise and that material information is not obscured.
4. Take a step back and consider whether the annual report as a whole tells a consistent and coherent story, is clear, concise and understandable, and includes all material and relevant information.

5. FRC publishes second report on quality of Wates Principles reporting

The FRC has published a second report on the quality of corporate governance reporting by private companies that follow the Wates Corporate Governance Principles for Large Private Companies (Wates Principles). The FRC's first report was issued in 2022.

By way of reminder, the FRC published the Wates Principles in light of the implementation of the requirement in the Companies (Miscellaneous Reporting) Regulations 2018 (SI 2018/860) for in-scope private companies to include a statement of their corporate governance arrangements in their directors’ report. In-scope companies are those with either more than 2000 employees and/or a turnover of more than £200m and a balance sheet total of more than £2bn. Of 1,815 companies in scope of the reporting requirements, 547 applied the Wates Principles.

The report is based on an assessment of disclosures made in 2021/22 by those companies which applied the Wates Principles. It seeks to demonstrate where companies may be able to improve reporting to offer additional insight or clarity on their governance activities. 

Analysis in the report found:

• Slight improvements in most disclosures relative to the six Wates Principles compared to the findings of the first report. Improvements include disclosure of how corporate purpose aligned with business practices and on the connection between strategy and purpose/culture. Other improved disclosure included more information about the Chair, how the board understands the company's business needs and stakeholder interests, disclosures about those with responsibility for the oversight of culture, and the rationale for remuneration structures.
• The need for companies to foster a disclosure approach which explicitly links a company's purpose, strategy, culture and values to its board activities and the context in which it operates. To that end, the report recommends that companies provide context-relevant and time-specific disclosures.
• The need to reduce the use of boilerplate disclosures - the report found high levels of similarity between the corporate governance statements of different companies, as well as between reports by the same company in different years.

As part of the review process, a focus group was constituted of investors, regulators, governance professionals and others in order to gain an understanding of the users of corporate governance disclosures. Findings from this aspect of the research included the following recommendations to improve disclosure in the future:

• Principle 1 – Purpose and leadership: Set out how culture is embedded in the workforce and focus on outcomes-based reporting to provide meaningful insight into reporting on culture and values. Disclose how short-term goals are balanced against long-term visions and consider providing a statement from the chair which pulls together and demonstrates how the board brings different pieces of the governance structure together in making decisions so as to connect strategy with governance.
• Principle 2 – Board composition: Set out what is considered when evaluating the independence of directors – companies are encouraged to follow the Wates guidance on independence and disclose whether they consider their non-executives to be independent and able to offer constructive challenge. To make disclosures on diversity more meaningful, consider the issue beyond considerations of gender and ethnicity and avoid the use of boilerplate.
• Principle 3 – Director responsibilities: Be clear about who is on the board and what their roles are and consider including individual board committee reports (if such committees exist) alongside an introductory letter from each committee chair.
• Principle 4 – Risk and opportunities: Enhance reporting on the processes in place to identify opportunities, and the approach to risks and how they are dealt with. Ensure there is appropriate cross-referencing between sections dealing with risk and risk management to make reports more user-friendly.
• Principle 5 – Remuneration: Set out the philosophy on pay and connect remuneration with purpose, strategy and values. Discuss directors' remuneration in the context of workforce pay.
• Principle 6 – Stakeholder engagement: Set out how the board identifies key stakeholders, how they engage with them, and how they use information to make long-term decisions in the interest of those stakeholders and the company as a whole. Link these disclosures to section 172 reporting and, if possible, use case studies to bring disclosures to life, remembering that the workforce is only one of a number of stakeholders of interest to report readers.

Economic Crime and Corporate Transparency

6. Companies House publishes guidance on the civil penalties regime and its enforcement policy

Companies House has published guidance on its approach to issuing financial penalties.  

The Economic Crime and Corporate Transparency Act 2023 (Financial Penalty) Regulations 2024 which came into force in May 2024 (see AGC Update, Issue 53) enable the Registrar of Companies to impose a financial penalty for many offences under the Companies Act 2006 as an alternative to criminal proceedings. The guidance outlines the circumstances in which financial penalties can be imposed and the statutory procedure Companies House will follow, including the issue of prior warning notices and the timeframes for making representations. The guidance also explains how penalties will be calculated, the matters Companies House will take into consideration when setting a penalty amount, and the grounds and process for any appeal. It also sets out penalty band ranges which are based on the seriousness of the offence and whether it is a repeated offence of the same type. 

The guidance is accompanied by a new enforcement policy which sets out how Companies House will exercise its wider enforcement powers including bringing civil actions, director disqualification proceedings and criminal prosecutions for more serious offences, working in partnership with the Insolvency Service and other enforcement partners where necessary.

Payment Practices Reporting

7. Payment practices reporting: updated guidance published and new measures announced

The Department of Business and Trade has published updated guidance on the payment practices reporting regime. 

By way of reminder, the regime requires 'large' UK companies and LLPs to report on their payment practices, policies and performance. Entities within the scope must produce a report every six months on their payment practices and submit the report to a government website for publication. The guidance provides detail on which entities are in-scope, what information must be reported, and how reporting should be undertaken.

First published in 2017, the updated guidance contains various changes including to reflect the additional reporting requirements introduced by the Reporting on Payment Practices and Performance (Amendment) Regulations 2024 (for more detail, see AGC Update, Issue 53) and the meaning of various terms within the legislation.

More recently, the government has also announced further measures to deal with late payments including:

• New legislation to require all large businesses to include payment reporting disclosures in their annual reports.
• A step change in enforcement of the payment practices reporting regulations. By way of reminder, responsible directors at non-compliant companies who fail to report their payment practices can face criminal prosecutions leading to potentially unlimited fines and criminal records.
• A commitment to consider other policy proposals including the role of audit and audit committees in relation to payment practices.
• The launch of a new Fair Payment Code will replace the current Prompt Payment Code and will be open to signatories 'this autumn'.

AGMs and climate-related issues

8. LAPFF calls for climate strategy vote in FTSE 100

The Local Authority Pension Fund Forum (LAPFF) has written to the chairs of 76 FTSE 100 companies which have not held a vote on their climate transition plans in the past three years setting out their expectations ahead of next year’s AGM season.

The letter notes that investors expect companies to set out credible transition plans which contain Paris-aligned targets and detailed strategies for achieving those goals. To enable shareholders to make informed investment and stewardship decisions, companies should also include material climate-related impacts in their financial statements.

The letter points out that approximately a fifth of FTSE 100 companies (excluding investment trusts) have provided their investors with the opportunity to approve their climate plans and that, in the LAPFF's opinion, this is now viewed as good practice.

Sustainability Reporting Standards

9. IFRS publishes guidance on using its sustainability reporting standards 

The IFRS Foundation has published a guide for companies that are voluntarily applying the International Sustainability Standards Board (ISSB) sustainability reporting standards (SRS). SRS S1 and S2 (which cover general disclosures and climate-related disclosures respectively) are intended to provide a global baseline for sustainability disclosures and several jurisdictions including the UK have announced their intention to adopt them. For more information on the UK's progress towards adoption, see Government publishes an update on UK Sustainability Disclosure Requirements (SDR) and Sustainability Reporting Standards (SRS) (ashurst.com).

The guidance reminds companies that they can only state they have complied with the ISSB SRS if they meet all of the requirements in both S1 and S2. However, the guide also states that S1 and S2 include transition reliefs (such as 'climate first' reporting and a dispensation from providing comparative information in the first year) that allow a phased introduction of the requirements that supports companies to start using them. Companies can apply these reliefs and still state that they comply with the ISSB SRS if all other requirements are met. 

Similarly, proportionality mechanisms apply to certain requirements (these include the concepts of using ‘reasonable and supportable information that is available to the entity at the reporting date without undue cost or effort’ and taking into consideration ‘skills, capabilities and resources available to the entity’). These mechanisms also help companies start using the ISSB SRS. A company applying the proportionality mechanisms is still able to assert that it has complied with the ISSB Standards. The guide also explains when companies should claim partial rather than full application of the ISSB SRS in their statement of compliance. 

The Appendix to the guide links to further information on how other standards such as the SASB Standards or TCFD recommendations may provide a starting point for using the ISSB SRS.

Authors: Will Chalk, Partner; Rob Hanley, Partner; Marianna Kennedy, Senior Associate, Vanessa Marrison, Expertise Counsel; Becky Clissman, Counsel