The Financial Reporting Council (FRC) has won significant support from investors for its proposal to force companies to engage with shareholders if more than 20% vote against a company resolution.
The FRC wants companies to explain what action they plan to take to “understand the reasons behind the result”.
The proposed new measure forms part of the FRC’s reboot of the UK Corporate Governance Code.
However, stakeholders also called for a tougher stance on issues affecting pension scheme members and employees.
Liz Murrall, director of stewardship and reporting at the Investment Association, which represents asset managers in the UK, supported the 20% trigger.
“We believe that 20% is the appropriate level and welcome the requirement for companies to respond publicly within six months of the AGM outlining the actions they have taken in response to the shareholder vote,” she said.
Royal London Asset Management (RLAM) added its support but urged the FRC to include abstentions in the 20% trigger.
RLAM said it used abstentions “as an initial flag of discontent” and contacted companies in its actively managed portfolios to explain why it had abstained on a vote.
At present, the trigger is set at more than 50% shareholder opposition to a measure.
Typically, if a company loses a resolution at an AGM, it will simply retable it and hold a second ballot including majority shareholdings. The effect is invariably to reverse the earlier defeat, as happened at Sports Direct in 2016 .
The issue has been brought into sharp focus recently, with a number of high-profile shareholder rebellions over executive pay packages.
The UK Corporate Governance Code sets the standards of good practice in relation to board leadership and effectiveness, remuneration, accountability and dealings with shareholders. Companies must confirm that they have complied with the Code’s provisions or explain why not.
The FRC’s consultation, launched in December 2017, followed the UK government’s proposals on corporate governance reform.
The UK parliament’s Business, Energy and Industrial Strategy Committee issued its own report on corporate governance in April last year, prompted by growing public disquiet over perceived corporate greed in the wake of scandals such as the collapse of BHS .
The committee’s report demanded action on corporate governance, executive pay and boardroom diversity concerns. It also found that there was a “worrying lack of trust of business among the public”.
Regulator calls for explicit pension fund recognition in governance code
Meanwhile, the Pensions Regulator (TPR) urged the FRC to link the requirements in section 172 of the Companies Act 2006 (s172) to the Corporate Governance Code.
S172 requires company directors to promote the long-term success of the company for the benefit of shareholders while having regard to other stakeholders such as pension scheme members.
TPR said boards should explain how they have taken the interests of pension scheme members and beneficiaries into account.
The Corporate Governance Code and the FRC’s Strategic Reporting Guidance currently make no mention of pension scheme members, beneficiaries or trustees as company stakeholders.
The Pensions Regulator also urged the FRC to apply the same reporting requirement to privately owned companies. It said there were 490 large privately-owned companies sponsoring defined benefit schemes in the UK.
The FRC’s chief executive Stephen Haddrill told parliament in November 2016: “Frankly, we have not given sufficient thought or appreciation to the company’s wider responsibilities beyond the shareholder. We do need to focus on that stakeholder issue. Section 172 has been there, but it has not borne on thinking in companies and it needs to.”
The FRC wants companies to apply the updated code for accounting periods beginning on or after 1 January 2019.