Out-Law Analysis | 10 Jun 2020 | 5:55 pm | 8 min. read
There are 10 areas of governance that UK businesses should keep in mind in particular over the next few months as we return to a semblance of normality.
The statutory obligation for directors to make decisions that are "most likely to promote the success" of the company remains a constant. This is an individual obligation on each and every director. The words "most likely" create a high bar. Each decision must be justifiable as the best option available for the benefit of shareholders, not just one among several choices of equal merit.
The tough decisions companies have been taking during this crisis – and will continue to take in the months ahead – have emphasised the need to focus on the essentials and keep good records in board papers and minutes of the reasoning behind the board's thinking. The good news is that courts remain reluctant to interfere in commercial decision-making by boards and will not use hindsight to second guess a decision taken in good faith. A challenge to a director is only likely to succeed if a court concludes that no director acting reasonably in the company's best interests could have arrived at such a decision.
While the last 12 months have seen investors urging companies to increase their focus on the interests of their stakeholders, the UK's Companies Act has made the same point since 2006. When making their decisions UK directors need to "have regard to" their stakeholders, particularly their employees, customers and suppliers, together with the community and the environment. "Have regard to" means no more than "think about". The success of the company remains the paramount goal and hard decisions may mean that stakeholder interests have to be put to one side in furtherance of the greater good.
If trading does not improve, employees may ultimately have to be made redundant to save the business; supplier payment terms might have to be extended; and climate change policies put on hold temporarily. Nevertheless, the requirement for larger companies to report at the end of the year on how a board has had regard to the interests of its stakeholders means that this thinking will, to some extent, become public. Indeed, for most companies, coming out of lockdown is likely to be a case study: readers of a company's accounts will want to know how those difficult decisions were taken and different stakeholder interests balanced.
This focus on stakeholder interests is further emphasised for premium listed companies obliged to follow the UK Corporate Governance Code. Note that the Code includes as stakeholders a company's "workforce", a wider group than its own employees, including all those who work for a business under any guise, including those in outsourced operations. Neither the Code nor the Companies Act sets out an exhaustive list of stakeholders: each company needs to work out who its key stakeholders are. And particularly at times of financial challenge, these might include creditors and pensioners.
If insolvency threatens, creditors won't just be a stakeholder group the board should be considering in its deliberations. Instead, they rise to the top of the list of priorities and supplant shareholders as the ultimate beneficiaries of the directors' efforts. With banks reluctant in the last few months to drive their customers into insolvency, a false sense of security could have been created. Financial and legal advice is crucial, with good record-keeping of the advice received and reasons for decisions taken.
The government is legislating for temporary relief from the UK's wrongful trading rules which create personal liability for directors of a liquidated company if they are shown to have taken on commitments when there was no reasonable prospect of the company meeting the liabilities created. The Corporate Insolvency and Governance Bill (238-page / 941KB PDF) was published in May 2020, along with useful explanatory notes.
The Bill as drafted temporarily removes the threat of personal liability arising from wrongful trading for directors who continue to trade a company through the crisis uncertain whether that company will be able to avoid insolvency in the future. Liquidators and administrators will not be able to make a claim against an insolvent company's directors for any losses to the company or its creditors resulting from continued trading while the wrongful trading rules are suspended - proposed to be from 1 March to 30 June 2020 or one month after the provision comes into force, whichever is the later, with the possibility for extension of up to six months. The intention is that this will remove the pressure on directors to close otherwise viable businesses to avoid potential liability. However, at the time of writing, no legislation has been published or passed, so the threat remains. Other checks and balances on directors, including those identified above, also remain in place.
Few businesses will have had a pandemic on their risk register before the crisis broke, but there is clearly no excuse now. Risk registers should be kept under regular review, with new risks added as they emerge and those no longer relevant retired.
Boards and their risk committees need to find time to look ahead: is Covid-19 a once in a hundred years event, or are pandemics part of a new normal and likely to occur every few years? What is the likely effect on the business? What can be done to mitigate that risk? How will customers and suppliers, governments and regulators react? What lessons can be learnt from the past few months? What would the board do differently next time? And, to return to an old theme, does a company's Brexit planning need to be reviewed?
If a company has publicly traded shares covered by the Market Abuse Regulation, it is under an obligation to announce "inside information" as soon as possible. Information caught by that definition is that which is precise in nature, not publicly known, which relates directly or indirectly to the company or its shares, and which, if it were made public, would be likely to have a significant effect on the price of those shares. Delay in announcing is permissible only if immediate disclosure would be likely to prejudice the company's legitimate interests, continuing confidentiality can be ensured and the delay is not likely to mislead the public.
Listed companies will be used to navigating their way through these requirements, but in a rapidly developing situation the market needs to be updated as previously announced information changes. If past announcements have trumpeted the winning of new contracts or the start of fresh projects, for example, careful consideration needs to be given to whether the market should be told when a contract is paused or a project cancelled.
Director and senior executive remuneration is usually under the spotlight and the current crisis has only intensified interest in the topic. The Investment Association, the trade body for institutional investors who manage as much as one third of shares in UK plc, has fired an early shot across the bows of remuneration committees. In a Q&A they make clear their view that remuneration levels need to reflect current trading and actions taken by a company to raise new capital, as well as furloughing staff, accessing other government support schemes and decisions to scrap or reduce dividend payments.
For some companies this will be an immediate issue as forthcoming AGMs may need to be asked to approve a remuneration policy for the next three years.
Some companies will have postponed an AGM or held off sending out a notice during the lockdown, but will still be facing the need to hold their meeting within 15 months of the last AGM and no more than six months from the year end. As with crisis-related provisions relating to wrongful trading, the Corporate Insolvency and Governance Bill is intended to temporarily ease problems in this area. If the Bill is passed as drafted it would mean that, for a limited period - proposed to be 26 March to 30 September 2020 - companies will be able to suspend shareholders' and members' ability to attend meetings in person and will be able to convene meetings in a flexible way using a range of technologies. In particular, companies with a deadline for holding an AGM which falls between 26 March and 30 September will be given until 30 September to hold it. There is also a power to provide for further temporary extensions of any deadlines for holding an AGM.
In the meantime, while meetings remain problematic, guidance from the Chartered Governance Institute and a Q&A (8-page / 244KB PDF) from the Department for Business, Energy and Industrial Strategy shows how most companies can fulfil their statutory obligations. Many companies went ahead and held an AGM on these restricted terms with minimum shareholder participation.
Thought might now be given to holding a webinar or other Q&A session to brief investors with the presentations that would otherwise have been given at the AGM. When time allows, Articles should also be reviewed to ensure they give maximum flexibility in postponing and adjourning an AGM and holding hybrid meetings – potentially fully virtual meetings if and when legislation allows.
As already noted, many companies have either cancelled or reduced a planned final dividend at their 2020 AGM – a subject addressed in another guidance note from the Chartered Governance Institute. Investors have, on the whole, been supportive, but a resumption of distributions will be expected once there is more certainty as to future trading and balance sheets allow. A review of dividend policy should be an item for the board agenda and large shareholders may expect to be consulted. Regulators' views and public perception might also be relevant. Interim dividends can be approved by the board alone, with no need for a shareholder vote.
Crisis or no crisis, the relentless round of corporate reporting continues. Companies with a 31 December year end will be starting to think about their half year results to 30 June. These may not require a full audit but will be compiled in line with accounting standards and auditors often play some role in their production. Audit firms continue to be hard pressed with extended timetables because of the going concern and viability issues that inevitably arise. Early planning and engagement with both audit team and audit committee on likely contentious issues should help ensure the corporate timetable can be kept to.
Various reporting deadlines have been extended: Companies House is allowing an extra three months to file audited accounts (and the Corporate Insolvency and Governance Bill includes formal extensions for public companies); businesses have an additional six months to complete their Modern Slavery Act statements, if needed; and Gender Pay Gap reports have been cancelled entirely for 2020, though they may still be produced on a voluntary basis if employers wish.
However, none of these issues should be forgotten entirely. Accounts still need to be produced, audited and filed at some stage; employees and other stakeholders will continue to be interested in gender, and racial, diversity throughout an organisation; and the government have made the point that businesses still need to carry out due diligence on their supply chains to ensure they are not encouraging poor employment practices or worse. And when the next Modern Slavery report does come to be written, what has been done during this period will need to be disclosed.
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