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Climate change, diversity and executive pay have been identified as key areas for companies ahead of the 2021 AGM season, following the Investment Association’s (IA) announcement that it will issue warnings to companies that do not meet the expectations it has outlined. According to the influential shareholder advisory group, investment managers will be ‘turning up the pressure’ on companies, with a particular focus on improving board diversity and reporting on climate-related risks.
IVIS, the IA’s Institutional Voting Information Service, is a paid-for service that provides independent information on listed companies in the FTSE All-Share and FTSE Fledgling Index, to help shareholders reach a decision on how to vote at AGMs. It does not provide investors with recommendations on how to vote. Instead, using the IA’s guidelines as the basis for its analysis, each IVIS report is colour-coded from a ‘blue top’, ‘amber top’ to a ‘red top’, to reflect any breaches of best practice or highlight areas of concern. Red denotes the strongest concern, followed by amber, which shows a significant issue to be considered. A 'blue top' indicates no areas of major concern.
In 2021 IVIS will, for the first time, issue an ‘amber top’ to FTSE 350 companies that do not disclose either the ethnic diversity of their board, or a credible action plan to achieve the Parker Review targets of having at least one director from an ethnic minority background by 2021. The IA’s director for stewardship and corporate governance, Andrew Ninian, noted that three-quarters of FTSE 100 companies failed to report the ethnic make-up of their boards in the 2020 AGM season. ‘Those who fail to do so this year will find themselves increasingly under investors’ spotlight’, he warned. For more on this see Market Tracker’s trend report on Ethnicity in Corporate Governance Reporting.
Investors are also seeking greater progress on gender diversity, the IA said, with companies whose boards comprise 30% or less female directors receiving a ‘red top’—an increase on last year’s 20% threshold. The red top warning in relation to gender also extends to companies with less than 25% female representation in the Executive Committee and its direct reports. For an update on the current progress of the FTSE 350 in relation to gender diversity, see ‘Hampton-Alexander Review reports ‘enormous progress’, though women in senior management remain low’.
In 2021, companies in high-risk sectors—ie those identified by the Task Force for Climate-related Financial Disclosures (TCFD) as ‘potentially most affected by climate change’—that do not address all four pillars of the TCFD will, for the first time, receive an amber top warning. The IA said that investment managers want to see companies reporting on climate-related risks in a consistent, clear and comparable manner, in order to help managers make better informed investment decisions. According to Ninian, ‘investors will now be placing additional pressure on those that fail to provide this information.’
The IA said that investors will also continue to ‘shine a spotlight’ on executive pay, having already cautioned companies to treat their executives in line with the rest of the workforce and remain mindful of the pandemic’s impact on society. Investors have warned remuneration committees not to compensate executives for reduced pay as a result of the coronavirus (COVID-19) pandemic by adjusting this year’s remuneration, whether through ‘catch up’ awards or disproportionate salary increases.
In addition, the IA have addressed audit quality, noting that 94% of FTSE 100 companies failed to provide evidence on how they judged the quality of auditing. Although there was no commitment to issuing any warnings ahead of the 2021 AGM season, the IA have stated that if they do not see progress in the way companies disclose how they judge audit quality they will introduce a colour top approach in 2022.
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Market Tracker is a unique service for corporate lawyers housed within Lexis®PSL Corporate. It features a powerful transaction data analysis tool for accessing, analysing and comparing the specific features of corporate transactions, with a comprehensive and searchable library of deal documentation across 14 different deal types. The Market Tracker product also includes news and analysis of key corporate deals and activity and in-depth analysis of recent trends in corporate transactions.
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