Key Governance Developments - November 2021

Businesses push back against audit and governance reforms

Investors and auditors are concerned that the UK government is backtracking on plans for a major overhaul of audit and corporate governance requirements to reduce the risk of financial misstatements and fraud, in the face of fierce opposition from business groups. One key measure - a legal requirement on directors to approve companies’ internal controls for financial reporting - is now set to be replaced by a duty under the UK corporate code, which only applies to companies with a premium stock market listing, and allows them to ignore it if they explain why. Companies say the cost of the requirements would be an added burden at a time when many are struggling to recover from the Covid-19 pandemic. However, audit and governance experts say the Sarbanes-Oxley Act in the US, on which the reform plans were originally based, had proved difficult and expensive to implement but ultimately had benefited companies by improving the overall quality of information in audited financial statements.

UN secretary-general promises global standards to assess corporate net zero pledges

UN secretary-general António Guterres has announced at the Cop26 climate conference that he is creating an expert committee to develop global standards for measuring corporate pledges to reach net zero carbon emissions. He says that recent climate action announcements could create a false impression that large swathes of the global economy are embracing net zero targets, and that a lack of credibility and harmonisation for standards for emissions reductions and targets is creating confusion among investors and policymakers.

Best source: City A.M.

UK financial institutions and large companies must publish net zero plans by 2023

Large companies and financial institutions in the UK will be required to publish detailed plans to reach net zero carbon emissions by 2023, according to proposals unveiled by the country's finance ministry. Companies' plans will be submitted to an expert panel but net zero commitments will not become mandatory, allowing companies and their shareholders to decide whether and how to achieve the transition.

Best source: BBC News

Third Point calls for Shell to split legacy fossil fuel and clean energy businesses

Activist hedge fund firm Third Point Management has called on Shell to split itself into two companies: one for its legacy oil and chemicals business, and the other for clean energy activities. Royal Bank of Canada calculates that the two businesses could be worth a combined $250bn, significantly more than Shell’s current $178bn market capitalisation. However, Shell insists that significant synergies exist between its various businesses and that keeping them together enables it to help 30 million retail customers and one million corporate customers to decarbonise.

Best source: Financial Times (subscription required)

BlackRock cuts exposure to UK’s THG amid continuing governance concerns

BlackRock is selling almost half of its shares in THG, formerly known as The Hut Group, at a 10.3% discount, following concern about the governance of the UK e-commerce company. Investors are unhappy that co-founder Matt Moulding, who retains a significant shareholding in the company following its stock market listing in September 2020, continues to hold the roles of executive chairman and CEO in contravention of the UK corporate governance code’s best practice guidelines. The company's share price has fallen from nearly £8 at the beginning of the year to less than £2, although THG is now searching for a non-executive chairman to help it qualify for a premium listing on the London Stock Exchange's main board.

Best source: The Guardian

Investors question pharmaceutical group’s $5bn sustainability-linked bond

The issue of a $5bn sustainability-linked bond by Israel-based Teva Pharmaceutical Industries has been questioned by institutional investors, who complain there is little transparency over how the bond proceeds will be used and that the company will not face significant consequences if it fails to meet its sustainability targets. Teva says it will aim to increase by 150% the provision of medicines to poor and middle-income countries and reduce direct and indirect greenhouse gas emissions by 25% by 2025. However, the bond proceeds will mostly be used to repay outstanding debt falling due from next year, and analysts say failing to meet the conditions would result in the company paying less than $10m a year in additional interest.

Best source: Financial Times (subscription required)

Royal Dutch Shell shift to London could facilitate green transition through share buybacks

The plan by Royal Dutch Shell to move its tax residence and much of its executive leadership from the Netherlands to the UK could be necessary to keep shareholders on board as the group transitions to greener energy, enabling it to boost returns from share buybacks as it reduces fossil fuel investments and sells off existing assets, such as the disposal of the sale of its Permian shale oil business in September. Shell currently has a dual-share structure, but A shares listed in the Netherlands are subject to a withholding tax, making share buybacks uneconomical. Buybacks of the group's UK B shares are capped at a proportion of their trading volume, effectively limiting buybacks to $2.5bn a quarter, compared with up to $6bn after the restructuring.

Best source: Financial Times (subscription required)

Investors concerned over £2.4m exit payment for Barclays CEO

Some of Barclays' largest shareholders are to meet with the bank to raise concerns that CEO Jes Staley will receive £2.4m in fixed pay and £120,000 in pension entitlements after resigning from the bank for allegedly minimising his past links to sex offender Jeffrey Epstein. Investor Forum members have also complained about the bank’s handling of the events leading up to Staley's departure and paying repatriation expenses to its American former CEO, who has been investigated by UK regulators.

Best source: Financial Times (subscription required)

UK investors and auditors protest at government’s readiness to downgrade financial governance reform

The UK government's intention to water down proposals for the reform of audit and corporate governance rules could result in further corporate financial scandals, according to the Chartered Institute of Internal Auditors and investor groups, including the UK Shareholders’ Association. British businesses and directors that had resisted proposals for stricter rules have welcomed the intention of business secretary Kwasi Kwarteng to scale back requirements on internal controls. A requirement on directors to approve companies’ internal financial reporting controls, modelled on the US Sarbanes-Oxley Act, is expected to be dropped in favour of inclusion of a similar measure in the UK corporate code, which would limit its scope to the biggest listed companies and restrict enforcement mechanisms.

Best source: City A.M.

See also: Financial Times (subscription required)

Shareholder resolution may have prompted Apple reversal on self-repair policy

A shareholder resolution filed by US asset manager Green Century Capital Management may have prompted Apple to reverse its longstanding opposition to product owners carrying out their own repairs of mobile phones, computers and other devices. The company is launching a Self Service Repair programme next year, initially enabling customers to repair displays and cameras or replace batteries of iPhone 12 and 13 models, with recent editions of its Mac computers also to be included. Shareholders and consumer groups have long urged the company to reverse its anti-repair stance, and regulators in the US and elsewhere are now considering making self-repair capability mandatory to improve sustainability.

Best source: Apple Insider

See also: The Guardian

UN agencies, OECD and World Bank launch Impact Management Platform

United Nations agencies, the Organisation for Economic Co-operation and Development, and the World Bank are launching the Impact Management Platform to develop standards that companies, investors and financial institutions can use to measure their sustainability impact. The platform aims to take a broader and longer-term view, in contrast to risk and returns models that focus on near-term financial performance.

Best source: Reuters