11 January 2021
Most PLC Directors, most people on the planet indeed, will have been pleased that the blighted year of 2020 finally came to an end, offering the hope of renewal.
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?
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:
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:
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:
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.
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:
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:
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.
The pandemic has accelerated the focus on climate and other Environmental, Social and Governance (“ESG”) issues:
So, this area needs to be front and centre of PLC Board thinking in 2021. For sure. Three thoughts here:
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:
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:
So, the suggestion is to “unbundle existing reporting and create a network of reports”. At the core of this exercise would be:
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:
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:
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:
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”
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