25/01/2022
Welcome to our snapshot of key changes and current affairs for Company Secretaries working in social housing. We take a thoughtful look this month at some wider reforms and developments in corporate governance.
Report on Corporate Culture
The Financial Reporting Council (FRC) has published a report on corporate culture (following up on a report from 2016) which intends to demonstrate how linking culture, purpose, values and strategy can help a company better manage its resources and be better equipped to face future challenges.
The FRC's conclusions include:
- Leadership should come from the top but it is also important that the workforce feel engaged and able to contribute. The board should ensure that the organisation's culture is aligned with its purpose, values and strategy and the CEO should be aware of its important role in driving and embedding culture throughout the company.
- Often, the benefits that can be gained from joining up across different functions of the company are not being effectively utilised. For example, by encouraging greater cooperation and communication between HR, internal audit, ethics and compliance and risk functions, companies may be able to better assess, monitor and embed their culture.
- Trust, empathy and psychological safety are crucial to foster positive culture. Everyone should be encouraged to speak up, share concerns and have candid conversations. However, the key challenge for companies and their boards is to acknowledge that culture requires patience, openness and commitment to continuous development through any future changes to senior personnel. Creating a positive culture should improve performance.
Based on these findings, the FRC is considering what further action to take including whether any amendments to its issued guidance is required. Looking further forward, the Government has proposed a reform package in response to the consultation in a recent White Paper, Restoring Trust in Audit and Corporate Governance, and it is anticipated that this package will help strengthen stakeholders’ trust in the quality of corporate governance, reporting and audit.
These themes will be familiar to RPs from the National Housing Federation’s Code of Governance, but it is interesting to see them filtering through to the wider corporate sector on a more formal basis.
Proxy voting guidelines
The Institutional Shareholder Services (ISS) has published updates to its UK proxy voting guidelines which will be effective for meetings held on or after 1 February 2022.
The updates applicable to the UK are as follows:
1. Gender and ethnic board diversity
The ISS has incorporated a provision expecting companies listed on the London Stock Exchange to have at least 33% female representation on the board in the case of FTSE 350 constituents, and to have at least one female director on the board for smaller companies. Companies will be encouraged to appoint at least one individual from an ethnic minority background to the board by 2024.
2. Board accountability on climate
ISS has identified 167 companies who are considered to be strongly contributing to climate change (referred to as the Climate Action 100+ Focus Group) and intends to recommend against voting for the current board chairs in these companies where the company does not have both a minimum criteria of climate-related disclosure and quantitative and significant greenhouse gas emission reduction targets. The ISS policy updates for 2022 also introduce a board accountability policy for the assessment of the world’s highest greenhouse gas emitting companies.
3. Non-financial environmental, social and governance (ESG) performance conditions
The ISS policy update is confirming that ESG metrics can be included as performance measures utilised by a company's variable remuneration schemes if the measures are clearly linked to the company’s long-term strategy, material to the business and are quantifiable. Non-financial ESG metrics are becoming increasingly popular in variable remuneration schemes.
It is expected that the ISS will publish full updated policy documents for 2022 in the coming weeks and will also release more information about its new climate-related policies before they come into effect. We will keep tabs on this and likely cover any relevant further information in future snapshots.
Director disqualification: Rating (Coronavirus) and Directors Disqualification (Dissolved Companies) Act 2021
New legislation has come into force (as of 20 December 2021) which grants the Insolvency Service new powers to investigate and disqualify company directors who dissolve companies to avoid paying their liabilities. The Act will also help tackle directors who dissolve companies to avoid repaying Government backed loans put in place to support businesses during the Coronavirus pandemic.
Under previous legislation, the Insolvency Service already had the power to investigate directors of companies that enter a form of insolvency and live companies where there is evidence of wrongdoing. However, this new Act extends those investigatory powers to directors of dissolved companies. If misconduct is found, directors can face sanctions including being disqualified as a company director for up to 15 years or, in the most serious of cases, prosecution. The Business Secretary will also be able to apply to the court for an order to require a former director of a dissolved company, who has been disqualified, to pay compensation to creditors who have lost out due to their fraudulent behaviour.
In relation to the circumstances brought about by Covid-19, the Act provides that Covid-19 cannot be taken as a cause of material changes of circumstances for business rates. However, the Government has announced that £1.5 billion is to be provided in business rates relief to sectors which have suffered most economically over the pandemic and not been eligible for existing support.
Breach of directors duties: High Court ruling
In a recent High Court ruling (Mahoney v Renwick [2021]), two directors were found to be in breach of their duties for attempting to exclude another director from her involvement with two private companies.
In particular, the Court held that:
- The purported removal of the third director as a director was a breach by the first two directors of their duties to act in accordance with each company's constitution (section 171, Companies Act 2006 (CA 2006)), to act in good faith to promote the success of each company for its member (section 172, CA 2006 and to exercise independent judgment (section 173, CA 2006).
- In actively denying that the two private companies owned their assets, the two first directors had breached sections 172 and 173 of the CA 2006 and the duty, under section 174 of the CA 2006, to exercise reasonable care, skill and diligence.
- The fact that the companies' accounting records were in the third party's possession and had never been seen by the first two directors evidenced further breaches of sections 171, 172 and 173 of the CA 2006.
This is the latest in a spate of recent decisions in which the courts have blocked improper attempts to gain control of private companies and is an interesting demonstration of how duties imposed on directors can be enforced in practice. The case clearly illustrates the importance of ensuring absolute adherence with the duties contained in the CA 2006.
Consumer Regulation Review: Tracker
Following the Regulator’s publication of its ‘principles and approach’ and current consultation on the Tenant Satisfaction Measures, the minister for homelessness and rough sleeping has announced the Social Housing Professionalisation Review. The review will consider the qualifications available for staff and whether any additional training is needed to improve services to residents.
The Social Housing Regulation Bill is expected in March and it is anticipated that it will incorporate many of the proposals set out in the Social Housing White Paper. We will be following this closely and will keep you updated as the reforms progress.
AOB
Welcome to our newest team member!
We are delighted to confirm that Cecilia Wong has recently joined our team to work on all things housing corporate governance! Check out Cecilia’s experience here.
Fit for Purpose Structures - Mergers
The next in our Fit for Purpose Structures webinar series will be taking place on Thursday 27 January from 10am-11am. This time we will be discussing mergers, with colleagues from Abri inputting from their recent merger experience.
Senior Independent Network
If your Senior Independent Director is looking to expand their peer network, our next SID Network event will be taking place on 31 January.
Legal compliance: from implementation to assurance
Take a moment to watch Sarah Greenhalgh and Sarah Pearson - Head of Legal and Compliance at Abri in this short video, as they identify top tips for meeting the Governance and Financial Viability Standard which requires all Registered Providers to ensure that they comply with ‘all relevant law’.
Committee Chairs Network
If you have a colleague who is a Chair for one of your committees and who would like to expand their network, our next virtual event will be held on 9 February. Our guest speaker will be Rina Goldenberg Lynch from Voice at the Table a diversity and inclusion consultancy, who focus on culture change, particularly in the context of Inclusion. Rina regularly works with executive teams and boards to help them understand and fulfil their responsibilities in setting the right tone for organisational culture.
