August 2017: UK: Corporate Governance Reforms

The UK Government yesterday published corporate governance proposals which impact executive pay.

Key Proposals Impacting Executive Pay

  1. The Government will introduce secondary legislation requiring listed companies to report the ratio of CEO pay against the average UK worker’s pay, with a narrative explaining changes to the ratio each year and setting the ratio in the context of pay and conditions across the wider workforce. The ratio is expected to be based on the ‘single figure’ total variable remuneration for the CEO as set out in the Directors’ Remuneration Report against the average total remuneration of the company’s UK workforce.
  2. The Government will also introduce secondary legislation requiring listed companies to provide a clearer explanation of the potential outcomes of executive long term incentive arrangements. This includes, for example, potential share gains.
  3. The Government also intends to consult with the Financial Reporting Council (FRC) on extending the combined vesting and post-vest holding periods for share-based remuneration from 3 years to 5 from grant.
  4. The FRC will consult on how companies should react to significant shareholder opposition (20% or more) to the remuneration report, with the intention that changes will be made to the UK Corporate Governance Code. The Investment Association will also maintain a public register of these companies, also recording what these companies say they are doing to address shareholder concerns.
  5. The Government will invite the FRC to consult on changes to the UK Corporate Governance Code and supporting guidance to give remuneration committees greater responsibility for demonstrating how pay and incentives align across the company, and to explain to the workforce each year how decisions on executive pay reflect wider pay policy. The Government will also ask the FRC to consult on a proposal that remuneration committee chairs should have served for at least 12 months on a remuneration committee, unless there is a clear and valid explanation why this may not be appropriate or possible in a particular case.
  6. Companies (public and private) of a significant size, that is, more than 1,000 employees, will be required to explain how directors have taken into account the interests of employees and other stakeholders.
  7. The FRC and other interested stakeholder bodies will develop voluntary corporate governance principles for large private companies.
  8. The Government will introduce secondary legislation requiring companies of a significant size (expected to be those with more than 2,000 employees) to disclose their corporate governance arrangements in their Directors’ report and on their website, including whether they follow any formal code. There will be an exemption for premium listed companies who are required to report against the UK Corporate Governance Code or companies required by the Disclosure and Transparency Rules to issue a Corporate Governance Statement.

Next Steps

The Government intends to put draft legislation before Parliament before March 2018, and consult on them “where necessary”, before bringing the reforms into effect by June 2018. The FRC will consult on proposed amendments to the UK Corporate Governance Code in late Autumn 2017 and these are expected to come into effect between 2018 – 2019.

Tapestry Comment

These proposals aim to increase pressure on companies to maintain strong corporate governance in relation to pay, to ensure that the interests of stakeholders, and particularly shareholders, are considered, and to increase the effectiveness of remuneration committees. The proposals also aim to further align the interests of executives with those of the company by extending the minimum combined vesting and holding periods to 5 years from grant. The latter proposal being something that financial services businesses may already be familiar with, due to financial services regulatory requirements having a similar effect.
However, the Government stopped short of implementing key proposals from their consultation at the end of last year, that is, putting workers on boards, and introducing annual binding pay votes. These proposals may take form in the future, but it is clear that these are not priorities.

There is still some time before the legislative proposals take effect, with changes to the UK Corporate Governance Code expected to come in even later. This gives companies time to consider how the proposals will impact pay structure. Many FTSE 100 companies already have 5 year vesting and holding in their executive share plans. We produced a report last year showing which companies were already doing this and our report for this year will be ready shortly. 

If you would like to discuss the potential impact of these changes, or if you would like any help with your corporate governance or wider remuneration compliance, please do let us know.

Janet and Matthew 

Janet Cooper   Matthew Hunter

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