What Boards need to address in 2021 and beyond
Article by CMS
Article by CMS
In a number of respects, the pandemic has accelerated an existing migration towards an increasingly online environment. International travel was grounded, national travel severely restricted and workplaces relocated to workers homes. Face to face meetings became the exception, rather than the norm, and in one of the biggest changes, conference calls rapidly became replaced by video calls. Amongst other things, these changes have led to questions over how to maintain appropriate oversight of activities when you are unable to physically supervise and inspect what is going on, how to instil and encourage the culture of the organisation when people are not meeting together and how to find and initiate new relationships with customers and suppliers without being able to attend events and the like.
For those who have been able to do so, working from home has become a part of their working lives which many will be reluctant to lose entirely as the various pandemic restrictions are lifted and many businesses are grappling with how to balance attendance in the workplace with reasonable working from home policies. As well as the more obvious questions this raises over the need for workplaces, boards also need to consider some of the less obvious aspects, such as ensuring the health and safety and general well-being of employees working at home, and ensuring adequate learning and development for workforces
Since the mid-2010’s, governments around the world have become increasingly protectionist. This has ranged from campaigns such as Narendra Modi’s “Make in India” and Donald Trump’s “Make America Great Again” to more direct action such as the Trump administration’s threats to ban vehicle imports. More recently the UK government introduced an ability to block acquisitions of business which it considers to be important in fighting a pandemic. Aside from the speed at which the new rules were introduced, what was particularly interesting was the very broad interpretation the government was applying to the types of business which this could apply to – internet service providers and any manufacturers which are capable of retooling to produce medical equipment were included.
Across Europe, we are seeing rules being introduced which are increasingly protective of their domestic businesses – the UK has introduced a National Security and Investments bill giving government potentially wide-ranging powers to intervene in transactions with overseas companies, Germany and Italy are introducing similar protections and a member of the French government recently stated that only a French buyer would be able to buy Carrefour.
Environmental issues were gaining increasing prominence prior to the pandemic and despite initial views that prioritising economic recovery from the pandemic’s effects would see environmental issues taking a back-seat, the opposite is proving to be the case with investors and companies increasingly eager to burnish their “green” credentials. London Stock Exchange has introduced its Green Economy Mark and Sustainable Bond Market, listed companies being required to include statements based on the Taskforce on Climate-related Financial Disclosures (TCFD) and alternative investment funds measuring themselves under the Sustainable Finance Disclosure Regulation.
Increasingly, investors are including ESG-related policies in the investment policies and measures in their investment processes to assess whether an investment meets their ESG criteria.
The UK listing regime has long included several investor protection measures which are not seen in other markets around the world. These range from the 25 per cent. free float requirement to limiting the ability of companies to raise capital on a non-pre-emptive basis. In an increasingly competitive environment, the UK is having to revisit a number of its requirements, both formal and informal, to ensure that companies continue to list on the UK markets and resist the call of markets such as New York or Amsterdam.
In a response to the pandemic, the Pre-emption Group relaxed its rules on general dis-applications of pre-emption rights for new share issuances to a maximum of 20 per cent., the level at which main market listed companies would need to produce a prospectus. While the limits have since reduced back to their original “5+5” per cent. level, the success of fundraisings carried out during the period at the higher level has led to calls to review the levels with a view to making the 20 per cent. level the new normal.
The UK government is also consulting on further changes to the listing rules to allow for a reduced free float (15 per cent. instead of 25), allowing dual share classes (with a view to allowing founders to retain control of their companies after listing) and making it easier to list special purpose acquisition companies (SPACs). To be effective, any change to the free float will need to be accompanied by a review of the index inclusion criteria by, in particular, FTSE, while the appetite for dual share classes amongst investors remains to be seen, albeit that The Hut Group has managed to set a precedent with a 5-year “golden share” structure, albeit with a Standard, rather than a Premium listing. SPACs have proven to be very popular investment vehicles in the US (with well over 200 currently looking for acquisition opportunities) and present an alternative to a traditional IPO, although often on closer examination the benefits (over a traditional IPO) can appear more illusory than originally billed. These measures, in particular, lower free float and dual class shares will present new challenges for NEDs, representing smaller proportions of independent shareholders and navigating board decisions where controlling shareholders hold weighted voting rights.
After a bit of pause at the onset of the pandemic, there are plenty of changes coming for boards to deal with – and that is without even going into the potential changes to the audit world!