Publications

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As the 2012 AGM and reporting season gets underway, we highlight the key developments and trends that listed and AIM companies should consider as they prepare for this.

AGM business

Annual re-election of directors

During 2011, the vast majority of FTSE 350 companies (around 80%) adopted the new UK Corporate Governance Code's ('Code') recommendation that all directors of FTSE 350 companies should be subject to annual re-election. Fears that this would lead to significant dissenting votes and therefore board instability have not, as yet, been realised. The FRC reports that annual re-elections have not had a discernible impact on the levels of dissenting votes on re-election resolutions.

As annual re-election is now standard practice, we expect that take up amongst the FTSE 350 will be even more extensive in 2012.

Although the code's provision on annual re-election of the whole board does not apply to listed companies outside the FTSE 350, a number of these companies nevertheless chose to comply with this provision during 2011. Smaller listed companies should therefore consider whether, as a matter of best practice, all directors should be put up for re-election at the 2012 AGM. It is worth noting that PIRC expects all listed companies to hold annual re-elections of the whole board.

Annual re-election of all directors is not market practice on AIM and there is very little evidence that this has been taken up by AIM companies.

Short notice resolutions

Listed companies who wish to hold general meetings on 14 days' notice must seek authority for this at each AGM (AIM companies do not need to do this). The ABI and NAPF are generally supportive of such resolutions, provided there is an accompanying statement that the shorter notice period will be used only when merited by the business of the meeting. However, there are indications that some investors and proxy advisers oppose them. In particular, certain US proxy advisers recommend an 'against' vote on this resolution. Listed companies should therefore offer a clear explanation as to the circumstances in which a shorter notice period may be used.

Company reporting

For many listed companies, 2012 will be the first year that they report against the revised code. When preparing corporate governance disclosures in the annual report, particular attention should be paid to the following new provisions of the code:

• Disclosures relating to the board's diversity policy
• Reporting on risk and an explanation of the company's business model 
• Personal reporting by the chairman on how the code's principles on the role and effectiveness of the board have been applied 
• Disclosures relating to externally facilitated board evaluations (FTSE 350 companies only)

We examine some of these new provisions in more detail below and other key issues that companies should consider when preparing their 2012 annual reports.

Diversity

The issue of diversity and particularly gender diversity on listed company boards has been a hot topic during 2011. Lord Davies' report 'Women on boards' published in February 2011, made various recommendations designed to improve female representation on boards.

When considering how to reflect this issue in the annual report, note that Lord Davies recommends including: 

• The percentage of women the company aims to have on its board in 2013 and 2015 (this should already have been separately announced) and the progress the company has made towards achieving this goal
• The proportion of women on the board, women in senior executive positions and female employees in the whole organisation 
• A summary of the board's diversity policy and the progress made in achieving its objectives

The code has also been amended to require all listed companies (not just those in the FTSE 350) to explain their policy on boardroom diversity and report how it is being implemented. Although this amendment only applies in respect of financial years beginning on or after 1 October 2012, the FRC strongly encourages immediate compliance. The NAPF also now expects boards to set out an explicit policy for achieving a greater degree of diversity than has been the practice in the past and track the implementation of that policy.

A report commissioned by the government to monitor progress on Lord Davies' recommendations finds that FTSE 350 companies have started to make disclosures about their policy on boardroom diversity but acknowledges that it may take time to establish reporting guidelines and the most appropriate place to locate such disclosures in the annual report.

Risk and strategy reporting

In light of continued economic difficulties and uncertainty, there has been increased focus on the way that boards identify, manage and report on the risks facing their business. Although the FRC is encouraged by evidence of improvement in risk reporting, it considers that more effort is needed. In particular, companies should avoid describing generic risks applicable to all companies and focus on the risks inherent in their own business models and strategies.

In response to the Eurozone debt crisis, the FRC has also recently published guidance for companies who may be materially exposed to country and currency risk, either directly or through trading counterparties or financial instruments. It explores the impact such exposure may have on the company's reporting obligations and the key issues directors should consider.

External board evaluation

The code provides that evaluation of the boards of FTSE 350 companies should be externally facilitated at least every three years. The FRC reports that early indications are that the majority of such companies intend to comply with this provision and that some have already done so.

When reporting on such evaluations, note that the FRC encourages companies to report on the process followed and the review's outcomes (not just that a review has taken place and who carried it out). At present, only a minority of companies provide this information. The ABI and NAPF also encourage more open reporting on the outcomes of the board evaluation process.

Explanations of non-compliance

The FRC has signalled that the quality of explanations for non-compliance with the code will be an area of increased scrutiny this year. Therefore companies should ensure, when explaining any non compliance with the code, that their reasons for doing so are clearly set out and are linked to the specific circumstances of the company.

Executive remuneration

The issue of executive remuneration in listed companies has been high on the public agenda in recent weeks. The government have proposed a number of legislative and regulatory measures designed to curb excessive pay, including a binding shareholder vote on future pay policy.

Companies should therefore be sensitive to this when preparing their disclosures on remuneration and be prepared to actively engage with shareholders on this issue. During 2011, investors showed an increased willingness to intervene and either vote against or abstain on the remuneration report vote. In light of recent developments, we expect this to continue in 2012.

Further guidance

For advice and further information on any of the matters discussed in this publication, or to obtain a copy of our annual report and accounts checklist for officially listed or AIM companies, please get in touch with your usual Corporate contact at DLA Piper.