8 Themes for PLC Directors for 2021

But alas. The ink was barely dry on New Year messages to friends and colleagues expressing optimism for 2021 when a third UK lockdown was announced. Those uplands basking in the sunlight of a Biden win, the vaccine roll-out and a late-breaking trade deal with the EU were suddenly cast in shadow. We were back to “stay at home” for many weeks. It is clear that, as my daughter says, this is a “long slog”.

What about business, then, as this New Year gets going? Coping with Covid and Brexit will inevitably be front of mind but what are the other themes which PLC Directors should be focussed on? What should be on the laundry list at the first Board meeting of the year?

Some thoughts:

1. Living with, and moving beyond, Covid-19

The emergence of a new, more transmissible, Covid strain and the imposition of another lockdown is a grim reminder that functioning society is underpinned by health. Whilst the gathering pace of vaccination and the approval of the Oxford/AstraZeneca and Moderna vaccines are precious and exciting developments, it will surely be mid-year at the earliest before anything like “normality” returns. So, the continuing implications of Covid, and shaping the “Covid Exit strategy”, will be critical considerations for PLC Boards.

Four points here:

• employee well-being will need to continue to be front of mind for PLC Directors. Many colleagues will be fatigued, distressed and frustrated. Is employee well-being the first item on the Board agenda and are leading, rather than trailing, indicators being used to monitor health and morale?
• will the new lockdown affect our “going concern” analysis and the timing of our annual results announcement, what are the broader business model and liquidity implications - and, given that the virus trajectory has typically turned out to be worse than hoped for, are our worst-case projections sufficiently robust?
• in terms of Exit strategy, I noticed the following in a recent McKinsey briefing: “The strongest companies are also reinventing themselves through next-normal operating models, capitalising on this malleable moment and the resulting spread of agile processes, nimbler ways of working and increased speed and productivity”. I had not previously come across the expression “malleable moment” but it does, well, resonate; and
• to the extent that Boards paused their succession plans in 2020 (and some did), it will be important for them to “re-light the fire” so that the refreshing of the ranks of Board and Exco members is not further delayed.

2. Brexit

The signing of the Trade and Co-operation Agreement with the EU has been greeted with relief by UK business as the alternative of no-deal would have been much worse. The agreement was negotiated at record speed, which is greatly to the credit of Michel Barnier, Lord Frost and their respective teams.

In terms of substance, however, the deal prioritises sovereignty over economics, as Charles Grant of the Centre for European Reform observes, and that has a number of profound implications:

• although not burdened by tariffs or quotas (at least initially, but subject to the level playing field mechanisms), manufacturers and farmers will face a sobering array of formalities, checks and fees in respect of customs, VAT, safety and many other requirements, inevitably increasing friction in trade and just-in-time supply chains. The Road Haulage Association estimates that some 220 million new forms will need to be filled in each year to facilitate trade with the EU;
• rules of origin to determine whether a British product is actually British (and can be sold tariff-free into the EU) will add complexity and constraint;
• the employment of EU citizens will be more challenging and British citizens used to working and spending time in the EU will face new limits; and
• the deal does not include financial services, a key industry which contributes 7% to UK GDP and the biggest trade surplus of any in the UK (with £79bn of exports in 2019). The UK will wish to be granted equivalence in key areas but it will be a while before there is clarity as the two sides will hold talks early in 2021 aimed at drafting a memorandum of understanding on future co-operation in financial services with the goal of agreeing a text by March.

All of this of course represents a major adjustment for UK-based businesses.

Whilst PLC Boards will have developed their contingency plans around Brexit, there is a lot to digest in the deal and an early priority in 2021 will be to assess what it means for the business:

• how quickly can new procedures and systems be mobilised;
• what about supply chains (more on-shoring?) and investment strategy (the development of battery technology for electric cars is a topical example);
• what does it mean for the group’s international footprint and do we move more operations and staff into the EU; and
• what are the medium to long-term opportunities offered by this new world?

Chairs might want to ensure that their respective Brexit brains trust teams present to the Board in short order on the Top 6 points arising from the deal and the decisions which they will require of the Board.

3. The UK Corporate Governance Code

The FRC published their Review of Corporate Governance Reporting in November 2020 and it makes for bracing reading https://www.frc.org.uk/getattachment/c22f7296-0839-420e-ae03-bdce3e157702/Governance-Report-2020-2611.pdf. The FRC is not (at all) happy with reporting against the new 2018 UK Corporate Governance Code (the “Code”).

In its research the FRC looked at Annual Reports for financial years commencing on or after 1 January 2019, and certain third party reports, in respect of a sample of 100 companies (including FTSE 100, FTSE 250 and Small Cap companies). Headline points are:

• overall, “reporting does not demonstrate the high quality of governance that the FRC expects” and much is formulaic “concentrating on achieving box-ticking compliance, at the expense of effective governance and reporting”;
• “an unexpectedly high number of companies in our sample claimed full compliance but could not demonstrate this.” Areas of erroneously claimed compliance included: alignment between pension contributions of executive directors with those of the workforce (Provision 38), chair not to be on the Board for more than 9 years (Provision 19) and policy on post-employment shareholding (Provision 36); and
• as the FRC transitions to becoming a new regulator - the Audit, Reporting and Governance Authority (“ARGA”) - it expects to “receive further powers to engage with companies about the quality of their governance reporting”. Whilst it will engage constructively, “where appropriate we will call out poor behaviour.”

Some, maybe many, will take the view that the FRC is being unduly picky in its critique. But a great deal of work has gone into the Review and this last point around ARGA’s potential powers should be taken seriously.

The Kingman proposals from December 2018 recommended the creation of ARGA and suggested, it will be remembered, enhanced recourse against CEOs, CFOs, Chairs and Audit Committee Chairs. Whilst this is not at all straightforward (how would it fit with the collective responsibility of the Board and, indeed, “comply or explain”?), it must be likely that ARGA will have more enforcement tools than the FRC and Directors of premium listed PLCs should pay heed to this polite “tougher regulation coming” message from the FRC.

So, careful reflection on the points of detail made in the Review is recommended. A few to note:

1. how does the company apply the Principles (not just the Provisions) of the Code in developing its governance framework? It is worth taking a look at the way AstraZeneca approach this;
2. articulate purpose in a way which genuinely explains what the business is for and why it is unique. I am super-keen on “purpose” because it drives strategy and inspires stakeholders. Reckitt Benckiser are doing good work here;
3. there should be more analysis and description around succession planning and diversity (I return to diversity later); and
4. what are the outcomes from stakeholder engagement - “We found, generally, that companies are not reporting on the effectiveness of their stakeholder engagements and how those have contributed to their long-term success”. As a sub-set of this, the FRC is looking for evidence that there is meaningful and regular dialogue with the workforce and that this is brought to the Board’s attention.

Although the Review is generally critical, I need to finish this section on a mildly positive note as the CEO of the FRC does say in his Foreword - “We saw some examples of excellence in reporting” – albeit going on to be clear that, in the round, PLCs have a hill to climb.

4. Climate and ESG

The pandemic has accelerated the focus on climate and other Environmental, Social and Governance (“ESG”) issues:

• there is major political momentum around the world and the fact that it is hosting COP 26 in Glasgow this year will increase pressure on the UK to set pace and tone. Moreover, from 1 January 2021 premium listed companies will be required to disclose how climate change affects their business on a basis consistent with the recommendations of the Taskforce on Climate-related Financial Disclosures (“TCFD”) on a “comply or explain” basis - with TCFD-aligned disclosures becoming mandatory across the economy by 2025;
• investor interest is intense. ESG funds raised $80 billion in the third quarter of 2020 and held an aggregate of $1.2 trillion at 30 September, 2020; and
• corporates are setting net zero targets and responding to stakeholder concern as to how those targets will be met. Thus, Unilever in December became the first FTSE company to offer its shareholders a regular advisory vote on its climate transition action plan. There will be pressure on others to follow suit.

So, this area needs to be front and centre of PLC Board thinking in 2021. For sure. Three thoughts here:

1. the TCFD framework recommends the disclosure of actual and potential impacts of climate-related risks and opportunities on strategy and financial planning and of metrics and targets used to assess and manage these risks and opportunities. Whilst some FTSE companies already make these disclosures (for example. Hammerson and ITV), research by EY with reference to 2019 Annual Reports suggests that 59% of FTSE 350 companies have not adopted the TCFD framework or are silent. Given the new TCFD “comply or explain” requirement and Unilever’s lead, Directors of those companies need to act;
2. more broadly, have we got a clear and convincing ESG narrative? Have we assessed where, in the context of the 17 UN Sustainable Development Goals, we can make a difference and what metrics we should deploy to test ourselves, respond to the reasonable expectations of our stakeholders and demonstrate progress? Croda, for example, dashboard their SDG targets impressively on one page in their Annual Report; and
3. do we, the Directors, walk and talk meaningful purpose and ESG? I am the CEO of Chris Saul PLC, a detergent manufacturing business. Do I highlight, at the town-halls I speak at, our progress on water use and our commitment to reduce waste sent to landfill? Is my Volkswagen ID3 charging outside?

5. Diversity

The trend in gender diversity on FTSE 350 Boards has been positive. According to the Cranfield Report in June 2020, 34.5% (32.1% in 2019) of FTSE 100 Directors, and 31.9% (27.3%) of FTSE 250 Directors, were women. This is encouraging. There is still a way to go, however, on the executive side. 13.2% (10.9%) of FTSE 100 Executive Directors, and 11.3% (8.4%) of FTSE 250 Executive Directors, were women.

So, gender mix in the executive pipeline needs to be a continuing focus for PLC Boards. But what about diversity beyond gender?

The tragic events which led to the Black Lives Matter movement last summer sparked major change. The CBI and other organisations are leading initiatives which endorse the Parker Review targets for FTSE 100 Boards to have one member from an ethnic minority background by the end of 2021 and for FTSE 250 companies to meet this target by the end of 2024. Legal & General have, moreover, indicated that they will vote against the re-election of Chairs of FTSE 100 companies which have failed to meet the target by 2022. This will add to impetus.

Two other important points for PLC Directors to keep in mind in 2021 are:

• ethnic diversity initiatives are, as Lord Bilimoria (Chair of the CBI) says, about the whole business and not just the Board. Companies are encouraged by the CBI to set and publish stretching targets for ethnic minority participation in the Executive Committee and the level below, with separate targets for black participation, and (by 2022) to publish their respective ethnicity pay gaps; and
• aside from gender and ethnicity Boards should strive to embrace broader aspects of diversity (for example, sexuality, disability and social background) both to enrich Board discussion and to provide a more varied group of role models for colleagues in the business to look to. In this context, I commend to you the type of disclosure shown in the Board Diversity Characteristics diagram to be found in Ocado’s Annual Report.

6. Future of Corporate Reporting

Whilst not necessarily a subject to get the pulse racing, the FRC launched last October an interesting (“bold” is their word) consultation on the future of corporate reporting https://www.frc.org.uk/getattachment/cf85af97-4bd2-4780-a1ec-dc03b6b91fbf/Future-of-Corporate-Reporting-FINAL.pdf.

The FRC explains the background to the consultation as a general concern that the corporate Annual Report has, over recent years, been “pushed and pulled” to meet increasing demands from traditional and new users so that it is now:

• too long - and old-fashioned in the sense that the move away from paper means that “one big document” is no longer necessary;
• confused about its intended audience and purpose; and
• even then, supplemented by other reports (such as gender pay gap and sustainability reports).

So, the suggestion is to “unbundle existing reporting and create a network of reports”. At the core of this exercise would be:

• a Business Report which would be an objective stakeholder-neutral document (akin to the current Strategic Report) designed to enable users to understand how the company creates long-term value in accordance with its stated purpose;
• Financial Statements; and
• a Public Interest Report describing how the company views its obligations from a public interest perspective (for example in relation to societal and environmental matters) with companies having the flexibility to supplement these by other network reports giving, for example, more divisional information.

There is much to chew on in the FRC’s paper and it will be interesting to see what emerges after the consultation closes in February. For my part, I have three misgivings:

1. I do think that that a single annual cornerstone document describing the business, its performance, its aspirations and its governance, in the round, retains real attractions, even in an increasingly paperless age. Length and approachability could perhaps be addressed by requiring an Annual Report Summary (of the sort required for Prospectuses);
2. the unbundling approach does risk creating inconsistencies between documents and a layer-cake of “materiality” assessments (a challenge acknowledged by the FRC); and
3. comparability as between competitor businesses might be less readily assessed (particularly with businesses in jurisdictions maintaining an Annual Report model) and those UK companies with US listings, and 20-F filing requirements, might well prefer the traditional UK Annual Report.

7. The National Security and Investment Bill

This is a really significant piece of prospective legislation. It is working its way through Parliament, and may change, but the key elements of the regime envisaged by the Bill are:

• mandatory notification, and prior Governmental approval, of prospective acquisitions in 17 specified sensitive “core” sectors where national security concerns are most likely to arise. The initial list of sectors has been subject to public consultation (just closed) but covers areas such as Artificial Intelligence, Communications, Data Infrastructure, Defence and Energy;
• voluntary notification of prospective acquisitions in other sectors where such acquisitions may be of interest from a national security perspective and an expansive “call-in” mechanism to enable the Government to review non-notified transactions up to five years after completion; with
• extra-territorial reach in that the regime is not limited to foreign direct investment. For example, a Brazilian investor purchasing a 15% interest in a South African company which has a UK subsidiary active in Data Infrastructure would need to notify the transaction to the UK Government.

The Government expects that between 1,000 and 1,800 deals per year will be reviewed under the new framework, of which 75-90 will be subject to detailed review and 10 will require remedies. Remembering that under the existing Enterprise Act 2002 regime there have been only 12 interventions on national security grounds over 18 years, this is a radical change.

Whilst heightened concerns about national security are understandable, and many other jurisdictions have foreign investment legislation, there must be a risk that, just as UK leaves the EU and wishes to encourage inbound investment (see the recent creation of the “Office for Investment”), this will have a genuinely chilling effect on that investment flow.

Two takeaways for PLC Directors:

1. it seems likely that the legislation will come into force by the middle of the year but there is little point in trying to beat the moment because, if the Bill is passed, the new rules will have retrospective effect to all transactions taking place after 12 November 2020; and
2. whilst the ultimate legislation may differ from the Bill, it must be likely that the regime will be broadly as described above. Thus, an early brainstorming session with the M&A team would be wise in order to assess the potential impact on the company’s Disposals/M&A strategy and the shape of its portfolio over the coming, say, two years.

8. Board collegiality

Many Boards will not have gathered in person since early 2020. Numerous new Board members will not have met, in real life, their new colleagues. This separation is set to continue for months.

Whilst Zoom, Teams and Webex are extraordinary tools, and have been a lifeline for many in business and home life, they cannot replicate the personal connection that can be achieved by individuals sharing a breakfast poached egg or a morning coffee or a ride in a cab. Given that a Board is a team, and the friendship and respect among team members is important fuel in the team’s tank (or charge in its battery), this is a real concern.

Many Chairs are focussed on this and convene virtual Board drinks parties or find other ways to keep the bonds between Board members fresh, but the topic is one for all PLC Directors to reflect upon. Do I take the trouble to reach out once a month to my Board colleagues to see how they are and kick around issues which are bubbling in the business? If I am a committee chair do I curate periodic informal gatherings of committee members and the team which supports the committee?

As more months of separation stretch out ahead of us it is worth taking to heart the words of Canned Heat in their (excellent) 1970 hit Let’s Work Together:

“…when things go wrong, as they sometimes will

And the road you travel, it stays all uphill

Let’s work together, come on, come on, let’s work together”

Christopher Saul

Christopher Saul provides independent trusted advice to senior executives and key stakeholders within publicly quoted and privately owned businesses and professional service firms. His areas of focus are governance, succession and the moderation of differences.

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