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Investment Association: Shareholder Priorities for 2020

In looking at shareholder priorities for the year ahead, the Investment Association (IA) has recently published a report which sets out the areas it believes investors will place greater importance on in terms of corporate delivery. These areas are:

  1. Responding to Climate Change.

  2. Audit Quality.

  3. Stakeholder Engagement and Employee Voice.

  4. Diversity.

Taking a look at each of the areas in turn, the following particular points are made:

Responding to Climate Change

The risks associated with the impact of climate change on the long-term sustainable value of investments (including, for instance, disruption to global supply chains, changing consumer habits and the implementation of measures to address climate change) are driving increased scrutiny of the steps being undertaken by listed companies in respect of climate change. To support its members’ engagement with climate change, the IA’s corporate governance research service, the Institutional Voting Information Service (IVIS), will be introducing a new section within its ESG report that will highlight to investors the extent to which companies have made climate change related disclosures. In particular, this new section will be informed by the following four questions, which are aligned with four areas of disclosure recommended by the Taskforce for Climate-related Financial Disclosures (TCFD):

  1. does the company describe its governance of climate related risks and opportunities?

  2. does the company describe the actual or potential impacts of climate related risks and how will it assess and manage them?

  3. does the company explain how its strategy takes into account the impact of climate change?

  4. does the company describe climate change related metrics and targets?

Cognisant of the fact that companies are still trying to fully appreciate the impact of climate change on their long-term viability and how best to communicate their response to investors, IVIS will not be introducing any colour top for these disclosures in 2020, but it will keep this under review for future years. However, the IA supports full disclosure in line with TCFD by 2022.

Audit Quality

The quality and robustness of audits of companies’ annual reports and accounts are essential to assisting investors make informed investment decisions and to hold boards to account. With recent concerns arising over audit quality and the scrutiny with which they were undertaken following a number of recent high profile corporate reporting failures, IVIS will ask the following two revised questions of companies to encourage a greater focus on audit quality in company disclosures:

  1. has the audit committee demonstrated how it assessed the quality of the audit, including how the auditor demonstrated professional scepticism and challenged management’s assumptions where necessary?

  2. has the audit committee demonstrated how it challenged management’s judgments and what happened as a result?

Stakeholder Engagement and Employee Voice

To take account of the increasing desire of investors to promote greater long-term value by developing stronger relations between companies and material stakeholders (including employees, customers, suppliers as well as the environment and the communities the companies affect), the IA will introduce the following two new questions into the IVIS report:

  1. has the board identified the company’s material stakeholders and to what extent has it engaged with them in the year under review?

  2. which of the options for workforce engagement outlined in the 2018 UK Corporate Governance Code has the company adopted (i.e. has the company put in place any one or a combination of the following methods: (i) a director appointed from the workforce; (ii) a formal workforce advisory panel; or (iii) a designated non-executive director. To the extent no such arrangements are in place, the board will need to explain what alternative arrangements are in place and why they are effective)?

Diversity

The IA notes that its members are increasingly scrutinising the progress companies are making on the issue of encouraging greater diversity as investors are increasingly seeing this as being a core and critical business issue in terms of securing long-term success. To this end, the IA will take the following steps to support its members in promoting greater diversity:

Gender Diversity

  1. the IA will continue to apply pressure on companies with only one (or no) women on their boards and seek to understand how those boards intend to meet the aims of the Hampton-Alexander review to have 33% female representation on FTSE 350 boards and senior leadership teams by the end of 2020.

  2. IVIS will red top any FTSE 350 company with:

    1. women representing 20% or less of the board;

    2. one or less women on the board (unless the one third target is achieved where, for instance, there is a board of three directors); or

    3. women representing 20% or less of the executive committees and their direct reports.

  3. IVIS will amber top any FTSE SmallCap company with:

    • women representing 25% or less of the board;

    • one or less women on the board (unless the one third target is achieved where, for instance, there is a board of three directors); or

    • women representing 25% or less of the executive committees and their direct reports.

Ethnic Diversity

IVIS will ask a new question of companies as to whether they have disclosed the percentage of their board that come from an ethnic minority background.

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About this Author

Andrew Gawley Corporate Practice Attorney Squire Patton Boggs law Firm Leeds UK

Andrew Gawley is an associate in the Corporate Practice Group based in Leeds. Andrew has experience in advising on private mergers and acquisitions, disposals, corporate restructuring and governance.

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